Scapegoats during economic crisis?

It has already started in the UK.  Phil Woolas, Immigration Minister in the UK has said that immigration is a "thorny" issue in times of financial crisis and that he will do what he can to make it more difficult for people to immigrate to the UK.  

As the pie gets smaller, who will be left out?  Certainly not the executives from AIG (see Financial Times post below Independent article).

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http://www.independent.co.uk/news/uk/politics/welfare-groups-condemn-ministers-pledge-on-migrants-966240.html

Welfare groups condemn minister's pledge on migrants

Phil Woolas's promise to make it harder for foreign workers to settle in Britain sparks fury

Brian Brady, Whitehall Editor
Sunday, 19 October 2008
Phil Woolas said that immigration becomes 'an extremely thorny issue' at times of economic woe



Phil Woolas said that immigration becomes 'an extremely thorny issue' at times of economic woe

Britain's new immigration minister was accused yesterday of leading a "baying pack" after he suggested the growing economic crisis could force a reduction in the number of migrants allowed into the UK.

In his first public statement in his new position, Phil Woolas conceded that immigration became an "extremely thorny" issue during an economic downturn when people already living in this country were losing their jobs. He also pledged the Government would respond by making it even harder for non-European Union nationals to come to Britain to work and live.

His warning was condemned by immigrant welfare organisations, who claimed the move towards quotas conflicted with the Government's settled policy on migration, which included the recently introduced "points-based" entry system. Keith Best, chief executive of the Immigration Advisory Service, said: "Whenever we face a recession, poor old migrants get the blame, but I don't think I was expecting a newly appointed minister to lead the baying pack."

Keith Vaz, Labour chairman of the Home Affairs Select Committee, said he would be astonished at a Labour immigration minister "in effect, changing the policy". "His predecessor and the Home Secretary have made it clear they do not support a quota," he said.

Immigration has consistently been a politically sensitive issue for New Labour for the past decade. Although a series of immigration reviews reduced numbers of new citizens settling in the UK every year, official figures show that the population grew by nearly two million – to almost 61 million people – between 2001 and 2007.

Mr Woolas has made it clear the Government will not allow it to continue rising without restraint, particularly with the economy in difficulties. "It's been too easy to get into this country in the past and it's going to get harder," he told The Times. "If people are being made unemployed, the question of immigration becomes extremely thorny. This Government isn't going to allow the population to go up to 70 million. There has to be a balance between the number of people coming in and the number of people leaving."

His warning that the Government planned to "break the link" between people coming to work and subsequently gaining citizenship was welcomed by pressure groups and MPs who have been demanding action to limit the number of people allowed to settle in the UK.

The Labour MP Frank Field claimed Home Secretary, Jacqui Smith, had signalled a plan for fresh limits at a meeting earlier this month. "It is long overdue, but it is clear the Government is moving towards a new position on immigration and it will be the first government whose views on immigration reflect the views of the overwhelming majority of the British public," Mr Field said. "What matters now is delivery. If our population is to be stabilised, immigration must be substantially reduced. For a start, we need to end the virtually automatic right of those who come on work permits to settle permanently in Britain."

Sir Andrew Green, chairman of the pressure group Migrationwatch, said the minister's intervention "could be a significant turning point". "I think the economic crisis has shown up the weakness of uncontrolled immigration. This is the very first time that a government minister has recognised the link between immigration and population. The Government has been in denial about that for years," he said.

The shadow Home Secretary, Dominic Grieve, said: "We have been calling for immigration limits for years but the Government has repeatedly poured scorn on this. It appears it now realises just how out of touch it is."

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AIG acts amid probe by attorney general
Financial Times
By Joanna Chung in New York

Published: October 17 2008 03:00 | Last updated: October 17 2008 03:00

AIG yesterday agreed to help recover any illegal compensation payments made to Martin Sullivan, former chief executive, and other senior management as part of an investigation by Andrew Cuomo, the New York attorney general.

The company, which was rescued by the government last month with an $85bn loan, is also withholding an estimated $10m payment from Steven Bensinger, who served as chief financial officer until May, and is immediately cancelling all junkets or perks.

The announcements came a day after Mr Cuomo threatened legal action unless AIG stopped "outrageous" expenditures and helped recover past ones, including certain executive compensation. He said such expenditures could have violated a New York law...

for complete Financial Times article click here

2008 Global Financial Crisis: from the London Independent

Great Depression seems to the phrase that "cannot be spoken" these days.  Sometimes it is hard to imagine how things on Wall Street could affect our everyday life.  Maybe not much will happen... maybe it will only be that the car lots will be empty of customers - and new housing subdivisions won't grow so fast for a while.  

Either way, maybe we need to think about not having to buy everything we want right now.  Do we really need all those extra channels on our cable programming?  Do we need all those minutes for our cell phone use?  Do we really need a new car?  or new furniture?  or new curtains?  

It seems like a good idea to take a second look at where our money is going - and consider trying to save instead of charge.

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http://www.independent.co.uk/opinion/commentators/andreas-whittam-smith/andreas-whittam-smith-we-could-be-on-the-brink-of-a-great-depression-959311.html

Andreas Whittam Smith: We could be on the brink of a Great Depression

It has been fashionable to say that this can never happen again

Monday, 13 October 2008

As we return to work this Monday morning, let the words of the director general of the International Monetary Fund, Dominique Strauss-Kahn, ring in our ears. Mr Strauss-Kahn, having spent all Saturday with finance ministers in Washington, warned that the global financial system has been pushed "to the brink of a systemic meltdown". And he added that the measures taken thus far to deal with the financial crisis "have not yet achieved the goal of stabilising markets and bolstering confidence".

I stretch "systemic" to mean that we are all affected by what has begun to happen – the shrinking of bank credit. Banks won't even lend to each other, let alone to the rest of us. In a sense, they know too much. Grimly aware of the substantial amounts of dud loans on their own books, following a prolonged period of over-optimistic lending, they assume the worst of each other. They also turn down highly respectable companies, the mainstays of the economy, when they come to them for credit. For as the banks' mistakes return to haunt them, they feel compelled to hoard cash.

Two weeks ago, for instance, I was on the executive floor of a large company, a household name for generations. Decent people run it. It makes substantial profits. I found the directors stunned to discover that they could no longer go on raising short-term loans from time to time to balance out the ebbs and flows of their cash flows. This was a "first" in the company's long history. From now onwards, the directors would have to run their business more cautiously. They will provide less employment and reduce the orders they place with outside suppliers.

Systemic, because virtually all businesses have some borrowing. Credit is the oxygen in the system. Take it away and businesses begin to falter. They become like climbers at high altitudes. An example is the plight of local authorities and charities whose funds have been trapped in insolvent Icelandic banks. Some of these lenders will have difficulty in paying their bills and so they will unwittingly harm others who know nothing of Icelandic banks.

