The lastest from Dr. Michael Hudson

Finance Capitalism Hits a Wall

The Oligarchs’ Escape Plan – at the Treasury’s Expense

By Prof. Michael Hudson

The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

February 18, 2009 "Global Research" -- - Mr. Obama’s “recovery” plan based on infrastructure spending will make real estate fortunes for well-situated properties along the new public transport routes, but there is no sign of cities levying a windfall property tax to save their finances. Their mayors would rather keep the cities broke than to tax real estate and finance. The aim is to re-inflate property markets to enable owners to pay the banks, not to help the public sector break even. So state and local pension plans will remain underfunded while more corporate pension plans go broke.

One would think that politicians would be willing to do the math and realize that debts that can’t be paid, won’t be. But the debts are being kept on the books, continuing to extract interest to pay the creditors that have made the bad loans. The resulting debt deflation threatens to keep the economy in depression until a radical shift in policy occurs – a shift to save the “real” economy, not just the financial sector and the wealthiest 10% of American families.

There is no sign that Mr. Obama’s economic advisors, Treasury officials and heads of the relevant Congressional committees recognize the need for a write-down. After all, they have been placed in their positions precisely because they do not understand that debt leveraging is a form of economic overhead, not real “wealth creation.” But their tunnel vision is what makes them “reliable” to Wall Street, which doesn’t like surprises. And the entire character of today’s financial crisis continues to be labeled “surprising” and “unexpected” by the press as each new surprisingly pessimistic statistic hits the news. It’s safe to be surprised; suspicious to have expected bad news and being a “premature doomsayer.” One must have faith in the system above all. And the system was the Greenspan Bubble. That is why “Ayn Rand Alan” was put in charge in the first place, after all.

So the government tries to recover the happy Bubble Economy years by getting debt growing again, hoping to re-inflate real estate and stock market prices. That was, after all, the Golden Age of finance capital’s world of using debt leverage to bid up the book-price of fictitious capital assets. Everyone loved it as long as it lasted. Voters thought they had a chance to become millionaires, and approved happily. And at least it made Wall Street richer than ever before – while almost doubling the share of wealth held by the wealthiest 1% of America’s families. For Washington policy makers, they are synonymous with “the economy” – at least the economy for which national economic policy is being formulated these days.

The Obama-Geithner plan to restart the Bubble Economy’s debt growth so as to inflate asset prices by enough to pay off the debt overhang out of new “capital gains” cannot possibly work. But that is the only trick these ponies know. We have entered an era of asset-price deflation, not inflation. Economic data charts throughout the world have hit a wall and every trend has been plunging vertically downward since last autumn. U.S. consumer prices experienced their fastest plunge since the Great Depression of the 1930s, along with consumer “confidence,” international shipping, real estate and stock market prices, oil and the exchange rate for British sterling. The global economy is falling into depression, and cannot recover until debts are written down.

Instead of doing this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds give the banks – bonds whose interest charges will have to be paid by taxing labor and industry.

The oligarchy’s plans for a bailout (at least of its own financial position)

In periods of looming collapse, wealthy elites protect their funds like rats fleeing a sinking ship. In times past they bought gold when currencies started to weaken. (Patriotism never has been a characteristic of cosmopolitan finance capital.) Since the 1950s the International Monetary Fund has made loans to support Third World exchange rates long enough to subsidize capital flight. In the United States over the past half-year, bankers and Wall Street investors have tapped the Treasury and Federal Reserve to support prices of their bad loans and financial gambles, buying out or guaranteeing $12 trillion of these junk debts. Protection for the U.S. financial elite thus takes the form of domestic public debt, not foreign currency.

It is all in vain as far as the real economy is concerned. When the Treasury gives banks newly printed government bonds in “cash for trash” swaps, it leaves today’s unpayably high private-sector debt in place. All that happens is that this debt is now owed to (or guaranteed by) the government, which will have to impose taxes to pay the interest charges.

The new twist is a variant on the IMF “stabilization” plans that lend money to central banks to support their currencies – for long enough to enable local oligarchs and foreign investors to move their savings and investments offshore at a good exchange rate. The currency then is permitted to collapse, enabling currency speculators to rake in enough gains to empty out the central bank’s reserves. Speculators view these central bank holdings as a target to be raided – the larger the better. The IMF will lend a central bank, say, $10 billion to “support the currency.” Domestic holders will flee the currency at a high exchange rate. Then, when the loan proceeds are depleted, the currency plunges. Wages are squeezed in the usual IMF austerity program, and the economy is forced to earn enough foreign exchange to pay back the IMF.

