FedUpUSA

Archive for February 10th, 2010

The Feds Were Quick To Bail Out Their Friends At The Big Banks But Are Letting All The Small Banks Die Like Dogs

The massive federal bailouts that Congress passed in 2008 and 2009 were supposed to stabilize the banking system and breathe new life into the U.S. economy.  We were told over and over that the major banks were “too big too fail” and that the U.S. government was helping “Main Street” by giving massive bailouts to Wall Street.  But unfortunately all that is not working out too well.  Instead, the major banks (which got the bailouts) have cut their collective small business lending for the seventh month in a row while the feds are letting all the small banks die like dogs.

The truth is that the major Wall Street banks that had friends positioned in the U.S. government were able to get massive bailouts during the economic collapse of 2008/2009, but all of the small banks that have been so good to so many communities across the United States for so many years are not getting any help.  In fact, there are rumors that they are purposely being allowed to fail.  In 2009, 140 banks and S&Ls failed.  In addition, 31 credit unions went under.  So that makes a total of 171 lending  institutions that were allowed to collapse in 2009.  It is estimated that the bank failures during this financial crisis have already cost the FDIC ten times more than the entire S&L crisis of the 1980s did.

But the crisis is far from over.  In fact, some analysts are now projecting that 200 banks will fail in the U.S. in 2010.

The FDIC is officially in the red and it is rapidly hemorrhaging cash and there is no sign that the bleeding is going to stop any time soon.  Small banks are failing at a rate that is beyond alarming.

But do you know what they are being told when they turn to the U.S. government for help?

They are being told to go find a big bank that is willing to gobble them up.

In fact, there are persistent rumors that the banking system is being consolidated by design.  So if that is the case, expect to see a lot more small banks continue to fail and get gobbled up by the sharks for pennies on the dollar.

Meanwhile, the big boys on Wall Street are being criticized for the gigantic year end bonuses that their top executives will be receiving.  

Life is good if you are a bankster.

So are all of those big Wall Street banks helping out “Main Street” by lending to small businesses?

No way. 

In fact, the biggest banks in the U.S. cut their collective small business lending balance by another $1 billion in November.  That drop was the seventh monthly decline in a row.

The truth is that in modern America, small businesses are incredibly dependent on credit.  For many small businesses, no credit means that they simply will not have the capital to operate.

But the big fat cats who got all of those bailouts have reduced their lending to small businesses each of the past seven months.

So, no, “Main Street” is not reaping the benefits of all of those bailouts.

Apparently the big banks needed to save up cash to pay all of those outrageous bonuses.

So all of the big banks are hoarding cash, and hundreds of small banks are being allowed to die like dogs.

What a mess!

Anyone have any ideas for cleaning it up?

It Is Now Mathematically Impossible To Pay Off The U.S. National Debt

A lot of people are very upset about the rapidly increasing U.S. national debt these days and they are  demanding a solution. What they don’t realize is that there simply is not a solution under the current U.S. financial system. It is now mathematically impossible for the U.S. government to pay off the U.S. national debt. You see, the truth is that the U.S. government now owes more dollars than actually exist. If the U.S. government went out today and took every single penny from every single American bank, business and taxpayer, they still would not be able to pay off the national debt. And if they did that, obviously American society would stop functioning because nobody would have any money to buy or sell anything.

And the U.S. government would still be massively in debt.

So why doesn’t the U.S. government just fire up the printing presses and print a bunch of money to pay off the debt?

Well, for one very simple reason.

That is not the way our system works.

You see, for more dollars to enter the system, the U.S. government has to go into more debt.

The U.S. government does not issue U.S. currency – the Federal Reserve does.

The Federal Reserve is a private bank owned and operated for profit by a very powerful group of elite international bankers.

If you will pull a dollar bill out and take a look at it, you will notice that it says “Federal Reserve Note” at the top.

It belongs to the Federal Reserve.

The U.S. government cannot simply go out and create new money whenever it wants under our current system.

Instead, it must get it from the Federal Reserve.

So, when the U.S. government needs to borrow more money (which happens a lot these days) it goes over to the Federal Reserve and asks them for some more green pieces of paper called Federal Reserve Notes.   

