Saturday, May 1, 2010

36. Money & Banking

Banking institutions, paper money, and paper speculation are capable of undermining the nation's stability and could be a danger in time of war. The Constitution does not empower the Congress to establish a National Bank. Rather than trust the nation's currency to private hands, the circulating medium should be restored to the nation itself to whom it belongs.

"Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war." --Thomas Jefferson to John Wayles Eppes, 1813. ME 13:430

"Paper is poverty,... it is only the ghost of money, and not money itself." --Thomas Jefferson to Edward Carrington, 1788. ME 7:36

"Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted." --Thomas Jefferson to James Monroe, 1791. ME 8:208

"It is a [disputed] question, whether the circulation of paper, rather than of specie, is a good or an evil... I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin." --Thomas Jefferson to John W. Eppes, 1813. ME 13:409

    Specie as a National Resource

"In such a nation [as ours], there is one and one only resource for loans, sufficient to carry them through the expense of a war; and that will always be sufficient, and in the power of an honest government, punctual in the preservation of its faith. The fund I mean, is the mass of circulating coin. Everyone knows, that although not literally, it is nearly true, that every paper dollar emitted banishes a silver one from the circulation. A nation, therefore, making its purchases and payments with bills fitted for circulation, thrusts an equal sum of coin out of circulation. This is equivalent to borrowing that sum, and yet the vendor receiving payment in a medium as effectual as coin for his purchases or payments, has no claim to interest. And so the nation may continue to issue its bills as far as its wants require, and the limits of the circulation will admit... But this, the only resource which the government could command with certainty, the States have unfortunately fooled away, nay corruptly alienated to swindlers and shavers, under the cover of private banks." --Thomas Jefferson to John W. Eppes, 1813. ME 13:274

"One of three great measures necessary to insure us permanent prosperity... should insure resources of money by the suppression of all paper circulation during peace, and licensing that of the nation alone during war. The metallic medium of which we should be possessed at the commencement of a war, would be a sufficient fund for all the loans we should need through its continuance; and if the national bills issued be bottomed (as is indispensable) on pledges of specific taxes for their redemption within certain and moderate epochs, and be of proper denominations for circulation, no interest on them would be necessary or just, because they would answer to everyone the purposes of the metallic money withdrawn and replaced by them." --Thomas Jefferson to William H. Crawford, 1816. ME 15:30

"It would be best that our medium should be so proportioned to our produce, as to be on a par with that of the countries with which we trade, and whose medium is in a sound state." --Thomas Jefferson to John W. Eppes, 1813. ME 13:430

    Dangers of Paper Money

"That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied. --Thomas Jefferson to Josephus B. Stuart, 1817. ME 15:113

"The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals... it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted." --Thomas Jefferson to John W. Eppes, 1813. ME 13:430

"Scenes are now to take place as will open the eyes of credulity and of insanity itself, to the dangers of a paper medium abandoned to the discretion of avarice and of swindlers." --Thomas Jefferson to Thomas Cooper, 1814. ME 14:189

"The States should be applied to, to transfer the right of issuing circulating paper to Congress exclusively, in perpetuum." --Thomas Jefferson to John W. Eppes, 1813. ME 13:276

"The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then, we must be content to return quoad hoc to the savage state, to recur to barter in the exchange of our property for want of a stable common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers." --Thomas Jefferson to John Adams, 1819. ME 15:185

"Private fortunes, in the present state of our circulation, are at the mercy of those self-created money lenders, and are prostrated by the floods of nominal money with which their avarice deluges us." --Thomas Jefferson to John W. Eppes, 1813. ME 13:276

"It is a cruel thought, that, when we feel ourselves standing on the firmest ground in every respect, the cursed arts of our secret enemies, combining with other causes, should effect, by depreciating our money, what the open arms of a powerful enemy could not." --Thomas Jefferson to Richard Henry Lee, 1779. ME 4:298, Papers 2:298

"I now deny [the Federal Government's] power of making paper money or anything else a legal tender." --Thomas Jefferson to John Taylor, 1798. ME 10:65

    Paper Speculation

"A spirit... of gambling in our public paper has seized on too many of our citizens, and we fear it will check our commerce, arts, manufactures, and agriculture, unless stopped." --Thomas Jefferson to William Carmichael, 1791. ME 8:230

"Our public credit is good, but the abundance of paper has produced a spirit of gambling in the funds, which has laid up our ships at the wharves as too slow instruments of profit, and has even disarmed the hand of the tailor of his needle and thimble. They say the evil will cure itself. I wish it may; but I have rarely seen a gamester cured, even by the disasters of his vocation." --Thomas Jefferson to Gouverneur Morris, 1791. ME 8:241

"All the capital employed in paper speculation is barren and useless, producing, like that on a gaming table, no accession to itself, and is withdrawn from commerce and agriculture where it would have produced addition to the common mass... It nourishes in our citizens habits of vice and idleness instead of industry and morality... It has furnished effectual means of corrupting such a portion of the legislature as turns the balance between the honest voters whichever way it is directed." --Thomas Jefferson to George Washington, 1792. ME 8:344

"We are now taught to believe that legerdemain tricks upon paper can produce as solid wealth as hard labor in the earth. It is vain for common sense to urge that nothing can produce but nothing; that it is an idle dream to believe in a philosopher's stone which is to turn everything into gold, and to redeem man from the original sentence of his Maker, 'in the sweat of his brow shall he eat his bread.'" --Thomas Jefferson to Charles Yancey, 1816. ME 14:381

    The Importance of Personal Economy

"I own it to be my opinion, that good will arise from the destruction of our credit. I see nothing else which can restrain our disposition to luxury, and to the change of those manners which alone can preserve republican government. As it is impossible to prevent credit, the best way would be to cure its ill effects by giving an instantaneous recovery to the creditor. This would be reducing purchases on credit to purchases for ready money. A man would then see a prison painted on everything he wished, but had not ready money to pay for." --Thomas Jefferson to Archibald Stuart, 1786. ME 5:259

"We should try whether the prodigal might not be restrained from taking on credit the gewgaw held out to him in one hand, by seeing the keys of a prison in the other." --Thomas Jefferson to Thomas Pleasants, 1786. ME 5:325, Papers 9:472

"The maxim of buying nothing without the money in our pockets to pay for it would make of our country one of the happiest on earth." --Thomas Jefferson to Alexander Donald, 1787. ME 6:192

"Every discouragement should be thrown in the way of men who undertake to trade without capital." --Thomas Jefferson to Nathaniel Tracy, 1785. Papers 8:399

"Would a missionary appear, who would make frugality the basis of his religious system, and go through the land, preaching it up as the only road to salvation, I would join his school, though not generally disposed to seek my religion out of the dictates of my own reason and feelings of my own heart." --Thomas Jefferson to John Page, 1786. ME 5:305

"I look back to the time of the war as a time of happiness and enjoyment, when amidst the privation of many things not essential to happiness, we could not run in debt, because nobody would trust us; when we practised by necessity the maxim of buying nothing but what we had money in our pockets to pay for; a maxim which, of all others, lays the broadest foundation for happiness. I see no remedy to our evils, but an open course of law. Harsh as it may seem, it would relieve the very patients who dread it, by stopping the course of their extravagance, before it renders their affairs entirely desperate." --Thomas Jefferson to Fulwar Skipwith, 1787. ME 6:188

"It is a miserable arithmetic which makes any single privation whatever so painful as a total privation of everything which must necessarily follow the living so far beyond our income." --Thomas Jefferson to William Hay, 1787. ME 6:223

"I know of no remedy against indolence and extravagance, but a free course of justice. Everything else is merely palliative... Desperate of finding relief from a free course of justice, I look forward to the abolition of all credit, as the only other remedy which can take place." --Thomas Jefferson to Alexander Donald, 1787. ME 6:192

    Banking Institutions

"That we are overdone with banking institutions which have banished the precious metals and substituted a more fluctuating and unsafe medium, that these have withdrawn capital from useful improvements and employments to nourish idleness, that the wars of the world have swollen our commerce beyond the wholesome limits of exchanging our own productions for our own wants, and that, for the emolument of a small proportion of our society who prefer these demoralizing pursuits to labors useful to the whole, the peace of the whole is endangered and all our present difficulties produced, are evils more easily to be deplored than remedied." --Thomas Jefferson to Abbe Salimankis, 1810. ME 12:379