Systemic, seeing that the United States, Germany, Japan and most large economies are feeling the effects. Last week, for instance, shares in General Motors crashed to their lowest level since 1950. Yes, since just before the company launched the first ever "American" sports car, the Chevrolet Corvette, with its white paintwork and red upholstery. Over 50 years later, General Motors' customers are having increasing difficulty in obtaining car finance. And the stock market was spooked by the fact that loans raised by General Motors itself, already classified as "junk" debt, are to be down-rated even further – to sub-junk, I suppose. In these circumstances, virtually nobody will lend to this giant.

"Meltdown," in Mr Strauss-Kahn's phrase, is not an exaggeration because depriving the economic system of credit would quickly result in prolonged recession, or depression, call it what you will. Stock markets suddenly began to sense this possibility last week. That is why investors rushed for the exit.

Indeed, it is not fanciful to make comparisons with the Great Depression, which started with the stock market crash of 29 October 1929 and ended some time in the late 1930s. President Roosevelt's chairman of the Federal Reserve, Marriner Eccles, tried to sum up its essence in his memoirs published in 1951. He had led the Federal Reserve from 1934 to 1948 and seen everything. I quote him extensively because of his sudden relevance: "This is what happened to us in the Twenties," Mr Eccles wrote, "We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system (which) increased about 50 per cent. This debt, at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer instalment debt, brokers' loans, and foreign debt."

Before going further, notice the similarities between then and now – the presence of mortgage debt and of shadow banking – what Mr Eccles called debt outside the banking system. Mr Eccles went on: "The stimulation to spend by debt creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time ... The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment ... (finally) the vicious circle of deflation was closed (with) one-third of the entire working population unemployed. This then, was my reading of what brought on the depression."

It has long been fashionable to say that this can never happen again because this time we know better than to let banks actually crash – that is, apart from Lehman Brothers a few weeks ago, whose collapse had had such serious consequences. Nor would governments savagely hack into public spending as they did in the early 1930s – though there are plenty of reasons in 2008 to cut back. Nor would we lapse into protectionism again – in spite of increasing temptation to move in that direction. We know what not to do. But do we know what to do?

"On the brink," observed Mr Strauss-Kahn, a clear reference to the failure of the Group of Seven industrialised nations to decide anything definite at their meeting on Saturday. But since then, I am glad to say, the pace has quickened. There are three encouraging developments. This morning, we are likely to learn which British banks are to get money under the UK Government's £50bn bank rescue. These may well be HBOS and Royal Bank of Scotland.

The Bush administration has quickly embarked on an overhaul of its own strategy for rescuing the foundering financial system. Having two weeks ago persuaded Congress to let it spend $700bn to buy distressed securities tied to mortgages, the White House has decided in addition to follow Britain's approach. The US government would inject capital directly into the nation's banks. Finally, the French government also appears to be moving towards the British solution, expressing a willingness to guarantee banks' short-term borrowings as well as their deposits.

As an international civil servant rather than a finance minister with daily politics to consider, Mr Strauss-Kahn may have felt that he should issue the dreadful warnings that others dare not proclaim. Governments won't even use the word "recession" when it is staring them in the face. And while the weekend's developments have by no means achieved "the goal of stabilising markets and bolstering confidence", they do represent progress of a kind.

I - Financial Meltdown: How will it affect us?

Television news are focusing on stocks, and CEO's, traders, and the stock exchanges in different countries. Everybody seems to be asking "what will happen to us" - "Us" being people who generally don't invest in the stock market, or make in the 6 figures. Money Magazine published an article about how this could affect your regular person...
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http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET

YOUR SAVINGS

With banks falling like dominos, there's a lot of worry about the solvency of financial institutions. Some people are pulling their cash out of the stock market and putting it into FDIC-insured accounts, while others are hiding theirs under their mattress. Before you make any drastic moves, read these answers to some common questions about your savings.

Are there any safe havens left?

It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.

What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.

Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?

Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.

Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).

Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.

Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.

If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.

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II - Financial Meltdown: How will it affect us?

http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET

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JOB MARKET

The job market
By Stephen Gandel and Paul J. Lim
Last Updated: October 9, 2008: 12:29 PM ET

It's rough out there, but most of us can weather the storm as long as we keep getting a paycheck. With all this talk of the R-word though, economists predict that lots of workers are going to end up on the chopping block. Could your job be next?
How safe is my job?

If you are an investment banker, you already know the answer. If you work in most other fields, you're likely nervous but not panic-stricken. In the past year the U.S. economy has shed just over 550,000 jobs, according to the Bureau of Labor Statistics, but most of the layoffs have come in home building, the auto industry and financial services. Take those three industries out of the equation and our economy has created 90,000 jobs.

"Companies are continuing to add executive positions even as the market slows," says Mark Anderson, president of ExecuNet, a Norwalk, Conn. firm that tracks management hiring.

The recent financial turmoil could make the jobs outlook tougher, and not just for Wall Street types. If business lending stays choked off, hiring will suffer. In a deeper recession, some economists predict more than 1 million jobs will be lost in 2009.

Now is the time to make sure your emergency fund is in place. Three months of expenses is standard, but if you are in an at-risk industry, sock away enough for six months to a year.

At work, lower your chances of being the first out the door by making yourself valuable - and conspicuous. This may be the time to reconsider your flexible schedule. Demonstrate that you can find ways to bring in revenue and cut costs, don't be afraid to point out the good job you and your team are doing and, to be safe, step up your networking, both inside and outside your company.
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III - Financial Meltdown: How will it affect us?

http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET

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YOUR RETIREMENT


With stock markets plunging, nest eggs are cracking and retirement dreams are slipping away. But don't hit the panic button yet. With a solid strategy, there's still hope for your golden years.
Will I ever be able to retire?

If you have several years, if not decades, to go, don't worry. Yes, your 401(k) and IRAs have taken a significant hit. But history shows that you'll make up 80% of your bear market losses within the first year of the recovery, according to Standard & Poor's Equity Research.

If you're planning to retire in the next few years, the answer is still yes, with a bit of effort. Why? The decade before you quit your job and the first five years that you're out of the work force are vulnerable times. How much your investments earn - or lose - during this time will go a long way toward determining how much money you can afford to spend for the following 30 years or more.

Say you planned to quit this year and begin withdrawing 4% of your retirement funds annually. If you started with a $1 million retirement portfolio last year (split 70% stocks, 30% bonds), the market has already cut that down to $833,000. That means if you pulled 4% of your remaining money out, you'd be left with just under $800,000 after Year One, cutting your odds of having your money last 30 years from nearly 80% to less than 50%.