The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds. The Federal Reserve either sells these U.S. Treasury bonds or they keep the bonds for themselves (which happens a lot these days).

So that is how the U.S. government gets more green pieces of paper called “U.S. dollars” to put into circulation. But by doing so, they get themselves into even more debt which they will owe even more interest on.

So every time the U.S. government does this, the national debt gets even bigger and the interest on that debt gets even bigger.

Are you starting to get the picture?

As you read this, the U.S. national debt is approximately 12 trillion dollars, although it is going up so rapidly that it is really hard to pin down an exact figure.

So how much money actually exists in the United States today?

Well, there are several ways to measure this.

The “M0″ money supply is the total of all physical bills and currency, plus the money on hand in bank vaults and all of the deposits those banks have at reserve banks.  As of mid-2009, the Federal Reserve said that this amount was about 908 billion dollars.

The “M1″ money supply includes all of the currency in the “M0″ money supply, along with all of the money held in checking accounts and other checkable accounts at banks, as well as all money contained in travelers’ checks.  According to the Federal Reserve, this totaled approximately 1.7 trillion dollars in December 2009, but not all of this money actually “exists” as we will see in a moment.

The “M2″ money supply includes everything in the “M1″ money supply plus most other savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).  According to the Federal Reserve, this totaled approximately 8.5 trillion dollars in December 2009, but once again, not all of this money actually “exists” as we will see in a moment.

The “M3″ money supply includes everything in the ”M2″ money supply plus all other CDs (large time deposits and institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.  The Federal Reserve does not keep track of M3 anymore, but according to ShadowStats.com it is currently somewhere in the neighborhood of 14 trillion dollars.  But again, not all of this “money” actually “exists” either.

So why doesn’t it exist?

It is because our financial system is based on something called fractional reserve banking.

When you go over to your local bank and deposit $100, they do not keep your $100 in the bank.  Instead, they keep only a small fraction of your money there at the bank and they lend out the rest to someone else.  Then, if that person deposits the money that was just borrowed at the same bank, that bank can loan out most of that money once again.  In this way, the amount of “money” quickly gets multiplied.  But in reality, only $100 actually exists.  The system works because we do not all run down to the bank and demand all of our money at the same time.

According to the New York Federal Reserve Bank, fractional reserve banking can be explained this way….

“If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000).”

So much of the “money” out there today is basically made up out of thin air.

In fact, most banks have no reserve requirements at all on savings deposits, CDs and certain kinds of money market accounts.  Primarily, reserve requirements apply only to “transactions deposits” – essentially checking accounts.

The truth is that banks are freer today to dramatically “multiply” the amounts deposited with them than ever before.  But all of this “multiplied” money is only on paper – it doesn’t actually exist.

The point is that the broadest measures of the money supply (M2 and M3) vastly overstate how much “real money” actually exists in the system. 

So if the U.S. government went out today and demanded every single dollar from all banks, businesses and individuals in the United States it would not be able to collect 14 trillion dollars (M3) or even 8.5 trillion dollars (M2) because those amounts are based on fractional reserve banking.

So the bottom line is this….

#1) If all money owned by all American banks, businesses and individuals was gathered up today and sent to the U.S. government, there would not be enough to pay off the U.S. national debt.

#2) The only way to create more money is to go into even more debt which makes the problem even worse.

You see, this is what the whole Federal Reserve System was designed to do.  It was designed to slowly drain the massive wealth of the American people and transfer it to the elite international bankers.

It is a game that is designed so that the U.S. government cannot win.  As soon as they create more money by borrowing it, the U.S. government owes more than what was created because of interest.

If you owe more money than ever was created you can never pay it back.

That means perpetual debt for as long as the system exists.

It is a system designed to force the U.S. government into ever-increasing amounts of debt because there is no escape.

We could solve this problem by shutting down the Federal Reserve and restoring the power to issue U.S. currency to the U.S. Congress (which is what the U.S. Constitution calls for).  But the politicians in Washington D.C. are not about to do that.

So unless you are willing to fundamentally change the current system, you might as well quit complaining about the U.S. national debt because it is now mathematically impossible to pay it off.