As a condition for getting this kind of IMF “support,” governments are told to run a budget surplus, cut back social spending, lower wages and raise taxes on labor so as to squeeze out enough exports to repay the IMF loans. But inasmuch as this kind “stabilization plan” cripples their domestic economy, they are obliged to sell off public infrastructure at distress prices – to foreign buyers who themselves borrow the money. The effect is to make such countries even more dependent on less “neoliberalized” economies.

Latvia is a poster child for this kind of disaster. Its recent agreement with Europe is a case in point. To help the Swedish banks withdraw their funds from the sinking ship, EU support is conditional on Latvia’s government agreeing to cut salaries in the private sector – and not to raise property taxes (currently almost zero).

The problem is that Latvia, like other post-Soviet economies, has scant domestic output to export. Industry throughout the former Soviet Union was torn up and scrapped in the 1990s. (Welcome to victorious finance capitalism, Western-style.) What they had was real estate and public infrastructure free of debt – and hence, available to be pledged as collateral for loans to finance their imports. Ever since its independence from Russia in 1991, Latvia has paid for its imported consumer goods and other purchases by borrowing mortgage credit in foreign currency from Scandinavian and other banks. The effect has been one of the world’s biggest property bubbles – in an economy with no means of breaking even except by loading down its real estate with more and more debt. In practice the loans took the form of mortgage borrowing from foreign banks to finance a real estate bubble – and their import dependency on foreign suppliers.

So instead of helping it and other post-Soviet nations develop self-reliant economies, the West has viewed them as economic oysters to be broken up to indebt them in order to extract interest charges and capital gains, leaving them empty shells. This policy crested on January 26, 2009, when Joaquin Almunia of the European Commission wrote a letter to Latvia’s Prime Minister spelling out the terms on which Europe will bail out the Swedish and other foreign banks operating in Latvia – at Latvia’s own expense:

Extended assistance is to be used to avoid a balance of payments crisis, which requires … restoring confidence in the banking sector [now entirely foreign owned], and bolstering the foreign reserves of the Bank of Latvia. This implies financing … outstanding government debt repayments (domestic and external). And if the banking sector were to experience adverse events, part of the assistance would be used for targeted capital infusions or appropriate short-term liquidity support. However, financial assistance is not meant to be used to originate new loans to businesses and households. …

… it is important not to raise ungrounded expectations among the general public and the social partners, and, equally, to counter misunderstandings that may arise in this respect. Worryingly, we have witnessed some recent evidence in Latvian public debate of calls for part of the financial assistance to be used inter alia for promoting export industries or to stimulate the economy through increased spending at large. It is important actively to stem these misperceptions.

Riots broke out last week, and protesters stormed the Latvian Treasury. Hardly surprising! There is no attempt to help Latvia develop the export capacity to cover its imports. After the domestic kleptocrats, foreign banks and investors have removed their funds from the economy, the Latvian lat will be permitted to depreciate. Foreign buyers then can come in and pick up local assets on the cheap once again.

The practice of European banks riding the crest of the post-Soviet real estate bubble is backfiring to wreck the European economies that have engaged in this predatory lending to neighboring economies as well. As one reporter has summarized:

In Poland 60 percent of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America’s sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks.1

This was the West’s alternative to Stalinism. It did not help these countries emulate how Britain and America got rich by protectionist policies and publicly nurtured industrialization and infrastructure spending. Rather, the financial rape and industrial dismantling of the former Soviet economies was the most recent exercise in Western colonialism. At least U.S. investors were smart enough to stand clear and merely ride the stock market run-up before jumping ship.

But now, the government’s plan to “save” the economy is to “save the banks,” along similar lines to the West trying to save its banks from their adventure in the post-Soviet economies. This is the basic neoliberal economic plan, after all. The U.S. economy is about to be “post-Sovietized.”

