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The narcotics revenue source is only one of three sources, says Defense Sec Gates. The other two are funds generated locally from the Pashtun minority in Pakistan, and funds generated from outside sources like people in Saudi Arabia and Kuwait. A 2006 World Bank report says the hawala system- an informal money transfer system using a network of money brokers with little oversight- "carries out the majority of the country's cash payments and transfers." Of the local sources, its only now that the Pakistan government is making a serious effort to freeze these bank accounts traced to the Taliban. The CIA says it has identified the charities and organizations that send money, but it is not clear if these sources have been suspended. The implications of this is that the war could be sustained by the Taliban even if the opium crop was destroyed, or smuggling routes and labs were destroyed. Gates points out that the very same external funding channels for sending money by wealthy Muslims that the US supported in the 1980's to help Muslim militants expel the Russians may still be open today. His comment that "it would't surprise me if some of those channels were still open today," suggests that even the Defense Dept does not know how these channels operate because of their extreme secrecy. In a way this shows how the war and the people that the US supported have come back to hurt the US, just as the people on the Pakistani side find that the people they supported in the Afghan and tribal areas and the Taliban organization they created is now coming back to hurt Pakistan. What makes it deeply disconcerting is that as Gates points out, there is so little time before the patience of the American public wears out with rising casualties. And on the Pakistani side there is so little time also because the war is spreading to Pakistani cities. See the link to The Taliban's war on the ill trained Pakistani police forces across the country in the WSJ May 28, 2009. ...

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The Dean of Harvard Medical School says the Health Reform bill gets an "F" grade. He say its disingenuous to call this reform, and Congressmen and the White House are deceiving the public if they attempt to pass this off as reform. What it will do is accelerate health care spending in the US, and the bill has simply postponed most of the major health care problems, especially the ones that drive cost including the fee for service system and delivery of health care.There are no substantial efforts to control the growth in health care costs or improve the quality of care, which makes this effort unacceptable as reform. In his discussions with other health care leaders and economists, Dean Jeffrey Flier, says he has found the opinion unanimous on this point, that whatever the final legislation looks like in Congress, it will only serve to accelerate health care spending rather than contain it. On the present system's failings he is explicit- the current system he says promotes fragmented care making it difficult to assess outcomes, the true costs of care are disguised, and competition based on price and quality is made impossible. The new legislation while expanding access to coverage makes a terrible tradeoff of an accelerated crisis of health care costs and merely continues the current dysfunctional system. The experience of Massachusetts, where access to care was expanded but spending went up, is that this won't work. He points to the Special Commission on Health Care Payment System in Massachusetts recommendation, that the health care system there must be changed from a fee for service system to one with "capitated" payments. So what is really disingenuous about this whole affair? Congressmen making it look as if reform has happened and congratulating themselves on increasing access to health care, when many of the serious problems of funding health care, skyrocketing costs, and a dysfunctional system, have only been kicked further down the road for some future legislators to tackle. With the national debt about 12 trillon dollars when this plan is factored in, this is cause for serious concern. ...