***UPDATE***

It has been suggested that the same dollar can be used to pay off debt over and over – this is theoretically true as long as the dollar remains in the system.

For example, if the U.S. government gives China a dollar to pay off a debt, there is a good chance that the U.S. government will be able to acquire that dollar again and use it to pay off another debt.

However, this is not true when debt is retired with the Federal Reserve.  In that case, money is actually removed from the system.  In fact, because of the “money multiplier”, when debt is retired with the Federal Reserve it can remove ten times that amount of money (and actually more, but let’s not get too technical) from the system.

You see, fractional reserve banking works both ways.  When $100 is introduced into the system, it can theoretically create $1000 as the example in the article above demonstrates.  However, when that $100 is removed, it can have the opposite impact.

And considering the fact that the Federal Reserve “purchased” the vast majority of new U.S. government debt last year, we have got a real mess on our hands.

Even if a way could be figured out how to pay off all the debt we owe to foreign nations (such as China, Japan, etc.) it would still be mathematically impossible to pay off the debt that we owe to the Federal Reserve which is exploding so fast that it is hard to even keep track of.

Of course we could repudiate that debt and shut down the Federal Reserve, but very few in Washington D.C. have any interest in doing that.

It has also been suggested that instead of just using dollars to pay off the U.S. national debt, we could use the assets of the U.S. government to pay it off.

That is rather extreme, but let us consider that for a moment.

That total value of all physical assets in the United States, both publicly and privately owned, is somewhere in the neighborhood of 45 to 50 trillion dollars.  Of course the idea of the U.S. government “owning” every single asset of the American people is repugnant to our entire way of life, but let’s assume that for a moment.

According to the 2008 Financial Report of the United States Government, which is an official United States government report, the total liabilities of the United States government, including future social security and medicare payments that the U.S. government is already committed to pay out, now exceed 65 TRILLION dollars.  This amount is more than the entire GDP of the whole world.

In fact, there are other authors who have written that the actual figure for the future liabilities of the U.S. government should be much higher, but let’s be conservative and go with 65 trillion for now.

So, if the U.S. government took control of all physical assets in the United States and sold them off, it could not even make enough money to pay for everything that the U.S. government is already on the hook for.

Ouch.

If you have not read the 2008 Financial Report of the United States Government, you really should.  Actually the 2009 report should be available very soon if it isn’t already.  If anyone knows if it is available, please let us know. 

The truth is that the U.S. government is in much bigger financial trouble than we have been led to believe. 

For example, according to the report (which remember is an official U.S. government report) the real U.S. budget deficit for 2008 was not 455 billion dollars.  It was actually 5.1 trillion dollars.

So why the difference?

The CBO’s 455 billion figure is based on cash accounting, while the 5.1 trillion figure in the 2008 Financial Report of the United States Government is based on GAAP accounting. GAAP accounting is what is used by all the major firms on Wall Street and it is regarded as a much more accurate reflection of financial reality.

So needless to say, the United States is in a financial mess of unprecedented magnitude.

So what should we do?  Does anyone have any suggestions?

***UPDATE 2***

We have received a lot of great comments on this article.  Trying to understand the U.S. financial system (even after studying it for years) can be very difficult at times.  In fact, it can almost seem like playing 3 dimensional chess.

Several readers have correctly pointed out that when the U.S. money supply is expanded by the Federal Reserve, the interest that is to be paid on that new debt is not created. 

So where does the money to pay that interest come from?  Well, eventually the money supply has to be expanded some more.  But that creates even more debt.

That brings us to the next point.

Several readers have insisted that the Federal Reserve is not privately owned and that since it returns “most” of the profits it makes to the U.S. government that we should not be concerned about the debt owed to it.

The truth is that what you have with the Federal Reserve is layers of ownership.  The following was originally posted on the Federal Reserve’s website….

“The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like private corporations – possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”

So Federal Reserve “stock” is owned by member banks.  So who owns the member banks?  Well, when you sift through additional layers of ownership, you will ultimately find that people like the Rothschilds, the Rockefellers and the Queen of England have very large ownership interests in the big banks.  But there are so many layers of ownership that they are able to disguise themselves well. 

