Topic: US/World Economics' effect on Canada

[GAP]

I'm sure there will be many more impacts on Canadian businesses, but here's the first one I have seen.....

Banks seize Deripaska's 20 million Magna shares
GREG KEENAN and JACQUIE MCNISH AND JOHN PARTRIDGE From Saturday's Globe and Mail October 3, 2008 at 8:55 PM EDT
 Article Link

Russian billionaire Oleg Deripaska has been forced to hand over his stake in Magna International Inc. to his banks, after taking a margin call on his $1.54-billion (U.S.) investment in the Canadian auto parts maker.

In a stunning turn of events, Paris-based bank BNP Paribas SA seized the Russian oligarch's 20 million shares in Magna, unwinding a deal that closed 13 months ago and making one of the world's richest men the latest casualty of the global credit crisis.

The move hands full control of the auto parts giant back to its founder, Frank Stronach.

According to people familiar with the transaction, BNP Paribas led a syndicate that financed an estimated $1-billion.

That amounts to about two-thirds of the total purchase price.

It is understood that the lending agreement gave the banks the power to reclaim the Magna shares in the event they fell more than 40 per cent below the $76.83 a share Mr. Deripaska paid for the stock. That threshold appears to have been triggered on Thursday, when the shares slumped to a closing price of $45.59 on the New York Stock Exchange.

The aggressive move to force one of Russia's richest men to hand over assets casts a stark spotlight on the harsh new lending environment for businesses seeking to raise capital or hang on to acquisitions that were snapped up in headier times.

It also highlights how quickly billionaires, even in growing economies such as Russia, are seeing their fortunes erode as the crisis cripples financial markets around the globe.

Sources said banks lined up to lend money to Mr. Deripaska in the spring of 2007, when he first announced he had struck the agreement with Mr. Stronach. Eighteen months later, a deal that was code-named Project Pearl is in tatters because of a crisis that could spiral into an “economic Pearl Harbour,” according to a warning issued this week by Omaha billionaire Warren Buffett.
More on link

[retiredgrunt45]

unfortunately we are about to see much more of this in the next little while and not only to the big players, it will affect all of us. My mortgage comes due for renewal in four months and I'm already worried I won't be able to get the credit, let alone get a decent interest rate. I was watching the news last night and many small businesses are finding it hard to get any credit at all. The days of easy credit is dead and buried and Canada is not immune.

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, is more on this topic:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081004.weconomy04/BNStory/Business/home

The gloom spreads north

By KONRAD YAKABUSKI , VIRGINIA GALT and GREG KEENAN AND NORVAL SCOTT

From Saturday's Globe and Mail
October 4, 2008 at 1:37 AM EDT

MONTREAL, TORONTO AND CALGARY — Rick Lafleur is walking away from his home in Windsor, Ont., unable to renew his mortgage. Customers won't even talk to Newfoundland manufacturer Lorne Janes as their lenders tighten the screws. New Brunswick Finance Minister Victor Boudreau fears a budget deficit may be inevitable as a collapsing stock market whacks government pension funds and the province's export-driven economy falters further.

Across the country, even in the seemingly unsinkable resource towns of the Prairies, the grim prospect of a U.S.-led global recession and credit crunch has exited the abstract realm of the financial markets and landed with a thud on the kitchen tables of average Canadians.

In most parts of the country, house prices are flat or falling – they were down 6 per cent in the city of Toronto in September over the previous year – and down with them is the net worth of millions of debt-loaded consumers. They are in poor financial shape to weather an economic downturn that is already forcing some financial institutions to review the creditworthiness of existing borrowers.

Central Canada's manufacturing sector, already reeling from about 400,000 job losses since 2003, is bracing for an even bloodier downturn than was expected only a few weeks ago. But it is hardly alone in its misery, as evidence mounted this week that the commodity price boom that has fuelled some provincial economies and filled government coffers is out of gas.

How bad it all gets depends largely on whether the $700-billion (U.S.) bailout package passed Friday by the U.S. Congress – which aims to take bad mortgage-related loans off bank balance sheets – meets its goal of getting financial institutions to start lending again. The deep integration of global financial markets – and particularly of Canadian and U.S. ones – means that it's not just the fate of the American economy, which lost 159,000 jobs last month, that hangs in the balance.

“Canadian banks are borrowing and lending in the same credit markets as U.S. banks, so if the credit markets seize up in the U.S., they're going to seize up in Canada, too,” McGill University economics professor Christopher Ragan explained.

Lender skittishness is a major worry for the Bank of Canada, which Friday massively boosted the amount of cash it plans to make available to the financial system to $20-billion from $8-billion, in a bid to unclog frozen money markets.

Still, there are no guarantees that its actions, along with similar moves by central banks around the world, will be enough to avert a protracted credit crunch. That would exacerbate the economic slowdown that had already been threatening Canadian jobs, Prof. Ragan added. “It will mean that the recession will be deeper. And any extension of a U.S. downturn is just an extension of the amount of time they're not buying Canadian wood and Canadian car parts.”

It's already too late for Mr. Lafleur, in Windsor, where auto-sector job losses pushed the unemployment rate to the highest of any Canadian city at 9.6 per cent in August. Although he and his wife have both found new jobs after losing their last ones at a Chrysler car dealership and General Motors plant, respectively, their house is now worth less than the mortgage on it.

Mr. Lafleur's lender, Xceed Mortgage Corp., has tightened its credit conditions and recently told Mr. Lafleur it would not renew the $155,000 mortgage on his modest 50-year-old bungalow because the property is now worth about 25 per cent less than that amount.

“I'm being told, no, they're not going to renew, because they are pulling out of Ontario and, secondly, because the loan-to-value was out of sync … because of the economy and Windsor is pretty bad,” Mr. Lafleur said.

It's a big switch from a few years ago when lenders were falling over themselves to offer a mortgage to almost any homeowner or buyer who asked for one. Indeed, Mr. Lafleur was not required to retain any equity in his property when he remortgaged it five years ago.

“I was getting married and I needed 100-per-cent financing. They said fine, no problem. Got the mortgage,” Mr. Lafleur said.

Xceed, meantime, has problems of its own and has tightened its credit after being caught up in the subprime mortgage crisis that has convulsed the United States housing market. Xceed and a handful of subprime mortgage lenders in Canada had used asset-backed commercial paper to fund their mortgage portfolios. Then the bottom fell out of the ABCP market, which is now being restructured.

“Xceed had to change its business model to where it no longer underwrites mortgages that do not qualify for the Canada Mortgage and Housing Corp. [insurance],” Xceed spokesman Richard Wertheim said.

In June, Finance Minster Jim Flaherty tightened the criteria for mortgage insurance provided by government-owned CMHC, requiring buyers to provide a down payment of at least 5 per cent. He also made the CMHC stop insuring mortgages amortized over a period of more than 35 years, in effect killing the budding 40-year mortgage market that had been popular with first-time buyers seeking to keep their monthly payments to a minimum. Both moves were aimed at preventing the kind of housing bubble that has now burst south of the border, but they may have come too late to prevent a similar rash of mortgage defaults in Canada.

Many homeowners who got mortgages under the laxer rules that existed a few years ago could find themselves in trouble at renewal time. If they have not improved their financial situations to the point where they would qualify for a more traditional mortgage, Xceed for one is turning them down, Mr. Wertheim said.

Times aren't just getting tougher for homeowners. Home builders face bleaker prospects, too. Across Canada, jobs in the construction sector have accounted for virtually all – 99.4 per cent – of total employment growth so far this year, according to Statistics Canada data. One in 12 Canadians is now directly employed in the sector, the largest share on record.

Residential activity, which constitutes about half of the total construction market, is already cooling after a decade of growth. Now, limited access to credit is threatening to curb the start of big new infrastructure and commercial projects.

Financing “at this point in time will be very tough, so they will definitely be impacted,” said Michael Clifford, Canadian tax leader for engineering and construction at PricewaterhouseCoopers. “The banks are being cautious, so the whole scenario leads to people waiting and seeing.”

For Canadian manufacturers, the credit crisis is the third stage of a triple whammy. They have already been battered by the surge in the value of the Canadian dollar and the spike in prices of such key commodities as steel and plastic.

Companies are hunkering down, scrapping expansion projects and cutting employees. The decline in the prices of some of Canada's key commodities, such as oil and fertilizer, could help ease their pain, since it has sent the Canadian dollar lower. But that might not matter much as a U.S. recession erodes demand for Canadian manufactured goods.

Mr. Janes, president of Newfoundland-based Continental Marble of Canada, is already getting the cold shoulder from his customers in Florida, Maryland and California. “The reply I'm getting now is, ‘Lorne, save the phone call, don't call any more until this sorts out,'” said Mr. Janes, whose 12-employee company manufactures equipment to produce moulded stone countertops.

Across the country in Annaheim, Sask., Gurcan Kocdag has been feeling the pinch for more than a year. The U.S. downturn – new housing starts have fizzled – means fewer lumber trucks heading south, slowing demand for the trailers Mr. Kocdag's Doepker Industries makes. The 60-year-old company has already cut the work force at its three Saskatchewan plants by about 200 people to 325 in the past year.

“It's not just manufacturers,” Mr. Kocdag said. “Everybody who supplies services to the transportation industry – our customers, our customers' customers, their customers. Everybody in the value chain is significantly affected.”