"The system of banking [I] have... ever reprobated. I contemplate it as a blot left in all our Constitutions, which, if not covered, will end in their destruction, which is already hit by the gamblers in corruption, and is sweeping away in its progress the fortunes and morals of our citizens." --Thomas Jefferson to John Taylor, 1816. ME 15:18

"The banks... have the regulation of the safety-valves of our fortunes, and... condense and explode them at their will." --Thomas Jefferson to John Adams, 1819. ME 15:224

"The States should be urged to concede to the General Government, with a saving of chartered rights, the exclusive power of establishing banks of discount for paper." --Thomas Jefferson to John W. Eppes, 1813. ME 13:431

"I sincerely believe... that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816. ME 15:23

    A National Bank

"The incorporation of a bank and the powers assumed [by legislation doing so] have not, in my opinion, been delegated to the United States by the Constitution. They are not among the powers specially enumerated." --Thomas Jefferson: Opinion on Bank, 1791. ME 3:146

"It has always been denied by the republican party in this country, that the Constitution had given the power of incorporation to Congress. On the establishment of the Bank of the United States, this was the great ground on which that establishment was combated; and the party prevailing supported it only on the argument of its being an incident to the power given them for raising money." --Thomas Jefferson to Dr. Maese, 1809. ME 12:231

"The idea of creating a national bank I do not concur in, because it seems now decided that Congress has not that power (although I sincerely wish they had it exclusively), and because I think there is already a vast redundancy rather than a scarcity of paper medium." --Thomas Jefferson to Thomas Law, 1813. FE 9:433

"[The] Bank of the United States... is one of the most deadly hostility existing, against the principles and form of our Constitution... An institution like this, penetrating by its branches every part of the Union, acting by command and in phalanx, may, in a critical moment, upset the government. I deem no government safe which is under the vassalage of any self-constituted authorities, or any other authority than that of the nation, or its regular functionaries. What an obstruction could not this bank of the United States, with all its branch banks, be in time of war! It might dictate to us the peace we should accept, or withdraw its aids. Ought we then to give further growth to an institution so powerful, so hostile?" --Thomas Jefferson to Albert Gallatin, 1803. ME 10:437

    Meeting the Banking Problem

"The monopoly of a single bank is certainly an evil. The multiplication of them was intended to cure it; but it multiplied an influence of the same character with the first, and completed the supplanting the precious metals by a paper circulation. Between such parties the less we meddle the better." --Thomas Jefferson to Albert Gallatin, 1802. ME 10:323

"In order to be able to meet a general combination of the banks against us in a critical emergency, could we not make a beginning towards an independent use of our own money, towards holding our own bank in all the deposits where it is received, and letting the treasurer give his draft or note for payment at any particular place, which, in a well-conducted government, ought to have as much credit as any private draft or bank note or bill, and would give us the same facilities which we derive from the banks?" --Thomas Jefferson to Albert Gallatin, 1803. ME 10:439

"If treasury bills are emitted on a tax appropriated for their redemption in fifteen years, and (to insure preference in the first moments of competition) bearing an interest of six per cent, there is no one who would not take them in preference to the bank paper now afloat, on a principle of patriotism as well as interest; and they would be withdrawn from circulation into private hoards to a considerable amount. Their credit once established, others might be emitted, bottomed also on a tax, but not bearing interest; and if ever their credit faltered, open public loans, on which these bills alone should be received as specie. These, operating as a sinking fund, would reduce the quantity in circulation, so as to maintain that in an equilibrium with specie. It is not easy to estimate the obstacles which, in the beginning, we should encounter in ousting the banks from their possession of the circulation; but a steady and judicious alternation of emissions and loans would reduce them in time." --Thomas Jefferson to John W. Eppes, 1813. ME 13:275

"Bank paper must be suppressed, and the circulating medium must be restored to the nation to whom it belongs. It is the only fund on which they can rely for loans; it is the only resource which can never fail them, and it is an abundant one for every necessary purpose. Treasury bills, bottomed on taxes, bearing or not bearing interest, as may be found necessary, thrown into circulation will take the place of so much gold and silver, which last, when crowded, will find an efflux into other countries, and thus keep the quantum of medium at its salutary level. Let banks continue if they please, but let them discount for cash alone or for treasury notes." --Thomas Jefferson to John W. Eppes, 1813. ME 13:361

"Put down the banks, and if this country could not be carried through the longest war against her most powerful enemy without ever knowing the want of a dollar, without dependence on the traitorous classes of her citizens, without bearing hard on the resources of the people, or loading the public with an indefinite burden of debt, I know nothing of my countrymen. Not by any novel project, not by an charlatanerie, but by ordinary and well-experienced means; by the total prohibition of all private paper at all times, by reasonable taxes in war aided by the necessary emissions of public paper of circulating size, this bottomed on special taxes, redeemable annually as this special tax comes in, and finally within a moderate period." --Thomas Jefferson to Albert Gallatin, 1815. ME 14:356

"Our people... will give you all the necessaries of war they produce, if, instead of the bankrupt trash they now are obliged to receive for want of any other, you will give them a paper promise funded on a specific pledge, and of a size for common circulation." --Thomas Jefferson to James Monroe, 1815. ME 14:228

"Instead of funding issues of paper on the hypothecation of specific redeeming taxes (the only method of anticipating, in a time of war, the resources of times of peace, tested by the experience of nations), we are trusting to tricks of jugglers on the cards, to the illusions of banking schemes for the resources of the war, and for the cure of colic to inflations of more wind." --Thomas Jefferson to M. Correa de Serra, 1814. ME 14:224

"It is literally true that the toleration of banks of paper discount costs the United States one-half their war taxes; or, in other words, doubles the expenses of every war. Now think but for a moment, what a change of condition that would be, which should save half our war expenses, require but half the taxes, and enthral us in debt but half the time." --Thomas Jefferson to John W. Eppes, 1813. ME 13:364

"The State legislatures should be immediately urged to relinquish the right of establishing banks of discount. Most of them will comply, on patriotic principles, under the convictions of the moment; and the non-complying may be crowded into concurrence by legitimate devices." --Thomas Jefferson to Thomas Cooper, 1814. ME 14:190

    The Issuance of Treasury Notes

"Necessity, as well as patriotism and confidence, will make us all eager to receive treasury notes, if founded on specific taxes. Congress may borrow of the public, and without interest, all the money they may want, to the amount of a competent circulation, by merely issuing their own promissory notes, of proper denominations for the larger purposes of circulation, but not for the small. Leave that door open for the entrance of metallic money." --Thomas Jefferson to Thomas Cooper, 1814. ME 14:189

"Treasury notes of small as well as high denomination, bottomed on a tax which would redeem them in ten years, would place at our disposal the whole circulating medium of the United States... The public... ought never more to permit its being filched from them by private speculators and disorganizers of the circulation." --Thomas Jefferson to William H. Crawford, 1815. ME 14:242

"There can be no safer deposit on earth than the Treasury of the United States." --Thomas Jefferson to Lafayette, 1825. ME 19:281

"The government of the United States have no idea of paying their debt in a depreciated medium, and... in the final liquidation of the payments which shall have been made, due regard will be had to an equitable allowance for the circumstance of depreciation." --Thomas Jefferson to Jean Baptiste de Ternant, 1791. ME 8:247

    Commercial Banking

"The art and mystery of banks... is established on the principle that 'private debts are a public blessing.' That the evidences of those private debts, called bank notes, become active capital, and aliment the whole commerce, manufactures, and agriculture of the United States. Here are a set of people, for instance, who have bestowed on us the great blessing of running in our debt about two hundred millions of dollars, without our knowing who they are, where they are, or what property they have to pay this debt when called on; nay, who have made us so sensible of the blessings of letting them run in our debt, that we have exempted them by law from the repayment of these debts beyond a give proportion (generally estimated at one-third). And to fill up the measure of blessing, instead of paying, they receive an interest on what they owe from those to whom they owe; for all the notes, or evidences of what they owe, which we see in circulation, have been lent to somebody on an interest which is levied again on us through the medium of commerce. And they are so ready still to deal out their liberalities to us, that they are now willing to let themselves run in our debt ninety millions more, on our paying them the same premium of six or eight per cent interest, and on the same legal exemption from the repayment of more than thirty millions of the debt, when it shall be called for." --Thomas Jefferson to John W. Eppes, 1813. ME 13:420

