« Former Goldman Sachs Executive Gene Sperling Floated As Larry Summers Replacement »

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Video - Geithner aides made millions on Wall Street

Sperling worked in the Clinton administration, then for Goldman Sachs and currently serves as a senior aide to Tim Geithner at Treasury. With this we can assume the Roger Altman trial balloon crashed and burned.

From last month:

• Goldman Alum Roger Altman STEALS $46 Million From Taxpayers, Lobbies To Replace Larry Summers & Complete Government Sachs Round Trip #2

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Source - Reuters

(Reuters) - A trusted aide with first-hand experience negotiating with Republicans has emerged as the favorite to become President Barack Obama's new top economic policy adviser, Democratic sources said on Monday.

Several sources close to the deliberations said Gene Sperling, a Clinton administration veteran, has gained traction in the last few weeks as a potential successor to Larry Summers, who is departing as director of the National Economic Council.

Sperling is seen as having an edge over two other leading contenders, investment banker Roger Altman and Yale University President Richard Levin.

A source familiar with the matter also said Obama is considering tapping J.P. Morgan Chase executive William Daley for a senior role within the White House, possibly as chief of staff.

Sperling, 52, brings a unique characteristic to the table: he has actually done the NEC job, a role that coordinates economic advice throughout the administration.

Sperling, who serves as counselor to Treasury Secretary Timothy Geithner, has a reputation as a savvy political and economic expert and is known for his tireless work ethic.

"The president is considering a number of qualified candidates and he has not made a decision or offered a job," White House deputy communications director Jen Psaki said.

"The most important qualification is finding the right person for the job, who can lead the team at this pivotal time in recovery."

Psaki declined to say whether Sperling had emerged as the leading candidate.

Some liberal Democrats see Sperling as too close to Wall Street because of work he has done as a consultant and because he was at the NEC during a period of financial deregulation under former President Bill Clinton.

Sperling helped put together the $858 billion tax-cut deal hammered out late last year and has helped focus attention on small-business issues within the administration.

Continue reading at Reuters...

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« Chris Whalen: 'Gift From Government To Bank Of America' In $2.8 Billion Settlement With Fannie & Freddie »

http://tinyurl.com/27pcqnx

The deal with Fannie Mae is not airtight; it leaves open the possibility that Fannie could pursue additional claims against Bank of America. In contrast, the settlement with Freddie Mac closes the book on pending and potential claims.

• "This is a gift from the government to the bank," said Christopher Whalen of Institutional Risk Analytics. "We're all paying for this because it will show up in the losses from Fannie and Freddie."

Inside I've also included an update on Ally's (GMAC) settlement last week with Fannie, and the status of MBIA's lawsuit against Bank of America.

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Bank of America settles with Fannie, Freddie

Source - Washington Post

Fannie Mae and Freddie Mac, the financial giants whose failed mortgage investments made them wards of the government, have accepted $2.8 billion from Bank of America to largely put to rest claims that the bank sold them faulty loans.

The cost to Bank of America was less than the potential blow some investors had expected, and the bank's stock rose 6.4 percent on the news Monday.

For Bank of America, the settlements eliminate "a doomsday scenario," said analyst Paul Miller of FBR Capital Markets.

• "This is a gift" from the government to the bank, said Christopher Whalen of Institutional Risk Analytics. "We're all paying for this because it will show up in the losses from Fannie and Freddie."

The deal with Fannie Mae is not airtight; it leaves open the possibility that Fannie could pursue additional claims against Bank of America. In contrast, the settlement with Freddie Mac essentially closes the book on pending and potential claims.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, approved the settlements. In a statement, the agency said the deals were "consistent with market practice and FHFA's conservatorship responsibilities."

Fannie spokeswoman Janis Smith called it a "fair and responsible resolution."

At issue is one of the biggest threats facing Bank of America and other major lenders that weathered the financial crisis with help from the government.

During the housing bubble, the banks typically sold mortgages to investors around the world, including Fannie Mae and Freddie Mac. But those investors were generally entitled to repayment by the lenders if the loans were sold on the basis of false assurances.

Stocks of major banks swooned last year when the market was gripped by fears that banks could be on the hook for huge sums.

Bank of America's acquisition of one of the biggest issuers of troubled loans, Countrywide Financial, has left it especially vulnerable.

In October, a group of investors including the Federal Reserve Bank of New York, Pacific Investment Management and BlackRock, wrote to Bank of America signaling that they might try force repayment on pools of Countrywide mortgages totaling more than $47 billion. That dispute remains unresolved.

Continue reading...

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Bank of America hit with setback in MBIA mortgage liability lawsuit

Bank of America's hangover from the housing bubble could be harder to shake in the new year as a result of a recent court decision.

The bank lost a major procedural ruling in a lawsuit over its liability for allegedly toxic mortgages. The ruling will make it harder for the bank to defend itself in that case, and it could set a standard for similar disputes.

http://www.washingtonpost.com/wp-dyn/content/article/2010/12/31/AR2010123101728.html

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Ally Financial in $462 million settlement with Fannie

(Reuters) - Ally Financial Inc, the lender formerly known as GMAC, on Monday said it agreed to pay $462 million to Fannie Mae to avoid having to repurchase poorly underwritten mortgages sold to the housing finance giant.

Ally, which is majority-owned by U.S. taxpayers, said the agreement releases its Residential Capital LLC mortgage unit from any liability related to bad underwriting on $292 billion worth of loans sold to Fannie Mae, itself about 80 percent owned by the government.

http://www.reuters.com/article/idUSTRE6BQ3OA20101227

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The Elite Now Have Unlimited FDIC Coverage for Deposits

Activist Post

A little known clause in the gigantic Dodd-Frank financial reform bill went into effect January 1st. All funds in a "noninterest-bearing transaction account" are insured in full by the Federal Deposit Insurance Corporation from December 31, 2010, through December 31, 2012.

This temporary unlimited coverage is in addition to, and separate from, the coverage of at least $250,000 available to depositors under the FDIC's general deposit insurance rules.

It is unclear the purpose of this temporary status, but certainly we can speculate that it is to protect the elite's deposits should another catastrophic financial collapse happen in the next two years.

The official purpose as stated by the financial bill itself is beyond convoluted:

The proposed rule serves as a vehicle for the FDIC Board of Directors to announce that it will not extend the TAGP beyond the scheduled expiration date of December 31, 2010. Because of the differences between the TAGP and the new statutory provision, changes to the rules are necessary.

Say what? It seems that the designers assume another financial crisis is looming and they want to make sure that the taxpayers will be on the hook for the potential billions in private bank losses.

Consumer bankruptcies hit 5-year high in 2010

(Reuters) - The number of U.S. consumers who filed for bankruptcy protection in 2010 was the highest in five years, and the figure could rise as Americans struggle with excess debt in an uncertain economy, a report issued Monday said.

Roughly 1.53 million consumer bankruptcy petitions were filed in 2010, up 9 percent from 1.41 million in 2009, according to the American Bankruptcy Institute, citing data from the National Bankruptcy Research Center.

Filings in December totaled 118,146, up 4 percent from a year earlier and 3 percent from November's total.

The full-year total is the highest since the 2.04 million recorded in 2005, when there was a rush to seek bankruptcy protection ahead of a stricter federal law taking effect in October of that year.

Samuel Gerdano, executive director of the ABI, said filings are rising even as consumers try to cut spending and debt after the 2008 financial crisis and accompanying recession, and with the unemployment rate at 9.8 percent.

He said there is usually a 12- to 18-month lag between declines in consumer spending and bankruptcy levels.

According to the Federal Reserve, U.S. consumer credit outstanding has fallen in 19 of the last 21 months for which data are available, declining to $2.41 trillion in October 2010 from $2.57 trillion in January 2009.

"Consumers have been on sort of a strike when it comes to taking on more debt, as they become more aware of the dangers of high debt burdens in a weak economy," Gerdano said.

Robert Lawless, a bankruptcy professor at the University of Illinois College of Law in Champaign, said the pace of filings may peak in early 2011 but that full-year filings could drop by a single-digit percentage.

"Consumer debt is declining, which means the incentive for taking the legal step of filing for bankruptcy is going down," he said. "I suspect borrowing demand has also gone down, but the bigger reason is that lenders are less willing to lend."

There were 2.94 million U.S. consumer bankruptcy filings in 2009 and 2010, the most over a two calendar year period since the 3.6 million recorded in 2004 and 2005.

"The (2005) law was supposed to reduce filings, but we are very close to levels we were at then," Gerdano said. "The laws of economic gravity are more powerful than the laws passed by Congress."

(Editing by Steve Orlofsky)

Italian Banks Wage 'War on Cash' as Consumers Pass on Plastic

Jan. 4 (Bloomberg) -- Cash is king in Italy, a lesson Massimiliano Romano learned when he tried to pay for a cab with a credit card at Rome's main train station.

"I thought my cards would be enough," said Romano, head of research at brokerage Concentric Italy in Milan. "But I had to let 10 people go in front of me in the line before I found a driver who would accept a credit card."

The Italian Banking Association has declared "war on cash" in a country where credit-card usage is less than half the European Union average, according to the Bank of Italy. The association, known by its Italian acronym ABI, says it costs banks and companies as much as 10 billion euros ($13.3 billion) a year to process cash payments, mainly in increased security and labor. Rome-based ABI aims to cut those expenses by promoting electronic payments with credit and debit cards and wire transfers in both the public and private sectors.

"Italy urgently needs these changes to catch up with other countries like France, which has allowed non-cash payments for public services for more than two decades," said Rita Camporeale, head of payment systems and services at ABI.

Italy's culture of cash is deeply rooted. Italians are the euro-region's least-indebted consumers and among its biggest savers, according to 2009 Eurostat data. Companies often pay salaries in cash to evade taxes, particularly in Italy's southern region, where organized crime is prevalent.