Falling commodity prices – which have helped knock about 25 per cent off the Toronto Stock Exchange's benchmark index from its summer peak – have not yet eroded the confidence of Saskatchewan Premier Brad Wall. After all, despite dropping 50 per cent from its summer peak of $147, oil is still trading higher than it was a year ago.

“We are not going to be immune to what's happening around the world,” Mr. Wall said. “But even with the drop in oil, it brings it down to $94. Our government was only elected less than a year ago and it wasn't over $90.”

Across the border in Alberta, however, there are concerns that the U.S. downturn will be so severe that oil prices will fall further still. Together with spiralling costs for oil sands projects, it could make any new developments economically questionable, capping the province's boom.

The consortium behind the giant Fort Hills oil sands project revealed last month that its development costs had grown by more than 50 per cent in little more than a year. With the credit crunch, investors have assumed it will be hard for UTS Energy Corp., a junior partner in the consortium, to raise the cash to fund its 20-per-cent stake. The company's stock has dive-bombed to just over $1 from $6 a share in June.

But while some oil sands projects may be delayed or pulled, that would only slow the breakneck pace of Alberta's oil boom, rather than stop it. Companies plan their multibillion-dollar investments on long-term price projections that still support development.

The short-term picture looks bleaker for Alberta's natural gas sector. While larger companies – flush with cash from 2008's previously sky-high prices – say they'll be unaffected by any downturn, junior firms, which rely on raising funds through debt and equity, won't be able to easily find the cash they need to grow.

“Junior companies will not be able to get the cash to do drilling this year,” said Roger Soucy, president of the Petroleum Services Association of Canada. “At best, the forecast [for drilling next year] is flat, and it could drop.”

With neighbours losing homes or jobs, even consumers not directly affected by a downturn are likely to be rattled by what's happening around them.

“It's more likely than not that consumers are going to be more anxious, more concerned and less likely to spend going into the Christmas season,” said Kyle Murray, director of the school of retailing at the University of Alberta. “And if consumers, en masse, just hold off on buying those things like cars and houses, that also has a real negative impact on the economy in the short term. So none of that really bodes well.”

It all means finance ministers across the country will likely be facing lower revenues from income and sales taxes, while expenditures on unemployment and welfare benefits could balloon. That could push many governments – including Ottawa, which had a relatively slim $2.9-billion surplus in the first four months of the fiscal year – into the red.

“A deficit is something that's certainly in the cards right now [for New Brunswick],” Mr. Boudreau said in an interview Friday.

In its March budget, the government projected a tiny $19-million surplus, on spending of $7.2-billion, “so there's not a whole lot of cushion” if the economy slips into recession, he added. On top of that, government pension funds have been sideswiped by sliding stock prices, forcing the province to top up shortfalls with its own cash.

Each of the federal party leaders has insisted that he or she would not run a deficit if elected on Oct. 14, despite pledges of billions in new spending. But Prof. Ragan thinks their “no-deficit religion” is wrong-headed.

“The last thing you would want when the economy slows down is to intentionally raise taxes or cut spending just to stay out of a deficit,” he said. “It's bad economics and I suspect [the party leaders] know it.”

Ottawa's budget deficit exploded to $41-billion in 1992-93, in the wake of the last big recession, up from $28-billion in 1989-90. But subsequent moves to eliminate the deficit and pay down the federal debt – which now represents about 30 per cent of gross domestic product, down from a peak of 70 per cent – means Ottawa has room to prime the pump.

“One of the reasons it was so important to bring down the deficit and debt was so that in bad times you would have a little bit of fiscal room to manoeuvre,” Prof. Ragan said. “Well, the rainy day has arrived.”

With a report from Tavia Grant in Toronto

None of these symptoms are new. Back in the 1970s:

•   Oil prices spiked;

•   Canadians walked away from their mortgages – in the face of 20% rates;

•   Unemployment rates rose to unprecedented highs; and

•   Credit tightened.

These factors – termed stagflation, a stagnant economy and high inflation – led to the severe recession of the early ‘80s which was, in turn, followed by a decade of strong economic growth, anther shorter, less severe recession in the early ‘90s and then another long burst of economic growth which is ending now.

[GAP]

To add to ER's post, here's another focus....

Cash makes kings
GORDON PITTS AND BOYD ERMAN  Globe and Mail October 3, 2008 at 8:56 PM EDT
 Article Link
 
The global credit crisis of the past two weeks has blown up the established order of Canadian business, and created a new class system based on cash. In this emerging hierarchy, Sean Roosen must qualify as one of the lesser nobility.

The president of Osisko Mining Corp. is sitting on $140-million in cash – enough funds to support the next round of work on his $760-million gold mine project in Malartic, Que.

Osisko is partly the beneficiary of pure dumb luck, but Mr. Roosen is boasting of a bit of foresight too. He saw the credit turbulence coming and he locked up financing late last year and early this year.

“We anticipated there might be some rough water coming up,” says Mr. Roosen, the burly executive whose company is moving part of a community in northwestern Quebec to make room for its project.

Higher borrowing costs

Global forces will certainly buffet Canada, which is insulated but not immune. The benchmark rate for most corporate loans, the London interbank offered rate, better known as Libor, has jumped to 4.3 per cent for three-month loans in U.S. dollars from 2.8 per cent. On top of that, banks are charging wider premiums to protect their own bottom lines. That's going to mean dramatically higher borrowing costs, even in Canada.

The hard part, Mr. del Missier said, is explaining to company executives that the borrowing world has changed, because there is a tendency to want to wait for markets to return to what was once normal. “You have to paint a realistic picture of what's going on in the world,” he said.

Waiting can be fatal, especially for companies that are facing imminent debt rollovers. In the case of Quebecor World Inc., the giant printing company, passing up financing in hopes of better times was one of the factors that led the company to end up in bankruptcy protection.

Late in 2007, as the credit crisis was just getting rolling, Quebecor World's board was searching for a way to raise money to repay $175-million of preferred shares coming due in early 2008. The company had a deal lined up with four Canadian banks to sell $250-million of stock and $500-million of debt on terms that prior to the credit crisis would have been unthinkable. But at the last minute, the company cancelled the deal with a plan to try other options, such as raising money by selling assets.

The market started losing confidence in the company, the asset sales never worked out, and the company was forced to file for protection from its creditors only two months later.

More on link

[E.R. Campbell]

There is some ‘good news’ in this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Reuters web site:

http://www.reuters.com/article/ousiv/idUSTRE4981X220081009

Canada rated world's soundest bank system: survey

Thu Oct 9, 2008 4:40am EDT
 

By Rob Taylor

CANBERRA (Reuters) - Canada has the world's soundest banking system, closely followed by Sweden, Luxembourg and Australia, a survey by the World Economic Forum has found as financial crisis and bank failures shake world markets.

But Britain, which once ranked in the top five, has slipped to 44th place behind El Salvador and Peru, after a 50 billion pound ($86.5 billion) pledge this week by the government to bolster bank balance sheets.

The United States, where some of Wall Street's biggest financial names have collapsed in recent weeks, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.

The United States was on Thursday considering buying a slice of debt-laden banks to inject trust back into lending between financial institutions now too wary of one another to lend.

The World Economic Forum's Global Competitiveness Report based its findings on opinions of executives, and handed banks a score between 1.0 (insolvent and possibly requiring a government bailout) and 7.0 (healthy, with sound balance sheets).

Canadian banks received 6.8, just ahead of Sweden (6.7), Luxembourg (6.7), Australia (6.7) and Denmark (6.7).

UK banks collectively scored 6.0, narrowly behind the United States, Germany and Botswana, all with 6.1. France, in 19th place, scored 6.5 for soundness, while Switzerland's banking system scored the same in 16th place, as did Singapore (13th).

The ranking index was released as central banks in Europe, the United States, China, Canada, Sweden and Switzerland slashed interest rates in a bid to end to panic selling on markets and restore trust in the shaken banking system.

The Netherlands (6.7), Belgium (6.6), New Zealand (6.6), Malta (6.6) rounded out the WEF's banking top 10 with Ireland, whose government unilaterally pledged last week to guarantee personal and corporate deposits at its six major banks.

Also scoring well were Chile (6.5, 18th) and Spain, South Africa, Norway, Hong Kong and Finland all ending up in the top 20.

At the bottom of the list was Algeria in 134th place, with its banks scoring 3.9 to be just below Libya (4.0), Lesotho (4.1), the Kyrgyz Republic (4.1) and both Argentina and East Timor (4.2).

RANKINGS

1. Canada
2. Sweden
3. Luxembourg
4. Australia
5. Denmark
6. Netherlands
7. Belgium
8. New Zealand
9. Ireland
10. Malta
11. Hong Kong
12. Finland
13. Singapore
14. Norway
15. South Africa
16. Switzerland
17. Namibia
18. Chile
19. France
20. Spain
--------------------------------------------
124. Kazakhstan
125. Cambodia
126. Burundi
127. Chad
128. Ethiopia
129. Argentina
130. East Timor
131. Kyrgyz Republic
132. Lesotho
133. Libya
134. Algeria

SOURCE: World Economic Forum Global Competitiveness Report 2008-2009.

(For the full World Economic Forum report click on: here )

(Editing by Kim Coghill)

And there’s more, also reproduced under the Fair Dealing provisions (§29) of the Copyright Act, his time from the Financial Post:

http://www.financialpost.com/story.html?id=868581

Close, but no recession for Canada, forecasters agree

Eric Beauchesne, Canwest News Service

Published: Wednesday, October 08, 2008

OTTAWA -- Close, but no recession, at least in Canada.

