New World Order

By Justin Fox Thursday, Feb. 05, 2009

In recent weeks, the world has been politely standing by and watching how things play out with the fiscal stimulus and latest bank-bailout plans in Washington. Yes, there's been some grumbling overseas about "buy American" provisions in the stimulus bill, but for the most part, officials elsewhere don't want to step on the toes of a new President to whom they are favorably disposed. They also don't want to endanger legislation that they hope will help jump-start the global economy.

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Just wait a couple of months, though. Politicians from Beijing to Berlin to Brasília see the current crisis as the product of a messed-up global financial infrastructure dominated by the U.S., and they will soon be pushing for big changes--whether Americans like them or not.

All this will begin to gel on April 2, when the newish international organization known as the G-20--the leaders of 19 of the world's biggest national economies, plus the European Union--meets in London. An unofficial meeting has already taken place, at the World Economic Forum in Davos, Switzerland, where G-20 officials (with the conspicuous exception of those from the U.S.) made speeches, conversed in the halls and gave a sense of the direction in which the world outside the U.S. wants to head. (Read TIME's special report on Davos 2009.)

The global discussion of the financial crisis is strikingly different from the one in the U.S. Here there's still something of a debate over whether the mess is the result of too much government interference in the housing market or too little government regulation of financial markets. In the rest of the world, that's no debate: inadequate and inconsistent financial regulation is uniformly blamed. What's more, a consensus seems to have emerged among the world's finance ministers and central-bank bosses that the chief underlying cause of the crisis was an unbalanced and out-of-control system of global capital flows in which some big-spender countries (namely the U.S.) ran up huge debts while big savers (China and India, for example) hoarded surpluses.

On the regulatory front, the path to a new global approach is pretty clear. Last spring the leaders of the G-7, a club of wealthy nations, agreed to create a "college of supervisors" to more closely coordinate regulation of multinational banks. The Group of Thirty, an influential organization of current and former central bankers and financial regulators, recommended in January that "systematically significant" financial institutions (those that are too big to fail) be identified in advance and subjected to higher capital requirements and tougher regulation. (See who's to blame for the financial crisis.)

Yet regulators around the world were already jointly setting bank-capital standards before the current crisis hit. A lot of good that did us. So there is also much talk about the need for a new architecture--"a new Bretton Woods" was a phrase that echoed around Davos--to rein in global financial flows.

Bretton Woods is the mountain resort in New Hampshire where in 1944 the Allied nations met--with the U.S. calling almost all the shots--to plan a postwar financial system. The Bretton Woods creations included the International Monetary Fund (IMF), the World Bank and a quarter-century of fixed exchange rates built around a U.S. dollar that was linked to gold. The fixed exchange rates and gold standard unraveled in the 1970s, and ever since we've had a system in which the IMF occasionally steps in to help countries in currency crises (usually imposing harsh terms in the process) but exercises no real control over the global financial system.

After the emerging-market currency collapses of the late 1990s, in which IMF aid wasn't much help, the lesson that emerging economies such as China and India took was that they needed to build up gigantic reserves of U.S. dollars to protect their currencies. To build those reserves, they ran big trade surpluses, which were in turn enabled mainly by record trade deficits in the U.S., which were in turn enabled by massive borrowing from around the world. It was an extremely unbalanced financial ballet, and it has now come crashing to the ground.

In the view of many outside the U.S. (and some within), the only way to limit such excesses is through a bigger, more powerful IMF that can act as a central bank to the world--and knock heads when needed. While everybody agrees that this new IMF needs to be less dominated by the U.S. and Western Europe, things get controversial as soon as you go past voting rights. Should capital flows be restricted? Should there be limits on trade deficits and surpluses? Should the IMF be able to order around even the U.S.? If the answer to any of these questions is yes, global capitalism will have entered a new and dramatically less freewheeling era.

Financial Crisis Called Top Security Threat to U.S.

By Walter Pincus and Joby Warrick

Washington Post Staff Writers
Friday, February 13, 2009; Page A14

Director of National Intelligence Dennis C. Blair told Congress yesterday that instability in countries around the world caused by the current global economic crisis, rather than terrorism, is the primary near-term security threat to the United States.

"Roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown," Blair told the Senate Select Committee on Intelligence, delivering the first annual threat assessment in six years in which terrorism was not presented as the primary danger to this country.

Making his first appearance before the panel as President Obama's top intelligence adviser, Blair said the most immediate fallout from the worldwide economic decline for the United States will be "allies and friends not being able to fully meet their defense and humanitarian obligations." He also saw the prospect of possible refugee flows from the Caribbean to the United States and a questioning of American economic and financial leadership in the world.