Lost Revenue

Italy loses about 100 billion euros of revenue a year from untaxed transactions in the so-called underground economy, which amounts to about 22 percent of gross domestic product, according to government statistics. The Finance Ministry agrees with ABI proposals to make public offices accept electronic payments and install point-of-sale terminals, Camporeale said in a Dec. 21 interview. Banks also want a ban on cash salaries, she said.

Consumers and merchants are skeptical. "The banks only want to multiply the transactions they handle to increase their profits," said Carlo Rienzi, head of consumer-rights group Codacons in Rome. "Replacing cash with electronic money is correct from a security standpoint, but should be done for free, which won't happen."

ABI hasn't said how much banks stand to profit from commissions tied to an increase in electronic payments.

The average Italian makes 26 credit-card transactions a year, according to the latest Bank of Italy annual report in May. That's five times less than in the U.K., which leads the ranking with 125 annual transactions, the report shows.

Taxi Drivers

Charges on card payments discourage retailers and small businesses from accepting them. "We have to pay fees from 3 percent to 4 percent for every card transaction," said Efrem Abramo Goi, a Milan taxi driver.

It's the customer though who often gets stuck with the bill. "When I finally got to my destination, as a final surprise the taxi driver rounded up the fare to cover the card commission," said analyst Romano, who arrived 30 minutes late to his meeting in Rome.

Visa Europe Ltd., operator of the largest payment-card network in the 27-nation EU, will reduce debit-card transaction fees paid by retailers as part of a deal announced on Dec. 8 to end EU antitrust action. Visa Europe agreed to cut fees to 0.2 percent per debit-card purchase. MasterCard settled a similar case with the commission last year, agreeing to trim fees to 0.3 percent for transactions with credit cards and 0.2 percent for debit cards.

The 0.2 percent rate is "the level where merchants have no preference whether consumers pay with a Visa debit card or with cash," Joaquin Almunia, the EU's competition commissioner, said Dec. 8 in Brussels.

Tax Burden

With surcharges decreasing in Italy, the price of using plastic is almost in line with the hidden costs of managing cash, said Davide Steffanini, general manager of the Italian unit of Visa Europe. "Merchants only notice the costs of cards because they have to pay a fixed fee," he said. "But cash also has costs related to handling, transport and security."

Many companies accept those costs in the face of some of Europe's highest payroll taxes. An employee at a nougat plant near Naples, who declined to be identified because of concern she might lose her job, said the company pays staff in cash to evade taxes and sells about 20 percent of its products without issuing any receipts.

Increased use of cards and wire transfers would allow authorities to track payments now outside their control, said Steffanini. ABI says it also would help Italy, Europe's most indebted nation in nominal terms, recoup billions of euros in lost tax revenue.

Winning over cash-loving Italians won't be easy, said Carlo Alberto Carnevale-Maffe, a professor of business strategy at Milan's Bocconi University. "Italians have a strong family tradition that leads them to avoid debt and save a lot to ensure their kids a future," he said by phone.

"They like solid investments such as houses. And for renovations or purchases made under the table, what better way than cash?"

--Editors: Dan Liefgreen, James Hertling

War Causes Inflation ...

And Inflation Allows The Government to Start Unnecessary Wars

War almost always causes inflation.

As liberal economist James Galbraith wrote in 2004:

War causes inflation.

Every major war in the past century brought inflation to some degree. And so did two upheavals in the Middle East, the Yom Kippur War of 1973 and the Iranian Revolution of 1979, which did not directly involve the United States, except through their effect on the price of oil. Why is this so? The big reason is that wars must be paid for, somehow. They require resources that civilians would otherwise use. Those resources must be diverted to the war effort. Usually, inflation is the easiest way. World War I was largely financed by inflation, and so were the Revolutionary and Civil Wars before that. So, though on a smaller scale, was Vietnam.

Inflation applies the law of the jungle to war finance. Prices and profits rise, wages and their purchasing power fall. Thugs, profiteers and the well connected get rich. Working people and the poor make out as they can. Savings erode, through the unseen mechanism of the "inflation tax" -- meaning that the government runs a big deficit in nominal terms, but a smaller one when inflation is factored in.

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There is profiteering. Firms with monopoly power usually keep some in reserve. In wartime, if the climate is permissive, they bring it out and use it. Gas prices can go up when refining capacity becomes short -- due partly to too many mergers. More generally, when sales to consumers are slow, businesses ought to cut prices -- but many of them don't. Instead, they raise prices to meet their income targets and hope that the market won't collapse.

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Is there another way? The answer is yes, but it isn't easy.

In wars past -- notably in World War II and Korea -- the job was done by steeply progressive taxes including taxes on excess profits, by "forced saving" (which was an essentially compulsory private holding of public debt), and by price control. Interest rates were frozen at 2 percent on government bonds -- and essentially at 0 on bank deposits. The principle was: No one profits from the war.

This combination kept inflation down -- prices were stable from 1942 through 1945. Not many grew rich off that war. Instead, my generation grew up with series EE bonds to our names. They were the promise that those working to win the war would see some of the material fruits of their labor later, when peacetime production returned.

Libertarian Congressman Ron Paul agreed in 2007:

Congress and the Federal Reserve Bank have a cozy, unspoken arrangement that makes war easier to finance. Congress has an insatiable appetite for new spending, but raising taxes is politically unpopular. The Federal Reserve, however, is happy to accommodate deficit spending by creating new money through the Treasury Department. In exchange, Congress leaves the Fed alone to operate free of pesky oversight and free of political scrutiny. Monetary policy is utterly ignored in Washington, even though the Federal Reserve system is a creation of Congress.

The result of this arrangement is inflation. And inflation finances war.

Economist Lawrence Parks has explained how the creation of the Federal Reserve Bank in 1913 made possible our involvement in World War I. Without the ability to create new money, the federal government never could have afforded the enormous mobilization of men and material. Prior to that, American wars were financed through taxes and borrowing, both of which have limits. But government printing presses, at least in theory, have no limits. That's why the money supply has nearly tripled just since 1990.

For perspective, consider our ongoing military commitment in Korea. In Korea alone, U.S. taxpayers have spent $1 trillion in today's dollars over 55 years. What do we have to show for it? North Korea is a belligerent adversary armed with nuclear weapons, while South Korea is at best ambivalent about our role as their protector. The stalemate stretches on with no end in sight, as the grandchildren and great-grandchildren of the men who fought in Korea give little thought to what was gained or lost. The Korean conflict should serve as a cautionary tale against the open-ended military occupation of any region.

The [hundreds of billions] we've officially spent in Iraq is an enormous sum, but the real total is much higher, hidden within the Defense Department and foreign aid budgets. As we build permanent military bases and a $1 billion embassy in Iraq, we need to keep asking whether it's really worth it. Congress should at least fund the war in an honest way so the American people can judge for themselves.

Blanchard Economic Research pointed out in 2001:

War has a profound effect on the economy, our government and its fiscal and monetary policies. These effects have consistently led to high inflation.

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David Hackett Fischer is a Professor of History and Economic History at Brandeis. [H]is book, The Great Wave, Price Revolutions and the Rhythm of History ... finds that ... periods of high inflation are caused by, and cause, a breakdown in order and a loss of faith in political institutions. He also finds that war is a triggering influence on inflation, political disorder, social conflict and economic disruption.

The type of inflation that is associated with wars usually arises from increases in aggregate demand. In time of war, government spending for military purposes stimulates demand throughout an economy, at the same time that a shift of workers from productive labor into war production causes a decline in aggregate supply.

War also causes the type of inflation that results from a rapid expansion of money and credit. "In World War I, the American people were characteristically unwilling to finance the total war effort out of increased taxes. This had been true in the Civil War and would also be so in World War II and the Vietnam War. Much of the expenditures in World War I, were financed out of the inflationary increases in the money supply." (See "American Economic History," Scheiber, Vatter and Faulkner)

War usually leads to the type of inflation which is caused by inflationary expectations. Professor Fischer explains:

"It occurs when people begin to raise prices not because of actual changes in supply or demand or cost or the size of the money supply, but out of fear that some such changes might happen."

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Professor Fischer also provides an interesting perspective on war-related inflations in the 20th century:

"Inflation surged after America joined World War I in 1917, then declined after 1919, but to pre-war levels. After World War II, Korea and Vietnam, war-inflations were not followed by a decline at all. Prices continued to climb."

Professor Fischer had some interesting things to say about the Korean War:

"In its economic impact the Korean War was similar to the world wars that had preceded it. Once again, inflationary pressures surged throughout the world. In 1950, wholesale prices jumped 12% in the United States, 18% in Germany, 21% in Britain, 28% in France, and 32% in Sweden."

Professor Fischer discusses the inflation that took place as part of the Vietnam War and as part of the 1973 Yom Kippur War. He says that the Vietnam War was not the pivotal event in the acceleration of inflation during the 1960s, although he admits that the Johnson administration's decision to expand public spending for social welfare at the same time that it fought a major war in Southeast Asia, without a large increase in taxes, was a major miscalculation.

Other economists agree with Professor Fischer's link between inflation and war.

James Grant, the respected editor of Grant's Interest Rate Observer, supplies us with the most timely perspective on the effect of war on inflation in the September 14 issue of his newsletter:

"War is inflationary. It is always wasteful no matter how just the cause. It is cost without income, destruction financed (more often than not) by credit creation. It is the essence of inflation."

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Roger Bootle, in his book, The Death of Inflation, also traced the historic link between inflation and war in America's 225-year history:

"This country's first two experiences with high inflation were during the American War of Independence (1775-83) and during the Civil War. There was also high inflation associated with the First World War; the unifying theme running through inflation episodes are the occurrence of bad times, often as a result of war or its aftermath."

"After the Second World War, inflation became the norm everywhere in the industrial world. There was another surge of inflation during the Korean War, which took inflation in the U.S. above 9% in 1951 (and wholesale price inflation into double digits)."