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Bernanke's plan to address the deep downturn is very aggressive and he is pulling out all the stops. This includes the purchase of mortgage backed securities, Fannie Mae and Freddie Mac corporate debt and other assets, Since it stated its intention in late November to buy such securities, the 30 year mortgage rates have fallen to 5.2% from 6%, and refinance applications have tripled. Now the purchases will be greatly expanded. See the related link to this in Hubbard and Mayer article based on their research paper, in the WSJ, that shows that at a mortgage rate of 4.5% the housing market prices could stabilize. Next step the Fed will, starting early 2009, pump money into markets for student, auto, credit card ansd small business loans in hoping to bring life to those markets. How much money is involved? Quite a bit. All told the Fed's assets could add up to $5 trillion says Ed Yardeni of Yardeni Research, up from $2.2 trillion now. Its these sweeping moves and decisions that have overshadowed the December 16 announcement cutting the target federal funds rate to a range from zero to 0.25%, the lowest in its history. Whats the thinking behind this? Coy of BW points to Bernanke's research on the depression years and the lost decade years in Japan. In 1999, in a book he contributed to, Bernanke referred to Japan's monetary policy and passive approach as a self induced paralysis, including all the zombie loans that were allowed to continue on company books and no effort to clear up the bad assets quickly. He always thought highly of the aggressive approach taken by Franklin Delano Roosevelt, and felt that more tools available and a better understanding of the market system since FDR's day enabled a lot more actions to be taken to reverse the kind of steep global downturn that might occur. Yardeni's view is that even though this huge asset buildup could lead to inflation down the road, the economy in the medium term faces a deflationary environment, and the only way to cope with this series of bubbles bursting is to create another bubble, rather than risk anything going seriously wrong. Basically Bernanke is making an assessment of the current situation, and he sees bad credit situation getting worse, bad unemployment situation getting worse, consumer spending falling off and getting worse, continued home foreclosures and falling prices, the transition between administrations and lack of policy direction for a few critical months complicating things, and he sees the economies of all trading partners in Asia and Europe weakening in great speed, and sees very tough years for 2009 and 2010 no matter what the administration and the Fed do. Not enough aggressive actions to forestall the worst is as bad as inaction in Bernanke's view. And with all the aggressive moves, including the $1 trillion stimulus and infrastructure spending to create 2.5 million jobs that Obama administration plans, the US and global picture for the next 24 months will still be a long uphill climb. So the risks for Bernanke are all in the region of not doing enough and not doing it vigorously and speedily to get the best results. ...

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President Obama in his speech at Georgetown, April 13, 2009, describes the thinking behind the decisions made in the first 12 weeks of his administration- why the actions are not aggressive and overreaching as some critics say, and why they are not timid as other critics have said. This was not a typical downturn of the business cycle, but a perfect storm arising from irresponsibility and poor decisionmaking in Washington, Wall Street and Main Street- in effect several crises colliding for something like an explosion, if not dealt with at once, and with strong action. He says "the key to dealing with our deficit and debt is to get a handle on out-of-control health care costs, not to stand idly by as the economy goes into free fall." The recognition that the crisis itself brings with it new possibilities, the opportunity for coming to grips with and forging a good solution to health care, energy and education issues that were neglected while Wall Street directed investments to areas other than investment in building for the future. To the critics like Krugman, Rosenfeld and others who say that the takeover of insolvent banks should be done quickly before the situation worsens, he says it is not because of any ideological or political judgement he has made about government involvement in banks, but because it is more likely to undermine than create confidence at this point. He goes on step by step, through the process of decisionmaking, first to step in and boost spending vigorously, second to get lending flowing again to businesses and families, strengthening the non-bank credit market for consumer purchases and loans, the housing plan, the auto plan, and the work at the G-20. Then President Obama goes on to project his vision and the road to getting there. The five pillars he sees for the future are: redirecting Wall Street and banking to constructive investments for the future, investments in education, investments in renewable energy and technology to create new industries and new jobs, investments in health care to cut costs for businesses and families, and new savings in the federal budget to bring down the deficit. Obama says he will look for savings line by line in every corner of the budget, and has already identified two trillion dollars in deficit reductions over the next decade. And the goal is to reduce discretionary spending for domestic programs as share of the economy by more than 10% over the next decade. Procurement reform will greatly reduce no-bid contracts and save $40 billion. Secretary Gates is attacking th problem of hundreds of billions of dollars in waste and cost overruns that have bloated the defense budget, without adding to the nation's safety. And education programs that don't work will be removed, and waste, fraud and abuse in the Medicare program will be controlled. Finally, Mr Obama points to the nation's political system as one more reason we are in this perfect storm- "a fundamental weakness in our political system." He cites the putting off hard decisions for another day, scoring political points instead of rolling up up sleeves to solve real problems, an impatience that is only worsened by the 24 hour news cycle, and a short attention span that focusses on the immediate results and on poll numbers. And there is too much responding to the "tempest of the moment until the furor has died away and the media coverage has moved on, instead of confronting the major challenges that will shape our future in a sustained and focussed way." After these 12 weeks President Obama says, for the first time there are glimmers of hope, and way off in the distance can be seen a vision of America's future that is far different than its troubled past. And citing the parable in the Sermon on the Mount about that "house built on a rock", he sees America's house built on a rock, a house for which we use this moment to lay a new foundation, come together and begin the hard work of rebuilding, persisting and persevering in the face of disappointments and setbacks that surely lie ahead. Then he has no doubt "that this house will stand and the dreams of our founders will live on in our time." Its a remarkable speech in its directness, its simplicity in approaching the subject, and its borrowing from the Bible for that story of that house built on a rock, and its Lincolnesque reference to the house that will stand. And more than a speech, it describes a vision, and the set of actions and steps taken and to be taken to get there. ...

