From the Economist Intelligence Unit: Posted on Debtonation December 16th

Ecuador’s government will withhold an interest payment on its foreign bonds due on December 15th, making it the first major country to default on its debt obligations since the current global financial crisis began-indeed the first sovereign to do so since Argentina’s huge default of 2001. The president, Rafael Correa, is responding less to deteriorating economic and fiscal conditions than to a belief that much of Ecuador’s debt was contracted illegally. Nonetheless, this move will shut the country off from international credit markets, and could increase risk aversion towards other Latin American borrowers as well.

Read the EIU article here.

Ann Pettifor: 16th December, 2008, 15.00PM

I notice that the magnificent Chicago Tribune and its 14,600 employees are threatened with insolvency by its owner Sam Zell.  Zell borrowed huge sums with which to seize the Tribune as recently as December, 2007. In other words, he raised most of the asking price not by putting up his own cash, but by persuading gullible banks to create credit, and saddle the company with $13 bn in debt.  It turns out that churning out stories to raise the cash to service that debt just did not prove possible.

Look out for Manchester United and other sports clubs – buried under mountains of debt – and lets together reckon how long it will take for the debt to be serviced by men in trunks kicking balls around a football ground.

16th December, 2008

The unravelling of the Bernard Madoff Hedge Fund -  a Ponzi scheme, it seems, modelled on the scam of Charles Ponzi (pictured) – was described by Nicola Horlick of Bramdean Alternative Investment Fund as ‘the biggest financial fraud in the history of markets’. This reminds me of the witty comment of a trader at Bear Stearns -  Michael Driscoll.

Driscoll noted presciently in 2005 that  “there are 9,000 hedge funds out there. There aren’t that many smart people in the world”.

His words are recorded for posterity in ‘The Coming First World Debt Crisis’.  I sincerely hope that Michael Driscoll has landed safely somewhere after the collapse of Bear Stearns, whose foolish managers surely did not draw on his wisdom and foresight.

Back in 2003, in the opening chapter of “The Real World Economic Outlook”  (Palgrave Macmillan) I defined globalisation as a form of Ponzi Finance, explaining that “the kind of speculation indulged in by pension fund managers, investment and merchant banks is well known – especially to those who have already been duped. It is ‘Ponzi’ finance.”

This was hard to stand up, as of course a Ponzi scheme – whether on a local, national or global scale – is not visible until the proverbial tide goes out, to mix metaphors. Well, it now has – both for Madoff’s gullible and greedy investors; but also for the project dubbed ‘globalisation’.

Here, in an extract from the book is an explanation of Ponzi Schemes and their origins.

Ponzi finance
The term Ponzi finance was invented by the American economist Hyman P. Minsky as part of his analysis of financial market inflation. It describes a form of finance in which new liabilities are used to finance existing liabilities. Ponzi schemes are named after Charles Ponzi, an Italian immigrant who duped thousands of Boston investors in the 1920s with a postage stamp speculation scheme. Ponzi thought he could take advantage of differences between US and foreign currencies used to buy and sell international mail coupons. Ponzi told investors that he could provide a 40 per cent return in just 90 days compared with 5 per cent for bank savings accounts. Ponzi was deluged with funds from investors, taking in $1million during one three-hour period – and this was in 1921. Though a few early investors were paid off to make the scheme look legitimate, an investigation found that Ponzi had only purchased about $30-worth of the international mail coupons.

Decades later, the Ponzi scheme continues to work on the ‘rob-Peter-pay-Paul’ principle, as money from new investors is used to pay off earlier investors until the whole scheme collapses.

Minsky noted that Ponzi’s scheme ‘swept through the working classes and even affected ‘respectable folk’. Because they prey on the poor and the ignorant, Ponzi schemes in banking are usually banned. However, this does not prevent them from occurring in countries where it is difficult to regulate them. Ponzi schemes have surfaced in Portugal and Eastern Europe.

15th December, 2008

Last week there were several media pieces that mentioned the Green New Deal, including The Times, The Observer, and The Independent on Sunday.

Also, UN Secretary General Ban Ki-moon has followed his colleagues at UNEP in calling for a Green New Deal.

You can also read nef’s Green New Deal Round-up here.

8th December, 2008

My piece in today’s Guardian, The Credit Crisis Myth, was resoundingly rubbished in many of the comments. Reminds me of when my book, The Coming First World Debt Crisis came out in 2006… Then it was: Chicken Licken – The sky is falling!

Read the article (and comments)

8th December, 2008

Are some journalists guilty of “careless headlines or injudicious reporting” which risk becoming self-fulfilling prophecies of a very serious nature? Peter Wilby discusses reporting on the current crisis in his piece today for the Guardian. In it he also refers to my 2003 New Statesman article warning of the coming debt crisis.

Go to the article

8th December 2008

Members of Local 1110 of the United Electrical, Radio and Machine Workers of America are occupying the Republic Windows and Doors factory this weekend – something rarely seen here since the 1930’s. Obama sided with the workers, saying ” I think they’re absolutely right and understand what’s happening to them is reflective of what’s happening across this economy.”

As part of the U.S. bailout, Bank of America has already received $25 billion in taxpayer money. Read more.

7th December, 2008

On friday 5th December the Financial Times finally acknowledged that ‘real borrowing costs remain high‘. For those readers that may have missed it let me recap: UK interest rates are now at 2%. The three-month Libor rate (the London inter-bank offer rate – fixed by a committee of the British Bankers Association) has come down from 6% to just under 4%.  Mortgage rates for new borrowing are just under 6%. The cost of borrowing for companies (loans and overdrafts) is at 7%. The yield on UK corporate bonds (BBB) are just under 12%.  Lets hear no more about low rates of interest.

Read post »

6th December 2008

The tears of millions of Americans stripped of livelihoods and healthcare remain hidden from view, unlike the tearful special pleading of the unscrupulous leaders of the finance sector, and this week, of the auto industry CEO’s. The latest unemployment numbers to emerge from the Dept. of Labor imply immense pain and anguish; and emotional, mental, familial and even social breakdown.  For those of us in other G8 countries cushioned by a public health service that is still, mercifully, largely free, it is hard to imagine how Americans cope with the shock of losing a job, and also their health care. As we await Barack Obama’s inaugural speech, Franklin D. Roosevelt’s 1933 speech becomes more and more striking for its relevance. I have used it often, but do so again, unashamedly.

But first, a brief whinge: on successive visits to the US, I have struggled to get biographies and speeches by FDR. I hope that is changing. US citizens should be proud of the fact that a time of grave global financial crisis, when Europe moved to the right, towards fascism, the United States, under Roosevelt’s leadership, moved in a progressive direction.

Read post »

6th December 2008

From the Institute for Policy Studies – a new report released November 24th details the ratios of financial bailout spending to spending on development aid and climate crises.

The key finding published in the report is that the $4.1trillion that the United States and European governments have committed to rescue financial firms is 40 times more money to rescue financial firms than to fight climate and poverty crises in the developing world.

For a pdf of the Institute for Policy Studies report, click here.