"The inflation that accompanied the Vietnam War and the Yom Kippur War, and oil price shocks in the 1970s, led people to increase their inflationary expectations, which aggravated inflation itself."

Similarly, in her book, Money Meltdown, Judy Shelton also traces the relationship between war and inflation from the Civil War through Vietnam:

"'We tried to finance the Vietnam War and the Great Society programs without a tax increase,' admits Charles L. Schultze, Johnson's budget director at the time, 'and clearly that started our course of inflation.'"

"Political leaders always have tended to take the view that in time of war the nation must do whatever is necessary to succeed, and the financial repercussions can be dealt with later. Johnson was only following the pattern that had been adhered to by his predecessors ...."

Libertarian economics writer Lew Rockwell noted in 2008:

You can line up 100 professional war historians and political scientists to talk about the 20th century, and not one is likely to mention the role of the Fed in funding US militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions every devised.

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The connection between war and inflation, then, dates long before the creation of the Federal Reserve.

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Before the creation of the Federal Reserve, the idea of American entry into the conflict that became World War I would have been inconceivable. In fact, it was a highly unpopular idea, and Woodrow Wilson himself campaigned on a platform that promised to keep us out of war. But with a money monopoly, all things seem possible. It was a mere four years after the Fed was invented under the guise of scientific policy planning that the real agenda became obvious. The Fed would fund the US entry into World War I.

It was not only entry alone that was made possible. World War I was the first total war. It involved nearly the whole of the civilized world, and not only their governments but also the civilian populations, both as combatants and as targets. It has been described as the war that ended civilization in the 19th-century sense in which we understand that term. That is to say, it was the war that ended liberty as we knew it. What made it possible was the Federal Reserve. And not only the US central bank; it was also its European counterparts. This was a war funded under the guise of scientific monetary policy.

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Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919

One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier.

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The story of central banking is one step removed from the story of atom bombs and death camps. There is a reason the state has been unrestrained in the last 100 years, and that reason is the precise one that many people think of as a purely technical issue that is too complicated for mere mortals.

Fast-forward to the Iraq War, which has all the features of a conflict born of the power to print money. There was a time when the decision to go to war involved real debate in the House of Commons or the US House of Representatives. And what was this debate about? It was about resources and the power to tax. But once the executive state was unhinged from the need to rely on tax dollars and did not have to worry about finding willing buyers for its unbacked debt instruments, the political debate about war was silenced.

In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population were reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn't have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars — or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher — perhaps $20,000 per household.

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If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context, the choice has always been for war.

And progressive economics writer Chris Martenson explains as part of his "Crash Course" on economics:

Along came a war, the Revolutionary War, and the country found itself unable to pay for the war with the gold and silver to be found in the Treasury.

So a paper currency called “continentals” was printed, and at first it was fully backed by a specified amount of real gold and/or silver in the Treasury. But then the war proved to be more expensive than thought, and more and more was printed. Then the British, aware of the corrosive effects of inflation on a society, started counterfeiting and distributing vast amounts of bogus continentals, and soon the currency began to collapse.

Before long, massive inflation took hold, and Abigail Adams complained bitterly about this experience, noting that goods were hard to come by, making life difficult.

Seen on the inflation chart, the Revolutionary War took the general price level from a reading of “5” to a reading of “8”. After the war, the paper continentals were utterly rejected by the populace, who strongly preferred gold and silver. Most interestingly, price levels promptly returned back to their prewar levels.

The next serious bout of inflation was also associated with a war, again due to overprinting of paper currency, and again, upon conclusion of the war, we saw a relatively prompt return of prices to their pre-war levels, where they stayed for an additional 30 years. By now we are nearly 200 years into this chart, and we find that the cost of living is roughly that same as it was in 1665. That’s a truly fascinating concept to entertain.

But then a war came along – the Civil War – and it was a doozy. To finance the war, the North had to resort to printing a type of currency that still lends its name to our own currency today. Of course, back then it really did have a “green back.” Again we see a rapid rise of inflation as a direct consequence of war that again returned to baseline after the crisis was over. We are now 250 years into this story and the cost of living is still roughly the same as it was at the start. Can you imagine?

But then another war came along, this one even bigger than any before, and again it was a highly inflationary event.

And then another war, even bigger than any before it, which again proved inflationary. But this time, something odd happened. Inflation did not retreat before the next war began. Why? Two reasons. First, the country was no longer on a gold standard, but instead a fiat paper standard administered by the Federal Reserve, and the populace did not have another form of money to which it could turn. And second, because this was the first time that the war apparatus was not dismantled upon conclusion of hostilities.

Instead, full mobilization was maintained and a protracted cold war was fought; certainly as inflationary a conflict as any shooting war ever was.

And now if we look at the entire sweep of history, we can make an utterly obvious claim: All wars are inflationary. Period. No exceptions.

Why? Simple, really. Any time the government engages in deficit spending, it creates the conditions for inflation. However when the deficit spending is on legitimate infrastructure, such as roads or bridges, that investment will slowly “pay for itself” by boosting productivity and paving the way for the creation of additional goods and services that will ‘soak up’ the extra cash over time.

Wars, however, are special. Vast quantities of money are spent on things that are meant to be blown up. The money stays at home, while the goods get sent off to be blown up. When a bomb blows up, there is no residual benefit to the domestic economy later on. This means war spending is the most inflationary of all spending. It’s a double whammy – the money stays behind, working its evil magic, while the goods disappear. Heck, even if the goods aren’t blown up, there’s practically zero residual economic benefit to such specialized hardware, as amazing as that technology may be.

For some reason, the most recent pair of wars have been presented by the US mainstream press as being relatively “pain-free” for the average citizen, despite overwhelming historical odds to the contrary.

In fact, on this 15-year-long chart of commodity prices, we observe that prices bounced in a channel, marked by the green lines, for more than 10 years. However, and now hopefully unsurprisingly, shortly after the start of the Iraq War commodity prices began marching higher and have inflated nearly 140% in the five years since. Your gasoline and food bills will confirm this.

So if anybody tries to tell you that you haven’t sacrificed for the war, let them know you sacrificed a large portion of your savings and your paycheck to the effort, thank you very much.

And see this:

(Click here for larger version.)

The bottom line is that war always causes inflation, at least when it is funded through money-printing instead of a pay-as-you-go system of taxes and/or bonds. It might be great for a handful of defense contractors, but war is bad for Main Street, stealing wealth from people by making their dollars worth less.

And contrary to what many pundits say, war will not lead to an economic recovery.

And as discussed above, liberals such as James Galbraith and conservatives such as Ron Paul agree that we wouldn't get into as many wars - and the wars which we did wage would be ended more quickly - it if the people were required to pay for them directly instead of war being paid out of the "hidden tax" of inflation.

The father of modern economics - Adam Smith - agreed:

Were the expence of war to be defrayed always by a revenue raised within the year [instead of financing it with long-term public debt], the taxes from which that extraordinary revenue was drawn would last no longer than the war. The ability of private people to accumulate, though less during the war, would have been greater during the peace than under the system of funding. War would not necessarily have occasioned the destruction of any old capitals, and peace would have occasioned the accumulation of many more new. Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. The seasons during which the ability of private people to accumulate was somewhat impaired, would occur more rarely, and be of shorter continuance. Those on the contrary, during which that ability was in the highest vigour, would be of much longer duration than they can well be under the system of funding.

Food Emergency: Millions of Americans Are Heading to Foodbanks for the First Time in Their Lives

The good news is there's no reason anyone should ever starve to death in America. The bad news is more and more working Americans, many earning what were once middle class incomes, are spending their time and scarce money to find their next meal.

Emergency Food: More and More It's What's for Dinner

Val Traore, the radiant and gregarious CEO of the Food Bank of South Jersey (FBSJ), wanted to make one thing perfectly clear in our discussion of hunger in America today. "We do not have starvation here in the United States. In Mali," she says, referring to the West African country where about half the population lives below the internationalpoverty lineof $1.25 a day, "if you live in poverty you risk starvation and death. That doesn't happen here in America." It's an important point worth dwelling on.

So what is happening here?

"We're seeing a large number of families that have never needed food assistance before," reports Traore. How many? So far, for 2010 FBSJ has witnessed a 10% increase in their client base of approximately 100,000 people. Here's the surprise: a large portion of the people needing food assistance today are working, and especially among FBSJ's new clients, many are earning incomes nearly twice the poverty line of $22,055 per year for a family of four (up to 185% of poverty).

Who are the hungry and why can't they afford to feed themselves and their families? Increasingly, the shocking answer is this: If you are not financially independent, the odds are good that someday you could be waiting in line to feed yourself and your family.

Food Lines: The Growing Reality Based Social Network

December 18, 2010 - Burlington County, NJ: Especially since the airing of television shows like "The Sopranos" and "Jersey Shore" most of the nation probably sees New Jersey as some cultural aberration. Perhaps it is. But, this is south Jersey and the landscape looks a lot like other semi-rural areas of the country.

On the drive from Philadelphia through Burlington County, a main highway cuts through farmland that includes several agricultural supply and farm equipment dealers. There are also strip malls, fast food franchises and diners offering breakfast for $2.99 and prime rib dinner specials as low as $10.99. If you were somehow transported here and I told you that you were in Ohio, you would have no reason not to believe me.

In Browns Mills, population 11,257, a tractor trailer painted as the "Hope Mobile" carrying about 28,000 pounds of food is being unloaded at the local United Methodist Church. People are lined up outside, but most of the line has been moved inside on this frigid morning. The church pastor has allowed the use of the facility's assembly room and adjacent corridor to bring members of some 600 pre-qualified, pre-registered families in from the cold.

Depression soup lines have nothing on this sucker. The first in line sit along the hundred foot length of the assembly room where a beautifully lighted Christmas tree glows. The line extends out the door and down one side of a hundred foot corridor and then loops back on itself down the opposite wall. At the end of the line, another 30 feet or so, people will brave the weather for an hour or two until things get moving. Over 20,000 pounds of food will be provided to the crowd here, the remaining 7,000 pounds will go to a second event later in the day in Camden, NJ.

