Las Vegas Sitting on Huge Housing Inventory; 70% of NV Mortgages Underwater; Massive Wave of Distressed Sales Coming

May 16, 2010 · Posted in General Economics · Comment

The New York Times notes Building Is Booming in a City of Empty Houses:

In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.

The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.

For now, builders are still able to find demand due to long drawn out short sale processes which are frustrating buyers, according to Calculated Risk.

CR also has a chart that shows the percentage of negative equity homes by state:

Homes underwater by state

While thousands of homes are empty and ghost towns are developing, 70% of homeowners are under water, builders continue to pile on, and agents again try to lure in people for the “next housing boom”. This next housing boom is not going to happen. Not in this decade, and probably not even in our lifetime.

As a result of this insanity, there will be great opportunities to strike ridiculous deals in Sin City at some point. Now is not that time.

This has all to do with what I explained recently:

True Consumption as Percentage of GDP

The true consumption ratio will need to come down significantly before a true alignment of resources in the production structure toward a recovery will be possible.

A close up to the years 2000 through now:

Government stimulus and bailout programs since the beginning of 2008 have fundamentally accomplished one thing: The ratio of the production of consumer goods versus factors of production has been bumped up for a little while.

Road to Recovery?

Contrary what the government says, they have not lead us onto a “path to recovery”. In fact, they have done the exact opposite! They have used all means at their disposal and all the force and dedication in the world to pull people in precisely the opposite direction.

This is the outcome of all the corporate bailouts, the cash for clunkers program, the 10,000 tax credit for homebuyers and what have you. Instead of abstaining from producing overproduced consumer goods and re-aligning toward capital goods, businesses have thus continued to produce excess trash and continued to engage in overly risky activities.

The payback for supporting this nonsense will be a double dip recession, Uncle Sam sends his regards.

Tags: las vegas, nevada

Marijuana Prices are Crashing – Panic Among California Growers

May 15, 2010 · Posted in General Economics · Comment

Here’s the NPR story:

Here’s the article:

For decades, illegal marijuana cultivation has been an economic lifeblood for three counties in northern California known as the Emerald Triangle.

The war on drugs and frequent raids by federal drug agents have helped support the local economy — keeping prices for street sales of pot high and keeping profits rich.

But high times are changing. Legal pot, under the guise of the California’s medical marijuana laws, has spurred a rush of new competition. As a result, the wholesale price of pot grown in these areas is plunging.

Demand Not Meeting Supply

In 1983, the Reagan administration launched a massive air and ground campaign to eradicate pot and lock up growers in northern California. Charley Custer, a writer and community activist, had just arrived to Humboldt County from Chicago. With the Reagan crackdown, Custer recalls, wholesale prices shot up — to as high as $5,000 a pound. That sudden and ironic windfall for those growers willing to risk prison time transformed the community.

“A lot of people were living on welfare and peanut butter and banana sandwiches for a long time before pot made it possible to be part of the middle class,” Custer says.

Nearly 30 years later, Custer says that boom may be over.

“Outdoor growers are having a hard time unloading their fall harvest,” Custer says. “And this is six months later and when some people do move it, they don’t get nearly the price they were hoping for.”

That goes for both legal growers who cultivate limited quantities of pot under the medical marijuana laws and illegal operators who often grow larger amounts.

Prices are now much less than $2,000 a pound, according to interviews with more than a dozen growers and dealers. Mendocino County Sheriff Tom Allman says some growers can’t get rid of their processed pot at any price.

“We arrested a man who had … 800 pounds of processed,” Allman says. “Eight hundred pounds of processed. And we asked him: ‘What are you going to do with 800 pounds of processed?’ And he said, ‘I don’t know.’”

‘Only The Good Ones Make It’

As recently as last December, things were still pretty upbeat. At Area 101, an events and healing center near Laytonville, local growers gathered to celebrate the Emerald Cup, an annual competition for the season’s best pot buds. But the event’s host, Tim Blake, says the mood has darkened since then.

“There’s a tremendous amount of concern, borderlining on fear,” says the former underground grower who now cultivates medical marijuana.

