Timothy Wilken, MD writes: The truth is especially hard to believe if it requires that we take action — if it requires that we change. If humanity is to have a future, we must take action — we must change. If humanity is to have a future, we must believe the truth. In an earlier article I wrote:

Truth #1 — Possessions are not necessarily property.

The possession of an object does not mean that the possessor has a
moral or rational claim to ownership of the object. The political,
economic, and social structures of our present world are all based on
our concept of ‘property’ and property rights. If we define property as
those possessions that were acquired by 1) either paying a fair price
in a free market to the rightful owner, or 2) that which is produced by
the mind and hands of the owner. Using this definition, most of today’s
possessions are plunder and not property. In today’s world plunder is
common and property is rare.

Truth # 2 — The Majority of Human Wealth is a Gift

The vast majority of human wealth is a gift free for the taking, and
cannot be morally or rationally claimed as property by any individual.

The land and natural resources are wealth provided to us by God and
Nature. The sunshine, air, water, land, minerals, and the earth itself
all come to us freely. The Earth’s land and natural resources are not
products of the human mind or body. They existed long before life and
humankind even emerged on our planet. There exists no moral or rational
basis for any individual to claim them as Property.

If a claim of ownership can be made at all, it must be a claim on behalf of all Life both the living and those yet unborn.

From these truths, it follows that if we humans synergically reorganized our world, we
would all be wealthy beyond our wildest dreams. Today in 2008, if we
were to reclaim the gift of all the land and natural resources
presently held on planet Earth as individual property. And if we were
to further reclaim the gift of Progress from those few who control it
today, and then divided these two gifts equally among the 6.7+ billions of
us living on the planet, we would discover to our surprise and
amazement that every man, woman, and child is wealthy beyond their
dreams.

With synergic organization, and careful utilization of the
planet’s total wealth for the benefit of all humanity, the carrying
capacity of the Earth could be maximized to solve all our human
problems and meet our all our needs. And this is without any need to
damage the Earth, or degrade our environment.

There would never be any need for humans to earn their livings
again. Our livings have already been earned by all those humans who
lived and died to give us the great gift of progress. Then all humans
would be free to spend their time making their lives meaningful by
creating more wealth to be gifted to living and future humanity.

To better understand my proposal for a synergic future, it is important to understand what I mean by “wealth.” (09/24/08)
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This article was first posted in 2002, by a careful observer of the
human condition. It is reposted here today in honor of fellow citizens
Paulson and Bernanke. The author speaks about energy, while Paulson and
Bernanke speak of money. But in our financial society, money is simply a
surrogate for energy. …

Theedrich Yeats writes: The main thesis of Joseph Tainter’s work, “The Collapse of Complex Societies,”is
that such societies collapse as a result of Declining Marginal Returns
(DMR). 

Whether a society uses its energy subsidies wisely or
foolishly, parsimoniously or profligately, the tendency toward such
decline is almost as inherent in all human societal energy use as it is
in the bacterium’s petri dish.

We are very near the DMR breaking point both nationally (in the
U.S.) and globally.  And not at all because of oil depletion alone. 
Consider the situation in America:

• Exhaustion, damaging and poisoning of undergound aquifers almost everywhere.

• Massive topsoil erosion, which precludes future soil fecundity.
• The incapacity or unwillingness of Americans to farm, and the
  replacement of farms by gigantic agribusinesses employing millions of
  Mexican serfs, whose dependents overload the social supports in the
  U.S. (an overload viewed as an “externality” by the agribusinesses).

• Massive megalopolises whose populations depend on diabolically
  complex systems of import and export, trade and business - at a time
  when the general educational level is stagnant or even falling.

• Millions of feral semi-literates in the urban slums whose
  jobs, if they have any, are often either make-work (another form of
  welfare) or (as in construction) a serious net drain on the
  civilization’s energy subsidy.

• Millions of high-tech jobs, once the pride of America, have
  followed much of manufacturing to Second-World countries such as Taiwan
  or Second-and-a-Half-World Japan, where wages are much lower than in
  overpriced America.  Increasingly, only the paperwork is done in the
  U.S.

• There is no more surplus money in the national budget, nor
  will there ever be again.  The widely expected multi-trillion-dollar
  budget surplus has evaporated in the twinkling of an eye.  And by the
  way, moon landings are over forever.  All the attempts by the U.S. to
  achieve yet another scope enlargement of international trade have
  fallen short of their goal.  Liebig’s law of the minimum (i.e.,
  whatever necessity is least abundantly available [relative to per
  capita requirements] sets an environment’s carrying capacity) is now
  about to be felt on the international scale.

