Here is the promised hard-hitting attack on the financial rescue plan from Jeff Randall of The Daily Telegraph, London.
The second item here is Ambrose Evans-Pritchard’s tour d’horizon across the eurozone - not pretty reading
US taxpayers are being enrolled in an economic chain gang
By Jeff Randall
"To preserve their [the people's] independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty, or profusion and servitude" - Thomas Jefferson
There was a time, early in America's history, when its leaders believed in financial discipline. No more. Perpetual debt, which Jefferson feared would enslave future generations, is clamped on Uncle Sam's undercarriage like a ball and chain. US public borrowing is $9.8 trillion - and rising.
Jefferson, America's third president (1801-09), is widely regarded as the White House's most intellectually gifted occupant. He believed that "banking institutions are more dangerous to our liberties than standing armies", and that "the principle of spending money to be paid by posterity … is but swindling futurity on a large scale."
If Congress approves the Treasury Secretary's $700 billion bail-out of dysfunctional banks, it would be hard to invent a better example of what Jefferson foresaw: authorised "swindling". Tomorrow's Americans and those who come after them will pay and pay for the grotesque excesses and self-indulgence of today's flim-flam merchants.
As Jefferson put it: "If we run into such debt, as we must be taxed in our meat and in our drink, in our necessaries and our comforts … [we will have] no means of calling our mis-managers to account but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow sufferers."
Having failed to deliver victory in the War on Terror, President Bush is hoping for better luck in the War on Error. His goal is to limit damage from the egregious mistakes of sub-prime mortgages; his tactics are to carpet-bomb the banking system with federal funds. The upshot, in Jeffersonian terms, is that US taxpayers are about to be enrolled in an economic chain gang.
The prospect is unappealing, but, we are told, there's no alternative. Hank Paulson's plan offers fewer details than his weekly milk bill, but now, it seems, is no time for nit-picking. Having collected sacks of gold at Goldman Sachs, this former champion of free markets wants to nationalise assets at a pace not seen since Che Guevara was lighting cigars with Batista's legacy.
No wonder so many Congressmen look queasy. They must persuade constituents, many of whom are losing jobs and homes in the credit crunch, that it is a bright idea to rescue those who profited hugely from the creation of dark instruments. Not for the first time, Wall Street is bilking Main Street.
For those who work in the fast lane of finance, the speed of decline has been ear-popping. Less than a year ago, America's investment banks were wallowing in record bonuses, totalling almost $38 billion. Yes, billion.
Their pool of monopoly money was greater than the GDP of Bulgaria. Split among 186,000 workers at Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns, it equated to an average of more than $200,000 per person, about four times the median US household income.
Goldman's chairman, Lloyd Blankfein set a new standard in executive gluttony, collecting $68 million (about one third in cash), but at least his bank is still standing. Richard Fuld, Lehman's chief executive, trousered $41 million. Nice work, except that he took the lot in the bank's shares. Nine months later, when Lehman went bust, Fuld's bonus joined his reputation, in the trash-can.
Banking's bacchanalia has morphed into a therapy group for manic depressives. Those still in work look around the room and wonder how many will be flipping burgers by Christmas. In an interview with Fortune magazine, Mr Paulson admits: "Raw capitalism is a dead end. I've seen it."
Now I have heard it all. What next?
In place of rip-roaring markets, according to a Wall Street trader, America has embraced "trickle-down communism". This system involves the state paying "cash for trash" to benefit a few miscreants, and then hoping that some of the taxpayers' largesse will trickle down to the masses.
Toxic rubbish will not be made to disappear by Mr Paulson's proposals. All that will be different is ownership. It will be like removing nuclear waste from a failing business and parking it in a government building. The risk moves from private to public.
It is this form of regressive redistribution that Messrs Bush and Paulson are peddling as the road to redemption for Western finance. Excuse my cynicism, but would you buy a used derivative from either of them?
