Open thread – news and views …

"[In Afghanistan] a small army would be annihilated and a large one starved."
Duke of Wellington (1769-1852) (source)

With recent attacks on convoys through the Khyber pass, the line of communications through Pakistan to Afghanistan is in deep trouble. WaPo reports:

Security restrictions forced customs officials to slow the flow of
traffic to 25 trucks every few hours. Before the Taliban raid and
border closure last week, an average of 600 to 800 tractor-trailers
moved through Torkham a day, according to Afghan customs officials. Customs officials said they hoped at best to see 200 trucks pass through on Tuesday.

The U.S. military asking suppliers to evaluate alternatives:

The first option is to move cargo between Northern Europe and various destinations in Afghanistan through Caucus’ and Central Asia. The second option is to move cargo between CONUS and Afghanistan through Asia and Central Asia.

Some European countries have arranged transport via railroad through Russia and Uzbekistan to Afghanistan. The U.S. seems not be willing to depend on Russian goodwill. That leaves the red and the green lines as the only possible transport routes. Both are much longer than the current blue route through Pakistan.

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The request for information to suppliers says the new route’s capacity should eventual be some 75,000 twenty foot container equivalent units (TEU) per year. Those would be some 200 medium truck loads every day on roads build for much less traffic.

That is certainly not enough to replace the 600 to 800 daily trucks passing through Torkham, but it would certainly relief that line. Unless more troops are needed.

Lt. Col. John Nagl, who works for General Petraeus on a new Afghanistan plan, wants more troops:

Nagl says he believes the U.S. needs to double its American troops from
30,000 to 60,000 in Afghanistan. He also says the Afghan National Army
needs to grow from 70,000 to 250,000. That may mean getting more help
from the international community.

Double the U.S. troops will need double as much in supplies. The Afghan troops will also need lots of ammunition, fuel, food and other materials. (So many Afghan troops would cost much more than the Afghanistans total GDP. Who will finance them how long?)

And who will finance the logistics for U.S. troops?

The troops in Iraq also had a transport problem. But the road from Kuwait to Baghdad is much shorter than the one from Bremerhaven or Shanghai to Kabul. And while fuel to Iraq could come from refineries in Kuwait, where will the fuel for the additional troops in Afghanistan come from? It does not seem to be included in the above TEU calculation.

A retreat from Iraq would relief the U.S. from some costs. But to supply a soldier in Afghanistan might easily cost double or triple as much as to supply a soldier in Iraq. Has Obama thought about how he will finance that war?

While a large U.S. army in Afghanistan may not starve these days, what about children in the U.S.?

—
older coverage:
Fuel for War in Afghanistan Aug 20, 2008
The Road War in Afghanistan Aug 16, 2008
Fuel Tanker Attacks in Afghanistan Mar 24, 2008

The last relatively reliable bin Laden sighting was in late 2001.

Robert Baer, former CIA field officer assigned to the Middle East

There is lots of reaction in ‘western’ media to the Iraqi cabinet passing the Status of Force Agreement (SOFA). Even an English translation (.doc) (h/t Helena) of the SOFA, including version changes, is available. Article 24/1 now says (red = newly inserted, ‘must’ replaced ‘shall’):

All U.S. forces must withdraw from all Iraqi territories no later than December 31st 2011.

While there are still ambiguities, the SOFA seems to be not as bad as it was.

But from the beginning of the negotiations the talk was about TWO agreements, the SOFA and a Strategic Framework Agreement (SFA) and in fact, two agreement have been signed:

Apart from the troops pact, the two men signed a long-term strategic framework, which Crocker said would define relations between the countries for years in "economy, culture, science, technology, health and trade, just to name a few."

"It reminds us all that, at a time when U.S. forces will continue to withdraw from Iraq in recognition of the superlative security gains over the last few years, our relationship will develop in many other important ways."

Next to Crocker’s words we only have this slightly expanded but similar talking point from Maliki’s spokesperson Ali al-Dabbagh repeated by :

“The second agreement frames the principles of cooperation between the two countries in the fields of politics, diplomacy, culture, health, environment, economy, and power, in addition to information and communication technology and implementing law and judiciary,” he explained.