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The Economist makes an important point about the violence, poverty and terrorism in failing states. The failure of civil institutions and civil wars in Africa, have led to complete breakdown. Similiar situations playing out in Afghistan and Pakistan. At the very least says the Economist, "there is evidence that economic growthin countries next to failing states can be badly damaged." Even in South Asia where India has forged ahead with high growth rates, one can say that economic development has not made a significant dent in the poverty, malnutrition and lack of infrastructure across the country. It adds that a weak goverment may lack the wherewithal to identify and contain a pandemic that could spread globally.

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The authors of this article say 2.4 million excess houses over and above nomal working inventories remain to be sold, and it is this surplus that is a mortal enemy of housing prices. US buyers are too debt ridden and have seen their 401 K's and pensions decline. So they suggest giving permanent resident status to immigrants who will invest in US housing, buy one or more than one house. They did not have to live in them, they also could not rent them, and would have to be above a certain price, so they would be taken off the housing market. They are aware of the effect on Vancouver of letting people from Hong Kong buy into that market, just before the handover to China. About a quarter of Vancouver's population became Chinese, and billions were invested in the housing market. They quote Merrill Lynch that there are 7.1 million households in the world with $1 million in financial assets, with a total of $29 trillion. They figure that 2.4 million excess houses could be sold at a median price of $184,000, and bring in billion sof dollars. If jobs are not impacted, and wealthy people in Asia and the rest of the developing world were to put money into buying houses of above $184,000 as an asset, with a temorary residency attached to it which could be permanent in 5 years, this could be part of the overall solution to the housing excess supply. The fact that values are attractive could make this an investment for affluent foreigners who may not stay in the houses at this time and keep it as a safe haven house, an additional property to use in the USA. It would ease the hosuing price situation in certain cities by bringing in a new buyer with resources into the market. ...

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How banks and credit card companies have given borrowers without the ability to repay large credit lines and encouraged people to get into debt deeper and deeper. The reckoning for these reckless practices and faulty information gathering about borrowers is approaching.

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Student loan default reaches 22% in 2017 up from 17% in 2013. Defaulted loans are $84 billion or 13% of $631 billion required to be paid by borrowers.

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A Republican move for a 3 month extension of the U.S. debt ceiling to provide time to reach a negotiated deal with Democrats.

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Chapman points out that the Phillips curve did not hold in low inflation years since 1948 when low inflation was accompanied by low unemployment and higher growth rates. It did hold in the higher inflation years after 1948 when higher inflation was accompanied by high unemployment and low growth rates. So can the Federal Reserve hold onto the idea of a Philips curve hoping that higher inflation will somehow lead to lower unemployment and higher growth as it lowers interest rates. What it may end up doing is hurting the dollar, while increasing inflation and leading to lower growth. Without the demand for Treasurys the way there is now because of the confidence in the dollar, interest rates would rise and domestic savings would be diverted to service the debt, and output would be lower and prices higher. McKinnon at Stanford and others have been arguing the case for a strong dollar in the WSJ recently. Chapman is accepting that interest rate cuts may help the economy but only by a little bit in the current situation and temporarily because there are too many forces at work pushing the economy into recession. So the comparitively small dividends from interest rate cuts should not be allowed to give up the bigger dividends from having international confidence in the dollar not erode. Especially as the current market imbalances cannot be fixed by the mechanism of interest rates, and its not the Fed's job to fix the considerable challenges facing the economy today which will take time to work out and require political leadership from Congress and a new President....