That was the good news amid all the bad in economic forecasts Wednesday, including declarations by several that the U.S. economy is already in recession and one that without further action by authorities the U.S. faces a 1930s style depression.

The forecasts -- by a bank and a think-tank in Canada, and the International Monetary Fund in Washington and think tanks in New York -- were released as North American markets were gyrating between triple-digit losses and gains in volatile trading in the wake of a co-ordinated round of deep half-point interest rate cuts by half a dozen central banks, including the U.S. Federal Reserve and the Bank of Canada.

"There are pre-depression conditions," New York-based High Frequency Economics in a report in which it joined other analysts in predicting a further half-point cut in U.S. rates later this month, and in which it called for near zero interest rates as well as a more activity fiscal policy by the U.S., such as a major increase in spending on infrastructure there as offering the most effective antidote.

Here, Bay Street's benchmark TSX eventually ended up with a gain of more than 225 points to back over 10,000, while the blue-chip Dow Jones industrial average in the final minutes plunged back into the red to end the day down nearly 190 points, and remaining well below the 10,000 mark.

The Canadian dollar, meanwhile, continued to lose ground to the U.S. dollar, slipping below 90 cents US for the first time in 18 months to close at 89.06 cents US as oil sank below US$89.

Finance Minister Jim Flaherty -- in comments to reporters in Toronto and a statement later -- applauded the united response of central banks to the deepening financial crisis.

"This significant action will provide timely support for the Canadian economy," Mr. Flaherty said, adding he will work with his G7 counterparts and central bankers at their meeting this week in Washington for further co-ordination in dealing with the crisis.

However, Canadian commercial banks -- instead of matching the Bank of Canada interest rate cut as they would normally do -- passed on only half the rate relief to their customers, and then only after a delay of several hours, with quarter-point reductions in their prime rates to 4.5% from 4.75%. That's the rate traditionally offered to blue-chip borrowers, and the rate to which other floating consumer loans and mortgages are tied.

"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions," said Tim Hockey, CEO of TD Canada Trust, which was the first financial institution to cut its prime rate by a quarter point. "This makes it challenging to match the Bank of Canada rate cut at this time."

National Bank of Canada economist Paul-Andre Pinsonnault, in warning that the commercial banks may not match the central bank rate cut, noted that the spread between the prime rate and a measure of what banks pay for funds has narrowed by about a third to 1.16 percentage points from a historical norm of 1.64.

The rate cuts by central banks in Asia, Europe and North America, as well as a £50-billion ($96-billion) financial sector rescue by the British government, came as forecasters were slashing their forecasts for economic growth around the world and here, although all predicted Canada will avoid recession.

RBC, Canada's largest financial institution, said the "persistent turmoil in financial markets and disappointing economic trends over the past two quarters" prompted it to cut its forecast for growth here to 0.9% from 1.4%, and project only a modest rebound to 1.5% in 2009.

"The U.S. economy now appears to be in recession with Europe, the U.K. and Japan also sinking fast," RBC said. "While Canada is in better position with its financial sector less heavily impaired, overall growth will be substantially weaker than previously anticipated."

"The continued weakness in the U.S. economy is expected to dampen growth in Canada," said RBC's chief economist Craig Wright. "However, this pressure on our growth will be tempered by strong commodity prices which are contributing to robust export revenues and providing support to Canadian domestic spending via a boost to incomes."

Canada has also enjoyed strong growth in national income, which have boosted consumer spending, business investment and purchases of imports and is benefitting from what are still relatively high commodity prices, it said.

Job growth has also slowed and Canada's housing market is cooling, but it is not expected to suffer a U.S. style meltdown as Canadian mortgage markets did not see the excesses that afflicted the U.S. housing sector, it said.

Global Insight, an economic think-tank, also cut its growth projections for Canada while declaring the U.S. is in recession.

"The U.S. economy is forecast to now be in recession," it said, adding that it's no longer just a "mild" recession and projecting the contraction in that giant economy will run from the third quarter of this year through the first quarter of next year.

Meanwhile, it cut its forecast for growth in Canada's economy this year to 0.6% from 0.8% and next year to 0.9% from 1.7%.

However, there will not be two consecutive quarters in which the economy contracts.

"While a recession is most often defined as two consecutive quarters of negative growth, we should not take too much comfort in the ‘no recession' forecast," it added. "This is a very weak forecast of economic growth."

The International Monetary Fund, meanwhile, projected that Canada next year will have the fastest growing economy of the G7 major industrial countries, at 1.2%, despite virtually no growth of just 0.1% in the U.S., Canada's main export market.

Both of those stories may go some way to explaining this one, also reproduced under the Fair Dealing provisions (§29) of the Copyright Act from yesterday’s National Post:

http://www.financialpost.com/news/story.html?id=866377

Fed trolls Canada to rescue U.S. banks

Karen Mazurkewich and Eoin Callan, Financial Post

Published: Tuesday, October 07, 2008

In a desperate bid to help U.S. banks recapitalize, Washington is dropping its inhibitions and reaching out to Canadian financial institutions to gauge their willingness to participate in rescue operations.

The Federal Reserve has activated a back channel that puts the central bank in direct contact with chief executives at Canada's largest banks and insurers, according to a person familiar with the dialogue.

They are approaching "banks with major assets in the U.S. like [Toronto-Dominion Bank] and Royal [Bank of Canada], because when they have a bailout situation they want everyone who is a potential buyer to look at it," the source said.

The ongoing conversations between the U.S. central bank and Canadian executives reflects the challenge facing Washington as it seeks to address both short-term liquidity and permanent capital needs of financial institutions crippled by more than $500-billion in losses and limited access to financing.

The communications have included phone calls from Fed officials pitching potential sales of assets of U.S. financial companies and at least one intensive discussion of a major rescue operation, according to people familiar with the contacts.

The Fed has been steadily widening the circle of foreign institutions it is working with as the banking crisis has deepened, according to a former Fed official now on Wall Street.

The outreach to Canadian companies signals a more permissive environment in which U.S. authorities would look very favourably on an intervention by a Toronto-based institution.

It comes as Washington deploys greater reserves than initially anticipated to restore liquidity, while still facing an uphill battle to help banks recapitalize at a point in the crisis when projected losses of up to $1-trillion still ahead for the global banking system.

The engagement of Canadian institutions follows U.S. federal assent for the acquisition of assets in bankrupt Lehman Brothers by the U.K.'s Barclays, in a deal that followed intensive discussions with the Federal Reserve and U.S. Treasury.

That deal was smoothed by good relations between the London and Washington and a lower level of resistance to a deal with the U.K. on Capitol Hill, where political disquiet over foreign interventions has helped keep some buyers at bay.

"Canada is not China," said a former Fed official.

A lobbyist for a Canadian bank said the political climate in Washington had changed markedly since the passage of a $700-billion bailout and that this country is now seen as a potential source of support.

Executives and advisors in the Canadian financial services industry indicated they still saw live opportunities for their sector to help drive consolidation and recapitalization in the U.S., despite limited flexibility at a time when sinking markets were lowering all boats.

"I don't think Canadian banks want to take a lot of balance sheet risk but I don't think they are going to have to," the source said, adding that while the target banks have many subprime mortgages, the Federal Reserve will backstop these high-risk liabilities.

"We could end up in a funny situation two years from now saying this was a once in a generational opportunity for Canadian banks."

U.S. regional banks remain in deep distress and an acquisition of this scale is seen as possible in the coming months, as Canadian banks cautiously explore possible buys and after TD Bank Financial Group put its name forward during an auction of Washington Mutual.

A broad sell-off in the U.S. insurance sector has also cut into the valuations and capital positions of U.S. insurers seen as possible matches for Sun Life and Manulife, the Canadian life insurers.

Sun is actively weighing the likelihood of an intervention in the U.S., according to one person in the industry.

A foreign bank executive who participated in a recent round of rescue talks with the Fed said U.S. authorities were also keeping national regulators informed of high-stakes negotiations.

It was not clear how deeply involved Canadian authorities were in the discussions.

The Bank of Canada declined to comment.

Canadian banks have fought long, hard and ultimately unsuccessful campaigns to grow – either by merging or by expanding into foreign markets. Canadians hate banks and bankers – they don’t know why, they just do – so politicians have steadfastly refused to allow mergers. The US is was highly protectionist in its attitude towards foreign entry into its banking system – although both TD and RBC managed to enter. Now a growth opportunity is there, maybe without a requirement to buy up ‘distressed assets’ (‘toxic mortgages or just plain bad ebts).

 

[Greymatters]

There is some ‘good news’ in this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Reuters web site:`

Good articles, thanks for posting.

Any good ones on how the lending rates will be affected over the next year, or is everyone avoiding that topic?

[E.R. Campbell]

My guess is that for the next few months central bankers’ main concern will be to inject liquidity (money) into the banking systems. That means lower and lower rates but, as Canadian banks proved yesterday, central bank rate cuts may not always reach ‘Main Street’ in full.

So long as inflation remains within or not too far above the target ‘ranges’ (broadly 1.5 to 3.5% for most countries) there should be no need to raise rates, but constantly lowering rates might fuel inflation, so ...