But Blair also raised the specter of the "high levels of violent extremism" in the turmoil of the 1920s and 1930s along with "regime-threatening instability" if the economic crisis persists over a one-to-two-year period.

In answer to a question about whether he was shifting assets to cover the financial downturn, Blair said that by leading off with the economic situation he "was trying to act as your intelligence officer today, telling you what I thought the Senate ought to be caring about." He said he was not refocusing the intelligence community's basic collection and analytic work from traditional concerns such as terrorism, Afghanistan, Pakistan, Iran, North Korea, Russia and China.

In fact, during the nearly two-hour hearing, Blair took lawmakers on a virtual tour of every other major and minor security threat, from terrorism and cyber-attacks to the country's evolving relations with Russia and China.

Discussing terrorism, Blair emphasized the progress being made against al-Qaeda. "We have seen notable progress in Muslim opinion turning against terrorist groups such as al-Qaeda" as more religious leaders question terrorists' use of brutal tactics against fellow Muslims. He said that "al-Qaeda today is less capable and effective than it was a year ago" based on the pressure the U.S., Pakistan and others put on Osama bin Laden and his core leadership in Pakistan's tribal areas and the decline of al-Qaeda in Iraq. He also reported that while no major country faces the risk of collapse at the hands of any terrorist groups, "Pakistan and Afghanistan have to work hard to repulse a still serious threat" to their governments.

Despite these successes, Blair said al-Qaeda and its affiliates and allies "remain dangerous and adaptive enemies," and the threat continues that they could inspire or orchestrate an attack on the United States or Europe. He told the committee there is still concern that al-Qaeda could inspire some homegrown terrorists inside the United States. He added that if al-Qaeda is forced out of the Pakistan tribal areas, it will have difficulty supporting the Taliban in Afghanistan. He said bin Laden could relocate. For example, he said, al-Qaeda elements in Yemen now pose a new threat to Saudi Arabia, whose own efforts have been successful in killing or capturing most al-Qaeda senior leaders in that country.

Blair delivered a blunt assessment of Iran and its weapons programs, saying that it is possible that Tehran could develop a nuclear weapon as early as next year, if the country's leaders choose to do so. But he also suggested that Iran could be kept off the nuclear path with the right combination of diplomacy and economic pressure.

"Iran is clearly developing all the components of a deliverable nuclear weapons program," he said, but "whether they take it all the way to nuclear weapons depends a great deal on their internal decisions."

Blair described Iraq as increasingly stable, with terrorist attacks on the wane and al-Qaeda losing followers and influence. But he warned that recent progress could be undermined by tribal disputes, corruption and foreign support for militia groups.

Echoing recent statements by U.S. military commanders, he gave a grim portrayal of security in Afghanistan, where Taliban insurgents have shown new aggressiveness while the government continues to struggle with rampant corruption and an extensive drug trade. In neighboring Pakistan, an intensified campaign against terrorists has failed to subdue multiple insurgencies or quell growing radicalism in many parts of the country.

Panasonic orders staff to buy £1,000 in products

Leo Lewis, Asia Business Correspondent

Its electronic gadgetry is gathering dust on the shelves of high street stores, nobody is buying new fridges and the mountain of unsold plasma televisions is growing by the day.

However, in desperation, Panasonic has hit on the perfect counter-attack against the consumer slump: it has ordered every member of staff to go out and buy £1,000 of Panasonic products.

Large swathes of corporate Japan are expected to follow suit, either by directly commanding or indirectly “pressuring” employees to divert part of their salaries towards the goods that their employers produce.

Toyota has already tacitly applauded a “voluntary” scheme in which 2,200 of its top brass decided to buy new Toyota cars, and the president of Fujitsu recently e-mailed 100,000 staff and gently pointed out how nice it would be if “employee ownership rates” of Fujitsu PCs and mobile phones were a little higher.

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The 10,000 Japanese staff affected by Panasonic’s unorthodox strategy do not have long to consider their purchases.

Management insists that staff buy their Panasonic goods — whether they need them or not — by the end of July.

Upper-level managers, all of whom have been “encouraged” for years to fill their homes with Panasonic goods as a symbol of corporate loyalty, are being asked to spend at least 200,000 yen (£1,500).

A Panasonic spokesman said that because the “Buy Panasonic” request was made to management-level employees, the company did not expect refusal rates to be high.

The emergency directive, some Panasonic employees say, is a particularly cruel blow: the same 10,000 managers now being commanded to fork out for unwanted electronics were told two weeks ago that their salaries and bonuses would also be slashed.

