In this revealing study of a Southside Chicago neighborhood, sociologist Venkatesh opens a window on how the poor live. Focusing on domestics, entrepreneurs, hustlers, preachers and gangs linked in an underground economy that “manages to touch all households,” the book reveals how residents struggle between “their desires to live a just life and their needs to make ends meet as best they can.” In this milieu, African-American mechanics, painters, hairdressers, musicians and informal security guards are linked to prostitutes, drug dealers, gun dealers and car thieves in illegal enterprises that even police and politicians are involved in, though not all are criminals in the usual sense. Storefront clergy, often dependent “on the underground for their own livelihood,” serve as mediators and brokers between individuals and gang members, who have “insinuated themselves—and their drug money—into the deepest reaches of the community.” Although the book’s academic tenor is occasionally wearying, Venkatesh keeps his work vital and poignant by using the words of his subjects, who are as dependent on this intricate web as they are fearful of its dangers.

2. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

Economics is not widely considered to be one of the sexier sciences. The annual Nobel Prize winner in that field never receives as much publicity as his or her compatriots in peace, literature, or physics. But if such slights are based on the notion that economics is dull, or that economists are concerned only with finance itself, Steven D. Levitt will change some minds. In Freakonomics (written with Stephen J. Dubner), Levitt argues that many apparent mysteries of everyday life don’t need to be so mysterious: they could be illuminated and made even more fascinating by asking the right questions and drawing connections. For example, Levitt traces the drop in violent crime rates to a drop in violent criminals and, digging further, to the Roe v. Wade decision that preempted the existence of some people who would be born to poverty and hardship. Elsewhere, by analyzing data gathered from inner-city Chicago drug-dealing gangs, Levitt outlines a corporate structure much like McDonald’s, where the top bosses make great money while scores of underlings make something below minimum wage. And in a section that may alarm or relieve worried parents, Levitt argues that parenting methods don’t really matter much and that a backyard swimming pool is much more dangerous than a gun. These enlightening chapters are separated by effusive passages from Dubner’s 2003 profile of Levitt in The New York Times Magazine, which led to the book being written. In a book filled with bold logic, such back-patting veers Freakonomics, however briefly, away from what Levitt actually has to say. Although maybe there’s a good economic reason for that too, and we’re just not getting it yet.

3. Ragnar’s Guide to the Underground Economy

Through detailed case studies Ragnar shows you how carpenters, woodcutters, farmers, housecleaners, computer consultants, mechanics, lawyers, vendors, locksmiths and others are cashing in on today’s booming economy - and keeping what they earn by not paying taxes. From these undergrounders you’ll learn how to locate work, get paid without supplying identifying numbers, prepare a realistic budget, advertise your services or product and finance your project when you can’t go to the bank. You’ll also learn the pitfalls of working off the books and what you can do to prepare for them.

4. How to Survive Without a Salary: Learning How to Live the Conserver Lifestyle

I thought that this book was so funny in places that I haven’t laughed so hard, so much, for a long time. Charles is a skilled writer; the book is very readable, intelligent, thoughtful,and well organized. It contains a copious (even prodigious) amount of tips, for a 200-page book. Very practical, and at the same time touches on abtruse philosophical areas, especially at the end of the book.

Hey, I used to think I was cheap. This guy is CHEAP. His anecdotes include waiting for it to rain to take a shower instead of installing indoor plumbing. He had a big hole in the floor of his entryway, or somewhere in his house, into which the kids and a few guests fell. He refused to spend one cent covering the hole, until a neighbor told him about a steel grate they threw away years ago, so he went to the dump and found it.

The point is that you can learn from a top-notch “conserver”; an applied example I would give is to buy two gallons of milk when it’s on sale and freeze one for later use (works well!). This guy probably drinks powdered milk though.

I disagree with his economic analysis; prudence CAN be a vice, as any virtue most certainly is in its extreme, or even overdone. But Adam Smith’s Wealth of Nations is not just about “McPimple Burger” or keeping up with the Joneses. Any system on a mass scale is going to have gaping faults, and the weaker of us might succumb to our basest impulses. But perhaps Long goes a bit too far the other way…

At any rate, he sounds like an economic anarchist. Very well thought out book, great advice.