Sounds scary. But you can fix this problem. For starters, pledge to work one more year. A study from T. Rowe Price found that putting in another 365 days at the job would boost your annual retirement income by 7%. Work three years more and your retirement income could soar by 22%.

By staying at your desk longer, you can also delay taking Social Security benefits. For each year you put off starting your benefits between ages 62 and 70, you boost your Social Security payments by 8%.

What if you don't want to - or can't - work longer? You still have an option: spend less. The traditional advice is to withdraw 4% of your assets in the first year of retirement and boost subsequent withdrawals by the inflation rate. But in this type of market, consider withholding your inflation adjustments for the first three years after you retire. T. Rowe Price found that a retiree with a 55% stock/45% bond allocation in 2000 would have cut his odds of running out of money by half simply by following this approach.
What should I be doing with my portfolio?

Every long-term investor has to face nerve-rattling times like this - likely more than once - and your success will hinge on your ability to keep a cooler head than many others around you.

If you own a diversified portfolio, your asset-allocation strategy has probably protected you from the worst of the storm. While the S&P 500 has lost more than a quarter of its value over the past year, a portfolio consisting of 70% stocks and 30% bonds has fallen around 17%, thanks to the gains fixed-income funds enjoyed.

Still, markets like this are a good time to check if your asset-allocation strategy is still appropriate for your time horizon and if you need to rebalance. You'll likely find that you own too big a stake in bonds - or at least more than you bargained for.

Let's go back to that portfolio of 70% stocks and 30% bonds. If you hadn't traded in the past year, the market would have shifted your mix to 62% stocks and 38% fixed income. That might feel good now because bonds are less volatile, but it will mean that you will lose out on the higher returns on stocks when the market eventually recovers.

If you're selling bonds to add to stocks, what's safe to buy? It's fair to assume that the government's efforts to bail out Wall Street will add to our national debt, which will likely push up interest rates. Basic-materials stocks tend to do well when rates rise. So consider T. Rowe Price New Era (PRNEX), which owns energy and mining stocks. New Era is a member of the Money 70, our list of recommended funds and ETFs.

Also, beef up your blue chips. As Lehman and WaMu shareholders learned, not every large company can weather tough times. But as a whole, the category clearly can. The Vanguard 500 Index (VFINX) is the safest way to invest in the largest American companies.

Another sound option is the Fairholme fund (FAIRX). The managers of this Money 70 fund follow the Warren Buffett school of investing. They buy a stock only if it's trading well below its intrinsic value - perhaps a richly populated universe after this market meltdown.

If you see that the bond portion of your portfolio is underperforming, consider Treasury Inflation-Protected Securities (TIPS), one of the few types of bonds that can do well when rates rise.
I'm retired. What does this mean for me?

If you're living off a collection of dividend-paying stocks, it may feel as if you've been hit by the perfect storm. Not only have financial stocks, which generate around a quarter of all the dividends produced by the S&P 500, taken a huge beating - they've sunk nearly 45% since the start of this bear - but 30 blue-chip financial firms have cut their dividends.

Worse still, not all of the income you'll receive this year will be eligible for the beneficial 15% tax rate. For dividends to qualify for the rate, the company that issues them must pay taxes on them. And since many banks and brokers are reporting huge losses, they may not owe a penny to Uncle Sam this year.

As long as you diversify among different stocks as well as different sectors, dividend investing still has a lot of appeal. One strategy that's holding up, relatively speaking: Instead of focusing on companies with the highest yields - which could simply be a sign that a payer's share price has tanked or the dividend is at risk - concentrate on companies that are consistently growing their payouts over time. By doing so, the Vanguard Dividend Growth fund (VDIGX) has kept its exposure to the financial sector to only around 11%, and the fund is down just 10% so far this year, about half what the overall market has lost.

In the wake of the near failure of AIG, another worry for retirees is whether to buy an immediate annuity. In exchange for handing over a lump sum of money to an insurer, you get monthly or annual payments guaranteed for life with one of these policies. In this environment, it's hard enough to have faith that your financial institution will be around for the next three months, let alone three decades.

But bear in mind that no major insurer has failed in this meltdown. Even though AIG required $85 billion in loan guarantees to stay in business, it was the parent company that needed the help - not its insurance subsidiary.

In the event your insurer does fail, your state's life and health insurance guaranty association will attempt to find another carrier to take over the failed firm's contracts. If that can't be done, state guaranty funds will cover at least $100,000 in benefits (around 20 states cover more).

There is one reason to hold off awhile before you enter a new contract: Rating agencies like A.M. Best, Moody's, Fitch and Standard & Poor's are likely to re-assess the financial health of insurers in the wake of the financial crisis. Wait to see which insurers maintain the highest ratings.
How will I know when things are recovering?

An oft-quoted Warren Buffett bit of wisdom goes that the stock market is designed to transfer money from the active to the patient. Keep that in mind when you wonder when this crisis is over for good.

Let's remember what this crisis is all about. It's not just about problems with bad mortgages and toxic mortgage-backed bonds. "That's just the tip of the iceberg," says Charles de Vaulx, portfolio manager for International Value Advisers. The reason that we're still stuck in a bear market and that loans are hard to come by is the ongoing crisis in confidence in the financial system that greases the wheels of the economy. It may take months, if not longer, for the markets to get enough courage to overcome this.

Whether you're an investor or a would-be borrower looking for a sign of better days to come, pay attention to the so-called overnight London Interbank offered rate. Libor is a rate banks charge one another. The lower it is, the greater the likelihood that banks are willing to lend freely - and the sooner this credit crisis may be over.

Historically, Libor has run fairly close to the federal funds rate, which the Fed is currently targeting at 2%. But lately the overnight Libor has fluctuated between around 3% and 6%, an indication that banks still perceive a great deal of risk in the market.

In the short run, that's not great news for investors or consumers waiting for banks to start lending again. In the long run, however, the fact that banks are starting to consider risk isn't necessarily bad. After all, says Steven Romick, manager of the FPA Crescent Fund, "the reason we're in this mess is that financial institutions tried to make money without any regard to the concept of risk."

Additional reporting by Joe Light

IV - Financial Meltdown: How will it affect us?

http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET

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THE REAL ESTATE MARKET


The global contagion has spread, but the source of the crisis is still bleeding. From struggling homeowners who can't make their payments to would-be buyers, almost everyone is wondering where home prices are heading next. Here's some insight.
Is there any hope for home prices?

The burst real estate bubble that kicked off this crisis is unlikely to reinflate quickly. "I don't see the slump in housing prices ending anytime soon," says Dean Baker, co-director of the Center for Economic Policy and Research. The government takeover of Fannie Mae and Freddie Mac lowered mortgage rates briefly (which helps buyers afford your home).