The company itself is staring down the barrel of one of its worst annual earnings performances ever, with a Y350 billion flood of red ink expected by the end of the year.

Panasonic said that the move, which is not unprecedented in company history, was aimed at forcing management to “recognise the severity of the current business environment” — a recognition that might have been expected to be in place already, Mitsubishi Tokyo UFJ brokers said.

Only a fortnight ago the company announced plans to close 20 per cent of its factories and cut 15,000 jobs from its global workforce.

Other warning signs from that announcement included pay cuts of between 10 per cent and 20 per cent for directors and 5 per cent for managers.

Even if other Japanese companies are less overtly aggressive about forcing staff to buy their products, many are expecting the Japanese corporate tradition of socially enforced loyalty to kick in and force the issue anyway.

Companies such as Sony and Sharp hold regular discount sales of goods for employees, and sources at both companies have suggested that the most recent events have involved a “clear sense of pressure” to be seen supporting the company by buying its products.

The “Buy Fujitsu” campaign involved an e-mail from the president that read: "If everyone in the company gets together, then it will become a great power.”

Will Obama Exploit the Unemployed as Recruits for a Ramped Up War in Afghanistan?

The jobless rate is a depression-level 18 percent. Americans might sign up to kill abroad rather than be homeless and hungry at home.

Is there intelligent life in Washington, D.C.? Not a speck of it.

The U.S. economy is imploding, and President Barack Obama is being led by his government of neoconservatives and Israeli agents into a quagmire in Afghanistan that will bring the U.S. into confrontation with Russia, and possibly China, America's largest creditor.

The January payroll job figures reveal that last month, 20,000 Americans lost their jobs every day.

In addition, December's job losses were revised up by 53,000 from 524,000 to 577,000. The revision brings the two-month job loss to 1,175,000. If this keeps up, Obama's promised 3 million new jobs will be wiped out by job losses.

Statistician John Williams (shadowstats.com) reports that this huge number is an understatement. Williams notes that built-in biases in seasonal adjustment factors caused a 118,000 understatement of January job losses, bringing the actual January job loss total to 716,000 jobs.

The payroll survey counts the number of jobs, not the number of employed, because some people have more than one job. The Household Survey counts the number of people who have jobs, and it shows that 832,000 people lost their jobs in January and 806,000 in December, for a two-month count of Americans who lost jobs at 1,638,000.

The unemployment rate reported in the U.S. media is a fabrication. Williams reports that in changes since 1980, particularly in the Clinton era,

" 'Discouraged workers' -- those who had given up looking for a job because there were no jobs to be had -- were redefined so as to be counted only if they had been 'discouraged' for less than a year. This time qualification defined away the bulk of the discouraged workers. Adding them back into the total unemployed, actual unemployment, [according to the unemployment rate methodology used in 1980] rose to 18 percent in January, from 17.5 percent in December."

In other words, without all the manipulations of the data, the U.S. unemployment rate is already at depression levels.

How could it be otherwise, given the enormous job losses from jobs sent overseas? It is impossible for a country to create jobs when its corporations are moving production for the American consumer market offshore. When they move the production offshore, they shift U.S. gross domestic product to other countries. The U.S. trade deficit over the past decade has reduced U.S. GDP by $1.5 trillion dollars. That is a lot of jobs.

I have been reporting for years that university graduates have had to take jobs as waitresses and bartenders. As over-indebted consumers lose their jobs, they will visit restaurants and bars less frequently. Consequently, those with university degrees will not even have jobs waiting on tables and mixing drinks.

U.S. policymakers have ignored the fact that consumer demand in the 21st century has been driven, not by increases in real income, but by increased consumer indebtedness. This fact makes it pointless to try to stimulate the economy by bailing out banks so that they can lend more to consumers. The American consumers have no more capacity to borrow.

With the decline in the values of their principal assets -- their homes -- with the destruction of half of their pension assets, and with joblessness facing them, Americans cannot and will not spend.

Why bail out GM and Citibank when the firms are moving as many operations offshore as they possibly can?

Much of U.S. infrastructure is in poor shape and needs renewing. However, infrastructure jobs do not produce goods and services that can be sold abroad.

The massive commitment to infrastructure does nothing to help the U.S. reduce its huge trade deficit, the financing of which is becoming a major problem. Moreover, when the infrastructure projects are completed, so are the jobs.

At best, assuming Latino immigrants do not get most of the construction jobs, all Obama's stimulus program can do is to reduce the number of unemployed temporarily.

Unless U.S. corporations can be required to use American labor to produce the goods and services that they sell in American markets, there is no hope for the U.S. economy. No one in the Obama administration has the wits to address this problem. Thus, the economy will continue to implode.

