Lin Hersh, a 61-year-old small-business owner in Bearsville, N.Y., about two hours north of New York City, called up her stock broker two weeks ago and gave the order to sell everything.

She dumped nearly all of her individual equities and her stock mutual funds, moving almost completely into cash. Ms. Hersh is haunted by the market plunge of 2008, when her $432,000 in savings dwindled to $150,000.

“What I’ve got left after the last downturn is about a third of what I started out with and I’m not in the mood to play anymore,” she said. Pointing to the weak American economy and concerns about Europe, Ms. Hersh said she would most likely steer clear of stocks through the end of this year.

Read it all.

“The short-sale ban really smacks of desperation,” said Kenneth S. Rogoff, a professor of economics at Harvard. “That’s their plan for solving the euro debt crisis? I mean, this isn’t going to buy them much time.”

The crisis in Europe, Mr. Rogoff said, goes far beyond falling stock prices and has more to do with the state of banks there, including banks in Italy and France. He said the sovereign debt problems were an extension of the stress on the system created by the banking crisis.

Read it all.

Bank of America would have us believe the goodwill by itself was more valuable than what the market says the entire company is now worth. Investors don’t buy that. They see a company that needs to raise fresh capital, judging by the discount to book value, in spite of the company’s claims it doesn’t need to. The more the stock price falls, the more shares Bank of America would need to issue to appease the markets, leading to fears of even more share dilution.

The same story is playing out in Europe, driven by the sovereign-debt crisis. The 32 companies in the Euro Stoxx Banks Index yesterday had a stock-market value of 313.2 billion euros ($444 billion) and a combined book value of 620.5 billion euros. France’s Credit Agricole SA (ACA), the index’s third-largest bank by assets, trades for just 34 percent of book.

Read it all.

If the experience of previous ECB interventions is anything to go by it is only a matter of time until we see larger-scale ECB operations, potentially accompanied by a European Financial Stability Facility (and later European Stability Mechanism) bailout. This is how it happened in the cases of Ireland and Portugal. ECB measures have always been announced as ways to prevent further, more costly rescue packages. The strategy never worked because in the end we got both. It won’t work this time, either.

It is remarkable how far the ECB has now moved from its initial Bundesbank-like philosophy of independence and monetary stability. These were not just soap-box oratories but supposedly law. The EU Treaty defines the ECB’s role very clearly: “The primary objective of the European System of Central Banks [the ECB and eurozone central banks] shall be to maintain price stability.” And the ECB “shall be independent in the exercise of its powers and in the management of its finances. Union institutions, bodies, offices and agencies and the governments of the Member States shall respect that independence.” If only!

Maybe the ECB somehow manages to conform to the letter of the law. It certainly doesn’t to its spirit….

Read it all.

From here:

Lord God, we live in disturbing days:
across the world,
prices rise,
debts increase,
markets are in turmoil,
jobs are taken away,
and fragile security is under threat.
Loving God, meet us in our fear and hear our prayer:
be a tower of strength amidst the shifting sands,
and a light in the darkness;
help us receive your gift of peace,
and fix our hearts where true joys are to be found,
in Jesus Christ our Lord. Amen.

The Federal Reserve on Tuesday sharply downgraded its outlook for the American economy and took the extraordinary step of signaling that it would hold short-term interest rates at exceptionally low levels “at least through mid-2013.”

The move marks the first time that the U.S. central bank has pegged a specific timetable to a pledge on its benchmark interest rate, the federal funds rate, which has been near zero since late-2008.

But the decision came with three dissenting votes from Fed committee members, reflecting concerns about the threat of runaway inflation down the road.

Read it all.

No amount of jaw-jawing from the ECB (or from the G-7, which yesterday put out an odd statement calling the rise in euro-zone bond yields not “warranted”) can make investors buy Italian debt. Mr. Trichet continues to act as if the markets are having an attack of the vapors, from which they’ll recover presently. But no rational person or institution is going to start buying sovereign debt from heavily indebted, stagnant, deficit-running countries as if the past 15 months had never happened. The lamp has been rubbed, the genie has escaped, and no amount of un-rubbing will put him back in the lamp.

Read it all.

Standard and Poor’s, the agency responsible for Friday’s downgrade, merely confirmed what anyone with their eyes open for the past decade or two already knew: The U.S. has a huge and growing debt problem that it is resolutely unwilling to solve.

Not unable. Just unwilling.

Not just politicians, but anyone who buys into their divisive, fanciful rhetoric.

Read it all.

The downgrade of the United States long-term debt to AA+ from AAA has global implications, said Alessandro Giansanti, a credit market strategist at ING in Amsterdam.

“We can see that this may force the U.S. to move more aggressively to cut spending,” he said, something that could drive the already weak economy into recession and weigh on the economies of all of its trading partners. “That’s the main driver” of the stock market declines, he said.

Read it all.

A half-hearted approach by the EBC will achieve little. Even full-blown “shock and awe” will only buy time. That’s because the real instability stems from fears euro-zone governments will impose losses on those holding individual country bonds if debts prove unsustainable. Those fears are mounting as the growth outlook deteriorates. Italy’s announcement of new austerity measures Friday may help address concerns over the deficit but could actually worsen the short-term challenge of growth.

