“Soft despotism is a term coined by Alexis de Tocqueville describing the state into which a country overrun by "a network of small complicated rules" might degrade. Soft despotism is different from despotism (also called 'hard despotism') in the sense that it is not obvious to the people."

Monday, March 17, 2008


The most powerful economic force in the world right now is what bankers call "deleveraging". Bear Stearns reduced to $2 per share is serious deleveraging.

Deleveraging drive as banks chase debts

By Robert Peston
BBC business editor

It's the process, currently under way with a vengeance, of banks and financial institutions asking for their loans back, especially from borrowers perceived as high risk.

It follows years of the opposite, known - unsurprisingly - as leveraging.

There's pain for all of us - in the form of less credit, cripplingly expensive credit or a drop in the value of the investments held by the pension funds on which we depend
In the leveraging era, the world's banks and other great lenders lent far too much - to businesses, to various financial speculators, such as hedge funds and private-equity investors, to homeowners, to shoppers, and even to each other.

A great bubble of debt was created.

That bubble was punctured last summer, when lenders suddenly realised that some of their loans - the subprime ones to US homeowners with poor credit histories - weren't ever going to be repaid in full.

'Bad risks'

Since then lenders have been asking for their money back from those perceived to be a lousy credit prospect - and pushing up the cost of credit for almost everyone.

This deleveraging process, which has gone in fits and starts, moved up a gear in the past fortnight, as lenders became increasingly fearful about the outlook for the biggest economy in the world, that of the US.

Borrowers dependent on certain parts of the US economy, especially its ailing housing market, are increasingly perceived as bad risks.

That's what caused the crises last week at Carlyle Capital Corporation and Bear Stearns.

In the coming days you can expect more bad news from financial firms whose sources of finance are drying up.

Now, in many ways deleveraging is a good thing. It's time we learned not to borrow more than we can afford.

The problem is that the process of deleveraging causes pain, and not just to Wall Street firms or wealthy investors.

Mortgage pot shrinking

There's pain for all of us - in the form of less credit, cripplingly expensive credit or a drop in the value of the investments held by the pension funds on which we depend.

Or if a company that's borrowed too much runs into difficulties, well then there's a potential financial cost to its employees.

Even Bear Stearns, primarily a Wall Street firm, employs 2000 people in London.

So is there nothing that governments can do to minimise the dislocation caused by deleveraging?

Well in a way our own government has actually been encouraging deleveraging, by supporting the plan of Northern Rock - the nationalised bank - to shrink its balance sheet by around £60bn.

The impact of that is to cut the amount of mortgage finance available in the UK by up to a fifth.

As for central banks, they increasingly look not like supermen but seven-stone weaklings.

They've been reducing official interest rates, but that's done little to cut the cost of credit for most of us or increase its availability, because banks have taken the opportunity to rebuild their profit margins.

'Dodgy assets'

And what about central banks' new willingness to allow banks to swap financial assets of dubious value for hard cash or liquid government bonds?

Well that may have encouraged lenders to seize dodgy assets from borrowers that are in trouble in order to dump them on a central bank like the New York Fed.

In other words, central banks may inadvertently be accelerating that fateful deleveraging process.

Worse still, perhaps, the cost of longer-term loans is being pushed up, because lenders and investors believe the Fed is devaluing the dollar and stoking up inflation.

As the distinguished economist Joseph Stiglitz has observed, much of central banks' evasive action looks as effective as pushing on a piece of string.


  1. Fateful Choice on Iraq Army Bypassed Debate

    The decision by L. Paul Bremer III to dissolve Iraq’s Army was a reversal from a plan the White House had approved.

    The account that emerges from those interviews, and from access to previously unpublished documents, makes clear that Mr. Bremer’s decree reversed an earlier plan — one that would have relied on the Iraqi military to help secure and rebuild the country, and had been approved at a White House meeting that Mr. Bush convened just 10 weeks earlier.

    The interviews show that while Mr. Bush endorsed Mr. Bremer’s plan in the May 22 meeting, the decision was made without thorough consultations within government, and without the counsel of the secretary of state or the senior American commander in Iraq, said the commander, Lt. Gen. David D. McKiernan. The decree by Mr. Bremer, who is known as Jerry, prompted bitter infighting within the government and the military, with recriminations continuing to this day.

    Colin L. Powell, the secretary of state and a former chairman of the Joint Chiefs of Staff, said he was never asked for advice, and was in Paris when the May 22 meeting was held.
    Mr. Powell, who views the decree as a major blunder, later asked Condoleezza Rice, who was serving as Mr. Bush’s national security adviser, for an explanation.

    “I talked to Rice and said, ‘Condi, what happened?’ ” he recalled. “And her reaction was: ‘I was surprised too, but it is a decision that has been made and the president is standing behind Jerry’s decision. Jerry is the guy on the ground.’ And there was no further debate about it.”

  2. Do you think GWB is beginning to think Iraq was not such a good idea?

  3. Blogger Mətušélaḥ said...

    How do banks get to a situation like this?