Adding to the brewing disaster, Obama has been deceived by his military and neoconservative advisors into expanding the war in Afghanistan, a large, mountainous country.

Obama intends to use the draw-down of troops in Iraq to send 30,000 more to Afghanistan. This would bring the U.S. forces to 60,000 -- 600,000 fewer than Marine Corps and Army counterinsurgency guidelines define as the minimum number necessary to bring success in Afghanistan -- and less than half as many that was unable to occupy Iraq.

The Iranians had to bail out the Bush regime by restraining its Shiite allies and encouraging them to use the ballot box to attain power and push out the Americans.

In Iraq, the U.S. troops only had to fight a small Sunni insurgency drawn from a minority of the population. Even so, the U.S. "prevailed" by putting the insurgents on the U.S. payroll and paying them not to fight. The withdrawal agreement was dictated by the Shiites. It was not what the Bush regime wanted.

One would think that the experience with the "cakewalk" in Iraq would make the U.S. hesitant to attempt to occupy Afghanistan, an undertaking that would require the U.S. to occupy parts of Pakistan.

The U.S. was hard-pressed to maintain 150,000 troops in Iraq. Where is Obama going to get a half-million more to add to the 150,000 to pacify Afghanistan?

One answer is the rapidly growing massive U.S. unemployment. Americans will sign up to go kill abroad rather than be homeless and hungry at home.

But this solves only half of the problem. Where does the money come from to support troops in the field of 650,000, 4.3 times larger than U.S. forces in Iraq, a war that has cost us $3 trillion in out-of-pocket and already incurred future costs?

This money would have to be raised in addition to the $3 trillion U.S. budget deficit that is the result of Bush's financial sector bailout, Obama's stimulus package and the rapidly failing economy.

When economies tank, as the American one is doing, tax revenues collapse. The millions of unemployed Americans are not paying Social Security, Medicare and income taxes. The stores and businesses that are closing are not paying federal and state income taxes. Consumers with no money or credit to spend are not paying sales taxes.

The Washington Morons, and morons they are, have given no thought as to how they are going to finance a fiscal year 2009 budget deficit of some $2 trillion to $3 trillion.

The U.S. government really has only two possibilities for financing its budget deficit. One is a second collapse in the stock market, which would drive the surviving investors with what they have left into "safe" U.S. Treasury bonds. The other is for the Federal Reserve to monetize the Treasury debt.

"Monetizing the debt" means that when no one is willing or able to purchase the Treasury's bonds, the Federal Reserve buys them by creating bank deposits for the Treasury's account.

In other words, the Fed "prints money" with which to buy the Treasury's bonds. Once this happens, the dollar will cease to be the reserve currency.

In addition, China, Japan and Saudi Arabia, countries that hold enormous quantities of U.S. Treasury debt, in addition to other U.S. dollar assets, will sell, hoping to get out before others. The dollar will become worthless, the currency of a banana republic.

The U.S. will not be able to pay for its imports, a serious problem for a country dependent on imports for its energy, manufactured goods and advanced-technology products.

Obama's Keynesian advisors have learned with a vengeance Milton Friedman's lesson that the Great Depression resulted from the Federal Reserve permitting a contraction of the supply of money and credit.

In the Great Depression, good debts were destroyed by monetary contraction. Today, bad debts are being preserved by the expansion of money and credit, and the U.S. Treasury is jeopardizing its credit standing and the dollar's reserve-currency status with enormous quarterly bond auctions as far as the eye can see.

Meanwhile, the Russians, overflowing with energy and mineral resources, and not in debt, have learned that the U.S. government is not to be trusted. Russia has watched Reagan's successors attempt to turn former constituent parts of the Soviet Union into U.S. puppet states with U.S. military bases. The U.S. is trying to ring Russia with missiles that neutralize Russia's strategic deterrent.

Russia's Prime Minister Vladimir Putin has caught on to "comrade wolf." He has succeeded in having the president of Kyrgyzstan, a former part of the Soviet Union, evict the U.S. from its military base. This base is essential to America's ability to supply its troops in Afghanistan.

To stop America's meddling in its sphere of influence, the Russian government has created a collective security treaty organization comprising Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan. Uzbekistan is a partial participant.

In other words, Russia has organized Central Asia against U.S. penetration.

To whose agenda is President Obama being hitched? Writing in the English-language version of the Swiss newspaper, Zeit-Fragen, Stephen J. Sniegoski reports that leading figures of the neocon conspiracy -- Richard Perle, Max Boot, David Brooks and Mona Charen -- are ecstatic over Obama's appointments. They don't see any difference between Obama and Bush/Cheney.