That’s why the second part of the crisis resolution requires a vast expansion of the euro zone’s bailout facilities and most likely a move by European countries to guarantee European Financial Stability Facility’s bonds, effectively turning them into genuine euro-zone bonds.

Read it all.

[If done properly]….Tax reform will already have slashed rates radically. In one Simpson-Bowles scenario, the top rate plunges to 23 percent. Conservatives could at that point contemplate increasing net revenue by slightly tweaking these new low rates, say, back to Reagan’s 28 percent, still much lower than the current 35 percent and Obama’s devoutly desired 39.6 percent. The deviation from revenue neutrality would yield new tax receipts for the Treasury, in addition to those resulting from the economic growth stimulated by the lower rates.

Democrats would have to respond by crossing their own red line on entitlements. That means real structural changes. That means raising the Medicare and Social Security ages, indexing them to longevity (until 70 becomes the new 65) and changing the inflation formula. Perhaps even means-testing Social Security (after one has recouped what one originally paid in).

The result of such a grand bargain would be debt reduction on a scale never before seen. World confidence in the American economy would rise dramatically. Best of all, we would be back on the road to national solvency….

Read it all.

Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.

Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.

So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.

Read it all.

1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis?

2. How will non-US investors (Private and Central Banks) view the downgrade?…

9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory?

Read it all.

From here:

Earlier today, Standard & Poor’s rating agency lowered the long-term rating of the U.S. government and federal agencies from AAA to AA+. With regard to this action, the federal banking agencies are providing the following guidance to banks, savings associations, credit unions, and bank and savings and loan holding companies (collectively, banking organizations).

For risk-based capital purposes, the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected.

…there a sliver of a silver lining ”” and an important one. America’s downgrade may serve as a wakeup call for its policymakers. It is an unambiguous and loud signal of the country’s eroding economic strength and global standing. It renders urgent the need to regain the initiative through better economic policymaking and more coherent governance.

There is a risk, of course, that different political factions will use S&P’s action as a vindication of their prior beliefs. Democrats would argue that it is recent Republican political sabotage that pushed S&P over the edge while Republicans would argue that we are here due to irresponsible government spending by the Democrats.

For the sake of their country and the wider global economy, both parties should resist the urge to begin bickering. Instead they should seize this potential “Sputnik Moment…”

Read it all.

Though Beijing has few options other than to continue to buy United States Treasury bonds, Chinese officials are clearly concerned that the country’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued.

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs.

Read it all.

Standard & Poor’s announced Friday night that it has downgraded the U.S. credit rating for the first time, dealing a symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation’s rating to one notch below AAA, the credit rating company said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.

“It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” said David Beers, head of S&P’s government debt rating unit.

Read it all.

The federal government is expecting and preparing for bond rating agency Standard & Poor’s to downgrade the rating of U.S. debt from its current AAA value, a government official told ABC News.

Although the Obama administration is preparing for the possible downgrade, it is not 100 percent positive it is going to happen, a second government official said, and if it does happen officials are not sure when it will happen.

Read it all.

Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.

With the countries weighed down by debt, the think tank modelled “good” and “bad” economic scenarios for both.

It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth.

Read it all.

…another type of contagion is causing concern: the risk of problems spreading to big banks, especially in Italy and Spain.

The growing vulnerability of the giant banks in these two countries is spurring investor fears that Europe’s latest bid to get a handle on its festering debt crisis, adopted just a few weeks ago, has come up short.

The banks own so many bonds issued by their home countries that they are being weakened as the value of those bonds falls, amid concerns that the cost of government borrowing could become too expensive for Italy and Spain to bear.

Now there are signs that these concerns are, in turn, making it harder and costlier for the banks to borrow money to finance their day-to-day operations, a troubling trend that, at the worst, could lead to liquidity problems.

Read it all.

Chinese rating agency Dagong Global Credit Rating Co. said Wednesday it has cut the credit rating of the United States from A+ to A with a negative outlook after the U.S. federal government announced that the country’s debt limit would be increased.

The decision to lift the debt ceiling will not change the fact that the U.S. national debt growth has outpaced that of its overall economy and fiscal revenue, which will lead to a decline in its debt-paying ability, said Dagong Global in a statement.

Read it all.

Investors continued to flee Italian and Spanish bonds Tuesday amid renewed concerns about the ability of Rome and Madrid to regain control of their finances in the face of sluggish growth and weakened administrations.

The Italian economy minister, Giulio Tremonti, called a meeting of the country’s financial authorities Tuesday to discuss the recent market turmoil, Reuters reported, citing an unidentified official. The Italian Treasury did not respond to calls seeking comment.

In Madrid, meanwhile, Prime Minister José Luis Rodríguez Zapatero delayed the start of a planned vacation to the southern region of Andalucia. Reuters quoted the secretary of state for communications as saying the prime minister wanted to “more closely monitor the evolution of the economic indicators.”

Read it all.

Read it all.

