Ideology wins, the people lose

By Julian Delasantellis

It's probably hard to believe or comprehend these days, but not all that long ago, many of the most learned minds of politics and sociology actually postulated that we were entering a time wherein the concept of ideology would play a very minor role in the lives of the citizens of the modern industrial state.

In 1960 Harvard sociologist Daniel Bell published The End of Ideology: On the Exhaustion of Political Ideas in the Fifties, voted by the Times Literary Supplement as one of the 100 most important books of the second half of the 20th century.

In the book, Bell theorized that, after the murderous ideological disputes of the early 20th century, the second half of the 20th century was shaping up as a period in which the ideological differences that had led to two world wars would be tamped down and blunted. Although Bell primarily was looking at the political cultures of the West, implicitly the theory also saw the phenomenon occurring on the eastern side of the Berlin Wall as well.

It was believed and hoped that Joseph Stalin's death in 1953, and the subsequent arrest and execution of his secret police chief Lavrenti Beria, would herald a more managerial, less murderously ideological brand of state socialism - at least in comparison to Stalin and his party purges that killed millions. In place of the fire-breathing, death-delivering ideologue, the avatar of the next age would be the bureaucrat, called a plant manager, program director or executive vice president in the West, the commissar or apparatchik in the East, quietly and effectively managing society's affairs to bring the soothing balm of prosperity to happy, contented citizens.

Looking at matters today, at least as President George W Bush's rule over America enters its final 15 months, it seems that things have turned out completely in contrast to what Bell and his followers had prophesied. America is drenched in ideology these days, superseding any and all other considerations. Were a young sociologist to look out over the political situation these days, his tome would probably be more accurately titled The End of Competence - On the Exhaustion of the Expectation of Effective Governance in the First Decade of the Twenty First Century.

This personal observation arrives on the heels of reading two reports in the media last week.

One is Dahr Jamail's extraordinary piece US soldiers shy from battle in Iraq (Asia Times Online, October 26, 2007).

In it, Jamail provides probably the best explanation for the recent decline in US combat casualties that so contributed to General David Petraeus' smashing victory in September's battle of Capitol Hill. Quoting Iraq War veteran Phil Aliff, "We decided the only way we wouldn't be blown up was to avoid driving around [in their still, after more than four years of battle, unarmored Humvees] all the time. So we would go find an open field and park, and call our base every hour to tell them we were searching for weapons caches in the fields and doing weapons patrols and everything was going fine."

Another soldier, Eli Wright, reported to Inter Press Service that, "We would just sit with our binoculars and observe rather than sweep. We'd call in radio checks every hour and say we were doing sweeps. It was a common tactic, a lot of people did that. We'd just hang out, listen to music, smoke cigarettes, and pretend."

Being of a particular ripe age and vintage these reports rang vaguely familiar to me. I remember that, in the last stages of the Vietnam War, particularly after the Tet offensive in 1968, when the only thing that was still keeping America in the war was its leaders not wanting to face the facts and admit that they had made a catastrophic error by getting into it, there were similar reports of what were, in essence, American troop mutinies.

CBS News filmed an actual instance of troops refusing to leave their forward operating bases for yet another pointless search and destroy mission in the jungle, where success would be achieved and proclaimed by spilling blood and lives to win ground in the day that would be handed back to the Viet Cong at night . More serious forms of resistance signifying the breakdown of morale was rampant drug use (a family friend went to Vietnam a fairly average, for the period anyway, occasional pot smoker, and came back with the mainlining heroin addiction that took his life in 1976), and "fragging", the innocent sounding euphemism for troops who murdered disliked superior officers by throwing fragmentation grenades into their tents.

(In her own singularly genteel way, conservative pundit Ann Coulter brought back the wistful charm of that happy period by suggesting things would have been better today had Vietnam veteran and current Iraq war critic, Pennsylvania Congressman John Murtha, been "fragged" by his troops back then. It is truly indicative of just how poisonously polarized the political discourse in America now is, that a person such as Coulter can still be counted among those who "support the troops" even after advocating the murder of a prominent former one of them.)

And so it's happening again, today in Iraq. Karl Marx said that "history always repeats itself, the first time as tragedy, then as farce", but the tragedy here is that the nation chose to forget everything that it so painfully learned in Vietnam, and, in doing so, assured that it would someday have to suffer the same mistakes again.

It's not really surprising that troop mutinies are happening again, for nobody knows better than the troops themselves how pointless their sacrifices now are. The soldiers interviewed by Jamail all expressed the sentiment that they did not feel obligated to go out on patrols in Humvees that the Bush administration has chosen to take its own sweet time to "up-armor" against the roadside improvised explosive devices (IEDs) that are the principle lethal threat to US forces in Iraq.

The Pentagon's partial answer to the IED problem, a new class of military transport vehicles called MRAPs (mine resistant armor protected) are well behind schedule for their combat deployment in Iraq; the main function they are now performing is making many of the Republican Party's allies in the military industrial complex very rich very fast. After all the previous focus-group generated and tested rationales for the war (WMDs, deposing Saddam Hussein, inspiring Arab democracy, supporting the al-Maliki government in Baghdad, the "surge" spurring Iraqi political reconciliation) have proved to be lies, many of the troops can see just what purpose they now are actually serving.

In reality, their continued presence in Iraq, driving around dusty hostile streets waiting for insurgents to target them, serves no real purpose other than to be a thumb in the eye of the nominal Democratic Party majorities in Congress, a bloody testament to the opposition’s ever spreading impotence across this and other policy issues.

So now many soldiers seem to feel that is not a cause worth dying for. In 1971, returning decorated Vietnam veteran and 2004 Democratic Party nominee for the presidency John Kerry, rhetorically asked the US Senate's Foreign Relations Committee: "How do you ask a man to be the last man to die for a mistake?" Unfortunately, all of the important lessons young Lieutenant Kerry had for today were sent straight down the memory hole by the character assassinations organized by former White House political director Karl Rove and his unleashed attack dogs, the magnificently mendaciously monikered Swift Boat Veterans for Truth.

To me, what is going on with today's quasi-mutinies is as natural as the basic human instinct for self preservation, as the troops choose not to sacrifice their lives or bodies for a cause that has been proven to be a lie, for a national political leadership that seems to have so many other priorities more pressing than that of protecting them from harm.

What is really interesting here is not what is being done, or in this case not being done, by the troops, but by their officers. As in Vietnam, they are surely very well aware of the charade being performed right in front of their eyes by their troops.

The rigid mandates of a commissioned officer's honor point to but one course of action here; to bring the troops in their command up on a charge of mutiny. This was not done in Vietnam, and, as long as today's troops keep their rebellion relatively quiet, it won’t be done here, either. No soldier wants to be the last to die for a mistake, more importantly here, no officer wants to be the last to blow his career and chance for promotion for one either.

Charging one's own troops with this type of offense would be the career advancement version of strapping a suicide vest to one's torso and blowing up any further hopes of promotion in the US military. Being the self-professed commanding officer of mutinous soldiers is the surest way to getting yourself drummed up and out of the military by the service promotions boards today so that you can be out selling insurance annuities at shopping mall kiosks tomorrow.

But even here, there is another liar's logic at work, another reason why America's officer class in Iraq, from young lieutenants to the general staff, would look at the truth and ask for other options.

Many researchers, including Duke University Professor of Political Science Ole Holsti, have noted that, in comparison to the general population, and at least before this current war, the political orientation of the US military's officer class skews heavily rightward.

Should their troops' current rebellions make it further into the general press, which would certainly happen if this became a matter for the military courts, it could not help but put the war and the war effort in a highly negative light, demonstrating the fact that many of the troops see their current and potential sacrifices as pointless. This would certainly work to the advantage of the Democrats back home, and, much more so than the Sunni jihadis of al-Queda, or the Quds Force of Iran, the Democratic Party in the United States is the real foe meant to be defeated in Iraq.

This is the total triumph of ideology over competence, of political spin over truth. In much the same way that the early post-invasion administration of American Iraq viceroy L Paul Bremer mucked up the country beyond recognition or any possibility of repair, telling the truth about the ongoing soldiers’ rebellion would strike a blow to the "support the troops" ideological orthodoxy that is, and will, keep America fighting, bleeding and dying in Iraq, until at least George W Bush’s final day in office in January 2009, and possibly beyond that as well.

If ideology is trumping truth and competence in an area as central to the nation's future as the lives of its young soldiers, then it shouldn't be all that surprising that it's also reigning all-conquering over many other policy arenas as well, including blocking any governmental attempts to resolve the ongoing and intensifying subprime mortgage crisis.

In the Thursday, October 25, edition of the Financial Times it was reported that US Democratic Senator Charles Schumer, the chairman of the US Congress' Joint Economic Committee, believed that current US Treasury Secretary Henry Paulson would like to see the US government take a more active role in pulling the US financial system out of the current deep hole of illiquidity and insolvency into which it has jumped headlong, but Secretary Paulson was being blocked by White House ideologues, presumably including Bush himself, not wanting to sacrifice their core principle of private markets always and forever ruling supercedent over government.

In that Paulson came to the Treasury from previous employment as the chief executive officer of US superstar investment bank Goldman Sachs, it stands to reason that the man who led the company that ruled the markets just might know a thing or two about how to cure what's currently roiling the markets.

Now that last week's presumed private sector subprime salvation, the US$100 billion rescue "superfund", has foundered over the issue of just who was going to be the one putting up the $100 billion (I wrote about the quick rise, and ever quicker fall, of the superfund in my ATol piece of October 23, Subprime fallout: Save our souls) attention is turning to other, possible government centered, solutions to the crisis.

The New York Times is editorializing in favor of a plan in which the US government's Federal Deposit Insurance Commission (FDIC), the agency that pays off depositors in case of a member bank's insolvency, would act to freeze interest rates on subprime mortgages before they "reset" to much higher rates in the next few months.

Many of the now long gone and hard to find subprime mortgage brokers lured their borrowers into the now ticking time bomb of their mortgages with low, initial "teaser" rates that would reset higher after a few years. The mortgage brokers promised the borrowers that, when the time came to pay the higher rates, the borrower could avoid the executioner's axe by just re-financing into another low interest mortgage, which, now, of course, they can't. The borrowers believed the brokers; why shouldn't they have? After all, the brokers all wore shiny new suits and ties, and had such nice offices at the far end of the strip mall next to the coin laundromat and the Dairy Queen.