5. Gang Leader for a Day: A Rogue Sociologist Takes to the Streets

In Freakonomics, many people were fascinated by a section that described how most crack cocaine dealers lived at home with their mothers. Why? They make less money than minimum wage. The source of that factoid was research conducted on site by Sudhir Venkatesh, author of Gang Leader for a Day, who describes in this book how he did that research and came to make decisions one day for part of the Black Kings gang in Chicago.

In the process of reading this book, you’ll learn more than you ever expected to know about the ways that the poorest people support and protect themselves. You’ll also find how drug-dealing gangs are both a help and a hindrance to the poor.

More powerfully, you’ll be exposed to the great difficulties involved in observing the lives of the poor and the gangs that spring from them. The moral and ethical dilemmas this book presents are almost beyond belief.

6. Under the Table and Into Your Pocket: The How and Why of the Underground Economy

Under The Table And Into Your Pocket: The How And Why Of The Underground Economy by Bill Wilson will provide the non-specialist general reader with a complete education on a facet of the American economy rarely (if ever) covered in school. Beginning with an introduction to just some of the ways governmental regulations strangle business, overtax the little guy, and enable Washington to be the drunken big spender that it is today (if you overpay your taxes by $7,000 and don’t reclaim it within three years you’re out of luck - but underpay it by $7,000 and the IRS can and will come after you no matter how much time has passed!), Under The Table proceeds to demonstrate how the little guy can circumvent taxes by doing business away from Big Brother’s prying eyes. From boarding houses and flea markets to roadside merchants and dominatrix work, Under The Table covers the benefits, disadvantages, tips, tricks, techniques and much more of common underground ways to earn a living. Under The Table is emphatically not a legal guide; neither the author nor the publisher assume any responsibility for the use or misuse of information contained within - but the eye-opening ins and outs of a truly free economy make for quite fascinating and advantageous reading.

7. Deep Inside the Underground Economy: How Millions of Americans are Practising Free Enterprise in an Unfree Economy

Are you fed up with giving so much of your hard earned cash to the government, then watching it get spent on ridiculous pork-barrel special-interest projects? Would you like to hold on to more of your money for your own special-interest boondoggles? The underground economy continues to grow in spite of ever-widening atttempts by the government to regulate and tax everything we do. Millions of Americans are practising fee enterprise in today’s increasingly unfree tax society. This is the most comprehensive how-to book ever written for those entrepreneurial individuals who have decided to end their slavery to a wage and to government taxation as well. Discover how you can keep more of what you earn for yourself. Here you will find complete and up-to-date information on the ins and outs of guerrilla capitalism and the underground economy in this country.

8. Empire of Scrounge: Inside the Urban Underground of Dumpster Diving, Trash Picking, and Street Scavenging.

In December of 2001 Jeff Ferrell quit his job as tenured professor, moved back to his hometown of Fort Worth, Texas, and, with a place to live but no real income, began an eight-month odyssey of essentially living off of the street. Empire of Scrounge tells the story of this unusual journey into the often illicit worlds of scrounging, recycling, and second-hand living. Existing as a dumpster diver and trash picker, Ferrell adopted a way of life that was both field research and free-form survival. Riding around on his scrounged BMX bicycle, Ferrell investigated the million-dollar mansions, working-class neighborhoods, middle class suburbs, industrial and commercial strips, and the large downtown area, where he found countless discarded treasures, from unopened presents and new clothes to scrap metal and even food.

9. McMafia: A Journey Through the Global Criminal Underworld

In McMafia, Misha Glenny draws the dark map that lies on the other side of Tom Friedman’s bright flat world. That connected globe not only brings software coders and supply-chain outsourcers closer together; it’s also opened the gates to a criminal network of unsettling vastness, complexity, and efficiency that represents a fifth of the earth’s economy, trading in everything from untaxed cigarettes and the usual narcotics to human lives and nuclear material. Glenny’s a Balkans expert, and he begins his story there, with the illicit–but often state-sponsored–underworld that grew out of the post-Soviet chaos, but he soon follows the contraband everywhere from Mumbai and Johannesburg to rural Colombia and the U.S. suburbs. It’s not just a hodgepodge of scare clips, though: Glenny reports from the ground but follows the leads as high as they go, showing how the dark and bright sides of the flat world are more connected than we imagine.

