Tuesday, July 15, 2008

The Current Oil Shock

The Current Oil Shock

No Relief in Sight

By Dilip Hiro

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When will it end, this crushing rise in the price of gasoline, now averaging $4.10 a gallon at the pump? The question is uppermost in the minds of American motorists as they plan vacations or simply review their daily journeys. The short answer is simple as well: "Not soon."

As yet there is no sign of a reversal in oil's upward price thrust, which has more than doubled in a year, cresting recently above $146 a barrel. The current oil shock, the fourth of its kind in the past three-and-a-half decades, and the deadliest so far, shows every sign of continuing for a long, long stretch.

The previous oil shocks -- in 1973-74, 1980, and 1990-91 -- stemmed from specific interruptions of energy supplies from the Middle East due, respectively, to an Arab-Israeli war, the Iranian revolution, and Iraq's invasion of Kuwait. Once peace was restored, a post-revolutionary order established, or the invader expelled, vital Middle Eastern energy supplies returned to normal. The fourth oil shock, however, belongs in a different category altogether.

Nothing Like It Before

Unlike in the past, the present price spurt has been caused mainly by global demand for energy outstripping available supply. Alarmingly, there is no short-term prospect that supply will match demand. For a commodity like petroleum that underwrites and permeates every aspect of modern life -- from fuel to fertilizers, paints to plastics, resins to rubber -- "balance" requires a 5% safety factor on the supply side.

At present, however, spare capacity in the oil industry is less than 2%, down from more than 6% in 2002. As a result, the price of oil responds instantly to negative news of any sort: a threat against Iran by an Israeli cabinet minister, a fire on a Norwegian offshore drilling rig, or an attack on an oil facility by armed rebels in Nigeria.

Behind the present price surge, other factors are also at work. Take the sub-prime mortgage crisis in the U.S. It flared almost a year ago, drastically lowering the market value of the stocks of banks and allied companies. The concomitant downturn in other equities led investment fund managers and speculators to direct their cash into more productive markets, especially commodities such as gold and oil, driving up their prices. The continued weakening of the U.S. dollar -- the denomination used in oil trading -- has also encouraged investment in commodities as a hedge against this depreciating currency.

The earlier oil shocks led non-OPEC (Organization of the Petroleum Exporting Countries) nations to accelerate oil exploration and extraction to increase supplies. Their collective reserves, however, represent but a third of OPEC's 75% of the global total. By the turn of the century, these countries had pumped so much crude oil that their collective output went into an irreversible decline.

A mere glance at the oil production table of the authoritative BP Statistical Review of World Energy -- published annually -- shows declines in such non-OPEC countries as Britain, Brunei, Denmark, Mexico, Norway, Oman, Trinidad, and Yemen. Over the past decade, oil output in the U.S. has declined from 8.27 million barrels per day (bpd) to 6.88 million bpd.

The exploitation of the much-vaunted tar sands of Canada -- expected to cover the global shortfall -- only helped to raise that country's output from 3.04 million bpd in 2005 to 3.31 million bpd in 2007, a mere 10% in two years.

In the 1990s, overflowing supplies and cheap oil had led to an overall decline in oil exploration as well as under-investment in refineries. These two factors constitute a major hurdle to hiking the supply of petroleum products in the near future.

In addition, new hydrocarbon fields are increasingly found in deep-water regions that are arduous to exploit. The paucity of the specialized equipment needed to extract oil from such new reserves has created a bottleneck in future offshore production. The world's current fleet of specialized drill ships is booked until 2013. The price of building such a vessel has taken a five-fold jump to $500 million in the last year. The cost of crucial materials -- such as steel for rigs and pipelines -- has risen sharply. So, too, have salaries for skilled manpower in the industry. Little wonder then that while, in 2002, it cost $150,000 a day to hire a deep-water rig, it now costs four times as much.

Static Supply, Rising Demand

While the oil supply remains essentially static, worldwide demand shows no signs of tapering off. The only way to cool the energy market at the moment would be to reduce consumption. Luckily -- from the environmentalist's viewpoint -- soaring gasoline and diesel prices have begun lowering consumption in North America and Western Europe. Gasoline consumption in the United States dropped 3% in the first quarter of 2008, when compared to the previous year.

When it comes to energy conservation, there is a far greater opportunity for saving in the affluent societies of the West than anywhere else in the world. An average American uses twice as much oil as a Briton, a Briton twice as much as a Russian, and a Russian eight times as much as an Indian. It was therefore perverse of U.S. energy secretary Sam Bodman to focus on the way the Chinese and Indian governments subsidize oil products to provide relief to their citizens -- and to urge their energy ministers to cut those subsidies to "reduce demand."

It is true that China and India, which together account for two-fifths of the human race, are now major contributors to the growth in global oil demand. But it's an indisputable fact that only by increasing per capita energy consumption from current abysmally low levels can the Chinese and Indian governments hope to lift hundreds of millions of people out of grinding poverty.

In a country like India, for instance, half of all households lack electricity, so hurricane lanterns, fueled by kerosene, are a basic necessity. Subsidized kerosene, also used for cooking stoves, helps hundreds of millions of poor Indians. To cut or eliminate the subsidy on kerosene would only intensify poverty.

In truth, when it comes to energy conservation, the main focus at the moment should be on the 30-member Organization for Economic Co-operation and Development (OECD), a group of the globe's richest nations which cumulatively consumes nearly three out of every five barrels of oil used anywhere.

Among OECD members, Japan provides a model to be emulated.

Japan's Exemplary Performance

When it comes to energy conservation, Japan provides a glaring counterpoint to the United States. Consider what's happened in both countries since the first oil shock of the mid-1970s when prices quadrupled.

That price hike initially led to a drive for fuel efficiency in the U.S., Western Europe, and Japan. It also gave a boost to the idea of developing renewable sources of energy. Ever since, Japan has followed a consistent, long-range policy of reduction in petroleum usage, while the U.S. first wavered and then fell back dramatically.

Under the presidencies of Gerald Ford and Jimmy Carter, the U.S. modestly improved the fuel efficiency of its vehicles, as stipulated by a federal law. President Carter also announced a $100 million federal research and development program focused on solar power and symbolically had a solar water heater installed on the White House roof.

During the subsequent presidency of Ronald Reagan, when oil prices fell sharply, energy efficiency and conservation policies went with them, as did the idea of developing renewable sources of energy. This was dramatized when Reagan ordered the removal of that solar panel from the White House.

In the private sector, utilities promptly slashed by half their investments in energy efficiency. President George H.W. Bush, an oil man, followed Reagan's lead. And his son, George W. (along Vice President Dick Cheney, former chief executive of energy services giant Halliburton) has done absolutely nothing to wean Americans away from their much talked about "addiction to oil."

Even now, instead of urging Americans to cut oil usage (and putting a little legislative heft behind those urgings), politicians of both parties are blaming soaring gas and diesel prices on "speculators," conveniently ignoring how thin a line divides "speculators" from "investors."