You see, these people are not stupid.  They did not become the richest people in the world by being morons.  It was the banking elite of the world who designed the Federal Reserve and it is the banking elite of the world who benefit the most from the Federal Reserve today.  In the article above when we described the Federal Reserve as ”a private bank owned and operated for profit by a very powerful group of elite international bankers” we may have been oversimplifying things a bit, but it is the essence of what is going on.

In an excellent article that she did on the Federal Reserve, Ellen Brown described a number of the ways that the Federal Reserve makes money for those who own it….

The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered “for profit” corporations.

In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their “reserves.” The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in “reserve” can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total “loans and leases in bank credit” as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.

The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ — for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.

The reality is that there are a lot of ways that the Federal Reserve is a money-making tool.  Yes, they do return “some” of their profits to the U.S. government each year.  But the Federal Reserve is NOT a government agency and it DOES make profits. 

So just how much money is made over there?  The truth is that we have to rely on what the Federal Reserve tells us, because they have never been subjected to a comprehensive audit by the U.S. government.

Ever.

Right now there is legislation going through Congress that would change that, and the Federal Reserve is fighting it tooth and nail.  They are warning that such an audit could cause a financial disaster.

What are they so afraid of?

Are they afraid that we might get to peek inside and see what they have been up to all these years?

If you are a history buff, then you probably know that debates about a “central bank” go all the way back to the Founding Fathers.

The European banking elite have always been determined to control our currency, and that is exactly what is happening today.

Ever since the Federal Reserve was created, there have been members of the U.S. Congress that have been trying to warn the American people about the insidious nature of this institution. 

Just check out what the Honorable Louis McFadden, Chairman of the House Banking and Currency Committee had to say all the way back in the 1930s….

“Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.”

The Federal Reserve is not the solution and it never has been.

The Federal Reserve is the problem.

Any thoughts?

It seems like 90% of the countries in the world are printing money and issuing debt in a desperate attempt to solve a crisis caused by too much debt. The problem is that if 90% of the countries are issuing debt and the 10% aren’t willing to buy the debt, what happens? The danger is that most of this debt is being issued on a short-term basis, so rollover risk is huge. Soaring interest rates would destroy the world economic system. This problem is a bug in search of a windshield with an 18 wheeler barreling toward the bug.

Is Greek Crisis a Precursor to a “Global Margin Call”?

Rorschach’s Journal: Last Night, a Comedian Died in New York…

This was no accident, no act of God. No unforeseen mishap, no simple miscalculation.

Somebody pushed AIG out a window, to collect the insurance. Then they saw the opportunity to extort billions from the Congress and a Presidency in transition by bringing the financial system to the point of collapse. And they took it. And somebody knows who and how they did it.

Somebody knows.

NY Times
Goldman Helped Push A.I.G. to Precipice
By GRETCHEN MORGENSON and LOUISE STORY
February 6, 2010

…Well before the federal government bailed out A.I.G. in September 2008, Goldman’s demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.

With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman’s role in the insurer’s downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms — most prominently Goldman — made during 2007 and 2008 as the mortgage market imploded.

The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market’s implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities’ prices fell, the greater were Goldman’s profits…

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated — and in many cases, less than the prices at which other dealers valued the securities.

The pricing dispute, and Goldman’s bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.

The dispute between the two companies, he said, “was the tip of the iceberg of this whole crisis.”

“It’s not just who was right and who was wrong,” Mr. Brown said. “I also want to know their motivations. There could have been an incentive for Goldman to say, ‘A.I.G., you owe me more money.’ ”

Goldman is proud of its reputation for aggressively protecting itself and its shareholders from losses as it did in the dispute with A.I.G.

In March 2009, David A. Viniar, Goldman’s chief financial officer, discussed his firm’s dispute with A.I.G. in a conference call with reporters. “We believed that the value of these positions was lower than they believed,” he said.

Asked by a reporter whether his bank’s persistent payment demands had contributed to A.I.G.’s woes, Mr. Viniar said that Goldman had done nothing wrong and that the firm was merely seeking to enforce its insurance policy with A.I.G. “I don’t think there is any guilt whatsoever,” he concluded.