But the bankruptcy of Lehman Brothers, the failure of Washington Mutual and the sale of Wachovia, as well as the stock market sell-off, have made investors nervous about everything, mortgage bonds included. And that has pushed home-loan rates right back up.

The proposed government bailout could help home prices if the banks that get relief turn around and make new loans, but it's not clear that they will. More important, housing prices are not just a factor of mortgage rates. Foreclosures and slow sales have left 4-million-plus homes on the market, nearly half a million more than two years ago. That could get worse before it gets better if rising unemployment translates to fewer buyers to work off that fat inventory.

"In the long run none of what we're doing now is going to matter that much to real estate," says Wellesley economics professor Karl Case. "Home prices have to do with the scarcity of land and perception of that scarcity."

Until homes for sale are again scarce, it will continue to be better to be a buyer than a seller. Most economists expect another 10% drop in housing prices nationally over the next year. Some, like Nouriel Roubini of New York University, say a 15% to 20% drop is more likely.

V - Financial Meltdown: How will it affect us?

http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/

By Stephen Gandel and Paul J. Lim
Money Magazine
Last Updated: October 9, 2008: 12:29 PM ET

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THE ECONOMY

If you're watching the news and scratching your head wondering what bomb hit the economy, you're certainly not alone. It's rough out there. People are losing their jobs, retirement dreams are going up in smoke and personal wealth is plummeting. Here's why it's happening and what it all means.
How did we get here?

By now you likely know that the crisis in the financial markets is the culmination of years of reckless mortgage lending and Wall Street dealmaking. It's the final gasp of the burst housing bubble. But how exactly did this happen?

To find the root cause of Wall Street's woes, you have to go back to the collapse of a different bubble - tech. In 2001, after the dotcom craze ended and the bear market began, the Federal Reserve started aggressively slashing short-term interest rates to stave off recession. By eventually reducing rates to a historically low 1%, the Fed reinflated the economy. But this cheap money sparked a new wave of risk taking.

Homeowners, armed with easy credit, snapped up properties as if they were playing Monopoly. As prices soared, buyers were able to afford ever-larger properties only by taking out risky mortgages that lenders were happily approving with little documentation or money down.

At the same time, Wall Street investment banks got a brilliant idea: bundle the riskiest of these mortgages, then slice and dice these portfolios into tradable bonds to be sold to other banks and investors. Amazingly, bond-rating agencies slapped their highest ratings on the "best" of this debt.

This house of cards came down when subprime borrowers began defaulting on their mortgages. That sent housing prices tumbling, unleashing a domino effect on mortgage-backed securities. Banks and brokerages that had borrowed money to boost the impact of those investments had to race to raise capital.

Some, like Merrill Lynch, were forced to sell. Others, like Lehman Brothers, weren't so lucky. "What we always tell investors is beware of too much leverage in a company," says Brian Rogers, chairman and portfolio manager for T. Rowe Price. "Leverage is the enemy of the investor."

Sure, everyone from former Fed chairman Alan Greenspan to your friends and neighbors played a role in stoking this casino culture. But troubled banks and brokerages can't pass the blame. "These firms closed their eyes and made very bad bets on risky securities that they didn't truly understand," says Jeremy Siegel, finance professor at the University of Pennsylvania's Wharton business school. "Investments that they did not have to make led to their demise."
How bad could the economy get?

Before the meltdown, economists fell into two camps: those who thought the economy had already slipped into recession and those who thought a recession could still be avoided.

While forecasters still differ on the timing and severity of a downturn, "the consensus view is that we're headed for recession and will be in one until next year," says Mark Zandi, chief economist for Moody's Economy.com.

Corporate profits are already on the verge of falling for a fifth straight quarter, according to Thomson Financial. The next shoe to drop will be consumer spending. "Two years ago, people were using their homes as ATMs, pumping out cash," says Robert Arnott, chairman of the investment consulting firm Research Affiliates in Pasadena. "As banks continue to tighten their lending, that spending is disappearing."

But softer profits and slower spending haven't translated into widespread layoffs yet. "This is the strongest recessionary job market in 40 years," says James Paulsen, chief investment strategist of Wells Capital Management. A jump in unemployment could still be coming, especially given bank and brokerage failures and mergers. But outside of finance and housing, much of the rest of the economy is strong, he says.

The weak dollar is boosting demand for our goods abroad, and lower gas prices are making Americans feel more flush. Add in the cash that the Fed has been hosing into the banking system and we are bound to see growth in 2009. "If all this stimulus has no effect on the economy, that would be a rarity indeed," says Paulsen.

Standard & Poor's chief economist David Wyss expects a mild recession that ends next spring. "Gradually we will regain confidence in the market. Lower oil prices and a falling trade deficit will help," he says. "This is a financial panic, not an economic one."

Of course, that could change if the financial panic doesn't abate soon. If banks remain too scared or broke to lend, would-be home buyers will be frozen out of the market. If that happens, home values could fall even more, crimping confidence and putting the brakes on the economy's greatest engine: the consumer.
Does all this mean I'll pay higher taxes?

Yes. "Taxes will rise regardless of who wins the Presidency," predicts Greg Valliere, chief political strategist for Stanford Group Co.

It's impossible to say what the final bill for rescuing Wall Street will be. Even before the bill to buy $700 billion of unwanted mortgage-backed debt, the government had already signed on for nearly $365 billion in loan guarantees and other costs.

The eventual price tag will depend in part on the housing market. If it recovers by 2010, the value of mortgage-backed securities could rise, minimizing the tab for taxpayers, says Brian Bethune, chief U.S. financial economist for Global Insight.

"On the other hand," Bethune adds, "if the economy continues to tank into a deeper recession, dragging the housing market along with it, then the costs to the taxpayers easily could escalate to several hundred billions of dollars."

Under Treasury Secretary Henry Paulson's original debt-buyback proposal, some economists predicted the federal deficit could soar to $900 billion in 2009. Even without a bailout, the federal budget was expected to hit $482 billion next year. If government aid pads that figure by $200 billion, the deficit will be back to where it stood in the 1980s - around 5% of GDP. At the very least, that will make it hard for a future President to keep tax-cut promises.

From the UK: " It's official. It's a bloodbath"

"It's official. It's a bloodbath - just pure blind panic! Valuations go out the window, sentiment rules OK," commented David Buik, veteran City commentator at BGC Partners.



http://www.guardian.co.uk/business/2008/oct/10/marketturmoil-creditcrunch

Financial crisis: Panic selling piles sees FTSE down nearly 10%
# Graeme Wearden and Julia Kollewe
# guardian.co.uk,
# Friday October 10 2008 14.00 BST

A wave of panic selling wiped more than £100bn ($170 billion dollars) off the value of Britain's biggest companies today, as recession fears sent stockmarkets worldwide tumbling.