In Japan, on the other hand, the government and private companies have stayed on course since the First Oil Shock. Despite the doubling of Japan's gross domestic product during the 1970s and 1980s, its annual overall levels of energy consumption have remained unchanged. Today, Japan uses only half as much energy for every dollar's worth of economic activity as the European Union or the United States. In addition, national and local authorities have continually enforced strict energy-conservation standards for new buildings.

It is, again, Japan that has made significant progress when it comes to renewable sources of energy. By 2006, for instance, it was responsible for producing almost half of total global solar power, well ahead of the U.S., even though it was an American, Russell Ohl, who invented the silicon solar cell, the building block of solar photovoltaic panels, which convert sunshine into electricity.

What to Do: Medium-Term Solutions

Worldwide, over half of all oil is used for transport. Though we instantly associate a car or truck with an internal combustion engine (ICE), it was not always so. At the turn of the twentieth century, cars were also powered by steam engines or batteries.

Now, our salvation lies in finding a way back to the pre-ICE era. It is incumbent upon the automobile companies in rich nations to accelerate the process of divorcing vehicles from the internal combustion engine. Cars of the future can be powered by batteries, hydrogen cells, or solar panels -- or a combination of the above.

Typically, Japanese companies are in the forefront of research and development on this. It was Toyota which first introduced a "concept" hybrid car in 1995, combining batteries with the internal combustion engine, and began mass producing them some years later.

This June, Honda set up an assembly line for producing a hydrogen-powered car, the FCX Clarity. This model already can travel 280 miles on a tank of liquid hydrogen. But it will go into mass production only after there is an infrastructure of liquefied hydrogen stations in place in Japan and in California, which will take time. So far there are only 13 hydrogen stations, funded by the government, in the Tokyo area. Meanwhile, aware of the enormous cost of its product, it is initially planning to lease the FXC Clarity to drivers for $600 a month.

Another Japanese corporation, Mazda, has come up with a hybrid car using hydrogen cells as well as an internal combustion engine.

As the mass production of non-ICE cars takes off in rich nations, the cost will fall, and such models will find markets in the fast expanding (yet comparatively poor) economies of China and India.

Medium-Term: The Nuclear Option

Besides powering transport, oil is a major source of fuel for electricity-generating plants. With even Royal Dutch Shell CEO Jeroen van der Veer conceding publicly that we are nearing peak oil production (after which oil reserves will decline irretrievably), attention is increasingly turning, in the West, to coal and nuclear power as medium-term solutions.

The very mention of nuclear plants revives nightmarish memories of the partial meltdown of a U.S. reactor at Three Mile Island in Pennsylvania in 1979, and the catastrophic burning of the Chernobyl nuclear plant in Ukraine in 1986. On the other hand, nuclear stations now provide 79% of France's electricity and have, so far, been accident-proof. That country's leading nuclear company, Avera, expects to sell 100 power stations, fueled by third-generation Evolutionary Pressure Water Reactors (EPWR), worldwide by 2030.

Avera also heads a consortium that is building the first nuclear power station in Europe in more than a decade -- in Finland. On nuclear waste management and safety, the Finnish nuclear authority Posiva seems to have found a workable solution. After twelve years of public debate, it has allowed the construction of a $3.5 billion nuclear plant equipped with an EPWR reactor, on an offshore island.

The new plant is designed to last 60 years, twice the average life of a nuclear power plant today. If its control rods should fail, triggering a core meltdown, a special basin of concrete will be there to hold the debris, thus theoretically preventing the release of radioactive material. The nuclear waste will then be set in cast iron, encased in copper, and dropped down a borehole, half a kilometer deep, which would, in turn, be saturated with bentonite, a kind of clay. According to Posiva's metallurgists, under such conditions the copper barrier should last a million years.

Once this station is commissioned, nuclear-fueled electricity will rise from 27% to 37% of the total on the Finnish national grid.

So acute is the demand for electricity in India that three nuclear power stations are to be commissioned this year. Once on line, however, these plants will make but a marginal difference in meeting Indian energy needs. Only coal, which abounds in India, can help meet exploding demand, as is true in coal-rich China. There, an electric plant fueled by (dirty, conventional) coal is being commissioned every week.

Medium-Term: Cleaner Coal

In the hydrocarbon family, coal is the least efficient energy source, providing only half as much energy as oil, while producing twice as much carbon dioxide (CO2). But coal has the longest history of supplying energy to modern societies, and as the twenty-first century began, it was still one of the leading fuels for power plants worldwide.

Today, coal provides 28% of electric power globally, only marginally less than in the 1970s. Countrywide, percentages vary widely -- from 20% in the United States to four times as much in China.

Because coal isn't going away any time soon, the challenge is obviously to burn coal more efficiently and, at the same time, capture its CO2 emissions before they reach the atmosphere. One possible solution to coal's polluting problems lies in producing de-carbonized coal -- that is, in converting coal into petroleum products, thereby also reducing demand for crude oil. A hybrid technology involving de-carbonizing natural gas or coal already exists. In a coal-fired integrated gasification combined cycle (IGCC) facility, coal is broken up, extracting the hydrogen and leaving behind the carbon. Next the hydrogen is burned, emitting heat that drives the electricity-generating turbines, while carbon, in the form of liquefied CO2, is stored underground or under the seabed.

But, at the moment, an IGCC station needs one-fifth more coal as fuel than a conventional plant just to produce the energy needed to power the carbon-capturing mechanism. The price of the electric power thus generated would be a third to a half higher than that from dirty coal.

On the other hand, according to the United Nations' Intergovernmental Panel on Climate Change (IPCC), the CO2 capture and storage (CCS) system could someday provide up to 55% of the emissions reduction needed to avoid the worst effects of global warming. Last month, the G8 energy ministers, meeting in Japan, called for the launch of 20 large-scale CCS projects globally by 2010. Soon after, the British government invited four leading European companies to submit tenders for such a project in the United Kingdom.

At the recent oil summit in Jeddah, British Prime Minister Gordon Brown announced that his country would work with Saudi Arabia on perfecting the technology for carbon capture. The United States and Australia are already committed to advance this technology with public funds. As it gets cheaper with frequent application, it will become affordable by countries like India and China.

With oil supplies peaking in the coming years and uranium following a similar path as the present century unfolds, the weight of humanity's needs will increasingly fall on coal. It is coal, for better or worse, that will provide the energy to sustain higher living standards for a growing segment of humanity, even as the search for, and development of, renewable energies proceeds at a faster pace. Last week, recognizing this reality, the G8 summit renewed its commitment to advance carbon capture and storage systems with all due speed.

This, in a nutshell, is the global energy future in the medium term. It is the reality we face.

Dilip Hiro is the author of numerous books on the Middle East. His most recent book, Blood of the Earth: The Battle for the World's Vanishing Oil Resources (Nation Books) is a vivid history of how oil has revolutionized civilian life, war, and world politics over the last century, as well as of alternatives to oil, including renewable energy sources.