After Hurricane Katrina and the flooding of New Orleans, Mr Bush's record on rescue missions does not inspire confidence. As for Mr Paulson, if he's so insightful, why, when he was earning an $18 million bonus at Goldman in 2006, did he not spot the radio-active dump piling up in his industry's back-yard?
Mr Paulson's sales pitch is essentially: "American capitalism, I love you! But we only have 14 hours to save the Earth!" In return for a promise to head off financial obliteration, he is demanding a cheque of disturbing blankness. It is to be a bail-out with precious few strings, plus immunity from review "by any court of law or administrative agency". His legal team must have chuckled when they slipped in that one.
The scheme is under attack from right and left. George Soros, the investor who helped break the pound in 1992, is in favour of action to stem insolvencies, but insists that Paulson's plan falls short. Paul Krugman, professor of economics at Princeton, has little faith in Paulson as a fixer: "He's making it up as he goes along, just like the rest of us."
Outside Washington, in the real world, there is a growing clamour for something to be done. Ordinary voters are in pain. They want government to make it go away. But there is no magic powder.
Those who borrowed to buy assets at the wrong prices will have to suffer, as financial gravity re-asserts its downward pull. There is no policy yet invented that can make fifty cents worth two bucks forever.
Any long-term solution will have to recognise that contraction cannot be deferred in perpetuity. Having restored stability, it should punish those who created the mess. Where's the retribution in Paulson's package? It looks too much like a parachute for his chums at the back of a burning plane.
Finally, there needs to be an overhaul of banking governance. The rules of the game were, in effect, made redundant by the ingenuity of financial engineers. We do not need more regulation, but more appropriate regulation.
Which brings us back to Jefferson. Two hundred years ago, he demanded: "The issuing power should be taken from the banks and restored to the people to whom it properly belongs." Twas ever thus.
TELEGRAPH Business News 25.9.08
EU refuses bail-out package despite crisis fears
Europe rebuffs calls for fiscal rescue plan as German exports collapse and Nordic central banks firefight liquidity squeeze.
By Ambrose Evans-Pritchard
The European Union no plans “yet” for a rescue package along the lines of the Paulson plan despite severe stress in the region’s banking system and further evidence that the bloc is sliding into a deep and protracted recession.
“The situation we face here in Europe is less acute and member states do not at this point consider that a US style plan is needed,” said Joaquin Almunia, the EU’s economics commissioner, in a tense session at the European Parliament.
“We didn’t have subprime mortgages. We do not have investment banks. In any case, it’s not up to the EU; it’s up to every one of the member states to decide whether they need to launch this kind of fiscal initiative.”
The comments fell far short of reassuring doubters that the EU system has the machinery to tackle a major financial crisis.
Daniel Gross, director of the Centre for European Policy Studies in Brussels, said euro-zone lenders are heavily exposed to the fall-out from the US credit crisis, describing the Paulson plan as a de facto rescue for the Euopean banking system.
It has emerged that French finance minster Christine Lagarde was one of those pleading with US Treasury Secretary Hank Paulson last week to bail out AIG, which had insured over $300bn of credit derivatives to European firms.
Mr Gross said Deutsche Bank deploys fifty times leverage and has liabilites of $2,000bn, equivalent to 80pc of Germany’s GDP. Fortis Bank has liabilities of 300pc of Belgian GDP. These dwarf the burden of any US bank on the US government balance sheet. He said EU states do not have the means to bail out these banks. Any rescue would have to come from the European Central Bank, yet it is not allowed to carry out bail-outs under the Maastricht Treaty law.
The picture is clearly going from bad worse across the eurozone and the Nordic region. Germany’s IFO index of business expectations fell to 86.5 in September, the lowest level in fifteen years. “The time has come to cut interest rates,” said Gernot Nerb, the IFO’s chief economist.
“A full-blown recession is looming in the 2009 for the euro area,” said Jacques Cailloux, Europe economist at the Royal Bank of Scotland.
“We think Germany’s economy will contract next year. Foreign manufacturing orders have been falling for eight months in row, which is the longest continuous drop on record. German house prices have fallen 4pc this year, which is surprising for a country that has seen no increase for ten years,” he said.