Lucas van Praag, a Goldman spokesman, reiterated that position. “We requested the collateral we were entitled to under the terms of our agreements,” he said in a written statement, “and the idea that A.I.G. collapsed because of our marks is ridiculous.”

Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.’s insurance did not even cover.

A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman’s valuations of the securities that A.I.G. insured were “consistently lower than third-party prices.”

To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world’s largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred — as, in fact, it did.

Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty — and Goldman became one of the biggest beneficiaries.

Longstanding Ties

For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.

…Mr. Egol structured a group of deals — known as Abacus — so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol’s deals still sat on A.I.G.’s books when the insurer was bailed out.

“Al probably did not know it, but he was working with the bears of Goldman,” a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. “He was signing A.I.G. up to insure trades made by people with really very negative views” of the housing market.

Mr. Sundaram’s trades represented another large part of Goldman’s business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. — helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.

Through Société Générale, Goldman was also able to buy more insurance on mortgage securities from A.I.G., according to a former A.I.G. executive with direct knowledge of the deals. A spokesman for Société Générale declined to comment.

It is unclear how much Goldman bought through the French bank, but A.I.G. documents show that Goldman was involved in pricing half of Société Générale’s $18.6 billion in trades with A.I.G. and that the insurer’s executives believed that Goldman pressed Société Générale to also demand payments.

Goldman’s Tough Terms

In addition to insuring Mr. Sundaram’s and Mr. Egol’s trades with A.I.G., Goldman also negotiated aggressively with A.I.G. — often requiring the insurer to make payments when the value of mortgage bonds fell by just 4 percent. Most other banks dealing with A.I.G. did not receive payments until losses exceeded 8 percent, the insurer’s records show.

Several former Goldman partners said it was not surprising that Goldman sought such tough terms, given the firm’s longstanding focus on risk management.

By July 2007, when Goldman demanded its first payment from A.I.G. — $1.8 billion — the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.

Still, Goldman’s initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments.

On Nov. 1, 2007, for example, an e-mail message from Mr. Cassano, the head of A.I.G. Financial Products, to Elias Habayeb, an A.I.G. accounting executive, said that a payment demand from Société Générale had been “spurred by GS calling them.”

Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.’s downfall, declined to be interviewed and referred questions to A.I.G. The insurer also declined to comment for this article. Mr. van Praag, the Goldman spokesman, said Goldman did not push other firms to demand payments from AIG….

Read the entire story here.

Here is an interesting email from “JL” about the architecture industry.

“JL” writes:

Hi Mish-

A while ago, you published a stat from the American Institute of Architects (AIA) regarding architecture businesses and billing increases and decreases. I thought that was a good indication of future construction growth and I checked it out. It looks like it ticked up marginally for December but it’s still terrible according to the Wall Street Journal article Architecture Billings Tick Up, but Still Show Decline.

The Architecture Billings Index moved slightly higher last month, although the index remained below 50 for the 23rd consecutive month. The score in December was 43.4 compared with 42.8 in November. The December reading indicates a continued decline in demand for design services.

To give you some information just from my small circle of friends and family in Architecture:

• All architects I spoke to said business was terrible and some in coma mode.
• My wife, an architect, has almost no business.
• Leads typically fade off when the bids come in and inquiries stop or get outright canceled.
• Construction sites around Berkeley post signs on the mobile offices saying “NO-WE ARE NOT HIRING!”
• Survey and discussion among architects and contractors revolve around how many carpentry shops have laid everyone off or shut down.

It hasn’t been this bad since the 70′s. Moreover, in the 70′s and 80′s there were some lucky firms would make a name for themselves with big government projects such as museums, embassies, government offices and such. We just don’t see that work anymore.

Moreover, the BLS employment numbers last week had a big drop in construction employment, yet again.

I expect that AIA number will fall off horribly in the near future.

As a personal anecdote, a neighbor who is an architect for his own business tells me much the same thing. He had full a time employee helper that became part-time, that became zero-time (laid off), and now he has nowhere near enough architecture work to keep himself busy.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Is That A Bailout Or A Lit Fuse?

Posted by Karl Denninger

The rumors came fast and furious – first Greece was going to get “help” from Germany, then it was denied, and then maybe it was again.  The latest?