"The bank mania... is raising up a moneyed aristocracy in our country which has already set the government at defiance, and although forced at length to yield a little on this first essay of their strength, their principles are unyielded and unyielding. These have taken deep root in the hearts of that class from which our legislators are drawn, and the sop to Cerberus from fable has become history. Their principles lay hold of the good, their pelf of the bad, and thus those whom the Constitution had placed as guards to its portals, are sophisticated or suborned from their duties." --Thomas Jefferson to Josephus B. Stuart, 1817. ME 15:112

"Put down all banks, admit none but a metallic circulation that will take its proper level with the like circulation in other countries, and then our manufacturers may work in fair competition with those of other countries, and the import duties which the government may lay for the purposes of revenue will so far place them above equal competition." --Thomas Jefferson to Charles Pinckney, 1820. ME 15:280

"But it will be asked, are we to have no banks? Are merchants and others to be deprived of the resource of short accommodations, found so convenient? I answer, let us have banks; but let them be such as are alone to be found in any country on earth, except Great Britain. There is not a bank of discount on the continent of Europe (at least there was not one when I was there) which offers anything but cash in exchange for discounted bills." --Thomas Jefferson to John W. Eppes, 1813. ME 13:277

"No one has a natural right to the trade of a money lender, but he who has the money to lend. Let those then among us who have a moneyed capital and who prefer employing it in loans rather than otherwise, set up banks and give cash or national bills for the notes they discount. Perhaps, to encourage them, a larger interest than is legal in the other cases might be allowed them, on the condition of their lending for short periods only." --Thomas Jefferson to John W. Eppes, 1813. ME 13:277

"If the debt which the banking companies owe be a blessing to anybody, it is to themselves alone, who are realizing a solid interest of eight or ten per cent on it. As to the public, these companies have banished all our gold and silver medium, which, before their institution, we had without interest, which never could have perished in our hands, and would have been our salvation now in the hour of war; instead of which they have given us two hundred million of froth and bubble, on which we are to pay them heavy interest, until it shall vanish into air... We are warranted, then, in affirming that this parody on the principle of 'a public debt being a public blessing,' and its mutation into the blessing of private instead of public debts, is as ridiculous as the original principle itself. In both cases, the truth is, that capital may be produced by industry, and accumulated by economy; but jugglers only will propose to create it by legerdemain tricks with paper." --Thomas Jefferson to John W. Eppes, 1813. ME 13:423

"Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs." --Thomas Jefferson to Thomas Cooper, 1814. ME 14:61

"Certainly no nation ever before abandoned to the avarice and jugglings of private individuals to regulate according to their own interests, the quantum of circulating medium for the nation -- to inflate, by deluges of paper, the nominal prices of property, and then to buy up that property at 1s. in the pound, having first withdrawn the floating medium which might endanger a competition in purchase. Yet this is what has been done, and will be done, unless stayed by the protecting hand of the legislature. The evil has been produced by the error of their sanction of this ruinous machinery of banks; and justice, wisdom, duty, all require that they should interpose and arrest it before the schemes of plunder and spoilation desolate the country." --Thomas Jefferson to William C. Rives, 1819. ME 15:232

"It is said that our paper is as good as silver, because we may have silver for it at the bank where it issues. This is not true. One, two, or three persons might have it; but a general application would soon exhaust their vaults, and leave a ruinous proportion of their paper in its intrinsic worthless form." --Thomas Jefferson to John W. Eppes, 1813. ME 13:426

"To the existence of banks of discount for cash... there can be no objection, because there can be no danger of abuse, and they are a convenience both to merchants and individuals. I think they should even be encouraged, by allowing them a larger than legal interest on short discounts, and tapering thence, in proportion as the term of discount is lengthened, down to legal interest on those of a year or more. Even banks of deposit, where cash should be lodged, and a paper acknowledgment taken out as its representative, entitled to a return of the cash on demand, would be convenient for remittances, travelling persons, etc. But, liable as its cash would be to be pilfered and robbed, and its paper to be fraudulently re-issued, or issued without deposit, it would require skilful and strict regulation." --Thomas Jefferson to John W. Eppes, 1813. ME 13:431

"I am an enemy to all banks discounting bills or notes for anything but coin." --Thomas Jefferson to Thomas Cooper, 1814. ME 14:61

    Regulating Banking Institutions

"The principle of rotation... in the body of [bank] directors... breaks in upon the espirit de corps so apt to prevail in permanent bodies; it gives a chance for the public eye penetrating into the sanctuary of those proceedings and practices, which the avarice of the directors may introduce for their personal emolument, and which the resentments of excluded directors, or the honesty of those duly admitted, might betray to the public; and it gives an opportunity at the end of the year, or at other periods, of correcting a choice, which on trial, proves to have been unfortunate." --Thomas Jefferson to Albert Gallatin, 1803. ME 10:437

ME, FE = Memorial Edition, Ford Edition. See Sources.

Gulf Coast residents brace for potential calamity

Officials anticipate that oil floating toward Louisiana is likely to reach land sometime Friday.

(Update 9:13 p.m.) EPA administrator Lisa Jackson said Friday there is a chance that workers will be able to stop the flow of oil into the Gulf of Mexico, but warned that the EPA is preparing for the worst.

"There is still the opportunity and the possibility that they would be able to shut it down," Jackson told CNN Chief National Correspondent John King. "Of course as responders we have to look at the worst case, and keep planning for that."

Jackson's comments come as the federal government is ramping up the pressure on BP to do more to stop well leaks gushing thousands of barrels of oil into waters off Louisiana. The government is also pushing BP to beef up its response as a giant oil slick approaches the Louisiana coast.

In the interview on CNN's John King USA that aired Friday, Jackson responded to questions about the level of trust the Obama administration had in BP immediately following the April 20 oil rig explosion that also resulted in 11 presumed deaths.

"I don't think it was ever a question of trust in the company, I think it was a question of responding to the set of facts as we came to understand them," Jackson said. "The situation has certainly worsened. It began as a human tragedy, it is now what I think is an environmental challenge of the highest order."

(Update 7:42 p.m.) Sen. David Vitter announced the closure of several oyster beds in eastern Louisiana, but kept the western parts open, CNN affiliate WDSU reports.

The director for Rouses Supermarket, which has stores across the Gulf Coast, including southern Louisiana and Mississippi, said all seafood on the shelves is safe, according to WDSU.

"Everything that is coming into the markets and restaurants is coming from the west part of the Mississippi River," Seafood Director James Bruel told WDSU.

"Everything we get is traceable. Anything that comes through our back doors has an invoice of where it came from. Everything right now is 100 percent safe to eat," he said.

(Update 6:48 p.m.) U.S. Secretary of Defense Robert Gates has approved Louisiana Gov. Bobby Jindal's request to mobilize 6,000 National Guard troops in response to the massive oil spill expanding in the Gulf of Mexico, according to a Defense Department spokesman.

(Update 5:25 p.m.) The federal government is heightening the pressure on BP, pushing the oil company to do more to stop well leaks gushing thousands of barrels of oil into the Gulf of Mexico and to beef up its response to the potential environmental impact on the coast.

"We'll continue to urge BP to leverage additional assets," U.S. Secretary of Homeland Security Janet Napolitano told reporters Friday as the massive oil slick approached the Louisiana coast. "It is time for BP to supplement their current mobilization as the slick of oil moves toward shore."

BP, which owns the ruptured well, said officials expect oil to reach land sometime Friday, with Venice and Port Fourchon the first places likely to be affected.

Doug Suttles, chief operating officer of BP, said the company has had only three priorities since the April 20 rig explosion that led to the oil spill: stop the flow of oil, minimize its impact and keep the public informed.

"We've so far mounted the largest response effort ever done in the world," Suttles said at the same news conference. "We've utilized every technology available, we've applied every resource request. ... We welcome every new idea and every offer of support."