    Ever heard of a ponzi scheme?

  4. From my e-mail box this morning, the kind of scheme I'm familiar with. Told her I already had 2 'parsons' at my church--

    Good Morning,

    Am Citizen of United Kingdom , I saw your advert ,am sincerely interested in the advertised , Am planning to come over there & rent from you , I am really interested in Renting from you, Because am planning to stay there for long time Vacation.

    I love traveling, sporting, very dedicated individual who is totally committed to human development, friendly, very trustworthy and value relationship above any thing .I am a laid back parson , enjoy meeting people around the world, I am an easy going parson and like to have a roommate who is very responsible and understanding, someone I can really get along with. I don't smoke but do not mind people who do being around me, I don't have pet as well..

    NOTE : Kindly answer the Question below Thurs :


    Am cool ,Easy going parson and like to have a mate who is very responsible and understanding mate. I've traveled all around the world, I will be 26 yrs old in October 2008 . I'm real motivated to get ahead in life and try new things. Ilike to read, listen to music, shop, and exercise.

    Let me know the Date Available ?

    I will be glad to know the the renting charges per Month with the Security Charges & Utility charges , Am set to make the Payment with Check . I will be making this advance payment ahead my arrival so that you can be rest assured.

    NOTE : I wish to come over and view the place, But am in United Kingdom, So i won't be able to come and view, but there is no problem OK, Am interested in renting , You it will be possible you Reply me with the Total cost you charging with the Security Charges & rent cost per month.

    E-mail me with the Information below for the payment to be send Thurs :

    Name that will be on the check...
    Full Address.....
    Zip Code.........
    Phone #......

    You can also explain to me more about you.
    Thanks you and will await your Urgent Reply.

    Here is My Information .. Thursn:
    23 Mead Close,
    Lincoln, LN6 7LB,UK,England,United Kingdom.
    Phone # : 011447031922972.

  5. It sounds like you've been advertising for a companion there bobal...

    ...I've been meaning to respond to this post of yours yesterday but time has been short:

    bobal said...

    "As for me, Ash, maybe it's because I come from a state that has had so little population, and is booming now, I think with 300 million and rising, it's enough. I've seen a lot of ruination of beautiful places. Sun Valley as an example. Even Las Vegas. Coeur d' Alene, Idaho. I see visions of China and India. More is not better, at his point. Yes, I'm an equal opportunity excluder. Let them build their own societies. I don't think I hate anyone because of their background alone. I hope I don't hate anyone at all, hate being a negative emotion. But.. Enough, already."

    I understand your sentiment especially given my love of nature. Canada has some lovely wilderness still though it is disappearing fast. Where does one draw the lines for the border, for the fence? Shall we wall off Idaho and let no Arizonans in? Canada for Canadians only - all our oil and water will keep us in clover for eons? Shall we wall off America and say no more others?

    One of the problems lie in how we've structured our economy, our society. We are dependent upon growth to perpetuate this ponzi scheme we live in. Social security is but one example of how youth pay for the elders. Once you have more elders then youth you've got a problem. Similarly the leveraged banking system depends upon growth to perpetuate the paying off of each successive loan plus interest. Once growth stops the cascade begins. All of this seems to hinge primarily upon population growth (however productivity certainly plays a part) and immigration is a main driver of population growth in the western world these days. We really need to look to ways to prosper without being so dependent upon growth. Unfortunately it looks like we have a long ways to get there from where we are.

    Free trade has opened up the problem of manufacturing migrating to low wage/cost countries. Either we need to find a way to lower the wages/costs paid to keep manufacturing jobs local, increase the wages/costs of those elsewhere, or migrate to a value added economy, and/or a combination of all three. Building walls for businesses and immigration will stifle growth and cause us much pain. Top down planning hasn't proven to be a good method of running an economy but intelligent regulation can. The free flow of ideas, products and people can help us all bootstrap ourselves to nirvana ;)

    p.s. a side note on health care. Health care is rationed, necessarily. Should ability to pay be the prime force in determining rations? On the battlefield, how do we ration health care for wounded soldiers? Rank? No, through triage.

  6. We really need to look to ways to prosper without being so dependent upon growth.

    Agree with that.
    World calls, later.

  7. 'Mad Money' host drastically underestimated the investment bank's trouble surrounding the mortgage crisis.

    By Jeff Poor
    Business & Media Institute
    3/17/2008 11:13:17 AM

    Hopefully your financial portfolio didn’t include stock in Bear Stearns, but it might have if you had listened to CNBC’s Jim Cramer.

    After it was announced March 16 that J.P. Morgan Chase & Co. (NYSE:JPM) was purchasing Bear Stearns Cos. (NYSE:BSC) for $2 a share, the stock plummeted over 80 percent at the open of trading on March 17.

    But, on March 11, Cramer told an e-mailer not to sell the beleaguered investment bank’s stock on his show’s Web site:

    “Dear Jim: Should I be worried about Bear Stearns in terms of liquidity and get my money out of there? --Peter
    Cramer says: “No! No! No! Bear Stearns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear.”