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Paul Singer, head of hedge fund firm Elliott Management and its unit NML Capital, has relentlessly pursued a case in U.S. courts involving collecting full payment on bonds from the Argentine government after its default on the bonds in 2001. Singer bought bonds with face value of about $170 million according to legal filings, but paid a price well below the original value. Elliott and other investors are now seeking $1.5 billion, including unpaid interest. Judge Griesa's ruling in a federal court in Manhattan blocks Argentina from paying bondholders who accepted an agreement for about 25 cents on the dollar from being paid $530 million in interest in July 2014. Argentina has to consider other risks in settling the dispute as more than the $1.5 billion as a one off payment is involved, because as Stevenson points out in another article (see link), the payment could run from $15- $27 billion depending on whether it then has to pay all holdout bondholders or all exchange and holdout bondholders at a higher rate. The result is an intractable dispute beyond the statement of honoring creditor rights, seen by a debtor country facing difficult finances in a different light. Serving as a reminder for Greece, Argentina, and other countries with chronic borrowing and debt history about the need for care and constant vigilance on state finances. In May 2012 Greece paid over $436 million in a one off payment to holdout bondholder financial firm Dart Management in a similiar bind, even as pensions were being cut and Greeks protested daily on Athens streets with over 20% unemployment (see link)....

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Hilsenrath cites Robert Hall, a Stanford University professor whose research shows three fourths of American households do not have two months worth of income put away as cash or other liquid assets. The Federal Reserve researcher Karen Pence says 41% of households can borrow less than $3000 on their credit cards and 23% have been turned down or discouraged from applying for credit. This shows the general financial weakness of overly indebted American households and the overlayed effects of the housing crisis, and higher unemployment. It suggests the margin for consumers to weather difficulties and increase spending is thin.

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The warning light is again on for Greece in the beginning of 2012, as the rapidly deteriorating economy makes a 50% loss by private creditors insufficient to help it meet repayment or refinancing of bonds coming due in 2012. Additional funds will be needed from EU countries unwilling to do this. 14.5 billion euros in Greek bonds come due on March 20, 2012. Greece also faces a public increasingly resistant to austerity cuts. A vountary exchage of existing Greek bonds by private creditors for new bonds at 50% face value and maturing over a longer period will be done under English law. This will be harder to change in the future. Most of the existing bonds were issued under Greek law which can be altered by Greece's parliament.

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Signs of a serious bubble in house prices in Canada. Home prices in February 2011 rose 8.8% from the year before, to 365,000 Canadian dollars. This is more than double the average home price of C$158,145 in 1999, according to the Canadian Real Estate Association. A comparison with the U.S. shows home prices going up 58% between 1999 and 2006, according to the National Association of Realtors, and falling 18% after the subprime mortgage crisis. By contrast home prices in Canada went down in 2008-2009 during the global financial crisis but are now back up and surpassed the previous high. This suggests the Canadian real estate market is facing a serious bubble comparable to or exceeding the bubble in the U.S. Trends that have supported the market such as Chinese buyers in Vancouver and Toronto, depend largely on the strength of the high economic growth in China and overseas buyers. Other weaknesses- the Canadian Association of Accredited Mortgage Professionals pointed out in a study in January that of the 400,000 first time home buyers during 2010, about 50,000 would have high-debt service ratios if interest rates, now at between 2-4%, were to rise to 5%. The Canada economst at Capital Economics, David Madani, says he expects a correction of 25% in the next 3 years, as this boom unwinds. He points out that house prices are now 5.5 times disposable income per worker, compared to an historical average of 3.5....

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The large infrastructure investments in the high speed rail network - estimated at $300 billon- have increased the debt of the railway ministry to about 5% of national GDP in the 1st quarter of 2011.The high speed rail lines are not likely to be economically viable, with revenues not enough to pay for operation and investment costs. With the higher fares it would take 9% of monthly disposable per capita income of urbanites or 555 yuan ($86) to pay for the cheapest ticket on the 300 mile Beijing-Shanghai high speed rail line. This makes high speed rail less affordable for middle and lower income people in China. The acceleration of the program in 2008 with stimulus funds and the moving up of deadlines for completion have led to corruption, stress on suppliers, and overinvestment. The program suffered from lack of good financial management and supervision in the rush to complete the program. Lack of equitable access and affordability to income groups from a majority of Chinese people have left the impression that it was for higher income groups. Higher tolls on highways and now the higher prices on highspeed rail have left the impression among ordinary Chinese that all income groups are not being served by the large infrastructure investments....