It is the specter of millions of these subprime borrowers groaning, and finally collapsing, from the weight of the burdens of mortgage rate resets in the next few months that is the real ghoulish fright terrifying Wall Street this Halloween season. The FDIC plan could save many of these poor lost souls, but how much good it would do for the banks holding the subprime mortgage paper is another question.

The banks could be helped by another possible solution. It has been suggested that the US government’s two principal mortgage finance assistance agencies, the Federal Home Loan and Mortgage Corp (called Freddie Mac in the markets) and the Federal National Mortgage Association (called Fannie Mae), more aggressively buy the subprime mortgage paper from the banks which can't now unload it back into the markets for anything near what they paid for it.

This could act to free up billions of dollars from the banks' balance sheets, restoring at least part of the liquidity now sorely lacking from the short-term money markets. Also, Fannie and Freddie could make a policy decision to at least temporarily use a lighter touch with the subprime borrowers entering into default whose mortgages they would then own, potentially saving hundreds of thousands of them from foreclosure . Perhaps best of all, in a Washington where it's 100 times easier to get a policy "no" than a "yes", both Fannie and Freddie have expressed their willingness to act in such a way to solve the crisis.

Perhaps a combination of the FDIC plan with the Freddie and Fannie initiatives could effectively work to save both the subprime homeowners and the markets.

Ain't gonna happen. Bush has already shot down the Freddie/Fannie solution. When the FDIC plan reaches his desk he'll undoubtedly do the same, unless, of course, the stock market is then down a couple thousand points from where it is now. With this administration the imperative of enforcing the ideological orthodoxy of free market supremacy ruling over an enfeebled and emasculated government far and away takes precedence over the interests of the quarter of a million American families now losing their homes through foreclosure every month.

The battle-hardened foot soldiers of laizzez faire ideological conformity are now receiving and accepting their combat orders to march out onto the carnage-sodden battlegrounds of the American cable news television pundit landscape. Since two of the American states now being hit hardest by foreclosures, Michigan and Ohio, have Democratic Party governors, it is now being claimed that the entire subprime problem lies not with unregulated Wall Street finance, but with incompetent local state house incumbents. (The fact that California and Florida, also both now getting hit hard with foreclosures, have Republican governors is something not talked about.)

This strategy worked with Hurricane Katrina, as White House mouthpieces laid the blame for the incompetent federal rescue response at the feet of Democratic Louisiana Governor Kathleen Blanco, so they must figure that if the people are stupid enough to accept it once, there's no reason they won't fall for it again.

Ideology wins, the people lose. So what else is new; "what time is American Idol on?"

America has been seduced by ideology's siren song. Ideology is intoxicating, addictive; it replaces the disconsonant jangle of reality with the simple symphony of a secular theological purity and certainty; it takes whoever is debauched by it to what the Greek historian Herodotus called "the happy land of absolutes".

Maybe there is one thing that might bring Americans back to the land of the real. Much like spoiled thirtysomething socialites who have never worked a day in their lives, perhaps America's choice of believing what it wants to believe over what is real derives from the fact that, for decades upon decades now, America has been allowed to live beyond its means.

With the exception of the years of the Clinton surpluses, the US Federal Budget has been continually in deficit since 1970; the balance of payments on current account - what the US borrows/lends from/to foreign nations, has been in deficit since 1983.

If someone else is paying for your reality, it’s easy to live in fantasy. But there are signs that this situation may be changing. The federal government maintains a running monthly ledger, called the Treasury International Capital, or TIC report of how much finance the nation draws in from foreign sources. (I wrote further about the mechanics and implications of TIC data in my March 24, 2006, ATol article, US living on borrowed time - and money.)

The most recent data for August, released on October 16, show a stunning reversal of foreigners' willingness to pay for US profligacy. Instead of foreign capital interests actually putting money into the US in August, for that month the TIC data actually went negative, indicating that, for that month at least, the net capital inflows into the United States were at minus $163 billion. That includes a minus $35 billion capital flow into long-term US government securities, the principal car park where foreign capital traditionally sits.

This is the worst net TIC data report since the late 1980s, and it is the first time that foreigners have been net sellers of Treasury bonds since 1998.

Those who think that America is still looking at an upcoming forecast of unending sunny economic skies brought to us by meteorologist George W Bush say that the August TIC data was anomalous due to that month's severe economic crisis. That is of course possible, but even with all that month's travails, the Dow Jones Industrial Average, the S&P 500, the NASDAQ, and the price of the Treasury's benchmark 10 year note all closed up for the month.

In other words, although you could still make money in US markets even in August, foreigners chose to take their money and run.

Most commentators are looking at the August TIC data with far less sanguinity, interpreting it as indicative of a growing reluctance of foreigners to forever finance a country that can't live within its means. In much the same way as the famed 18th century English literary light Samuel Johnson once said that nothing focuses the mind like the prospect of a hanging, perhaps the prospect of finally living within its means will focus the nation's mind away from ideological fantasy and back towards practical policy solutions to the nation's problems.

But it won't be easy, and it won't be pretty. Just as the paparazzi press captured the famed pictures of Paris Hilton in tears in the back of a police car as she was transferred from her fantasy life of privilege in the Hollywood Hills to the reality of the Los Angeles County Jail, perhaps we will soon see similar pictures of forlorn American consumers in tears, weeping inconsolably outside such high-end retailers as Restoration Hardware or Coach, mourning for the mindlessly acquisitive consumer lifestyle that soon might be no more.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.

(Copyright 2007 Asia Times Online Ltd. All rights reserved.)

Respite's over

By Doug Noland

COMMENTARY
The autumn respite from summer Credit tumult has run its course. Global central bankers may have succeeded at least temporarily in their aggressive liquidity operations. This liquidity, however, has characteristically avoided post-Bubble risky mortgages and mortgage-related derivatives. Today, a strong case can be made that Monetary Disorder was only exacerbated. To be sure, the unfolding spectacular bursting of the Mortgage Finance Bubble runs unabated. Meanwhile, myriad other global Bubble excesses have gone to only more dangerous extremes – certainly including global equities markets.

It was a week of worrying developments. The degree of mortgage Credit deterioration was confirmed by the dreadfully rapid earnings deterioration being reported by the banking industry. And the housing data out of California suggests an unfolding disaster. If market sentiment doesn't recover soon – and it’s not easy to envision such a scenario in the face of a strangling Credit tightening – we’ll be witnessing a housing bust of historic proportions.

From Wednesday’s Los Angeles Times (Peter Y. Hong and Maura Reynolds): “Home sales in Southern California plummeted in September to a two-decade low… ‘We’re on our way down and still picking up speed,’ said Christopher Thornberg, a Los Angeles-based economist… According to Dataquick, September Southern California homes sales were down 48.5% from a year earlier to the lowest level since at least 1988. Things weren’t much better up north. Dataquick puts Northern California sales down 40% from a year ago. For the entire state, September sales were down 27% from a terrible August to the lowest sales in 20 years. The lack of jumbo mortgage availability received widespread blame. Credit conditions will likely tighten further.

It is an ongoing theme that I don’t expect Credit insurance (in its various contemporary forms) to survive the unfolding downside of the Credit Cycle. Current tumult in the mortgage derivative arena is cause for concern. The rapid deterioration in the mortgage insurance business is quite alarming.

October 18 – Bloomberg (Erik Holm): “MGIC Investment Corp., the largest U.S. mortgage insurer, posted its first quarterly loss in 16 years and said it won’t be profitable in 2008 as foreclosures increase from record levels. The net loss of $372.5 million…was the worst quarter…since it went public in 1991… Costs to bail out lenders tripled to $602.3 million as home prices in the biggest U.S. markets fell, making it harder for banks to recover when loans go sour. Chief Executive Officer Curt Culver said on a conference call today that real estate prices may drop 10% nationally over the next 18 months… MGIC wrote off its $466 million investment in Credit-Based Asset Servicing and Securitization LLC, jointly owned with Radian Group Inc., after demand for subprime loans collapsed… Culver blamed much of the surging losses on larger claims from bigger mortgages and fewer delinquent mortgages being returned to good standing as housing markets deteriorated, particularly in California and Florida… The number of borrowers more than 60 days behind on privately insured loans jumped 30% from year-earlier levels in August… The company is forecasting declines in home values of 20% in the Phoenix area, 18% in Las Vegas, 13% in Orlando, Florida, and 7% in Los Angeles over the next two years.”

October 18 – Bloomberg (Erik Holm): “PMI Group Inc., the second-largest U.S. mortgage insurer… said today it will lose $1.05 a share in the period and withdrew earnings forecasts for the year… The cost to bail out lenders is expected to increase fivefold from the same period a year earlier to about $350 million…PMI said… Stagnant home prices make it harder for banks to recover when loans go bad.”

There are certainly grounds today to suggest that the unfolding California housing bust will test the viability of mortgage insurance industry. MGIC, in particular, noted increased Credit losses in higher-end homes and in the Golden State. But I don’t believe anyone has modeled in the type of housing crisis that is unfolding. This thinly capitalized industry in on the hook for Trillions of insurance exposure. And as the debt market begins to question the ongoing solvency of these insurers, a major additional uncertainty will plague the vulnerable “private-label” ABS and MBS marketplaces. Moreover, the thinly-capitalized GSEs have huge exposure to the fragile mortgage insurance industry. The next stage of the mortgage meltdown is at hand.

Unfortunately, I don’t have time this evening to properly highlight what was a very poor week of bank earnings. Almost across the board, Credit deterioration was much worse than had been expected. It will get much worse.

October 19 – Bloomberg (David Mildenberg): “Wachovia Corp. reported its first earnings decline in six years and missed analysts' estimates after a record $1.3 billion of writedowns for bad loans and mortgage-backed securities… Profit at the five biggest U.S. banks totaled $18.7 billion for the quarter, the lowest in almost four years, as demand for securities linked to mortgages and leveraged loans dried up… Home foreclosures have forced banks to write down the value of mortgages and home equity loans. Citigroup, Bank of America and JPMorgan together wrote down more than $2.5 billion in loans for leveraged buyouts of companies.”

October 19 – Bloomberg (David Mildenberg): “Wells Fargo & Co., Regions Financial Corp., and KeyCorp, three of the biggest U.S. banks, posted lower-than-estimated third-quarter profit and said rising loan losses may hurt future earnings.”