    On Jan. 17, 2007, Bear was trading at its high of $171.51 a share. Since then, it has been racked by the mortgage turmoil. On March 11, when Cramer posted the e-mail and his response, the stock closed at $62.97. As of 10:00 a.m. on March 17, the stock was trading at $3.72 a share.

    Cramer frequently appears on “NBC Nightly News” and “Today.” On the January 22 “Nightly News,” Cramer was referred to by his colleague Carl Quintanilla as “one of the most influential voices on Wall Street.”

    On the “Today” show March 17, Cramer maintained that “if you’re a diversified investor, you’re not going to get hurt” by the Bear Stearns collapse. “Those who only had their money in Bear obviously will get wiped out today. But you most importantly don’t have to take your money out of a bank,” he said.

  8. From Dennis Perrin:

    "Jeremiah Wright's supposedly inflammatory statements about 9/11 and the ongoing specter of racism are uncontroversial to those following the real world. We live in horrific, corrupt times, and while I don't agree with everything Wright says, he's certainly not speaking fiction, primarily when it comes to American foreign policy. We are hated not so much for our freedoms, such as they are, but specifically for our mass murder, our torture, our occupations. There are other, cultural elements that are part of the overall mix, yet they are doubtless secondary to those seeking refuge from our cluster bombs and client armies. Wright's sermons about reaping what you sow is nothing new, especially in the Christian tradition. But to hear cable chatters and assorted reactionaries tell it, such time-honored concepts don't apply to the United States. The God who watches over us and guides our trigger-happy hand excuses any and all slaughter committed in His Holy Name. He wouldn't have endorsed that song about how He blesses us were the opposite the case."

  9. Stiglitz is wronglitz.

    As you guys know, I haven't been a big booster of the Fed in the past; but, they're handling this pretty well, right now.

    We might see One More shoe fall, but (and, I've been waiting awhile to make this call) I think this deal is just about to wrap up.

    I would be a little nervous right now if I had a wad of Merril Lynch stock, or Lehman, but, other than that, this is starting to look like a pretty good time to buy the broad indexes.

    Be cautious about getting TOO WRAPPED UP in Energy at this point; there's a whole lot of oil that is "SUPPOSED" TO come online in the next couple of years (after that, Nothing) and, if it materializes (a medium to long shot, I'll admit) oil could fall like a rock.

    On the other hand, if it doesn't we could, easily, be looking at $140.00 oil by the end of the year. Looking for that One-Armed Economist, again, ain't we.

    In any case, by 2011 the Jig's Up, and there just ain't no telling what the price of oil will be. Don't bet AGAINST Anything.

  10. Do you think GWB is beginning to think Iraq was not such a good idea?

    Mon Mar 17, 07:47:00 AM EDT

    Oh, I think he's probably had that thought for years.

    Circumstances being what they are (and boy are they) he probably will not get credit, any time soon, for the actual, if limited, defense policy achievement of his administration: He got AQ to keep their heads down.

    And there's a question worth asking each and every one of the current candidates for the WH: How is it, exactly, that that state of affairs was brought about?

  11. If we really are at the bottom now why would the fed be in such a panic to backstop the Bear deal? I wish you were right rufus, but no, I think there are a load of shoes waiting to drop, or dominoes all set to topple for another idiom. You know you've got to worry when the Secretary of the Treasury is going around to all the news shows on a Sunday after working a deal with the fed to backstop to the tune of 30 billion one company taking over another saying "Trust me, our capital markets are strong".

  12. I dunno 'bout that trish. He's been so happy, serene, and relaxed these days it's almost as if someone "up there" had whispered in his ear.

  13. Maybe the Missus has been going the extra mile.

  14. When all was said and done that day, Obama rallied from an earlier deficit to take the lead with 14 delegates heading to Des Moines. Clinton garnered 12 delegates, and Edwards finished with eight.

    The lengthy platform is likely available from any Democratic party officer, but two new planks were added and approved by the minimum two-thirds (88 people) majority.

    The delegates agreed any emergency responder has to be trained as a first responder. In the area of agriculture, all new construction of hog or livestock confinement areas or expansion thereof will cease until further regulations are passed.

    Edwards' Delegates

  15. That's disgusting Trish, and beneath the dignity of the office, depending on preferences, of course.
    (I've never totally bought in to W's Missionary Shtick.) to speak.
    Mo Dowd provides all the answers in her latest, and W. I think, runs on his own secret formula of Happy Juice.
    The ever dull and predictable Gail Collins even produces a dollup of levity on the subject.
    Dark Humor, of course.

  16. We would like to nominate you for a Best of Blog Entry.

    Please visit our site at: to submit your blog entry!

    Benefits include:
    1) Permanent Backlinks to your blog
    2) Fully SEO optimized for maximum exposure
    3) A chance to be published into a top 500 best of blog book"