The U.S. giveaway to banks, masquerading as “help for troubled homeowners”

The Obama bank bailout is arranged much like an IMF loan to support the exchange rate of foreign currency, but with the Treasury supporting financial asset prices for U.S. banks and other financial institutions. Instead of banks and oligarchs abandoning the dollar, the aim is to enable them to dump their bad mortgages and CDOs and get domestic Treasury bonds. Private-sector debt will be moved onto the U.S. Government balance sheet, where “taxpayers” will bear losses – mainly labor not Wall Street, inasmuch as the financial sector has been freed of income-tax liability by the “small print” in last autumn’s Paulson-Bush bailout package. But at least the U.S. Government is handling the situation entirely in domestic dollars.

As in Third World austerity programs, the effect of keeping the debts in place at the “real” economy’s expense will be to shrink the domestic U.S. market – while providing opportunities for hedge funds to pick up depreciated assets cheaply as the federal government, states and cities sell them off. This is called letting the banks “earn their way out of debt.” It’s strangling the “real” economy, because not a dollar of the government’s response has been devoted to reducing the overall debt volume.

Take the much-vaunted $50 billion program designed to renegotiate mortgages downward for “troubled homeowners.” Upon closer examination it turns out that the real beneficiaries are the giant leading banks such as Citibank and Bank of America that have made the bad loans. The Treasury will take on the bad debt that banks are stuck with, and will permit mortgagees to renegotiate their monthly payment down to 38% of their income. But rather than the banks taking the loss as they should do for over-lending, the Treasury itself will make up the difference – and pay it to the banks so that they will be able to get what they hoped to get. The hapless mortgage-burdened family stuck in their negative-equity home turns out to be merely a passive vehicle for the Treasury to pass debt relief on to the commercial banks.

Few news stories have made this clear, but the Financial Times spelled the details buried in small print.2 It added that the Treasury has not yet decided whether to write down the debt principal for the estimated 15 million families with negative equity (and perhaps 30 million by this time next year as property prices continue to plunge). No doubt a similar deal will be made: For every $100,000 of write-down in debt owed by over-mortgaged homeowners, the bank will receive $100,000 from the Treasury. Government debt will rise by $100,000, and the process will continue until the Treasury has transferred $50,000,000 to the banks that made the reckless loans.

There is enough for just 500 of these renegotiations of $100,000 each. Hardly enough to make much of a dent, but the principle has been put in place for many further bailouts. It will take almost an infinity of them, as long as the Treasury tries to support the fiction that “the miracle of compound interest” can be sustained for long. The danger is the economy may be dead by the time saner economic understanding penetrates the public consciousness. In the mean time, bad private-sector debt will be shifted onto the government’s balance sheet. Interest and amortization currently owed to the banks will be replaced by obligations to the U.S. Treasury. Taxes will be levied to make up the bad debts with which the government is stuck. The “real” economy will pay Wall Street – and will be paying for decades!

Calling the $12 trillion giveaway to bankers a “subprime crisis” makes it appear that bleeding-heart liberals got Fannie Mae and Freddie Mac into trouble by insisting that these public-private institutions make irresponsible loans to the poor. The party line is, “Blame the victim.” But we know this is false. The bulk of bad loans are concentrated in the largest banks. It was Countrywide and other banksters that led the irresponsible lending and brought heavy-handed pressure on Fannie Mae. Most of the nation’s smaller, local banks didn’t make such reckless loans. The big mortgage shops didn’t care about loan quality, because they were run by salesmen. The Treasury is paying off the gamblers and billionaires by supporting the value of bank loans, investments and derivative gambles, leaving the Treasury in debt.

U.S./post-Soviet Convergence?

It may be time to look once again at what Larry Summers and his Rubinomics gang did in Russia in the mid-1990s and to Third World countries during his tenure as World Bank economist to see what kind of future is being planned for the U.S. economy over the next few years. Throughout the Soviet Union the neoliberal model established “equilibrium” in a way that involved demographic collapse: shortening life spans, lower birth rates, alcoholism and drug abuse, psychological depression, suicides, bad health, unemployment and homelessness for the elderly (the neoliberal mode of Social Security reform).

Back in the 1970s, people speculated whether the US and Soviet economies were converging. Throughout the 20^th century, of course, everyone expected government regulation, infrastructure investment and planning to increase. It looked like the spread of democratically elected governments would go hand in hand with people voting in their own economic interest to raise living standards, thereby closing the inequality gap.