(Update 3:47 p.m.) U.S. Interior Secretary Ken Salazar has ordered inspections of all deep-water operations in Gulf of Mexico.

The Department of Interior will also establish a new Outer Continental Shelf Safety Board to conduct a review of offshore drilling practices and safety issues and tighten the oversight of equipment testing, he said.

(Update 3:41 p.m.) The American Bird Conservancy, the nation's leading bird conservation organization, released a list of key bird sites they say are most immediately threatened by the ongoing Deepwater Horizon oil spill in the Gulf.

They are: the Gulf Coast Least Tern Colony; the Lower Pascagoula River – including the Pascagoula River Coastal Preserve; the Gulf Islands National Seashore; Breton National Wildlife Refuge – including the Chandeleur Islands; Dauphin Island; Fort Morgan Historical Park; Bon Secour National Wildlife Refuge; Eglin Air Force Base; Delta National Wildlife Refuge; and Baptiste Collette Bird Islands.

(Update 2:20 p.m.) A roundup of some of the latest developments:

– More than 217,000 feet of boom, or barrier, is assigned to contain the spill. An additional 305,760 feet is available.

– 139,459 gallons of dispersant have been deployed and an additional 51,000 gallons are available.

– Gov. Bob Riley of Alabama met with members of his Cabinet to give them the latest information on the oil slick in the gulf and to tell them to reach out to citizens and businesses that could be affected.

– Biloxi Mayor A.J. Holloway discussed oil-spill preparations with key department heads and will ask the City Council to declare a state of emergency.

– Two Air Force Reserve C-130s from 910th Airlift Wing out of Youngstown Ohio have arrived at Stennis Airfield in Hancock County Mississippi to help.

– BP has set up a "Vessel of Opportunity" program for vessel owners to offer their services to assist with response efforts.

– To supplement its Houma, Louisiana incident command post, BP is now establishing a similar onshore incident command post in Mobile, Alabama to oversee the onshore response in Mississippi, Alabama and Florida.

(Update 2:12 p.m.) A number of organizations are recruiting volunteers to help with the effects of the oil spill. Here’s how you can help.

(Update 1:31 p.m.) Attorney General Eric Holder is sending a team of Justice Department attorneys to the Gulf Coast to meet with federal prosecutors and response teams, the Justice Department said in a statement released Friday.

"The Justice Department stands ready to make available every resource at our disposal to vigorously enforce the laws that protect the people who work and reside near the Gulf, the wildlife, the environment and the American taxpayers," the statement said.

(Update 1:10 p.m.) The oil spill could threaten hundreds of species of wildlife, some in their prime breeding season, environmental organizations said.

"The terrible loss of 11 workers (unaccounted for after the rig explosion) may be just the beginning of this tragedy as the oil slick spreads toward sensitive coastal areas vital to birds and marine life and to all the communities that depend on them," said Melanie Driscoll, director of bird conservation for the Louisiana Coastal Initiative, in a statement.

(Update 12:57 p.m.) Track the oil spill with this map and tell us how it is affecting you.

(Update 11:58 a.m.) President Barack Obama is ordering Interior Secretary Ken Salazar "to conduct a thorough review" of the explosion of the Deepwater Horizon rig and subsequent oil spill.

He said domestic oil production continues to be "an important part of our overall strategy" but said "it must be done responsibly for the safety of our workers and our environment."

(Update 11:54 a.m) Florida Gov. Charlie Crist has declared a state of emergency in the Panhandle coastal counties of Escambia, Santa Rosa, Okaloosa, Walton, Bay, and Gulf.

Officials anticipate that oil floating toward Louisiana is likely to reach land sometime Friday, with Venice and Port Fourchon, being the first places affected, said BP spokesman Mike Abendhoff.

Officials monitoring the Gulf oil spill have not yet confirmed reports that oil reached land in the morning hours. Full story

A roundup of other developments:

– Louisiana's Gov. Bobby Jindal has declared a state of emergency and asked the Defense Department to approve funding for the deployment of 6,000 National Guard troops.

– Along the Gulf coast business owners are concerned about the potential impact on the bottom line. The oil slick coming ashore "would put us out of business," fisherman Rene Cross in Venice, Louisiana, told CNN affiliate WDSU.

– Dave Rauschkolb who owns three restaurants on the Florida Panhandle says: "We are a seasonal economy. If I don't have my summer business, I am out of business." Full story

Here are highlights from the latest briefing Friday by the Joint Information Center, which is coordinating response to the oil spill.

– Nearly 2,000 personnel are involved in the response

– More than 217,000 feet of boom assigned to contain the spill. An additional 305,760 feet is available.

– To date, the oil spill response team has recovered 20,313 barrels (853,146 gallons) of an oil-water mix.

– 75 response vessels are being used including skimmers, tugs, barges and recovery vessels.

– Five staging areas are in place and ready to protect sensitive shorelines: Mississippi; Pensacola, Florida; Venice, Louisiana; Pascagoula, Mississippi; and Theodore, Alabama. A sixth staging area is being set up in Port Sulphur, Louisiana.

– Winds on Friday are from the southeast at 20 knots Seas are 5- to 7- feet, with slight chance of afternoon showers.

Stowaway Earth Microbes May Survive on Mars, Contaminating the Search for Life

Mars: Harborer of Life?

Relax, David Bowie: in all likelihood there is life on Mars. Unfortunately for those of us hoping to find organic life forms thriving elsewhere in our solar system, there's a reasonably good chance the microbial life we might someday find on Mars was put there by us.

Searching for life -- or signs that it once existed -- on Mars is one of NASA's primary objectives when it comes to exploring the red planet. So when we launch probes at the surface or pack up rovers like Spirit or Opportunity for deployment on the surface, it's protocol to swab everything down so as to keep Mars pristine.

But a recent study coming out of the University of Central Florida showed that some microbial communities common on spacecraft can survive both the sterilization process on Earth and the hostile conditions on Mars. Replicating the Martian environment, the researchers showed during a week-long study that bacteria like E. coli -- a common stowaway on spacecraft -- can likely survive a space launch scenario. If shielded from radiation inside the nooks of a spacecraft or deposited beneath the Martian soil, it could conceivably live there, though it likely wouldn't reproduce.

But E. coli isn't the only candidate. Other common (and often nasty) microbes like acinetobacter, bacilus, streptococcus and staphylococcus might also survive the sterilization process and live on in a Martian environment. Which means we may have already contaminated the Martian surface, and if we haven't, there's a good chance we will as we conduct more exploratory missions there.

But there are two sides to this coin. Though we'd like a pristine Martian environment in which to conduct experiments and search for life organic to that planet, it's somewhat exciting to know that microbial survival is indeed possible on Mars. If we can contaminate it, we can seed it, setting the stage (potentially) for humans to create microbial environments that can persist -- and proliferate -- on Mars. Let's just hope our first contact with life on another planet isn't a nasty case of strep throat.

Gulf of Mexico oil spill sparks new US drilling ban

The US administration has banned oil drilling in new areas of the US coast while the cause of the oil spill off Louisiana is investigated.

White House adviser David Axelrod told ABC TV it wanted to know exactly what led to last week's explosion on the BP-operated rig in the Gulf of Mexico.

As many as 5,000 barrels of oil a day are thought to be spilling into the water, threatening US coastal areas.

Florida Governor Charlie Crist declared a state of emergency on Friday.

The order, which covers Escambia, Santa Rosa, Okaloosa, Walton, Bay and Gulf counties, says the oil slick "is generally moving in a northerly direction and threatens Florida's coast".

Louisiana Governor Bobby Jindal has already declared a state of emergency. The slick from the wreck of the rig has begun to reach the Louisiana shore and on Friday the state's National Guard was mobilised.

Heavy seas on Friday were pushing the slick towards the coast and over the booms meant to contain it.

The US National Weather Service said strong winds, high tides and waves could push the oil into inlets, ponds and lakes in south-east Louisiana over the weekend.

Rescuers poised to treat affected wildlife had their first patient on Friday - a young gannett found offshore covered in thick, black oil.

It was taken to a treatment centre at Fort Jackson, south-east of New Orleans.