[GAP]

Europe to Canada: Get your act together
DOUG SAUNDERS From Saturday's Globe and Mail October 4, 2008 at 8:19 AM EDT
 Article Link

BRUSSELS — The two presidents of the European Union will arrive in Montreal on the Friday after Canada's Oct. 14 federal election for a meeting that Prime Minister Stephen Harper has studiously avoided mentioning.

Nicolas Sarkozy will be there not as the President of France but as the acting president of the European Council, the top political office of the European Union. He will be joined by Jose Manuel Barroso, the president of the European Commission, the EU's top executive office. Thus, the two men who can be described as "the president of Europe" will be joined by whoever happens to be the prime minister of Canada.

That night, the three of them will announce the economic and political engagement of the two federations. They still haven't agreed on the name of the thing, though they are leaning toward Economic Partnership Agreement.

It will just be the preliminaries, but many people hope it will result, after a period of talks, in the consummation of a complex and potent marriage between Europe and Canada.

Two weeks ago, when I revealed that there had been months of secret meetings, led by Quebec officials and involving serious engagement by Mr. Harper and Mr. Sarkozy, to arrange what some European officials call "deep integration" talks, the idea proved to be enormously popular with Canadians.

Prominent European leaders, such as Trade Commissioner Peter Mandelson (who stepped down yesterday to join Gordon Brown's British government) and Mr. Barroso, tell me, through their senior aides, that they are willing to give the idea a shot, albeit while also courting other developed nations, such as Japan. Mr. Sarkozy, for his part, wants a Canadian deal to be one of the major accomplishments of his six-month turn in the European presidency.

Yet there is a very good chance it will not happen. If the talks collapse, as they did after a 2005 attempt at a much more modest investment deal, it won't be the result of Europe's failings. There is something very dysfunctional about Canada, many Europeans believe, that makes it hard to fit into the wider world. Any failure will be the direct result of the Canada that Stephen Harper has created.

"The problem with Canada," senior EU official involved in the talks told me, echoing a view that is heard in many of the EU member governments today, "is that it's not really one place. You think you're talking to Canada, and you make a deal, and then it turns out that someone else, in one of the provinces, has gone the other way. There's no unity."

The problem with Europe, Henry Kissinger once famously said in the seventies, is that it doesn't have a phone number. That's not true any more. Now, Brussels happily answers the phone for guys like Henry, but when Mr. Barroso tries to get on the horn with Canada, his secretary doesn't know whether to dial 613 or 450 or 403 or 604. Each line gives a different answer.

While the premiers of Quebec and Ontario both gave this deal their outspoken assent this week, the Europeans can't help noticing a major barrier to a deal that would harmonize European and Canadian standards and allow companies to do business with governments as if they were at home: Canada's provinces have never been able to get that kind of co-operation between each other. Note the tragic irony: Canada, a sovereign nation with 10 provinces and three territories, is considered fractious and lacking in unity by an organization that contains 27 independent nations and employs 3,000 full-time translators, including a woman who spends her days rendering Estonian into Maltese. But in many ways it's true: Bulgaria and Ireland play together better than Alberta and Newfoundland.

More then half the laws in any European country are EU laws; there's a near-total harmonization of standards, measures, government activities; there's complete freedom of movement, allowing companies to do business in any other member country as if it were their own. If the mayor of Lisbon wants to buy some new city buses and a company in Slovakia has the right stuff, then he has to treat it as if it was a Portuguese company. If a Polish plumber wants to set up shop in Bologna, the Italians have to give him a licence and recognize his qualifications.
More on link

[rw4th]

Yet there is a very good chance it will not happen. If the talks collapse, as they did after a 2005 attempt at a much more modest investment deal, it won't be the result of Europe's failings. There is something very dysfunctional about Canada, many Europeans believe, that makes it hard to fit into the wider world. Any failure will be the direct result of the Canada that Stephen Harper has created.

I believe this is the crux of that particular article and a blatant attempt to influence the outcome of the coming election. Some of what's in the article does ring true but the blame does not lie on Harper's shoulders.

[chanman]

There is some ‘good news’ in this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from the Reuters web site:

http://www.reuters.com/article/ousiv/idUSTRE4981X220081009

And there’s more, also reproduced under the Fair Dealing provisions (§29) of the Copyright Act, his time from the Financial Post:

http://www.financialpost.com/story.html?id=868581

Both of those stories may go some way to explaining this one, also reproduced under the Fair Dealing provisions (§29) of the Copyright Act from yesterday’s National Post:

http://www.financialpost.com/news/story.html?id=866377

Canadian banks have fought long, hard and ultimately unsuccessful campaigns to grow – either by merging or by expanding into foreign markets. Canadians hate banks and bankers – they don’t know why, they just do – so politicians have steadfastly refused to allow mergers. The US is was highly protectionist in its attitude towards foreign entry into its banking system – although both TD and RBC managed to enter. Now a growth opportunity is there, maybe without a requirement to buy up ‘distressed assets’ (‘toxic mortgages or just plain bad ebts).

 

That looks about right.  The need of some institutions for capital right now means that they may be compelled to sell off their most valuable parts, either as a condition of a government bailout or in an attempt to keep themselves afloat.  The inability for these firms to troll around for the best offer means that they can't afford to be picky about who they sell to and that means that there will be bargains to be had.

Cash-flush Japanese banks have been venturing out to buy again, and it's probably a given that sovereign wealth funds will be looking to add to their assets on the cheap.

Do you think there may be a chance that such buyers may be percieved by the public as profiteering from the misfortunes of others?

[GAP]

10 things the credit crisis taught me about investing
JOHN HEINZL Globe and Mail Update October 9, 2008 at 6:00 AM EDT
 Article Link

Based on the dictionary definition of wealth, I'm considerably poorer today than I was just a few weeks ago. Many of my dreams have been, if not shattered, then at least put off for a decade or two.

I will not be retiring early, for example, or splurging on the 12-inch sandwich at Subway when the six-inch will suffice.

But getting a one-way ticket to the poor house courtesy of Mr. Market is not as terrible as one might expect, for what I have lost in financial assets and hope for my children's future, I have gained back many times over in wisdom.

Indeed, watching my life savings get sucked into the credit vortex this week, I have never felt so wise. In the interest of giving back some of the priceless knowledge I have gleaned, allow me to share what I consider to be the most valuable lessons of the credit crisis thus far.

1. All stocks are risky, even the safe ones. You can buy the most conservative stocks, focus on the most recession-proof industries and diversify until the cows come home, but guess what? You'll still get crushed when the market decides to roll over. Why? Because the stock market hates you.

2. Buy and hold, buy and schmold. If you were a good little investor and diversified your portfolio by putting $10,000 (Canadian) into the S&P 500 index 10 years ago, your money would have “grown” to $7,800 today. But don't feel too badly. Including dividends, you'd have a whole $9,200.

3. Nobody is immune. There was a time when commodity super-bull Eric Sprott was considered a genius. That was last spring, when his fund company went public at $10 a share. Yesterday, the stock closed at $3.05. You do the math.

4. Money isn't the root of all evil, debt is. Whether you're talking about 1929, 1987 or 2008, most financial calamities are variations on the same theme: too much debt. Debt is intoxicating on the way up, and horrifying on the way down.

5. A lot of brilliant people are actually quite stupid. The math and physics geeks who brought us this horror show are great at making short-term profits for themselves. What they're not so great at is anticipating the destruction their arcane financial contraptions inflict on the world, largely because their models never anticipate any of the “rare” events that always seem to happen.

6. Just because a stock is cheap doesn't mean it won't get cheaper. Example: Less than two weeks ago, mutual fund company IGM Financial looked like a steal at $40, or 12 times estimated 2008 earnings. But the stock has since tumbled 12 per cent, pushing the P/E down to 10.7. Now that's a steal!

7. Grandpa was right after all. My grandfather, a shoemaker who lived through the Great Depression, was forever telling us to “save every nickel.” We always thought that was a bit extreme. But now that the world may be hurtling toward a replay of the dirty 30s, it's rather sound advice.

8. We've had it too good for too long. Decades of outsized stock market returns, fuelled by the greatest debt bubble in history, have given investors unrealistic hopes. Instead of counting on double-digit gains, we need to lower our expectations. Breaking even, for example, would be nice.

9. Cash is king. When was the last time you were holding a $10 bill and it suddenly turned into a $8 bill, or a $4 bill? At times like these, I'll take the silent march of inflation over a 30-per-cent thrashing, thanks.

10. Some things matter more than money. After the horror of 9/11, people came together like never before. It is my hope that, united in our anguish over the stock market's brutal collapse, we can all discover deeper meaning in our lives. So give your kids an extra hug today and take a moment to feel the sun on your face, because it's not like you can afford a trip down south this winter.
More on link

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and mail is more news about the crisis:

http://www.theglobeandmail.com/servlet/story/RTGAM.20081009.wbankpolitics10/BNStory/Business

Ottawa admits it must act on the economy

BRIAN LAGHI , HEATHER SCOFFIELD and STEVE CHASE AND TARA PERKINS

Globe and Mail Update
October 9, 2008 at 10:48 PM EDT

OTTAWA, RICHMOND, B.C. and TORONTO — The federal government is moving to backstop the Canadian banks' capacity to lend money in an acknowledgment that not even the country's sturdy banking system is immune to the global financial crisis.