10. Living Well on Practically Nothing

Living Well on Practically Nothing: Revised and Updated Edition is for people who need to live on a lot less money. If you have been fired, demoted, retired, divorced, widowed, bankrupted or swindled - or you just want to quit your job and remain financially self-reliant - this book is for you. In it are hundreds of tips, secrets and necessary skills for living well on little money. Chapters include: Save Up to $37,000 a Year and Live on $12,000 a Year; Low-Cost Computers for Fun, Profit, and Education; Some Ways to Live on No Money at All; A Day of Cheap Living; A New Career or Business for You; Fix Things and Make Them Last; and Protect Your Investments and Make Them Grow. From cover to cover, this book is stocked with proven methods for saving money on shelter, food, clothing, transportation, entertainment, health care and more. The author left the “system” in 1969 and has worked for himself ever since. Let him show you how you, too, can live happily, comfortably and with complete financial freedom.

P.S. If you’d like to know how I make my money (it’s not really “shadow” or illegal at all, but it give me freedom to do anything I want to, while providing steady stream of income), feel free to check out my websites - PickyDomains.com, NicheGeek.Com, StandupKings.com, SoftwareJudge.Com, Best Free Documentaries.

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Due to the lifting of the foreclosure moratorium at the end of March, the downward slide in housing is gaining speed. The moratorium was initiated in January to give Obama’s anti-foreclosure program—which is a combination of mortgage modifications and refinancing—a chance to succeed. The goal of the plan was to keep up to 9 million struggling homeowners in their homes, but it’s clear now that the program will fall well-short of its objective.
In March, housing prices accelerated on the downside indicating bigger adjustments dead-ahead. Trend-lines are steeper now than ever before–nearly perpendicular. Housing prices are not falling, they’re crashing and crashing hard. Now that the foreclosure moratorium has ended, Notices of Default (NOD) have spiked to an all-time high. These Notices will turn into foreclosures in 4 to 5 months time creating another cascade of foreclosures. Market analysts predict there will be 5 MILLION MORE FORECLOSURES BETWEEN NOW AND 2011. It’s a disaster bigger than Katrina. Soaring unemployment and rising foreclosures ensure that hundreds of banks and financial institutions will be forced into bankruptcy. 40 percent of delinquent homeowners have already vacated their homes. There’s nothing Obama can do to make them stay. Worse still, only 30 percent of foreclosures have been relisted for sale suggesting more hanky-panky at the banks. Where have the houses gone? Have they simply vanished?
600,000 “DISAPPEARED HOMES?”
Here’s a excerpt from the SF Gate explaining the mystery:
“Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.
“We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,” said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. “California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.”
In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as “shadow inventory.” (”Banks aren’t Selling Many Foreclosed Homes” SF Gate)
If regulators were deployed to the banks that are keeping foreclosed homes off the market, they would probably find that the banks are actually servicing the mortgages on a monthly basis to conceal the extent of their losses. They’d also find that the banks are trying to keep housing prices artificially high to avoid heftier losses that would put them out of business. One thing is certain, 600,000 “disappeared” homes means that housing prices have a lot farther to fall and that an even larger segment of the banking system is underwater.
Here is more on the story from Mr. Mortgage “California Foreclosures About to Soar…Again”
“Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season…Foreclosure start (NOD) and Trustee Sale (NTS) notices are going out at levels not seen since mid 2008. Once an NTS goes out, the property is taken to the courthouse and auctioned within 21-45 days….The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium.”
JP Morgan Chase, Wells Fargo and Fannie Mae have all stepped up their foreclosure activity in recent weeks. Delinquencies have skyrocketed foreshadowing more price-slashing into the foreseeable future. According to the Wall Street Journal:
“Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can’t meet their loan payments, up from about 1.7 million in 2008.” (Ruth Simon, “The housing crisis is about to take center stage once again” Wall Street Journal)
Another 20 percent carved off the aggregate value of US housing means another $4 trillion loss to homeowners. That means smaller retirement savings, less discretionary spending, and lower living standards. The next leg down in housing will be excruciating; every sector will feel the pain. Obama’s $75 billion mortgage rescue plan is a mere pittance; it won’t reduce the principle on mortgages and it won’t stop the bleeding. Policymakers have decided they’ve done enough and are refusing to help. They don’t see the tsunami looming in front of them plain as day. The housing market is going under and it’s going to drag a good part of the broader economy along with it. Stocks, too.

