by Mark Roe, for The Harvard Law School Forum at Harvard Law School, October 28, 2009.

In a recent working paper Assessing the Chrysler Bankruptcy, which I presented at the Law and Economics seminar here at Harvard Law School, David Skeel and I evaluate the Chrysler bankruptcy. Chrysler entered bankruptcy as a company widely thought to be ripe for liquidation if left on its own, obtained massive funding from the United States Treasury, and exited via a transaction that transferred its auto business and most of its preexisting creditors to a new company principally owned by some of Chrysler’s old creditors.

The transaction proved controversial in capital markets, as some lenders — those left behind with claims on the shell company that had owned the auto business — complained that their entitlement to priority wasn’t honored. Warren Buffett wondered out loud that there would be “a whole lot of consequences” if the transaction was approved, as it was, because it could “disrupt lending practices in the future.”

Our overall conclusions are not favorable to the process and results. The Chrysler bankruptcy process used undesirable mechanisms that federal courts and Congress struggled for decades to suppress at the end of the 19th and first half of the 20th centuries, ultimately successfully. If the mechanisms are not firmly rejected, either explicitly or via judicial (or legislative) distinction or via a collective forgetting of the event among bankruptcy institutions, then future reorganizations in chapter 11 will be at risk, in ways that could potentially affect capital markets…(continue reading)

A letter from the US Treasury Dept. to the Lawrence Public Library was wrapped around a pile of Confederate currency which was in an envelope in the vault of the Lawrence Public Library.

Samples of Confederate currency were dispersed to library and other institutions as historical relics, for exhibition purposes.  The bills were confiscated by the War Department at the end of the Civil War and then turned over to the US Treasury Department in 1867.

Forwarded conversation

This rally looks like its got some legs.  While I suppose a short term mild sell-off or sideways move as speculators unload financials (equity) in the weeks ahead in advance of further equity dilution is likely, the stability being pronounced by Bernake and Geitner  will certainly attract buyers whoever they are.  That said today’s M2 data came in wildly higher (+41.6B) than last week’s negative (-4.4B).  I suppose one could infer that the trillions being spent by the government is translating into nickels into the economy.  Nonetheless, earlybirds have been short credit, short the dollar, and long risk assets.  Today’s 30-year treasury auction disappointment only helps to bolster that fact that the market is beginning to shun duration risk in favor of this beta rally.  Inflation traders come one, come all.

Money Supply (M2) Weekly Data

YOY money supply growth is finally rising, sharply.

M2 (Money Supply) YOY Growth

Will be important to keep an eye on the velocity of money.  Remember that GDP = Velocity*Money Supply.  While velocity has been decreasing, Uncle Ben has been printing greenbacks to flood us with supply (quantitative easing).  If velocity does not pick up (we don’t spend more), poor Ben will probably have to clear-cut South American Rainforests to make enough paper for the amount of money he’ll have to print.

Velocity of M2 (Velocity of Money)

These are certainly interesting times.

Source:
Charts via Bloomberg.com

What is your real credit score?

As you might know, your hypothetical “credit score” assigned by private central banks such as the Federal Reserve Corporation is close to the opposite of your real credit score.

Private central banks have been issuing fractional-reserve “dollars”, “pounds”, “francs” and other counterfeit currency for hundreds of years, therefore such banks are not creditors. 

Private central banks and their subsidiaries are debtors. 

To determine your real credit score on a scale of one hundred (100) to one thousand (1000) points, please use the following guidelines:

1)  If you are a United States Citizen age sixteen (16) years or more, begin with a neutral credit score of five hundred (500) points.

2)  If you have read the United States Constitution and understand the rule of law, add one hundred (+100) points.  If not, subtract one hundred (-100) points.

3)  If you have watched “The Money Masters” and/or understand the history of money, usury, banking, energy and war, add one hundred (+100) points.  If not, subtract one hundred (-100) points.

4)  If you have filed individual and personal income tax forms to the IRS (other than reporting that you are EXEMPT) subtract one hundred (-100) points.  If you have not filed individual and personal income tax forms to the IRS (or have reported that you are EXEMPT) add one hundred (+100) points.

5)  If you have promoted renewable energy production and efficiency rather than petro-banking warfare, add twenty (+20) points per year of activity, not to exceed the maximum credit score of one thousand (1000) points.

