From the piece:

Colombian government officials declared a state of emergency Monday, boosting their powers of arrest and money seizure, to help deal with multimillion-dollar investment scams that have targeted mostly poor investors.

I mean, wow. Rioting and a state of emergency? Just think about what would happen here if people took to the streets hardcore like that. Chaos. This also brings to light the problem that smaller countries have with enforcement of laws and even creation of laws surrounding financial protections for consumers. Let’s take a look at the Heritage Foundation’s Economic Freedom report for Colombia, specifically the Financial Freedom section:

Colombia’s financial sector is relatively large and sophisticated. Banking has undergone significant consolidation and privatization since the 1998–1999 financial crisis. The government has strengthened regulations and seized some banks for falling below solvency requirements. As of December 2006, there were 17 commercial banks: 11 domestically owned and six foreign-owned; one is state-owned. All financial institutions nationalized during the crisis were privatized or liquidated by mid-2006 except for the state-owned Granbanco-Bancafé. Foreign companies are prominent in the insurance sector, and competition has intensified since 2003. The informal credit market is extensive. Foreign investors face few restrictions in small equity markets, and renewed enthusiasm for investing in developing markets has stimulated foreign investment in Colombian equities.

Looks good, right? Until you read the corruption index below it:

Corruption is perceived as significant. Colombia ranks 59th out of 163 countries in Transparency International’s Corruption Perceptions Index for 2006. Despite significant advances in fighting corruption, criminal narcotics organizations influence the military and the lower levels of the judiciary and civil service.

Not so great. Developing countries still have a long way to go in terms of removing corruption, which I’m about 99% sure led to the current crisis they are having. SOMEONE must have known what was going on in government. People in the American government sure knew what was going on during the past few years, nobody did anything because the good times kept rolling. When they stopped, just like when Colombia’s did, problems emerged.

Grilled by lawmakers examining the causes of the financial crisis, former Federal Reserve Chairman Alan Greenspan on Thursday admitted some mistakes in assumptions about deregulation while rejecting the idea that he is personally responsible for what he termed a “once-in-a-century credit tsunami.”

Hm, so it must have been that other federal reserve board chair that lowered rates to 1% after the dot com bubble burst, allowing banks access to easy money, which they in turn lent back out to anyone and everyone, even the people that shouldn’t have been able to get a loan. Hmph. Funny how all the different Greenspan’s out there all seem to be involved in finance.

New York Times Op-Ed columnist Thomas Friedman uses his latest op-ed to connect the tragedy of Iceland’s banking system with his theories on the flat world, and hits the nail perfectly on the head. As he begins:

If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like Icesave.co.uk

This is one of the most interesting aspects of the crisis in Iceland – that so many British citizens, and public entities had large deposits in Icelandic banks, and upon hearing about the crisis they all begun attempting to withdraw funds at once. This, of course, rendered the banks unable to continue operations due to the wonderful world of fractional reserve lending.

As Friedman later discusses:

The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.

Then the idea of the world being flat can really be seen clearly, and Friedman makes his main point:

And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.

At first, I read this and realized with horror that he was correct – a global interconnected financial system with trillions of dollars being traded back and forth in currency, derivative, stock, bond, and who knows what else markets every day. However, upon contemplating the danger of the utter lack of regulation, one is brought back to the standard “How much regulation is acceptable or not?” question.

In response to that, many European leaders have joined together to call for a “new economic order”, without explicitly discussing what that would mean. There is also the obstacle of a US lame-duck president not feeling any immediate pressure to respond to a call for new sets of regulations on the financial industry. The bottom line is that billions of dollars in transactions every day occur without regulation (think credit default swaps) and to assure the long term stability of the economy some new regulation is needed. The only question is how much, and how long after the new regulations are in place will the companies being regulated find a way around the regulations, and thus start the never ending cat and mouse game all over again…

What do you think?

The indictment also alleges the two men concealed the fact that one of the largest investors in the hedge funds wanted out and sought to withdraw some $57 million in April. Authorities say the pair repeatedly told investors to put more money into the fund and withheld information about redemption requests. Tannin allegedly told investors on more than occasion that he was putting more of his own money into the funds, even though he never did. On May 3, Tannin told one of the hedge funds’ bank lenders he doesn’t anticipate any large redemptions.

Ouch. Sounds pretty bad. Lied, manipulated people, all that jazz. Not a nice person – but then again I wonder if this sort of thing happens more than we’d think. I’ll leave you with this quote from the end of the article, which I often find contains the article writer’s true feelings about what happened (and in this case my feelings are mirrored with the authors)

Ross Intelisano, an attorney who represents a number of hedge fund investors, says: “These are the first criminal indictments related to the subprime debacle and it’s fitting that Cioffi and Tannin who helped trigger the crisis are the first ones indicted.”