October 17 – Bloomberg (Elizabeth Hester and Charles V. Zehren): “SunTrust Banks Inc., Huntington Bancshares Inc. and BB&T Corp. posted third-quarter profits that fell short of analysts’ estimates as the worst housing market in 16 years forced the regional lenders to write down the value of bad loans. Net income at SunTrust of Atlanta declined 23% while profit at… Huntington fell 12%... None of the companies had a bigger decline than the second-largest U.S. lender -- Bank of America Corp. of Charlotte, North, Carolina -- which said earnings dropped 32% on $4 billion in writedowns and trading losses. Record foreclosures and a decline in the value of securities related to subprime mortgages forced the banks to set aside more money to cover future losses. SunTrust, the third-largest bank in Florida, more than doubled its provision for loan losses to $147 million and said loans no longer paying interest climbed about 70% to $1 billion.”

From Bank of America’s Q3 earnings release: “Unprecedented market disruptions impacted trading results. As a result, Global Corporate and Investment Banking (GCIB) net income fell 93% to $100 million from $1.43 billion a year earlier. Capital Markets and Advisory Services, a business within GCIB which includes Liquid Products, Credit Products, Structured Products and Equities, posted a $717 million net loss compared with net income of $298 million a year earlier. Included in the net loss for the quarter were $247 million in markdowns...on leveraged and non- leveraged loans and commitments. Contributing to the loss in Credit Products was a $607 million trading revenue loss due principally to the breakdowns in traditional pricing relationships, which made hedges ineffective, and the widening of credit spreads. Structured Products, which includes asset-backed and residential mortgage-backed securities, commercial mortgages, collateralized debt obligations (CDOs) and structured credit trading had a net revenue loss of $527 million. The loss arose from lower investment banking fees and trading declines principally due to the same conditions affecting Credit Products... Provision for credit losses was $2.03 billion, up from $1.81 billion in the second quarter of 2007, and $1.17 billion in the third quarter of 2006. Net charge-offs were $1.57 billion, or 0.80% of total average loans and leases. This compared with $1.50 billion, or 0.81 percent, in the second quarter of 2007 and $1.28 billion, or 0.75%, in the third quarter of 2006.”

From Citigroup’s Q3 earnings release: “This was a disappointing quarter, even in the context of the dislocations in the sub-prime mortgage and credit markets. A significant amount of our income decline was in our fixed income business... Fixed income markets revenues declined $1.64 billion to $671 million, driven primarily by: Losses of $1.56 billion, net of hedges, on sub-prime mortgages warehoused for future CDO securitizations, CDO positions, and leveraged loans warehoused for future CLO securitizations. Losses of $636 million in credit trading due to significant market volatility and disruption of historical pricing relationships... ending revenues declined 14% to $412 million, primarily driven by write-downs of $451 million, net of underwriting fees, on funded and unfunded highly leveraged finance commitments...Net investment banking revenues were $541 million, down 50% due to write-downs of $901 million... Credit costs increased $2.98 billion, primarily driven by an increase in net credit losses of $780 million and a net charge of $2.24 billion to increase loan loss reserves. In U.S. higher consumer credit costs reflected an increase in net credit losses of $278 million and a net charge of $1.30 billion to increase loan loss reserves. The $1.30 billion net charge compares to a net reserve release of $197 million in the prior-year period...”

It is worth noting that Citigroup expanded its balance sheet by $133bn during Q3, a 24% annualized rate. Amazingly, Citi’s assets have ballooned $608bn during the past four quarters, or almost 35%. Despite the poor and deteriorating outlook, Bank of America’s Assets increased at an 11.6% pace during the quarter, exceeded by Wachovia’s 19.0%. Big Five (Citi, BofA, JPMorgan, Wachovia and Wells Fargo) Total Assets expanded $243bn during Q3 – a 15.1% growth rate. Big Five Assets have inflated 20% over the past year.

October 19 – The New York Times (Floyd Norris): “‘The banking system is healthy.’ Ben S. Bernanke, Oct. 15… ‘Our bank regulators must evaluate regulatory capital requirements applicable to bank exposures to off-balance-sheet vehicles.’ Treasury Secretary Henry M. Paulson, Oct. 16. Out of sight, out of mind. As America’s big banks reported poor quarterly results this week, it was hard to know what was more distressing: the news, or the fact many bankers were clearly surprised. They were surprised because banking has evolved to the point where a large part of the revenue comes from things invisible to readers of financial statements, either commitments to make loans, or through vehicles carefully engineered to stay off the balance sheet. A notable illustration came from Citigroup. Its write-offs were half a billion dollars more than the bank had forecast only two weeks earlier, and its optimism about the fourth quarter was toned down considerably. But the most impressive fact was the bank’s explanation of why its nonperforming corporate loan total had doubled, to $1.2 billion, in just three months. Citi explained that the bulk of that came from just one loan — and it was a loan that had not even been made a few months earlier. Citi had taken a fee to provide a backup line of credit to a structured investment vehicle — a line that would be called on only if the S.I.V. could not borrow and a German bank could not meet its promise to make the loan. That happened, so Citi forked over the cash and immediately put the loan on nonperforming status. That’s a neat trick. You don’t make the loan until you know it will be a bad loan.”

It was one of the great myths of this Credit Cycle that the banking system was much healthier and more stable because of the capacity of contemporary finance to dis-intermediate bank Credit risk to “the marketplace.” It is now becoming clearer to market participants that the major banks in particular have huge exposures to myriad risks market and otherwise, previously having been distributed to various vehicles, structures and market operators. The problem today is that the preponderance of players active in this non-bank risk intermediation have been thinly capitalized and often leveraged. Too many were aggressively writing flood insurance in a drought, without the wherewithal to deal with an eventual flood. There’s now a severe one heading our way whether the Fed cuts rates or not.

It is both fascinating and alarming to witness the wild inflation in the banking system balance sheet in the midst of a rapidly faltering Credit Cycle. Not only are the banks forced now to “-re-intermediate” risk they had previously distributed, they also have no alternative than to take up the slack from an increasingly impaired Wall Street risk intermediation mechanism. The market is beginning to appreciate the great risks associated with such a proposition.

It is today’s inescapable Credit Bubble Dilemma that enormous quantities of new Credit must be forthcoming – which entails intermediating Credits that are at this stage highly risky. For one, they’re of high risk because the Credit system is proceeding toward a major dislocation - one with major ramifications for the entire economic system. Inevitably, the flow of finance will be altered profoundly. Many individuals, market operators, business enterprises, and (local, state, and federal) governments are today poorly positioned and will be forced to adjust. This will amount to a momentous financial and economic adjustment, and we should not expect that it will proceed smoothly.

In the meantime, there is today apparently no alternative than massive banking system inflation. In just 12 weeks, bank Credit has ballooned $360bn. And as much as the unfolding mortgage debacle will impair the banking system, I fear it has already irreparably damaged “Wall Street finance.” If upper-end jumbo, alt-A and home equity loans are the looming disaster that I suspect (significantly larger in scope than subprime), the viability of the CDO and mortgage derivatives markets may soon be in doubt. The terrible earnings news this week from the mortgage insurers plays right into this debacle. If confidence falters in the GSEs… And the melt-up in Treasury prices only exacerbates MBS instability, while the (not so) quiet run on the dollar further reduces the appeal of U.S. mortgage paper to our foreign Creditors.

Stock market complacency over the past weeks was astounding. But if the markets head directly south from here, market confidence and the Fed’s capabilities will be tested simultaneously. Lower rates are definitely not the answer. Respite’s over.

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The Respite from Credit crisis came to an abrupt end. For the week, the Dow was hit for 4.1% (up 8.5% y-t-d) and the S&P500 3.9% (up 5.8%). The Transports fell 2.8% (up 5.3%), and the Utilities were clobbered 4.1% (up 7.4%). The Morgan Stanley Cyclical index was slammed for 4.6% (up 16.3%), and the Morgan Stanley Consumer index dropped 3.4% (up 4.8%). The broader market was weak. The small cap Russell 2000 sank 5% (up 1.4%), and the S&P400 Mid-Cap index dropped 3.7% (up 9.3%). The NASDAQ100 declined 2.2% (up 21.3%), and the Morgan Stanley High Tech index fell 3.4% (up 17.1%). The Semiconductors declined 2.5% (up 1.5%). The Street.com Internet Index dropped 3.7% (up 19.1%), and the NASDAQ Telecommunications index sank 3.8% (up 21.3%). The Biotechs fell 2.7% (up 9.1%). Financial stocks were hammered. The Broker/Dealers dropped 7.6% (down 7.4%), and the Banks sank 7.7% (down 14.6%). The HUI gold index declined 2% (up 19.7%).

Crisis dynamics returned to the Credit market. Three-month Treasury bill rates collapsed 38 bps this week to 3.83%. Two-year government yields sank 45 bps to 3.77%. Five-year yields ended the week down 39 bps at 4.02%. Ten-year Treasury yields dropped 30 bps to 4.39%, and long-bond yields declined 21 bps to 4.69%. The 2yr/10yr spread widened 16 bps this week to 61 bps. The implied yield on 3-month December ’08 Eurodollars sank 44 bps to 4.145%. Benchmark Fannie Mae MBS yields fell 20 bps to 5.78%, this week significantly under-performing Treasuries. The spread on Fannie’s 5% 2017 note widened 4 to 46, and the spread on Freddie’s 5% 2017 note widened 5 to 47. The 10-year dollar swap spread increased 2.8 to 64.5. Corporate bond spreads widened significanlty this week as Treasuries went into melt-up mode. The spread on an index of junk bonds ended the week 22 bps wider.

Investment grade debt issuers included Wells Fargo $3.0bn, Covidien $2.75bn, Vodafone $1.7bn, IBM $1.5bn, McDonalds $1.5bn, American Waterworks $1.5bn, Yum Brands $1.2bn, Washington Mutual $1.0bn, Marriott $400 million, and Nationwide Health $300 million.

Junk issuers included First Data $2.2bn, GTL $1.0bn, Indianapolis Downs $425 million, and Bausch & Lomb $650 million.

Convert issuers included Rayonier $300 million.

Foreign dollar bond issuance included Pemex $2.0bn, Taq Abu Dhabi $1.5bn, and Santander $1.5bn.

German 10-year bund yields dropped 20 bps to 4.22%, as the DAX equities index dropped 2.0% for the week (up 19.5% y-t-d). Japanese 10-year “JGB” yields fell 10 bps to 1.60%. The Nikkei 225 sank 3.0% (down 2.4% y-t-d) Most emerging equities markets were hit by late-week selling, while debt markets mostly rallied. Brazil’s benchmark dollar bond yields declined 9 bps to 5.71%. Brazil’s Bovespa equities index declined 2.5% (up 36.9% y-t-d). The Mexican Bolsa gave back 2.0% (up 20.3% y-t-d). Mexico’s 10-year $ yields dropped 11 bps to 5.48%. Russia’s RTS equities index slipped 1.0% (up 11.5% y-t-d). Volatility returned to India’s Sensex, with this index falling 4.7% (up 27.4$ y-t-d). China’s Shanghai Exchange declined 1.4%, reducing y-t-d gains to 117% and 52-week gains to 225).