6)  If you have promoted petro-banking warfare, subtract twenty (-20) points per year of activity, not to decline below the minimum credit score of one hundred (100) points.

EXAMPLE ONE:

If you are a US Citizen (+500), understand the US Constitution (+100), have payed unlawful taxes to the IRS (-100), but have been promoting renewable energy production and efficiency rather than petro-banking warfare for ten years (+200), your credit score is seven hundred (700).

EXAMPLE TWO:

If you are a US Citizen (+500), do not understand the US Constitution (-100), have payed unlawful taxes to the IRS (-100), and have promoted petro-banking warfare for ten years (-200), your credit score is one hundred (100).

EXAMPLE THREE:

If you are a US Citizen (+500), understand the US Constitution (+100), have not payed unlawful taxes to the IRS (+100), and have been promoting renewable energy production and efficiency rather than petro-banking warfare for twenty years (+400), your credit score is one thousand (1000).

In one week the Sun provides more energy to Earth than all the world’s petroleum, coal and uranium reserves.  

When this clean, cost-effective and abundant renewable energy is efficiently utilized and equitably distributed, the delusion that war, pollution and poverty are necessary for our quality of life is prevented.  

In the solar economy, everyone can live with much greater security, liberty, justice, health, independence and prosperity.  

The Federal government, however, wastes over $1 trillion ($1,000,000,000,000) each year to wage “profitable” wars for the Federal Reserve Corporation and other private central banks.  

Americans are deceived into fighting criminal wars and paying unlawful taxes for these bankrupt banks.  

But an ounce of prevention is worth infinitely more than a pound of pollution, war and debt.

When we eliminate Federal subsidies, the most practical, cost-effective, safe, secure and environmentally benign energy resources are renewables such as wind, solar-thermal, photovoltaics (PV), geothermal, hydroelectricity, cellulosic ethanol, organic vegetable oil, and efficient transportation like electric rail and plug-in hybrid electric vehicles (PHEVs).  

If Europeans, Japanese and others have high-speed rail, high-performance 50-mpg turbo-diesel automobiles, universal healthcare, tuition-free education, real elections and many other choices, why does the Federal Reserve Corporation rob such opportunities from Americans?  

The real price of petro-banking – including military costs and petroleum replacement value, but excluding health and safety – is over $1 million ($1,000,000) Federal Reserve Bank debt “dollars” per gallon.  

Too expensive to burn?  A brighter choice is possible.

http://rothschildmotors.com/solarbank/jpchance.html

I could not help but post this story, just a day after my last post (He Who Owns the Mortgage Owns the House) talking to this specific issue.  I wonder if the Chinese are reading my blog?  Hah.

Feb. 11 (Bloomberg) — China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank.

The U.S. “should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way,” Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences, said in response to e-mailed questions yesterday from Beijing. He declined to elaborate on the assurances needed by China, the biggest foreign holder of U.S. government debt.

Benchmark 10-year Treasury yields climbed above 3 percent this week on speculation the government will increase borrowing as President Barack Obama pushes his $838 billion stimulus package through Congress. Premier Wen Jiabao said last month his government’s strategy for investing would focus on safeguarding the value of China’s $1.95 trillion foreign reserves.

China may voice its concerns over U.S. government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on Feb. 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation’s third-largest lender by assets.

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

Chinese Foreign Ministry Spokeswoman Jiang Yu said yesterday that talks with Clinton would cover bilateral relations, the financial crisis and international affairs, according the Xinhua news agency.

Treasury Returns

U.S. government bonds returned 14 percent last year including price gains and reinvested interest, the most since rallying 18.5 percent in 1995, according to indexes compiled by Merrill Lynch & Co. Concern that the flood of bonds would overwhelm demand caused Treasuries to lose 3.08 percent in January, the steepest drop in almost five years, Merrill data show. The yield on the benchmark 10-year U.S. Treasury has risen to 2.83 percent from 2.21 percent at the end of last year.

China’s loss of more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007 may increase its demand for the relative safety of Treasuries.

“The government will be a net buyer of Treasuries in the short-term because there’s no sign they have changed their strategy,” said Zhang Ming, secretary general of international finance research center at the Chinese Academy of Social Sciences in Beijing. “But personally, I don’t think we should increase holdings because the medium- and long-term risks are quite high.”