Mr Axelrod announced the ban on drilling in new areas on ABC's Good Morning America programme.

He also defended the administration's response to the 20 April explosion that destroyed the BP-operated Deepwater Horizon rig saying: "We had the coast guard in almost immediately."

Last month President Barack Obama eased a moratorium on new offshore drilling.

In a statement outside the White House on Friday, President Obama said he believed oil exploration was an important part of the US economy but it had to be done responsibly.

"BP is ultimately responsible... for paying the costs of response and clean-up operations but we are fully prepared to meet our responsibilities in all affected communities," he said.

He said five staging areas had been set up to protect sensitive shorelines and about 1,900 emergency workers and more than 300 ships and aircraft were on the scene.

He added that he had ordered a "thorough review" of what might be required "to prevent accidents like this from happening again".

A BP spokesman in London, Toby Odone, told the BBC his company would face up to its obligations but did not bear sole responsibility for the oil spill.

"We... take responsibility for the environmental consequences of that accident and we are obviously fully committed to taking all possible steps to contain the spread of the oil spill," he said.

"The rig was owned and was the responsibility of Transocean, which is a drilling company which operates all over the world."

He said BP would continue to prospect for new sources of oil.

"We are responsible to our shareholders to continue to do the thing which we do best, which is to explore for and to produce oil and gas," he said.

The US government has designated the oil spill an "incident of national significance" which allows it to draw on resources from across the country.

The wetlands off the Louisiana coast sustain hundreds of wildlife species and a big seafood and fishing industry.

Nasa satellite picture

The US Coast Guard said it had sent investigators to confirm whether crude oil had begun to wash up on parts of the Louisiana shoreline.

Cdr Mark McCadden, of the coast guard, told the BBC: "We're putting everything forth in plans for a worst-case scenario.

"Right now the priority is to bring as many resources as are available to attack this spill."

Two US Air Force planes have been sent to Mississippi in case they are needed to spray oil-dispersing chemicals over the slick.

The Louisiana coastline, with its rich shrimp and oyster beds, is the most threatened by the spill.

A group of Louisiana shrimpers has already filed a lawsuit against BP and the owners of the rig, Transocean.

Richard Arsenault, a lawyer for the group, told the BBC: "The harm right now to the fishing industry and to the economic sector is just almost incalculable."

There are also fears of severe damage to fisheries and wildlife in Mississippi, Alabama and Florida.

Barack Obama: "Domestic oil production must be done responsibly"

An emergency shrimping season was opened on Thursday to allow fishermen to bring in their catch before it was fouled by the advancing oil.

Navy vessels are helping to deploy booms to contain the spill.

President Obama has dispatched high-level administration officials, including Homeland Security Secretary Janet Napolitano, to the area.

At a news conference on Friday, Ms Napolitano said the US government would continue to push BP for a strong response to the spill.

Eleven workers are still missing, presumed dead, after the Deepwater Horizon rig exploded.

Are you in the Gulf Coast area? Are you affected by the oil slick, or have you seen it spreading? Send us your comments using the form below.

Bailout Bill Would Require Banks to Track and Report Personal Checking Accounts to Feds

It’s amazing to watch the civil libertarians hide when Democrats propose the most sweeping intrusions of privacy in generations. In addition to the litany of bad policies contained in the Dodd Financial Reform bill is this nugget on pages 1039-1040. In short, it extends government reach to every deposit account of every citizen.

Required Acct MonitoringSubtitle G of the Dodd discussion draft bill requires that records be maintained and reported “for each branch, automated teller machine at which deposits are accepted, and other deposit taking service facility with respect to any financial institution, the financial institution shall maintain a record of the number and dollar amounts of deposit accounts of customers.”

What’s worse, banks will be required to submit these records to the new super regulatory agency called the Consumer Financial Protection Agency (page 1041). The CFPA will be allowed to use this information for any purpose “as permitted by law” under CFPA rules—rules set by CFPA themselves.

So, lets get this straight—the law requires banks to snoop on its customers MOST PERSONAL INFORMATION and submit it to another government agency so it can be used anyway the CFPA see’s fit.

Must submit to CFPASo, if the CFPA Czar see’s fit, information about your deposit account activity could be shared with the IRS, immigration officials, state officials, or any other entity that the Administration and their various Czar’s think beneficial.

But CFPA will impact your life even before they give away your personal data. Remember that part of the excuse for including this authority is to make policy recommendations. So, be careful not to run your credit limit too high above the amount of money you are depositing in the bank or the CFPA will know you can’t pay your bills and make the appropriate “policy recommendations”.

This is exactly why conservatives have fought so hard against things like national ID cards—if the government is authorized to collect and utilize data, there is no way to prevent the government as a whole or certain individuals within the government from using the information against the citizens.

But passage of the CFPA will settle the whole ID card thing once and for all. There will be no need for them because if you have a bank account, you already have a number and the CFPA will have it.

The breadth of sweeping new powers given to the federal government by these three pages is astonishing. Yet we have heard nary a peep about this provision.

After capitulation and surrender, Republicans will have a chance to amend the legislation when it comes to the floor of the Senate and protect the private details of your banking account.

But if they don’t, smile the next time you go to the ATM because Big Brother will be watching.

Apollo 11 launch revisited in slow-mo HD

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Goldman-Sachs "Shitty Deal" - Goldman-Sucks More Like

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Davis School District faces major budget shortfall

DAVIS COUNTY -- Davis School District is facing its most challenging budget season in its history: a budget shortfall of $30 million this year and $31 million next year.

A huge budget shortfall for the Davis School District means bigger classes and maybe a tax increase.

Spokesman Chris Williams says the district has outlined major cuts. "For two years we've been cutting, and there's no fat. We're cutting into bone," he said.

The district is also looking at eliminating many positions from the top on down, but hope most will come through natural attrition like retirements and moving.

The board of education is also doing a survey to see if residents would support a tax increase.

Michael Krieger - This Is The Last Dance

resenting the latest terrific analysis by Michael Krieger of KAM LP, who joins Willem Buiter and everyone else left with a gram of prudence, in realizing that this is nothing more than the "last dance."

History is a set of lies agreed upon.
- Napoleon Bonaparte

Most people prefer to believe their leaders are just and fair even in the face of evidence to the contrary, because most people do not want to admit they do not have the courage to do anything about it. Most propaganda is not designed to fool the critical thinker, but only to give moral cowards an excuse not to think at all"
- Michael Rivero

Every man gotta right to decide his own destiny,
And in this judgment there is no partiality.
So arm in arms, with arms, we'll fight this little struggle,
'Cause that's the only way we can overcome our little trouble.
- Bob Marley, Zimbabwe

A Thousand Words On Conventional Wisdom

Conventional wisdom. Many market analysts define conventional wisdom in relation to what direction the market is going to head in the future, but I think this is an utter mischaracterization of the concept. For example, someone that is bullish on the market right now is likely to see conventional wisdom on stocks and the economy as overly bearish after ten years of no returns for U.S. equities. In contrast, someone that expects a market collapse will say that everyone is a cheerleader and that the “conventional wisdom” after such a huge rally is for stocks to continue to go up. This is not how I would describe conventional wisdom and all is does is drag the debate into the intellectual gutter. Rather, to me conventional wisdom is more the “zeitgeist” of the financial and economic community at any given time. Zeitgeist is defined by the Merriam-Webster dictionary as: the general intellectual, moral, and cultural climate of an era. In this sense an “era” will generally mean a lengthy period of time, several decades or perhaps even more extended periods. That said, what is interesting is that every cycle in the global economy seems to bring forward distinct “mini-zeitgeists” that the experts create to justify market movements or give credence to economic dogma.

When I define conventional wisdom in this manner what I have found is that I almost always disagree with conventional wisdom. Two very interesting recent periods were fall 2007-July 2008 and then mid-2008-early 2009 period. In the first period, it was clear to me that decoupling was impossible because the U.S. was too large and it was clearly on the verge of collapse and, more importantly, that China and the U.S. were joined at the hip in a Keynesian economic Frankenstein that would not be easily severed. Despite what I thought was pretty obvious at the time, conventional wisdom was that the BRICS had decoupled and all would be well. Rather than seeing the commodity surge as the flight out of the dollar due to the distinct money policies of the U.S. Fed and everyone else, the rally was seen as evidence of decoupling. This is mainly because conventional wisdom tends to view rising assets as a signal of prosperity. I believe this was and is generally due to a misunderstanding of economics (we are all taught mostly rubbish in schools) and a shocking ignorance of the global financial system, how it really works and who/what is pulling the levers.