He says the drop in pot prices is in part the result of more growers and a more tolerant legal landscape. But he says another factor is quality. Indoor-grown marijuana is increasingly favored by dispensaries and consumers for its looks, consistence and potency. It costs more to produce than pot grown under the sun, but commands as much as double the price. That’s one reason retail prices haven’t hit the skids.

“What’s happening is the people that don’t have quality product aren’t selling it,” Blake says. “So they’re the ones that are creating this panic. So it really comes back down to that, just like in every other agricultural industry. When you get too many vineyards and too many people growing vines out there, then only the good ones make it.”

Matt Cohen is one of those growers who are making it. On an organic farm near Ukiah, Cohen raises chickens, grows vegetables and cultivates high-grade medical pot. He has avoided the downturn by distributing marijuana directly to patients. But other growers who rely on middlemen and dealers for legal and illegal sales are in financial trouble.

“And I know people, and they’re living from credit card to credit card,” Cohen says. “They’re not even making money. It’s just a lifestyle that they’re in and the alternative is to go do what?”

Instability And Anxiety

In recent weeks the upheaval has spurred a series of unprecedented public forums about where things are headed for the marijuana industry, especially if Californians vote to legalize pot this fall.

“The displacement of persons deriving supplemental income through clipping, gardening and distribution of marijuana dwarfs the number of growers who will lose their income entirely,” says local activist Anna Hamilton, who organized a gathering in Garberville. She says the broader community is already feeling the ripple effects of falling pot prices.

“There are business foreclosures, storefronts closing. There’s a lot of instability and anxiety,” she says.

Still, amid the turmoil, Custer says some locals haven’t lost their sense of humor. He recalls a recent musical revue where three performers in miniskirts, sunglasses and spiky heels mocked the plight of local pot growers all to the beat of the ’60s hit “My Boyfriend’s Back.”

“‘My dealer’s back and I’m gonna get ready/Hey now, hey now, my dealer’s back,’” Custer sings. “It was a song of hope in this hopeless situation. ‘It’ll happen to you. Your dealer will come back.’”

Or maybe not. California’s pot economy is transforming, and it’s starting to resemble a real commodities market where only big players can compete. It’s a shift that could leave some growers in the dust.

What’s interesting about this story is this: Prices are crashing as a a result of the potential legalization of marijuana in the Golden State. This is hurting a lot of sub-par quality sellers.

This goes to show us once again: The war on drugs and government meddling in the business helps nobody more than the guys who produce and sell drugs.

Once the state withdraws, the market becomes open, more competitive, subject to more scrutiny, less subject to gray areas, and thus prices come down. As a result, the return on investment in getting people hooked on drugs via free samples declines, so that fewer and fewer people will fall into the trap of drug addiction and drug abuse.

Tags: california, drugs, legalization, marijuana, pot

Police State Fascism on the March; Obey and Convey

May 15, 2010 · Posted in Government · Comment

Police Brutality – A Never Ending Saga

Some people take offense when I define government as nothing but a gang of people that periodically and perpetually aggresses with impunity against individuals who have done no harm. That is fine, decades of indoctrination are likely to provoke offense to such a statement. But it has no bearing on whether or not it describes with 100% accuracy what happens in reality.

This sounds silly and it kind of freaks me out a bit too: But a lot of people really seem to derive their knowledge and opinions about the police from cop dramas on TV and in the theaters! It’s not like there is a shortage of those, that’s for sure. (In fact, I have the TV running as I write this and “The Capture of the Green River Killer” is on LMN.) I’m serious. Ask anybody what they think it is the police does. They will tell you something along the lines of that they are here to serve and protect us, and yes there are some bad apples here and there, but we shouldn’t let isolated incidents delude us, bla bla bla. Then ask them how many times they were actually protected by a cop vs. how many times they themselves have, on the contrary, been inconvenienced by cops for doing harm to nobody, for such things as driving with a cracked windshield, expired registration, doing illegal U-turns, J-walking, etc. This is a great example of concepts clouding people’s reality.

We can talk all day long about taxes, and deficits, and health care bills, financial reform, “freeing” Iraqis in wars, Social Security, and the Federal Reserve Bank, etc. etc.