Currency Reserves

China’s foreign-exchange reserves, the world’s biggest, grew about $40 billion in the fourth quarter, the smallest expansion since mid-2004 as an end to yuan appreciation since July prompted investors to pull money out.

The world’s third-biggest economy grew 6.8 percent in the fourth quarter, the slowest pace in seven years. Policy makers cut interest rates by the most in 11 years and announced a 4 trillion yuan ($585 billion) economic stimulus plan in November to spur domestic demand.

Yu said China won’t channel its reserves toward stimulating the economy because its trade surplus is sufficient to fund any import needs. China’s trade surplus was $39 billion in December, the second-largest on record.

A decline in reserves “isn’t likely because of China’s huge twin surpluses,” Yu said. China “should diversify its reserves away from U.S. Treasuries if the value of China’s foreign- exchange reserves is in danger of being inflated away by the U.S. government’s pump-priming,” he said.

Linking Disputes

China may try to link trade and currency policy disputes to its future investment in Treasuries, said Lu Zhengwei, an economist in Shanghai at Industrial Bank Co., a Chinese lender partly owned by a unit of HSBC Holdings Plc.

U.S. Treasury Secretary Timothy Geithner accused China on Jan. 22 of “manipulating” the yuan to give an unfair advantage to its exporters in the global market. The currency has dropped 0.14 percent since the start of this year to 6.8326 per dollar, following a 21 percent gain since a peg against the dollar was abandoned in July 2005.

“China can also use this opportunity to get a promise from the U.S. not to make inappropriate requests on bilateral trade and the Chinese yuan,” Lu said. “We can’t afford more yuan appreciation as the economy is facing a serious slowdown.”

Source:
China Needs U.S. Guarantees for Treasury Bond Holdings, Yu Says
Belinda Cao and Judy Chen, Bloomberg, February 10, 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_dsDz145J_A&refer=home

As too many homeowners are learning, when someone else owns debt against your assets, they in fact own your assets.  Homeowners, many of which who have been in their homes for a long time are finding that banks are calling in debt as the reign in their balance sheets.  When that happens, if the homeowner does not have the cash to pay down the debt the bank can in fact repossess the property.  Or, if they like, they can use their bargaining power to force the homeowner into a repayment program on their terms with a good number of potentiality intrusive stipulations.

Why am I bothering with the obvious?  Well think about our newly financed bailout.  It will be interesting to track ownership of US Treasury securities over the next couple of years because the same rules hold true for the good old US of A.  The chart below uses data as of January 2009, and lists the largest holders of US Sovereign debt by size, the largest of which is of course China, followed by Japan and then the United Kingdom.  In fact those three countries alone own more than half of all of our foreign debt outstanding, which is a bit more than 50% of all of our sovereign debt outstanding, or to be clear, China, Japan and the UK own 25% of America’s debt.   Forget the recent bugaboo about inflation for a minute, or what happens if countries decide they no longer want to finance our bailout which is generally to their benefit anyway.  These would be serious issues, creating more real economic drama, but they would pass in relatively short order, as did the massive inflation that erupted through the 1980’s.

The bigger problem here is that we are offering tremendous bargaining power to other developed and developing nations, some friendly and some potentially unfriendly.  Throughout our own history we have used such leverage to the benefit of our own foreign policy, and it would be naive to think the process won’t work in reverse.

We are offering a once in a lifetime opportunity to give significant leverage away to foreign powers, not just financial leverage, but certainly political, economic and possibly even social leverage.  At the  moment our biggest three creditors are friendly nations, with China being the largest and largest “unknown”.  The staggering level of debt we are creating to rightfully steady the economy is going to place a burden on our children far greater than future interest payments.  We are giving away pieces of our democracy, foreign trade bargaining power, and potentially our national security.

All this talk of treasuries imploding if other nations decide to stop buying them, or worse begin to sell them is probably overdone.  While current yields on US debt is probably unsustainably low, the bargaining power premium foreign sovereigns are gaining by absorbing our relentless need to issue new debt more than makes up for the paltry yield.  Imagine if you had enough money to lend without limit to Donald Trump just before bankruptcy.  At the very least you’d own a few buildings for pennies on the dollar, at the very best you’d negotiate an exclusive on a good chunk of his future business.

What happens if we need debt forgiveness?  What pieces will China ask us to take off the chess board?  What favors will they call in?  Which assets will they select?  Will they negotiate a one sided deal to secure future energy demands?  Once the banker sits in the drivers seat there is little limit to what he can require if it means he has the power to kick you out of or to keep you in your home.