Why did Crocker avoided to mention the ‘implementing law and judiciary’ point in that new  U.S-Iraq agreement? Hmmm …

And what is the agreement’s status? The SOFA will have to pass the Iraqi parliament. How about the SFA? Will the parliament get a vote on that treaty or will it not?

Somehow the SOFA seems to be a shiny object held out to keep our eyes away from the piece of work that might well be the real ‘long-term strategic’ sell out of Iraq.

Cont. reading: The Iraq SOFA Is A Shiny Object

Anna missed muses about the demise of american exceptionalism:

[S]ince the Nixonian era of red-baiting, [..] the republicans have become the standard bearers of American exceptionalism – in that they have consolidated under them methods that have eventually led to the demise of said exceptionalism, while at the same time still appearing to idealize it.

American exceptionalism, as anna missed sees it, is build on a few certain specific conditions:

The three main pillars of which would be 1) a laissez-fare economy, 2)
an equitable and apolitical judicary & legal system, and 3) a system
that favors individualism over state power structures [..] which as an end result produces a
meritocratic but egalitarian society that highly values individual
initiative over statism.

Take those away, as the Republicans did, exceptionalism is a hollow shell and will die.

But exceptionalism as a common identity is a necessity for such a diverse country as the U.S. is. Without exceptionalism it might fall apart in ethnic and  social sectarianism.

In a second piece anna missed looks at political implications:

Cont. reading: Abandoning Exceptionalism as National Identity

by Rick

Often being too naïve to understand what is satire, and often the butt of sarcasm in my youth, I am not a huge fan of satirical humor.  In this particular Friedman satire, I again was naïve, but was fortunate to have biklett #6, ndahi #8, annie #13, DM #33, and finally b #41 spell it out for me and maybe for some others here. 

Besides such personal psychological hang-ups, there is an additional uneasiness when satire makes light of a serious situation, or when it seems to attribute personal characteristics that are most likely untrue.  In these situations, the full embarrassing, uncomfortable and hurt of feelings of my youth return.

Many years ago, there was a weekly TV comedy series called “Hogan’s Heroes.  In case anyone doesn’t know, it was about a supposedly cool bunch of American prisoners held in a German prison camp in WWII.  Lots of entertaining satire, but even as a kid, I was overly scrupulous and somewhat uncomfortable about a comedy constructed from a scene of war and prisoners. 

Cont. reading: On Satire

A few days ago Willem Buiter asked How likely is a sterling crisis or: is London really Reykjavik-on-Thames?. He found it possible as Great Britain, though bigger than Iceland, has the same problems:

The risk of a triple crisis – a banking crisis, a currency crisis and a sovereign debt default crisis – is always there for countries that are afflicted with the inconsistent quartet identified by Anne Sibert and myself in our work on Iceland: (1) a small country with (2) a large internationally exposed banking sector, (3) a currency that is not a global reserve currency and (4) limited fiscal capacity.

Over the last year the pound sterling already went down from €1.50 per pound to €1.15 and from $2.00 per pound to $1.50. Could that slump be only the beginning of a currency rout?

Following a funny rant on why he blogs in such long and winded posts, Buiter today adds a long and winded post to analyzes the possibility of a Sterling crisis.

Great Britain’s taxpayers will soon be owners of 60% of the Royal Bank of Scotland (RBS). With that ownership comes a lot of debt, about £2 trillion, and assets of unknown value. The additional net debt on Britain’s asset sheet could be huge.

At the same time Gordon Brown plans tax cuts, which, as the recent tax rebate in the U.S. has shown, are an ineffective, costly way of providing stimulus. As they will also increase Britain’s debt the markets might start to doubt Britain’s solvency and the value of the pound sterling.

Writes Buiter:

If there is doubt in the markets about whether the solvency gap of the banking system is smaller than the fiscal spare capacity of the government, we could have a UK public debt crisis.  Fear of default would cause an across-the-board rush of out sterling assets.