Dealers in the City dumped shares when trading began this morning, sending the FTSE 100 plunging by more than 10% in early trading. The index fell by 438.8 points, careering down through the 4000 mark for the first time in five years.

Markets across Europe were also in freefall, following yet another rout in Asia, piling pressure on world leaders as they meet in Washington for the G7 summit to consider joint action to contain the financial turmoil.

The CBI warned that any signs of disarray at the G7 meeting could have a devastating effect on the markets.

"Never has a meeting of the G7 been so important to the financial markets," said the CBI's deputy director-general, John Cridland. "This meeting has the power to galvanise sentiment and aid the confidence-building process internationally."

The markets clawed back some losses as the morning progressed, but there was little sign of confidence returning. By 2pm the FTSE 100 has lurched down to 3918.8, off 958 points or more than 9%, putting it on track for one of its biggest ever losses. Banks and miners led the fallers, along with blue-chip firms such as British Airways, BT and Thomson Reuters, as the pound hit a five year low against the dollar.

"It's official. It's a bloodbath - just pure blind panic! Valuations go out the window, sentiment rules OK," commented David Buik, veteran City commentator at BGC Partners.

Shares on Wall Street are also expected to plummet later today, with the Dow Jones industrial average tipped to drop by almost 300 points, or 3.3%. Yesterday, in a further sign that the wider economy was being pulled into the crisis, shares in General Motors and Ford plunged on Wall Street over fears that the troubled automotive industry may not survive the downturn.

The stockmarket turmoil shows confidence has not been restored despite America's $700bn (£380bn) bail-out, Britain's £500bn banking rescue plan and the coordinated interest rate cuts by the world's central banks.

The latest Libor figures, released before noon, showed that banks were still very reluctant to lend to each other.

It's clearly a crash

Investment guru Jim Rogers today criticised the political response to the crisis, warning that attempts to rescue "incompetent" banks would simply drive up debt and inflation.

"Markets are collapsing because they have no confidence in the various government plans," said Rogers, who said the markets were "very clearly experiencing a crash".

Martin Slaney, the head of derivatives at financial spread betting company GFT, said markets were suffering "vicious sell-offs".

"What we are witnessing is mass selling on a global scale due to a combination of sheer panic and fear, combined with complete uncertainty over the future of the world's major economies," Slaney said. "Investors are effectively pricing in the possibility of a global depression."

President George Bush is due to speak later today on the state of the economy, after watching the Dow Jones industrial average suffer its third-worst points fall ever, hitting a five-year low.

Japan's Nikkei index has now fallen by more than 24% in the past week. It closed down 9.6% earlier today, its biggest one-day fall since 1987, at 8,276, while Hong Kong's Hang Seng index was nearly 8% lower at 14,672.

The price of a barrel of oil also tumbled overnight, with traders anticipating lower demand as several economies lurch towards recession.

US light crude for November delivery dropped $4.19 a barrel to $82.40, taking its losses over the past two weeks to 23% — the biggest two-week sell-off since prices fell at the start of the 2003 war in Iraq.

London Brent crude slid $3.58 to $79.08 a barrel, falling below $80 for the first time in a year.

Gold prices jumped to the highest in two months as investors scrambled for safety. Spot gold rose for the fifth day in a row and hit $925.05, the highest since July 31.

"Investors only concentrate on gold. Stock prices and other commodities are not so good," said Yukuji Sonoda, a precious metals analyst at Daiichi Commodities in Tokyo.

Are we panicking or is the financial crisis for real?

--
http://www.independent.co.uk/opinion/commentators/hamish-mcrae/hamish-mcrae-its-bad-may-get-worse-but-its-no-great-depression-955492.html

Hamish McRae: It's bad, may get worse, but it's no Great Depression

Thursday, 9 October 2008
London Independent

The world's monetary authorities are at last really trying to reassert their power over the financial markets. They have not yet succeeded and they will have to do more, maybe much more, but eventually they will win. Or at least they always have in the past 75 years. You have to think that the world is facing something akin to the Great Depression of the 1930s to believe that they will fail.

For a start, the fire-power of the world's central banks, particularly when acting together, is huge. They can flood the world with money almost without limit, hence reinforcing the changes in interest rates such as they agreed on yesterday. Central banks don't act in concert very often. The last time I recall was a pact in 1985 to support the dollar. This time there will have to be more interest rate cuts around the world, but one of the messages yesterday was that there will be. This is the start of global interest rate disarmament. It was also great in show-biz terms to get the Chinese on board, since the Chinese economy has become the principal source of growth in the world.

The second way in which the authorities are taking charge is by supporting the banks. The response has had to come from governments and it has been pretty mixed. You would expect that. Governments had to make it up as they went along.

Not all have succeeded. The wooden spoon clearly goes to Iceland but the US has done none-too-well either. Continental European governments have done rather better with their bank rescues and this latest British plan makes a great deal of sense because it goes to the heart of the problem. It will give the banks access to whatever capital they need to keep functioning. You cannot do this well for that is not in the nature of the beast, but the British authorities are doing it better than most.

Getting the world's banking system moving again is a necessary precondition to averting a serious economic slump. There was always going to be some sort of global slowdown but the loss of confidence in the financial markets has made matters worse, potentially much worse. Markets reflect what they think will happen to the economy, but also help shape it. The markets are now in blue funk mode, signalling they believe that the forthcoming downturn will be serious indeed. They are not in the utter despair of the mid-1970s, the feeling that governments have lost control over monetary policy, their budgets, everything.

But the negative response to the British bank rescue plan and to the global interest rate cuts is undoubtedly troubling. You could say that what they are suggesting is that this downturn will be similar to that of the 1990s, a nasty but "conventional" post-war recession. That may happen, though my own view is that the UK may pull through in somewhat better shape than it did then. But could it be worse still – something more akin to the 1930s Depression?

I can think of at least half-a-dozen reasons why the present situation is quite different to that after the 1929 share price crash.

First, what is happening now follows a long period of rising prosperity, the longest such period the world has ever known. In the 1930s the world was still recovering from the destruction of half the accumulated wealth of the 19th century.

Second, there were deep rivalries and even hatreds between major nations that made economic co-operation virtually impossible and encouraged the rise of trade barriers and competitive devaluations. As a result world trade halved, making recovery very difficult.

Third, the US allowed many banks to go bust, leading to a breakdown in commercial activity. The US has a deeper recession than any other major nation. This time, pace Lehman, it will patch things up.

Fourth, countries followed what they thought were sound fiscal policies, trying to balance their budgets, cutting spending as their tax revenues fell. This time budget deficits will be allowed to rise.

Fifth, price levels in the 1930s were falling, so even very low nominal interest rates were high in real terms and investment funds were therefore expensive. Now prices are rising so low interest rates are more likely to boost investment.