This will have deep implications for foreign policy for at least a generation.

The chart below uses data from www.treas.gov.  I simply dumped it into excel and created the chart below.  The outer ring is the most recent data from November 2008.  The inner ring is from November 2007.  The rings in between represent each month in between.  Apparently the UK has been one of our largest supporters, more than doubling their ownership of our debt over the last year. China increased their ownership by nearly 50%, and even some of our enemies have grown their holdings of dollars by nearly 50% as noted by the oil exporting countries which includes Iran.

Major Foreign Holders of Treasury Securities (Chart) as of January 2009

The raw data is shown in the table below and available at: http://www.treas.gov/tic/mfh.txt

Major Foreign Holders of Treasury Securities (Table) as of January 2009

Will foreign governments seize power from the US through debt covenants?  Countries that hold 25% of all of our outstanding debt wield massive power.  If this bailout ends up costing what folks like Roubini estimate, that number will be getting much larger.

Let’s not forget that he who owns the mortgage owns the house.

Source:
Major Foreign Holders of Treasury Securities
www.treas.gov, Accessed February 7, 2009
http://www.treas.gov/tic/mfh.txt

Report to The Secretary Of The Treasury from The Treasury Borrowing Advisory Committee of The Securities Industry and Financial Markets Association
Keith T. Anderson, Chairman; Rick Rieder, Vice Chairman, US Treasury, November 4, 2008
http://www.treas.gov/press/releases/hp1238.htm

The other day I was exercising my mind, trying not to hurt myself, around the arguments for and against inflation.  There seems to be enough consensus that an inflation trade is less a matter of if and more a matter of when.   I am writing here to offer at least one reason why inflation may not materialize.

Government spending need not lead to inflation as long as the supply of currency does not exceed demand.  In a deflationary period the demand for cash spikes.  As asset values are in decline the safest place to park wealth is in cash and cash equivalents.  This drives nominal yields down, but real yields remain higher than nominal yields as long as the economy is deflating.   As the cost of goods and services is in decline each dollar becomes worth more in real terms.  There is no single country in the world today besides the United States that can provide the volume of liquidity desired.

At some point in the future, however, when the risk taking returns with the prospect of a new growth cycle, conventional wisdom is that the excess liquidity will lead to inflation, and in our case today it could lead to massive inflation or even hyper-inflation.  However, this scenario presupposes that as the cycle reverses we are not working to tighten our currency again.  It also presupposes that we would be looking to remain a debtor nation.

While the balance of debts at the end of this crisis will certainly serve to weaken the dollar, our new administration at least plausibly has the gumption to do what it takes make sure the US pays its debts.  In that scenario we would see a strong plan towards a balanced budget aided in large part to additional tax revenue, likely from the upper class and from the war on energy independence.  As Obama has stated we will see a large deficit for some time, by my guess is he will work to make sure it is gowning smaller and not larger.

As a debtor nation, our debt holders will want the faith that an expanding economy will be able to provide the economic strength required to service and retire our debts.  While raising taxes generally has the opposite effect, the current administration will be walking a tightrope of fiscal and monetary policy.  In addition, with advisors like Paul Volker in the shadows, I don’t think the current easing will be abused as it was by Greenspan.  As soon as we see a recovery underway I would venture to guess that monetary policy will grow quite hawkish rather quickly, further stifling a rapid expansion and ensuring a prolonged muddle through.

Regarding current market levels, valuations, and earning multiples there has been a lot of talk about bear market PE multiples falling into the single digits.  While I have generally felt this was the natural order for where we are headed, the counter intuitive argument from mean reversion in earning multiples lies in comparing inflation and interest rates with past troughs.  As long as interest rates remain low and inflation remains low, earning multiples may see their bottom where they have been, in the low double digits.  What many people who argue that 1970’s earning multiples bottomed in single digits forget is that interest rates and inflation in those days were much higher then than they are today.  From a simple discounted cash flow perspective, using interest rate assumptions as low as they are today provides some serious support for current market levels.  I’d guess the major indexes remain range bound unless or until real earnings come under new pressure.