Not only are Obama's appointments moving him into an expanded war in Afghanistan, but the powerful Israel lobby is pushing Obama toward a war with Iran.

The unreality in which he U.S. government operates is beyond belief. A financially bankrupt government that cannot pay its bills without printing money is rushing headlong into wars in Afghanistan, Pakistan and Iran.

According to the Center for Strategic and Budgetary Analysis, the cost to the U.S. taxpayers of sending a single soldier to fight in Afghanistan or Iraq is $775,000 per year!

Obama's war in Afghanistan is the Mad Hatter's Tea Party. After seven years of conflict, there is still no defined mission or endgame scenario for U.S. forces in Afghanistan.

When asked about the mission, a military official told NBC News, "Frankly, we don't have one." NBC reports: "They're working on it."

Speaking to House Democrats on Feb. 5, Obama admitted that the government does not know what its mission is in Afghanistan and that to avoid "mission creep without clear parameters," the U.S. needs a clear mission.

How would you like to be sent to a war, the point of which no one knows, including the commander in chief who sent you to kill or be killed? How, fellow taxpayers, do you like paying the enormous cost of sending service members on an undefined mission while the economy collapses?

Fannie, Freddie Funding Needs May Pass $200 Billion

Feb. 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the mortgage-finance companies seized by regulators, may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said.

The companies’ needs will depend largely on the direction of home prices, Lockhart said in an interview in Las Vegas yesterday. His comments followed statements from Fannie Mae in November and Freddie Mac Chairman John Koskinen last week that the government’s funding commitment through 2009 may fall short of what the companies need to make good on their obligations.

“When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace,” Lockhart said. “There’s been some significant events since then that weren’t in our forecast.”

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth, according to a Feb. 3 report from Zillow.com. Following a record boom, home prices are down 25 percent on average since mid-2006 amid a tightening of lending standards and an economic recession, the S&P/Case-Shiller Composite 20-city price index shows.

Freddie Mac and Fannie Mae are the largest U.S. mortgage- finance companies, owning or guaranteeing $5.2 trillion of the $12 trillion home-loan market. The government seized control of Fannie Mae and Freddie Mac after their losses threatened to further disrupt the housing market, and pledged to invest as much as $100 billion into each company as needed if the value of their assets drops below the amount they owe on obligations.

A ‘Hard Look’

Fannie Mae said in a November regulatory filing that “this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership.” Freddie Mac is taking a “hard look” at whether it will need more than $100 billion, Koskinen said last week.

“It’s going to be a close question,” Koskinen said in an interview on Bloomberg Television’s “Conversations with Judy Woodruff.”

McLean, Virginia-based Freddie Mac has taken $13.8 billion in federal aid and said it will need as much as $35 billion more by the end of this month. Washington-based Fannie Mae said it may tap as much as $16 billion in funding.

Lockhart, who was in Las Vegas yesterday to speak before the American Securitization Forum’s annual conference, said Fannie Mae and Freddie Mac’s most recent requests for aid, which were larger than some expected, were driven by temporary market disruptions that may not translate into permanent losses.

“There were some temporary imbalances that made their numbers pretty dramatic,” he said.

Government Demands

Federal officials are now leaning on the government- sponsored enterprises to help stabilize the housing market. House Financial Services Committee Chairman Barney Frank said last week that the companies will be used “very aggressively” to help reduce record foreclosures.

Lockhart said Fannie Mae and Freddie Mac aren’t expected to take a loss “under any program” that requires their involvement. “We would expect them to be writing business that’s profitable at this point, not a large profit,” he said yesterday. “But we would not expect them to be writing business at a loss under any program.”

The Treasury, not the companies, would bear the cost under proposals to use the companies to drive down mortgage rates to about 4.5 percent, Lockhart said. That proposal was under consideration as part of a comprehensive housing-recovery plan being developed by the Treasury.

‘A Hot Idea’

“That was a hot idea for a while: It’s cooled off,” Lockhart said. “But Fannie and Freddie wouldn’t be asked to eat the difference. If it happened, that would be the U.S. Treasury.”

Fannie Mae and Freddie Mac may also be used to provide direct financing to single-family and multifamily residential mortgage lenders, Lockhart said. Currently Fannie Mae and Freddie Mac provide financing by either buying loans from lenders or helping them package the debt as bonds for sale to investors, thus freeing up cash to make more mortgages.

The FHFA is reviewing whether the companies’ congressional charters, which generally prohibit lending directly to the public, would restrict expanding into so-called warehouse financing.