But it really all comes down to one simple thing: If you don’t agree and thus prefer not to hand over your property to support any of these programs, or if you dare to peacefully compete with government enforced monopolies, or if you do whatever else the state orders you not to do, armed people in uniform will come to your house to kidnap you, lock you up, and steal your property. If you raise a gun to defend yourself against this intrusion, you will be shot down.

Here are some clips of incidents involving cops across the country.

These friendly cops break into a family home and shoot the owner’s dog in front of his children. The reason they did this is because they think he is in possession of a certain vegetation:

These cops harass a filming bystander while throwing grenades into empty buildings in residential neighborhoods:

4 Cops brutalize 2 young female school protesters:

Oakland BART Cop shoots unarmed man lying on the ground in the back:

Support CopBlock

Pete Eyre just invited me to a new site he is involved with, CopBlock, go check it out:

The idea behind Cop Block is to highlight the double standard within police departments. We hope to accomplish this by documenting police actions, whether they be illegal or just a waste of time and resources, then having supporters call into the police stations highlighted (hopefully recording their conversations). On top of the direct pressure we hope to put on police departments we want to be an educational resource for those with rights violating police officers. A place where several different techniques, view points and courses of action can be displayed.

Obey and Convey

There is no point in “standing up” against brute force. There is no point in arguing over “constitutional rights” with someone who can brutalize you with impunity. In doing so one actually sanctions a fundamentally corrupt process. By invoking legality or morality, one implies that the purpose of a police force is to be moral and follow universally preferable behavior.

Well, of course it’s not. The police are the henchmen of the state. Do you think this system of interventionist fascism would work if cops were moral?

Why do you think it is that so many times abusive cops get away with impunity? It’s because brutalizing innocents is one of the big perks for potential new cadets. The state needs those bonehead cops who follow orders without questions and who enjoy beating up on the weak and powerless, because those are the guys who “get things done” for them and who scare potential competitors and “tax dodgers” into submission!

Here is some more on the nature of the police and the military:

And here is how the police would work in a stateless society:

There is nothing wrong with obeying brute force. It is a perfectly valid and natural response to overwhelming aggression.

But what we can and should do is to convey the message, spread clips such as the above, inform people that there are much more viable and intelligent alternatives out there than giving young and abusive (and probably abused) people guns, tanks and blue costumes, and over time people will wake up to reality from their all too long slumber. Ideas will shape the future, guns only shape the present. The power is with us.

Tags: copblock, police, police brutality

Federal Deficit Hits April Record; 4 Times Higher Than April ‘09; Where’s the Recovery?

May 12, 2010 · Posted in Government · Comment

The Federal deficit has reached a record level in April:

The federal budget deficit hit an all-time high for April as the government kept spending to aid the recovery while revenue fell sharply.

The Treasury Department said Wednesday the April deficit soared to $82.7 billion. That was significantly higher than last year’s April deficit of $20 billion and the largest imbalance for that month on record.

The government normally runs surpluses in April as millions of taxpayers file their income tax returns. However, income tax payments were down this April, reflecting the impact of the recession which has pushed millions of people out of work.

Total revenues for April were down 7.9 percent from a year ago.

The Obama administration forecast in February that the deficit for this year will hit an all-time high of $1.56 trillion, surpassing the current record $1.4 trillion set last year. Many private economists believe this year’s imbalance will be closer to last year’s figure and that deficits will remain high for years to come.

Flashback – in January 2009 I wrote:

The estimated receipts for 2008 are $2.5 trillion. It is save to assume that the upcoming tax shortfall will dwarf all precedents. But to make the outlook as optimistic as possible we shall assume a drop of just 10% per year:

Federal tax receipts will fall to $2.25 trillion in 2009, to $2 trillion in 2010, to $1.75 trillion in 2011, and to $1.5 trillion in 2012.

In February 2009 I followed up re. the deficit:

Now that we have updated figures on coming expenses it’s time to update the deficit predictions:

$1.65 trillion for 2009

$1.6 trillion for 2010

$1.95 trillion for 2011

$2.2 trillion for 2012

If President Obama keeps spending like this, and really wants to cut the deficit in half by 2013, he will at one point be faced with no other choice but to raise taxes on all Americans, rich, middle class, and poor.