EXCERPTED FROM THE WALL STREET JOURNAL OF JANUARY 9, 2009

WASHINGTON — The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners…The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions…

Read Full Article

For quick and dirty evidence that a government bailout is an oxymoron, just take a look at the federal pay tables for jobs at the U.S. Treasury as outlined by the U.S. Office of Personnel Management. The table below represents all pay scales by grade and step.  This is the formula for most government jobs, including those around servicing the TARP, and the host of new government related programs to help stem the financial crisis.

OPM 2008 General Schedule (Base)

Now to be clear I do not in any way want to undermine the skills and commitment of the many millions of men and women who currently serve us in important and often thankless public service jobs.  I am, and we should all be grateful for the brave ones who defer private sector work and pay grades to become a part of helping our system function (ok, I also admit that there are a number of good jokes there too).

However, as a rule of thumb, Wall Street’s best and brightest are generally motivated by the almighty buck.  It is hard for me to imagine that the most qualified people would be attracted to public service given public service salaries, particularly in finance.  At this point in time we need America’s best and brightest working on solutions.  While it is important to note that not everyone on Wall Street ought to be allowed into the discussion on solutions, I have to believe that the uncompetitive pay scale is enough to keep many of the right kind of folks away.  That is truly sad.

Source:
2008 General Schedule (Base)
U.S. Office of Personnel Management, Accessed December 14, 2008
http://www.opm.gov/oca/08tables/indexGS.as

Employment – Careers at Treasury
U.S. Department of Treasury, Accessed December 14, 2008
http://www.ustreas.gov/organization/employment/

OK - let me get this straight …

::: just to nutshell it for ya … :::

… yet THIS greedy douchebag — who presided over his company’s $11.7  BILLION loss this year — is probably gonna get his manicured hands on the $10 million bonus he’s demanding.

That about right?

… cuz it doesn’t seem right …

… and Paulson is taking the heat. Rightfully so. This whole thing is a disgrace.

I was against it from the get-go, and now that it’s a done deal Paulson and the Treasury Department seem to be no better than a room full of drunk monkeys in handling the process. I wouldn’t let Paulson manage my sock drawer at this point.

From the link:

Members of the House Financial Services Committee grilled Paulson for not doing enough to help distressed homeowners and for failing to force banks that get some of the bailout money to specifically use it to bolster lending to customers, one of the prime reasons behind the rescue package.

“It is essential” that some of the bailout money be used to ease foreclosures, said the panel’s chairman, Rep. Barney Frank, D-Mass., a key player in shaping the package that Congress passed and President George W. Bush signed into law Oct. 3.

Amid fits and starts in the administration’s rollout and direction of the program, “I have to say at this point that public confidence in what we have done so far is lower than anybody would want it to be, to the point where it could be an obstacle to further steps,” Frank lamented.

In a break with the administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, made a fresh pitch for using $24 billion of the bailout pool to help Americans at risk of losing their homes. House Speaker Nancy Pelosi is urging Paulson to support the FDIC plan.

“As foreclosures escalate, we are clearly falling behind the curve,” Bair warned the panel. “Much more aggressive intervention is needed if we are to curb the damage to our neighborhoods and broader economic health.”

Will there be a funeral cost credit crunch like Wall street? Here are five warning signs.

1. Every month we hear of the funeral  homes either taking money or breaking the law. Here is one of the latest:

http://www.foxnews.com/wires/2008Nov03/0,4670,FuneralHomeInvestigation,00.html

2. In  the UK bodies are piling up do to the credit crunch.  The article on this pile up of dead bodies is referenced here:

http://afp.google.com/article/ALeqM5hmsIReYtM60fZi_y5jdOCkZpIk6Q

Quoting from this article: “This distressing aspect of the credit crunch shows that the hurricanes blowing down Wall Street have the power to affect us all in unexpected ways,” the newspaper wrote.

“The sad story of the unburied dead should alert us to the much worse things that lie ahead if we do not pull out of this dive.”

3. The funeral industry is rocked  with scandal. Specifically the preneed scandals of this year.

The IFDA Preneed Trust deficit and Scandal is witnessed here.

a-http://yourfuneralguy.wordpress.com/2008/09/14/your-funeral-guy-ifda-preneed-trust-40-million-deficit-funeral-cost-scandal-fades-with-fannie-and-freddie-takeover/

b-http://www.progressiveu.org/075616-key-month-funeral-cost

This was a 41 million dollar loss but is nothing compared  to  the 500 million dollar loss of NPS.