The Financial Tsunami: The Next Big Wave is Breaking Fannie Mae, Freddie Mac and US Mortgage Debt

The Financial Tsunami: The Next Big Wave is Breaking Fannie Mae, Freddie Mac and US Mortgage Debt

By F. William Engdahl

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The announcement by US Treasury Secretary Henry Paulson together with Federal Reserve chief Bernanke, that the US Government will bailout the two largest guarantors of housing mortgage debt—the Fannie Mae and Freddie Mac—far from calming financial markets, has confirmed what we have said repeatedly in this space: The Financial Tsunami which began in August 2007 in the relatively small "sub-prime" high risk US mortgage securitization market, far from being over, is only gathering momentum. As with the Tsunami which devastated Asia in wave after terrifying wave in December 2004, the financial Tsunami we are witnessing is a low-amplitude, long-wave phenomenon of trillions of dollars of financial securities being unwound, defaulted on, dumped on the market. But the scale of the latest wave to hit, the collapse of confidence in the two Government-Sponsored Entities, Freddie Mac and Fannie Mae, is a harbinger of worse to come in what will be the most devastating financial and economic catastrophe in United States history. The impact will be felt globally.

The Royal Bank of Scotland, one of the largest financial institutions in the EU has warned its clients "A very nasty period is soon to be upon us—be prepared." They expect the S&P-500 index of US stocks, one of the broadest stock indices in Wall Street used by hedge funds, banks, pension funds could lose almost 23% by September as in their term, "all the chickens come home to roost" from the excesses of the US-led securitization revolution that took hold after the dot.com bubble burst and Greenspan lowered US interest rates to levels not sustained since the 1930’s Great Depression.

This all will be seen in history as the disastrous Alan Greenspan "Revolution in Finance,"—the experiment in Asset Backed Securitization, a mad attempt to bundle risk in loans, "securitize" them in new bonds, insure them via specialized insurers called "monoline" insurers (they only insured financial risks in bonds), rate them thereby via Moody’s and S&P as AAA, highest grade. All that was done so that pension funds and banks around the world would assume they were high quality debt paying even higher interest than safe US Government bonds. Fed in Panic Mode

While he is getting praise in the financial media for his "innovative" and quick reactions to the un-raveling crisis, Fed chairman Ben Bernanke in reality is in a panic mode with little short of hyperinflationary tools at hand to deal with the crisis. Yet, his room to act is increasingly bound by the soaring asset price inflation in food and oil which is pushing consumer price inflation to new highs even by the doctored "core inflation" model of the Fed.

If Bernanke continues to act to provide unlimited liquidity to prevent a banking system collapse, he risks destroying the US corporate and Treasury bond market and with it the dollar. If Bernanke acts to save the heart of the US capital market—its bond market—by raising interest rates, its only anti-inflation weapon, it will only trigger the next even more devastating round in Tsunami shock waves.The real significance of the Fannie Mae bailout

The US government passed the law creating Fannie Mae in 1938 during the Great Depression as part of President Franklin D. Roosevelt's New Deal. It was intended to be a private entity but "government sponsored" that would enable Americans to finance buying of homes, as part of an economic recovery attempt. Freddie Mac was formed by Congress in 1970, to help revive the home loan market. Congress started the companies to promote home buying and their charters give the Treasury the authority to extend a $2.25 billion credit line.

The problems in the privately-owned Government "Sponsored" Entities or GSEs as they are technically known, is that Congress tried to fudge on whether they were subject to US Government guarantee in event of a financial crisis as the present. Before now, it always appeared a manageable problem.

No more.

The United States economy is in the early phase of its worst housing price collapse since the 1930’s. No end is in sight. Fannie Mae and Freddie Mac, as private stock companies, have gone to excesses in leveraging their risk, most as many private banks did. The financial market bought the bonds of Fannie Mae and Freddie Mac because they bet that the two were "Too Big To Fail," i.e. that in a crisis the Government, that is the US taxpayer, would be forced to step in and bail them out.

The two, Fannie Mae and Freddie Mac, either own or guarantee about half of the $12 trillion in outstanding US home mortgage loans, or about $6 trillion. To put that number into perspective, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so $6 trillion would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.

In addition to their home mortgage loans, Fannie Mae has another $831 in outstanding corporate bonds and Freddie Mac has $644 billion in corporate bonds.

Freddie Mac owes $5.2 billion more than its assets today are worth meaning under current US "fair value" accounting rules, it is insolvent. Fair value of Fannie Mae assets has dropped 66% to $12 billion and may as well go negative next quarter. As the home prices continue to fall across America, and corporate bankruptcies spread, the size of the negative values of the two will explode.

On July 14, symbolically the anniversary of Bastille Day, US Treasury Secretary Paulson, former chairman of the powerful Wall Street investment bank Goldman Sachs, stood on the steps of the US Treasury building in Washington, a clear attempt to add psychological gravitas, and announced that the Bush Administration would submit a bill proposal to Congress to make taxpayer guarantee of Freddie Mac and Fannie Mae explicit. In effect, in the present crisis it will mean nationalization of the $6 trillion agencies.

The bailout by Paulson was accompanied by a statement by Bernanke that the Fed stood ready to pump unlimited liquidity into the two companies.

The Federal Reserve is rapidly becoming the world’s largest financial garbage dump as for months it has agreed to accept banks’ Asset Backed Securities including sub-prime real estate bonds as collateral in return for US Treasury bond purchases. Now it agrees to add potentially $6 trillion in GSE real estate debt to that.

However, the disaster in the two private companies was obvious as far back as 2003 when grave accounting abuses in the two companies were made public. In 2003 then President of the St. Louis Federal Reserve, William Poole publicly called for the US Government to cut its implied guarantee of Freddie Mac and Fannie Mae claiming then that the two lacked capital to weather severe financial crisis. Poole, whose warnings were dismissed by then Fed Chairman Greenspan, called repeatedly in 2006 and again in 2007 for Congress to repeal their charters and avoid the predictable taxpayer cost of a huge bailout

As financial investors warn the Paulson bailout is not a bailout of the US economy but a direct bailout of his Wall Street financial cronies. What until recently had been the largest bank in terms of loans outstanding, Citigroup in New York, has been forced to raise billions in capital from Sovereign Wealth Funds in Saudi Arabia and elsewhere to remain in business. In its May announcement, Citigroup’s new Chairman Vikram Pandit announced plans to reduce the bank’s $2.2 billion balance sheet of liabilities. However, he never mentioned an added $1.1 trillion in Citigroup "off balance sheet" liabilities which include some of the highest risk deals in the US real estate and securitization era it so strongly backed. The Financial Accounting Standards Board in Connecticut, the official body defining bank accounting rules is demanding tighter disclosure standards. Analysts fear Citigroup could face devastating new losses as a result with value of liabilities exceeding the bank’s $90 billion market value. In December 2006 prior to the onset of the Tsunami crisis, Citigroup had a market value of more than $270 billion.