Reuters notes U.S. posts 19th straight monthly budget deficit:

It was more than twice the $40-billion deficit that Wall Street economists surveyed by Reuters had forecast and was striking since April marks the filing deadline for individual income taxes that are the main source of government revenue.

Department officials said that in prior years, there was a surplus during April in 43 out of the past 56 years.

The government has now posted 19 consecutive monthly budget deficits, the longest string of shortfalls on record.

For the first seven months of fiscal 2010, which ends September 30, the cumulative budget deficit totals $799.68 billion, down slightly from $802.3 billion in the comparable period of fiscal 2009.

Outlays during April rose to $327.96 billion from $218.75 billion in March and were up from $287.11 billion in April 2009. It was a record level of outlays for an April.

Department officials noted there were five Fridays in April this year, which helped account for higher outlays since most tax refunds are issued on that day.

But for the first seven months of the fiscal year, outlays fell to $1.99 trillion from $2.06 trillion in the comparable period of fiscal 2009, partly because of repayments by banks of bailout funds they received during the financial crisis.

Receipts in April — mostly from income taxes — were $245.27 billion, up from $153.36 billion in March but lower than the $266.21 billion taken in during April 2009.

Receipts from individuals, who faced an April 15 filing deadline for paying 2009 taxes, fell to $107.31 billion from $137.67 billion in April 2009.

The U.S. full-year deficit this year is projected at $1.5 trillion on top of a $1.4 trillion shortfall last year.

White House budget director Peter Orszag told Reuters Insider in an interview on Wednesday that the United States must tackle its deficits quickly to avoid the kind of debt crisis that hit Greece.

What he means by that is of course: We need to quickly raise taxes to solve the problems caused by the deficits.

See, the problem with budget deficits are that at some point higher taxes will be needed to pay off old debts. Thus, these brilliant geniuses will sooner or later tell us that the “solution to the problem of deficits will be higher taxes” … which are the very problem of deficits.

You really couldn’t make this stuff up. Only in government …

In light of consistently falling tax revenues across the board, with the reasons cited being less employment and lower sales, one just might feel impelled to be so insolent to ask: Where’s the recovery we keep hearing about all over the place?

Tags: april 2010 deficit, deficit

Germany Leaving the Euro?

May 12, 2010 · Posted in Global Economics · Comment

Well, first off: No, that ain’t happening. As much as I wished. At least not until the Euro completely falls apart. No other people consider the Euro their pet project more than German politicians.

Zerohedge posted something about rumors and a clip with a statement from Gregor Gysi, the head of the socialist party in Germany:

What he’s essentially saying is the usual communist nonsense about curbing evil speculation against the currency and in the end he says that “something will be decided on Friday and I have no idea what it’ll be …”.

But hey, there’s nothing better to distract people from the obvious issues than some fun rumors …

Tags: euro, germany

Beijing Property Prices Plunge 31.4% in One Month!

May 12, 2010 · Posted in Global Economics · Comment

Buckle up, the Chinese bubble is popping:

The average transaction price of commercial residential properties in Beijing for the week ended May 9 fell 1,790 yuan per square meter or 9.6 percent week-on-week to 16,898 yuan per square meter, reports The Beijing News, citing statistics released by Beijing Real Estate Information Network.

Compared with the week ended April 11, the average transaction price of commercial residential properties in Beijing plunged 31.43 percent to 7,744 yuan per square meter.

In the last weeks of April, the transation volume of commercial residential properties in Beijing decreased by 10.34 percent, 11.39 percent and 30.82 percent respectively. Average transaction price was flat at between 22,000 yuan to 23,000 yuan per square meter.

The share price of Poly Real Estate (600048) was down 2.65 percent to close at 10.66 yuan today.

The share price of Beijing Capital Development (600376) was down 4.16 percent to close at 13.26 yuan today.

There are several property bubbles around the world that are ready for a massive correction, just as US home prices slip back into decline. This is just the beginning …

Tags: china, china property bubble

Hope You Enjoyed the Housing Recovery … Because It’s History

May 10, 2010 · Posted in General Economics · Comment

Some considerations from Richard Suttmeier:

Since the recovery in house prices began last summer, homeowners and real-estate agents have embraced what many believe is a return to normalcy (forever rising prices).