The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

That is such a key point I cannot overstate it. The Federal Reserve, contrary to what you might think, is actually a consortium of mostly privately owned banks making decisions affecting the monetary policy of the United States. I recommend thoroughly reading through the Wikipedia article I linked to to gain a real understanding of how the system actually works, and how every single dollar printed by the reserve is actually loaned to the United States Government.

When the interest rate is cut it tends to both increase inflation and decrease the value of the dollar, and that is precisely what is happening. If one takes a look at the Consumer Price Index, it is clear that inflation has been steadily increasing. According to the Department of Labor’s statistics, the Consumer Price Index has risen by 4% over the past year. The Euro has risen from being worth around $1.33 a year ago to $1.56 today.

Things are bad, but they could be worse. The Fed needs to hurry up and slow down. Try keeping interest rates at least stable for a little while longer, which will hopefully reinvigorate the dollar and keep inflation low. This will allow the American consumer to retain some of its spending power. It’s going to be a rough 2008 but let’s ride the rapids, hang on tight, and hope for the best! Till next time!

U.S. institutional investors pledged at a U.N. summit on Thursday to invest $10 billion over two years in technologies that aim to reduce greenhouse gas emissions and to pressure companies to disclose their risks associated with climate change.

This is a big deal for many reasons, but especially because so many old time U.S. companies whose destiny sat on producing so-called dirty energy such as nuclear, coal, and gas, repeatedly made claims that renewable energy simply was not cost effective enough to make sense. Remember, in a society as capitalistic as America, the key to convincing anyone to do anything is properly explaining that there is money to be made. The reason dirty energy companies are able to continue making money is due to the huge energy subsidies the federal government pays them every year. These companies then give huge campaign contributions to both major political parties, thus ensuring the continuation of the cycle. For instance, as reported by Public Citizen, over $6 billion in oil and gas subsidies were given in the energy bill passed in 2005. $9 billion in subsidies to coal companies and $12 billion in subsidies to nuclear energy companies complete the circle of doom.

Since the federal government is clearly not giving this kind of money to renewable energy suppliers, such as wind and solar energy producing companies, they cannot price their products as cheaply as the oil, natural gas, and nuclear power companies do. This problem must then be solved by private investment, which is exactly what this United Nations summit is trying to do. As the article mentions in the end,

“Some analysts have said green technologies like solar power, ethanol and biodiesel are forming an investment bubble that could soon pop.”

The key to making money off this is finding the when and the where and the how, but as many people have come to recognize that global warming is indeed a serious issue for the planet, seeing that $10 billion being invested in potential solutions (or at least ways to slow down the destruction) should motivate companies looking to grab a piece of the pie just work just a little bit harder. Or maybe a lot harder.

the Bush administration hopes that it can help more than half of the two million homeowners who took out adjustable-rate subprime loans with payments due to move sharply higher soon by offering some of them a five-year mortgage-rate freeze.

How nice of the Bush administration to hope! The idea to freeze some of the rates before they reset is a good idea, so that should help those of you out there stuck with a loan about to reset to a much higher interest rate, and therefore a much higher monthly payment. The article further explains that some $367 Billion with a B worth of mortgages are set to reset within the next two years. That number is truly mind-boggling. Now when you read the next quote keep in mind Bush said he hoped to help more than half of the 2 million homeowners… in my mind when someone says more than half of 2 million it’s at least 1 million or more. So let’s listen to Mr. Zandi:

“In theory, the plan could help as many as 750,000 subprime homeowners,” said Mark Zandi, chief economist for Moody’s Economy.com. “In practice, my sense is that it will probably help at best about 250,000 homeowners.”

250,000?? Seems like a lot of people are going to be left out. I bet those living above the poverty line but still really having trouble paying the mortgage are going to be stuck. That means there’s still going to be hundreds of thousands of people making the choice between eating or paying the mortgage. Not a pleasant thought. I understand that some of these people shouldn’t have been thinking about homes, but when they walked in to sign the loans everybody around them was smiling and patting them on the back. As the Reuters article states, the devil is in the details. Those words of wisdom apply in many more situations than just home loans.

And, my favorite quote of the Reuters article:

Some on Wall Street worried they would be forced to accept mortgages rewritten in the borrowers’ favor.

No attribution, but let’s all collectively say “aww, poor Wall Street billionaires” in our most sarcastic tones. I mean seriously you guys.

UPDATE: Details of the plan are now out. Check out my man Mish’s most excellent post on the subject!

My favorite discussion about the cut was on John Stewart’s excellent Daily Show on the Comedy Central network. Stewart had the notorious former federal reserve chairman Alan Greenspan on. Alan was hitting all the big talk shows in the hopes of pushing up the sales numbers of his new book, but Stewart makes a wonderful point a few minutes into the interview, which was:

When you lower the interest rate and therefore drive up the price of stock, you then lower the rate of return received by people who have savings account. You could look at this interest rate cut as favoring those who have invested stocks and not favoring those who have invested their money in banks.”