• Every observer in his right mind recognizes that both America
  and the world are seriously overpopulated and growing more so each day,
  putting stress on every resource available.  Population growth alone
  puts increasingly greater strains on infrastructure, steadily reducing
  the benefit each individual can receive.  At some point the benefit per
  capita will fall below a critical threshold, and the system will
  collapse.

I am sure others can add to this list.  I have purposely excluded
oil and transportation from it in order to emphasize that, even in
sectors not directly connected with oil, the U.S. is moving into the
region of DMR nationwide.  And this means it is nearing collapse, which
could come without warning.  And when America goes, the rest of global
civilization will follow. (09/24/08)
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BBC Environmental Science — The UN says millions of new jobs will be created worldwide over the next few decades by the development of alternative energy technologies.

More than a million people already work in biofuels, but a UN report says that could rise by 12 million by 2030. It says “green jobs” depend on a shift of subsidies from oil and natural gas to wind, solar, and geothermal power.

New jobs could also include the expansion of recycling and making environmentally friendly vehicles.

The report, ‘Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World’, was commissioned and funded by the UN’s Environment Programme (Unep). It says the manufacture, installation and maintenance of solar panels should add 6.3 million jobs by 2030, while wind power should add more than two million jobs.

Unep director Achim Steiner said that if the world did not transform to a low-carbon economy it would “miss a major opportunity for the fast tracking of millions of new jobs.” …

Late next year, delegates from around the world will try to reach a successor agreement to the Kyoto Protocol to control climate change, in a UN meeting in Copenhagen. But Mr Steiner said the movement toward green jobs would happen whether there was an agreement or not. He said that was because the world’s population is heading toward eight or nine billion by 2050, and resources like metals, oil and gas are becoming more expensive to find.

If the world waits 10 years to take serious action on greenhouse gases the costs for moving to a green economy will be much higher, he said. (09/24/08)
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Nouriel Roubini writes: Even
if the Treasury TARP plan is implemented fairly and efficiently the US
will not avoid a severe U-shaped18-month recession and a severe
financial and banking crisis: the recession train has already left the
station in Q1 and the financial/banking crisis will be severe
regardless of what the Treasury and the Fed do from now on. What a
proper rescue plan can do is to avoid having the US experience a
multi-year L-shaped recession and extreme financial crisis like the one
that led to a decade long stagnation in Japan in the 1990s after the
bursting of their real estate and equity bubbles.

I
have also argued that, in order to resolve this financial crisis it is
not enough to take the bad/toxic assets off the balance sheet of the
financial institutions (a new RTC); it is also necessary and
fundamental to reduce the debt overhang of millions of insolvent
households via a significant debt reduction on their mortgages (an HOLC
program like the one that was implement during the Great Depression);
and also recapitalize undercapitalized banks with public capital in the
form of preferred shares (as the RFC did with 4000 banks during the
Great Depression). An RTC scheme without an HOLC and RFC component
would not resolve two fundamental problems: millions of households are
insolvent and unable to service their mortgages; the financial system
is vastly undercapitalized and needs capital to avoid an ugly credit
crunch and to foster new credit creation that is needed for future
growth.

That is why I proposed the creation of a HOME (Home Owners’ Mortgage Enterprise)
that would be a combination of an RTC, a HOLC and a RFC. Let me flesh
out this proposal and its key elements and compare it to the Treasury
TARP proposal that in its current form has many flaws.

There are 10 steps in this HOME proposal to resolve this most severe financial crisis. Here they are:

First,
like in the Treasury TARP plan you need to buy illiquid/toxic assets
and take them off the balance sheet of banks and financial institutions
to reliquify them and allow new credit creation. The biggest problem
here – as the debate between Bernanke and senators yesterday is one of
the proper valuation and the proper price at which the government
should buy these assets (the RTC did not have this problem as it was
working out assets of failed S&Ls): if the government buys the
asset at at price that is too high (too small of discount relative to
face value) the fiscal cost will be huge and you massively subsidize
reckless bankers and their shareholders. If you buy at a discount that
is too high you minimize the fiscal cost in the short run but many
banks could go bust and the eventual fiscal cost of bailing out the
depositors of failed banks could be large. You can debate endlessly
whether such assets should be bought at current market price or at
prices closer to hold to maturity values (as Bernanke suggested). Given
that these assets are impaired pricing the long run value of them is
mission impossible. Thus, there is only one solution to this
fundamental uncertainty: avoid the government overpaying by having the
government having some of the positive benefits of an upside gain in
case the banks’ values recover after the bailout. I.e. you need for the
government to have some equity in the banks whose assets are purchased
by the government. This leads to step 2 of the proposal.