[..] much of the debt of the banking system is foreign-currency-denominated rather than sterling-denominated (total foreign currency liabilities and assets of the banking system are each over 200 percent of annual GDP). With the foreign currency liabilities of the banking system likely to have shorter remaining maturity and more liquid than its foreign currency assets (these are banks, after all), the UK would be likely to face a (partial) sovereign debt crisis as well as a foreign exchange liquidity crisis, even if the government tried to inflate its way out of trouble.

Because the Bank of England cannot issue foreign currency reserves, and because sterling is no longer a serious global reserve currency, the lender of last resort has to fall back on the deep pockets of last resort: the creditworthiness of the British state.  That creditworthiness, I would argue, is now in worse shape than it has been since the days of the Stewarts.  The reason is the fact that the UK authorities have effectively underwritten the balance sheet of the over-sized UK banking sector.

The tax cuts Brown is planing add to the above problematic situation.

To avoid a currency crisis there are two things, Buiter says, Britain needs to do immediately:

Introduce a Special Resolution Regime to avoid the nationalization of banks. This would probably be comparable to a Chapter 11 reorganization bankruptcy in the U.S., where a company keeps operating but shareholders and creditors have to take haircuts. Currently the UK only knows a Chapter 7 comparable liquidation bankruptcy where a company stops operating. As RBS is of systemic importance the lack of a Chapter 11 solution requires nationalization where the taxpayers take on all the risks, debt and assets.

The second point is to prepare the way to join the euro, though it is not clear if the criteria for that can be met. A pound sterling, officially bound to the euro in preparation for a currency change would make the sterling’s value defensible.

Wolfgang Münchau in his FT column sees additional reasons for Britain to join the Euro. Keeping the sterling has costs as it would likely result in higher interest rates and the loss of financial center status for London.

While there is tremendous public resistance to adopting the euro, as was in Iceland until a few weeks ago, the now imminent costs of monetary independence may push the British public into that direction.

But rather then join the euro and thos pesky French and Germans, could the Brits vote to join the U.S. dollar? Aren’t they already the 51St State?

Anyway – a sterling crisis may well be in the making. MoA readers in Britain should prepare for that while they still can.

Interim Israeli Prime Minister Ehud Olmert accused the Islamist Hamas movement on Sunday of "shattering" the Gaza truce after two rockets hit Israel, prompting an air strike which killed four Palestinian militants.
…
"The responsibility for the shattering of the calm and the creation of a situation of prolonged and repeated violence in the south of the
country is entirely on Hamas and the other terror groups in Gaza,"
Olmert told ministers.
Israel accuses Hamas of ‘shattering’ Gaza truce

The truce was broken by Israel twelve days ago. As the Guardian reported on November 5:

A four-month ceasefire between Israel and Palestinian militants in Gaza was in jeopardy today after Israeli troops killed six Hamas gunmen in a raid into the territory.

Hamas responded by firing a wave of rockets into southern Israel, although no one was injured.

Since then Palestinian rockets have lightly injured two Israelis, the Israeli military has killed 17 people in Gaza and blocked any transfer of oil and food into the strip. The sole power-plant in Gaza can not operate and people go hungry.

Olmert is again lying to justify the slow suffocating of the people in the big concentration camp that Gaza has become.

Thomas Friedman has written a number of books and likes to talk about them for $50,000 per speaking engagement. But today he talks his book in a different sense.

In his column Friedman writes:

Now is when we need a president who has the skill, the vision and the courage to cut through this cacophony, pull us together as one nation and inspire and enable us to do the one thing we can and must do right now:

Go shopping.
…
If you are going to fight a global financial panic like this, you have to go at it with overwhelming force — an overwhelming stimulus that gets people shopping again and an overwhelming recapitalization of the banking system that gets it lending again.

‘Overwhelming force’ – shock and awe at Walmart.
Does Friedman wants Bush back? After all, to go shopping was Bush’s advice after 9/11.

Maybe, but this Friedman call for shopping is rather directly related to the likely bankruptcy of General Growth Properties Inc.

GGP.N shares fell 64 percent on Tuesday after the second-largest U.S. mall owner expressed doubts it could keep operating due to looming near-term debt.

General Growth shares closed down 88 cents at 49 cents after reaching an intraday low of 33 cents on the New York Stock Exchange. Nearly a year ago, the shares traded as high as $51.24.