Food Bank Volunteers Unload Bags of Rice by Chaz Valenza

The Browns Mills' Hope Mobile drop has been occurring monthly since August in an effort to relieve demand on overwhelmed local pantries. Some 450,000 people live here in Burlington County where the median household income here is just under $77,000 per year. The county is 77% white, 17% black and 6% Hispanic.

Many of the people here (according to national averages about 70%) are just plain poor. Some are on Social Security Disability. Others are senior citizens living on small fixed incomes. Some of them care for grandchildren that their own children, for whatever reason, can not care for.

A few are homeless, or the formerly homeless who have recently found a place live. They are white, they are black and they are Hispanic. All represented in good numbers. They are a typical gathering of Americans in winter wear, with kids in tow and babies in strollers. If I put them all in a local shopping mall - even the ones that told me they were homeless - you would have no reason to believe they weren't holiday shopping.

Deborah (all the names of those interviewed for this article have been changed) is twenty-something, smart, articulate, bi-lingual single mother of four. After losing a well paying job eight months ago, she took a warehouse position at minimum wage, $7.25 an hour in New Jersey, and moved her family into a shelter.

She's hoping her education and language skills will mean a quick promotion and higher wages. Though she pays little in rent, she tells me that after her car expense, diapers and clothes, there's no much left for food. A quick calculation reveals her car expenses alone will eat up nearly a third of her $14,790 annual income.

If you can't quite relate to a single mother of four, who recently lost a significant amount of income, then consider Joan.

Joan tells me over and over that hers is a good story that people need to hear. Unfortunately, for her and her family she is right.

Before moving to Shamong, NJ, Joan, her husband and four children, lived a well above average middle class life in a suburban Toledo, OH. They owned a single family home. She ran a home day care to supplement her husband's $80,000 plus income. He worked as a pipeline technician, a career he built over 26 years, lost 14 months ago and has not been able to reclaim. Two years ago he found work in New Jersey through relatives and the family moved.

Food Line for the Holidays - Browns Mills, NJ by Chaz Valenza

Moving meant Joan's day care income was gone. It also meant a cut in her husband's salary to $40,000, and an increase in rent from $875 monthly mortgage payment, which included principle, interest, taxes and insurance, to a trailer park rent of $1,125.

Doing some quick math for Joan's situation reveals how the Great Recession has decimated middle class America: after taxes $40,000 is about $30,000 take home in New Jersey. Less $5,000 for carfare to get to work. Less $13,500 for rent. Utilities and phone, let's say $2,400; way too low, right? That leaves $14,100 for food, insurance, diapers, laundry, clothes and every other vagary life throws at a family of six. Since a decent family health care insurance is at least $9,000 per year, I'll bet they aren't making what's left of the COBRA payments.

Think you can feed yourself for $5 a day? What would you buy? What would you forego? Fast food will eat up that whole amount in a single meal. If Joan spends every cent of her family's $14,100 of "discretionary" money on food she would have a $6.53 per person per day food budget.

Joan wasn't embarrassed to talk about her situation with me. For whatever reason, she wanted people to know her story. But she was the exception. There were many others seeking a week's worth of food who didn't want to be noticed. They were still well shod. One middle aged gentleman, escorting his wife, was twitching. He didn't care to share his story.

Why You Will Choose to Be Hungry

Setting priorities when your budget gets squeezed is exactly why food is going to come last and why you're going to be left with little or nothing to feed your face and the hungry faces of those you love.

In a strange subversion of Maslow's hierarchy of human needs, when things get tough in our modern world, you will put food last. "There are a couple of reasons," explains Traore. "First impulse is we don't want other folks to know we're struggling. So, Americans have a tendency to decide to pay for the visible expenses first."

If you think about it, it's pride, practicality and the unwillingness to give up hope too soon. Mix it all together and before you know it, you're hungry.

You may put off buying new clothes, or if interviewing for a job is a must, you won't.

You've been out of work for a couple of months, but obviously now is no time to sell the house. So you'll continue to make the payments as long as you can, especially in this market.

The car is leased or not yet paid off and you have to get to interviews and in today's environment public transportation to a job may not be an option. Anyway, you don't want to start taking the bus or train when a better situation is probably just around the corner, and the neighbors will notice the Camry is gone.

In today's world, how can you live without a cell phone? A haircut? An internet connection? A clean pressed suit? A couple beers with the crew after a hard day on the job site? Paper towels for the kitchen, heck toilet paper for the bathroom? A small gift for the kid's birthday? A coffee at break time? Money for the school field trip? License, registration and auto insurance?

So, you're going to pay the rent, you're going to keep the car, you're going to pay the cell phone bill. Do you think you want the neighbors seeing the electric is off? I don't think so. And, as things don't improve for months and months, you're going to max out the credit cards and home equity line of credit.

In retrospect, you're going to see that it was time to stop the hemorrhaging of money long ago, but you didn't do that. You couldn't do that. Where would you move? How much would that save? Are you underwater on the mortgage, ditto the car loan?

Whether it's looking for a job equal to, or nearly equal to the one that's long gone, or running in the right circles to get that job, appearances are important. The fear is if you're seen as a loser now there's no going back. Sadly, employers appear to be embracing this thinking as evidence continues to show that older workers and long time unemployed workers are being discriminated against.

Nice Spread: The Odds on You vs. Food

Sustained under or unemployment, yours or that of your life partner, or any other significant decrease in income is certainly the most obvious way to find your tight budgethas you looking for your next meal. But it is not the only way.

Case in point: Paul, a postal worker, and his wife Amy, a part-time housecleaner and full-time mother of six.

On paper, Paul doesn't look like he belongs on a breadline. He has a solid employment history, 23 years with the United States Postal Service. His wife not only raised their children, but supplemented the family income. He has always had a government medical insurance plan for the entire family. With $52,000 of earnings in 2010, you would think he would be at least lower-middle class.

Paul's family, formerly of Queens, NY, moved to south Jersey two years ago to get out from under an oppressive and ever escalating rent that ate up nearly half of their family income of $62,000 per year, $2,500 per month when they left, utilities not included.

There were other reasons to move as well. Two of Paul's children have learning disabilities. So it made sense to also look for a good school district that could meet their educational needs. The move to a two-plus bedroom garden apartment in Mount Holly, NJ at a rent of $1,300 per month looked like a smart thing to do.

With a little luck, Paul could make a swap transfer to a post office in New Jersey without losing his seniority. But the recession and luck was not with them. Housecleaning work in New Jersey has not been plentiful for his wife. The hoped for transfer has yet to materialize. And, Paul is spending $400 a month for a 2 hour commute to Brooklyn, NY on a commuter bus, then the NYC subway and then a second bus to main post office.

Peanut Butter, No Jelly - Hope Mobile by Chaz Valenza

In New Jersey they also have a car expense. Paul tells me he is not a regular food pantry client, but the children are getting older and eating more in their teen years. At just over 130% of the poverty line, Paul's family is not poor enough to get food stamps. They are well within the 185% of poverty qualifier for food assistance.

What happened? Did Paul and his wife have too many children? They were all born by the year 2000. If their income was as little as $40,000 per year 11 years ago, they were no where near living in poverty. Just ten years later, with only a slight decrease in income and their efforts to decrease their housing expense, they are no longer getting by.

Paul's was probably one of the few families here with decent healthcare insurance. But ten years of higher living costs without enough increase in income has thrown them off balance and into a financial net loss.

Together, decreases in income and increases in living costs are the combined factors that will put more and more of us in the food lines. In a way, Paul and his family are solidly in the middle class, a middle class newly defined as not quite able to afford the necessities of life.

The imbalance is continuing even if, by academic measures, the recession is over. The engine of this financial imbalance for the middle class is another imbalance: wealth and income inequity. By all indications, the financial assault on working people will continue.

Oil is now hovering at $90 a barrel and the average national gasoline price is set to break $3.00 a gallon any moment. Not only is this more money out of the pockets of Americans, most of whom must drive to work, it threatens another round of layoffs should demand for goods and services fall as a result.

In a new report from the Food and Agriculture Organization of the United Nations, global food prices are forecast to spike over the coming decade. The report concludes that demand for food from developing countries will outstrip even an increased production supply.

But inflation over the past ten years has been tame, right? Wrong, whenever you hear a report of "core inflation," just remember that number does not include two categories that affect working people the most: food and energy. Shelter costs, that spiked with the bank fashioned housing bubble, have also thrown many middle class families into financial turmoil.

The only good news on the horizon is in the area of housing where costs are predicted to fall. But moving is expensive and foreclosures will soon return to historic high levels as soon as the banks sort out their questionable procedures for putting people out on the street.

So, what does it take to be middle class today? That depends, and it's not necessarily an income number, though many analysts throw around income from $70,000 to $100,000. Tell that to Joan. You'll need to be able to sustain those dollars year after year without much in the way of cash flow interruption.

To be middle class, paying for all the vital and frivolous "necessities" of American adult life, you do need an income, usually from a job.

If it took education to get the training or degree needed for that job, subtract the cost of student loan repayment. Then you need housing at a cost that fits that income, and transportation that provides a reliable way for you to do what you need to do to earn that income.

As you would like to have more in your life, like a spouse and/or children your income needs may change, i.e. increase substantially. But because life is generally unpredictable you also need to be able to afford at least some insurance, auto, home and medical, to smooth those costs.

To be middle class, you will also need the one thing the current economic and socio-political situation refuses to oblige: stability.

You need to know that at least most of the important things that you've build your life on will not disappear tomorrow. For example, the job that expensive education bought will not be down-sized, right-sized, off-shored, out-sourced or become obsolete and eliminated altogether.

Unfortunately, that modicum of stability no longer exists. Too many things that put your stability at risk are out of your control.