A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation. In turn, the banks might receive CMHC paper – possibly bonds – against which they could use as collateral for their own loans from other banks.

In recent weeks, the big banks have faced a sharp rise in the cost of borrowing money in international markets to cover Canadian mortgages – a situation that puts them at risk of losing ever-increasing amounts of money on one of their core businesses.

Prime Minister Stephen Harper, Finance Minister Jim Flaherty and the banks say no bailout is on the table and the plan falls short of an intervention, but sources told The Globe and Mail Ottawa now recognizes the fast-changing economic landscape requires action to help the banks access cheaper funds to fuel lending.

With the double whammy of the last days of an election combining with the global economic slowdown, the federal government and senior bank executives are hypersensitive. The Conservative Party has been insisting throughout the election campaign that the fundamentals of the economy are strong. But in the past 24 hours a new reality has set in.

Mr. Flaherty, who is expected to be in Washington Friday at an emergency G7 session of finance ministers, had been preparing to make the announcement of a banking plan Thursday, but after word leaked Wednesday night, the plans were delayed, sources say, in an illustration of how important it is for the government to try to control the message.

Pressure from the banks is growing, with executives arguing their sector needs federal help immediately to ease their credit pressure.

Banks want it right now but the Harper government has to reconcile calls for immediate assistance with its insistence the Canadian banking system requires no extraordinary measures.

Financial stocks were battered Thursday. Toronto-based insurers Sun Life Financial and Manulife Financial fell 13.96 per cent and 11.35 per cent, respectively. Bank of Montreal dropped 4.59 per cent, Toronto-Dominion Bank 6.42 per cent, Bank of Nova Scotia 7.15 per cent, and both Royal Bank of Canada and Canadian Imperial Bank of Commerce fell 9.01 per cent. Comparatively, the S&P/TSX composite fell 4.54 per cent.

The Conservatives have watched their lead in the polls shrink over the past two weeks as financial turmoil boils over. Mr. Harper had argued that the economy is strong enough not to require urgent action, and that the stock-market plunge was a buying opportunity. That messaging has come to an end, however, as the Conservatives try to appear more sympathetic in helping put an end to the turmoil. As the election campaign comes to its conclusion, Mr. Harper has argued that Canadians should re-elect the Conservatives because they are the steadiest hand in guiding the turbulent economy.

Asked Thursday whether the government is working on a plan to help the flow of funds to borrowers by expanding mortgage security, Mr. Flaherty confirmed that “yes, we are looking at additional steps that could be taken.”

In British Columbia Thursday, Mr. Harper defended the idea of extending a helping hand. “To be very clear: there is no question, no possibility of bailing out the banks and the banks aren't seeking to be bailed out and the government won't be bailing them out,” he said. He added, however, that the banks need help to cope with the “growing tightness in world credit markets” now. “We're doing that to make sure there's money available for routine loans [for] small business, for car loans, for mortgages.”

But his main rival for the prime minister's job dismissed Mr. Harper for acting too late.

Asked if it was appropriate for the government to be intervening, Liberal Leader Stéphane Dion said it's the Tories who are panicking.

“It's too little, too late for Mr. Flaherty and Mr. Harper,” Mr. Dion said. “They have no plan. It's too late for them.”

The Tories have been facing increasing criticism this week for their handling of the crisis.

On Thursday, an executive said he was “shocked” when Mr. Flaherty said that two Canadian banks had run the risk of falling outside Canada's capitalization requirements.

This is a prudent measure. It is, above all, important to remember that Canadian Banks are in pretty fair shape -  they do not need to be nationalized or “bailed out” but they do need some temporary, interim help (in the form of repayable loans) because their costs of borrowing, that LIBOR thing again, are going up and up. Despite the best efforts of central banks, like the Bank of Canada and the US Federal Reserve, banks mostly borrow from one another and the LIBOR is high for dollar transactions, higher than central banks’ prime rates, (in fact it’s high for all transactions) so banks cannot pass the full of Bank of Canada rate cuts on to consumers because they have to pay a higher rate on most of the cash they use (loan or pay out) day by day.


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

Mods: I’m pretty sure this ‘page’ (International Situation & World News) is not the best place for his thread – except that it keeps this thread adjacent to the US Economy thread.

Maybe we could use a whole new ‘page’ in one of the domestic areas – Canadian Politics or even Military Current Affairs & News for ”The Economics of Defence”.

Just a thought ... and, at my age, I don’t have all that many in one day.

[E.R. Campbell]

Here, reproduced under the fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is some ‘meat’ on the previous announcement’s bones:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wflaherty1010/BNStory/Business/home

Ottawa buying $25-billion in mortgage pools

SHAWN MCCARTHY

Globe and Mail Update
October 10, 2008 at 7:49 AM EDT

OTTAWA — Ottawa is buying $25-billion in insured mortgage pools.

More to come.

This is a mix of good politics and damage control. The latter aimed at stopping the panic being spread by the frightened, ignorant ‘investors’ who drive the markets, and the Liberal Party of Canada campaign office.

[YZT580]

Doug Saunders has obviously NOT spend much time in Europe if he believes that the multiple government levels are any more fractious than those in Europe.  In Brussels, the so-called capital of the EU, the flemish and the french won't even talk to one another and there is no such thing as education in two languages in the public school system.  Ireland turned down the last attempt at a constitution and ever since has been under pressure to deny the democratic princple, hold their collective noses and vote yes regardless of the public's opinion.  France only votes yes when their palms have been greased and Germany demands their cut as well.

Besides, it is our banks, financial institutions, and investment framework that is holding firm right now and not the EU.  After the past weeks events, I do hope that Doug prints a retraction.

[E.R. Campbell]

This news, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is neither good nor bad:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wloonie1010/BNStory/Business/home

Loonie continues its decline

JOHN PARTRIDGE

Globe and Mail Update
October 10, 2008 at 8:20 AM EDT

Unexpectedly powerful job creation numbers for September briefly blasted the Canadian dollar up by nearly half a cent against its U.S. counterpart Friday, but the loonie quickly rejoined other major currencies in their collective plunge against the greenback.

Having crawled back from an overnight low of 85.84 cents (U.S.) the Canadian currency shot up to 86.68 cents from 86.19 after Statistics Canada disclosed at 7 a.m. (ET) that the nation's employers added about 107,000 jobs last month, although only about 10,000 of these were full-time.

“You should have heard the gasps and oohs and ahs in the office this morning,” said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. “People were just shocked. The jobs were ... fantastic given what's going on. It's just a really, really healthy number for Canada.”

However, Mr. Butler also correctly predicted that the job-creation figures would be forgotten as currency traders and their clients got back to the business of liquidating their positions and trying to preserve capital in the global financial maelstrom.

The loonie soon gave up its gains and headed back down, hitting 86.22 cents, down another 0.73 cent from Thursday's battered close.

“Data is so secondary at the moment, unfortunately, given all the other turmoil in the financial markets,” Mr. Butler added in a telephone interview. “It's just overwhelming.”

Foreign exchange markets are far more concerned about global economic and financial risk, and the plunge in commodities prices than a jobs number that probably reflects the end of the glory days for Canada's jobs market, Douglas Porter, deputy chief economist at BMO Nesbitt Burns.

It's notable that the currency didn't react much to the jobs numbers, after an initial bounce, said Mr. Porter said.

"It speaks volumes that it wasn't able to rally on the jobs numbers," he said. "The currency has a real problem here."

The loonie, which plunged by 1.78 cents on Thursday alone, has now lost nearly 9 per cent against the U.S. dollar since the end of September, and nearly 24 cents or 22 per cent from its record high last November of $1.10.

“In almost 40 years of floating, the Canadian dollar's only decline close to that deep over such a short period of time was a 7 per cent drop in two weeks after it peaked at $1.10 early last November,” Mr. Porter said. “After that would be a drop of 5.5 per cent in the period following the PQ election in 1976. Yes, this latest episode for many markets is right off the charts.”

Andrew Pyle a Scotia Capital financial adviser and former senior economist, told clients in a note that “foreign exchange players have thrown in the towel on the loonie in the wake of this week's events. Even at current levels, [it] has already reversed 50 per cent of the overall rally from 2002 to last November's high.”

With files from Heather Scoffield

There are just about as many views on the dollar’s proper value as there are Canadians. It is a commodity – rather like oil – its price reflects demand. When, for whatever reason, people want Canadian dollars the price (exchange rate) goes up; when people want some other currency or just don’t want Canadian dollars the price (exchange rate) goes down. The law of supply and demand is immutable and applies, alays and everywhere, to everything.

In part, the dollar’s value reflects the views of others on the state of our economy. Despite being one of the world’s premier industrialized nations we still have a resource based economy and when resource demand falls then our economy appears (to currency traders) to be falling, too, so the dollar falls. As I say so often, ‘investors’ and, especially, ‘traders’ are not famous for being broadly and well informed or for being rational.

[E.R. Campbell]

Doug Saunders has obviously NOT spend much time in Europe if he believes that the multiple government levels are any more fractious than those in Europe.  In Brussels, the so-called capital of the EU, the flemish and the french won't even talk to one another and there is no such thing as education in two languages in the public school system.  Ireland turned down the last attempt at a constitution and ever since has been under pressure to deny the democratic princple, hold their collective noses and vote yes regardless of the public's opinion.  France only votes yes when their palms have been greased and Germany demands their cut as well.