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The direct relation:

Friedman’s wife, Ann, is a graduate of Stanford University and the London School of Economics. Her father, Matthew Bucksbaum, is the chairman of the board of General Growth Properties, the real estate development group that he co-founded with his brother in 1954. The Bucksbaums helped pioneer the development of shopping centers in the United States. As of 2007, Forbes estimated the Bucksbaum family’s assets at $4.1 billion, including about 18.6 million square meters of mall space.

Dear Thomas, why not just wait six month? That seemed to be your preferred solution on other major issues.

And if you really want a big consumption orientated stimulus program, how about financing it with a 90% income tax on every dollar of the millions you make by giving bad advice?

Under the headline Russia Backs Off on Europe Missile Threat, the NYT’s Stephen Castle hawks several misconceptions. He writes:

President Dmitri A. Medvedev of Russia retreated Friday from his threat to deploy missiles on Europe’s borders, but only if President-elect Barack Obama joined Russia and France in calling for a conference on European security by next summer.

– Russia did not retreat on any missile deployment.
– Russia did not threaten to deploy missiles on ‘Europe’s borders’.

At a meeting in Nice hosted by President Nicolas Sarkozy of France, Mr. Medvedev backed away from the bellicose speech he gave last week, just hours after Mr. Obama won the United States presidential election. On Friday, the Russian leader argued instead that all countries “should refrain from unilateral steps” before discussions on European security next summer.

– The speech referred to was not bellicose.
– The speech was not related to Obama’s election.

Mr. Sarkozy, who presided over the meeting between Russia and the 27 European Union nations in his capacity as the union’s president, helped ease the way for Mr. Medvedev’s retreat. The French leader supported the idea of talks on a new security architecture for Europe and suggested that they could be held by the Organization for Security and Cooperation in Europe in June or July.

– There was nothing taken back by Medvedev in relation to a European security conference.

– By achieving Sarkozy’s support for such a conference Russia won a major point.

Let us start with that ‘bellicose speech’:

Cont. reading: NYT Is Misreporting That Russia Is “Backing Off”

by remembereringgiap
lifted from a comment

for my beloved/is a lamb/climbing the step/in eisensteins film
alluding to synthesis/that never came/or  resolution/of  thesis
initiated by lenin/in railway carriage/funded by germans/to end war
& lenin read/aloud to companion/while drinking tea/from isiah certainly
it was reference/to some things/or other matter/he’d prefer/not to discuss
with central committee/the wolf also/shall dwell with/lamb & leopard
shall lie down/with the kid/& the calf/& young lion/& fatling together
& little child/shall lead them/referring to jerusalem/but lenin leant
from this passage/that we need/messiah to motivate/desire to change
circumstances as described/in the eighteenth/brummairre of louis
bonaparte marx’s essay/still read somewhere/in latin america/perhaps some canton
in new china/where distinguished emporers/turn tianemen square/into endless circle

Cont. reading: For My Beloved

On November 6 this blog picked up echos from Israeli media about Rahm Emanuel as Obama’s Chief of Staff. One was from the Jerusalem Post and it included this:

In an interview with Ma’ariv, Emanuel’s father, Dr. Benjamin Emanuel, said he was convinced that his son’s appointment would be good for Israel. "Obviously he will influence the president to be pro-Israel," he was quoted as saying. "Why wouldn’t he be? What is he, an Arab? He’s not going to clean the floors of the White House."

The next day Helena Cobban took that up and wrote a (re-)engaged piece: R. Emanuel: Repudiate this disgusting racist comment.

The Jewish Telegraphic Agency reported the remarks in a longer Emanuel piece on November 9.

By the time JTA reached the elder Emanuel, a physician, it was clear his son had asked him to keep away from reporters. Picking up the phone, he said, "This is Benjamin Emanuel, the plumber," and asked a reporter to call back in a week, after he’d spoken in person to Rahm – "if I’m still alive then."