It may not seem possible, but in today's global corporate market, your job could be history tomorrow.

The probability that you will need to retrain for another job, no matter how old you are, is high and today education is very expensive and may mean becoming a debtor in a big way.

The odds energy costs will increase to unaffordable levels, for at least periods of time, is nearly a sure bet. These spikes will increase what you pay for transportation, heating, electric and also affect a broad market basket of prices on everything from food to paper.

That housing shortages and increased rents may occur is still in the cards. If housing costs do decease you will need money to move and reestablish your living situation.

That labor prices may continue to be depressed is nearly certain. Most American workers have already tightened their belts. You only need to look a Paul's story to see the fine line between making it and otherwise.

That large corporations will enter more and more business categories where small business once thrived is a foregone conclusion. Today, there are only a handful of small business opportunities that have not been taken over by corporate category killer big box and national chain operations.

Odds that some day you and your family will need food assistance because you haven't yet made the rent or paid the phone or gas bill and your next paycheck is nine days hence: better, much better, in my opinion, than ten to one.

The Hunger Game: What You Will Do to Get Food

As stated earlier, unless for some odd reason you are unable to make contact with the outside world, you will not starve to death in America. You will, however, play a game with certain rules and you will also spend time, money and effort to play the hunger game.

As with many lifelines in American society, help is available but you will need to jump through a few hoops to get it. We just can't bring ourselves to make basic needs easy to get. It's a puritanical punishment our society seems to need mete out to those in need.

Money is short. The fridge has a bottle of ketchup and bread bag with a heel in it. What do you do? That night you'll scour the house for loose change and buy some macaroni and a jar of tomato sauce. While you're eating you'll vow to do something about the situation.

That night on the internet tubes, you will look into Supplemental Nutrition Assistance Program or SNAP, formerly known as Food Stamps. SNAP is not only an acronym, it's also a contradiction; nothing about the program is quick or easy.

You will probably find you don't qualify as your income can be no more than 130% of the federal poverty threshold. If you're single that's $14,079 pre year; for a childless couple $18,941. Then, for each additional person or child in the family add $4,862. Really!?! It just doesn't add up, expenses for children can be much greater than those for adults, but that's the formula.

Let's say you think you may qualify, SNAP won't get food on the table tomorrow or the next week or even necessarily the next month. Remember Joan, the woman who moved with her family from Toledo? She applied for SNAP in September of this year. To date, her application has neither been accepted nor rejected.

Eventually, depending on how dire your need is, you will find a food pantry. If the one you find isn't open the next day, you may get referred to one that is. Maybe you'll remember those little $1, $3 and $5 coupons you occasionally purchased at the supermarket that make a donation to a food bank. In that case, you might call the food bank and they will somehow get you somewhere you can get your first supply of emergency food.

Congratulations! You've just join the ranks of 37 million Americans served by Feeding America and all the related agencies that are part of their food assistance programs and the ranks of approximately 49.1 million people who are food insecure in the U.S. today. Don't be embarrassed. If you or you spouse or significant other has a job you are among 36% of those millions that do, the working class Americans that are not able to afford food.

That's just the beginning. Now the major part of the game begins. Pantries are not open every day and lately they've also been running out of food. More importantly, you may not be able to get there when they are open. So, like any good game, you'll need a strategy and a plan.

Still got a car? Great! You can drive to the food pantry and depending on their inventory you may get enough food for a day or two. No, car? It's public transportation or spring for a car service. Call before you leave to check if food is available. Also ask when they open and get there early to be sure you get your share.

Big events, like FBSJ's Hope Mobile are a godsend as you'll pick up 5 days of food in one stop. But chances like this don't come every day, or every week, just once a month. Deborah, Joan and Paul all drove 20 miles, about 30 minutes, each way to get to the Browns Mills Hope Mobile. They were early birds and waited just three hours to receive about $50 worth of food.

So, to win the Hunger Game, you will gather information on where the pantries are and when they are open. You will talk to a counselor at your child's school and enroll your children in whatever programs may be available. You will get pre-qualified with the local food bank. If you're an older citizen or physically disabled you may be able to get your food delivered, if possible, or a senior center or other nearby agency to relieve you of the need to stand in line.

The Hunger Game comes with an excellent support feature. You are not alone. Organizations like the FBSJ and other Feeding America organizations are playing the game and they're on your side. Besides procuring surplus food and donations to buy food for you, they are also working every day to figure out who is hungry, where they are and how to get food to them as easily as possible.

For example, demand for food and the need to get more food to more people spawned the Hope Mobile.

Preston Beckley the Hope Mobile Program Manager at FBSJ is obviously proud of the good work and success of the Browns Mills event. Not only have 600 pre-qualified families received food, another 28 families were qualified at this event. That's well over 1,300 people getting food they need in one quick shot.

Next year, FBSJ's Beckley plans to expand the program from 9 sites to 16 sites. "There's a real need and it's increasing. With this program we are able to supplement pantries that can't keep up with the increased need. We can also bring the truck to places that have no pantry."

That's the point of many of the FBSJ's programs: find ways to get the food to the needy. For seniors it's home delivery. For school children it was a weekend supply of food for the child, but that soon turned into a program of school based pantries were parents could obtain a weekend supply of food for the entire family. FBSJ supplies food to over 200 agencies, homeless shelters, soup kitchens, special services, church and faith based organizations in their four New Jersey county service area.

Nobody wants to see an important donated resource, like food or food stamps, turned into a nefarious business enterprise. But why do people have to prove they are in need, a reasonable requirement, but also spend excessive amounts of time and money to get help?

The Hunger Game shouldn't just be about getting food. It's getting food, keeping a job, working toward a self-sustaining future, getting the necessary education and to the point where you can afford all the necessities of life on your own.

Eliminating the Hunger Game

If hunger is the problem, food is the answer and the Food bank of South Jersey is just one of over 200 such non-profit organizations that serve all 50 states, the District of Columbia and Puerto Rico, distributing more than 2.5 billion pounds of food and grocery products annually under the national organization Feeding America.

Traore's organization is the hub of an intricate, charitable food distribution system designed to provide sustenance to anyone hungry in four south Jersey counties when money for food is scarce.

Hers is part of a shadow system to the gigantic profit driven arrangement that has made relatively inexpensive food easily available everywhere. They do a great job at minimal administrative cost and deserve your support.

Shouldn't there be a better way? After all, there are already large caches of food nearly everywhere in places called supermarkets, wholesale clubs and big box department stores? I put that question to Traore and she agreed.

"I'm sure our services are not accessible to everyone who needs emergency food in our area and that's a function of logistics," confessed Traore. So, what can be done?

"My wild idea is that certain food, what I call ground provisions," explains Traore, "should be free and available at all major food outlets." She defines "ground food" as basic, no frills food stuffs. A protein, maybe chicken, maybe just dark meat chicken, though I believe people deserve a whole chicken, a meal and soup after. Flour or basic bread. A green vegetable and a fruit, canned if not otherwise. Milk.

Under Traore's proposal, everyone would have a ground food provision that could be electronically tracked. You would "purchase" up to your provision limit monthly, or not use it at all. That's it. Have a food emergency? Tap your ground food provision. Need to supplement your food supply? Tap your ground food provision. Feel entitled to food Just because you are human, even if you're a millionaire? Tap you ground food provision. Nobody goes hunger. Nobody is put out. Nobody is wasting other valuable resources, like time and fuel, in the pursuit of a self-sustainable life here in America.

You know it's so crazy Traore's scheme just might work and be a boon to the economy.

Please donate to your local Feeding America organization: CLICK HERE FOR MORE INFORMATION

Chaz Valenza is writer and small business owner in New Jersey. He earned his MBA from New York University's Stern School of Business. His current feature film project is "Single Point Failure" an insider's account of how the Reagan Administration caused the greatest tragedy of the space age based on Richard C. Cook's book "Challenger Revealed." He is a former Director of Public Information for Planned Parenthood of NYC. His website is: WordsWillNever.com

« Case Shiller CHART: Home Prices Have AT LEAST 20% More To The Downside »

Read Peter Schiff's WSJ op-ed from last week...

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Reprinted with permission.

Source - WSJ

Home prices are still too high

They would have to decline another 20% just to get back to the historical trend line.

Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.

Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.

Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.

By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that mandated loans to marginal borrowers, and set off a national mania for real-estate wealth and a torrent of temporarily easy credit.

If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the nearby chart), a sobering picture emerges. In his book "Irrational Exuberance," Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and '60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late '90s.

In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.

How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.

Weitz - this is the story no one talks about. The measures taken to 'prop up' the market were unsustainable. Now, the tax credit has run it's course, and interest rates are creeping back up from historic lows. I still maintain that a second leg down in prices is imminent. The extent of the drop is hard to predict, but I would be very surprised if it did not exceed the 5% drop that many 'experts' are predicting.

Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.

With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.

Weitz - if Mr. Schiff is correct, our "recovery" will most certainly be short lived and things will likely get worse before they get better...a scary proposition indeed.

From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.

In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.

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Gary Shilling: Housing prices may still have 20% to fall

Gary Shillings's overview of the housing market -- which is based on an impressive 39 charts -- is about the clearest and most comprehensive I've seen. It's also the grimmest. "The bottom line," he says, is that "house prices probably have another 20% to fall." And that may be a "conservative estimate," as asset prices have a tendency to get too high when they're booming and too low when they're busting.

If Shilling is right, this'll be a big drag on the economy in 2011.

http://voices.washingtonpost.com/ezra-klein/2010/12/gary_shilling_housing_prices_m.html

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Never Forget The Fed Caused The Economic Downturn

January 1 2011: The Fed that destroys and The Fed that claims to repair, Milken still rich, wake up to revolution in 2011, few jobs created last year, billions in costs to taxpayers, tax breaks for the mega rich, flat Christmas, TSA gets in your pants, understanding the looming crisis.