Credit Standards

Mortgage bankers and other companies that have seen their sources of credit dry up in the past year have been pushing for the change, according to Lockhart.

“The problem is that unfortunately bankers have tightened their credit standards and withdrawn from some markets,” Lockhart said. “And as interest rates fall, if we have relatively large refinancings, we’re going to need to have mortgage bankers be able to provide mortgages in the interim before they sell them to Fannie and Freddie.”

The ASF is a New York-based group representing companies that package assets into bonds. More than 3,000 bond traders, sales representatives, lawyers, private equity investors and other financial industry workers registered for the three-day conference, about half of last year’s attendance, according to event organizers.

Too Big to Bailout

A modest proposal to restructure our financial system so that the big dogs topple when they need to

By John Sakowicz

This is the eighth of a multipart series on the state of the economy and how we got here.

On Tuesday, Jan. 20, 2009, Barack Hussein Obama was sworn in as the 44th president of the United States to the cheers of an estimated 2 million Americans who came to our nation's capital to celebrate the event. I was there.

For one magnificent day, all was right in the world. After all, what was there not to be happy about? A young, hip, progressive, Harvard-educated black man was sworn in as president. The First Family moved that day into the White House, a structure built by slaves during an earlier, shameful chapter in our nation's history. Crowds cheered in the streets. Crowds cheered in the Mall. Two million flag-waving Americans cheered in the frigid and bright day.

It's not too much to say people were more than happy; they were insane with joy. The era of the predator nation of George W. Bush—the eight years during which 5 percent of the population came to own or control 70 percent of our nation's wealth—was over. After eight unholy years of George Bush, starting with the stolen election in Florida in 2000 and ending with the two overseas wars and the worst recession since the Great Depression, it felt as if Barack Hussein Obama were somehow anointed, some sort of savior.

It was a magnificent day. Except on Wall Street.

Make That London, Too

Even before the first glass of Champagne was lifted to toast our new president at the first inaugural luncheon, the black holes on the balance sheets of our nation's banks started to open wide—again. And like yaws in some primordial universe, those black holes swallowed billions more in market capitalization—again.

Billions more gone. Shareholder equity. Bondholder obligations. Bailout money. Gone, disappeared—again.

Yes, there may have been happiness on the faces of 2 million Americans in Washington, but on the morning of Tuesday, Jan. 20, 2009, there was fear in the trading rooms of Wall Street.

On this otherwise magnificent day, stock markets suffered their worst Inauguration Day losses in more than a century. The Dow fell 332 points, or 4 percent. Even worse, the banking sector fell more than 15 percent, its biggest one-day drop in two decades. Inaugural or not, it was just another trading day on Wall Street.

Investors worried that it didn't matter who was president. Obama or Bush. Investors worried that the Obama team had no quick fix.

Some banks fell more than others. State Street Bank, the country's biggest money manager for institutional accounts, fell 59 percent. Even after all the terrible news of last year, this number was hard to believe. (For the record, State Street Bank received $2 billion in bailout money in the waning days of the Bush administration. It begs the question: Where did the money go?)

Citigroup, now called "Citimorgue" by many of us in the hedge fund community, fell 20 percent to close at under $3 a share. Citi's stock has fallen 85 percent in the last year. Citigroup's market capitalization is now about $20 billion. But this follows more than $45 billion in bailout money that the Bush administration poured into Citi. Forty-five billion! Whoa. Where did the bailout money go? Since this bailout money is taxpayer money—our money—I'll ask again: Where did our fucking money go?

On Tuesday, Jan. 20, 2009, Bank of America also fell about 29 percent. Shares of JPMorgan Chase, Morgan Stanley, Wells Fargo and several other big banks—what are called "money center banks"—each fell by double digits. Incidentally, all of the above received beaucoup bucks in bailout money.

Think the regional banks were immune on this magnificent day? Nope. Regions Financial, which has banks in 16 states, reported a $6.2 billion loss for the fourth quarter. Its shares fell 24 percent.

Think foreign banks were doing any better?

Nope. The Royal Bank of Scotland, the U.K.'s second biggest bank, fell 60 percent, to close at a new low. The stock fell on fears that the Royal Bank of Scotland will report a 28 billion pound sterling loss—about $39 billion!—as well as due to fears that the Chancellor of the Exchequer will have to nationalize the bank. Prime Minister Gordon Brown and other members of his team began speaking in dire tones. I spoke with Stephen Beard, a leading British lawmaker, who referred to the "growing lack of confidence, almost panic, traveling around the world right now, like an epidemic virus."

