Aggressive rate increases on credit cards are threatening to push struggling consumers into financial ruin, accelerating home foreclosures and the nation’s descent into recession.

The growing problem is reflected in cases such as that of Dennis Spaulding of Corona, Calif. He bought two last-minute plane tickets for his father’s funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards ”” to 24% and higher ”” doubling his monthly payments to about $2,000.

That led to a financial spiral that has put him on the verge of losing his home and filing for bankruptcy. “I see no light at the end of the tunnel,” says Spaulding, a cabinet designer.

Read it all.

The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

Going further than analysts anticipated, the central bank said it had cut its target for the overnight federal funds rate to a range of zero to 0.25 percent, a record low, bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation.

The move to a zero rate, which affects how much banks charge when they lend their reserves to each other, is to some degree symbolic. Though the Fed’s target had previously been 1 percent, demand for interbank lending has been so low that the actual Fed funds rate has hovering just above zero for the past month.

Far more important than the rate itself, the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.

In essence, the Fed is embarking on a radically different route to stimulate the faltering economy, and it puts the Fed chairman, Ben S. Bernanke, in partnership with the incoming Obama administration as it moves on a parallel track.

This is a high risk tack in terms of the potential for inflation down the road (unless it is properly handled), but it is much needed. The Fed has been badly behind since this whole crisis began and the chairman was telling us that the subprime struggles would stay “isolated” to a small part of the economy. Better late than never–read it all.

MS. CARLY FIORINA: …I think all of those statistics are an important reminder. While we have been focused in Washington on big companies…

…the Detroit automakers, and big unions, the truth is we’re not as concerned, and we should be, about the hundreds and thousands of small businesses who actually create two-thirds of the jobs in this country. Which brings me all the way back to the original problem. We have a recession, a deepening recession right now because credit is unavailable. Credit is unavailable to small businesses so they can’t hire. When hundreds of small businesses can’t hire 10 and 15 people, over time that creates big unemployment numbers. They may not have big unions to represent their interests in Washington. They’re the little guy, but the little guy matters. When credit isn’t available, consumers don’t have the money they need to spend. So I think we have to go back to the root of this problem, ultimately, which is credit is still unavailable. And that is despite massive bailouts of big financial institutions who are still not lending (my emphasis).

Read it all from today’s edition of Meet the Press (and comments from two others besides these three also).

Check it out. Hardly any picture illustrates more clearly that there is ample money available in the financial system, but the banks are not lending it.

Steven Levitt’s best-selling book, Freakonomics, revitalized economics by explaining how economic principles affect our daily lives. With the economy so prominent in our lives today, how should we interpret what’s going on?

Host Scott Simon asks Levitt, now a professor of economics at the University of Chicago, for his thoughts about the state of the national economy.

Listen to it all.

Investors in money-market mutual funds that focus on U.S. Treasuries may lose money for the first time if the Federal Reserve cuts interest rates next week and yields become too small to cover expenses.

Record-low yields on government debt have already led money-market funds to waive fees to keep returns positive. If the Federal Open Markets Committee, as expected, cuts its target rate, some Treasury funds may allow returns to turn negative, said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.

“No one has ever paid above and beyond their interest income to be in a fund,” Crane said. “But if we see another cut, we’ll likely see negative yields.”

Read it all.

“Without giving specific names, most of the significant American banks, the larger banks, are bankrupt, totally bankrupt,” said [Jim] Rogers, who is now a private investor.

“What is outrageous economically and is outrageous morally is that normally in times like this, people who are competent and who saw it coming and who kept their powder dry go and take over the assets from the incompetent,” he said. “What’s happening this time is that the government is taking the assets from the competent people and giving them to the incompetent people and saying, now you can compete with the competent people. It is horrible economics.”

Read it all.

BTW, while…[the] folks in the Big Media churned out hundreds of thousands of words…waxing euphoric about the prospect for enhanced back office clearing of CDS contracts, the real issue is the festering credit situation in the front office. Truth is that the DTCC and the other dealers, working at the behest of Mr. Geithner, Gerry Corrigan and many others, have largely fixed the operational issues dogging the CDS markets. The danger of CDS is not a systemic blowup – though that will come soon enough. It is the normal operation of the now electronically enabled CDS market wherein lies the threat to the entire global financial system, this via the huge drain in liquidity illustrated above as CDS contracts are triggered by default events.

The only way to deal with this ridiculous Ponzi scheme is bankruptcy. The way to start that healing process, in our view, is by the Fed emulating the FDIC’s treatment of DSL, withdrawing financial support for AIG and pushing the company into the arms of the bankruptcy court. The eager buyers for the AIG insurance units, cleansed of liability via a receivership, will stretch around the block.