Freddie Mac posted 30-year fixed mortgage rates were unchanged this week at 6.40% (up 4bps y-o-y). Fifteen-year fixed rates added 2 bps to 6.08% (up 2bps y-o-y). One-year adjustable rates increased 3 bps to 5.76% (up 19 bps y-o-y).

Bank Credit ballooned an additional $32.1bn for the week (10/10) surpassing $9.0 TN for the first time. Bank Credit has now posted a 12-week gain of $360bn (18.1% annualized) and y-t-d rise of $707bn, a 10.8% pace. For the week, Securities Credit increased $10.8bn. Loans & Leases jumped $21.3bn to a record $6.606 TN (12-wk gain of $283bn). C&I loans rose $13.3bn, increasing the 2007 growth rate to 22.3%. Real Estate loans increased $7.9bn. Consumer loans added $1.9bn. Securities loans declined $2.2bn, while Other loans added $0.3bn. On the liability side, (previous M3) Large Time Deposits rose $22.4bn (5-wk gain of $100bn).

M2 (narrow) “money” added $1.0bn to a record $7.385 TN (week of 10/8). Narrow “money” has expanded $342bn y-t-d, or 6.1% annualized, and $458bn, or 6.6%, over the past year. For the week, Currency gained $1bn, and Demand & Checkable Deposits jumped $16.5bn. Savings Deposits dropped $25bn, while Small Denominated Deposits added $1.2bn. Retail Money Fund assets increased $7.3bn.

Total Money Market Fund Assets (from Invest. Co Inst) jumped $11.5bn last week to a record $2.920 TN. Money Fund Assets have now posted a 12-week gain of $337bn (62% annualized) and a y-t-d increase of $538bn (28% annualized). Money fund asset have surged $659bn over 52 weeks, or 29%.

Total Commercial Paper added $1.3bn to $1.866 TN. CP is down $357 bn over the past ten weeks. Asset-backed CP fell $23bn (10-wk drop of $279bn) to $895bn. Year-to-date, total CP has declined $108bn, with ABCP down $189bn. Over the past year, Total CP has contracted $27bn, or 0.9%.

Asset-backed Securities (ABS) issuance slowed to $2.3bn this week. Year-to-date total US ABS issuance of $486bn (tallied by JPMorgan) is running 31% behind comparable 2006. At $213bn, y-t-d Home Equity ABS sales are 53% off last year’s pace. Year-to-date US CDO issuance of $270 billion is running 4% below 2006.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 10/17) jumped $14.4bn to $2.018 TN. “Custody holdings” were up $266bn y-t-d (18.8% annualized) and $333bn during the past year, or 19.7%. Federal Reserve Credit was little changed at $858bn. Fed Credit has increased $5.9bn y-t-d and $26.6bn over the past year (3.2%).

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $1.100 TN y-t-d (28% annualized) and $1.240 TN year-over-year (27%) to a record $5.912 TN.

Credit Market Dislocation Watch
October 19 – Bloomberg (Hamish Risk and Bryan Keogh): “Credit-default swaps rose the most in three months this week as a planned $80 billion fund to rescue structured investment vehicles failed to stop two funds from being unable to repay debt. Investors are becoming more bearish as losses on SIVs, companies that borrow in short-term markets to buy longer-dated assets, add to concern that the fallout from record U.S. mortgage foreclosures may be worse than analysts had expected. The cost of credit-default swaps, contracts protecting payment on bonds, rises when the perception of credit quality worsens.”

October 19 – Bloomberg (Sebastian Boyd and Neil Unmack): “Cheyne Finance Plc and IKB Deutsche Industriebank AG’s Rhinebridge Plc, two structured investment vehicles that bought securities backed by home loans, defaulted on more than $7 billion of debt as the value of their holdings fell. The companies borrow in the short-term debt market and use the proceeds for buying mortgage-backed bonds and collateralized debt obligations. Falling market prices for assets forced the companies to declare all of their debt due this week… ‘The fallout from the credit crisis is far from over,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG… ‘There are probably more skeletons in the closet. The problem is knowing when and where they are going to emerge.’”

October 19 – Dow Jones (Anusha Shrivastava): “The subprime mortgage-based ABX index is under renewed pressure Friday, with its riskiest slice hitting a record low and the less risky slices also trading weaker, amid continued worries over the fallout from the U.S. subprime mortgage crisis.”

October 19 – Bloomberg (Bo Nielsen and Min Zeng): “The yen rose the most in six weeks against the euro as a decline in global stocks prompted investors to sell higher-yielding assets funded by loans in Japan. Japan’s currency gained for a fifth day versus the dollar, the longest winning streak in almost a year, and posted its best week against the euro in two months, as the risk of holding corporate debt increased.”

October 17 – Financial Times (Gillian Tett): “A decade ago, when Asia was facing a financial crisis, American bankers and government officials regularly travelled to the region delivering homilies about the best way to exit a banking mess. After all - or so the lectures typically went - America had suffered bank crises in the past, such as the Savings and Loan debacle of the late 1980s. This experience had shown that the best route to recovery was to establish realistic prices for distressed assets, by conducting fire sales if necessary, and then write the losses off. A decade later, however, it seems that some US financiers need to take another hefty swig of the medicine they used to wave at Asia.”

October 19 – The New York Times (Eric Dash and Gretchen Morgenson): “Does the rescue plan for the credit markets need to be saved? The plan is still being developed, but the roughly $75 billion effort to snap up troubled securities is struggling to get off the ground, days after it was disclosed by the country’s three biggest banks with the support of the Treasury Department. Citigroup, Bank of America, and JPMorgan Chase back the plan but are just beginning to hammer out the details. Bank regulators are aware of the discussions but some say they are out of the loop. And market participants are puzzled, with investors like Pimco and T. Rowe Price balking at buying in… But the plan, which was hatched in August but leaked last week, has been plagued by uncertainties. All three banks agree on the concept but differ on the details. Other questions remain. How will the plan work? Who will participate? How much will its backers put in? ‘Until we know the answers, it is tough to say just how much impact this is going to have,’ said Christian Stracke, a CreditSights analyst who follows S.I.V.’s. At this point, ‘It’s a big mess.’…So far, the banks agree on the larger goal: to restore stability and confidence to a vital pocket of the commercial paper market. They are concerned that if all 30 S.I.V.’s, which hold about $320 billion in assets, began selling securities at once, prices would plummet and lead to a lending freeze. But each bank has something different at stake in participating… Money market fund managers are also divided over participating. Some say the effort will just delay the inevitable by repackaging bonds backed by mortgages, loans and other assets that investors know little about and that have fallen in value.”

October 19 – MarketWatch: “Former Federal Reserve Chairman Alan Greenspan said the ‘Super SIV’ fund could have serious repercussions, according to an interview with the Emerging Market newspaper… In the article, Greenspan said the ‘Super SIV’ - the $75 billion Master Liquidity Enhancement Conduit designed to take on the assets of troubled investments - runs the risk of further undermining already brittle confidence in besieged credit markets.”

October 17 – Financial Times (David Wighton): “Big US commercial banks have seen $280bn of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans. The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer…"

October 17 – Financial Times (Dave Shellock): “Sky-high oil prices, a worrying report on US capital outflows and some disappointing corporate earnings set the scene for another edgy session for financial markets yesterday. The main shock of the day came from Treasury International Capital data showing that foreign investors sold a net $69.3bn of long-term US securities in August, the biggest outflow since 1990. ‘A truly stunning Tics number, the likes of which I have never seen,' said Alan Ruskin, chief international strategist at RBS Greenwich Capital Markets. Asian investors sold a net $52bn of Treasury bonds in August, but Tom Levinson, economist at ING, said the real damage to the headline number came from a near-$60bn negative month-on-month swing in corporate stock investment… ‘One month never makes a trend, but were Asian Treasury purchases to not rebound in coming months, markets would be left asking whether a key support for the dollar has begun to wane.’”

October 19 – The Guardian (Phillip Inman and Angela Balakrishnan): “Lending by the Bank of England to stricken mortgage bank Northern Rock was increased to Ł16bn ($32.bn) over the last week, raising fears that the Newcastle-based bank is running out of funds at a faster rate than expected. Figures released yesterday show that the Bank of England's balance sheet rose by a further Ł3bn in the week to Wednesday, which suggests that Northern Rock was demanding more funds each week and not less…”

Currency Watch
October 17 – Financial Times (Peter Garnham): “The meeting of finance ministers and central bankers from the seven leading industrialised nations in Washington this weekend comes amid signs of severe strains in global currency markets. The question is whether they will do anything about it. Ahead of the meeting, the Europeans are fretting over the impact of a strong euro on the region’s exporters, while the dollar’s slide is making a mockery of the US Treasury’s mantra that a strong currency is in the country’s interests. In Tokyo, the yen’s slide rings alarm bells as investors show a new interest in carry trades, in which the low-yielding Japanese currency is sold to finance purchase of riskier assets elsewhere. Meanwhile, China continues to decline persistent invitations from the US and Europe to let the renminbi appreciate faster.”

October 17 – Bloomberg (David Yong and Wes Goodman): “Japan, China and Taiwan sold U.S. Treasuries at the fastest pace in at least five years in August as losses linked to U.S. subprime mortgages sparked a slump in the dollar. Japan cut its holdings by 4 percent to $586 billion, the most since a new benchmark for the data was created in March 2000, Treasury Department figures…showed. China’s ownership of U.S. government bonds fell by 2.2% to $400 billion, the fastest pace since April 2002. Taiwan’s slid 8.9% to $52 billion, the most since October 2000.”

October 19 – Bloomberg (Stanley White and Kazumi Miura): “The dollar may ‘plunge’ in 2008, prompting the U.S., the European Union and Japan to intervene in foreign exchange markets, said Eisuke Sakakibara, Japan’s former top currency official. U.S. economic growth may slow to less than 1% next year…he said… Sakakibara, 66, was dubbed ‘Mr. Yen’ because of his ability to influence the currency market during his 1997 to 1999 tenure at the Ministry of Finance. ‘Should growth fall below 1%, we could see a plunge in the dollar,’ said Sakakibara… ‘Some form of intervention would be necessary to stop it, and that would require coordinated effort from all three major economies.’”