Once the collapse occurred the mini-zeitgeist cycle changed and everyone was forced to admit the errors of the decoupling thesis. That said, a new “conventional wisdom” emerged that was just as ridiculous as the one that came before. For example, the dollar rally was perceived as a flight to safety when this is not exactly true. The real reason for the dollar rally was that the world expected deflation and with the world’s reserve currency still the U.S. dollar this meant it would be time to settle positions much of which meant dollar settlement. So while many investors did indeed end up rushing out of “risk assets” and into the dollar, the desire to be in the dollar due to the relative strength of the U.S. economy was not the cause of the rally. This misunderstanding is also why so many investors remained in the deflationary mindset for far too long. The only way a deflation defined as dollar strength and commodity weakness could occur on a sustainable basis would have been if things were allowed to fail and the financial system was allowed to collapse. As soon as quantitative easing became a reality if should have been clear to all that we had just entered a new era. Even if one wanted to make the deflation case today (and I think the case can be made), the idea that deflation would lead to commodities falling in value versus the dollar is preposterous given the stance of the Federal Reserve. In my opinion, the deflation would be in relation to gold since it is now rightfully starting to be appreciated as the natural reserve currency of the world. The whole idea of the inflation/deflation debate is asinine since both sides are right in their own ways. The missing component is that the deflationists by and large haven’t figured out that the new reserve currency is gold. This becomes very clear when one watches the recent debate between Jim Grant and David Rosenberg. Grant argues that long-term treasuries are a horrific investment right now (I agree 100%) while Rosenberg thinks they are attractive. I respect Mr. Rosenberg and I think he does fantastic work but it wasn’t lost on me that he had no good response when Mr. Grant posed to him the question about what if the entire monetary system itself changes. This is the key point. The Central Bankers and their inept political allies will be the last to figure out that the entire paper ponzi they created and nurtured is falling apart all around them. The Central Bankers because they are loyalists to economic dogma as absurd as the notion that the sun revolves around the earth. The politicians because for the most part they don’t understand anything and have few skills other than getting elected to office by making promised they can’t keep. Look back at history and you will notice that it is entrenched academic ideas that die the hardest. In the Middle Ages they would send people to prison or worse for speaking against the dogma of the day. The establishment has and will fight back hard to maintain the status quo but the truth and economic law will win out in the end. Ben Bernanke is a parlor magician with a printing press. Please just go away!

For more on this topic please read the following piece by Martin Armstrong titled “The Clash of Two Worlds: The Battle Between Knowledge and Ignorance.”

Does China Need the U.S. to Collapse?

Another piece of conventional wisdom espoused these days is this idea that the Chinese “need the U.S. as much as we need them.” I think this is utter nonsense and in fact the opposite may in fact be true. At the least, it is worth considering. In July 2009 I wrote a piece titled “The Emerging China Risk” just before the Shanghai market topped out in early August. I noted that M2 and loan growth in China was dangerously high and that they risked creating major bubbles. Very few people were talking about this at that time. Now it is accepted that China has a property issue and the Shanghai index is still around 18% off from the August high. When I talk to people I respect in the business about the tremendous mal-investments occurring in China as a result of the government’s throwing money at the problem in an attempt to retain power, the main pushback I get are “ well x number of people still need to move to the cities” and “cars person in China is x versus the developed world.” This is all well and good but has anyone noticed oil is $85/b. As I have said time and time again, resource constraints are a very serious fact of life in the short-term. What 2007-2008 should prove to everyone is that the developed world and the emerging world cannot both grow strongly at the same time in the near-term. Resources will not allow China to grow at 10% and the U.S. to grow at 3%. Sorry folks, we will see oil at $200/b before you know it.

What is happening right now is everyone is printing enormous amounts of money in this Keynesian nightmare and thus supporting inefficient aggregate demand as I mentioned in last week’s email. This means the market’s rebellion will continue to be expressed in surging commodity prices and then surging sovereign yields. The really scary thing for me as an American is that the longer this goes on and the more empty cities and malls the Chinese create the greater their incentive and need to collapse the United States becomes. This is because as commodity prices continue to soar and the terms of China shifts against China (this has already started) the more they will need the improve their consumers purchasing power so that they can fill all of the vacant infrastructure. This is when the need to allow the yuan to strengthen will be most apparent and there will be no choice. Purchasing power for the Chinese will surge and the U.S. and Europe will be priced out.

The Last Dance

Either China’s leadership is very smart or is very stupid (I know what ours is). I do not have a great feel for this since I have no connections there but I am pretty sure it is one or the other. Conventional wisdom at the moment tells us two things with regard to China. 1) They need us as much as we need them. 2) They are creating monster bubbles that are dangerous and have no idea what they are doing. With point #1 I completely disagree. On point #2 I had tended to agree with that and in fact may have even played a small role in making that notion part of conventional wisdom with my prior writings. More and more I am doubting #2. The alternate scenario goes like this. They refuse to allow the yuan to strengthen because they know that once they do that it will mark the real end of the dollar era. So instead they are spending like crazy on infrastructure ahead of them allowing the dollar to plunge. Then the strong yuan will be employed to purchase all the commodities they need to utilize their infrastructure and the OECD gets priced out. To those that talk about yuan devaluation, you need to be specific. Devaluation versus what? Versus commodities generally along with other currencies? I can buy that argument very easily. Versus the dollar, highly doubtful. Why? The latest data says China owns $877.5 billion in U.S. treasuries. All they have to do is start dumping and the dollar is finished as the Fed will be forced to print so many dollars it will make Mugabe blush. People need to wake up.

Last year I wrote about how the leaders in America were essentially fiddling as Rome burned. This fiddling has become an all out dance party and many investors have been dragged onto the floor one more time due to money printing, an inherent desire to be optimistic, a plethora of propaganda and rising asset prices. However, this is the last dance folks. Our corporate and political leaders have destroyed us. Chuck Prince would be proud.

Now It's a European Banking Crisis

While the EU hesitated on a remedy for Greece's debt woes, a virus spread

For months the top leaders of the European Union resisted the idea of a bailout for Greece, wringing their hands over the estimated $61 billion cost. While the jawboning continued, the infection took hold. Bond vigilantes drove the Greeks' borrowing costs into the double digits. Investors, fearing a contagion in Europe's southern tier, dumped the stocks and bonds of Portugal and Spain. As it spread, markets started to pummel European banks and insurers for their exposure to what could prove to be one of the worst sovereign debt disasters ever. A bank crisis and a debt crisis rolled into one—the medical bills for this extreme case will make Europe long for the modest $61 billion of just a few weeks past.

Europe's banks and insurers hold some $193 billion in Greek debt. That's a fair piece of change, but it's no longer the central issue. For one thing, the debt is distributed among dozens of companies. Commerzbank and ING (ING) each hold $3.9 billion in Greek government debt. Writing off 50% of that would hurt, but it wouldn't send a major European banking institution toppling.

The bigger issue is metastasis. Nomura International (NMR) analyst Daragh Quinn noted, "Sovereign risk concerns are spreading to Portugal and Spain, as witnessed by a widening of bond spreads in these countries." In late April, ratings agency Standard & Poor's (MHP) not only downgraded Greek debt to junk, it knocked Portuguese sovereigns down two notches as well, and lowered Spain the next day.

Since investors are now worried about the fiscal health of the weaker European players, the borrowing costs of the Spanish, Portuguese, and Irish governments are jumping. Each of these countries may ultimately be forced to seek a bailout and break its pledge to pay off its debts in full.