The U.S. Economic Meltdown Continues

The U.S. Economic Meltdown Continues

Lee Rogers

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There is little doubt that the United States economy is edging closer to collapse. The U.S. is facing not just a recession but a depression and almost everyone in the U.S. mainstream press is in denial. The major cable news networks prefer to run story after story on celebrity sex scandals and other perversions than to talk seriously about the tanking U.S. economy. There is literally no good economic news. This past week we’ve seen oil reach a record high of $147 a barrel and we are also starting to see future predictions of $200 and even $300 for a barrel of oil. As if that wasn’t bad enough, the 2nd largest bank failure in U.S. history took place this past week and there are even predictions that 150 banks could fail over the next 12 to 18 months. Mortgage giants Fannie Mae and Freddie Mac which were facing collapse last week are now going to be bailed out by the U.S. government at great cost to the American people. Foreign interests continue to buy up what’s left of America as Anheuser Busch just got bought out by a European company. Along with all of this horrible news, the U.S. Dollar continues to lose more and more value as the Federal Reserve crime syndicate refuses to implement policies to defend the validity of the currency. The insanity of this is unparalleled.

There are so many different facets to the unraveling economy that it would literally take days to properly analyze everything that’s happening. What is clear is that all of this is happening by design. The high oil prices have been the result of the Federal Reserve devaluing the U.S. Dollar through their policy decisions. This combined with the continued funding of war in the Middle East are key causes behind the parabolic rise in oil.

Putting oil aside, almost all of the economic problems that we see occurring are the result of currency devaluation. Alan Greenspan’s policies of excessive credit creation fueled a bubble in the NASDAQ stock market during the late 1990s and spawned the housing market bubble that we are dealing with today. This has caused all sorts of problems within the banking system and has lead towards the IndyMAC bank failure and the very real prospects of additional bank failures. In fact, the FDIC has already hired additional staff in anticipation of this. The collapse in the housing market has also been one of the primary causes of Fannie Mae and Freddie Mac teetering towards collapse while a government bailout looms.

Jim Rogers a highly respected financial analyst slammed the government bailout of Fannie Mae and Freddie Mac.

``I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. ``So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''

Rogers has made predictions that the Federal Reserve could fail within the next decade. He has also been critical of the Fed’s policies that have resulted in the continued devaluation of the U.S. Dollar. He is not alone in his sentiments as other economists like Marc Faber also believe that the U.S. central bank and the currency it creates out of thin air could eventually collapse.

Despite massive currency devaluation, record high oil prices, an insane foreign policy, predictions of looming bank failures around the country and this recent debacle with Fannie Mae and Freddie Mac, the pundits on CNBC are still optimistic. On Larry Kudlow’s program, there were people actually suggesting that people should buy financial stocks despite the fact that they continue to lose value. Another words, this is a signal that the establishment is selling the financial stocks and they need suckers that will buy them.

With all of this financial turmoil, gold is rapidly heading towards $1,000 at a time in which precious metals have historically remained flat. This is a clear indication that people are losing more and more confidence in the U.S. Dollar. Gold still remains undervalued relative to oil and seems poised for a massive explosion in the next few months.

There is no doubt that the U.S. Dollar is heading further and further into the toilet. While the European Central Bank raises interest rates, the Federal Reserve continues to maintain interest rates, which means the Euro is going to continue to rise against the U.S. Dollar. Ben Bernanke, Hank Paulson and the rest of these criminals in Washington DC, simply do not care about defending the value of the U.S. Dollar. These people are more interested in consolidating power and ensuring that their banker buddies on Wall Street don’t lose their shirts.

With everything that’s going on, the United States could face a scenario similar to what happened to Argentina nearly a decade ago. There is simply no good economic news regardless of how the pundits in the media try to spin it. When the economy crashes the government will not be there to help you because this financial crisis has been created intentionally. When it finally unravels, the American people should demand the heads of the policy makers at the U.S. Treasury and in the Federal Reserve. These people have sold out this country through their criminal economic policies.

US bailout of mortgage giants: The politics of plutocracy

US bailout of mortgage giants: The politics of plutocracy

By Barry Grey

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For the second time in four months, the US government has intervened to rescue major financial firms and prevent an imminent collapse of the American and global banking system.

The government bailout of the mortgage giants Fannie Mae and Freddie Mac announced Sunday goes well beyond the $29 billion injection of Federal Reserve funds used to subsidize the takeover of Bear Stearns last March by JPMorgan Chase.

It not only demonstrates the depth of the economic crisis of American capitalism, it also provides an object lesson on the real relations of political power and influence behind the fa├žade of American democracy.

The plan outlined by Treasury Secretary Henry Paulson would give him virtually unlimited and unilateral authority to pump tens of billions of dollars of public funds into the mortgage finance companies. At the same time, the Federal Reserve Board announced that it would allow the companies to directly borrow Fed funds.

It is generally conceded that a failure of the two government-chartered mortgage finance companies would have consequences even more cataclysmic than those which would have likely followed a collapse of Bear Stearns. Between them, Fannie Mae and Freddie Mac, which purchase mortgage loans from banks and other lenders, bundle them into securities and sell them to financial institutions and big investors around the world, hold or guarantee more than $5 trillion in mortgage debt. They currently account for some 80 percent of all new mortgages in the US. Were they to lose the ability to borrow at a discount, the US housing market would come to a grinding halt.

But even before that happened, US and global financial markets would face a meltdown, since thousands of US banks, hedge funds, pension funds and other institutions hold securities guaranteed by the two companies, and central banks, governments and private banks around the world are heavily invested in Fannie Mae and Freddie Mac debt.

Fannie Mae and Freddie Mac have been at the center of the housing market speculation that generated billions for Wall Street investors and CEOs and has now come crashing down, precipitating the greatest financial crisis since the 1930s. The two companies are massively leveraged, holding a combined $81 billion in capital to back the mortgages they own or guarantee—a ratio of capital to debt of 1.6 percent.

Their Ponzi scheme structures have been undermined by the collapse in home prices and the virulent spread of foreclosures. Over the past nine months they have lost a combined $11 billion and their stock has fallen by as much as 80 percent—a decline that turned into a rout last week as their stock values were cut nearly in half.

Their debacle is the latest and to date most spectacular expression of the decay of American capitalism. It is another refutation of the myths promoted by the US ruling elite about the miraculous workings of the capitalist market—supposedly the pinnacle of human achievement.

At the same time, it exposes the cynicism behind the official mantra of “free enterprise.” When it comes to big capital, losses are socialized. Only profits remain private.

That Fannie Mae and Freddie Mac are not isolated cases, but rather expressions of a systemic crisis, was underscored by the government seizure on Friday of IndyMac, the third largest bank failure in US history. According to some reports, as many as 150 other banks are close to collapse.

Paulson’s plan to use taxpayer funds to rescue Wall Street were worked out over the weekend in feverish closed door consultations between the Bush administration, the Fed, the big banks and investment houses and congressional leaders. They were under enormous pressure to come up with a plan before the Asian markets opened Monday, and the crisis atmosphere was compounded by the fact that Freddie Mac was scheduled to market $3 billion in short-term debt. A catastrophe was looming if the banks and investment houses refused to buy the company’s bonds.