Chairman of the Federal Reserve, Ben Bernanke, would have us believe that if it were not for QE1 unemployment would have been considerably higher. Since QE2 began in June, U6 has only improved by ¼%. Perhaps better numbers are on the way, but that has not been an auspicious start. If we remember correctly almost all the funds in QE1 and now in QE2 have been lent to financial firms in the US and Europe, transnational conglomerates and governments and central banks. Most of those funds have been held on balance sheets to fain solvency. Very little has reached the public or to reduce unemployment. All we have to show for 2-1/2 years is a financial sector hanging on by a thread and more massive debt in the trillions.

What should be permanently stamped in your minds is that the financial carnage we have experienced is the fault of the Fed and the financial sector and that same Fed bailed out the crooks and left the public high and dry with 22-3/8% unemployment and a shattered residential and commercial real estate sector that is still two years from the bottom and perhaps 30 years away from appreciation.

It is despicable for Mr. Bernanke to have insinuated he helped avert higher unemployed when it was the policy of the owners of the Fed and Wall Street and banking, which was the cause of the worst depression since the “Great Depression” of the 1930s. It should be noted that the end of the damage is nowhere in sight. Throwing trillions of dollars at a problem doesn’t solve it, and in this case will only make it get worse. In addition, trillions of dollars in wealth were destroyed and as a reward for their greed the Fed, which allowed the public to pay for the Ponzi scheme, protected the financial sector.

As far as we know the Fed has already purchased with taxpayer funds about $1.5 trillion in MBS, known as toxic waste, which was created by the financial sector. The question is how much more has been purchased by the Fed and are they going to purchase more to bail out financial institutions and others? One of the things that is never mentioned is restitution for all the money these crooks stole. In a civil action concerning $5 billion in bogus MBS and other derivative products, Goldman Sachs, neither admitted or denied, and was found guilty of civil fraud, and paid a fine of $500 million. They got to keep the other $4.5 billion - another sweetheart deal to permanently protect them of criminal charges. Michael Milkin stole $3 billion, gave $1 billion back and kept $2 billion after doing 1-1/2 years in a prison country club. Then there was Warren Buffet’s, Berkshire Hathaway, which defrauded the government of $300 million. His firm paid a $100 million fine and kept the rest. Milkin was the exception, no one else since has been incarcerated. As you can see, it pays to be an elitist crook in America.

Now banking and Wall Street gets interest-free money, but the public does not. What is wrong with the public? Don’t they realize what is going on? What has happened to our representatives and senators and our courts? We’ll tell you what has happened; the NYC-Washington crime syndicate is paying almost all of them off. Americans have lost control of their government and if the slight improvements in the past elections are indicators, the situation is going to get worse.

As a result the Fed is monetizing debt in order to bail out government, banking and Wall Street, and to offset the persistent undertow of deflationary depression. All we can say is what is wrong with the American people? Can’t they see what is going on? If they do not wake up soon we could have a revolution on our hands.

America is facing almost zero interest rates. If those rates are raised the bottom will fall out of the economy and the financial structure will collapse. Any talk about higher rates is just that – talk. The only way out now is for the elitists to have another war as they did in 1941. How much longer can corporations keep two sets of books? What you have seen just didn’t happen, it was planned that way to force Americans and Europeans to accept world government.

Due to the current power of the Fed and other interconnected central banks, all other factors take a back seat to credit creation and their creation of money supply. Under mercantilist Keynesianism, which we prefer to call an economic plan for corporatist fascism, the greater the distortions the deeper the depression. This is the method of perpetual political and social control, which in one way or another has been successful over the centuries. These are the same people who have deliberately created economic cycles, which are extremely profitable, and when things are not going as planned they simply have another war. None of what you have seen has happened by chance, it has been planned that way.

As George Wallace said, “there isn’t a dime’s worth of difference in either party.” He was right. What he should have said was both parties are almost totally owned by Wall Street, banking, insurance, big Pharma and transnational conglomerates. The criminal deals that have and continue to exist in Washington are far worse than anything the Mafia ever did. Our government is operated just like any criminal syndicate.

What is becoming evident to us is that all is not going well for the Titans of Wall Street. Investors have been fleeing the stock and bond markets in hordes, although their owned rubber stamp is still in place. In fact, some of the higher placed elitist players are questioning whether they can again pull off a deflationary depression and war and still survive? As you can see they still have more than 50% of the electorate buffaloed, but as any student of history knows revolutions are led by 5% to 15% of the citizens. The rest are split along the sidelines.

Oddly enough what has suited both Democrats and Republicans has been a big loser for Americans, because the elitists almost in total control both parties. As a result, major Wall Street firms, which have for years owned the SEC and the CFTC now have virtually no regulatory oversight. Essentially Wall Street has a license to steal and they take full advantage of it.

The big question is can Ron Paul disarm or perhaps even eliminate the privately owned Fed? The answer to that question we should have over the next two years. Will it take a constitutional amendment or a monetary collapse? Again we will have to wait and see. It should be noted that after China and Japan the Fed now holds third place among those holding Treasury and Agency bonds. More than 60% of Americans want to dump the Fed and Wall Street, which owns the Fed, owns Congress, thus it will have to change by other means.

The greed of transnational conglomerates just never ends. Readers you are soon going to witness another great scam pulled off by America’s elitist corporations to further enrich themselves at your expense.

In a secret meeting on December 15th, business executives met in the White House requesting that the President declare a tax holiday, so that they could repatriate as much as $1.9 trillion from offshore subsidiaries in tax havens such as the Cayman Islands. Instead of going through Congress as they had to do six years ago, these crooks want an executive order. We were wondering how long it would take them to be back at the trough.

To make it simpler, participants recommended a reprise of a 2004 tax holiday that allowed these multinational conglomerates to return profits to the US at a tax rate of 5-1/4%, not the regular 35%. That piece of largess allowed these crooks to move $362 billion virtually tax free back into the US by declaring they will use the funds to create jobs for Americans. Needless to say, very few jobs were created. That money laundering operation and this new proposed operation would move part of $1.9 trillion into the US stock market, as was done before, to buy the shares of these US blue chips, which in turn buoys the stock market. The shares would rise in value as they did six years ago, and the executives would cash in their stock options making themselves billions of dollars. This is what this was all about last time and it is what it is all about this time. If under normal circumstances these companies paid the 35% tax they would owe the American people $665 billion. At a 5-1/4% tax rate that figure would be just under $100 billion. Is it any wonder that our government is broke?

In addition to this new caper in banditry these multinationals are already finding legal ways to avoid taxes. We won’t go into the details here but believe us their actions of the last five years have cost taxpayers billions of dollars. These US companies are very sophisticated and are routinely repatriating hundreds of billions of dollars in foreign earnings.

This is one of the main reasons tariff walls were torn down and why today we have free trade, globalization, offshoring and outsourcing. This not only enabled these crooks to pile up profits in tax havens, but it has hastened the demise of the American economy, so that Americans will be forced to accept world government, something these fascist monopolists want to take place in order to impose a new world order. This is really what this is all about. This is much more than meets the eye if you know what to look for.

Needless to say, there is a very simple solution to this financial treachery. All we have to do is re-impose tariffs of 25% to 40% and then there would be no reason to hold earnings offshore. This exercise over the past ten years has cost America 42,000 lost businesses, which were shipped overseas as well as 8.5 million high paying jobs. You ask yourself how could this happen? The answer is your House and Senate are bought and paid for and whatever these elitists want they get. If tariffs are not soon implemented there will be no way back for the US and European economies.

The answer by these transnational conglomerates is America is uncompetitive due to its tax structure. They convinced Congress of this some time ago and that is why they are allowed to keep profits offshore. The problem is when they bring those profits back to the US it is at 5-1/4% and these profits end up in the stock market for reasons we’ve explained. Thus, they get enormous tax benefits but in the process they destroy the underpinnings of society. In 1967, we wrote an article in a leading journal stating that this was where the elitists were headed and the article has proven prophetic. The American Mercury is no longer actively with us but its legacy is. Such tax breaks for the mega rich holds no water. These are the same corporations that in part are already sitting on another $1.9 trillion in cash in the US. This has nothing to do with investment or job creation and everything to do with corporate greed. This infusion of offshore funds onto the active US balance sheet has a tremendous levering effect as well on earnings.

We have all the dirty details but we’ll spare you homework. It is the way we say it is. Let’s see if they try to end run Congress on this issue and perhaps in the interim we can find out how much the President is being paid for ramming through such a grand venture. Why do you think such meetings are secret?

If you are wondering why your country is broke, one of the reasons is the antics of these elitists, when great profits are never enough.

First it was Argentina two years ago, then Hungary and France and now it is Poland. Argentina took over pensions and the others are using pension funds. Poland wants to limit transfers to private pension accounts to plug a widening budget deficit.

Poland faces an excessive debt, in part a result of pension contributions. Legislators want to limit transfers not temporarily but permanently. That being the case this move is not to solve a short-term problem, but a new policy to cut off retirees from their benefits and to spend the funds elsewhere. Politicians being what they are won’t reduce the deficit appreciably. The idea is to cut pensions from 7.3% of salaries to 2%. Just to give you an idea as to how efficiently government has been run since 2007, the deficit went from 1.9% to 7.9% of GDP. The pension flow demand is 40% of GDP. As you can see worldwide everything is on the table and America will be no exception.

Even though Ben Bernanke may end up being recognized as a disaster for the American economy, he is particularly popular on Wall Street and in banking. He supplies the liquidity for financial institutions to increase profits hopefully exponentially. Simultaneously, via the “President’s Working Group on Financial markets,” he directs the manipulation of markets. The results are known as the Bernanke put. There simply cannot be market and bond declines except for gold and silver. The latter have been restrained, but only on a temporary basis, because that is what they now are only capable of.