Greenspan agreed that it certainly looked that way, and I thought that really said something important. Honestly this was somewhat of a breath of fresh air into a market unsure of itself. Now current Fed chairman Bernanke did what he thought was the right thing.. but for who? For those corporations facing hardship because the housing crisis? The everyday American citizen? The hedge funds who own most of the stock market? Since most Americans have trouble saving anything at all (see American Savings Lowest Since Depression), what they do save is put into banks so it can be easily taken out in case of a crisis. To me this represented a bailout of the major wall street players who needed to take a deep breath after losing so much money in the first part of this year. Of course I am invested in the stock market (through no load index funds) and I managed to benefit a little myself, but what’s the problem with that? A guy makes a little money and everyone starts to point the finger at him. Sheesh.

Again, just my opinion, but I feel like the Fed chairman did what so many other branches of government routinely do: give more assistance to the rich, well to-do, corporations, and the people who represent the power brokers while ignoring the needs of the impoverished American citizens. Our current system of government favors those who have money, can make campaign contributions, and otherwise exert their influence through their wealth. That’s a whole different blog post though. Till next time, remember that only you can put out forest fires. And start saving money today!

Northern Rock is Britain’s fifth biggest mortgage lender, but customers on both sides of the Irish Sea began to withdraw savings en masse after the Bank of England bailed out the bank. The level of withdrawals was high, with a reported £1 billion taken out.

The bank has been promised money by the Bank of England, but that still did not help calm nervous customers. The reason behind all of the mess? Yes, you guessed it, the collapse of the subprime mortgage market in the United States. Somehow, someway, the subprime debacle still manages to unsettle financial markets worldwide. In this case, the bank was unable to raise sufficient cash to cover all its positions after the credit market was tightened due to the subprimes.

Northern Rock relied on capital markets over customer deposits more than most banks for its financing, and that policy decision came back to bite the bank. (in a big way. ouch.)Estimates are running between 3 and 4 billion with a B dollars having been withdrawn from the bank within the past week alone. Not only that, but shares in Northern Rock’s stock dropped 40% and then spread fear over to other banks like Llyod’s of London.

The lessons I would draw from reading about this would be: never trust any one bank to “do the right thing”. Spread your cash across multiple institutions and therefore protect yourself from the failure of any one bank or agency. In the United States, your deposits are FDIC insured only up to $100,000. Beyond that and you should split the amount up anyway just for your own protection. (Think it can’t happen here… you’re wr-o-ng)

** UPDATE: Now, even the New York Times has run a story on the impending demise of the bank. Now that the mainstream media has picked up the story, just watch everyone scramble to their computers to look up what they just read through the Times or heard on T.V. I just wish sometimes it would be the other way around.

Second, we all knew this day had to come eventually. The labor department released the new jobs figures for August, and lo and behold, employers eliminated 4,000 jobs in August. The New York Times article also has some very alarming quotes, including the classic doomsday prediction:

“If the economy is not headed toward recession, it is very close to one,” said Mark Zandi, chief economist at Moody’s Economy.com.

Wow. Well, Mr. Zandi sure thinks the worst is around the bend. That quote doesn’t make any sense to me though – I hope the writer merely mistook some of Mr. Zandi’s words. How can the economy be very close to a recession but at the same not not be headed towards one? Is it just going to spring up and bite me in the behind when I’m not looking? Only time will tell, I suppose.

Want another choice quote? Coming right up:

Not only did today’s report show that there was no job growth last month, but it also found that the job market was significantly weaker in June and July than the government first reported. Revisions to earlier jobs reports showed that 81,000 fewer jobs were created than initially estimated.

So estimates are wrong? Who would have thought? Me, for one. But apparently the one-two punch of the end of uninterrupted job growth and the revisions to estimates showing far fewer jobs created in previous months than first assumed led to some blood shedding on Wall Street today. The Dow Jones is off more than 222 points, Nasdaq is off 50, and the S&P is off 22. All things considered, it could have been much worse. To be honest, I’m not afraid of a stock pullback. That may have something to do with the fact that I still have 30+ years until retirement, so cheaper stocks now is the equivalent of a fire-sale for me. I’m planning on holding my investments for a very long time. Those of you with retirement looming over the next few years may have more than your fair share of nail biting moments, but the last few years should have fattened up your retirement accounts enough to lessen the blow.

All this has led many to pontificate on where the Fed will be taking the interest rate:

Investors and economists are widely expecting the Fed to lower its benchmark interest rate by a quarter-point, to 5 percent, at its next meeting. Some economists said the August employment report raises the chances of a second rate cut this year, or a half-point reduction at the next meeting. And traders in the futures market are predicting that the Fed will cut the rate to 4.5 percent by the end of the year.

Will the Interest Rate move from 5.25% to a flat 5%? Will the economy move into a recession? Stay tuned, my friends, for another edition of “As the US Economy Turns”.

UPDATE: For an in-depth report of just how bad this job report was, check out this post over at the excellent blog Mish’s Global Economic Trend Analysis: Moonbats Active Again in Massive Jobs Disaster