[Via - Mike Whitney]

Screwed: The Undeclared War against the Middle Class and What We Can Do About It

Not Keeping Up With Our Parents: The Decline of the Professional Middle Class

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1. Million Dollar Homepage

1000000 pixels, charge a dollar per pixel – that’s perhaps the dumbest idea for online business anyone could have possible come up with. Still, Alex Tew, a 21-year-old who came up with the idea, is now a millionaire.

2. PickyDomains

Hire another person to think of a cool domain name for you? No way people would pay for this. Actually, naming domain names for others turned out a thriving business, especially, when you make the entire process risk free. PickyDomains currently has a waiting list of people who want to PAY the service to come up with a snappy memorable domain name. PickyDomains is expected to hit six figures this year. Full Story

3. Doggles

Create goggles for dogs and sell them online? Boy, this IS the dumbest idea for a business. How in the world did they manage to become millionaires and have shops all over the world with that one? Beyond me.

4. LaserMonks

LaserMonks.com is a for-profit subsidiary of the Cistercian Abbey of Our Lady of Spring Bank, an eight-monk monastery in the hills of Monroe County, 90 miles northwest of Madison. Yeah, real monks refilling your cartridges. Hallelujah! Their 2005 sales were $2.5 million! Praise the Lord. Full Story

5. AntennaBalls

You can’t sell antenna ball online. There is no way. And surely it wouldn’t make you rich. But this is exactly what Jason Wall did, and now he is now a millionaire. Full Story

6. FitDeck

Create a deck of cards featuring exercise routines, and sell it online for $18.95. Sounds like a disaster idea to me. But former Navy SEAL and fitness instructor Phil Black reported last year sales of $4.7 million. Surely beats what military pays.

7. PositivesDating.Com

How would you like to go on a date with an HIV positive person? Paul Graves and Brandon Koechlin thought that someone would, so they created a dating site for HIV positive folks last year. Projected 2006 sales are $110,000, and the two hope to have 50,000 members by their two-year mark.

8. Designer Diaper Bags

Christie Rein was tired of carrying diapers around in a freezer bag. The 34-year-old mother of three found herself constantly stuffing diapers for her infant son into freezer bags to keep them from getting scrunched up in her purse. Rein wanted something that was compact, sleek and stylish, so in November 2004, she sat down with her husband, Marcus, who helped her design a custom diaper bag that’s big enough to hold a travel pack of wipes and two to four diapers. With more than $180,000 in sales for 2005, Christie’s company, Diapees & Wipees, has bags in 22 different styles, available online and in 120 boutiques across the globe for $14.99.

9. SantaMail

Ok, how’s that for a brilliant idea. Get a postal address at North Pole, Alaska, pretend you are Santa Claus and charge parents 10 bucks for every letter you send to their kids? Well, Byron Reese sent over 200000 letters since the start of the business in 2001, which makes him a couple million dollars richer. Full Story

10. Lucky Wishbone Co.

Fake wishbones. Now, this stupid idea is just destined to flop. Who in the world needs FAKE PLASTIC wishbones? A lot of people, it turns out. Now producing 30,000 wishbones daily (they retail for 3 bucks a pop) Ken Ahroni, the company founder, expects 2006 sales to reach $1 million.

To see other businesses that have not made the top 10 list but came pretty close, visit Uncommon Business Ideas Blog

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Just seven months ago, hundreds of mega-millionaires, including Ralph Lauren and David Geffen, were elbowing one another in the lineup to buy a $60 million Gulfstream G650, which was not expected to hit runways until 2012.