There can be no doubt that Wall Street exploited the situation to extract from the government the broadest possible guarantees and assurances for its interests. But the entire scheme had to be sanctioned by the Democratic Congress, since it required changes in the charters and legal regulations governing the two companies.

The immediate and vocal support announced by key Democratic legislators for this massive taxpayer-funded bailout demonstrates the most important fact of American political life: the utter subservience of both parties and all of the official institutions to the financial aristocracy.

Rep. Barney Frank, the chairman of the House Financial Services Committee, proclaimed his agreement and pledged to have emergency legislation ready for Bush’s signature by the beginning of next week at the latest.

Senator Christopher Dodd, the chairman of the Senate Banking Committee, similarly signed off on the blank check for the mortgage giants. Senator Charles Schumer, a senior member of the Banking Committee, said, “The Treasury’s plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to US taxpayers.” He added that the plan would “be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies should it be needed.”

The corporate-controlled media did its part to boost the scheme by portraying it for the most part as a boon to homeowners.

What does this response demonstrate? That when it comes to the vital interests of the financial aristocracy, the entire political system acts on command.

Suddenly, the much bemoaned “gridlock” in Congress vanishes. The Democrats, who have sought to explain away their repeated votes to fund the Iraq war by pointing to the supposedly insurmountable opposition of the Republicans to their “redeployment” plans, claiming “the votes aren’t there” for their partial withdrawal schemes, now march in lockstep with the minority party to rush through laws demanded by Wall Street. Other initiatives, such as those on immigration, have died as a result of unbridgeable differences between punitive and even more punitive bills. But on this issue, Congress moves with military dispatch.

The emergency provisions demanded by Paulson are to be attached to Democratic-sponsored housing bills already passed in the House and the Senate. The contrast between the bailout for Wall Street and the measures for distressed homeowners in the original bills is instructive. The former provides the Treasury with a blank check to allocate perhaps hundreds of billions of dollars in public funds to prop up the banks. The latter does nothing to block foreclosures and, according to the Congressional Budget Office (CBO), will aid less than 20 percent of the 2.5 million homeowners who are expected to receive foreclosure notices this year. The CBO estimates that the total cost of the Democratic housing measures will be a mere $2.7 billion over five years.

There is nothing mysterious about the abject subordination of both Congress and the executive branch to Wall Street. Paulson, whose worth is estimated in the hundreds of millions, was chairman and CEO of Goldman Sachs before taking over the post of treasury secretary.

The Center for Responsive Politics reported in 2006 that about half of the Senate’s 100 members were millionaires, with an average net worth of $8.9 million. In 2004, 123 members of the 435-member House of Representatives earned at least $1 million.

The buying of legislators and their votes by corporate interests is carried out openly and shamelessly. Members of Frank’s House Financial Services Committee received over $18 million from financial services, insurance and real estate firms this year. Frank himself raised over $1.2 million, almost half of which came from finance and related industries.

Senator Dodd’s top contributor in the 2003-2008 election cycle was Citigroup, followed by SAC Capital Partners. He raised $4.25 million from securities and investment firms.

Senator Schumer’s top contributor was likewise Citigroup. He raised $1.4 million from securities and investment firms, his most lucrative corporate sector.

The government-corporate nexus is awash in corruption and bribery. This has grown apace with the so-called “financialization” of the US economy over the past three decades. The ruling elite has systematically scrapped large sections of industry and increasingly amassed its wealth through forms of financial speculation divorced from and destructive of the productive forces. The result has been an immense growth of financial parasitism alongside a brutal assault on the social position and living standards of the working class.

Social inequality has grown to unprecedented levels, along with a new financial aristocracy that dominates all aspects of public life.

The counterpart of financialization is the criminalization of the American corporate-financial elite. Fannie Mae and Freddie Mac—which have their roots in social reforms enacted during the New Deal—epitomize these twin processes. Virtually unregulated, they have engaged in massive speculation, bolstered by accounting fraud and bribery, to provide multi-million-dollar salaries for their top executives.

The former CEO of Freddie Mac, Leland C. Brendsel, paid $16.4 million in fines last year to settle charges of mismanagement at the mortgage company. The year before, the company paid a penalty of $3.8 million for illegal payments and perks to members of the House Financial Services Committee.

Fannie Mae, for its part, was fined $400 million for accounting manipulation from 1998 to 2004, during which time top executives reportedly received more than $90 million in bonuses.

Nor will the proposed bailout of these companies halt the deepening crisis of American and world capitalism. It will inevitably further undermine global confidence in the US financial system, intensify the crisis of the US dollar and stoke inflationary pressures. What is emerging is a crisis in which the solvency of the US government itself is called into question. As the Wall Street Journal put it on Monday, “But with financial woes mounting, some investors are betting they may profit from weighing an unthinkable question: Could the US government default?”

The bailout with public funds of Fannie Mae and Freddie Mac will set a precedent for a far broader use of taxpayer money to rescue major financial companies. Last week Paulson and Bernanke went before the House Financial Services Committee to demand legislation institutionalizing federal intervention to bail out failing Wall Street firms. The response of key Democrats such as Frank was to urge the regulators to call for such measures now, rather than after the new Congress takes office next year.

The cost of such bailouts will be borne by the working class, in the form of deeper cuts in social programs, education, housing and basic infrastructure, and new waves of corporate downsizing and wage-cutting.

The working class cannot defend its vital interests through pressure on the Democrats or any other institution of the American plutocracy. In the coming class battles, it must organize itself as an independent political force to fight for the socialist reorganization of society, including the transformation of the banks and finance houses into public utilities under the democratic control of the working population.

Dollar freefall: New record low

Dollar Falls to Record Versus Euro; Credit Woes May Damp Growth

By Agnes Lovasz and Kosuke Goto

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The dollar declined to a record low against the euro on speculation Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will say credit- market losses are hurting U.S. economic growth.

The currency also weakened to the lowest level in more than a month against the Japanese yen and to a 25-year low versus the Australian dollar on concern confidence in the debt of Fannie Mae and Freddie Mac will diminish even after the U.S. government pledged support for the two-largest buyers of home loans. The pound surpassed $2 for the first time since July 1 after U.K. inflation quickened to the fastest pace in at least 11 years.

‘‘The markets are reacting negatively to the renewed credit crisis in the U.S. and that's hurting the dollar across the board,'' said Roberto Mialich, a Milan-based currency strategist at Unicredit Markets & Investment Banking, a unit of Italy's largest lender. ‘‘The market is speculating that Bernanke will offer a gloomy outlook for the U.S. economy.''

The dollar fell to $1.6038 per euro, the lowest since the euro's inception in 1999, and was at $1.6006 as of 7:22 a.m. in New York, from $1.5908 yesterday. The U.S. currency also dropped to 104.61 yen, the lowest level since June 9, from 106.14 yen yesterday. The yen traded at 167.69 per euro, from 168.89 yesterday, when it weakened to 169.75, the lowest since the single currency's debut.