As we wrote this past January, the effect of stimulus would end in April and in May some sort of effort had to be put forward to help a sagging economy. That came in the form of aid from the Fed in the bond market and via swaps. This proved an important event because we could then see that the Fed had to get more accommodative and allowed us to predict QE2. Thus, there is the Bernanke put. You can be sure he guaranteed Wall Street, before he was ever appointed, that he would do exactly as they instructed. No one has ever had that job that didn’t do so, and those orders come from JPMorgan Chase, which is the ringleader and always has been. Why do you think we have quantitative easing and zero interest rates? Those are Morgan’s orders. From Ben’s utterances we believe there will be a QE3 and more as we move toward hyperinflation and we predicted that last May. We also see indefinite low interest rates. He and they are not really concerned about the dollar. They have influenced many other nations to do the same thing, so its bad currency versus bad currencies. This way they can lay off their inflation on everyone else. That is why they have suppressed gold and silver because versus all currencies they are the only alternative. In that process they will make those who understand what the Fed is up to, essentially the Fed’s enemies, wealthy, an unavoidable fallout the elitists will have to live with to retain control of the system.

Mr. Bernanke arrogantly tells us he saved the system. What he should have said is that I saved the finance houses and moneylenders at your expense, it is the way we have done it for the last 1,000 years. If you do not understand monetary, financial, fiscal, political and social history, you cannot get it. You will never be able to get to the bottom of what these people are up too. This is how we are able to make the calls we do. You take this history and you get inside of the minds of these people and you then figure out what they will probably do next. That is why we have recommended gold and silver related assets for the past ten years and this game is far from over. The US will devalue and default along with everyone else and then re-back a new dollar with gold at a considerably higher price. Gold and silver are in the early stages of phase 2 of 3, 4 or 5 stages in the biggest bull market in history. If you don’t play you cannot be a winner.

Once again the usual suspects trumpeted a decline in Initial Jobless Claims (388k from 422k) while they ignored a 57,000 jump in Continuing Claims (4.128m from 4.071m) and the NSA increase of 24,879 - Initial Jobless Claims, to 521,834.

The reality is 521,834 people filed Initial Jobless Claims and 4,095,135 filed Continuing Claims.

Both Initial and Continuing Claims were revised higher from the previous week…Larger than expected declines in Initial Jobless Claims occur during holiday weeks yet most people don’t ‘get it’.

The mathematics of a large and prolonged drop in employed workers dictates that Initial Claims should be falling even with a rotten employment picture. Plus millions of people have exhausted claims.

Once again the Chicago PMI is better than expected, showing its highest reading since July 1988!!! The employment component is at a five year high! This alone is enough to invalidate this report because manufacturing employment has fallen for four consecutive months in the employment report.

We have warned for years that the Chicago PMI consistently shows more strength than ISM or other manufacturing surveys. And over the past few years, PMIs have been showing unwarranted economic strength due to ‘survivor bias’ and robust ‘expectations’.

“Inventories” soared to 60.1 from 48.4. We heard no mention of this from the usual suspects.

Discover [Card]: Small Business Economic Confidence Falls after 3-month Rise - The monthly index dropped to 81.6 in December, down 5.6 points from November. The index remains 4.6 points higher than one year ago.

Twenty-five percent of small business owners said the economy is getting better this month, down from 33 percent in November; 51 percent said it is getting worse, up from 46 percent; and 22 percent said the economy is staying the same, up from 17 percent the prior month…"Like the rest of us, they're seeing some positive signs, but they aren't ready to declare victory, especially not with 62 percent of them still rating the economy as poor."

http://www.discovercard.com/business/watch/2010/december.htm

MasterCard Advisors said retail sales soared 5.5 percent this holiday season, excluding car sales. Clueless journalists gushed that "the consumer is back."

Even one careful analyst on the economy cheered in his newsletter that this was the largest increase in five years amid an "orgy of consumerism."

Seriously, does anyone really think consumers went crazy this Christmas? With unemployment at 9.8 percent? It really doesn't make sense. So I asked MasterCard Advisors whether its numbers excluded gasoline sales, which are only increasing because of an unhealthy spike in prices.

I received this clarification from a spokesman for MasterCard Advisors: "The 5.5 percent increase during the period Nov. 5 through Dec. 24 is a total retail . . . number, so it'll include food, restaurants and gasoline. SpendingPulse measures total retail the same way that the Department of Commerce does."

Look closer at the survey of that 0.8 percent sales gain in November and it's even worse. When I asked, the Census Bureau said that a 4-percent jump in the price of gasoline had accounted for 0.3 percentage points.

So we don't know how much of Christmas sales were really wasted on the inflated prices of products that would have been purchased anyway -- gasoline but also food and especially clothing, which has been jumping in price along with the price of cotton…

The Energy Department says gas prices went from a nationwide average of $2.91 a gallon in mid- November to $3.05 a gallon around Christmas time. That's a 4.8-percent increase and indicates that a lot of this holiday's spending wasn't for the purpose of joyful gift- giving but rather went toward filling Luke's pickup. http://www.nypost.com/p/news/business/gasoline_fuels_myth_that_spending_sGOk1qddp5JWmQqVqXGnHK

Selfish Sanitation Department bosses from the snow-slammed outer boroughs ordered their drivers to snarl the blizzard cleanup to protest budget cuts -- a disastrous move that turned streets into a minefield for emergency-services vehicles, The Post has learned.

http://www.nypost.com/p/news/local/sanit_filthy_snow_slow_mo_qH57MZwC53QKOJlekSSDJK

The snowstorm that paralyzed New York this week struck just before 100 of the supervisors coordinating the city's plowing fleet were to be demoted to lower-paying jobs in a budget-cutting move.

The timing of the demotions, scheduled for Jan. 1, ignited speculation that disgruntled sanitation department foremen had purposely sabotaged snow removal.

http://online.wsj.com/article/AP4e3909c8387e4308909bd6b8736f4632.html

The trustee attempting to recoup money for the companies of convicted Ponzi scheme figure Tom Petters has sued J.P. Morgan Chase & Co., seeking more than $300 million in multiple lawsuits.

The money involved includes millions the bank took from Mr. Petters's accounts after his downfall and profits and fees it got from Mr. Petters's purchase of iconic camera company Polaroid Corp., which had been majority owned by J.P. Morgan's private-equity arm at the time.

In the latest lawsuit, filed Wednesday in federal court in Minnesota, Douglas A. Kelley, the court-appointed receiver for Mr. Petters's companies, alleged that the company had defrauded them.

[The Ghost of Christmas Future] A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary.

The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said…

http://www.nytimes.com/2010/12/28/us/28city.html?_r=1

Federal prosecutors in Manhattan have filed new charges as part of a national probe of insider trading, accusing a California consultant for an expert-networking firm with selling inside information to two unidentified hedge funds.

Winifred Jiau allegedly sold data on Nvidia Corp. and Marvell Technology Group, makers of computer components, through the networking firm. The hedge funds paid her $200,000 through the firm, prosecutors alleged.

Jiau, 43, is charged with one count each of conspiracy to commit securities fraud and securities fraud. The first count carries a maximum sentence of 20 years in prison. She was ordered held in custody by US Magistrate Judge Nandor Vadas in San Francisco, who set a hearing for Jan. 12 on whether to transfer her to New York. She did not enter a plea.

Her arrest follows charges earlier this month against three technology company workers who allegedly sold secrets about Apple Inc., Dell Inc., and Advanced Micro Devices Inc. The men, who worked at AMD, Flextronics International Ltd., and Taiwan Semiconductor Manufacturing Co., were arrested on securities fraud and conspiracy charges.

Also arrested at the time was James Fleishman, a sales manager at Primary Global Research LLC, the expert-networking firm where the three worked as consultants. If convicted, all four face as long as 20 years in prison.

Expert-networking companies match investors with specialists who provide insight into specific markets.

The criminal complaint unsealed earlier this month against the men described the links between Primary Global, the technology experts it employed, and unidentified hedge funds willing to pay for inside information.

Marvell, which makes chips for the BlackBerry phone, declined to comment. Nvidia said Jiau was a contractor who left the company about a year ago.

Officials from the U.S. Department of Homeland Security (DHS) seem to now be going on the offensive against those who oppose its new invasive and unconstitutional airport security protocols being carried out by agents of the U.S. Transportation Security Administration (TSA). According to George Donnelly, owner of WeWontFly.com, government workers appear to be posting hateful messages on his anti-TSA blog under the guise of anonymity.
One such comment, which has since been deleted, said, "F**k you, f**k all you c**ksuckers, you wont change anything." Another stated, "Ride the bus, TSA is here to stay there [sic] doing a great job keeping americia [sic] safe."

Donnelly says that upon tracing the origin of the comments, he discovered that they came from the servers of dhs.gov, the official website of the U.S. Department of Homeland Security.

A series of independent studies and reports at various levels are jolting Americans out of their sense of lull over a looming crisis that has been in the offing for quite some time now, but was largely ignored. The growing student debt in colleges and universities across the nation seems to be headed in the direction of the massive foreclosure crisis, going by recent data released by the U.S. Department of Education.
Graduating students listen to U.S. President Barack Obama speak at the University of Michigan commencement ceremony in Ann Arbor, Michigan May 1, 2010. The government is increasing its Pell Grant program and making loans directly.

The report shows that the national cohort default rate on federal student loans is 7 percent for borrowers who entered repayment in 2008, which is comparable with the default rate for credit cards (8.8 percent) and home mortgages (9.1 percent). In fact, earlier this year it came to light that the total amount outstanding on student loans was $875 billion, which actually exceeded the amount that Americans owe on their credit cards.

Another report from the Project on Student Debt - an initiative of the non-profit Institute for College Access and Success - indicates that college seniors graduating in 2009 had an average of $24000 in student loan debt, marking a 6 percent rise from the previous year. These figures, however, are based only on data reported voluntarily by public and private non-profit four-year colleges and the actual average is likely to be significantly higher when one takes into account many for-profit institutions, where student loans are typically higher.