This is not the kind of convergence that has occurred since 1991. Government power is being dismantled, living standards have stagnated and wealth is concentrating at the top of the economic pyramid. Economic planning and resource allocation has passed into the hands of Wall Street, whose alternative to Hayek’s “road to serfdom” is debt peonage for the economy at large. There does need to be a strong state, to be sure, to keep the financial and real estate rentier power in place. But the West’s alternative to the old Soviet bureaucracy is a financial planning. In place of a political overhead, we have a financial and real estate overhead.

Stalinist Russia and Maoist China achieved high technology without land-rent, monopoly rent and interest overhead. This purging of rentier income was the historical task of classical political economy, and it became that of socialism. The aim was to create a Clean Slate financially, bringing prices in line with technologically necessary costs of production. The aim was to provide everyone with the fruits of their labor rather than letting banks and landlords siphon off the economic surplus.

Ideas of economic efficiency and “wealth creation” today are an utterly different kind of liberalism and “free markets.” Commercial banks lend money not to increase production but to inflate asset prices. Some 70% of bank loans are mortgage loans for real estate, and most of the rest is for corporate takeovers and raids, to finance stock buy-backs or simply to pay dividends. Asset-price inflation obliges people to go deeper into debt than ever before to obtain access to housing, education and medical care. The economy is being “financialized,” not industrialized. This has been the plan as much for the post-Soviet states as for North America, Western Europe and the Third World.

But we are far from having reached the end of the line. Celebrations that our present financialized economy represents the “end of history” are laughingly premature. Today’s policies look more like a dead end. But that does not mean that, like the Roman Empire, they won’t lead us down toward a new Dark Age. That’s what tends to happen when oligarchies do the planning.

Is America a Failed Economy?

It may be time to ask whether neoliberal pro-rentier economics has turned America and the West into a Failed Economy. Is there really no alternative? Have the neoliberals made the shift of planning from governments to the financial oligarchy irreversible?

Let’s first dispose of the “foundation myth” of the idea still guiding the United States and Europe. Free-market economists pretend that prices can be brought into line most efficiently with technologically necessary costs of production under capitalism, and indeed, under finance capitalism. The banks and stock market are supposed to allocate resources most efficiency. That at least is the dream of self-regulating markets. But today it looks like only a myth, public relations patter talk to get a generation of increasingly indebted voters not to act in their own self-interest.

Industrial capitalism always has been a hybrid, a symbiosis with its feudal legacy of absentee property ownership, oligarchic finance and public debts rather than the government acting as net creditor. The essence of feudalism was extractive, not productive. That is why it created industrial capitalism as State Policy in the first place – if only to increase its war-making powers. But the question must now be raised as to whether only socialism can complete the historical task that classical political economy set out for itself – the ideal that futurists in the 19^th and 20^th centuries believed that an unpurified capitalism might still be able bring about without shedding its legacy of commercial banking indebting property and carving infrastructure out of the public domain.

Today it is easier to see that the Western economies cannot go on the way they have been. They have reached the point where the debts exceed the ability to pay. Instead of recognizing this fact and scaling debts back into line with the ability to pay, the Obama-Geithner plan is to bail out the big banks and hedge funds, keeping the volume of debt in place and indeed, growing once again through the “magic of compound interest.” The result can only be an increasingly extractive economy, until households, real estate and industrial companies, states and cities, and the national government itself is driven into debt peonage.

The alternative is a century and a half old, and emerged out of the ideals of the classical economic doctrines of Adam Smith, David Ricardo, John Stuart Mill, and the last great classical economist, Marx. Their common denominator was to view rent and interest are extractive, not productive. Classical political economy and its successor Progressive Era socialism sought to nationalize the land (or at least to fully tax its rent as the fiscal base). Governments were to create their own credit, not leave this function to wealthy elites via a bank monopoly on credit creation. So today’s neoliberalism paints a false picture of what the classical economists envisioned as free markets. They were markets free of economic rent and interest (and taxes to support an aristocracy or oligarchy). Socialism was to free economies from these overhead charges. Today’s Obama-Geithner rescue plan is just the reverse.

NOTES

1 Ambrose Evans-Pritchard, “If Eastern Europe falls, world is next,” The Telegraph, February 14, 2009.

2 Krishna Guha, “US closes in on subsidy plan to stop foreclosures,” Financial Times, February 13, 2009.

© Copyright Michael Hudson, Global Research, 2009

Oh! Oh! US debet limit goes up.