Besides, it is our banks, financial institutions, and investment framework that is holding firm right now and not the EU.  After the past weeks events, I do hope that Doug prints a retraction.

Doug Saunders is just being a typical journalist: a stenographer.

He is simply repeating a press release or, more likely, a ’private’ briefing from the EU negotiating team. His report is EU propaganda – aimed at ‘driving’ their agenda (position) through the media.

Everyone does it; we do it, too. In fact, back in the 1950s Louis St Laurent successfully ’bluffed’ Dwight Eisenhower by having US newspapers and US diplomats repeat the Canadian ‘line’ (which was false) that we could afford to and would build the St Laurence Seaway all on our own. Eisenhower wanted a bi-national deal, but a ‘better’ one than he got, and he ‘caved’ on almost all of St Laurent’s demands – based on a disinformation campaign.

The secret to St Laurent’s success as a ’bluffer’ lay in the fact that he was very trusted – by US politicians and by journalists. Everyone knew that all politicians lie, but St Laurent so rarely did (himself, he let others (e.g. Paul Martin Sr) do the lying for him) that people instinctively suspended their own good sense and printed what he said, without fact checking. Ditto Saunders and the EU bureaucrats he trusts – mainly because they are not Americans. Our national mythology includes Sam Slick and we do not trust the sly Yankee trader but, for unfathomable reasons, we are willing to trust those ‘nice Europeans’ who are so much like us.

[Thucydides]

A rather alarming post, if this set of calculations are close to correct, we are in for a tough time all around. I would suggest following the advice near the end of the piece; get your personal house in order, reduce debts and live within your means. The next step is to become politically active and work on getting governments at all levels to do the same (Overtaxation AKA "running a surplus" is not an option, unless the excess is applied to the debt. Even then, a far more powerful economic lever is to reduce government spending and taxation, putting resources back in the productive economy).

http://corner.nationalreview.com/post/?q=MzVmYzJiODc3M2E0OGM2YjRjYTU2ODQwZDk4OGY5NzY

Friday, October 03, 2008

Handicapping the Impact of the Bailout   [Jim Manzi]

A couple of days ago, I wrote a post that crudely estimated that if no material government action were taken to contain the current financial crisis, then the odds of a Great Depression level economic catastrophe were on the order of 1-in-4. I did this by using the natural experiment of the impact of Monday’s House vote on the Dow, in combination with a long-run view of the relationship between major downward movements in the Dow and subsequent economic results.

There is another way to try to get at a similar handicapping question. Remember that the hypothesized mechanism that would lead to a general economic collapse is a cascading series of defaults on debt that bring down numerous financial institutions. In this situation, the stock market is a bookie, but the debt markets are the action on the field.

Suddenly, numerous commentators are talking about something called the TED Spread as if they have been trading debt instruments in London their whole lives. There is a good reason for this. The TED Spread (which stands for Treasury-EuroDollar Spread) is the difference between the rate of interest paid on 30-day T-Bills (promises to pay by the U.S. government) and 30-day interbank loans (promises to pay by private banks). It is therefore a market measure of the likelihood of default by private banks.

Most of the time the risk that the U.S. government will default within the next month is considered to be almost zero, and the risk that institutions like Citibank will default within the next month is not considered to be much higher. For most of this decade, this difference has been a small fraction of 1% – something like 0.3%. About a year ago it rose suddenly to new level, and fluctuated between about 1% – 2% from September 2007 to the beginning of September 2008. On September 2, 2008, the TED Spread was 1.1%. On October 2, 2008, it was 3.6%. This increase in the cost of debt is now moving inexorably through the lending pipeline.

Econbrowser has an excellent decomposition of this change of the TED Spread into its component parts. It makes the point that the recent change in the TED Spread is dominated by some combination of fears on the part of lending banks: that the borrower (who remember is a big commercial bank) might default within the next 30 days, and that the lending institution might have a need for the money within the next 30 days.

A longer-term perspective, however, is useful. If we go back 20 or more years, a better long-term “typical” TED Spread is more like 0.5%. There have been a couple of other spikes that exceeded 1.5%. The most severe, by far, was at the time of the 1987 stock market crash when the TED Spread was about 2.7%. Previous spikes over the past 20 years (though none close to as severe as the current spike) have not been followed by Depressions.

All things considered, the difference in the general risk (or, more technically, the market price of risk) of interbank failure is therefore, as a rough guess, about 5 – 10 times its “normal” level right now.

There was one Depression in the 20th century. It seems to me that, therefore, a reasonable naïve Bayesian estimate of the odds of any randomly-chosen year being the year that a Depression starts should be about 1%. Obviously, if you think our process of government economic management is vastly better now than in the last century, you would have a lower estimate. I hope that most people who think this are a lot more humble about this belief than they were a year or two ago.

So, a crude estimate of the odds of this being the start of a Depression level economic catastrophe seem like they are something like 5 or 10 × 1% = 5% – 10%.

Now, to grossly simplify, traders here are handicapping: (i) the odds of a bailout happening, and then (ii) the potential range of outcomes, their odds, and their impacts under both the bailout and no-bailout scenarios. Given that the bailout seems very likely to pass (I’d guess the implicit market estimate for this is well above 90%), this is probably not too far from an estimate for what the odds of a catastrophe are even in the face of government action.

Combining the prior post with this one, that means that an unbelievably crude ballpark estimate for the market forecast for the impact of the bailout is to reduce the odds of a catastrophe from something like 25% to something like 5% – 10%. As per the previous post, this is really just guesswork, but I think if you play with these assumptions all you want, you will always come up with a directionally similar result.

If this is true, we are paying all this money and accepting all of these ideological costs in return for a 15 – 20 percentage point reduction in the odds of economic collapse. I think it’s clearly worth it, but it is an awfully unpleasant decision. Welcome to the very unpleasant economic world we’re likely to be living in for a while. Most Americans are discovering that they are not nearly as wealthy as they thought they were a year ago.

In the end, though, if this is a warning sign that stimulates a healthy reduction of debt in America without a massive contraction, it will be a positive step. The day you decide that you don’t want to deal with all this credit card debt, mortgage debt, car debt and so on, and take back control of your life is usually a good day. Even though you eat out less often and don’t buy that new, new flat screen TV or pair of shoes that you might previously have splurged on (with debt), you still are happier and more fulfilled. Let’s hope that’s where we’re moving.

10/03 12:45 PM

[DBA]

For complex systems any given statistic gives an indication of underlying conditions not a direct reading of them. There is also no guarantee that the stats your looking at will be dominant in the short, medium or long term if ever. Part of the current problem is investors looking at basic stats past when they have any real relation to the underlying risk and probabilities. An example is looking at the the low default rate on American mortgages while changing lending practices and an inflationary housing bubble added mountains of risk. The default rate didn't reflect the true risk of American mortgages.

I would urge caution in putting too much faith in any statistic, rosy or doom ladden.

[E.R. Campbell]

Although this story, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is, mainly, about US banks I am putting in the Canadian thread because it reinforces the ‘good news’ reported here:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wpaulson1011/BNStory/Business/home

U.S. ups ante with plan to buy stake in ailing banks

PAUL KORING

From Saturday's Globe and Mail
October 10, 2008 at 9:34 PM EDT

WASHINGTON — The Bush administration will buy big equity chunks in America's battered banks in a bold, even more aggressive bailout effort, Treasury Secretary Henry Paulson said Friday, unveiling a sweeping additional intervention that harkens back to the Great Depression.

Mr. Paulson said the government was ready to take stakes in “broad array” of banks and other financial institutions “as soon as we can.”

“This is a plan that I am quite confident will work,” Mr. Paulson said, referring not just to the latest stunning U.S. plans but also the broader, still-emerging, international effort being developed by G7 finance ministers meetings in crisis session in Washington.

The significant shift from just buying the toxic debt – centrepiece of the original $700-billion Paulson plan – to taking equity stakes surfaced earlier this week after Britain took that bolder approach.

Although it will dilute the holding of existing shareholders, the hope is that massive infusions of taxpayer-funded equity will prop up financial institutions sufficiently that they will resume lending.

Not since the 1930s have U.S. taxpayers taken equity stakes to salvage financial institutions teetering on the brink of ruin and threatening to wreak havoc on the broader economy.

On a day when markets whipsawed – and a week when an index of America's biggest 500 companies lost 18 per cent, capping a 40-per-cent drop in value over the past 12 months – the world's major economic powers scrambled to come up with concerted intervention while President George W. Bush pleaded for time.

“We're in this together and we'll come through this together,” the deeply unpopular Mr. Bush said in a brief Rose Garden speech. As he spoke, markets plunged, only to soar briefly before plunging again, ending one of the wildest weeks ever on global exchanges.

Canada's commodity prices tanked Friday, and the Canadian dollar did badly as well, losing as much as 4 1/2 cents against the U.S. dollar before staging a late rally to end the day at 84.69 cents, the currency's largest one-day drop since 1971. The S&P TSX composite index plummeted 5.6 per cent, capping a 16-per-cent loss this week, and oil dropped below $80 a barrel.

The Dow Jones Industrial Average closed at 8,451.19, its lowest point since April 25, 2003.

While stopping short of nationalizing banks – the equity stakes taken by the U.S. government will be non-voting – the dramatic announcement by Mr. Paulson underscored the gravity of the global crisis. Barely a week ago, Congress passed the $700-billion bailout bill that was regarded as the central thrust in an effort to restore confidence in shattered markets and to inject desperately needed liquidity into a system poisoned by toxic and impossible-to-value mortgage backed securities.