It did not matter that $500,000 had to be wired to Gulfstream’s account at a Midwest branch of JPMorgan Chase at exactly 12:01 a.m. on April 15, or that bidders who secured a place in the waiting line could not sell their rights if they changed their minds, according to one bidder.

Some eager moguls even tried to improve their chances of getting a jet quicker by opening accounts at Chase’s Midwest office. Among high-ticket status symbols, “me and my brand new jet” was it.

But that was another era — before the credit crisis and before billions of dollars in corporate and individual wealth were lost.

“The jet market stinks,” said Richard Santulli, the chief executive of Netjets, the private jet company owned by Berkshire Hathaway, the holding company led by Warren E. Buffett.

To control costs, companies including Citigroup and Time Warner are selling their jets. Alcatel-Lucent has allowed leases on two jets to expire without renewing them and has put its third jet up for sale.

And the public relations fiasco that engulfed the chief executives of Detroit’s automakers when they flew to Washington on company planes to seek a government bailout has underscored how inappropriate such travel can seem in this recession.

General Motors, which leases seven planes, put the majority of them on the market before the government said it must do so as a condition of government assistance. The automaker has also closed its air transportation services unit, which had 49 employees.

“We could not justify an in-house aircraft operation,” a G.M. spokesman, Tom Wilkinson, said. “We are negotiating to transfer the remaining planes to another operator. Ford too has shut down its flight department.”

Jet brokers, who normally have a worldwide clientele, say the market has constricted abroad in recent months as well.

“Our inventory is up dramatically, and demand is way down,” said Josh Messinger, of J. Messinger Corporate Jet Sales, a jet broker. “The decline is particularly pronounced for those who bought more recently because prices had soared so much.”

“I spent a week in Dubai, and the front page of the paper there had articles every day about their economy having issues due to real estate issues,” he said.

Mr. Santulli said that the Russians had been big buyers of jets.

“But the fall of the Russian stock market has had a huge impact,” he said. “The Indian stock market stinks, and the dollar has gotten stronger, which hurts airplane sales.”

Because jets are priced in dollars, they become more expensive for foreigners as the dollar gets stronger.

Among jets, the large-cabin, long-range segment of the market is suffering the most, said Bill Quinn, director of aircraft sales and acquisitions at Cerretani Aviation, based in Boulder, Colo. That includes planes from Gulfstream, Bombardier and Falcon.

Carrying costs are high. A Gulfstream G550 costs about $47 million. Though expenses can vary by state, one mogul’s business manager estimated that annual costs run about $1.3 million, including $500,000 for property tax and $400,000 for pilots and stewards. Typical operating costs are more than $2,000 an hour in the air, he said.

The corporate side of the business is particularly vulnerable because of public scrutiny. “They are not going to do employee layoffs and keep the jets,” said Mary Hevener, a tax adviser who specializes in executive compensation at Morgan Lewis & Bockius.

Besides, Congress stripped away the deductibility of personal travel for executives in 2004 by allowing companies to deduct from taxes only the rough amount of a first-class ticket, far less than private jet travel costs.

Corporate chiefs concerned about public scrutiny are more inclined to look for alternatives than to return to the airlines. Some are examining whether they should take delivery of planes already ordered. One company had been looking to upgrade its two planes. “Now they are weighing whether or not to buy new planes or keep what they have,” Mr. Quinn said.

Some are downsizing. “Some of these guys just move the deck chairs around,” he said. “They get rid of the big planes and go to fractional ownership, or they go to charter, or they come back into the marketplace with a leased plane,” he said.

But every part of the private jet industry has been affected. Netjets lets people buy a fractional ownership in planes, and it sells Marquis jet cards that give customers access to the fleet in 25-hour increments. Those businesses, too, are seeing a slowdown.

“People have lost a lot of money, and are careful about how they spend it,” Mr. Santulli said.

“I have never seen it like this,” said Mike Silvestri, the chief executive of Flight Options, which sells shares in jets as well as plans that cover a fixed number of hours a year of private jet use. “Customers are just not flying as much.” Some customers are stretching out the hours bought for a single year over a longer period.