Beard suggested that the Chancellor of the Exchequer would have to nationalize not just the Royal Bank of Scotland, but also the big insurance conglomerate Lloyd's of London and maybe even some other banks, like those in Ireland.

Finally, as if on cue, after the close of markets in New York, Allied Irish Banks and Bank of Ireland each fell by more than 50 percent in after-hours trading. The pound sterling also fell sharply to new lows against the euro and the dollar on fears that the Chancellor of the Exchequer would indeed have to nationalize the banking system in the U.K.

No Honeymoon

Poor Obama. The honeymoon was over before it began.

After all the big bailouts—$750 billion in TARP monies, the $1.5 trillion in new liabilities on the books at the Federal Reserve Bank, the commercial paper buying programs and foreign currency swaps and refinancing the Reserve Bank's Term Auction Facility—after all that, Wall Street was saying that banks still needed more capital. The downward spiral had turned into another crisis of confidence, just like the one that preceded the last twist of the downward spiral. The problem was as basic as it gets. My favorite banking analyst on the Street these days, Meredith Whitney at Oppenheimer, said it all: "Because banks haven't been able to raise capital on their own, the Feds have to give it to them."

By "the Feds," of course, she means us; it's our money the Feds are giving banks, more than $2 trillion in the last year and $13 trillion in national debt and counting—debt incurred on behalf of future generations of taxpayers, our children and grandchildren and our great-grandchildren.

Whitney continues: "The credit picture continues to devolve as our banking industry's balance sheets continue to weaken. High-risk assets on balance sheets continue to devalue as the banking industry continues to deleverage through the forced liquidation of those very same assets. The net result is that more and more capital is needed to put up against those high-risk assets that remain on balance sheets—assets worth less and less, if they're worth anything at all."

Indeed, it appears as if the Feds might even have to nationalize our own banking system, just like in the U.K. "Creeping nationalization," is what Chris Dodd, chair of the Senate Banking Committee calls it. And if we go that route, look for the dollar and the U.S. economy to fall even further, just like in the U.K. Welcome to Washington, Mr. President.

Let It Go

No one knows anything. Nothing is normal. There are no quick fixes. Everything is strange. There is no floor under home prices, no ceiling on unemployment. There's just an array of proposed "solutions," each of which can create a future, unknowable financial and economic multiple universes, posing its own unknowable risks and dangers.

Indeed, the situation in Washington and on Wall Street is so strange that even the best and brightest among us, like President Obama, are drawing a blank. I think the solution is: Let it go. Let the banks fail. "Too big to fail," you say? I say they're too big to bail out.

I've got some agreement from another one of our old friends, billionaire hedge fund manager and guru George Soros. Last week, I listened to Soros speak on a "squawk box call" from the World Economic Forum in Devos, Switzerland. Soros said not to make distinctions between good banks and bad banks. The marketplace will make the distinction. Good banks will survive. Bad banks will fail.

He said Obama's talk about creating a Big Bad Bank, managed by the Feds, onto whose balance sheets can be shoveled all of Wall Street's toxic debt, is crazy talk.

Crazy talk, because there is almost no end to toxic debt. Soros said that the Feds will never be able to sell toxic assets, much less manage them, because "toxic assets are typically unique. They are not like other classes of securities, like stocks and bonds. Almost every CMO, CDO and SIV is a unique class of securities. Same with swaps and derivatives. And as such, they're not fungible, not a commodity."

He continued, "And when the day is done, that's all money really is. Money is just another kind of commodity—the world's biggest commodity market, for sure, but a commodity market nonetheless. And for something to trade, it must be fungible. It must be a commodity."

In other words, Soros was telling us that all those toxic assets don't trade because it's a total "dealer market," meaning you can't find them described in any contract or sets of contracts, won't find them on any exchange, can't clear them through any clearinghouse, won't find them regulated by any agency, can't price them and can't fit them into value or risk-management models. Is it any wonder you can't find buyers?

Toxic assets were created first and foremost to earn mega-fees and mega-commissions for Wall Street, with little thought given to who would eventually end up owning them and what they would be worth, if anything.

Old New Values

How about creating two new classes of securities going forward into the future and forever more? In that Jan. 28 squawk box call, Soros called them "uniform transparent mortgages" and "uniform transparent bonds." Uniform. Transparent. In other words, Soros believes mortgage-backed securities should be identical. And he believes that all bonds should be identical, because if you can compare them, you can price them. And if you can price them, you can trade them. That's the key.

"Stimulus is for suckers," economist Jamie Galbraith told me last year. "The standard liberal line of 'borrow and spend' is not the same as 'investment,' nor does it address the moral crisis created by the predator nation we have become.