The Queen Bee House of Representatives have it's new crowning glory - a full spectrum dominance package - afterall the United States owns the world, right??

House seeks debt limit increase to $10.2 trillion

REUTERS
Reuters US Online Report Top News
Mar 14, 2008 13:53 EST

WASHINGTON (Reuters) - The government's debt limit would be raised to $10.2 trillion under a budget plan for next year approved by the U.S. House of Representatives.

The House's fiscal 2009 budget, which passed on Thursday, would increase U.S. borrowing authority by $385 billion from the current limit of $9.815 trillion, according to the House Budget Committee.

The Senate on Friday passed its own version of a fiscal 2009 budget that did not address the question of raising federal borrowing authority.

The two chambers in coming weeks are expected to try to work out their differences and then pass a budget for next year that would spend $3 trillion while projecting a deficit in the range of $340 billion to $366 billion for the year.

It is not clear whether negotiators will adjust the House's proposed $10.2 trillion debt limit.

Large annual deficits have caused the federal debt to climb steeply since President George W. Bush took office, rising from $5.6 trillion in January, 2001, to $9.3 trillion on Wednesday.

Congress last approved an increase in Washington's borrowing authority last September, increasing the credit limit by $850 billion.

Some lawmakers recently have estimated that the Treasury Department could bump up against the current $9.815 trillion limit either shortly after November presidential and congressional elections or early next year, depending on revenues and economic performance.
(Reporting by Richard Cowan)

Source: Reuters US Online Report Top News

More on Suspicious Activity Reports

They don't tell you much about SARs - they came in as part of the Patriot Act. Now Hankie Poo knows where ALL the bigger money is.

Through one SAR, the found out that MOSSAD was sending in cells of people, who were posing as art salesmen and setting up DEA agents, so suddenly nothing more was seen of those reports PUBLICALLY.

Score another one for the Big BoyZ in DC .. Another friggin brilliant plan of theirs. They got this plot from Executive Orders, btw.

And this is from a mainstream newspaper, so I suspect something is UP.

Veeger

Right now, feds might be looking into your finances

Banks tip off government to possible money laundering, fraud

By Thomas Frank
USA TODAY

WASHINGTON — Each year, federal agents peek at the financial transactions of millions of Americans — without their knowledge.

The same type of information that raised suspicions about New York Gov. Eliot Spitzer is reviewed every day by authorities to find traces of money laundering, check fraud, identity theft or any crime that may involve a financial institution.

As concerns about fraud and terrorist financing grow, an increasing number of suspicious deposits, withdrawals and money transfers are being reported by banks and others to the federal government. Banks and credit unions as well as currency dealers and stores that cash checks reported a record 17.6 million transactions to the Financial Crimes Enforcement Network in 2006, according to a report from the network, a bureau of the U.S. Treasury Department.

"I don't think Americans understand that their financial transactions are being reported and routinely examined," said Barry Steinhardt of the American Civil Liberties Union.

The Treasury Department's database now contains records of more than 100 million financial transactions going back to at least 1996, said network spokesman Steve Hudak.

Teams of agents from the FBI, IRS, Drug Enforcement Administration and other agencies regularly review newly filed financial reports and launch investigations. Federal and local authorities search the database to find information about people that can help ongoing probes. Treasury Department analysts study the reports to detect trends in fraud and issue reports alerting financial institutions.

"The government has access to untold volumes of records and can draw all sorts of conclusions about us, and many are going to be wrong," Steinhardt said.

Bankers disagree. "For the typical bank customer, this means very little because there's nothing they're doing that's likely to be viewed as out of the ordinary," said Richard Riese, head of regulatory compliance for the American Bankers Association.

The reporting system dates to the early 1970s when federal agents sought to pinpoint drug dealers by looking for people making large cash deposits.

Financial institutions have long been required to report cash transactions over $10,000. Those reports — simple notices of a deposit or withdrawal — account for more than 90% of the records the enforcement network gets each year.

Far more controversial are secret "suspicious activity reports" filed by financial institutions and reviewed by teams of agents spread around the country. The investigation of Spitzer began when a bank spotted potentially suspicious transfers from several accounts and filed reports with the IRS, according to a federal official who spoke on condition of anonymity. The official did not want his name used because he's not authorized to discuss the case publicly.

The number of suspicious activity reports soared from 413,000 in 2003 to 1 million in 2006, according to the enforcement network.