Banks' Exposure

Even if the worst doesn't come to pass, Europe's banks will have a lot of pain to absorb through writedowns of billions in bonds and loans. Belgian-Dutch insurer Fortis, for example, holds $5.4 billion in Greek government debt—and $4.1 billion of Portuguese government debt, according to bank statements and public documents. Europe's banks aren't saying how much in vulnerable debt they hold overall, but it adds up. The banks' exposure to Portugal comes to $240 billion; exposure to Spanish debt is another $832 billion. Some of the big banks are also heavily involved in Greece. France's Crédit Agricole and Société Générale have big stakes in Greek banks. SocGen's Greek affiliate has lost money every year since 2003.

The second Greek problem for the banks is the collateral issue. The European Central Bank keeps the Continent's banking system functioning day by day through short-term loans to commercial banks. In these cases the ECB usually accepts the banks' holdings of government bonds as collateral. Greek debt is now rated as junk by S&P: Under current ECB rules, Greek bonds can't be used as collateral by the ECB if Fitch Ratings and Moody's Investors Service (MCO) cut them to junk as well. The Frankfurt-based central bank may have to dilute its collateral rules to keep the Greek banks operating. The ECB's problem of securing solid collateral for its loans will expand greatly if Spain and Portugal lose their investment-grade status, too. In the view of Jacques Cailloux, chief European economist at Royal Bank of Scotland Group (RBS), the central bank may have to start accepting all government debt regardless of its rating and revive last year's policy of lending unlimited amounts for periods up to a year to support the region's banks.

Continental Contagion

The final problem for the banks is an indirect one. On Apr. 27, the day S&P downgraded Greek debt, shares in London-based Lloyds Banking Group (LYG) slid 8%. Lloyds doesn't have any "material exposure" to Greece, Finance Director Tim Tookey told analysts. That won't matter if panicked investors go on strike and stop buying financial securities of any kind in Europe. "It's all about sovereign risk," says Andrew Lim, an analyst at Matrix Corporate Capital in London commenting on the decline in Lloyds shares. "Ultimately it could lead to contagion for funding costs, and Lloyds is going to be hit."

The fear of a monumental banking crisis is triggering calls for an EU-led bailout that goes beyond Greece. "It is perhaps time to think of policy options of the last resort," says David Mackie, chief European economist at JPMorgan Chase (JPM) in London. "It may now be time for the euro area to do something much more dramatic."

What Mackie has in mind is akin to the Troubled Asset Relief Program that supplied hundreds of billions in assistance to the top U.S. banks, while in Europe's case governments would be the beneficiaries. Mackie calculates that in a worst-case contagion, supporting Spain, Portugal, Ireland, and Greece may cost 8% of the euro zone's GDP. That's equivalent to about $792 billion. "This is a big number, but the region has the fiscal capacity to backstop both banks and these countries," says Mackie. The alternative—an unplanned series of sovereign defaults and an implosion of the banking system—could be far worse.

The bottom line The decision to pursue a regional rescue ultimately depends on Germany, whose voters are hostile to bailouts.

Athens clash at finance ministry over budget cuts

Clashes between police and protesters outside the finance ministry in Athens

Protesters in Athens clashed with police as a group tried to force its way into the Greek finance ministry.

Police fired tear gas to disperse the crowd as the unrest flared over austerity measures that may be taken in return for a massive bailout deal.

The European Union (EU) has said it is close to approving the details of an emergency plan to help tackle Greece crippling debt.

EU commission chief Jose Manuel Barroso said "rapid progress" was being made.

Deal deadline

"I'm confident that the talks will be concluded soon, meaning in the next days," Mr Barroso told a news conference following the clashes.

"We believe that these solutions will be conducive to our actions and will prevent further possible effects of the contagion."

Officials from the EU, the International Monetary Fund, and European Central Bank are in Athens to negotiate the bailout.

The Greek government says it needs a deal by 19 May to avoid a devastating debt default.

Police fired tear gas at hundreds of demonstrators, after some tried to break through a police cordon guarding the Greek finance ministry.

The outbreaks came after Greece began talks over extra budget cuts as conditions for the bailout loans.

These cuts would be in addition to an already mooted austerity drive aimed at reducing the nation's public deficit, which is more than four times bigger than the EU limit.

Union officials say the IMF wants Athens to raise sales taxes, scrap bonuses amounting to two extra months of pay in the public sector and accept a three-year pay freeze.

The union officials also claim that by next year, the IMF and the EU want Greece to shed 10 percentage points from the public deficit that reached 13.6% of output in 2009.

In addition, they say Athens has been asked to get rid of 13th and 14th month bonuses for public sector workers and pensioners.

It was also reported in the Financial Times in London on Friday that another measure would include raising the retirement age from an average of 53 to 67.

"Have you understood that these measures that are being recommended to you are measures of destruction?" the head of the Left Coalition Syriza, a small left-wing party, Alexis Tsipras, told Greek Prime Minister George Papandreou and fellow lawmakers.

"There is no other choice, ask for the verdict of the Greek people, call a referendum," he added.

In the face of mounting opposition to the budget cuts, Mr Papandreou insisted that the poor must not suffer disproportionately because of the austerity drive.

"We are holding tough negotiations to protect what we can for the weak and the middle class in our country," he said.

He said spending on healthcare would continue, but that corruption in the sector would be tackled.

'Harsh package'

Negotiations about the terms of the Greek loan come as the country prepares for annual 1 May celebrations, with three demonstrations expected against the measures.

Meanwhile, there were also reports of further clashes outside the parliament building in Athens on Thursday night.

The latest protests followed a meeting between Prime Minister George Papandreou and trade union leaders, who reacted angrily to his planned austerity measures.

"We got a flavour of a very harsh package of measures, measures that will lead to recession," Yiannis Panagopoulos, head of the powerful GSEE umbrella trade union, was quoted by AP news agency as saying.

The unions have now called a general strike for 5 May.

The BBC's Gavin Hewitt in Athens says the mood is increasingly against any bailout and the Greek prime minister has said the country is in a battle for survival.

Goldman: Still Greedy, No Longer Patient

Once upon a time, Goldman Sachs’ raison d’etre was to serve the ongoing needs of its clients and be paid fees for helping them raise capital, trade blocks of stock or by providing merger and acquisition advice, a business strategy that made the firm for years the envy of Wall Street and immensely profitable. This strategy forced Goldman’s bankers to be “long-term greedy” — a shopworn phrase coined by a former senior partner, Gus Levy — and to do everything possible to stay in their clients’ good graces in order to have a legitimate shot at the next fee. While it was not exactly backbreaking — or the Lord’s — work, from one year to the next nothing was assured unless the Goldman partnership maintained that fragile bond of trust.

Nowadays — although the firm’s chief executive, Lloyd Blankfein, would never (and probably could never) concede the point — Goldman’s mission, along with its argot, have changed. This shift is not doing the firm or its boss any favors. As was made abundantly clear during Tuesday’s 11-hour Goldman Sachs-athon on Capitol Hill, the bank has eschewed its client-focused ethic in favor of “making markets” for its trading “counterparties.” It is no coincidence that not one of the seven current or former Goldman professionals grilled by senators in the hearing is, or ever was, a banker; most came from the trading floor. A generation ago, it would have been inconceivable that not one of its senior bankers — the people who actually meet with clients and help shape their long-term futures — would be representing the firm on such a critically important public stage.

A quick look at the economics of Goldman’s business explains why things have changed so dramatically. Bringing to a close a multibillion-dollar merger or underwriting a bond issue can take months, if not years, and might entitle the firm to a fee in the millions or tens of millions. By contrast, Goldman’s bet against the mortgage market — engineered in just two months at the end of 2006 and the beginning of 2007 — made the firm a profit of nearly $4 billion alone in 2007. No wonder Team Goldman spent so much time Tuesday speaking the language of traders.

To be sure, there was plenty of miscommunication during the hearing — it was almost as if the Goldman representatives were using one alphabet and the senators another — but at one point Sen. John Tester, the Montana Democrat, tried to dig into this fine distinction with Blankfein. Tester noted that when the four younger current and former Goldman traders who comprised the day’s first panel were asked whether they worked for the firm’s clients or for the firm, they said something about being “market-makers.”