4. NPS or National Prearranged Services shut down and had a 500 million Loss-theft.

http://ifda.wordpress.com/2008/07/10/ifda-will-the-ifda-have-a-low-cost-funeral-like-nps/

This caused more expense for many funeral homes which also pass the cost on to the folks, and more lack of trust for preneed and the funeral industry.

5.    According to  Fox News Broadcasts on November 7^th and November 8^th 2008 it was reported that credit card companies  at the Direction of the Federal Reserve are to put higher standards in place for credit even lowering the limits for and raising interest rates for people with good credit.

Most likely it will go the way of Great Britain for the funeral industry as well.

How will this affect  funeral cost in America? Folks simply will not have the money to pay for the Family Funeral. Honest funeral directors will tell you that the lion’s share of their people pay for the funeral on a credit card.

Will there be a Funeral Cost Credit Tsunami? Your Funeral  Guy says yes.

Will there be a bailout for the Funeral Industry. Probably it will happen.

But not just for the five warning signs mentioned above. The FTC, the United States Treasury, and The National Funeral Directors Association (NFDA) all have policies in place to make it happen. Yes before advocating a lower cost funeral a government bailout may occur. This will be covered in a later blog post.

Your Funeral Guy

September 22, 2008 – The U.S. bank meltdown has shaken world markets over the last few months. According to John Waggoner, USA Today investment columnist and author of Bailout, “In March of 2008, the world markets woke up with one of the ugliest hangovers in history.” Bear Stearns, the fifth largest U.S. investment bank, was sold in March for $10 dollars a share (compared to its 2007 high of $172) to JP Morgan Chase. By September, AIG had declared bankruptcy and received $85 billion in loans from the government; Lehman Brothers was sold to British bank Barclays; and Merrill Lynch merged with Bank of America.

As the Bush administration pressures Congress to pass a $700 billion bailout plan this week, the likelihood of the bailout costing shareholders and taxpayers millions of dollars is leaving many wondering what caused the meltdown and how they can protect their investments in the deteriorating economic environment.

In the new book BAILOUT: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments (Wiley; September 2008; $24.95; 978-0-470-40125-5; Hardcover), Waggoner not only explains how the meltdown happened, but more importantly, he advises individuals how they can protect their investments from the fallout of future corporate disasters.

Waggoner compares the entire meltdown in the housing and mortgage markets to a vast period of national intoxication. He delves into the separate ingredients that resulted in the mania that created the real-estate bubble and how that bubble burst when foreclosures, most originating from loans requiring little more than a signature and a credit check, exploded in 2007. Waggoner recounts how Bear Stearns, known as leader in mortgage-backed securities, was not brought down by its losses but by rumors that it did not have enough cash. Despite some $18 billion, Bear’s business partners fled to competitors, paralyzing the firm. In order to prevent the subprime contagion from spreading to the rest of the banking system, the Federal Reserve stepped in to broker a shotgun wedding to J.P. Morgan Chase. Waggoner also explores the recent government rescue of Fannie Mae and Freddie Mac.

If Bear Stearns can collapse, are any companies truly safe? While investors may be tempted to stuff their savings under a mattress, Waggoner argues that this would be a grave mistake. Even if the country slides into the next Great Depression, individuals must invest their savings to beat inflation. On the other hand, “…putting all your money into one type of investment because you’re worried about a market crash is often the single best way to lose money.” Waggoner demonstrates how to diversify stock holdings to increase the margin of safety and incorporate bonds to offset any periods of deflation. Waggoner offers practical advice that enables readers to take advantage of good economic times and stave off financial ruin during downturns.

Waggoner points out “…sooner or later—and we certainly hope sooner—the economy will recover, earnings and personal income will rise, and life will be good again. And—you can count on this—somewhere in the next recovery will be the seeds on the next new financial mania. Don’t fall for it.”

BAILOUT provides the lifeline needed to help navigate readers through the economic crisis so that their investments remain intact when the current volatile market recedes.

ABOUT THE AUTHOR
John Waggoner (Washington, D.C.) is a personal finance reporter for USA Today, where he has worked since 1989, covering mutual funds, stocks, bonds, and the economy. Waggoner also writes a weekly column, “Investing,” for USA Today. He is a regular contributor to The Nightly Business Report on PBS. Waggoner is the author of Money Madness: Strange Schemes and Extraordinary Manias on and off Wall Street and co-author of The Busy Family’s Guide to Money. He has previously served as a senior editor at The Independent Investor and Donaghue’s Money Fund Report, now IBC Money Fund Report.