The dollar may fall to between $1.62 and $1.63 in the coming month, Mialich said.

Given Up Gains

The U.S. currency has given up all the gains made versus the euro since July 3, when European Central Bank President Jean-Claude Trichet said he has ‘‘no bias'' on future interest- rate moves.

The dollar rose as much as 1.7 percent to $1.5611 per euro that week. It has since slumped as much as 2.7 percent as concern increased that Fannie Mae and Freddie Mac, which buy or finance almost half the $12 trillion of U.S. mortgages, would need to be rescued by the U.S. government.

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, fell for a fifth day on the ICE market to 71.334, the lowest since April 23, from 71.915.

Bernanke will give his semiannual testimony on monetary policy and the economy before the Senate Banking Committee at 10 a.m. Washington time. A separate hearing at the committee with Paulson, and Securities and Exchange Commission Chairman Christopher Cox on financial markets, is scheduled for about 11:30 a.m.

‘‘The reality is the U.S. housing market and credit squeeze haven't hit bottom yet,'' said Takuma Kurosawa, global markets treasurer in Tokyo at HSBC Bank, a unit of Europe's biggest lender. ‘‘That's discouraging investors from holding dollar assets.''

Losses and Writedowns

Global banks and securities firms have reported losses and writedowns of more than $400 billion as the subprime-mortgage market collapsed.

The British pound was bolstered by expectations accelerating inflation will keep the Bank of England from lowering interest rates to avert a recession.

Consumer prices climbed 3.8 percent from a year earlier, exceeding the government's 3 percent upper limit for a second month and the highest level since records began in 1997, the Office for National Statistics said today in London. Economists forecast 3.6 percent, according to the median of 36 IND' ))">estimates in a Bloomberg News survey. The pound was at $2.0107, from $1.9951 yesterday.

Japan Rates

The Swiss franc rose to within half a cent of parity with the U.S. dollar and the Japanese yen strengthened as investors reversed purchases of higher-yielding assets financed with loans in Switzerland and Japan.

Against the dollar, the franc rose as much as 1.4 percent to 1.0021 before trading at 1.0044, from 1.0161 yesterday.

The yen stayed higher after the Bank of Japan kept interest rates at 0.5 percent today, the lowest among major economies, as expected by all 39 economists surveyed by Bloomberg News.

The world's second-largest economy will grow 1.2 percent in the year ending March 31, slower than the 1.5 percent forecast on April 30, the central bank said in a statement in Tokyo. Consumer prices excluding fresh food will climb 1.8 percent, more than the 1.1 percent projected three months ago, it said.

Dollar at 100 Yen?

The yen may rise as high as 100 per dollar this year as the Bank of Japan is more likely to raise interest rates than the Federal Reserve, said Toyoo Gyohten, former currency-policy chief at Japan's Ministry of Finance.

Japan's central bank may increase borrowing costs should inflation accelerate and the economy sustain growth of at least 1 percent, Gyohten said.

‘‘The Fed is most likely to maintain its current level of interest rates,'' Gyohten, president for the Institute of International Monetary Affairs in Tokyo, said in an interview yesterday. ‘‘The BOJ is more likely to raise rates. The medium- term trend is for a weaker dollar and a stronger yen.''

U.S. stocks fell yesterday, led by financial shares, after the government's seizure of Pasadena, California-based IndyMac Bancorp Inc. and predictions of wider credit losses overshadowed Paulson's pledge to shore up Fannie and Freddie. The IND' ))">Standard & Poor's 500 Index declined 0.9 percent.

The dollar may extend declines on concern Fannie Mae and Freddie Mac will get the majority of funds they need by borrowing from the Fed rather than an investment from the government, increasing supply of the U.S. currency, said Ashley Davies, a currency strategist in Singapore at UBS AG, the world's second-biggest currency trader.

Trigger Declines

‘‘Any whiff that the authorities will adopt steps to monetize the problems facing the U.S. housing market would be the trigger to drive the euro-dollar'' lower, Davies wrote in a report today.

Against Australia's currency, the dollar weakened to 98.39 cents, the lowest level since 1983, from 97.18 cents yesterday.

Gains in the euro were limited after a report showed investor confidence in Germany, Europe's largest economy, fell to a record low in July, weakening the case for higher rates.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 63.9 in July from minus 52.4 the previous month. Economists expected a decline to minus 55, according to the median of 37 forecasts in a Bloomberg News survey.

Inflation Report

‘‘For the dollar to drop abruptly from here is unwarranted,'' said Robert Minikin, a senior currency strategist at Standard Chartered Plc. ‘‘We don't think the U.S. economy, or the financial system, is uniquely vulnerable. We see a lot of negative news on the U.K. and the euro zone economies. The balance of risks is tilted towards a recovery.''

The dollar may rise to $1.5750 in coming weeks and strengthen to $1.56 by the end of this quarter, Minikin said.

Losses in the dollar may be limited by speculation reports will show inflation accelerated, spurring traders to add to bets the Fed will raise its benchmark interest rate from 2 percent.

U.S. producer prices increased 8.7 percent from a year earlier in June, the most since 1981, according to a Bloomberg News survey of economists before a Labor Department report today. A report tomorrow will show consumer prices rose 4.5 percent in June, the most since September 2005, according to a separate Bloomberg survey.

Wholesale inflation is worst in 27 years

Wholesale inflation is worst in 27 years


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Soaring costs for gasoline and food pushed inflation at the wholesale level up by a larger-than-expected amount in June, leaving inflation rising over the past year at the fastest pace in more than a quarter-century.

The Labor Department reported that wholesale prices jumped by 1.8 percent last month, the biggest one-month rise since last November. Over the past 12 months, wholesale prices are up 9.2 percent, the largest year-over-year surge since June 1981, another period when soaring energy costs were giving the country inflation pains.

Core inflation, which excludes energy and food, was better behaved in June, rising by just 0.2 percent, slightly lower than expectations.

Federal Reserve Chairman Ben Bernanke, who was scheduled to deliver his mid-year report on the economy to Congress on Tuesday, was expected to highlight the threat posed by inflation pressures. The central bank at its June meeting brought an end to an aggressive rate-cutting campaign that had been designed to keep a prolonged housing slump and severe credit crunch from pushing the country into a deep recession.

The central bank is currently caught between the opposing forces of rising inflation and slumping economic growth.

For June, energy prices at the wholesale level shot up by 6 percent, as the price of gasoline surged by 9 percent following an even bigger 9.3 percent increase in May.

FDIC says 90 banks are troubled

No More Surprises!

Joshua Zumbrun

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Problems--but not catastrophes--await America's banks.

As falling home prices push ever more homeowners into financial trouble and the stresses on the economy pile up, some banks and thrifts are almost certain to fail. But a key group of banking regulators told U.S. Congress that major institutions appear secure, and they're confident they can handle further fallout. This time, they know big risks are still out there.