By embracing Geithner, President-elect Barack Obama is endorsing the ill-advised scheme to support AIG directed by Hank Paulson et al at Goldman Sachs and executed by Tim Geithner and Ben Bernanke. News reports have already documented the ties between GS and AIG, and the backroom machinations by Paulson to get the deal done. This scheme to stay AIG’s resolution cannot possibly work and when it does collapse, Barak Obama and his administration will wear the blame due through their endorsement of Tim Geithner.

Read it carefully and read it all.

But panel members lambasted the executives for taking undue risks to win bigger bonuses and for failing to take responsibility for a housing crisis that has ravaged the economy.

“Their irresponsible decisions are now costing taxpayers billions of dollars,” said committee Chairman Henry Waxman, D-Calif.

Fannie and Freddie own or guarantee half of outstanding home loans and became the largest buyers of subprime and Alt-A mortgages, both of which have had high rates of defaults. Alt-A, a category between subprime and prime, did not require documentation of income or assets. With the firms facing $12 billion in credit losses this year, the government took over both in September.

Read it all.

American International Group Inc. owes Wall Street’s biggest firms about $10 billion for speculative trades that have soured, according to people familiar with the matter, underscoring the challenges the insurer faces as it seeks to recover under a U.S. government rescue plan.

The details of the trades go beyond what AIG has explained to investors about the nature of its risk-taking operations, which led to the firm’s near-collapse in September. In the past, AIG has said that its trades involved helping financial institutions and counterparties insure their securities holdings. The speculative trades, engineered by the insurer’s financial-products unit, represent the first sign that AIG may have been gambling with its own capital.

Read it all.

Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.

Repeat after me: risk aversion. Read it all

Even as the Dow Jones industrial average rose nearly 300 points on growing confidence on Wall Street on Monday, a Treasury bill auction yielded a new low of less than 0.01%, noted Miller & Tabak analyst Tony Crescenzi. That’s a sign that investor demand for T-bills, considered the safest short-term assets around, is still on the rise despite a return of nearly zero.

“Things are bad, and they don’t look like they’re getting better,” said JPMorgan Chase economist Michael Feroli. The tone of the market was a bit better than last week, and Treasury yields recovered modestly on expectations of a $15 billion automaker bailout, but he cautioned against looking too much into “the day-to-day movements.”

As the reality of the mortgage meltdown and its massive, widespread aftershocks set in, investors and the financial industry are readjusting their strategies and becoming more cautious. Even if the government’s bailouts and other actions succeed in propping up the housing market, unemployment is worsening ”” a factor that will mean more losses for banks, and a tougher time for the government as it tries to stabilize the fragile economy.

Read it all.

The panic in global financial markets has sparked an unprecedented rush into safe US Treasury securities, driving yields on short-term government notes down to almost zero.

Due to stampeding demand for safe short-term investments, the US Treasury’s four-week and three-month bills on Friday yielded an effective rate of 0.01 percent — down sharply from 1.515 percent and 1.785 percent, respectively, in early September.

Other Treasuries are also showing record low yields. The 10-year bond yield fell as low as 2.505 percent and the 30-year bond yield slid to 3.005 percent at one point on Friday. The six-month bond yielded a mere 0.20 percent.

The low yields reflect a surge in demand for these instruments, seen as the safest in the world during times of turmoil.

“Investors seem to be content to sell stocks and park into the bonds for now,” said Greg Michalowski of the financial website FXDD.

Read it all.

Homeowners who want to refinance existing mortgages may be more likely to take advantage of the lower rates, but many people who bought during the real estate bubble won’t be able to qualify for a new loan because they have little equity or are “upside down” — owing more on their homes than they are worth.

“I anticipate it will increase refinance activity, but there will be nothing dramatic,” said Terrin Griffiths, an economist for the California Credit Union League, which represents credit unions in California and Nevada.
Jeff Lazerson, a Laguna Niguel mortgage broker, said all the customer calls he received Tuesday were from people seeking to refinance, not buy homes. Many are trying to get out of adjustable-rate mortgages scheduled to reset to higher rates next year, he said.

But most who called were rebuffed because they were upside down on their current mortgages or had credit scores too low to qualify.

“Out of all the people calling, about 30% at most can get help,” Lazerson said.

Read it all.

Pub-owner Sean Hughes, who’s his 20s, has seen a big change in people’s spending habits even in his young life.

SEAN HUGHES, Pub Owner: When I was very young, I mean, it was different then, because credit wasn’t a real kind of thing in people’s lives. It was obviously — you know, if you had the money to buy something, then you could buy it.