It clearly wasn't enough. Nor were the varied and sometimes conflicting efforts of European governments who negotiated all week over plans to cobble together confidence-restoring efforts.

That set the stage for the transformation of what was originally a routine biannual gathering of G7 finance ministers into a war-room conclave to avert financial catastrophe.

Despite the tough-sounding five points in the G7 communiqué, it offered few specifics for co-ordinated rescue efforts. Those may come later this weekend.

“Never has it been more important to find collective solutions,” Mr. Paulson said.

Finance Ministers from Britain, Canada, France, Germany, Italy, Japan and the United States along with senior officials of the World Bank and International Monetary Fund were to meet again Saturday along with a wider group of nations including Russia, China and India.

“There needs to be a systemic approach to this because this is a systemic issue,” Canadian Finance Minister Jim Flaherty said Friday.

But he also sounded a rare sanguine note amidst the cacophony of voices saying the world was facing the starkest financial crisis since the 1930s.

“Canada is in relatively good shape,” Mr. Flaherty said. “We have the soundest financial system in the world.”

But fear was trumping fundamentals in the markets and the corridors of power.

“We're up against a psychological event that is panic with a capital P,” said Alex Pollack, a former bank president and resident fellow at the conservative American Enterprise Institute. He too was calling for the government to buy into the banks. “When the capital is gone, something different is needed – an emergency provider of new equity,” he said.

That a lame duck president was moving within a hair of nationalizing banks less than a month before Americans go to the polls underscored the severity of the turmoil.

By injecting massive infusions of equity into banks and other financial institutions, Washington seemed to be following the British model.

But other countries had balked when Britain proposed that unified action along those lines be endorsed by the G7.

Mr. Paulson seemed an unabashed convert, although the Bush administration had previously shied away from taking major stakes in battered firms.

“We're going to do it as soon as we can do it and do it properly and do it effectively and right,” Mr. Paulson said. “Trust me, we are not wasting time.”

Although the Paulson plan for taking equity stakes in failing banks and other financial institutions has yet to be fleshed out, it has a clear precedent in the Reconstruction Finance Corporation created during the Great Depression. Established by President Herbert Hoover and expanded as part of Franklin Roosevelt's New Deal, the RFC invested more than $50-billion – worth more than $800-billion in today's dollars – in more than 6,000 U.S. companies.

It is, perhaps, prudent for the Americans to follow the British model – their banking system were rated (link above) 40th and 44th in ’soundness’ by the World Economic Forum. Canada, rated as having the soundest banking system in the world, should not have to do the same – kudos to successive Canadian governments, including Paul Martin’s and Stephen Harper’s, for rolling back some high risk policies and rules and maintaining a stable, prudent, well regulated system.

[tomahawk6]

I dont want to see the government owning banks - smacks too much of socialism.

[Old Sweat]

Government-owned banks are also apt to make decisions based on the short term political factors of the time, and not on sound business practice. Okay, so a lot of the bankers seemed to have been off sick the day the part about sound business practice was taught in banker school. That doesn't mean it isn't a good principle to follow. Much of the cause of the fiscal perfect storm was the rush by many of the left to 'make' the banks and the duo of Fanny and Freddy to give mortgages to the unqualified. Given a boom in housing starts, a sharp climb in house prices and some creative financial instruments that would make the proverbial Nigerian widow blush, the whole thing was inevitable.

To the credit of the Canadian financial class, and our stodgy old hard-nosed Scottish banking tradition, we were prevented from following our baser instincts. If anyone is looking for a primer on this sort of thing, look for a book called something like Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay LLD. It was published in 1841 and recounts some of the boom and busts involved with the mercantile class and the everybody is going to get rich syndrome, along with discussions of 'fads' such as alchemy, witchcraft trials, haunted houses and the popular admiration of criminals like Robin Hood and Dick Turpin.

Back to government ownership of banks, would you want the folks that brought you the gun registry handling your finances?

[E.R. Campbell]

I found this article, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail, a good read:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081010.wrcover11/BNStory/Business/

The Depression's history lessons

DEREK DeCLOET

From Saturday's Globe and Mail
October 10, 2008 at 9:41 PM EDT

Move quickly, be decisive

The early response by the politicians to the onset of the Depression was denial. "In the 1930s, there was a reluctance to intervene … the thought that this was a temporary adjustment," said Bill Waiser, a professor of history at the University of Saskatchewan. The two prime ministers who governed during the Depression era, Mackenzie King and R.B. Bennett, at times used the constitution to argue that unemployment and relief were provincial matters — there was no national unemployment insurance scheme — and Ottawa initially threw only meagre, "temporary" support to them, Prof. Waiser said.

In the United States, there was a similar lack of urgency. Far from the hustling fix-it man that is Henry Paulson, the Treasury Secretary at the time, Andre Mellon, was "a passionate advocate of inaction" on most matters of economic policy, John Kenneth Galbraith wrote in The Great Crash, 1929. Meanwhile, President Herbert Hoover was caught between those who wanted action, and those who held tight to the traditional conservative view that the government should always balance its budget (or at least try) and let economic nature take its course.

And where was the U.S. Federal Reserve during this? It "sat on its hands," said David Laidler, an economic historian from the University of Western Ontario. Nominal interest rates dropped as the contraction took hold, but because of massive deflation — prices dropped 24 per cent between 1929 and 1933 — real interest rates were far too high. Unlike today, the Fed of the 1930s wasn't nearly as aggressive in buying securities in order to get cash into bankers' hands — "pushing liquidity into the system," in central bank jargon. Interest rate policy was wobbly. In 1931, with the economy still in a deep funk, the Reserve Bank of New York raised interest rates twice in the space of a week, to stem an outflow of gold and protect the dollar amid fears the U.S. would drop the gold standard (as the U.K. had just done).

A number of academics who've studied the era — including Ben Bernanke, the world's most important central banker — have said the severity of the downturn was made worse by the Fed's foot-dragging and its blunders. Certainly, the lesson has stuck with Mr. Bernanke. In 2002, at economist Milton Friedman's 90th birthday, he gave a speech in which he joked: "I would like to say to Milton … regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"The speed of the response today is infinitely faster than it was in the Great Depression," Prof. Laidler said.

Don't demonize government deficits

Jeff Rubin, the chief economist of CIBC World Markets, thinks Canadian politicians have forgotten what governments are meant to do in a recession. The nation was so scarred by the monster deficits of the 1980s and early '90s that neither Liberals nor Conservatives want to add a dime of red ink. "The problem is we've lost sight of the role of fiscal policy over the cycle," Mr. Rubin complained on the same day Finance Minister Jim Flaherty unveiled his budget and pledged, yet again, not to break Ottawa's decade-long streak of surpluses.

Eight months later, the world is in a financial panic and the economic outlook is far worse. Yet Prime Minister Stephen Harper and Liberal leader Stéphane Dion have each stuck to the no-deficit line, with Mr. Dion even saying the Liberals would "never" cause a deficit. As a campaign strategy, it makes sense. No one wants to be attacked as a profligate.

But to stick to that pledge in a deep recession would not only be folly, as Mr. Rubin suggested; it would repeat what was arguably one of the biggest errors of Depression. In both Canada and the U.S., governments were hesitant to try to spend their way out of the problem. It wasn't until 1935 that the Bennett government proposed a Canadian version of the "New Deal" that included unemployment insurance, farm support and a pension scheme.

He was swept aside in the election of that year, but even Mackenzie King took a cautious fiscal approach. The next year, economist John Maynard Keynes published The General Theory of Employment, Interest and Money — which argued for active government intervention to stimulate investment and jobs — and Keynsian economics was born. Still, Ottawa didn't run a deficit that it planned for until 1938.

Mr. Hoover also could not shake the balanced budget orthodoxy. Remarkably, his administration ran a surplus in fiscal 1930, ran a small deficit in 1931 and raised taxes in 1932. Even Franklin Roosevelt wasn't as big a spender as he's often made out to be. "Roosevelt, unlike Hoover, wasn't absolutely wedded to balanced budgets. But he pretty much was," said Robert McElvaine, author of The Great Depression: America, 1929-1941 and a historian at Mississippi's Millsaps College. Before the war, he never ran a deficit larger than $5-billion (U.S.). Pearl Harbor, not the Depression, is what caused radical change in fiscal policy. By 1943, the deficit topped $50-billion. The worrying thing is that the U.S. enters this downturn already in poor fiscal shape, unlike in the 1930s. The public debt has increased from $5.7-trillion to $10.2-trillion during George W. Bush's time in the White House.

Bailouts may be only the beginning

This is a lesson that we're learning in real time. Remember how the Paulson plan was supposed to bring some relief? The financial world stayed glued to its screens as it came to a key vote in the U.S. House of Representatives. Once passed, it would give hope — that a $700-billion surgery would cut the cancer of subprime mortgages and toxic debt securities from the banking system, allow credit to flow again, and maybe even put some life into stocks.

President Bush signed the bill into law on Oct. 3. Since then, central banks around the world cut interest rates simultaneously; the Federal Reserve has offered to buy companies' short-term debt; banks have been nationalized, in whole or in part, in the United Kingdom and across Europe and the United States is considering a similar idea; and country after country has moved to stem a run on the banks by guaranteeing deposits or even other bank liabilities. None of it has had much impact so far.