In Wall Street-fueled markets like New York City, properties are once again getting multiple bids, and optimists are chattering about a quick return to old highs. If the trend continues, friends, neighbors, and real-estate agents will no doubt soon start repeating the adage that helped inflate the housing bubble in the first place: Real-estate is always a great investment.

But the trend won’t continue, says Richard Suttmeier, strategist at ValuEngine.com.

The temporary increase in prices has been driven by government efforts to prop up the housing market, Suttmeier says, and those measures have come to an end. A new wave of foreclosures is hitting the market. Fannie Mae and Freddie Mac have become black holes into which taxpayers must shovel endless billions just to keep the mortgage engine running. Most importantly, as measured by the Case-Shiller index, housing prices are still way too high.

In most major house-price indexes, prices have already begun to roll over and head back down. Suttmeier thinks this trend will continue. In fact, he thinks prices could fall another 25% nationwide.

For a good overview of the trends that concern Suttmeier, see fund manager Whitney Tilson’s latest presentation on the housing market.

New Wave of Foreclosures

From Zillow:

Zillow recently released its first quarter Real Estate Market Reports for the nation and 135 metropolitan areas. The reports show that home values continued to decline nationwide in the first quarter, amid encouraging signs in California. However, growing negative equity and record foreclosures will likely delay a broader recovery.
The full national report, in its new, interactive format, is available at www.zillow.com/local-info or by emailing press@zillow.com. Additionally, in most areas data is available at the state, metro, county, city, ZIP and neighborhood level.
Topline National Results:

U.S. home values fell 3.8 percent year-over-year, and declined 1 percent quarter-over-quarter, marking the 13th consecutive quarter of year-over-year declines. Home values declined year-over-year in 106 of the 135 metropolitan statistical areas (MSAs) tracked by Zillow.

Home values in several large California markets have stabilized significantly, and show tentative signs of reaching a bottom.

Negative equity remains high with 23.3 percent of all single family homes with mortgages underwater, up from 21.4 percent in fourth quarter.

Foreclosures reached a new peak in March, with more than one out of every thousand homes (0.11 percent) being foreclosed.

The $8,000 first time homebuyer tax credit program has now run out, and so has the $6,500 repeat homebuyer program. Everyone knew that once those run out home prices would resume their natural and required path of price deflation, and foreclosures and underwater homeowners would be back in the news.

Tags: foreclosures, housing, housing market

Roubini on Europe: We Are Kicking the Can Down the Road

May 10, 2010 · Posted in Global Economics · Comment

From Yahoo’s Tech Ticker:

With a $1 trillion bailout package for Greece and the other sick men of Europe, the EU and IMF spurred a huge global rally in stocks Monday, with the Dow rising 405 points, its biggest gain since March 2009.

The massive bailout prevented “another systemic seizure of the global financial system” and, “in the short run, markets are happy we’re not going to have another global meltdown like Lehman,” says NYU professor Nouriel Roubini, co-author of Crisis Economics.

But in the long run, Europe has just “kicked the can down the road,” Roubini says, agreeing with our earlier guest Richard Suttmeier.

Even $1 trillion isn’t enough so solve the “fundamental questions” facing Europe, the economist says, citing the following:

* — Even in Europe, There’s No Free Lunch: All of the bailout money is conditional on countries approving what Roubini calls “massive fiscal consolidation,” i.e. big austerity packages like Greece’s parliament just passed. Such measures mean fewer public sector jobs (and lower salaries for those who remain) and higher taxes in countries where a lot of people work for the government and already pay relatively high tax rates. “Politically can they do that…or will there be riots and strikes that are going to limit” fiscal austerity measures, Roubini wonders.
* — Tough Love Hurts: Raising taxes and cutting government spending should help alleviate the short-term debt crisis in Europe’s so-called PIIGS but will also likely lead to recession, if not outright deflation. “That will make it harder to force austerity” on the public, he says. There’s already violence and rioting in the streets of Athens. “The question is: Will we see the same thing in, for example, Lisbon, Madrid [and] throughout the euro zone?”
* — No Easy Way Out: One reason the European Union is in this mess is because few of its countries are able to compete in a global economy, especially since they lack the ability to deflate their currency, the economist says. Considering it took Germany 15 years to restructure its private sector so unit labor costs came down low enough to compete globally, nations like Greece, Portugal and Spain face a long, hard slog even if they embark upon such painful programs immediately.