On November 11 the American-Arab Anti-Discrimination Committee wrote (pdf) to Congressman Emanuel and cc’ed Obama:

The American‐Arab Anti‐Discrimination Committee (ADC) views this characterization of an Arab as an unacceptable smear. One can readily imagine the justifiable outcry if someone made a similar remark about African‐Americans, Jews, or Hispanics, concerning cleaning the floors of the White House. Do the normal standards of decency and civility not apply when talking about Arabs? ADC asks you to disavow and repudiate these remarks publicly.

Yesterday Emanuel phoned up the ADC President and fomer Rep. (D-Ohio) Mary Rose Oakar and declared:

From the fullness of my heart, I personally apologize on behalf of my family and me. These are not the values upon which I was raised or those of my family.

We are left to wonder on who’s values, if not his father’s, Rahm Emanuel was raised and why he marks his father as someone outside of his family.

—
Voluntary advertisement:

Buy Re-Engage! American and the World after Bush; An Informed Citizen’s Guide by Helena Cobban

North Korea has changed a lot over the last years.

[T]he market has shaken up previously rigid social hierarchies.
  One’s place in the pecking order was once determined by proximity to the leadership,
  distance from a compromising past, or ability to work in strategic industries.
  With a money economy now shaping a new social hierarchy, however, it is not
  uncommon for former untouchables to pull together a bit of capital and rise
  through the new economic ranks.

The North Korean elite, too, has changed over the last decade. Knowledge of
  English has become a desirable asset. Travel and market training have become
  indispensable. The rich have
  enough disposable income to buy luxury goods from China.

But no it is going back into isolation. On December 1 it will close down the border crossings with South Korea and will close the industrial zone where North Koreans produce export products in factories  financed by South Korean companies.

North Korea is also restricting Chinese travel within the country and has closed the border to its big neighbor to nearly all passenger travel. China is said to have moved additional troops to the boarder. This could be out of fear of a wave of refugees.

The North Korean ruler Kim Jong-il had a stroke recently and may have had a second one. The above may be some kind of retreat to provide for a more seamless change on the top. Or is it a power struggle between the military the ruling Kim family?

The close off could also be intended to not let out news of some catastrophe like a famine.

Or it could be in preparation of a war. But what could be reason for one?

Revenge if on Sunday the North Korean team loses against the U.S. team in the U-17 women’s World Cup final?

Something is up and in times of heighten alert and little available information a miscalculation on either site could start something bad nobody really wants to happen.

A central bank can manipulate the total money supplied in an economy by setting a short term interest rate target. To make market rates comply with the target rate, the central bank lends or borrows to/from banks in the open market. 

In a fractional-reserve banking system a bank can use the central bank money to create a multiple amount of that as commercial money. The multiplier is defined by the reserve rate (or capital adequacy ratio) the bank is supposed to hold. The central bank has the authority to set the required reserve rate.

In principal a central bank has thereby two possible means to influence the money supply. It can change the interest rate target and/or it can change the reserve requirement of major banks and thereby the multiplier that transfers central bank money supply into total money supply.

The reserve requirement tool has been weakened in recent years with the Basel accords and in the U.S. other regulatory measures which allow banks to a certain extend to define their effective reserve rate themselves.

Therefore the current ‘western’ mainstream central banks tend to not change the required reserve rate but do rely on interest rate setting to induce changes the total money supply.

Cont. reading: Reserve Requirement As Monetary Policy Tool

Just saw a House hearing on hedge fund regulation. The second panel were all hedge fund managers with their own skin in the game. George Soros, James Simons, John Alfred Paulson, Philip A. Falcone and Kenneth C. Griffin.

In 2007 each of those people made more than a billion.

The first four of the five mostly agreed to a need of more regulation and leverage control for hedge funds. Griffin was vehemently against it. Soros and Simons agreed on taxing hedge fund manager income at real income tax rates and not at capital gain rates like it is currently the case.  Paulson and Falcone where ambivalent on that, Griffin, the CEO of Citadel Investment Group, did not like the idea at all.

That split scheme with either 4 to 1 or 2, 2, 1 towards more center-left policies was clear through all the panels answers to questions put to them. The first two more on the left, two at the center and one guy, Griffin, on the far right.