… for reposting an entire Andrew Sullivan item because the quote he pulls is so great. In return for borrowing his content, here’s a plug — be sure to catch Sully on the Bill Maher show this weekend on HBO.

From the link:

Ron Paul Was Right, Ctd.

18 Sep 2008 02:28 pm

“I fear the government has passed the point of no return. We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams. It’s pure crisis management. It’s the Treasury and the Federal Reserve lurching from crisis to crisis without a clear statement on how financial failures will be handled in the future. They’re afraid to articulate such a policy. The safety net they are spreading seems to widen every day with no end in sight,” – Ron Chernow, a leading American financial historian.

<!– –>

By Patrice Hill
The Washington Times
July 26, 2007

China, this year for the first time, has dislodged the United States from its long reign as the main engine of global economic growth, with its more than 11 percent growth eclipsing sputtering U.S. growth of about 2 percent, according to the International Monetary Fund’s 2007 projections released yesterday.

China’s growth, which has been fueled by booming domestic building and commercial development, as well as soaring exports, has accelerated even as U.S. growth dropped to 0.7 percent in the first quarter under the weight of a profound housing recession. China is expected to drive a hearty 5.2 percent expansion of the global economy this year, the IMF said.

Read the rest:
http://washingtontimes.com/apps/pbcs.dll/article?AID=/20070726/BUSINESS/107260073/1001

Related:
To The U.S. Treasury Secretary: China Is Your Worst Nightmare, Sir

By John E. Carey
Peace and Freedom
Updated July 26, 2007

On July 25, 2007, the International Monetary Fund released its 2007 projections.  Those numbers indicate that China, this year for the first time, has dislodged the United States from its long reign as the main engine of global economic growth, with its more than 11 percent growth eclipsing sputtering U.S. growth of about 2 percent.

Faced with that information, next week the U.S. Treasury Secretary, Henry Paulson, visits China. He plans to engage in discussions on a host of topics including trade, the balance of trade, global warming and the environment, Intellectual Property Rights (copyrights, licenses and other protections), and, one would expect, the way China deals with the exports it sends our way.

A host of tainted and harmful products from lead-based paint covered toys to poisonous anti-freeze laced toothpaste has to be looming large over next week’s meetings, even if Paulson doesn’t raise the issue.

Henry M. Paulson

Mr. Paulson must be feeing significant pressure. If he isn’t, we’ll just reiterate here the things that should give any thinking U.S. Treasury Secretary nightmares instead of a good night’s sleep as he jets his way to Beijing.

Yet Mr. Paulson is usually optimistic on China.

Where many Americans see threats posed by the Asian giant’s growing economic might, Paulson often sees opportunity.

“The fact that they’re the world’s fastest growing economy is something that some people (see) as a problem. I look at that as an opportunity that I’d like to capture,” he said, adding China was the fastest growing market for U.S.-made goods and services.

Congress

The US Congress has complained for several years about China’s undervalued currency, the lack of intellectual property protection in China, over-reliance on subsidies, and several other issues. The Treasury Secretary, in interviews and in documents has said over and over that he is committed to solving “issues of concern to the US Congress.”

One of the most troubling parts of China’s economic policy, from the point of view of the U.S. Congress, is the undervaluation of the yuan. This has been a particular political sore point with no less than three bills dealing with China’s currency policy scheduled for Congressional action this year. Many in Congress want sanctions imposed upon China for its monetary policy. Yet Mr. Paulson has, in the past, been highly effective at convincing the Congress to delay legislation that would sanction China over currency.

While in China, one might expect Mr. Paulson to lay out the complexity of the difficulty he faces with the Congress, in the hope that China will alleviate his pain.

Global Warming and Environment

The United Nations has condemned China for the worst pollution in the world. China also produces more greenhouse gases than any other nation by far. But China is a world class polluter: many of her rivers are polluted and even much of the ground water is no longer safe. More than 70 percent of the waterways and 90 percent of the underground water is polluted, Chinese experts say.  Almost nowhere in the world is global warming more apparent: and Secretary Paulson will start his discussions with his Chinese hosts at Qinghai Lake.For a millennia this saltwater lake has been the home to some of China’s most beautiful birds. Black-necked cranes, Siberian swans and black cormorants are among 189 species that spend part of each year here hunting and building nests near the homes of Tibetan families.