The dollar index dropped 1.2% to 77.31. For the week on the upside, the Japanese yen increased 2.5%, the Canadian dollar 1.1%, the Swiss franc 1.2%,, the Brazilian real 0.7%, the Euro 0.7% and the Danish krone 0.6%. On the downside, the New Zealand dollar declined 1.8%, the Colombian peso 1.4%, the Indian rupee 1.1%, and the Australian dollar 0.9%.

Commodities Watch
October 19 - Bloomberg (Claudia Carpenter): "Gold headed for its biggest weekly gain in a month as the dollar weakened on speculation the U.S. Federal Reserve will cut interest rates this month, spurring demand for the precious metal as an alternative investment."

October 19 – Bloomberg (Halia Pavliva): “Platinum rose to a record in New York after Anglo Platinum Ltd., the world’s largest producer, closed shafts at its biggest mine.”

For the week, Gold gained an additional 2.1% to a 27-year high $765, while Silver dipped 1.9% to $13.64. December Copper fell 2.8%. November crude surpassed $90 for the first time, before closing the week with a gain of $4.91 to $88.60. November gasoline jumped 4.0%, and November Natural Gas gained 1.0%. December Wheat was little changed. For the week, the CRB index rose 2.0% (up 10.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 3.1% (up 30.9% y-t-d).

Japan Watch
October 19 - Bloomberg (Mayumi Otsuma): "The Bank of Japan remains committed to raising interest rates as the world's second-largest economy extends its expansion, Deputy Governor Toshiro Muto said. 'The Bank of Japan will gradually adjust the level of interest rates in accordance with the pace of improvements in the economy and prices and check risk factors,'' Muto said..."

China Watch
October 19 – Associated Press: “China’s consumer prices jumped 6.2% in September from a year earlier on higher food costs and the government will consider tightening monetary policy and investment curbs in response… September’s inflation rate was down slightly from 6.5% in August, the highest monthly rate in 11 years… ‘To lower prices will be an important task for our economic regulation,’ Zhu Zhixin, vice chairman of the National Development and Reform Commission… ‘Measures may include exercising a monetary policy of moderate austerity, restricting excessively fast investment in fixed assets and to take measures to adjust prices,’ he said.”

India Watch
October 19 - Financial Times (Joe Leahy): "India has pledged to open the 'front door' wider to hedge funds in an apparent bid to bolster foreign investor confidence after a stock market plunge triggered by a proposed crackdown on investment in the country through offshore derivatives. Hedge funds will be given easier direct access to the Indian stock market after the proposed curbs that have raised fears of a rush of selling by foreign investors... Sebi sparked the stock market plunge on Wednesday by announcing the proposed regulations that would curtail the sale of derivatives known as participatory notes that are used by foreign investors, particularly hedge funds, to gain exposure to underlying Indian shares. The market initially fell 9% on the news amid speculation the measures would curb massive capital inflows into India’s market."

Asia Bubble Watch
October 17 – Bloomberg (Josephine Lau): “Asia’s ranks of people with more than $30 million in assets is swelling at a faster pace than in the rest of the world… according to Merrill Lynch & Co. and Capgemini SA. The number of ‘ultra high net worth’ individuals increased 12.2% in 2006, compared with 11.3% worldwide…”

October 17 – Bloomberg (Seyoon Kim): “South Korea’s economy will expand almost 5% this year, topping the government's previous forecast, Finance Minister Kwon Okyu said.”

Unbalanced Global Economy Watch
October 17 – Bloomberg (Fergal O’Brien): “Irish house prices fell for a third straight quarter…as the highest borrowing costs in six years and concern about a property slump deterred buyers, a survey showed. Asking prices for houses fell 0.7% in the third Quarter…”

October 18 – Bloomberg (Steve Bryant and Ali Berat Meric): “Turkey’s ruling party plans to increase spending by 10% in 2008 as declining debt levels allow it to loosen budget targets for the first time since coming to power in 2002.”

Fiscal Watch
October 19 - Bloomberg (Michael Quint): "New York State's looming $4 billion budget gap will require use of one-time transfers of funds among various accounts and drawing down reserves, Budget Director Paul Francis said."

Central Banker Watch
October 17 – Bloomberg (Simone Meier and Andreas Scholz): “European Central Bank Council member Klaus Liebscher said the bank remains focused on ‘significant’ and rising inflation risks, suggesting it may still raise interest rates. ‘The message was and is that risks to price stability are clearly pointing to the upside,’ Liebscher, who also heads Austria’s central bank, said… ‘There are significant upside risks’ and ‘rising oil prices are also increasing these risks to price stability.’”

October 17 – Reuters: “Former Federal Reserve Chairman Alan Greenspan sees no imminent danger in the weakening of the U.S. dollar, a Czech newspaper quoted him as telling a closed-door conference in Prague via a video link... The ex-Fed chairman said inflation was a far bigger concern for the United States than the dollar, which was trading at a tolerable level, the newspaper said.”
California Watch
October 18 – Associated Press: “September home sales throughout California sank to their lowest level in two decades as mortgages became harder to get… A total of 24,460 new and resale houses and condos were sold statewide last month. That was down 45.2% from September of 2006 and 26.8% from August, according to DataQuick…”

October 17 – The Los Angeles Times (Peter Y. Hong and Maura Reynolds): “Home sales in Southern California plummeted in September to a two-decade low, and a rash of grim housing-market assessments Tuesday suggested the worst is yet to come. ‘We’re on our way down and still picking up speed,’ said Christopher Thornberg, a Los Angeles-based economist… In Southern California in September, home sales in six counties -- Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura -- fell 48.5% from the same month last year. They were at their lowest since DataQuick…began compiling such statistics in 1988.”

October 18 – Bloomberg (Daniel Taub): “San Francisco Bay Area house and condominium sales dropped 40% last month to the lowest for a September in two decades as stricter loan standards kept some homebuyers out of the market, DataQuick…said. Last month’s sales count was the lowest for a September since at least 1988, when statistics begin for…DataQuick. Banks and other lenders are requiring homebuyers to make larger down payments and have better credit ratings to qualify for mortgages.”

October 19 – Bloomberg (Jeremy R. Cooke): “California and the Port of Oakland sold the largest of $7.5 billion in municipal bond offerings as U.S. state and local government borrowing rose to the highest level in five weeks. California, whose bond sales this year already exceed the state’s issuance during 2005 and 2006 combined, borrowed $1.5 billion to fund civic improvements and refinanced $1 billion of debt…”

Financial Sector Earnings Watch
October 17 – Bloomberg (Bradley Keoun): “E*Trade Financial Corp… reported its first loss in five years and slashed its 2007 forecast because of rising costs for bad debt at its online bank… Chief Executive Officer Mitchell Caplan’s efforts to build E*Trade’s online bank over the past three years by tripling loans outstanding backfired as more borrowers fell behind on payments and U.S. home prices dropped.”

Mortgage Finance Bust Watch
October 17 – Bloomberg (Kathleen M. Howley): “The volume of U.S. mortgages will tumble this year to the lowest since the beginning of the housing boom as a ‘credit shock’ restricts lending, the Mortgage Bankers Association said. The total value of home loans will fall to $2.3 trillion in 2007, the lowest since $1.1 trillion of loans were made in 2000, before the real estate market’s five consecutive years of record sales and home prices…”

October 17 – Bloomberg (Mark Pittman): “Standard & Poor’s lowered ratings on $23.4 billion of subprime and Alternative-A mortgage securities that were created as recently as June. The cut covers 1,713 classes of bonds sold in the first half of 2007… Some debt with the highest AAA rankings were reduced… S&P’s action, in the same year as the securities were created, is its swiftest mass downgrade of mortgage bonds and the first time 2007 bonds have been cut by any company.”

October 19 – Bloomberg (James Tyson): “Standard & Poor’s lowered ratings on about $22 billion of securities backed by first-lien subprime home loans because of rising delinquencies. The cut covers 1,413 classes of bonds from the fourth quarter of 2005 through the fourth quarter of 2006…”

October 17 – Financial Times: “After absorbing staggering losses on their land holdings in past downturns, home builders have learned to limit risk by buying options on property instead of purchasing it outright. This time around, they have left other investors holding the bag - and the fallout has only just started. US home builders have taken billions of dollars in write-offs this year after relinquishing deposits on property they no longer need. That land, which is worth far less than book value, is now stuck on the balance sheets of a disparate group of property owners across the country. These investment groups, known as "land banks" and which include GMAC, Acacia Capital, IHP Capital and Hearthstone, are backed by big US institutional investors… In their eagerness to sponsor projects, many investors took extra risk by accepting smaller deposits from builders or looser deal terms. They now have too much property on their books, paltry deposits to show for it, and lenders breathing down their necks. Some investors will have to sell properties to stay solvent, causing huge tracts of land to hit the market at distressed prices. Discounted properties have already popped up for sale in hard-hit Phoenix, Arizona, and southern California.”

October 17 – Bloomberg (Kathleen M. Howley): “GMAC Financial Services will cut 25% of the staff at… ResCap… ResCap… will fire about 3,000 workers from its 12,000-person staff…”

October 17 – Bloomberg (Takahiko Hyuga and Mariko Yasu): “Nomura Holdings Inc., Japan’s largest securities company, will post its first quarterly pretax loss in more than four years after losing 73 billion yen ($620 million) on U.S. home loans… ‘This is extremely regrettable,’ Chief Executive Officer Nobuyuki Koga said… ‘The pace of the collapse in the U.S. residential mortgage-backed securities market was quicker than we expected.’”

Real Estate Bubbles Watch
October 17 – Bloomberg (Shobhana Chandra and Robert Willis): “The two-year U.S. housing recession deepened in September… Builders broke ground at an annual rate of 1.191 million homes… Starts were the lowest in 14 years.”

October 17 – Financial Times (Daniel Pimlott): “DR Horton, the largest US homebuilder by sales, painted a grim picture of the housing market yesterday, revealing that nearly half of its home orders were cancelled in the three months to the end of September. The surge in the company’s cancellation rate was complemented by a 39% drop in sales to 6,734 homes, in spite of an aggressive programme of incentives and price cutting. The dollar value of sales fell by 48%.”