The funny thing – this year the first four folks made profits or at least did not lose any money in their funds. Griffin lost a huge bunch.

Two of Griffin’s main Citadel funds are down by 35% this year, his fund of funds closed down and a reinsurance scheme he build up in Bermuda is currently getting dissolved.

But he still claims that zero regulation is in the best interest of investors in hedge funds.

Now I wonder how his clients might feel about that.

Everybody read the new New York Times? For once Tom Friedman wrote a good column: The End of the Experts.

Open thread …

GE is an international industrial conglomerate with a triple A rating. It has had very profitable years and is well able to cover some losses should they occur. While it also owns a Savings & Loans, that is only a very small part of its total business. GE has hardly any deposits but is a big debt issuer.

What then is the justification of giving GE the full backing of federal deposit insurance, i.e. risking saver and taxpayer dollars?

How can one reconcile A, B and C?

A:

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.
The Federal Deposit Insurance Corporation: Who is the FDIC?

B:

GE is Imagination at Work – a diversified technology, media and financial services company focused on solving some of the world’s toughest problems. With products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, media content and industrial products, we serve customers in more than 100 countries and employ more than 327,000 people worldwide.
…
GE’s financial results highlight our ability to deliver. In 2007, GE generated double-digit earnings and revenue growth ($173 billion in revenues and $22.5 billion of earnings). Also in 2007, GE generated $23.3 billion in cash, which has given us flexibility to invest in our businesses, return more than $25.4 billion to shareowners through a dividend increase and stock buyback. Over the past four years, GE’s average earnings growth rate has been 14 percent per year.
GE: Factsheet

C:

BOSTON (Reuters) – General Electric Co has secured the temporary backing of the Federal Deposit Insurance Corp for up to $139 billion of the debt of its finance arm, a spokesman said on Wednesday.
GE says gets FDIC backing for $139 billion in debt

Last week I highlighted a string of bombing in Baghdad. The series continued and today:

In Baghdad, the first car bomb ripped through a bustling section of downtown Baghdad during the Wednesday morning rush hour, killing four people and injuring 15. The blast occurred off Nasir Square in the heart of the city — a busy neighborhood of shops, pharmacies and photography stores.

A second car bomb exploded near a secondary school in the Shiite-dominated neighborhood of Shaab in north Baghdad. Iraqi police said five people were killed and 12 wounded.

Two bombs blew up within moments of each other in the Shiite district of New Baghdad, with the second explosion occurring just after police arrived to investigate the first.

One wonders why this surge in bombings occurs now.

The Bush administration is continuing to press for a Status of Force Agreement with Iraq, while all available polls and accounts say most Iraqis and most Iraqi politicians want the U.S. to leave.

One argument for the need to keep  U.S. forces in Iraq to provide security for Iraqis. The recent bombings by whomever may reinforce that argument.

As does the AP coverage linked above by quoting this representative Iraqi voice:

Hassan Rahim, a 42-year-old barber who lives in the neighborhood, heard the blasts as he fixed his rooftop satellite dish.

"I do not know why Iraqi officials keep talking about the improving security in Baghdad everyday. We are fed up with such lies and we will hope that the security file in the capital will not be handed over to Iraqi government," he said.

Hmm – who in the discussion about a SOFA will mention the bombings and will quote this genuine and eloquent barber voice in the further argument?

There is specialist in the U.S. government known for the ability to creating tense situations in foreign countries. When was the last time John Negroponte visited Iraq? And when did this fresh string of bombing in Baghdad start?

Cont. reading: The New Baghdad Bombing Campaign

Screaming "systemic failure, systemic failure" Paulson ran to congress to ask for lots of money to bail out his friends. He got $350 billion with no strings attached and a promise of $350 billion more, if needed.

The Democrats expected that the first tranche would be sufficient until a new administration steps in and directs a better program. But Lucy Paulson is now pulling that ball away.

Of the $350 billion $290 billion are already committed for unconditioned capital injection into big banks. Like most of the money spend so far, the latest bailout for A.I.G. is really a bailout for Paulson’s old company Goldman Sachs, for JP Morgan and other biggies which would take losses should A.I.G. go down. American Express just changed itself into a bank to be also entitled to taxpayer money. What is the systemic importance of Amex? Zero. But that seems not to matter anymore. Whoever asks for money, and has the right friends, is getting it.