Whereas now, people just seem to look at something like a television, and be like, “I want that,” and they can get it, because they can get on no percent interest or they can get it on whatever.

SELLER: We got things for 5 pounds, 10 pounds, 20 pounds.

MARGARET WARNER: That attitude led many British consumers, especially younger ones, to run up huge levels of personal debt, more than even in the United States. Total household indebtedness here, credit card and mortgage debt combined, stands at 160 percent of GDP, the highest in the developed world….

MARGARET WARNER: But now British banks are squeezing these consumers through their credit cards. Credit counselor Jahanara Hussain works for a nonprofit in London’s East End.

Read or watch the whole thing.

According to a report commissioned by the Government from the former HBOS chief executive, Sir James Crosby, and published with the pre-Budget report, net new mortgage lending may next year shrink to below zero, a situation quite without precedent even during the last housing market crash of the early 1990s, when the problem was never lack of mortgage finance but rather its cost. Today it is the reverse.

The main reason for this intensification in the mortgage famine is that lenders have approximately £160bn of mortgages to refinance next year, yet beyond the Government, no obvious way of doing so. Nobody is prepared to finance or buy mortgage assets right now. The securitisation markets remain closed.

Sir James suggests the Government guarantees £100bn of mortgage-backed securities as one way out of this downward spiral of decline. Yet Mr King doesn’t like this solution at all, as subsidisation of mortgage lending may end up only crowding out small business and other forms of lending. As can readily be seen, there is no magic wand that can be waved to get rid of the deleveraging process.

Read it all.

The Federal Reserve said Tuesday that it would buy up to $600 billion in mortgage-backed assets in another attempt to deal with the financial crisis.

The Fed said it would purchase up to $100 billion in direct obligations from the mortgage finance giants Fannie Mae and Freddie Mac as well as the Federal Home Loan Banks. It also will purchase another $500 billion in mortgage-backed securities, pools of mortgages that are bundled together and sold to investors.

The $600 billion effort on mortgages came as the Fed also unveiled a program to help unfreeze the market that backs consumer debt such as credit cards, auto loans and student loans.

Read it all

The trillions of dollars in public funds U.S. officials are putting on the line to stabilize financial markets and protect the economy from a deep recession would, in normal times, inspire fear of soaring inflation and a tumbling dollar.

But these are not normal times.

“The patient’s on the floor right now. You want to get him up off the floor; then you worry about diet and exercise,” said James Horney of the Center on Budget and Policy Priorities.

Read it all. Well, the Reuters headline says it is not a worry now but it is to a lot of us, and it should be as demonstrated in this article in this past weekend’s Barrons by Jack Willoughby. Make sure to read that also–KSH.

Rushing to rescue Citigroup, the government agreed to shoulder hundreds of billions of possible losses at the stricken bank and to plow a fresh $20 billion into the company.

Regulators hope the dramatic action will bolster badly shaken confidence in the once mighty banking giant as well as the nation’s financial system, a goal that so far has been elusive despite a flurry of government interventions to battle the worst global crisis since the 1930s.

The action, announced late Sunday by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already fragile financial system and the U.S. economy.

Read it all.

As Congress and the incoming Obama administration prepare to revamp federal financial oversight, the collapse of the thrift industry offers a lesson in how regulation can fail. It happened over several years, a product of the regulator’s overly close identification with its banks, which it referred to as “customers,” and of the agency managers’ appetite for deregulation, new lending products and expanded homeownership sometimes at the expense of traditional oversight. Tough measures, like tighter lending standards, were not employed until after borrowers began defaulting in large numbers.

The agency championed the thrift industry’s growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as “innovations.” In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion,” he said in a speech.

At the same time, the agency allowed the banks to project minimal losses and, as a result, reduce the share of revenue they were setting aside to cover them. By September 2006, when the housing market began declining, the capital reserves held by OTS-regulated firms had declined to their lowest level in two decades, less than a third of their historical average, according to financial records.

Scott M. Polakoff, the agency’s senior deputy director, said OTS had closely monitored allowances for loan losses and considered them sufficient, but added that the actual losses exceeded what reasonably could have been expected.

“Are banks going to fail when events occur well beyond the confines of reasonable expectation or modeling? The answer is yes,” he said in an interview.

But critics said the agency had neglected its obligation to police the thrift industry and instead became more of a consultant.

Read it all.

From 2003 to 2005, Citigroup more than tripled its issuing of CDO’s, to more than $20 billion from $6.28 billion, and Maheras, Barker and others on the CDO team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the CDO’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.

Even as Citigroup’s CDO stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.

When Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.

“He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”

Read it all.

Federal regulators were considering a new rescue for Citigroup on Sunday, a step that could mark a third leg of the government’s broader efforts to bolster the nation’s financial industry, according to people briefed on the plan.