October 17 – Financial Times (Ben White and Eoin Callan): “Hank Paulson, the US Treasury Secretary, warned yesterday that the downturn in the nation's mortgage market would burden the economy ‘for some time’ as several big banks, the largest homebuilder and a major construction equipment maker all highlighted the growing impact of the housing decline… A monthly survey from the National Association of Home Builders and Wells Fargo indicated that confidence among homebuilders had hit its lowest point in more than 20 years.”

October 18 – Bloomberg (Daniel Taub): “Apartment rents rose throughout the U.S. West in the third quarter as home sales slowed and companies boosted hiring…RealFacts said. The largest increases were in the Seattle and San Jose, California, areas. The average monthly rent in nine western U.S. states rose 5.5% from a year earlier to $1,142… In the San Jose, Sunnyvale and Santa Clara area, the average rent rose 12% from a year earlier to $1,449. In the Seattle, Tacoma and Bellevue area, it gained 11% to $955.”

Fiscal Watch
October 18 – Bloomberg (Michael Quint): “New York State’s looming $4 billion budget gap will require use of one-time transfers of funds among various accounts and drawing down reserves, Budget Director Paul Francis said. Francis, also a senior adviser to Democratic Governor Eliot Spitzer, said he expects ‘some additional revenue’ even if profits weaken on Wall Street… Francis said budget planners expect to limit state operating expense growth to 5.3% in the year beginning April 1, 2008.”

Speculator Watch
: October 19 – Dow Jones: “Wachovia (WB) CEO Ken Thompson says his biggest disappointment with his investment bank’s weak 3Q performance was that it lost roughly $300M on securities tied to subprime mortgages. He says WB generally steered clear of subprime exposure, and having those securities in the investment bank represented ‘a little bit of a breakdown.’ He also expressed surprise that the AAA-rated securities lost value so quickly. ‘We didn’t expect that that paper could degenerate that fast,’ he said. Nonetheless, Thompson said he’s comfortable with the investment bank’s risk-management systems.”

Doug Noland is a market strategist for the Prudent Bear Funds.

(Republished with permission from PrudentBear.com. Copyright 2005-2007 David W Tice & Associates. All rights reserved.)

Subprime fallout: Save Our Souls

By Julian Delasantellis

Call it karma, Karl Jung's synchronicity, serendipity, or just plain old bad dumb luck, but it is interesting that the US stock market chose to throw in a 5% price decline in the week that Rupert Murdoch's Fox Business cable channel, the unabashedly rightwing rah rah towel-snapping boobs over bonds alternative to General Electric's CNBC and Bloomberg TV, debuted in 30 million US homes.

In contrast to the rest of the financial media, which correctly placed the blame for this latest market falloff, culminating in Friday's 367-point, 2.6% fall in the US Dow Jones Industrial Average, on continuing and ever-deepening concern over the credit quality effects of the US subprime crisis, Fox Business rounded up the usual keffiyeh-clad suspects and was alone among the financial media in placing at least part of the blame for the selloff on market nervousness over the terror bombings that greeted former premier Benazir Bhutto's return to Pakistan the previous day.

In a time of significant crisis in the markets, when investors are in desperate need of real, unbiased actionable information, Fox Business will probably keep its viewers from changing the channel to CNBC or Bloomberg with the usual Murdoch media strategy of increasing the diaphanousness quotient of their female on-air talent's attire. (Surely, Fox Business' Liz Claman and Nicole Petallides must have by now discerned the purpose of the bowls of ice cubes on their dressing room tables.)

For the rest of us, dealing with the challenges posed by the current financial markets' travails may prove somewhat more problematic.

To paraphrase Henry II, "subprimes, subprimes; will no one rid me of these damned subprimes?" That's proving to be much easier said than done. For the third time since March, we are in the midst of a significant market selloff, a sharp and painful expansion of what the markets call "risk aversion".

The first time was in early March, followed soon by HSBC bank's reporting that its earnings would be negatively affected by problems at its American Household Finance mortgage unit, the signature event that brought the subprime mortgage crisis front and center to the market's attention. That caused a 7% decline in the US Dow Jones Index, 8.5% in Germany's XETRA DAX index and a 9.7% decline in Japan's Nikkei 225 index.

Strong world economic growth drove the subprimes from the market's concern in spring and early summer, but by mid-July, growing realization of just how extensive, and how widespread the subprime losses were going to be led to the big equity market calamities of August, with both the Dow Jones and the DAX falling over 11%, the Nikkei 16.5%. (I wrote about the internal market dynamics of the August selloffs in my October 2 ATol article, No such thing as a sure thing.)

August's market carnage and investor losses had the US Federal Reserve and other world central banks saddling up and riding to the rescue of their large investment banks and other speculative interests, with market interventions and, in the case of the Fed, interest rate cuts.

This settled things down a while; the Dow Jones and the S&P 500 reached all-time record highs in the first week in October, the DAX nearly so. Until last week the markets seemed to be confident that the world's economic regulators could, with more rate cuts and prudent oversight of the institutions endangered by the crisis, stay at least somewhat ahead of the whole subprime mess.

Last week the sentiment turned; it no longer seemed that the central banks were staying ahead of the crisis; the fear was that the crisis was going to catch up, run over and flatten them.

In a fitting upbraid to those who think that by the sheer force of their intellect or will they are able to tame markets, the proximate cause of last week's turmoil was an attempt to save them. I've written before that one of the biggest problems in the current subprime crisis is the fact that those investors outside of the financial institutions that waded into the subprime swamp have no real idea just how bad things are, just how much subprime and subprime-related exposure that those now caught in the swamp are hiding under water and away from view. (The Economist magazine reports that banks suspected of having the most exposure to the specific subprime-related debt called "structured investment vehicles" (SIVs), are now being termed by the markets as being "SIV positive", as if the SIVs were deadly communicable viruses, which, in actuality, may be closer to the truth than the wags either realized or intended.)

Three of the most bounteous of American finance capital's heavy hitters, Citigroup, JP Morgan/Chase and Bank of America, floated an idea over the weekend of October 13-14 to establish, within the neighborhood of US$100 billion (a very nice neighborhood indeed) of these banks' funds, something called "the Master-Liquidity Enhancement Conduit", or M-LEC - commonly called "the superfund".

In simplest terms, what the big hitters were hoping was that when investors dealt with these institutions after the establishment of the M-LEC, no longer would the big institutions be tinged with the pervading aroma of feculent subprime carrion that currently permeates much of American finance. The idea was that the M-LEC would buy the questionable (although not the worst) of the subprime SIVs, taking them off the bank's balance sheets, and, in so doing, restoring confidence in the big banks.

But if it was going to be this easy to solve the subprime mess it probably would have been done by now, and, as the markets realized this, the selling of last week set in. (This selling was matched in Asia on Monday, where stocks plunged, led by Japan's benchmark Nikkei 225 stock index losing 3.20% and the Korea Composite Stock Price Index shedding 3.8% in early trade. Stocks were also down in Australia, Hong Kong, Indonesia, the Philippines and Taiwan.)

If the big banks really wanted to get the SIVs off their books, they would not have needed to set up a $100 billion M-LEC to do it; all they would have to do is exactly the same thing that widows and orphans do when they want to sell 100 shares of AT&T; call up their brokers and have them put in a sell order.

But this is exactly what the big banks do not want to do, for they do not want to accept the fire-sale or worse prices for the distressed SIVs that the market is now willing to give them. Since the SIVs trade in the secondary market so infrequently, the big banks had been valuing them on their books not in relation to their recent sales, their "comps" in real-estate lingo, but instead according to a series of complicated proprietary mathematical model formulations that allowed the banks to carry them on their books at valuations far higher than what today's nervous markets are willing to pay for them. (I wrote about the inherent dishonesties involved in marked-to-model pricing in my July 3 ATol article, Of termites and index mania.)

So, if the M-LEC is going to take the bad SIVs off the big banks' hands, at what price will these transactions be made? The big banks don't want to take the market prices; they'd be overjoyed to get the marked-to-model prices. The free market won't give them the latter; it was the sneaking suspicion that the banks were going to force marked-to-model pricing down the throats of the M-LEC, which after all would be the big banks' creation, that turned the markets against the M-LEC concept by late last week.

Inherent in the idea of the M-LEC is the hope that, eventually, the big banks which created it would be able to take off its training wheels and let it stand alone as a profit-making entity. The market sees this as unlikely; if at birth the M-LEC is to be saddled with the dead weight of its creators' previous greed-soaked imprudence and impropriety, then it's not surprising that, by the end of the week, the market looked around and saw that the general situation was far worse than it previously thought.

As far as the markets are concerned, it's best to not have any problems, it's somewhat worse but acceptable to have a problem but then to come up with a workable solution. If you have a problem and it is then seen that your solution is nothing more than blather-sodden balderdash, then, in terms of inspiring and maintaining confidence, that's the worst situation of all. No wonder that, by Friday afternoon, investors were crowding the stock market's exits, having sold out and heading for the hills.

Many right-wing pundits, in their ever-more difficult effort to maintain the George W Bush-economy-triumphant-over-all talking point, continue to attempt to play down the seriousness of the subprime crisis, noting that, even amid all the bad news regarding the US real estate sector being proclaimed all across the non-Murdoch media, over 90% of US homeowners are still continuing



to meet their mortgage obligations on or near on time.

This is true, but meaningless. As I have written many times, it may be called the subprime crisis, but the real problems lie not with the poor subprime borrowers awaiting their upcoming and inevitable foreclosure, it's what happened to that subprime mortgage paper as it got packaged and repackaged, leveraged up, collateralized, borrowed upon, and then leveraged up again, while it moved further and further up into finance capital's elite addresses. A $1 loss on a $100 stock should not be a problem, unless you've used your $100 investment to buy $100,000 of that stock on margin. In that case, you are wiped out.

It is true that the general market is still only around 5% off its recent highs, but it is in looking at the market's internal dynamics that you can see just how serious things are becoming.

It was in the March selloff that the market basically decided to throw the pure subprime lenders, such as New Century Financial and Novastar, onto the refuse heap of finance history; as we move ever deeper into the dark cellars of this crisis the market is moving to target a far pricier prey. Far and away, the biggest losers in this month's selloff are the general banking and finance sectors, as the market now accepts and prices into stock values the fact that subprime contagion can now be found behind the regal polished doors of Wall Street's best addresses.

The entire banking and finance sector is trading at or near its lows for the past year, and much of that decline has occurred in the past two weeks. The S&P banking sector is down over 12% in that period; mortgage leader Washington Mutual is down 22%, Countrywide Financial is down 26% as news reports spread that the US government is now investigating its chief executive officer, Angelo Mozilo (last year's media darling for his supposed role in bringing home ownership to the masses) for his previous selling of $130 million of his personal stock in the company; a fairly sagacious move with a stock whose price has declined 67% since February.