Lots of other folks stand in line and wait for their turn on the trough:

The lobbying frenzy worries many traditional bankers — the original targets of the rescue program — who fear that it could blur, or even undermine, the government’s effort to stabilize the financial system after its worst crisis since the 1930s.

Among the most rattled are community bankers.

“By the time they get to the community banks, there may not be enough money left,” said Edward L. Yingling, the president of the American Bankers Association. “The marketplace is looking at this so rapidly that those who have the money first may have some advantage.”

Those who came first certainly have an advantage. That was the reason why Paulson pushed the first big giveaway to only a few big banks. For an investment banker like Paulson, community banks are competition and competition is by definition bad. The big companies that get Fed financing and gifts from the Treasury can refinance themselves much cheaper now and will, over time, push all smaller players out of the markets.

While those who got called first hauled away huge sums of unconditioned money, the
Treasury is now planing to attach conditions to further capital injections. Too bad if those community banks will not be able to meet these and will have to sell themselves for pennies by the big ones. Paulson is orchestrating the oligarchization of the U.S. financial system.

But back to the $350 billion. The three bankrupt car-makers in Detroit are asking for a big gift that would them allow to survive another six month. For political reasons, the Democrats want to give it to them and, if possible, through the TARP program which was marketed as an emergency fond to prevent a systemic financial crisis.

With the auto companies reeling and Mr. Bush sending no signal that he would act, Ms. Pelosi said she had asked Representative Barney Frank,
Democrat of Massachusetts and chairman of the Financial Services
Committee, to begin drafting legislation directing that part of the
$700 billion bailout be used to help the automakers.

Now here is my prediction. Paulson will spend full TARP.

As the first tranche of the $700 billion is nearly gone, the Treasury will tell Congress that help to Detroit through the TARP program can only be given if Congress immediately and unconditionally hands over the full second tranche. Of those $350 billion maybe $50 billion will then be handed to Detroit and on January 21 a new administration will discover that Paulson has given the rest down to the last dollar to his friends.

Why would he not do so?

An interesting piece from Barrons: Uncle Sam’s Credit Line Running Out?

The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.
…
Backshall is not alone in this dire assessment. Scott Minerd, the chief investment officer for fixed income at Guggenheim Partners, a Los Angeles money manager, estimates that total Treasury borrowing for fiscal 2009 will total $1.5 trillion-$2 trillion. That was based on $700 billion for TARP, a $500 billion-$750 billion "cyclical deficit," an additional $500 billion stimulus program and some uncertain amount for the Federal Deposit Insurance Corp.

Minerd doubts that private savings in the U.S. and foreign purchases of Treasury debt will be sufficient to meet those government cash. That leaves the Fed to take up the slack; that is, monetization of the debt.
…
Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it’s not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America’s credit line has its limits.

Every credit-card has a limit, and the U.S. has stretched its own for some years now. Overdrawn credit cards tend to to require higher interest payments.

Printing money and inducing high inflation is a possible way out of the debt. But there are consequences. If the U.S. inflates too much, the status of the U.S. Dollar as the dominant currency in the world  would come into doubt. If that happens people would sell the dollar which could move an inflation scenario into a hyperinflation one and leave, in the end, no other way out than default.

This would somewhat be consistent with GAEB’s prediction that the U.S. will default on its debt in 2009. (Can someone please send me the full GAEP report?).

Is this likely? I do not yet think so. But it is now a genuine possibility. To discuss such, or even a serious inflation scenario, would have been seen as pretty much out of wack by the mainstream just a few month ago. But today Barrons, one of the leading Wall Street papers, is printing the above.

Even with a decent background in economics I have now too little trust in the various models to predict the outcome of this crisis. There are myriad factors to consider. The yield curve and CDS spreads the Barrons piece emphasizes are more the result of opinions than of efficient markets and they may be quite wrong.

No model I know of fits anymore. Depression, deflation, stagflation, inflation, hyperinflation, default – all seem possible now.

What are you expecting?