Second,
in exchange for the purchase of illiquid asset (at whatever price it is
agreed) the government gets preferred shares in the financial
institutions that senior to existing common and preferred shares and
that are convertible into common shares to allow government to
participate into any future upside.

Third, even if the
government gets preferred shares as in step 2, the banks will need more
capital if they are undercapitalized and they have not fully
reserved/provisioned for the losses coming from writing down the asset
being sold to the government. So you will need to inject further actual
public capital in the form of preferred shares in the financial
institutions ( this is what the RFC did during the Great Depression).

Fourth,
given the risk to the government deriving from the public injection of
capital in the financial system the existing shareholders of the banks
need to take a first-tier loss to minimize the risks for the government
share. How to do that? First, you need to suspend dividend payments on
common share and possibly even existing preferred shared; you also need
to force to partially match the public capital injection with new Tier
1 capital.

Fifth, public and private recapitalization of
financial institutions unfairly benefits unsecured creditors (all
creditors but insured depositors) of such institutions. So, you also
need to convert some of this unsecured debt (the sub debt and other
debt unsecured debt) into equity (a debt for equity swap). Such swap
further reduce the leverage of the financial system (leading to a lower
debt to equity ratio for financial institutions).

Sixth, after
this crisis is resolved the banking and financial system may need lower
capital than before this crisis so as to avoid new asset and credit
bubbles; and if you recapitalize some banks that will be able to lend
more (still with lower leverage ratios) you still need to let other
insolvent banks and financial institutions to go bust and disappear.
Only healthier institution should survive. So you need to a systematic
triage between banks that are distressed, undercapitalized and illiquid
but solvent once the private and public recapitalization occurs from
those that are fundamentally insolvent and that need to be shut down.
You need to destroy the bad apples to let the good ones or the sick but
curable ones survive and thrive.

Seventh, as in the case of the
RTC the assets of the banks that are bankrupt and are allowed to fail
go to the HOME for workout (debt restructuring/reduction).

Eighth,
you need an HOLC-like program for debt reduction of the household
sector. Households in the US have too much debt (subprime, near prime,
prime mortgages, home equity loans, credit cards, auto loans and
student loans) while their assets (values of their homes and stocks)
are plunging leading to a sharp fall in their net worth. And households
are getting buried under this mountain of mounting debt and rising debt
servicing burdens. Thus, a fraction of the household sector – as well
as a fraction of the financial sector and a fraction of the corporate
sector and of the local government sector – is insolvent and needs debt
relief. When a country (say Russia, Ecuador or Argentina) has too much
debt and is insolvent it defaults and gets debt reduction and is then
able to resume fast growth; when a firm is distressed with excessive
debt it goes into bankruptcy court and gets debt relief that allows it
to resume investment, production and growth; when a household is
financially distressed it also needs debt relief to be able to have
more discretionary income to spend. So any unsustainable debt problem
requires debt reduction. The lack of debt relief to the distressed
households is the reason why this financial crisis is becoming more
severe and the economic recession - with a sharp fall now in real
consumption spending – now worsening. The fiscal actions taken so far
(income relief to households via tax rebates) and bailouts of
distressed financial institutions (Bear Stearns creditors’ bailout,
Fannie and Freddie and AIG) do not resolve the fundamental debt problem
for two reasons. First, you cannot grow yourself out of a debt problem:
when debt to disposable income is too high increasing the denominator
with tax rebates is ineffective and only temporary; i.e. you need to
reduce the nominator (the debt). Second, rescuing distressed
institutions without reducing the debt problem of the borrowers does
not resolve the fundamental insolvency of the debtor that limits its
ability to consume and spend and thus drags the economy into a more
severe economic contraction. So of the five possible uses of fiscal
policy – income relief to households (the 2008 tax rebate),
rescue/bailout of financial institutions (Bears Stearns, Fannie and
Freddie, AIG), purchase of assets of failed institutions (an RTC-like
institution), recapitalization of undercapitalized financial
institutions (an RFC-like institution), government purchase of
distressed mortgages to provide debt relief to households (an HOLC-like
institution) – the last option is the most important and effective to
resolve this severe financial and economic crisis. During the Great
Depression the Home Owners’ Loan Corporation was create to buy
mortgages from bank at a discount price, reduce further the face value
of such mortgages and refinance distressed homeowners into new
mortgages with lower face value and lower fixed rate mortgage rates.
This massive program allowed millions of households to avoid losing
their homes and ending up in foreclosure. The HOLC bought mortgages for
two year and managed such assets for 18 years at a relatively low
fiscal cost (as the assets were bought at a discount and reducing the
face value of the mortgages allowed home owners to avoid defaulting on
the refinanced mortgages). A new HOLC will be the macro equivalent of
creating a large “bad bank” where the bad assets of financial
institutions are taken off their balance sheets and
restructured/reduced.