America’s debt debate seems still more kabuki-like. Its fiscal problem is not now””it should be spending to boost recovery””but in the medium term. Its absurdly complicated tax system raises very little, and the ageing of its baby-boomers will push its vast entitlement programmes towards bankruptcy. Mr Obama set up a commission to examine this issue and until recently completely ignored its sensible conclusions. The president also stuck too long to the fiction that the deficit can be plugged by taxing the rich more: he even wasted part of a national broadcast this week bashing the wealthy, though the Democrats had already withdrawn proposals for such rises….

In both Europe and America electorates seem to be turning inward. There is the same division between “ins” and “outs” that has plagued Japan. In Europe one set of middle-class workers is desperate to hang on to protections and privileges: millions of others are stuck in unprotected temporary jobs or are unemployed. In both Europe and America well-connected public-sector unions obstruct progress. And then there is the greatest (and also the least sustainable) division of all: between the old, clinging tightly to entitlements they claim to have earned, and the young who will somehow have to pay for all this.

Sometimes crises beget bold leadership. Not, unfortunately, now….

Read it all.

Tea Party activists in and out of office, including 1st District Rep. Tim Scott, have been demanding more spending-cut assurances than House Speaker John Boehner can deliver on the debt accord. They should realize that with Democrats still controlling both the Senate and White House, they can’t get everything they want this time around.

Tea Party folks also should realize that unless the debt ceiling is raised in time, the immediate bottom-line consequences could include a federal default and U.S. credit-rating downgrade.

Of course, even with a debt deal, the nation still faces serious financial risks — including a credit-rating demotion. Fortunately, next year’s presidential and congressional elections will give voters another chance to send the message that Washington can’t keep spending so far beyond our means.

Read it all.

That’s why the posturing about whether and how Congress should increase the debt ceiling by Aug. 2 has been a hollow exercise. Failure to increase the borrowing limit would harm American prestige and the global financial system. But that’s nothing compared with the real threats to the U.S.’s long-term economic health, which will begin to strike with full force toward the end of this decade: Sharply rising per-capita health-care spending, coupled with the graying of the populace; a generation of workers turning into an outsize generation of beneficiaries. Hoover Institution Senior Fellow Michael J. Boskin, who was President George H.W. Bush’s chief economic adviser, says: “The word ”˜unsustainable’ doesn’t convey the problem enough, in my opinion.”

Read it all.

Should America embark on such fiscal contraction at a time when economic growth has already slipped to stall speed, and debt deleveraging continues with a vengeance, I would like to flee to Mars for safety.

Yes, there is such a concept as an “expansionary fiscal contraction”, as in Ireland (1980s), Denmark (1990s), arguably Canada (1990s), and the UK after both 1932 and 1993, but in every successful case this was accompanied by monetary loosening. That card has already been played this time.

Should America instead opt to evade these fiscal cuts by actually defaulting on debts accumulated by self-indulgent baby boomers, I would also like to flee Mars because such an outcome might be even worse.

Read it all.

No European country can succeed on its own – but the political determination to deal with the populations’ fears and concerns is still lacking. Europe needs radical internal reform led by committed and courageous political leaders. Such leaders must begin by declaring, repeating and teaching that Europe has changed, that it has a new face. New priorities, even though unpopular on the short run, must be established in order to hope for success in the long term.

Europe needs time, but our politicians are caught on the horns of a dilemma. While they need to think beyond the next generation, they are obsessed with winning the next election. Trapped between short-term imperatives and long-term necessity, it might well be that they cannot find a solution.

Citizens and civil society as a whole have no choice but to break the vicious circle – they cannot allow their future be destroyed by a lack of collective confidence and by narrow individual political ambition. It is time to be vocal and constructively critical.

Read it all.

House Speaker John A. Boehner and the Senate majority leader, Harry Reid, were preparing separate backup plans to raise the nation’s debt ceiling on Sunday, after the leaders were unable to end an increasingly grim standoff over the federal budget.

The dueling plans emerged as lawmakers appeared to miss a self-imposed deadline of 4 p.m. Eastern time to cut a deal before markets open in Asia. And at about 6 p.m., President Obama began meeting with Mr. Reid and the House Democratic leader, Nancy Pelosi, in the Oval Office to discuss the Reid proposal.

Mr. Reid, the Senate’s top Democrat, was trying Sunday to cobble together a plan to raise the government’s debt limit by $2.4 trillion through the 2012 election, with spending cuts of about $2.5 trillion. He would seek to avoid cuts to entitlement programs, but it was unclear how those savings would be achieved.

Read it all.

House and Senate negotiators have not reached a deal that would lift the nation’s debt ceiling just hours before markets in Asia are set to open ”” a test of whether Washington political dysfunction is beginning to shake the global economy.

House Republicans are not able to reach a deal with Senate Democrats, said congressional sources, though staff-level negotiations are continuing.

And in a sign that talks with Republicans appear to be going sour, Senate Majority Leader Harry Reid (D-Nev.) began to draft his own legislation Sunday that would slash at least $2.5 trillion to match an extension of the nation’s borrowing limit through the 2012 election, leadership aides said.

Read it all.