Federal law requires the reports to remain secret. They are written by officers at financial institutions who specialize in detecting suspicious activity, such as a series of large transactions.
f
The analysis can protect customers by spotting unusual withdrawals that may indicate fraud, said Robert Rowe, senior regulatory counsel of the Independent Community Bankers of America.

Many of the reports are a waste, said Riese of the bankers association. "We're reporting on a lot of things everybody knows law enforcement doesn't have the resources to pursue," he said.
Hudak said the "vast majority" of reports "are filed for a good reason. … There are law enforcement officials and investigators who use these reports and read them every day."

Find this article at:
http://www.usatoday.com/printedition/news/20080312/a_financial12.art.htm

Hank Paulson; Let states bail out bankers' mess

Subprime standards out 'soon,' Paulson says

Government, industry working on plan for troubled borrowers

By Robert Schroeder & Greg Robb, MarketWatch

WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson said Monday he's confident that a plan to help borrowers of subprime mortgages will be agreed upon soon.

The Bush administration has been working with mortgage servicers and investors to come up with a strategy to modify and refinance loans for certain subprime-mortgage borrowers.

As more such loans reset next year, "we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification," Paulson said in a speech to an Office of Thrift Supervision conference.

In an interview later Monday on Bloomberg TV, Paulson also said that a plan to freeze interest rates on troubled subprime home loans could be announced this week.

"I am optimistic we are going to have something to answer before the end of the week,

he commented.

In his speech, Paulson reiterated that the downturn in the housing market is "the biggest challenge to our economy," but said that the Treasury's plan to help out subprime borrowers doesn't include spending taxpayer money on funding or subsidies for either the industry or homeowners.

Speaking at the same housing conference on Monday, Washington Mutual Inc.

Chairman and Chief Executive Kerry Killinger said that the mortgage industry needs to find the "right safe harbor" for troubled borrowers.

"We just need to see if we can't get to a collective decision,"

he added.

On Monday, Paulson called for state and local governments to temporarily broaden their tax-exempt bond programs to include mortgage refinancings. If enacted, he said, the move would reduce the cost of some mortgage programs and allow the governments to reach more struggling homeowners. Read Paulson's speech.

The administration and Congress have been scrambling to address the woes in the subprime-mortgage market. Interest rates on about 2 million adjustable-rate mortgages are set to rise over the next two years, with many foreclosures a possible result.

Speaking at the same conference, Housing and Urban Development Secretary Alphonso Jackson urged Congress to pass a bill modernizing the Federal Housing Administration.

"With new legislation, refinancing and other FHA products, we will be able to help nearly half a million people next year buy and keep their homes," Jackson said. He added that his department has "exhausted our own administrative actions."

Analysts said the reported plan from Treasury could either help or hurt efforts to pass mortgage-reform legislation. "We believe failure to implement a comprehensive freeze -- or any freeze at all -- at this point will reinvigorate Democratic efforts to enact mortgage-bankruptcy reform," wrote Jaret Seiberg of the Stanford Group Company, in a note Monday morning.

However, according to Brian Gardner of Keefe, Bruyette & Woods, the Treasury plan could take pressure off of lawmakers to push through reforms.

In a note Monday, the analyst said that the chances for a reform bill would be less than 25% if Treasury succeeds in its negotiations with the mortgage industry and if the Fed announces changes to rules governing high-cost mortgages.

View from the Boston Fed

Meanwhile, earlier Monday, Boston Fed Bank President Eric Rosengren said research at the Boston Fed suggests that the foreclosure crisis in subprime mortgages will get worse before it gets better.

Just how much worse depends on the outlook for the economy and housing, he commented:

"Our forecast is quite dependent on how far home prices fall."

He urged community banks and states to focus on the 87% of subprime loans that are not seriously delinquent and where action may avoid future problems.

Rosengren said that he was not advocating any bailout, and wanted to use "existing programs for what they were designed to do." Some of the programs administered by the Federal Housing Administration could be modernized, he elaborated.

FHA lending is underutilized, falling to 2.8% of mortgages originations in 2006 from 16% in 2000. Many banks are not FHA-approved lenders, according to Rosengren.

Also Monday, Sen. Hillary Clinton called for a 90-day moratorium on home foreclosures, as well as a five-year freeze on the rates of adjustable mortgages.