"While the vast majority of national banks have the financial capacity and management skills to weather the current environment, some will not," said John Dugan, comptroller of the currency at the U.S. Treasury Department. "Of these, some will be able to find stronger buyers--in some cases, at our insistence--that will enable them to avoid failure and resolution by the Federal Deposit Insurance Corporation."

Several points of data indicate a rocky road for banks. According to the Federal Deposit Insurance Corp., the amount of non-current loans, those more than 90 days behind, on the portfolios of its institution has grown rapidly. In the last three months of 2007 and the first three months of 2008, the value of these loans rose by $53 billion to represent 1.71% of all loans from FDIC-insured institutions.

In the case of bank collapse, the FDIC has to step in to insure the value of deposits. Normally the FDIC attempts to maintain a fund at 1.25% of the value of its potential obligations. In recent months, however, this fund has slid to 1.19%, driven primarily by a rise in deposits, said Sheila Bair, chair of the FDIC. If this figure slides further to 1.15% it forces the FDIC to make moves to shore up the fund.

Bair said the FDIC is monitoring 90 institutions with assets of $26 billion that it has identified as troubled. The entire size of the FDIC reserve fund is $52 billion. As a precaution, the FDIC is running bank failure readiness exercises, she said.

Though cause for attention, the situation is not nearly as dire as the banking crisis of the early 1990s. The 90 institutions being watched is comparatively miniscule--at the end of 1991, the FDIC had 1,430 institutions with $837 billion in assets.

Other banking regulators agreed the situation was relatively calm. John Reich, the director of the Office of Thrift Supervision said that the number of thrifts on its troubled watch list has risen to 17 from 12 at the end of March. In perspective, however, over 200 such institutions were in trouble in 1992.

Credit unions face "isolated, but not systemic problems," said JoAnn Johnson, chairman of the National Credit Union Administration.

The regulators mostly agreed that regulatory lapses were partly to blame for the current turmoil facing banks. The FDIC's Bair said that "regulatory arbitrage," where those seeking to underwrite mortgages sought out the least regulated venue to underwrite, contributed to the crisis.

"The same rules need to apply to anyone who originates a mortgage," said Treasury's Dugan.

Perhaps the most positive sign for the industry, however, is that the surprise factor is gone. "I think we have a stronger set of investment banks than we had a month and a half ago," said Donald Kohn, the vice chairman of the U.S. Federal Reserve's board of governors. Falling home prices and underperforming loans have been priced into the market.

Difficulties in banking are likely to continue until the housing market begins to turn around. At least now, for banks and regulators, it won't be a surprise.

Analysts say more U.S. banks will fail

Analysts say more U.S. banks will fail

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As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year.

But after a large mortgage lender in California collapsed late Friday, Wall Street analysts began posing two crucial questions: Just how many banks might falter? And, more urgently, which one could be next?

The nation's banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

"Everybody is drawing up lists, trying to figure out who the next bank is, No. 1, and No. 2, how many of them are there," said Richard Bove, the banking analyst with Ladenburg Thalmann, who released a list of troubled banks over the weekend. "And No. 3, from the standpoint of Washington, how badly is it going to affect the economy?"

Many investors are on edge after federal regulators seized the California lender, IndyMac Bank, one of the nation's largest savings and loans, last week. With $32 billion in assets, IndyMac, a spinoff of the Countrywide Financial Corporation, was the biggest American lender to fail in more than two decades.

Now, as the Bush administration grapples with the crisis at the nation's two largest mortgage finance companies, Fannie Mae and Freddie Mac, a rush of earnings reports in the coming days and weeks from some of the nation's largest financial companies are likely to provide more gloomy reminders about the sorry state of the industry.

The future of Fannie Mae and Freddie Mac is vital to the banks, savings and loans and credit unions, which own $1.3 trillion of securities issued or guaranteed by the two mortgage companies. If the mortgage giants ever defaulted on those obligations, banks might be forced to raise billions of dollars in additional capital.

The large institutions set to report results this week, including Citigroup and Merrill Lynch, are in no danger of failing, but some are expected to report more multibillion-dollar write-offs.

But time may be running out for some small and midsize lenders. They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans. Most of these banks are far smaller than the industry giants that have drawn so much scrutiny from regulators and investors.

Still, only six lenders have failed so far this year, including IndyMac. In 1994, the Federal Deposit Insurance Corporation listed 575 banks that it considered to be troubled. As of this spring, the agency was worried about just 90 banks. That number may go up in August, when the government releases an updated list.

"Failed banks are a lagging indicator, not a leading indicator," said William Isaac, who was chairman of the FDIC in the early 1980s and is now the chairman of the Secura Group, a finance consulting firm in Virginia. "So you will see more troubled, more failed banks this year."

And yet IndyMac, one of the nation's largest mortgage lenders, was not on the government's troubled bank list this spring — an indication that other troubled banks may be below the radar.

The FDIC has $53 billion set aside to reimburse consumers for deposits lost at failed banks. IndyMac will eat up $4 billion to $8 billion of that fund, the agency estimates, and that could force it to raise more money from the banks that it insures.

The agency does not disclose which banks it thinks are troubled. But analysts are circulating their own lists, and short sellers — investors who bet against stocks — are piling on. In recent weeks, the share prices of some regional banks, like the BankUnited Financial Corporation, in Florida, and the Downey Financial Corporation, in California, have stumbled hard amid concern about their financial health. A BankUnited spokeswoman said the lender had largely avoided risky subprime loans.

In his "Who Is Next?" report over the weekend, Bove listed the fraction of loans at banks that are nonperforming, meaning, for example, that the assets have been foreclosed on or that payments are 90 days past due. He came up with what he called a danger zone, which was a percentage above 5 percent. Seven banks fell in this category.

An important issue for the regional and community banks will be whether they have managed to sell their riskiest loans to Wall Street firms.

And the government may have fewer failures than in the past because private investment funds might buy some troubled lenders. Regulators are considering rule changes that would allow private equity firms to buy larger shares of banks, and several prominent investors, like Wilbur Ross, have raised funds to leap in.

Panic On Wall Street Building - Credit Crisis Threatens Nation's Banks

Panic On Wall Street Building - Credit Crisis Threatens Nation's Banks

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Fannie Mae (FNM) and Freddie Mac (FNM) were on the verge of collapse, only to be saved by the full faith and credit of the United StatesNew York). (as well as now it looks like the Federal Reserve Bank of

The Federal Reserve branch of New York is the most powerful regional bank within the Federal Reserve System, given that all the major banks and financial institutions are in New York. They carry as much clout as the entity under which they report.

Sunday Morning, Treasury Secretary Paulson made it clear the government is going to do EVERYTHING in its power to save Fannie Mae and Freddie Mac.

The initial reaction when the market opened on Monday was a huge sigh of relief, and a rally on the open. Yet, after an hour the major indexes were back in negative territory as the market's reaction shifted from relief to an even deeper anxiety. Literally every one of our reliable economic and market sources were asking the question: Okay, the U.S. government is coming to the rescue, but "Is this too little too late?"