But Chinese scientists believe global warming is to blame for a steep decline in the bird populations and types.

“Global warming has become a reality here,” said Chen Dongmei, director of the World Wildlife Fund’s climate change and energy program in China. “Everyone can feel that there has been a change in Beijing’s attitude toward climate change over the past few years.”

Secretary Paulson fully understands this issue. “The only way to make progress on climate change is to engage all the large economies, developed and developing, to work toward embracing cleaner technology and reducing emissions,” Paulson said in a statement. “What’s happening with the environment in the middle of China not only affects the local climate and economy but also the global climate and economy.”

Though Beijing has imposed rigid pollution and greenhouse gas emission limits local governments are continuing to invest in dirty, resource-intense industries, jeopardizing Beijing’s goals of saving energy and cutting pollution.

On Monday, July 23, , the China Daily newspaper reported that some regions are encouraging steel, cement and other heavy industries to boost economic growth despite demands from Beijing to rein in those sectors. The central government in Beijing is being ignored.

“The central government is committed to achieving the (green) targets but some local governments have turned a blind eye to them,” said He Bingguang, a deputy director with the National Development and Reform Commission.

This is a dilemma Secretary Paulson will share with his number one host, President Hu Jintao. Both men should be uncomfortable with this tar baby: a problem seemingly too large to solve.

胡锦涛 Hu Jintao

Intellectual Property Rights

This has been a stumbling point between the two nations for a long time. American writers, film makers, computer software engineers and a host of others involved in the creative process of producing “intellectual property” expect that patents, copyrights, licenses, and other protections will ensure their work is not copied or stolen without proper reimbursement.

Chinese “entrepreneurs” do not believe in these copyright laws and freely copy just about everything for resale on the street.

China accounted for about 80 percent of the 14,775 shipments of counterfeit goods seized at U.S. ports last year, said W. Ralph Basham, commissioner of U.S. Customs and Border Protection.

I can remember buying pirated (illegally copied) expensive books in China in the 1970s. Books like the famous Oxford English Dictionary (OED), a tome that would cost hundreds of dollars in London, sold for just a few measly bucks in China. As I student I wanted reference books (this was before the internet, kids) and there was no place where reference books were less expensive than China. That was because the Chinese cared nothing for copyright laws or other such niceties.

Today, the U.S. is still deadlocked with China in bitter negotiations over Intellectual Property Rights.

Secretary Paulson will have his work cut out for him also because China feels defensive right now. The product safety scandal, which featured everything from tainted toys to tainted seafood, sent an alarm bell through China’s leadership. Just yesterday, the European Commission said, in so many words, that China’s promises to take corrective action haven’t resulted in the action Europe expected. And in Panama, lawmakers believe poisoned Chinese cough syrup killed more than 100 people.

International experts caution that there will be no arm twisting of the Beijing government by outsiders; especially on human rights and what Beijing considers “internal policy matters.”

Han Dongfang, the Hong Kong-based labor rights activist for the China Labour Bulletin organization, which monitors workers’ rights in China, insists “It’s about markets and it’s about cheap labor … Labor rights have become worse over the past few years.”

“The Chinese leadership does not care about international pressure. It is not China who is knocking at the door of the international community looking for favors — it is the other way around,” Han says.

Every indication is that this will be at least a somewhat tense meeting between Mr. Paulson and his Chinese hosts. Both sides will share the tension.

A Treasury Department insider told Peace and Freedom: “This is a tough diplomatic mission. But Secretary Paulson is a big boy and well versed in the issues. He’ll be successful and he’ll sleep.”

We’ll know if that is true, in part, at the end of next week.

Related:

China powering world economy

We documented many of the issues between the U.S. and China here:
China Planning a Surreal Facade for Summer Olympic Games: Beijing 2008

China and the U.S. are cooperating on IPRs but the going has not always proven as fruitful as these stories indicate:

China, FBI make $500M software piracy bust

China fails to deliver on product safety: European watchdog

China’s Counterfeiting Legacy
(By Les Lothringer in ShangHai)

China says pirated DVD production lines smuggled in

Human rights questions remain for China

From July 27:
Senate Panel Indicates Readiness to “Squeeze China” Over Currency