Flight Options has laid off 134 people, including 104 pilots, and hopes it will be able to bring them back.

Mr. Santulli said that the jet market usually picks up three months after the stock market has reached a bottom. There is no indication of an uptick yet.

[Via - NYTimes.Com]

Asset Management Is Nothing But A Huge Ponzi Scheme

American economy as a circle of cavorting skeletons

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Dec. 11 (Bloomberg) — Bernard Madoff, founder and president of a New York firm that invested funds for wealthy individuals, hedge funds and other institutions, was charged with operating what he told employees was a long-running $50 billion Ponzi scheme in what may be one of the largest frauds in history.

Madoff, 70, head of Bernard L. Madoff Investment Securities LLC, was arrested today at 8:30 a.m. by the FBI and appeared before U.S. Magistrate Judge Douglas Eaton in Manhattan federal court. Charged in a criminal complaint with a single count of securities fraud, he was released on $10 million bond guaranteed by his wife and secured by his apartment. Madoff, wearing a white-striped shirt, dark-colored pants and no tie, looked down as he left the courtroom with his wife, declining to comment.

“It’s all just one big lie,” Madoff told his employees on Dec. 10, according to the government. The firm, Madoff allegedly said to them, is “basically, a giant Ponzi scheme.”

Madoff faces as much as 20 years in prison and a $5 million fine if convicted. His New York-based firm was the 23rd largest market maker on Nasdaq in October, handling a daily average of about 50 million shares a day, exchange data show. It specialized in handling orders from online brokers in some of the largest U.S. companies, including General Electric Co. and Citigroup Inc.

‘One of The Pioneers’

“He’s one of the pioneers of modern Wall Street,” said James Angel, an associate business professor at Georgetown University in Washington. Madoff’s firm was among the first to automate market-making, in which a dealer continually buys and sells stock. The company was among the largest to offer “payment for order flow,” or paying to handle customer orders.

“The exchanges didn’t like the practice and questioned whether customers got the best price,” Angel said.

Madoff was also sued today by the U.S. Securities and Exchange Commission.

“Bernard Madoff is a longstanding leader in the financial services industry,” said defense lawyer Dan Horwitz. “We will fight to get through this unfortunate set of events. He’s a person of integrity.”

Fix Asset Management in New York, which had at least $400 million with Madoff, said it was checking with its lawyers regarding its holdings.

“We are very shocked,” John Fix, the son of founder Charles Fix, said by telephone from Greece. “We put in redemptions in the past few months and got our money back no problem. We are just so surprised about all this.”

‘Accelerating Their Redemptions’

Thomas Ajamie, a securities lawyer in Houston who won a $429 million arbitration award against Paine Webber Group in 2001, speculated that Madoff “couldn’t keep the Ponzi scheme going because investors were accelerating their redemptions.”

New York-based Fairfield Greenwich Group runs the $7.3 billion Fairfield Sentry Ltd., a fund that invested in Madoff. Andrew Ludwig, a spokesman for Fairfield, declined to immediately comment.

The SEC in its complaint, also filed in Manhattan federal court, accused Madoff of a “multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm.”

The agency said it’s seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm. Ira Sorkin, another defense lawyer for Madoff, couldn’t be immediately reached for comment.

Advisory Business

Madoff ran his investment advisory business from a separate floor of his firm’s office, keeping financial statements “under lock and key,” prosecutors said. Early in December, he told one employee that clients wanted to redeem about $7 billion and that he was struggling to free up the funds, the government said. After he told another staff member Dec. 9 that he wanted to pay annual bonuses before the year’s end, two months early, a pair of senior employees asked to speak with him, prosecutors said.

They had noticed he had been suffering from a “great deal of stress” and wanted to know what was happening, the U.S. said. When one of them challenged his explanations, Madoff invited them to his Manhattan apartment, saying he “wasn’t sure he would be able to hold it together” if they continued talking at the office, the government said.