Finally, global demand will be maintained by China, which in the 1930s was not a force in world trade. Now it is probably the world's third largest economy, so though much of the developed world may go into some sort of recession, we are not talking a decline for the world as a whole.

So yes, maybe something like the early 1990s, though that is not at all certain, but the 1930s? Unless something unspeakably dreadful happens in the coming months, absolutely not.

The war in our (American) heads

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http://www.guardian.co.uk/commentisfree/2008/oct/09/uselections2008.barackobama

The world needs the US to get over its cultural civil war - and fast
Sarah Palin is the Katyusha rocket of the American right. But so far her attacks on Barack Obama aren't working

o Timothy Garton Ash in Stanford
o The Guardian,
o Thursday October 9 2008


As if there were not enough real enemies to fight, the United States has been at war with itself in recent years. They call it the culture war. It has generated more hot air than most real wars in history. John McCain has now turned to its red army tactics to rescue himself from impending defeat - and Sarah Palin is his Katyusha.

"There is a religious war going on in our country for the soul of America," declared the conservative nationalist Pat Buchanan at the Republican national convention in 1992. "It is a cultural war, as critical to the kind of nation we will one day be as was the cold war itself." Later that year he explained that "the Bosnia of the cultural war is abortion". As Buchanan foresaw, this has been a war for power: not military power, but the kind that comes from shaping the norms, beliefs and values by which people live, and the meanings attached to words like liberalism, patriotism or, indeed, culture. The two sides in this war came to be labelled red and blue, after the colouring of Republican and Democratic states on electoral maps.

No one has generated more hot air in this cause than Fox News anchor Bill O'Reilly, who in 2006 published a book proudly called Culture Warrior. He describes the culture war as a battle between traditionalists ("T-Warriors") like himself and "the committed forces of the secular-progressive movement that want to change America dramatically: mold it in the image of western Europe". Like Europe! God, how horrible.

O'Reilly labels these secular-progressive forces "S-P", and identifies George Soros as "El Jefe of the S-P forces". In a fashion disturbingly familiar to any student of the 20th century, he illustrates this passage with an unflattering photo of the financier-philanthropist, captioned "George Soros, S-P Jefe, puppet master, and moneyman". "Born George Schwartz to a Jewish family in Hungary in 1930," he explains, "Soros assumed the identity of a gentile boy when the Nazis invaded at the start of world war II." This is what they call a Fox Fact. (It was Soros's father who changed the family name in 1936 and the Nazis did not invade Hungary until 1944: three errors in the space of one innuendo.) Anyway, what should that personal history have to do with an argument about cultural and social policies in 21st-century America?

Excoriating "leftwing outfits like the Canadian Broadcasting Corporation and the British Broadcasting Company" (Foxy Fact-checking again: it's the British Broadcasting Corporation), O'Reilly pounds the hot buttons of the culture war with a ham fist: abortion, drugs, gay marriage, not celebrating Christmas, atheism, the liberal or - as he prefers - "S-P" media and elites. The New York Times, he says in an afterword to the paperback edition, has "morphed into a brochure for secular-progressive causes". And so it goes on. And on.

Does this matter? Over the past decade it has mattered a lot. The framing of the political debate in cultural conservative terms - a counter-revolution against the cultural revolution of 1968 - contributed significantly to George Bush's election victories in 2000 and 2004. And one way of understanding the direction taken by the McCain campaign over the past few weeks is this: only the culture war can win it for us now. On Iraq, we lose. On the economy, we lose. But by caricaturing the liberal otherness of a candidate called Barack Obama, perhaps we can snatch victory from the jaws of defeat.

Enter Sarah Palin, the Katyusha rocket of red America. (I trust she won't mind a Russian analogy since, as she has informed us, you - or at least she - can see Russia from Alaska.) The selection of such an obviously under-qualified candidate for vice-president can only be explained by electoral calculation, and that calculation has everything to do with the politics of the country's cultural civil war. Her kind of down-home populist inveighing against Washington elites (add "liberal" or "S-P" according to taste) is part of the well-tried semantic armoury of the red army.

Katyusha Palin now leads the attacks on Obama. This week she has repeatedly tried to tar-and-feather him by association with former terrorist William Ayers. The not-even-subliminal message is: he's not like us, he's like them. The others: elites, liberals, subversives, immigrants and infidels, closet Europeans! Chapter one of O'Reilly's Culture Warrior begins with an imagined 2020 state of the union speech by a president of the United States called Gloria Hernandez: hispanic, and a woman to boot. Worse still, she celebrates the United States as "a diversified nation striving to be at peace with the world". How terrifying. How blood-curdling. Give us President Palin any day.

For Gloria Hernandez read Barack Obama. Or "that one", as McCain disrespectfully referred to him in Tuesday night's presidential debate. At the moment, the tactic isn't working. This election is about the economy, stupid. The pocketbook trumps the prayer book. However much McCain lauds himself as a "maverick", he can't disassociate himself from eight years of Republican rule that are ending in the biggest financial crisis since 1929 and a near-doubling of the national debt. And Obama is better on the economy: clearer, more specific, always bringing it back to the everyday struggles of ordinary Americans. In the instant-reaction polls, a clear majority thought Obama won that debate, as he is winning in most of the polls both nationwide and in key battleground states.

Even if the red-clawed tactics of culture war don't pull Obama down at the last minute, an Obama victory won't spell the end of this war. But perhaps it may spell the beginning of the end. Let's be clear: this war will not finish with a victory of blue over red, or vice versa. It will finish with the accepted, peaceful coexistence in one society of different faiths, value systems and lifestyles - along the lines laid down centuries ago by the classical liberalism of John Locke and others, which so much influenced this country's Founding Fathers. It won't be "liberals" (in the perverted sense in which that word is now used in the United States) trouncing conservatives, but classical liberalism re-made for the 21st century. It won't be blue obliterating red, but red, white and blue - as in Obama's healing promise earlier in this campaign, that there are not red states and blue states, just the United States.

The world needs the United States to get over its cultural civil war, and get over it fast. Not that these moral, cultural and social issues are unimportant. They are among the most important things. But they are also among the most private things. The business of government and the law should be confined to providing a liberal (in the classical sense) framework in which men and women can make personal choices about private goods. That should be only a small part of what government does. By contrast, the central business of government is to provide public goods such as national and personal security, the regulation of markets in which private enterprise can flourish, the international development that is in all our national interests, and a clean environment using diversified, sustainable energy supplies. That's what the United States needs from its new president, and that's what the world needs from the United States.

www.timothygartonash.com

The money lost in retirement accounts

The amount was $2 Trillion two days ago.