What is more alarming is that the default rate in for-profit institutions is also the highest and students in these institutions are also known to enter more risky, non-federal loan agreements. 43 percent of all student loan defaulters attended for-profit schools even though they represent only 10 percent of all university students.

For most American students, a four-year college degree is affordable only when they consider loans. But even as college costs in America skyrocketed, few students or their families seemed to be bothered by it because of the ease of credit, planning to address the issue when the time to foot the bill arrived. Many of the for-profit schools are also accused of deceptively luring students into signing up for programs and loans, even when they knew that their earning potential post graduation was not likely to match the repayment requirements.

The situation has been made worse by the recession that dried up jobs for graduates. The Project on Student Debt report puts the unemployment rate for recent college graduates at 8.7 percent in 2009 (up from 5.8 percent in 2008), the highest annual rate on record for college students between the ages of 20 to 24.

Lack of employment opportunities, inability to refinance and the lack of options to wipe out the debt in bankruptcy means that students are left with a crushing lifelong burden affecting their credit histories and long term spending capabilities; this, if sustained, could have a significant depressive effect on the economy as a whole.

Small steps have been taken to stem the problem at the root. For example, speaking to CNBC in an interview, Secretary of Education Arne Duncan pointed out that in the first steps towards reform of the educational loan system, the government has begun lending directly to students, rather than subsidizing and guaranteeing loans from private lenders. This has reportedly resulted in savings that are being funneled into an additional $40 billion worth of Pell Grants, the need-based Federal assistance granted to low-income undergraduate and certain post baccalaureate students. There is also a proposed government crackdown on for-profit colleges, which would tie the institutions' aid to the eventual employment of their graduates and rates of default among them.

However, for a vast majority of college students and their families, already saddled with growing interest burdens and a bleak employment market, these steps hold no promise.

Claims for jobless benefits dropped last week to the lowest level in two years, showing the U.S. labor market is taking a turn for the better as the economy accelerates into 2011.

Applications for unemployment assistance decreased by 34,000 to 388,000 in the week ended Dec. 25, breaking the 400,000 level for the first time since July 2008, according to Labor Department figures today in Washington. Other data showed businesses expanded this month at the fastest pace in two decades and pending home sales climbed in November for the fourth time in five months.

Mortgage rates for U.S. loans climbed to a seven-month high, increasing borrowing costs for homebuyers in a sluggish real estate market.

The average rate for a 30-year fixed loan rose to 4.86 percent in the week ended today from 4.81 percent, Freddie Mac said in a statement. The average 15-year rate advanced to 4.2 percent from 4.17 percent, the mortgage-finance company said.

A state authority may decide today whether to assert control over Nassau County’s finances, moving beyond an oversight role because elected officials haven’t closed next year’s $343 million budget gap.

The Nassau County Interim Finance Authority, created in 2000 to sell bonds and oversee operations while the county worked out earlier deficits, meets today at 10 a.m. in Uniondale. Nassau, which abuts New York City’s eastern edge on Long Island, has the highest median household income of any county in the state at $92,221, according to census data.

The county’s budget doesn’t meet “the standards of prudence necessary for us to project budget balance,” according to a Sept. 28 authority report. It said the county relied on $61 million of concessions by labor unions that may not happen and on bond sales to pay property-tax refunds, an operating expense.

Next year’s budget avoids raising property taxes, already the second highest among U.S. counties, and relies on cost cutting, fee increases and borrowing. The county, with a November jobless rate of 7 percent compared with 9.8 percent nationwide, still must cope with revenue growing more slowly than costs as do local governments across the U.S.

County officials say the budget is plausibly balanced, and say they would fight a declaration of a control period by the authority. If it takes over, the seven-member board’s approval would be required for new contracts and borrowing, according to the law creating the authority. It also would be empowered to freeze wages and issue binding orders to elected officials.

The Institute for Supply Management-Chicago Inc. said today its business barometer rose to 68.6 this month, exceeding the most optimistic forecast of economists surveyed by Bloomberg News and the highest level since July 1988. Figures greater than 50 signal expansion.

Gains in business investment on new equipment and growing exports to emerging economies will keep factories churning out goods in the coming year, contributing to the recovery. Reports showing consumer spending is also picking up mean retailers will need to restock shelves, giving manufacturing a further lift.

“The economy is gathering momentum,” John Silvia, chief economist at Wells Fargo Securities Inc. in Charlotte, North Carolina, said in an interview on Bloomberg Television. “New orders will follow the better business confidence that is showing up. Once the American consumer starts kicking in, we will see stronger orders data.”

Former Obama administration auto industry czar Steven Rattner has agreed to pay $10 million to resolve two lawsuits by New York's attorney general related to alleged kickbacks involving the state's pension fund.

Rattner also agreed to be banned from appearing in any capacity before any public pension fund in New York for five years.

Attorney General Andrew Cuomo announced the settlement, which ends two lawsuits by his office. These had sought to recover at least $26 million from Rattner and permanently bar him from the securities industry in New York.

Rattner is the last major figure to resolve allegations by Cuomo in the attorney general's long-running investigation into alleged wrongdoing in the roughly $130 billion New York State Common Retirement Fund.

Cuomo said he has won eight guilty pleas in the probe, including from former state comptroller Alan Hevesi, and more than $170 million of settlement payments.

The Rattner settlement "resolves the last major action of our multi-year investigation," Cuomo said in a statement. "We have been able to help restore and protect the integrity of the state pension fund."

In a statement released by Cuomo, Rattner said he was pleased to settle, and that the accord "allows me to put this matter behind me. I apologize if during the course of this process there is anything I did that may have made reaching this agreement more difficult."

Cuomo and the U.S. Securities and Exchange Commission had accused Rattner of entering quid pro quo arrangements with the pension fund to win $150 million of business in 2005 and 2006 for Quadrangle Group, the private equity firm he co-founded and worked for at the time. He no longer works there.

Rattner entered a civil settlement last month with the SEC, agreeing to pay $6.2 million and accept a two-year ban from working with an investment adviser or broker-dealer.

Quadrangle, Rattner and Rattner's lawyer were not immediately available for comment on Thursday.

Cuomo will become New York's governor on Jan. 1.

The US 7-year auction went well because ‘indirect bidders’ (central banks) bought 64.2% of the notes. Dealers had to warehouse only 31.2%; so a spirited bond market rally appeared after the auction.

If central banks have to buy almost 2/3 of a US auction, the bond market has a huge problem. But dealers, traders and PMs desperately needed any excuse or sophistry to mark up bonds for yearend.

Chase hiking fees on more services [more inflation that won’t show in CPI]

http://chicagobreakingbusiness.com/2010/12/chase-charging-penalty-fees-for-more-services.html

Wall Street’s best investment continues to be the bribery of Congress via direct payments and lobbyists.

Wall Street’s biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.

The U.S. government, promising to make the system safer, buckled under many of the financial industry’s protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives. Higher capital and liquidity requirements agreed to by regulators worldwide have been delayed for years to aid economic recovery.

“We continue to listen to the same people whose errors in judgment were central to the problem,” said John Reed, 71, a former co-chief executive officer of Citigroup Inc., who estimated only 25 percent of needed changes have been enacted. “I’m astounded because we basically dropped the world’s biggest economy because of an error in bank management.”

[What FINRA is trying to accomplish here is to impress their regulations on the Canadian stock markets. What they are talking about here is Black box trading, called flash trading, or high frequency trading which is in reality front-running, which is illegal in the US, but FINRA and the SEC refuse to bring it to a halt. The Canadians are doing it and beating up on the big US brokerage firms, such as Goldman, Morgan, Citi, etc. thus, what FINRA is trying to do is to eliminate competition against major US brokerage firms, who operate illegally. You might call this selective prosecution, because thousands of complaints are entered against naked shorters in the US and absolutely nothing is done about it and the SEC staff is arrogant and abusive to complaints that own companies. This is a complaint cloaked in an attempt to visitate FINRA rules on Canadian firms. We might add that the Canadian exchanges and regulatory bodies vigorously pursue naked short trading, which is banned in Canada as it is in the US.] Pure Trading was once again Canada's third most active alternative trading system during the 4.5-day week ended Dec. 24, 2010. The most active ATS was Alpha Trading Systems with an average of 172 million shares a day or 17.2 of the total market. In second place was Chi-X with 45.1 million shares or 5 per cent of the market. Pure traded 21.2 million shares a day or 2.3 per cent. In last place was Omega ATS with 8.8 million shares or 0.9 per cent. Combined, the ATSs accounted for 25.3 per cent of the market, while the Toronto Stock Exchange, TSX Venture Exchange and the Canadian National Stock Exchange got the remainder.

Taking a look at only TSX listings, Alpha captured 22.1 per cent, up from 19.2 per cent last week; Chi-X had 5.7 per cent and Pure took 3.8 per cent. The TSX captured only 65.6 per cent of market volume, down from 66.9 per cent a week earlier.

Only the TMX Group had something to brage about this week. Its Montreal Exchange set a volume record. On Dec. 20, the MX had a year-to-date volume of 43.4 million contracts, up from its previous record of 42.7 million contracts in 2007.

The United States Financial Regulatory Authority chief executive officer, Richard Ketchum has presented his year-end report. He notes that FINRA's "first truly effective case addressing high frequency trading" occurred this September. The regulator fined New York-based Trillium Brokerage Services LLC $2.3-million, and suspended 11 of its employees for using a HFT strategy to gain an advantage. FINRA says Trillium repeatedly entered orders, which created a false appearance of buy- or sell-side pressure, prompting other traders to buy and sell before Trillium quickly cancelled its own orders. Finra says nine Trillium traders were able to trade at advantageous prices on 46,000 occasions. The brokerage did not admit or deny the charges but did consent to the entry of the findings. Over 2010, FINRA says it levied $41.1-million in fines. In the New Year, Mr. Ketchum says FINRA will watch for price maneuvering by brokerages.