Herbert Hoover, despite his fiscal conservatism, wound up trying all manner of different schemes to revive growth. A federal farm board (established before the market crash, actually) bought up unwanted or surplus production from farmers, in the hope of stabilizing prices, just as Mr. Paulson's new asset management firm seeks to buy unwanted investments from banks.

It didn't work. The National Credit Corp. attempted to bring some large banks together to get them to lend to other banks. It didn't work. The Resolution Finance Corp., created by Mr. Hoover in 1932 and expanded by Mr. Roosevelt, was created to directly lend government money to banks, railways and other businesses, and ultimately ended up as financier to state public works projects. It may have saved the banking system temporarily, Prof. McElvaine believes, but it still didn't prevent the misery of 1933, the Depression's worst year.

In modern-day banking crises, such as those of Finland, Sweden and Norway in the late '80s and early '90s, the experience was much the same. Their governments had to take control of, or inject capital into, large parts of the banking system, but it still took years before the crisis passed and those institutions were healthy enough that blanket government guarantees could be removed.

Don't fall for protectionism

The biggest mistake of Depression-era policy makers wasn't what they did inside their own economies; it was the way they tried to shut other countries out, said Joseph Martin, director of Canadian business history at the Rotman School of Management in Toronto. On this, the politicians acted quickly — and foolishly. The Smoot-Hawley Tariff Act, which raised import tariffs in the U.S. to historically high levels, was passed by the summer of 1930, over the objections of more than 1,000 economists who'd urged Mr. Hoover to veto it. The same summer, Mr. Bennett swept to power in the Canadian election on a now-infamous promise to use tariffs to blast his way into the world's export markets.

The folly of this is now universally acknowledged; world trade declined by two-thirds between 1929 and 1934, and the trade barriers surely made that worse. But will we repeat the mistakes of the past? Recall Senator Barack Obama's earlier rhetoric about the North American free-trade agreement being "a big mistake".

The Democratic candidate has backed down from that remark. But playing to the protectionist crowd is a time-honoured tradition during recessions. And that crowd is growing. Two years ago, 44 per cent of Americans said free-trade agreements were good for their country in a poll by the Pew Research Centre, while 35 per cent said they were bad. Now those numbers have flipped: In a Pew poll taken this spring, 35 per cent said trade deals were a good thing, 48 per cent disagreed. And that was when things were calmer, before the financial crisis got even more serious in September. "From a trade perspective, I'm very nervous," said Prof. Martin. With the strong likelihood of Democratic control of both the White House and Congress, "the House of Representatives will be crying for trade protection. It'll be up to the Senate and the President to stop them. I think it's an issue Canadians seem to be oblivious to — but it's an issue."

Protect the biggest banks

A major New York-based financial institution was on the brink. Regulators scrambled to find a healthy bank — or even a group of banks — to rescue it through an acquisition or merger. At the last hour, a potential deal fell apart, the struggling institution collapsed, and the episode touched off a cascade of bank failures.

It sounds like Lehman Brothers Holdings in 2008. But it also describes the Bank of United States (which, despite its grand name, was not controlled by the government) in December, 1930. At the time, it was the largest commercial bank to go under in American history. Saving it probably wouldn't halted the wave of bank failures that hit the U.S. financial system over the next few years, but because of its size, some historians believe it accelerated the evaporation of confidence. Two thousand U.S. banks failed in 1931.

Lehman's Chapter 11 filing on Sept. 15 marked a similar turning point. You can draw a link between that event and virtually every shock that has happened since. Losses on Lehman debt caused one of the oldest and largest money market funds to "break the buck" (i.e., to cause the fund's value to drop below $1 a share), which caused a run on the money market funds as investors pulled out their money, which made it hard for banks, General Electric Co. and other businesses that rely on a constant infusion of short-term debt to raise the money they need. Result: deep freeze in the credit markets, and investment banks like Morgan Stanley struggling just to survive.

"One of the things I thought we learned from the '30s is, when in doubt, you don't let a financial institution fail if there's a systemic risk," said Prof. Laidler, who believes Mr. Paulson either failed to heed this lesson or made a huge miscalculation. "I just can't comprehend letting Lehman Brothers go broke. I simply don't know how that mistake was made."

Be wary of the rosy scenario

Just before he left office in 1929, U.S. President Calvin Coolidge said things were "absolutely sound" and that stocks were "cheap at current prices." In the spring of 1930, Herbert Hoover said: "We have not passed the worst and with continued unity of effort shall rapidly recover." The "worst" was still three years away.

In August, 2007, at the start of the credit crunch, U.S. President George W. Bush declared: "The fundamentals of our economy are strong." In November, Prime Minister Harper said: "Yes, we have some problems, but as our esteemed finance minister said more than a few times last week … the fundamentals of our economy are as solid as the Canadian Shield."

Hearing this would have amused J.K. Galbraith, the great Canadian-American economist, who died in 2006. In an updated version of The Great Crash, he wrote: "Always when markets are in trouble, the phrases are the same: 'The economic situation is fundamentally sound' or simply 'The fundamentals are good.'

"All who hear these words should know that something is wrong."

*****

How this crisis is similar:

Property bubble foreshadows trouble

The Great Depression didn't begin until the autumn of 1929, when chaos erupted in the financial markets. But then, as now, the market crash was preceded by a speculative frenzy in real estate that had burst.

Debt to excess

Brokerages in the late 1920s behaved as the subprime lenders of 2006 did, lending to almost anyone. But the buying of stocks on margin was only a small piece of a much bigger consumer credit boom. Between 1925 and '29, U.S. "instalment debt" more than doubled.

Wall Street was too clever

In the good times, investment bankers are lauded for what's benignly called "financial innovation." Only when those fancy products collapse in ruin are they seen as folly. The late 1920s saw an explosion in the number of investment trusts that made heavy use of leverage and proved to be nearly worthless after the crash. These were analogous to many of the debt-backed financial instruments at the heart of current problem.

A departing President struggles to cope

Though the economic contraction began in 1929-30, the banking crisis didn't really peak until 1933, according to Robert McElvaine, a U.S. Depression historian. President Herbert Hoover was an unpopular, lame-duck Republican who lacked political capital and couldn't contain the slide of confidence in banks.


How it's different:

Social programs help cushion the blow

Unemployment insurance, old age pensions, Social Security in the U.S. — these things either didn't exist in 1929 or existed in only a limited form. They're called "automatic stabilizers" because they put money into the economy as the private sector contracts.

There's still inflation

When the Depression began, Canada's most important export was food, not oil or wood. And the farm sector was already stuck in a deep deflationary funk. By the end of the '20s, the inflation rate in Canada was zero, and the U.S. was already in mild deflation. Today, most producers of commodities — including farmers — have enjoyed years of prosperity before the downturn.

The magnitude of the crisis is different

This may be the biggest financial crisis in 75 years, but let's put it in perspective. The unemployment rate in Canada and the U.S. is still barely 6 per cent. In the U.S., it has been rising quickly, but some key sectors, like health care, are still hiring. That's a long way from the 20-per-cent-plus rates of the 1930s. The latest data do not even show the economy is contracting.

Economic policy is more flexible

The U.S. is no longer on the gold standard, in which all dollars can be converted to a fixed amount of gold. It can let its exchange rate fall to help exporters. Central banks now understand the perils of deflation, and balanced government budgets are no longer a religion.

There is a lot of good advice in this article for incoming Prime Ministers (even re-elected ones) and incoming Presidents, too. It is also useful for we mere mortals who try to understand what is going on.

I am reasonably sure, based on everything I have read, that not even the US is going to slip into a depression; Canada should be able to get by with, at worst only one, maybe two quarters of zero or negative growth. BUT: it pays to understand what a prolonged, severe recession or even a mild depression might look lke.

[Thucydides]

A number of academics who've studied the era — including Ben Bernanke, the world's most important central banker — have said the severity of the downturn was made worse by the Fed's foot-dragging and its blunders. Certainly, the lesson has stuck with Mr. Bernanke. In 2002, at economist Milton Friedman's 90th birthday, he gave a speech in which he joked: "I would like to say to Milton … regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

What made the Great Depression "great" was the ham handed interventions of the "New Dealers", who's interventions in the US economy continually distorted market signals and diverted capital and labour from wher the market would have made use of them to areas where politicans and bureaucrats would benefit. I suspect that without the "New Deal", the "Great Recession" of 1929 might have been far shorter and had far lesser impact on the global economy.

I can already see the ham handed interventions of 2008 are having the opposite effects that the interventionists are expecting (notice how each wave of announcements are followed by market sell-offs?); and conspiracy theorists are already suggesting this is an orchestrated action designed to discredit free markets and create the climate for far greater State intervention in the economy.

[GAP]

suggesting this is an orchestrated action designed to discredit free markets and create the climate for far greater State intervention in the economy.

Well, if it is a conspiracy, they are succeeding.....It seems somebody(ies) is/are doing whatever to keep the government going one step further, then another, then another....

[tomahawk6]

I think there are market forces at work that the financial guru's dont have a clue about. They seem to be forced to take steps or else be accused of doing nothing. I think if we dont do anything further and let the markets correct we will be alot better off. My real fear is that the steps now being taken will be the death of our free market system. We have seen how government managed economies have fared in the past.