As surely as night follows day and autumn follows summer, in the financial markets the fuzz follows the froth, the cops follow the carousal. Market cheerleaders counter that other stock sectors, especially export-orientated and health care, are holding up better as finance falls away, but as an argument for the continued general health of the market that is very misleading.

Finance is the lifeblood of commerce; to expect the general economy to prosper if the internal malfunctions of the finance sector are rendering it unable to fulfill its traditional function as an intermediary between lender and borrower is about as realistic as assuming a body can survive without a circulatory system. In contrast, using the prosperity of America's overpriced, gold-plated employment-based health care system as a proxy for the wellbeing of the general economy is similar to saying that a community is prospering because all of its local vampires are healthy.

The relatively bullish US employment report of October 5 made some market observers wonder whether another Federal Reserve interest rate cut would be needed at the Fed's next meeting on October 31, but the market turmoil has settled that question. As I wrote in my September 19 ATol article, A rate cut with a shoeshine and a smile, Fed chief Ben Bernanke's actions during the summer have proven that he is more than willing to step into Alan Greenspan's big shoes as supporter of stock prices of last resort.

At least in the short term, how much good that will really do is questionable; the previous rate cuts of August 17 and September 18 have seemed to have had an effect most analogous to that of the newly popular energy drinks, a quick buzz of buying that rather rapidly wears off.

What more rate cuts will certainly do is give another kick to the US dollar while it's already down; since the commencement of interest rate cuts on August 17, the greenback has fallen over 6% against the euro, reaching record lows of over 1.43 euro/US$. One thing that this will do is continue to drive crude oil prices further up towards $100 a barrel. As I wrote in my September 20 ATol piece, US rate cuts: Like a blow to the head, the relationship between a falling dollar and higher crude oil prices is one of finance's most reliable tautologies. This will drive home heating oil prices up now, and gasoline prices up after the New Year; if you've got people who heat their homes with oil on your holiday list, big thick warm wooly sweaters (very much unlike those worn by the Fox Business anchorwomen) might this year be the gift that keeps on giving and giving and giving.

Is it possible that America might be facing an extended period of a declining standard of living, maybe even of living within its means? Heavens, what a terrible concept, you can hear political opinion and posturings from all across the ideological spectrum from the 17 or so odd (and, yes, some are very odd) candidates currently competing for the Democratic and Republican parties' presidential nominations. It's important to support the troops; it's a lot more important to support the credit cards.

In much the same way that in 2000 candidate George W Bush promised the US military that "help was on the way" and then threw it into the abattoir that is Iraq, for the beleaguered American shoppers till they droppers, a rescue from the country's current economic difficulties may soon be on the horizon.

Over the past week the financial press reported rumors that China's state-owned commercial bank, CITIC, the country's eighth-biggest lender, was looking to buy a good sized stake in the US investment brokerage house Bear Stearns, the bare-knuckle Wall Street brawler whose default on two in-house subprime hedge funds was essentially the starter's pistol for the midsummer crisis.

I wrote about this concept, the large pools of Asian and oil exporter state managed capital, called Sovereign Wealth Funds, (SWFs) in my August 21 ATol article, When the big guns fail, call in China. CITIC is not technically an SWF, but the principle is the same; it's 21st century state capitalism coming in to solve and benefit from the problems caused by the excesses of unregulated 20th century market capitalism.

The Economist magazine estimates that worldwide SWFs have over $3 trillion at their disposal; that represents about 5% of the world's total base of investment capital. The SWF horde is far and away the only source of funds big enough to dig America out of its subprime mess, but the inherent drawback of allowing foreign state capital to bail America out of the difficulties created by its long-standing desire to live beyond its means would be that the nation would in effect be selling the ownership of its very profitable banking and finance industries to other nations.

Like selling yourself out of your own house so that you can then pay a monthly rent to the new owners, generations of economic servitude would be the price of yet another all too brief period of illusionary prosperity.

No wonder those in the SWF home countries don't have to watch Fox Business to get that perky feeling.

Julian Delasantellis is a management consultant, private investor and educator in international business in the US state of Washington. He can be reached at juliandelasantellis@yahoo.com.

(Copyright 2007 Asia Times Online Ltd. All rights reserved.)

Dear Dinosaurs

By Chan Akya

At this weekend's G8 meetings, discussions between finance ministers of industrialized or developed nations will likely ignore the actual issues confronting these countries over the next few years. The following is a letter to the collective group of G8 finance ministers, which we hope does not prove too taxing for their intellects. The grouping includes Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States.

Dear Dinosaurs,

It is not often that your good selves manage to meet in a nice waterhole like Washington, so allow me to congratulate you on your choice of venue for this year's conclave. You have made the correct environmental choice by going to Washington, for where else in the world can such a large and important meeting benefit from the ready availability of hot air from a proximate source (Capitol Hill, just behind on your left). Indeed, a friend of mine tells me that hot air emissions from Donald Rumsfeld and Dick Cheney would have been sufficient to heat all your hotel rooms, but for the unfortunate departure of the former prematurely which has left you all overly reliant on the latter both for heat and comic relief. Still, it could have been worse - for example. Hillary Clinton as President would have likely melted many a libido before it lands in the United States.

Before we delve into the topics likely to confront you, may I ask each of you to look to your left and right, and ask whether the countries at your table actually mean anything for the global economy any more? Besides the obvious point that three countries that actually make up a bulk of global economic growth - China, Brazil and India if you were not paying attention when your economic consultant was talking - are conspicuously absent at the table, the countries around you by and large represent the most significant economic drag the world has seen in the last few decades. If indeed your idea was to cobble together a group of the world's largest losers, then please discard the previous comment and congratulate yourselves on the stupendous success of the initiative.

If not though, perhaps you have ask yourselves why someone makes it a point to invite France and Italy to this grouping, when neither of them has benefited from a functioning economy in the last five years. The Italian economy shrivels faster than the polar ice caps, and very soon will be reduced to a rump of old factories outside Turin and a couple of tailors in Milan. Then again, you do still have Japan in the mix, so perhaps it would be cruel to eject any of the Europeans who at least show the good grace to allow a reproduction-led takeover of their states by Muslims, a little demographic nicety that the Japanese could easily cobble together by just opening their borders to Filipino maids and nurses. Even if I bring myself to understand all three of these countries, can someone explain what Canada is doing in this grouping? They don't even have the declining factories of Italy or the jaded tourism of France, and as of this summer nor do they have a functioning financial system. Do you really need a member whose raison d ętre is this meeting?

Financial wobbles
Now that I have cruelly broached the "F" word, ie, financial system, perhaps it is time to look around the table once again. Massive losses have gripped banks in Canada, France, Germany and the United States, while the UK has actually witnessed a bank run (1). As for Japan, improvements to their financial system are slow enough to make snails complain. All that means of course that you will find that the standard-bearers for financial system stability in your grouping are Italy and Russia. Now, think about that for a moment - do you know of any other business in the world where Italy and Russia set the benchmark, other than organized crime?

The crisis is of course entirely of your own making. For years now, you have focused unnecessary energy on getting Asian countries to float their currencies, whilst ignoring your own responsibilities to balance your budgets and reduce dependence on their savings. The arbiters of quality in your bond markets, the rating agencies, were allowed to flourish as corrupt business entities without any oversight whatsoever. Meanwhile, as your citizens splurged on a borrowing binge all of you looked on like proud hippie parents witnessing their kids absorbing their first bong hits (2). Some of you are less culpable than others, to be sure - Russia, for example. Then again, none of you can imagine Russia as an example of anything, so let us move on.

Your central banks have fallen into the trap of unleashing liquidity on an unsuspecting population, who gobble up cheap financing without realizing the inflation sting that lies ahead. Citizens in other countries have smartened to the moral bankruptcy of your central bankers, and taken to purchasing billions of dollars worth of gold, oil and other real assets (3). Indeed my read of The Mogambo Guru tells me that even your own citizens are catching on to your schemes so perhaps there is a much closer day of reckoning than you all imagine (dinosaurs - reckoning - meteorite: get it?). Europeans have not smartened up on the investment side of things, but they have at least taken to their old habits of going on strikes as shown by transport workers across Germany, France and the United Kingdom this week. (Perhaps the Italians don't bother turning up for work anymore and so missed the opportunity to go on strike.)

A number of you around the table may think that TIC (Treasury International Capital) is a horrible louse that infests dogs. It is actually an important statistic that shows how much of American assets are being purchased by non-Americans. For the first time in a long while, this figure was actually negative in August this year - foreigners sold more than they bought in the United States. Others around the table don't necessarily publish these figures, but don't make any mistake, much the same may be happening in places like Italy and the United Kingdom already.

Then there is the ham-handed attempt by the three largest US banks to put together a rescue fund for the SIV (structured investment vehicles) sector. Among all the ideas that involved good money chasing bad, this one takes the cake. To think that none other than the US Treasury Secretary Hank Paulson chaired this effort leaves the rest of us with an astoundingly bad taste in the mouth - forgive me for being impertinent, but aren't you guys supposed to be the policemen rather than the thieves?

Xenophobes anonymous
All this talk of money and banking must be making you tired, so perhaps it is time to find an appropriate target for you to lecture and hector in your meetings. Yes, it is understandable that you need to make terrifying sermons from the pew, but this time around you may find the going a bit tougher than usual.

You see, by pulling in the sovereign wealth funds of various countries (China, Korea, Kuwait, Norway, Russia, Saudi Arabia and Singapore) for a quiet chat, you intend to signal the need for higher standards of disclosure and prevent backdoor takeovers of your largest companies. Truth is, if only you were so lucky. As I hinted in one of the preceding paragraphs, your economies are in a state of permanent decline, thus making your stock markets prone for long-term downward adjustments. In plain English, that means sell while you still can.

Then again, the presumption of relevance has long been a characteristic of your conclave, so why change it now? You happily lectured the Latin Americans and Asians in the 1990s (4) about the need for structural reforms, open markets et al, and yet when it is your turn to benefit from these innovations, actions no longer reflect the spoken word. You want foreigners to buy your worthless debt but not your brands or your technology? Well, why don't you look around for another group of suckers instead?

Making a symbolic gesture against China has of course always been a standard feature of these meetings, and this time your hosts invited the Dalai Lama for an otherwise-unknown honor just in time for this weekend's meetings. If symbolism was your goal though, perhaps you should have gone for Lee Hun-jai, the courageous head of the Korean restructuring effort post-1998 who actually achieved more in five years than the likes of Japan, Italy, Germany and Russia among you managed in your entire history.