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European banks have been slow to get rid of risky assets such as collateralized debt obligations, subprime mortgages and other risky assets after the 2007 financial crisis. As a result sixteen top European banks hold 386 billion euros of suspect credit-market and real estate assets, according to Credit Suisse analysts. The Royal Bank of Scotland has 79.6 billion of assets dating from the 2007 financial crisis. Over the three year period since the 2008 financial crisis, the top three U.S. banks shed 80% of this type of risky assets, compared to 50% for European banks. The four largest British banks have reduced these risky assets by more than 50%, and four French banks have reduced these assets by only 30%. At 29 billion euros, French bank Credit Agricole had the largest amount of such risky assets among the leading French banks. This adds to the difficulties facing French banks which also have large amount of loans to customers in Greece and Greece's sovereign bonds. Deutsche Bank has 20.2 billion euros in commercial mortgages and whole loans and 2.9 billion euros in U.S. residential assets including subprime loans. Mediobanca analysts estimate that Deutsche Bank's exposure to such assets is more than 150% of its tangible equity....

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Polls taken before the June 16 elections in Greece show the leading New Democracy party and the Syriza party running very close to each other. Both Tsipras of the Syriza party and Antonio Samaras of New Democracy are calling for renegotiating the agreements with the IMF, EU and the EC, referred to as the troika, so that austerity programs do not fall too hard on ordinary Greeks. Tsipras says the goal is to reach "a just and viable European solution." He added in a news conference in Athens that "We don't claim there is plenty of money. Greeks are not asking for money. They are asking for work and the ability to make a living." The troika imposed a 22% reduction in the monthly minimum wage of 751 euros, or $930. This is unpopular in Greece and both New Democracy and Syriza now support reversing this, and extending unemployment benefits. Syriza proposes a moratorium on debt payments till growth is restored, and stabilizing public spending at 43% of GDP, below the 46% that is the eurozone average and above the 37% demanded by creditors. Syriza says it will scale back the value added tax which falls largely on the poor, raise taxes on the wealthy, and reduce tax breaks....

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The 2014 budget for Spain is free of the strong austerity measures, cuts in spending, and tax increases, of earlier budgets. Growth is expected to be 0.7% in 2014, after 1.3% decline in 2013. The unemployment rate is set to decline from 27% high in first quarter of 2013, to 25.9% in 2014. Savings of $800 million euros will come from changes in the pension system and civil servants face a freeze in salaries for the fourth year. The premium over German government bonds for Spain's government bonds is now less than that of government bonds of Italy. Cost of financing Spain's debt is projected to decline by 5.2% to 36.6 billion euros, according to Treasury minister Montero. The EU with the backing of the IMF has considered the high unemployment in Spain in its decision to relax deficit targets. This has given Spain an opportunity to clean up its accounts without further damage to the economy. Spain's deficit will now decline to 6.5% in 2013 from a deficit of 6.8% in 2012. The target for the deficit is set at 5.8% for 2014. Credit is still tight and consumer spending weak, major concerns for the government- in addition to the need for creating jobs- of prime minister Rajoy....

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A further drop in the value of the ruble would increase the cost of servicing the $500 billion in foreign debt. Fitch downgraded Russia's credit rating to BBB, the main concern being the drop in foreign exchange reserves, down by $210 billion to $390 billion in 6 months. Forward rates on the ruble imply a further depreciation of 20% in 12 months. Russia last week abandoned its committment to stick to the 2009 budget. After the first $29 billion bailout for banks another $40 billion has been assigned for the banks. All this has shown clearly that for Russia the job of reforming the economy, of changing its dependence on oil and commodities, and shifting to manufacturing and high tech industries has hardly begun. As a writer at the Financial Times put it in a CSPAN talk show, Russia is like 120 million people gathered around a oil wellhead. Or as another writer puts it, it remains a dangerously leveraged bet on the oil price. This has ominous implications for Russia, and serious social implications in terms of unemployment, social unrest, and a crisis of expectations, as for the second time in the lives of this generation hopes are raised only to be disappointed....