"To end what is not just an economic crisis but an existential crisis," he stressed, "we must create a new economy based not just on new technologies but also on new values.

I agree. So does Soros. "Accountability" and "transparency" aren't just words you throw around during campaign season. They're words we must use to describe a new Wall Street. Assume Wall Street can't police itself, because it obviously can't.

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We should make securities fungible again, like they once were. Innovation is not necessarily a good thing on Wall Street. Stop the newfangled scams. Standardize stuff. Raise disclosure requirements. Protect investors, especially institutional investors, like pensions and endowments, who chase returns like tweakers chase crank—they can't seem to stop themselves. Lower the banking industry's debt-to-capital ratio to where it once was before the craziness started, 12-to-1, and reform Wall Street's compensation structure, which is perverse. Finally, bring back the Glass-Steagall Act.

Walls and fences in a zoo are a good thing. It's all so goddamn simple.

John Sakowicz is a Sonoma County investor who was a cofounder of the multibillion-dollar offshore hedge fund Battle Mountain Research Group. Go to www.ukiahvalley.tv to see Sakowicz in action. Ryan Morris assisted with research for this article.

A lament for savers

BORROWERS get bailed out. Run your bank into the ground and the taxpayer will lend it money. Buy a house you cannot afford and the central bank will cut interest rates to ease your burden.

Meanwhile those who have lived within their means and put money aside for the proverbial rainy day, have seen interest rates slashed to 2% in the euro zone, 1% in Britain and virtually nothing in America. No one offers to help them out, even though saving is needed to allow business investment which, in turn, generates growth. Asians, told off in the 1990s for their current-account deficits, now get lectured for saving too much.

This is quite a different paradox of thrift from the usual one. In theory, everybody regards thrift as a virtue. In practice, they treat it as a vice.

Of course, politicians and economists will argue that they are only talking about the short run. They need people to spend to lift the economy out of recession. As John Maynard Keynes remarked: “Whenever you save five shillings, you put a man out of work for the day.”

One could argue that savers should do well in the event of outright deflation. Nominal interest rates may have fallen sharply. But they cannot fall below zero. So in a world of falling prices, real rates will be high.

Nevertheless, savers are far from content. Those who have built diversified portfolios (another hallmark of prudence) will have suffered losses in equities, property and corporate bonds. Even those who have been clever enough to keep their money in cash have had to fret about the security of banks and money-market funds.

In any case, the community of savers is a diverse one. Take the many elderly people who depend on their savings for retirement income. When interest rates fall as quickly as they have in recent months, their income falls, and they will be forced to spend less.

The retired do not have the option of making up lost income. They are too old to work, or companies may not consider them employable. They could take more risk by moving into corporate bonds or equities. But that strategy incurs the danger of a permanent loss of capital.

In many countries the system is biased against the saver. Interest income is usually taxable, whereas some countries allow mortgage payments to be tax deductible. In Britain state benefits are means-tested. An elderly person with more than £22,250 ($32,000) in savings, hardly a golden nest-egg, has to pay the full cost of nursing-home care, which can easily exceed £40,000 a year. Those Britons who have saved money in the form of a personal pension must turn the bulk of their pot into an annuity by age 75; if they drop dead at 76, the insurance company keeps the lot.

Another group of savers are those who are planning for retirement (or other events such as children’s weddings or education fees). They have to make a complex series of calculations. What is their future liability, and what return can they expect?

Recent events will make such people want to save more, not less. Say you wished to buy a retirement income of $25,000 a year by investing in ten-year American Treasury bonds. In the summer of 2007, you would have needed a sum of $476,000 to get that result. But bond yields have plunged since then. Generating the same income would now require a sum of $833,000. And, with yields as low as they are, you would have to put more aside from your income to reach any targeted level of capital.

In theory, of course, long-term returns from risky assets like equities should be much higher now than they were 18 months ago, because of the fall in valuations. But few savers will be brave enough to make that bet.

Indeed, those saving for retirement have another problem to worry about. A much-discussed trend of the past ten years has been for employers to switch from final-salary to money-purchase pension schemes, transferring the investment risk to the employee. Less well advertised is the fact that the shift has allowed employers to cut the overall level of their contributions, and the financial crisis has prompted some to impose a moratorium on payments.

Rationally, therefore, many workers should be saving more for their retirement right now. And that is before they consider building up a cash cushion against the risk of losing their job, or rebuilding their wealth to offset falling house prices.

Such people will be prudently preparing for the future, with the aim of not being a burden on the state. And they will get no thanks for it whatsoever.