Germany is considering assistance for Greece after the country’s deficit threatened the stability of financial markets, two lawmakers from Chancellor Angela Merkel’s governing coalition said. Olli Rehn, who takes over as European Union economic affairs commissioner tomorrow, said EU support for Greece will be discussed in coming days.

Let’s not forget what we’re dealing with here.

The EU is a loose confederation with a common currency.  They lack common laws, they lack the ability to bind each other’s economic policies, and they lack the ability to play “print money.”  To mount any sort of concerted rescue based on the ECB all nations must agree – that you can forget about.

Bilateral – that is, single-nation – support is another matter.  Of course any nation can choose to support any other in any way it chooses.

But let’s look at the underlying realities that are in play here.

The EU in totality must roll over or issue somewhat more than EUR 1.5 trillion in debt this year.  The German Bund got pounded when the rumors started circulating that they were planning on bailing out Greece, and that of course will impact borrowing costs, which simply fuels a spiral (the wrong way) when it comes to interest expense and thus budget deficits.

The truly bad news, however, is that Greece (even with our banks more than $100 billion of exposure to them) isn’t the worst of it.  Their economy is tiny compared to those of Spain and Portugal, both of which are much larger – and bigger problems.

One would hope that Merkel and friends in Germany aren’t really stupid enough to implement such a transfer of a peripheral nation’s problem to the EU’s core, but then again we have seen time and time again that “can-kicking” is the mantra of the world since this crisis began.  Rather than deal with the underlying problems – excessive leverage, naked swaps that the seller can’t possibly pay, various forms of fraud and gamesmanship in securities issue and similar – governments have instead decided to lift up the corner of the carpet and sweep, time and time again.

Should the EU implement this with Greece they may indeed set a precedent that could easily destroy the European Union over the next couple of years.  Faced with Spain, Portugal, Italy and Ireland, all of which are huge problems compared to Greece both in terms of the debt outstanding and the size of their economies Germany will find itself unable to backstop all four nations – yet it will have to, once the die is cast with Greece.

Yet unlike Greece, which has a GDP of EUR $261 billion, Spain’s is EUR 1.134 trillion and Italy’s EUR 1.406 trillion.  Portugal and Ireland’s economies are smaller, but they belie big problems, with the “best” indication being the external debt to GDP ratio.

Italy’s is 127% (the US is running close to 100% at present), while Greece’s is 161%.  Spain’s, on the other hand, is 171%.  Germany, for all of its vaunted “strength”, runs 178% of GDP, Portugal is at 214% and Ireland is running an unbelievable 1267%.

That’s right – tiny Ireland with EUR 144 billion in GDP has well north of a trillion Euros outstanding in external debt.  This, by the way, makes clear that debt service is likely compounding upon itself even now, which is a death spiral from which one cannot escape – whether it is being recognized or not.

Oh, and don’t look at Great Britain as a bastion of “fiscal responsibility” - they’re over 400% – nor the Swiss, at 423%.

The lesson here?  We have not only fixed nothing the so-called “coordinated actions” of so-called “world leaders” have set up a potential catastrophe originating in Europe. 

More than two years ago I predicted that Europe was the most likely place where the second leg – the real “Oh…. My…… God” moment – would originate in this economic mess.  These ratios were the reason for my prediction, and all that has happened over the last two years is that they’ve gotten worse.

Neither Germany or the rest of the EU can fix this without massive reform – read that as restructuring and/or default – of the external debt in these nations, including Germany itself.

Go ahead and believe this won’t blow up if you want to.  I look at today’s action, and indeed that of the last couple of weeks, as a clarion call and a warning that when we had the opportunity in the depths of 2008 and early 2009 to take the CDS monster out and shoot him – to lock up the fraudsters – to change the way banking works worldwide – we instead refused and let the “wise guys” off the hook.

As a consequence we have fixed nothing and the fuse has not only been lit, it is now much shorter than it was two years ago and may have gone inside beyond the reach of a pair of scissors.

The United States, ironically, is one of the better-positioned nations to survive what is coming.  No, it won’t be easy for us, but of the developed world there are few who have the internal capacity to pull in the horns and make it – not comfortably, but to survive.

“Here it comes”