A bemused Tester asked Blankfein to explain. This did not go particularly well. After a bit of fumbling, Blankfein conceded, “I wish I were better [able] to explain it.” He tried again. “There are parts of the business where you’re a money manager, where you owe a duty to the client,” Blankfein said. “There are parts of the business where you are a principal and you are giving the client what it wants and it’s understood — where you have to know that they’re suitable, you have to know that the product you do delivers what they expect to have. But the markets couldn’t work if you had to make sure it was good for them.” Come again?

It would be nearly impossible to imagine the patrician John Whitehead, the former Goldman banker and co-senior partner (until he retired in 1984), uttering these words. And he cannot be pleased by what he saw Tuesday. Indeed, he cannot be pleased by the continuous public flogging Goldman has been getting since March 2009, when the firm’s name appeared near the top of the list of A.I.G. counterparties that received 100 cents on the dollar in the taxpayer-sponsored $182-billion A.I.G. bailout.

Unsurprisingly, there is an insurrection of sorts brewing at Goldman — and has been for some time. It pits those longtime Goldman loyalists — mostly present and former investment bankers favoring the highly successful formula of being “long-term greedy” — against Blankfein and his acolytes, most of them traders, who seem to favor more of a “short-term greedy” approach to the business. The Securities and Exchange Commission’s lawsuit and the Senate hearings have exposed the growing rift, which has been simmering at the firm even before Blankfein took over in 2006 from Henry Paulson, who left Goldman to become secretary of the Treasury. The S.E.C., which two weeks ago filed a civil fraud suit against Goldman, referred its investigation to federal prosecutors. It was confirmed on Thursday that the Justice Department has now opened its own inquiry, raising the possibility of criminal charges against the firm.

The bankers argue that Goldman should never be involved with anything that puts the firm’s interests above those of its clients. If that means not participating in a lucrative trade or passing on a private-equity investment to, so be it, because a happy client is a long-term — fee-paying — client. An unhappy client takes his business to another firm and never returns. This ethic has been deteriorating at Goldman, and across much of Wall Street, for a long time.

The old Goldman Sachs, the traditionalists say, would never have put its once-considerable prestige on the line for the likes of Abacus 2007-AC1, the too-clever-by-half “synthetic” collateralized debt obligation at the heart of the S.E.C.’s case against Goldman. And certainly not for the (relatively) measly $15 million fee, given the headline risk associated with a deal where one side was destined to make $1 billion and the other side was destined to lose a $1 billion. (Indeed, Goldman says it ended up losing $100 million on Abacus in the end.) “Not so long ago,” one former senior Goldman partner told me recently, “if there was a choice between making a quick buck or protecting client relationships, we would side with the client every single time.”

The takeover by the traders became complete with the appointment of Blankfein as C.E.O. and the departure in March 2009 of Jon Winkelreid, a banker and co-president (a post shared with a trader, Gary Cohn). Now it is Blankfein and Cohn running the show, free of meaningful input from bankers and their way of thinking. That is a new phenomenon at Goldman, which has always tried to balance the banking and trading strands of its DNA. “There’s no diversity at the top of the firm now,” said the former partner. “Both Lloyd and Gary are valuable guys, but you also need other guys at the top with a different ethic. Then you debate decisions out and you have balance. That has been lost.”

“The guys who succeed in this industry are the guys who say, ‘I care about the reputation of the firm,” he continued. “I care about my reputation. I care about doing the right thing. I care about having a great firm. I care about attracting and retaining the best people. If I do all of these things and do good business, eventually I’ll be fine.’ But in this top five, there is nothing about making money. The guys for whom making money is in the top three almost always get themselves into trouble. And this is the essence of how Goldman has changed.”

The battle between bankers and traders is as old as Wall Street itself. In “Greed and Glory on Wall Street,” the writer Ken Auletta famously described the near-collapse of Lehman Brothers in the early 1980s because of a similar feud. Morgan Stanley had its own culture war in 2005, when the old guard at the firm grew dissatisfied with their C.E.O., Phil Purcell, and deposed him in favor of a former president, John Mack. Wall Street has never been for the faint of heart.

Goldman Sachs is at a critical juncture in its 141-year history. Whether the firm is able to eke out a technical victory against the S.E.C. in civil court or not is almost beside the point. What is at stake at the once-invincible bank is a way of doing business that for generations brought the firm’s partners untold wealth, the admiration and respect of clients and the envy of its peers: the firm’s soul.

That now seems in danger of being lost. Surely Lloyd Blankfein, a Horatio Alger (his father was a postal clerk) and a graduate of both Harvard and Harvard Law School, is clever enough to appreciate this, even if he may be reluctant to take the steps necessary — like bringing back a cadre of high-profile, former bankers — to restore the firm’s luster and diversity of thinking at the top.

There’s no question he pretends to get it. “We are keenly aware that our legacy of client service and performance, which every person at Goldman Sachs is charged with protecting and advancing, must be continually nurtured and passed on from one generation to the next,” Blankfein wrote in the firm’s 2009 annual report. Indeed, in the eight-page letter, he used the word “client” (or clients) 56 times, up from 17 mentions the year before.

If Blankfein wants to keep his job, though, he’ll stop the pretending, and do everything he can to make good on all his talk of the importance of taking care of his clients.

New call for massive UK tax increase: 'Britain needs extra 6p in the pound to tackle ballooning national debt'

Taxes could rise by six pence in the pound over the next 10 years to slash public borrowing, an economic forecaster warned today.

Although cuts and a public sector pay clampdown will halve the UK's deficit over the next five years, the National Institute for Economic and Social Research (NIESR) said more action is needed to reduce borrowing to below 3 per cent of GDP by 2020.

'We assume it is achieved through income taxes rising by an equivalent of six pence in the pound on the basic rate,' NIESR said.

The prediction comes as the three main political parties have come under fresh pressure to explain exactly how they propose to reduce Britain's ballooning public debts.

Chancellor Alistair Darling on the campaign trail in Dumfries town centre yesterday

Chancellor Alistair Darling on the campaign trail in Dumfries town centre yesterday

It also comes after it was revealed that Bank of England boss Mervyn King had warned that whichever party wins the election, it will be forced to impose such severe spending cuts and tax rises that it will be kicked out of power 'for a generation.

The basic rate of income tax is currently 20 per cent after Gordon Brown cut the rate in one of his last acts as Chancellor in 2007.

VAT has been seen as a likely target for a tax hike after the election, although NIESR said VAT receipts would be held back by weak spending and higher saving.

The organisation is also calling for a further tightening of the public finances equivalent to 2 per cent of national output, saying the current debt mountain amounts to 'unfair treatment of our children'.

'Large government debts should exist only after wars and crises. After the crisis is over we have to rebuild the shock absorbers to prepare for the next one,' it added.

Enlarge recession

A long way to go: How the 2008 recession compares to previous economic downturns

NIESR said public sector wages would fall by almost 1per cent a year for the next five years, with taxes on household incomes set to rise by around 1per cent of GDP over the course of the next Parliament.

But its forecasts estimate the direct tax take would have to rise by around 1.25 per cent of national output by 2020 - almost £18 billion at today's prices - to begin to pay down the debts built up in the recession.

Although the UK is gradually pulling out of the slump with two successive quarters of modest growth, NIESR expects unemployment - currently 2.5 million - to peak at 2.7 million next year.

The UK economy will crawl ahead by 1per cent this year and 2per cent in 2011, it added.

Last week NIESR said UK output grew at 2 per cent a year on average under Labour, compared with 2.2 per cent from 1979 to 1997 under the Conservatives.

But after adjusting for population growth, it added that the country had risen to second place in the G7 ranking of national growth rates after being third between 1979 and 1997.

Tax experts at Deloitte said an average earner on £25,000 a year would pay more than £1,100 extra if income tax rose by 6p in the pound.

Based on figures for the current tax year, an average earner pays £3,705 in income tax at 20 per cent - but this would rise to £4,817 at 26 per cent, Deloitte said.

Earlier this week the influential think-tank Institute for Fiscal Studies (IFS) put out a report stating that voters were not getting sufficient details on how the Tories, Labour and Lib Dems would account for their deficit strategies.

The IFS believes that by 2014-15, the Conservatives would need to find cuts of nearly £64 billion a year, Labour almost £51 billion and the Liberal Democrats almost £47 billion to be in line with their plans.