---

http://www.huffingtonpost.com/2008/10/07/retirement-accounts-have_n_132737.html

Retirement Accounts Have Lost $2 Trillion
October 7, 2008
JULIE HIRSCHFELD DAVIS

WASHINGTON — Americans' retirement plans have lost as much as $2 trillion in the past 15 months _ about 20 percent of their value _ Congress' top budget analyst estimated Tuesday as lawmakers began investigating how turmoil in the financial industry is whittling away workers' nest eggs.

The upheaval that has engulfed financial firms and sent the stock market plummeting is also devastating people's savings, forcing families to hold off on major purchases and even delay retirement, Peter Orszag, the head of the Congressional Budget Office, told the House Education and Labor Committee.

As Congress investigates the causes and effects of the meltdown, the panel pressed economists and other analysts on how the housing, credit and other financial troubles have battered pensions and other retirement funds, which are among the most common forms of savings in the United States.

"Unlike Wall Street executives, America's families don't have a golden parachute to fall back on," said Rep. George Miller, D-Calif., the panel chairman. "It's clear that their retirement security may be one of the greatest casualties of this financial crisis."

More than half the people surveyed in an Associated Press-GfK poll taken Sept. 27-30 said they worry they will have to work longer because the value of their retirement savings has declined.

Orszag indicated the fear is well-founded. Public and private pension funds and employees' private retirement savings accounts _ like 401(k)'s _ lost about 10 percent between the middle of 2007 and the middle of this year, and lost another 10 percent just in the past three months, he estimated.

Private retirement plans may have suffered slightly more because those holdings are more heavily skewed toward stocks, Orszag added.

"Some people will delay their retirement. In particular, those on the verge of retirement may decide they can no longer afford to retire and will continue working," Orszag said.
Story continues below

A new AARP study found that because of the economic downturn, one in five workers 45 and older has stopped putting money into a 401(k), IRA or other retirement savings account during the past year, and nearly one in four has increased the number of hours he works. More than one-third of these workers have considered delaying retirement, according to the study, which also found that more than half now find it difficult to pay for basic items such as food, gas and medicine.

The hearing came just as workers are receiving _ or about to receive _ their quarterly retirement savings account statements, which are likely to show disheartening drops in the value of holdings.

Jerry Bramlett, the head of BenefitStreet Inc., a retirement savings plan administration company, said there's a risk that people will overreact to the bad news by pulling their money out of the accounts, which could add to their potential losses.

"For participants with many years of retirement, a drastic abandonment of equity positions in their retirement account will only serve to lock in as-of-yet-unrealized losses. Markets do go up and down, and 401(k) participants must try to think long-term," Bramlett said.

Still, he said workers should do their best to diversify their retirement savings accounts and "perhaps consider less volatile investments."

On the heels of enacting a $700 billion market bailout, lawmakers are searching for ways to help workers who are feeling the ripple effects of the financial crisis.

"What should we be doing to try to find a way to salvage the retirement position of American workers?" said Rep. Dennis Kucinich, D-Ohio, an opponent of the government rescue plan. Congress, he added, "rushed to protect Wall Street in hopes that some benefits would trickle down to workers."

The massive losses have already reopened a bitter and long-running debate about what role _ if any _ the government should play in helping workers save for retirement.

Some experts argue that the hefty tax subsidies that Congress has put in place in recent decades for 401(k) and other worker-contribution accounts have made people's retirement income less secure by shifting risks, decisions and costs from employers to people who often know little about investing.

"They are fatally flawed," Teresa Ghilarducci, an economist at the New School for Social Research, said of the tax-advantaged plans. "They're too risky, and it's not good policy to have workers run their own retirement plan. They want government help."

Common mistakes workers make include overinvesting in a single stock _ often their company's _ and participating in funds that carry large fees or involve excessive risk, the witnesses said.

"You cannot tell the participants at the bottom of your fund prospectus, 'Warning: Your psychology may lead you to make irrational choices,'" said Christian E. Weller of the University of Massachusetts Boston.

The current market turmoil adds to an already difficult retirement savings picture for Americans, who are increasingly shouldering the burden of managing and funding their own company-sponsored retirement savings plans as firms eliminate traditional pensions.

Even before the recent downturn, older Americans were on track to continue working longer. Twenty-nine percent of people in their late 60s were working in 2006, up from 18 percent in 1985, according to the Bureau of Labor Statistics. Over the next decade, the number of workers who are 55 and older is expected to increase at more than five times the rate of the overall work force, the BLS reported.

Falling home values and now the decimation of much of their savings could plunge older Americans into period of austerity not seen in decades, Miller said: "The fear factor is huge, and they don't see the availability of resources to them to get well."

Orszag said the situation has little precedent in American history.

"The period that we're experiencing is arguably the greatest collapse in confidence that we've experienced since the Great Depression," he said.

Not Just in Latin America: U.S. as a Banana Republic

http://www.vanityfair.com/politics/features/2008/10/hitchens200810

America the Banana Republic
by Christopher Hitchens WEB EXCLUSIVE October 9, 2008
Vanity Fair

The ongoing financial meltdown is just the latest example of a disturbing trend that, to this adoptive American, threatens to put the Land of the Free and Home of the Brave on a par with Zimbabwe, Venezuela, and Equatorial Guinea.

In a statement on the huge state-sponsored salvage of private bankruptcy that was first proposed last September, a group of Republican lawmakers, employing one of the very rudest words in their party’s thesaurus, described the proposed rescue of the busted finance and discredited credit sectors as “socialistic.” There was a sort of half-truth to what they said. But they would have been very much nearer the mark—and rather more ironic and revealing at their own expense—if they had completed the sentence and described the actual situation as what it is: “socialism for the rich and free enterprise for the rest.”

I have heard arguments about whether it was Milton Friedman or Gore Vidal who first came up with this apt summary of a collusion between the overweening state and certain favored monopolistic concerns, whereby the profits can be privatized and the debts conveniently socialized, but another term for the same system would be “banana republic.”

What are the main principles of a banana republic? A very salient one might be that it has a paper currency which is an international laughingstock: a definition that would immediately qualify today’s United States of America. We may snicker at the thriller from Wasilla, who got her first passport only last year, yet millions of once well-traveled Americans are now forced to ask if they can afford even the simplest overseas trip when their folding money is apparently issued by the Boardwalk press of Atlantic City. But still, the chief principle of banana-ism is that of kleptocracy, whereby those in positions of influence use their time in office to maximize their own gains, always ensuring that any shortfall is made up by those unfortunates whose daily life involves earning money rather than making it. At all costs, therefore, the one principle that must not operate is the principle of accountability. In fact, if possible, even the similar-sounding term (deriving from the same root) of accountancy must be jettisoned as well. Just listen to Christopher Cox, chairman of the Securities and Exchange Commission, as he explained how the legal guardians of fair and honest play had made those principles go away. On September 26, he announced that “the last six months have made it abundantly clear that voluntary regulation does not work.” Now listen to how he enlarges on this somewhat lame statement. It seems to him on reflection that “voluntary regulation” was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate of the program and weakened its effectiveness.