So what does all that — and the political pressure against more bailouts in Germany — mean for the future of the euro and the EU itself?

In late April, Roubini said “in a few days, there might not be a euro zone for us to discuss,” at the Milken Conference.

In the accompanying clip, the founder of Roubini Global Economics says he was “just joking” about that dire prediction, which potentially contributed to the recent rout in Europe. But expect “volatility in economies and markets” is going to be with us for the foreseeable future, Roubini says, offering cold comfort (and an odd sense of humor).

Tags: europe, european union, roubini

Fannie Mae Receives Another $8.5 Billion Bailout – Promises “No End in Sight”

May 10, 2010 · Posted in Business · Comment

After Freddie, it’s now Fannie’s move to loot the taxpayer once more:

Fannie Mae has again asked taxpayers for more money — this time $8.4 billion — after reporting another steep loss for the first quarter. The taxpayer bill for rescuing Fannie and its sibling Freddie Mac has grown to $145 billion — and the final tally could be much higher.

The rescue of Fannie and Freddie is turning out to be one of the most expensive aftereffects of the financial meltdown, and Fannie Mae’s first-quarter financial report on Monday made clear that there is no end in sight.

“The losses are not going to stop” soon, said Anthony Sanders, a finance professor at George Mason University, who warns that the housing market is likely to turn sharply downward again later this year.

Late last year, the Obama administration pledged to cover unlimited losses through 2012 for Fannie and Freddie, lifting an earlier cap of $400 billion. And with the housing market still on shaky ground, Obama administration officials say it is still too early to draft any proposals to reform the two companies or the broader housing finance system.

Republicans, on the other hand, argue the sweeping financial overhaul currently before Congress is incomplete without a plan for Fannie and Freddie. They propose amending the legislation to transform Fannie and Freddie into private companies with no government subsidies, or shut them down completely

… it’s always too early for “change”, isn’t it? :)

Tags: bailout, fannie mae

EU Launches Frantic Bazooka – Euro Gives Up Early Gains

May 10, 2010 · Posted in Global Economics · Comment

Europe Pulls Out Bazooka Part II in 3D

Since Euro countries are grappling with deficits, they are vowing to spend more money to fight the consequences of deficits, EU Crafts $962 Billion Show of Force to Halt Crisis:

European policy makers unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop a sovereign-debt crisis that threatened to shatter confidence in the euro. Stocks surged around the world, the euro strengthened and commodities rallied.

Jolted by last week’s slide in the currency and soaring bond yields in Portugal and Spain, European Union finance chiefs met in a 14-hour session in Brussels overnight. The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.

The rescue package for Europe’s sovereign debtors comes little more than a year after the waning of the last crisis, caused by the U.S. mortgage-market collapse, which wreaked $1.8 trillion of global credit losses and writedowns. Under U.S. and Asian pressure to stabilize markets, Europe’s governments bet their show of force would prevent a sovereign-debt collapse and muffle speculation the 11-year-old euro might break apart.

“A very thick line has been drawn in the sand,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co. and a former ECB official. “This is all in. What more could they have done?”

A 110 billion-euro bailout package for Greece approved last week by the EU and IMF failed to reassure investors, prompting yesterday’s renewed bid to bolster the euro.

How to Pay

“It might temporarily calm nerves but questions will come back later on how they will pay for this package when all of them need fiscal consolidation,” said Venkatraman Anantha- Nageswaran, who helps manage about $140 billion in assets as global chief investment officer at Bank Julius Baer & Co. in Singapore.

The MSCI World Index climbed 2.6 percent to 1,128 at 12:15 p.m. in Brussels. Standard & Poor’s 500 Index futures rallied 4.4 percent. The euro appreciated 2 percent to $1.30. Crude-oil futures gained 3.4 percent.