This morning the Dow Jones has opened sharply lower down as much as 200 points. Between the lingering questions about the Fannie Mae (FNM) and Freddie Mac (FNM) bail out and new warnings by analysts that as many as 150 banks may fail – a full fledge panic may be just days away.

All of this fear is also being fanned this morning thanks to statements by Federal Reserve Chairman Bernanke, who told Congress the U.S. economy is faced with "numerous difficulties," such as strains in financial markets, a shaky job market and ongoing weakness in the housing market. These difficulties are persisting despite the Fed's massive interest rate cuts and expanded lending efforts over the past year.

Will steps taken by the Federal Reserve and Treasury save the country from suffering a massive financial collapse?

The only real way to gain an idea of whether this latest move by the Treasury and the Federal Reserve is going to help is by objectively going back in time to understand how the markets got here.

The story starts in the late 1990s when the Chairman of The Federal Reserve Alan Greenspan decided that he, as the head of the Federal Reserve, needed to make a bet on fiscal policy. Usually the Federal Reserve only makes decisions based on monetary policy. The fiscal decisions are left to the political leaders. However, in the late 1990s the United States was facing Y2K, and a run on banks could have happened if ATM machines and the banking system failed to work on January 1st of 2000.

Therefore, the Federal Reserve decided to grow the money supply at the rate of 30% in the fourth quarter of 1999. On January 1st, everything worked fine, and now the Federal Reserve was in a jam. It now had to slow the supply of money, and by the third quarter of 2000 the growth rate dropped to 0%. The rest is history.

Did Alan Greenspan singlehandedly cause the Tech Crash?

With money supply stalled, the investment in technology stocks soon stopped, and the great Tech Crash of 2000 to 2002 began. At its end, the NASDAQ Composite had lost 85% of its value. All because of a bad decision by the Federal Reserve and it's then Chairman, Alan Greenspan.

"The Maestro," as Greenspan was dubbed by the media, made one terrible decision. The ramifications are still being felt now. But the question is how much longer could they be felt – and how much worse could it get?

Alan Greenspan and the housing bubble...

Greenspan decided that every American should be a homeowner, whether they were credit worthy or not. He reasoned that the housing market was stable, and that over time this would create a great deal of wealth for the "average American." Nice concept, but in reality a horrible idea.

Thus, the sub prime mortgage was born with Greenspan's blessing. Money flowed like water and everyone began to buy homes. No longer was 20% down a requirement. 0% or 5% down became the norm. Speculators began to jump into the housing market as well, and now the United States has a housing bubble...only a few years after a tech bubble! Like all bubbles, the housing bubble finally burst in the first quarter of 2006. Since then, the S&P SPDR Homebuilders ETF has fallen from $45.80 to a recent low of $14.72. The homebuilders have now fallen by 68%.

As the housing market fell apart, it was only a matter of time before loans made to recent purchases would run into trouble. It was kind of like "Musical Chairs" – where the last one standing when the music stops is out. And that is exactly what happened. Starting about a year ago, many individuals and speculators began to have trouble paying their mortgages. Why? These sub prime mortgages were done with adjustable rate mortgages. In fact, Greenspan pushed for this, and thought that individuals would be able to refinance their initial mortgage. Bad assumption. Remember, when you assume it makes an ass out of you and me.

And, of course, defaults led to foreclosures, which have complicated matters more. You see, twenty five years ago an individual would get a mortgage from a bank, who would then hold the loan to maturity, and that was how the bank made money. Then Salomon Brothers and Lewis Ranieri decided to package these mortgages into mortgage backed securities. These were simple securities when compared to the second and third generation of mortgage packaging, CDOs and CDS.

Bad loans were packaged into CDOs that cannot be undone or altered without changing the terms given to investors. Investors are not allowing changes to these instruments, and the unwinding of the CDO market is proving to be a nightmare.

Even Greater Troubles Lie Ahead

It gets worse. The financial stocks have been crushed. The Philadelphia Bank Index (BKX) has fallen from May of 2007 at 118.33, to the current level of 54.67 -- which is a drop of 54%. Remember that the NASDAQ fell 85% and housing stocks have fallen by 68%. Both the homebuilders and financial stocks have more to fall before they reach the level the NASDAQ saw in 2000 through the low in October of 2002.

In such an environment, energy prices continue higher because of one simple reason, the fall of the dollar. The dollar will continue to fall because the world no longer believes that the United States is fiscally responsible. As a result, the Gold and Energy Options Trader and the Gold and Energy Advisor may hold your only key to financial salvation in the coming months as the financial Armageddon spreading through the U.S. and the world continues.

How far can it fall?

Unfortunately, the consumer stocks may have to fall as much as the tech stocks did in 2000 to 2002, because their credit has been cut due to the sub prime crisis and the complete collapse of credit. Make no mistake about it, credit drove the economy of the United States to heights it should never have seen, and now we are going to have to pay a heavy price.

Usually, the Gold and Energy Option Trader only offers trades in energy and materials instruments. BUT there may be greater opportunities outside these sectors. As a result, the same team that produces the Gold and Energy Option Trader will offer trades in other areas in Super Stock Investor.

Thomas Jefferson offered these words at the founding of our country, "Banking establishments are more dangerous than standing armies." The next few months may prove to be very difficult as the financial crisis spreads to the consumer, and allows energy market to move even higher.

The current downfall of the United States is a horrible set of events driven by the irresponsible behavior of multiple administrations on both the Democratic as well as Republican side. The legislative branch is also culpable for these sets of events unfolding. Senator Charles Schumer should feel shame for throwing blame on the regulators for the collapse of Indy Mac Bank. The current collapse happened on his watch as well as the others mentioned above.

Pigs on Wall Street?

Those on Wall Street are to blame as well. They were greedy and deserve much of the blame. But their greed is coming home to roost. One of my friends stated that he felt sorry for those at Bear Stearns and Lehman Brothers. I do not and neither should you. Instead they deserve the current predicament.

The people of this country are slowly coming to understand why this crisis occurred. We are a good people and sooner than later the correct decisions will be made to begin the long corrective process out of this debacle. Unfortunately, the corrective process may take several years, the likes of which the world has not seen since the unwinding of Japan 1980's financial meltdown that has been playing out for over two decades. We understand the nuances of what can happen from this point onward.

The breakout down of the corporate and commercial paper market, leading to an erosion of corporate profits as working capital gets hit even more, sending unemployment even higher, guaranteeing that the U.S. and the world enter a recession and stocks continue to be pressured,

We are not bureaucrats, politicians or on Wall Street's sell side, but rather a team that is on the inside and knows how to make the correct calls to help you and your nest egg survive this awful time for many. Earlier we quoted Thomas Jefferson and we will end this piece with another quote from him, "Leave no authority existing not responsible to the people."

When the people take back the authority is when the new bull market can begin.