Yes, I think one might say that. Indeed, the “perceived mandate” of a parole program that allowed those enrolled in it to take off their ankle bracelets at any time they chose to leave the house might also have been open to the charge that it was self-contradictory and wired for its own self-destruction. But in banana-republicland, like Alice’s Wonderland, words tend to lose their meaning and to dissolve into the neutral, responsibility-free verbiage of a Cox.

And still, in so many words in the phrasing of the first bailout request to be placed before Congress, there appeared the brazen demand that, once passed, the “package” be subject to virtually no more Congressional supervision or oversight. This extraordinary proposal shows the utter contempt in which the deliberative bodies on Capitol Hill are held by the unelected and inscrutable financial panjandrums. But welcome to another aspect of banana-republicdom. In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

I was very struck, as the liquefaction of a fantasy-based system proceeded, to read an observation by Professor Jeffrey A. Sonnenfeld, of the Yale School of Management. Referring to those who had demanded—successfully—to be indemnified by the customers and clients whose trust they had betrayed, the professor phrased it like this:

These are people who want to be rewarded as if they were entrepreneurs. But they aren’t. They didn’t have anything at risk.

That’s almost exactly right, except that they did have something at risk. What they put at risk, though, was other people’s money and other people’s property. How very agreeable it must be to sit at a table in a casino where nobody seems to lose, and to play with a big stack of chips furnished to you by other people, and to have the further assurance that, if anything should ever chance to go wrong, you yourself are guaranteed by the tax dollars of those whose money you are throwing about in the first place! It’s enough to make a cat laugh. These members of the “business community” are indeed not buccaneering and risk-taking innovators. They are instead, to quote my old friend Nicholas von Hoffman about another era, those who were standing around with tubas in their arms on the day it began to rain money. And then, when the rain of gold stopped and the wind changed, they were the only ones who didn’t feel the blast. Daniel Mudd and Richard Syron, the former bosses of Fannie Mae and Freddie Mac, have departed with $9.43 million in retirement benefits. I append no comment.

Another feature of a banana republic is the tendency for tribal and cultish elements to flourish at the expense of reason and good order. Did it not seem quite bizarre, as the first vote on the rescue of private greed by public money was being taken, that Congress should adjourn for a religious holiday—Rosh Hashanah—in a country where the majority of Jews are secular? What does this say, incidentally, about the separation of religion and government? And am I the only one who finds it distinctly weird to reflect that the last head of the Federal Reserve and the current head of the Treasury, Alan Greenspan and Hank “The Hammer” Paulson, should be respectively the votaries of the cults of Ayn Rand and Mary Baker Eddy, two of the battiest females ever to have infested the American scene? That Paulson should have gone down on one knee to Speaker Nancy Pelosi, as if prayer and beseechment might get the job done, strikes me as further evidence that sheer superstition and incantation have played their part in all this. Remember the scene at the end of Peter Pan, where the children are told that, if they don’t shout out aloud that they all believe in fairies, then Tinker Bell’s gonna fucking die? That’s what the fall of 2008 was like, and quite a fall it was, at that.

And before we leave the theme of falls and collapses, I hope you read the findings of the Department of Transportation and the Federal Highway Administration that followed the plunge of Interstate 35W in Minneapolis into the Mississippi River last August. Sixteen states, after inspecting their own bridges, were compelled to close some, lower the weight limits of others, and make emergency repairs. Of the nation’s 600,000 bridges, 12 percent were found to be structurally deficient. This is an almost perfect metaphor for Third World conditions: a money class fleeces the banking system while the very trunk of the national tree is permitted to rot and crash.

At a dinner party in New York during the Wall Street meltdown, where the citizens were still serious enough to do what they are supposed to do—break off the chat and tune in to the speech of the President of the United States and Leader of the Free World—the same impression of living in a surreal country that was a basket-case pensioner of the international monetary system was hugely reinforced. The staring eyes (close enough together for their owner to use a monocle) and the robotic delivery were a fine accompaniment to the already sweaty “Don’t panic. Don’t whatever you do panic!” injunction that was being so hastily improvised. At a White House meeting with his financial wizards—and I mean the term in its literal sense—the same chief executive is reported to have whimpered, “This sucker could go down,” or words to that effect. It’s not difficult to imagine the scene. So add one more banana-republic feature to the profile: a president who is a figurehead one day and a despot the next, and who goes all wide-eyed and calls on witch doctors when the portents don’t seem altogether reassuring.

Now ask yourself another question. Has anybody resigned, from either the public or the private sectors (overlapping so lavishly as they now do)? Has anybody even offered to resign? Have you heard anybody in authority apologize, as in: “So very sorry about your savings and pensions and homes and college funds, and I feel personally rotten about it”? Have you even heard the question being posed? O.K., then, has anybody been fired? Any regulator, any supervisor, any runaway would-be golden-parachute artist? Anyone responsible for smugly putting the word “derivative” like a virus into the system? To ask the question is to answer it. The most you can say is that some people have had to take a slightly early retirement, but a retirement very much sweetened by the wherewithal on which to retire. That doesn’t quite count. These are the rules that apply in Zimbabwe or Equatorial Guinea or Venezuela, where the political big boys mimic what is said about our hedge funds and investment banks: the stupid mantra about being “too big to fail.”

In a recent posting on The New York Times’s Web site, Paul Krugman said that the United States was now reduced to the status of a banana republic with nuclear weapons. This is a variation on the old joke about the former Soviet Union (“Burkina Faso with rockets”). It’s also wrong: in fact, it’s the reverse of the truth. In banana republics, admittedly, very often the only efficient behavior is displayed by the army (and the secret police). But our case is rather different. In addition to exhibiting extraordinary efficiency and, most especially under the generalship of David Petraeus, performing some great feats of arms and ingenuity, the American armed forces manifest all the professionalism and integrity that our rulers and oligarchs lack. Who was it who the stricken inhabitants of New Orleans and later of the Texas coastline yearned to see? Who was it who informed the blithering and dithering idiots at fema that they could have as many troops as they could remember to ask for, even as volunteers were embarking for Afghanistan and Iraq? What is one of the main engines of integration for blacks and immigrants, as well as one of the finest providers of education and training for those whom the system had previously failed? It may be true that the government has succeeded in degrading our armed forces as well—tasking them with absurdities and atrocities like Guantánamo and Abu Ghraib—but this only makes the banana-republic point in an even more emphatic way.

Christopher Hitchens is a Vanity Fair contributing editor. Send comments on all Hitchens-related matters to hitchbitch@vf.com.