“The country has a `high-beta’ to the global cycle because of its industrial exports. Given this macro-outlook, we think the ECB should cut rates,” he said.
Spain’s finance minister Pedro Solbes said on Wednesday that his country’s economy may faces outright contraction in the second half of the year, warning that debt arrears had become “very disturbing”.
Even oil-rich Norway is facing strains in its credit system as the mayhem goes global. The Norges Bank joined with the central banks of Sweden, Denmark and Australia in an emergency scheme to draw $30bn of US dollar funds in a swap accord with the Federal Reserve.
“There is now an unusually high degree of uncertainty linked to the turbulence in financial markets. The crisis in financial markets has deepened. In Norway there are also clear signs that economic growth is slowing,” it said.
The wild ructions in the Oslo, Stockholm, and Copenhagen credit markets are a fresh reminder that there is almost nowhere left to hide in world economy as the fall-out from the collapse of Lehman Brothers continues to wreak havoc.
Under the swap deal, the Fed is providing $5bn each to Norway and Denmark, and $10bn each to Sweden and Australia. It aims to assuage the frantic scramble for dollars by banks with exposure to US toxic debt.
Denmark is in full-fledged recession and has already suffered two embarrasing bank failures this summer as the bubble burst in commercial real estate.
The central bank seized Roskilde Bank in August in a $8bn bail-out after a deposit run by client in a Nordic version of the Northern Rock debacle, warning that the total collapse of the lender would pose a “significant threat to the financial stability of Denmark”.
It stepped in again this week to rescue EBH Bank with a state guarantee, and has pushed shotgun marriages for two other distressed lenders, Lokalbanken and Forstaedernes.
Stein Bocian, chief economist at Danske Bank, said the banks had lent heavily to developers in high-risk projects, relying on short-term funding in the capital markets. The game ended when the credit window jammed shut.
“Short-term funding has become extremely expensive and now they can’t roll over their loans,” he said.
Denmark has enjoyed a blistering credit boom over recent years, fuelled by membership of Europe’s Exchange Rate Mechanism which fixed the Dranish krona to the euro.
The policy caused the country to import the monetary policy of the ECB at a time when it was far too loose for Danish needs. Intrest rates were just 2pc until the end of 2005. The result was to push household debt to 260pc of GDP, the highest level in the world. This compares to 135pc in America.
Denmark’s housing bubble is now popping with the same destructive effect as bubbles in the US, Britain, Ireland, Spain, and indeed China. Danish prices have dropped 4pc so far nationwide on official data, but estate agents say properties are now off at least 20pc in parts of Copenhagen.
Across the Oresund in Sweden, the economy has ground to a halt and Volvo sales in Russia, Europe, and the US have plummeted. The flagship car company laying off 8pc of its 25,000-strong work force and cancelling a production shift.
Adding to the gloom, the pan-Nordic airline SAS is now battling for its life, the latest casualty of the global aviation crunch. The carrier has denied persistent reports that it will soon be taken over Lufthansa.
Stefan Ingves, governor of Sweden’s Riksbank, said on Wednesday his country had been battered by the “renewed wave of international financial unrest” but insisted that the banking system remained fully solvent. He described the swap agreement with the Fed as a precautionary measure.
The Swedish treasury suspended bond sales last week because the market had ceased to function properly.
There have been concerns that Swedish banks could face a squeeze over coming months as the property boom deflates and the losses mount on heavy investments in the Baltic region, where Estonia and Latvia are sliding into deep recession.
The International Monetary Fund has warned that the Baltic slump could “cause a credit crunch in Sweden itself” if the Swedish banks prove unable to roll over their loans in the wholesale capital markets.
It said that Swedbank and SEB are highly exposed to the region. Svedbank is the dominant lender in Estonia and Latvia, earning 30pc of its porfits in the region. The share prices of the two banks have fallen by two thirds since mid-2007 and are understood to have been the target of aggressive “shorting” by hedge funds.