Ninth, we need to avoid a situation where
the recapitalization of the banks and the resolution of this financial
crisis leads to another credit and asset bubble. Many things need to be
done to avoid this risk but a rapid change of the Basel II capital
adequacy ratios to reduce their the pro-cyclicality would be essential.

Tenth, start
implementing rapidly a reform of the system of regulation and
supervision of financial institutions in a world of financial
globalization. With the collapse of most of the shadow banking
system most of these shadow banks are now being folded in the
traditional banks and will be regulated like banks. Indeed all
institutions of large size and that are systemically important
(commercial banks, investment banks, non-bank mortgage lenders, hedge
funds, private equity funds, etc.) should be supervised and regulated
in a similar way. To make the financial system more stable over time
and avoid severe financial crises like the current one will require
that both banks and former shadow banks be regulated and supervised
better than they have been in the last decade. After all traditional
banks have performed as poorly – and some more poorly – and have lost
more money than shadow banks during this severe financial crisis. So
both the poor regulation and supervision of banks (as regulators were
asleep at the wheel while the laissez fair ideology and voodoo-cult of
self-regulation and market discipline and internal risk management
became dominant) and the lack of sensible regulation of shadow banks
lies behind the current financial disaster. Thus, folding shadow banks
back into the traditional banking system will make the overall
financial system more stable only if the proper reform of the
regulation and supervision of financial institutions in a world of
financial globalization will be undertaken. (09/24/08)
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Shah Gilani writes: Are you shell-shocked? Are you wondering what’s really going on in
the market? The truth is probably more frightening than even your worst
fears. And yet, you won’t hear about it anywhere else because “they”
can’t tell you. “They” are the U.S. Federal Reserve and the U.S.
Treasury Department, and they can’t tell you what’s really going on
because there’s nothing they can do about it, except what they’ve been
trying to do - add liquidity.

At the exchange rate yesterday (Wednesday), 35 trillion British Pounds was equivalent to U.S. $62 trillion (hence, the 35 trillion Pound gorilla). According to the International Swaps and Derivatives Association, $62 trillion is the notional value of credit default swaps (CDS) out there, somewhere, in the market.

This isn’t the first time Money Morning has warned readers about the dangers of credit default swaps. And it won’t be the last.

In the mid-1980s, upon arriving in New York from Chicago with an
extensive background trading options and futures (the original
derivatives), I was offered a job at what was then Citicorp [today’s
Citigroup Inc. (C)]. The offer was for an entry-level post in the bank’s brand new OTC
(over-the-counter, meaning not exchange traded) swaps and derivatives
group. When I asked what the economic purpose of swaps was, the answer
came back: “To make money for the bank.”

I declined the position.

It used to be that regulators and legislators demanded theoretical,
empirical, and quantitative measures of the efficacy of new tradable
instruments being proposed by exchanges. What is their purpose? How
will they benefit the capital markets and the economy? And, what
safeguards will accompany their introduction?

Not any more. In the early 1990s, in order to hedge their loan risks, J. P. Morgan & Co. [now JPMorgan Chase & Co. (JPM)] bankers devised credit default swaps.

A credit default swap is, essentially, an insurance contract between
a protection buyer and a protection seller covering a corporation’s, or
sovereign’s (the “referenced entity”), specific bond or loan. A
protection buyer pays an upfront amount and yearly premiums to the
protection seller to cover any loss on the face amount of the
referenced bond or loan.

Typically, the insurance is for five years.

Credit default swaps are bilateral contracts, meaning they are
private contracts between two parties. CDSs are subject only to the
collateral and margin agreed to by contract. They are traded
over-the-counter, usually by telephone. They are subject to re-sale to
another party willing to enter into another contract. Most
frighteningly, credit default swaps are subject to “counterparty risk.”

If the party providing the insurance protection - once it has
collected its upfront payment and premiums - doesn’t have the money to
pay the insured buyer in the case of a default event affecting the
referenced bond or loan (think hedge funds), or if the “insurer” goes
bankrupt (Bear Stearns was almost there, and American International Group Inc. (AIG) was almost there) the buyer is not covered - period. The premium payments are gone, as is the insurance against default.

Credit default swaps are not standardized instruments. In fact, they
technically aren’t true securities in the classic sense of the word in
that they’re not transparent, aren’t traded on any exchange, aren’t
subject to present securities laws, and aren’t regulated. They are,
however, at risk - all $62 trillion (the best guess by the ISDA) of
them. (09/24/08)
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