Instead, you will probably choose to listen to the musings of former Fed chairman Alan Greenspan who has completed his "See No Evil, Hear No Evil, Speak No Evil, but Please Buy My Book" tour of world capitals. The gentleman announced that the credit crisis was over a few days back, so I guess all of us can rest easy now. Except of course that banks continue to fail their funding tests, and credit markets still operate within a logjam.

Perhaps I shouldn't be so critical after all. From the vantage point of the countries that will run the world soon enough, such as China, Brazil, India among a host of others, it is good news that your group will choose to ignore the most pressing problems and instead devote all your energies to mundane and useless agenda items. This gives us all the time we need to push you off the economic cliff once and for all. Oops, maybe I shouldn't have just written that.

Yours truly,

Chan Akya

Notes
1. Rocking the land of Poppins
2. 'Cracks' in credit
3. In gold we trust
4. Asia's scalded cats

(Copyright 2007 Asia Times Online Ltd. All rights reserved.)

Asia's papers keep print flag flying

By Raja M

Asia is driving the global newspaper industry, says the World Association of Newspapers, with China, Japan and India leading growth. Pre-dawn tribes of harried news sellers outside railway stations face no extinction as yet.

Even as the first BAW (Born After the Web) generation grows into adulthood, print media - rather than TV - is combining better with the Internet in the world's news and analysis market.

Proliferating TV channels have not dimmed Asia's love affair with the published word. Ninety two percent of Japanese see newspapers as necessary, according to the annual Yomiuri Shimbun study released on October 14, ahead of the ongoing annual "Newspaper Week" in Japan from October 15 - 21.

Eighty seven percent of 3,000 Japanese respondents in the Yomiuri Shimbun study said they "greatly trusted" or "moderately trusted" reports carried by newspapers.

"Seven of 10 of the world's 100 best selling dailies are now published in Asia," Larry Kilman, director of communications at the Paris-based World Association of Newspapers, informed Asia Times Online. "China, Japan and India account for 60 of them."

Round 2 of the Indian Readership Survey 2007 released on October 17 says six of the top 10 dailies declined in readership, but the market leader, Hindi daily Dainik Jagran (16.5 million readers), and the Times of India (6.5 million) moved upwards.

India owns over 4,000 newspapers and there's room for more. Industry estimates place print media reaching 222 million people. But 359 million literate people do not read any publication, a huge market that foreign media companies too are keen to grab.

In Indian villages, a literate farmer can be seen sitting on a rope cot reading aloud from a newspaper, with eager listeners squatting around on their haunches. The number of readers in rural India (110 million) is now nearly equal to urban India (112 million).

A PricewaterhouseCoopers study for the Federation of Indian Chambers of Commerce and Industry (FICCI) published this March says print media is the favored segment for global investors and enjoys maximum foreign investment.

This FICCI report expects the Indian media and entertainment industry to grow at 18% a compound annual growth rate at overall value of US$25.26 billion by 2011 from its present $11 billion size.
Media insiders say non-English newspapers generally display better circulation marketing skills to be in step with the changing preferences of their readers. "Hindi language dailies like Dainik Jagran and Dainik Bhaskar have this down to an art form," says Ralph Pais, three-decade media veteran and Mumbai-based Regional Manager of The Statesman. "They ensure every new edition achieves requisite number of readers, and have even proved themselves against established giants as competitors."

With the new circulation auditing approach in the US to combine a newspaper's print and electronic versions to measure marketing impact, newspapers could also gain more advertising revenue. Media analysts say newspapers, than TV news channels, are proving better at combining resources with the Internet.

Marketing value would also grow with newspapers now partnering with mobile phones. A cellular phone devise 'M-Paper' was launched in the South Indian city of Hyderabad this month, giving access to 10 complete English newspapers from India through Wireless Application Protocol (WAP) enabled mobile phones.

The Hyderabad-based Pressmart and IMI Mobile Limited jointly inaugurated the facility that they said was largely to reach out to the Indian diaspora.

It's the first of its kind in India and in the world, A R Vishwanath, Chief Executive Officer of Pressmart, told the media. "Internationally also only a part of newspapers is available (through cellular phones) but here the whole newspaper is being made available and that is unique."

Asia Pacific newsrooms too have evolved with technology and time. Gone are scenes such as in the newsroom of The Statesman, Calcutta, circa 1990: the clatter of news agency teleprinters and reporters' type writers, steaming hot cups of lemon tea and hungry copy editors hollering to the visiting dhoti-clad vegetable cutlet seller for their 11am snacks.

World Editors Forum Blog noted how the New Delhi-based Hindustan Times (HT), India's second largest English daily, is shaping its integrated newsroom to combine content from its print edition that sells 1.4 million copies daily with its website that gets an average of 1.6 million monthly unique visitors (80 million page views).

Pankaj Paul, HT's newly imported managing director from the US, set about an integrated multi-media newsroom with a basic video studio in the newsroom: a small room, with a Sony HD handheld camera. One of the HT photographers became the paper's first videographer and HT's first experiment with multimedia, a slideshow of a terrorist attack, scored the website's second best traffic ever.

Regional newsrooms will see more changes, as in Australia's Fairfax group equipping over 400 Sydney Morning Herald and Melbourne Age journalists with the all-purpose multimedia mobile Jasjam devices costing US$1,300 a piece. The i-Mate JasJam lets reporters file stories in wirelessly in multi-media format, and in real time.

Influential advertising professionals continue to vote for the virtue of the written word, particularly in dealing with complex issues. "I see newspapers still retaining their credibility, compared to television news that's getting increasingly sensational," Prabhakar Mundkar, COO of advertising major Percept H, told Asia Times Online.

"Newspapers have been better innovators in delivering online video news content and advertising," says Larry Kilman of the World Association of Newspapers. "Perhaps it has to do with the need to rapidly develop new competencies for the new digital distribution channels - newspaper companies did not have this expertise by definition but have succeeded in developing it quickly." He expects "bright" growth prospects for Asian newspapers.

(Copyright 2007 Asia Times Online Ltd. All rights reserved.)

IMF: Developing nations drive the globe

By Abid Aslam

WASHINGTON, DC - The International Monetary Fund's latest assessment of the world economy might resonate with developing countries, critics of economic globalization, and proponents of tighter financial regulation alike.

China, India, Russia and other developing countries will propel the world economy in the year ahead, the IMF says in its latest World Economic Outlook report.

In contrast, advanced economies - hobbled by financial turmoil that originated in poorly regulated niches of their capital markets - will continue to lose steam.

China and India have emerged as the top two contributors to world production and, along with Russia, "accounted for one half of global growth over the past year", the IMF said. "Other emerging markets and developing countries have also maintained robust expansions," it added, thanks to buoyant commodity prices, strong domestic demand, stout currency reserves, and reduced debt.

Governments in developing countries have said their importance to the world economy merits a fundamental shift in the balance of power between rich and poor at the IMF and in other organs of global economic governance.

Additionally, the fund's assertion that lighter debt burdens have boosted economic performance likely will not be lost on debt-relief campaigners and the governments of heavily indebted poor countries, most of them in Africa.

The fund's acknowledgment that inequality rose alongside wealth and could imperil future progress also might chime with anti-poverty activists.

"Technological advances have contributed the most to the recent rise in inequality, but increased financial globalization - and foreign direct investment in particular - has also played a role," the IMF said. However, it added: "Contrary to popular belief, increased trade globalization is actually associated with a decline in inequality."

In any event, the fund said, "it is important that policies help ensure that the gains from globalization and technological change are more broadly shared across the population".

The IMF went on to echo the demands of those who want to see poverty fought with a combination of more education and microcredit and fewer barriers to poor countries' agricultural exports.

"Reforms to strengthen education and training would help to ensure that workers have the appropriate skills for the emerging 'knowledge-based' global economy," it said. "Policies that increase the availability of finance to the poor would also help, as would further trade liberalization that boosts agricultural exports from developing countries."

If balance sheets are anything to go by, and if IMF forecasts are not proven optimistic, there will be plenty to redistribute despite a slight overall slowdown.

China is likely to chalk up 11.5% growth this year and India 8.9%, the fund said. It expected China to grow by another 10% next year and India to expand by a further 8.4%.

Emerging markets and developing countries will have grown by 8.1% this year and should lift output by another 7.4% next year.

In contrast, the advanced economies - including the United States, Europe, Britain, Japan, Canada, and newly industrialized Asia - could end the year with a collective growth rate of 2.5% and go on to post a sluggish 2.2% in 2008.

Overall, world output growth should amount to 5.2 % in 2007. This would be in keeping with projections issued in July, the fund said. "But we have marked down our projection for global growth in 2008 by almost half a percentage point to 4.8% in the wake of recent turmoil, largely reflecting lower growth expectations for advanced economies," said Simon Johnson, the IMF's chief economist.

In particular, the IMF marked down its US growth forecast for 2008 by nearly a full percentage point to 1.9%. This reflected ongoing credit problems as well as dampened consumer spending amid weaker housing prices, rising energy prices, and sluggish job growth.

Dodgy home loans and financial speculation on securities backed by subprime mortgages sparked a fire that has swept through US and European credit markets and banking sectors and it remains impossible to predict when the trouble might end.

"At this stage, we still do not know precisely how the losses from the US subprime mortgage market will be distributed nor whether credit conditions will tighten further as expectations of losses affect bank behavior," Johnson said.

"Like a forest that has not seen a fire in many years, a benign financial environment, including low volatility and unusually narrow risk spreads, had built up a sizeable underbrush of risky loans, relaxed lending standards, and high leverage in certain areas," he added. "When problems ignited in the US subprime mortgage market, the fire 'jumped' in somewhat surprising ways to other areas."

Chances of a US recession have risen, the IMF said in its report, but the world's largest economy likely would see a prolonged period of listlessness rather than contraction.

The fund's growth forecasts for low- and middle-income countries in the coming year included: Africa (5.7 % in 2007, 6.5% in 2008); sub-Saharan Africa (6.1% in 2007, 6.8 % in 2008); Central and Eastern Europe (5.8% 5.2%); Commonwealth of Independent States (7.8%, 7%); developing Asia (9.8%, 8.8%); Middle East (5.9%, 5.9%); Latin America and the Caribbean (5%, 4.3%); Brazil (4.4%, 4%); and Mexico (2.9%; 3%).

(Inter Press Service)