“The message has gotten through: the euro zone will defend its money,” French Finance Minister Christine Lagarde told reporters in Brussels early today after markets punished inaction last week.

ECB policy makers said they will counter “severe tensions” in “certain” markets by purchasing government and private debt, and the bank restarted a dollar-swap line with the Federal Reserve.

‘Overwhelming Force’

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This is Shock and Awe, Part II and in 3-D.”

…

Merkel’s Meeting

As Merkel’s cabinet held a late-night meeting in Berlin on the euro rescue, her party unexpectedly lost control of Germany’s most populous state in a regional election, potentially costing her a majority in the upper house of the federal parliament.

Goaded by Germany, the ministers made a fresh commitment to closer monitoring of government finances and more rigorous enforcement of the deficit-limitation rules.

The vow to push budget shortfalls below the euro’s 3 percent limit echoes promises that have been regularly broken ever since governments in 1999 set a three-year deadline for achieving balanced budgets. The euro region’s overall deficit is forecast at 6.6 percent of gross domestic product in 2010 and 6.1 percent in 2011.

Can you imagine? Governments that have regularly broken commitments to cut deficits? Unthinkable!

One thing’s for sure, as I said over 1 year ago:

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

The Euro

What are foreign exchange markets saying? Here’s the Euro today:

It rallied up as high as $1.31 on the announcement and has given up almost all those gains within a few hours already. This is volatility galore on the FX market!

This may be a result of frantic intervention on the part of the US, as the Federal Reserve opens credit line to Europe:

The Federal Reserve late Sunday opened a program to ship U.S. dollars to Europe in a move to head off a broader financial crisis on the continent.

Other central banks, including the Bank of Canada, the Bank of England, the European Central Bank, the Swiss National Bank and the Bank of Japan also are involved in the dollar swap effort.

The move comes after the European Union and International Monetary Fund pledged a nearly $1 trillion defense package for the embattled euro, hoping to calm jittery markets and halt attacks on the eurozone’s weakest members. The ECB also jumped into the bond market Sunday night, saying it is ready to buy eurozone bonds to shore up liquidity in “dysfunctional” markets.

The Fed’s action reopens a program put in place during the 2008 global financial crisis under which dollars are shipped overseas through the foreign central banks. In turn, these central banks can lend the dollars out to banks in their home countries that are in need of dollar funding to prevent the European crisis from spreading further.

The Fed said action is being taken “in response to the reemergence of strains in U.S. dollar short-term funding markets in Europe,” and to prevent the spread of that strain to other markets and financial centers.

A so-called “swap” line with the Bank of Canada provides up to $30 billion. Figures weren’t provided for the other central banks. The arrangements are authorized through January 2011.

The debt crisis first erupted in Greece. Fears that it could spread to Spain, Portugal and other eurozone countries. The crisis has pushed up demand for the U.S. dollar and has sharply weakened the value of the euro, the currency used by 16 European countries. Eurozone ministers and the IMF this weekend approved a $140 billion rescue package of loans to Greece for the next three years to keep it from imploding.

The Fed had wound down these crisis-era programs with other central banks in February, along with other emergency programs to get lending flowing more freely again and return stability to financial markets. At that time, financial strains in the United States were easing, and the Fed began to take steps to move policy closer to normal.

It also had begun to lay out a plan to reel in the unprecedented stimulus money pumped out during the crisis. The Fed’s balance sheet ballooned to $2.3 trillion, more than double where it stood before the crisis struck. The program reopened on Sunday will expand the Fed’s balance sheet, economists say. However, the program poses little credit risk to the Fed because the arrangements are with other central banks, they added.

It is doubtful whether these currency swaps have ever accomplished anything but a very very short term relief.

We hear European bureaucrats rail against evil speculators who are daring to question the stability of the system. This is all repetitive nonsense which we can shrug off with a smile. I have said before that a truly meaningful reform of capital markets would require that governments remove themselves from the equation, rather than becoming the only factor in that equation:

what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above and many more evils would automatically go with it.

So long as people don’t make these simple connections, they need not be surprised about the same problems popping up again and again, with the same short sighted responses protracting the problems again and again, choking our productive capacity until the system comes to a painful halt.

Tags: bailout, euro, europe, federal reserve bank

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