Meanwhile, Senate Banking Committee Chairman Christopher Dodd, D-Conn., also a presidential candidate, called on the White House to push loan servicers to put in place broad-based and transparent loan modifications.

"Modifications also need to be made available to borrowers who have become delinquent because of loan resets, but who had been current prior to that. These homeowners should not be punished because of the abusive loans they were sold,"

Dodd said in a statement.

Robert Schroeder is a reporter for MarketWatch in Washington.

And to check what our good friends at Golman Sachs have to say about the volatile market and the fact that Hank's news didn't go over that well with investor's give this market manipulation a GOOD read .. think two clever by half as you read it... a DEPRESSION is coming and no one can fix it. They can merely buy time so the fizzles rather than CRASHES. Oh, I am just so fond of that word "tanks" as in the market is tanking. Such a good omnapotomia for it, doncha think??

Goldman's Cohen Sees S&P 500 Rising 14% by 2008's End (Update3)

By Alexis Xydias and Eric Martin

Dec. 4 (Bloomberg) -- Goldman Sachs Group Inc.'s Chief Investment Strategist Abby Joseph Cohen said the Standard & Poor's 500 Index will rise 14 percent by the end of next year to a record 1,675 ``as recession fears fade.''

``U.S. stocks will offer moderate gains and will dramatically outperform bonds over a 12-month horizon,'' New York-based Cohen wrote in a report today. ``Recession will likely be avoided, due to strength in exports and capital spending by corporations and governments, and thanks to a vigilant and flexible Federal Reserve.''

Cohen was among the most bullish Wall Street strategists tracked by Bloomberg News with her estimate that the S&P 500 would surge to 1,600 by the end of 2007. Eight of 11 forecasters last month called for the benchmark for American equities to stage the biggest year-end rally since 1971. From yesterday's close, the measure would have to rise 8.7 percent to get there.

``Ongoing stresses'' on earnings stemming from turmoil in the financial system may be compensated by a ``competitive'' dollar, strong U.S. labor productivity and ``the favorable condition of corporate balance sheets,'' the strategist wrote.

The S&P 500 lost 0.5 percent to 1,465.22 as of 10:04 a.m. in New York.

Banks Fall Short

To account for profit shortfalls in the banking industry, Cohen, 55, and her New York-based colleagues Michael Moran and Michelle Kim cut their earnings estimates for S&P 500 companies.

Cohen said the Fed will ``stay friendly, if necessary'' in 2008. Traders unanimously expect the central bank to reduce its benchmark lending rate on Dec. 11, and have increased bets that the cut will be 0.5 percentage point, according to Fed fund futures.

Per-share operating profit this year is likely to grow 0.7 percent, down from a previous estimate of 4 percent growth, Cohen and her colleagues wrote in a separate report. They reduced their 2008 prediction to growth of 5.6 percent to $95 per share, from 7.5 percent to $100.

Cohen, who wasn't immediately available to comment, was known for her bullish calls during last decade's rally in U.S. stocks and was the top-ranked strategist in Institutional Investor magazine's surveys in 1998 and 1999.

She stayed bullish on computer-related stocks for too long as the S&P 500 suffered a bear market from March 2000 to October 2002. Cohen said in October 2000 that technology shares would be a good investment in 2001. The S&P 500 Information Technology Index tumbled 26 percent that year.

More Accurate

Her calls on the market in 2006 were more accurate. Cohen said on June 13, 2006, that stocks had fallen too far and the S&P 500 would rebound to 1,400 by year end. The index set its low for the year that day and has since risen 20 percent.

In December 2006, Cohen said the S&P 500 would climb to a record 1,550 this year. The index surpassed that level in July and went on to reach an all-time high of 1,565.15 in October. The S&P 500 then dropped 10.1 percent through Nov. 26, the steepest loss in four years, spurred by about $50 billion in subprime lending writedowns.

Separately, strategists at New York-based Merrill Lynch & Co. said today that they expect European stocks to rise 9.6 percent by the end of 2008. The Dow Jones Stoxx 600 Index may end next year at 406, up from 370.36 at the end of last week, Karen Olney and Charles Cara, London-based strategists at the U.S. bank, wrote in a report.

The forecast assumes corporate profits in the region will climb about 5 percent in 2008, while the price-earnings ratio for the European benchmark will reach 13.8 at the end of the year, the note said.