Under the proposal, the government would shoulder losses at Citigroup if those losses exceeded certain levels, according to these people, who spoke on the condition that they not be identified because the plan was still under discussion.

If the government should have to take on the bigger losses, it would receive a stake in Citigroup. The banking giant has been brought to its knees by gaping losses on mortgage-related investments.

Read it all.

Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said.

Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There is no question that Citi is in the category of ”˜too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

Read it all.

Finally, the outlines of a coherent debate on the federal bailout. This comes as welcome relief from a campaign season that gave us the House Republicans’ know-nothing rejectionism, John McCain’s mindless railing against “greed and corruption,” and Barack Obama’s detached enunciation of vacuous bailout “principles” that allowed him to be all things to all people.

Now clarity is emerging. The fault line is the auto industry bailout. The Democrats are pushing hard for it. The White House is resisting.

Underlying the policy differences is a philosophical divide. The Bush administration sees the $700 billion rescue as an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.

Treasury Secretary Henry Paulson is willing to stretch the meaning of “bank” by extending protection to such entities as American Express. But fundamentally, he sees government as saving institutions that deal in money, not other stuff.

Democrats have a larger canvas, with government intervening in other sectors of the economy to prevent the cascade effect of mass unemployment leading to more mortgage defaults and business failures (as consumer spending plummets), in turn dragging down more businesses and financial institutions, producing more unemployment, etc. — the death spiral of the 1930s.

Read it all.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. [Steve] Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says….

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ”˜I can’t figure this thing out.’ And I said, ”˜I think we have our story.’”‰”

Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine….

Quite a piece from the author of Liar’s Poker. Read it carefully and read it all.

During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays.

But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally.

The Wisconsin schools are on the brink of losing their money, confronting educators with possible budget cuts. Interest rates for New York’s subways are skyrocketing and contributing to budget woes that have transportation officials considering higher fares and delaying long-planned track repairs.

And the bank at the center of the saga, named Depfa, is now in trouble, threatening the stability of its parent company in Munich and forcing German officials to intervene with a multibillion-dollar bailout to stop a chain reaction that could freeze Germany’s economic system.

A really good article on just some of the massive collateral damage from the financial crisis which climaxed with the Credit Freeze Crisis of fall 2008–read it all.

As dozens of countries slip deeper into financial distress, a new threat may be gathering force within the American economy ”” the prospect that goods will pile up waiting for buyers and prices will fall, suffocating fresh investment and worsening joblessness for months or even years.

The word for this is deflation, or declining prices, a term that gives economists chills.

Deflation accompanied the Depression of the 1930s. Persistently falling prices also were at the heart of Japan’s so-called lost decade after the catastrophic collapse of its real estate bubble at the end of the 1980s ”” a period in which some experts now find parallels to the American predicament.

“That certainly is the snapshot of the risk I see,” said Robert J. Barbera, chief economist at the research and trading firm ITG. “It is the crisis we face.”

Read it all.

Euro: 4.77% vs. prior 4.79%; Dollar: 3.03% vs. prior 3.19%; Sterling: 5.84% vs. prior 5.88%

It sure is nice to see these rates continue to move in the right direction.

First came the mortgage crisis. Now comes the credit card crunch.

After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both just as an eroding economy squeezes consumers.

The pullback is affecting even credit-worthy consumers and threatens an already beleaguered banking industry with another wave of unprecedented losses after a gilded era in which it reaped near-record gains from the business of easy credit that it helped create.

Read it all.

Where relationship banking still survives, there have been relatively few problems of bad debts. The problems have arisen in transactional and unsecured credit card banking with one-off or completely unknown customers. Of course the customers have often behaved badly; if a bank does not know its customers, who are only blips on a computer screen, some of them will behave badly. The bank only has itself to blame.

The Sunday Times yesterday had a blazing example of the evils that can result. Banks issuing credit cards have found a legal way of turning unsecured debt into debt secured on house property. That means that credit card debt, which banks have been ladling out to all comers, can lead to the repossession of the family home. Which bank is notorious for the harsh use of this loophole of which credit card customers were given no prior warning? Apparently it is Northern Rock, which was “rescued” by being nationalised. So the grotesque situation has arisen in which the Government is repossessing the houses of credit card customers – to their considerable dismay – as part of the rescue of an incompetently run bank.

The decline of moral responsibility has damaged British banks; it is the real flaw behind the credit crisis. There will be new regulation of the world’s banking system after the crisis. Governments cannot risk another catastrophe on this scale. The banks need to change their behaviour. They need to re-establish relations with their clients and value experience in their staff.

Read it all.