While meeting the pair at his home yesterday, Madoff conceded that he was “finished,” that his advisory business is “all just one big lie” and “basically, a giant Ponzi scheme,” the government said. The business had been insolvent for years with losses of about $50 billion, he told the employees, according to the criminal and SEC complaints.

Madoff said he had about $200 million to $300 million left and planned to distribute money to select employees, family and friends before surrendering to authorities in about a week, the government said.

Confessed to FBI

Madoff allegedly confessed to FBI agent Theodore Cacioppi on Dec. 11, saying there was “no innocent explanation,” the SEC said in its complaint. Madoff said it was his fault and he had “paid investors with money that wasn’t there.” He also said he was “insolvent” and he expected to go to jail, it said.

The Madoff firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records.

Madoff started his firm in 1960 with $5,000 of savings and took advantage of securities-law changes in the 1970s designed to spur competition in U.S. stock markets, according to a profile posted on the Web site Finance Tech.

75 Percent Owner

Madoff, who owned more than 75 percent of his firm, and his brother Peter are the only two individuals listed on regulatory records as “direct owners and executive officers.”

Peter Madoff was a board member of the St. Louis brokerage firm A.G. Edwards Inc. from 2001 through last year, when it was sold to Wachovia Corp.

Bernard Madoff served as vice chairman of the National Association of Securities Dealers, a member of its board of governors, and chairman of its New York region, according to the SEC Web site. He was also a member of Nasdaq Stock Market’s board of governors and its executive committee and served as chairman of its trading committee.

He was chief of the Securities Industry Association’s trading committee in the 1990s and earlier this decade, where he represented brokerage firms in discussions with regulators about new stock-market rules as electronic-trading systems and networks gained prominence.

He was an early advocate for electronic trading, participating in roundtable discussions at the SEC as regulators weighed trading stocks in penny increments. His firm was among the first to make markets in New York Stock Exchange listed stocks outside of the Big Board, relying instead on Nasdaq.

‘Third Market Makers’

“These guys were one of the original, if not the original, third market makers,” said Joseph Saluzzi, the co-head of equity trading at Themis Trading LLC in Chatham, New Jersey. “They had a great business and they were good with their clients. They were around for a long time. He’s a well-respected guy in the industry.”

At 6:30 p.m., security guards at the front desk of the lipstick-shaped building on Third Avenue in midtown Manhattan housing Madoff’s office were turning people away. Ganesh Sewpershad, a messenger with Speeddox, said he had been trying to deliver mail for 20 minutes and was told to return tomorrow.

Madoff’s Web site advertises the “high ethical standards” of his firm.

“In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door,” according to the Web site. “Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.”

The case is U.S. v. Madoff, 08-MAG-02735, U.S. District Court for the Southern District of New York (Manhattan)

[Via - Bloomberg.Com]

American economy as a circle of cavorting skeletons

Too Big To Bail

The Day The Credit Died. How Americans Will Have To Live Without Visas And MasterCards

As America Crumles, It’s Pay Day For Pawnshops

Badconomy - Economics Of The Bad Times

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When Summer Mills visited her local CVS drugstore recently, to save a few dollars she bought the store-brand facial scrub rather than the Olay version she normally uses.

“I thought I’d be able to tell the difference, but I couldn’t — I looked at the ingredients and they seemed almost the same,” says 30-year-old Ms. Mills, a stay-at-home mother of two in Ardmore, Okla. On her next shopping trip, “I’m going to buy the store-brand moisturizer and cleanser — it’s less money.”

Many Americans are changing their everyday purchases and abandoning brand loyalty, prompted by the persistent financial pressure of rising food, gasoline and electricity prices. Over the past 24 months, consumer prices have risen 7.8% according to the U.S. Bureau of Labor Statistics. From coloring hair at home instead of at the salon to trying cheaper laundry detergents, new evidence indicates that Americans are modifying even minor household habits to save money.

Kimberly-Clark Corp. CEO Thomas Falk noted that sales of the company’s potty-training pants, once one of the biggest sales-growth products in the baby aisle, have fallen off in recent months. “You’re seeing consumers leaving children in diapers longer…the diaper is less expensive per piece than a training pant,” he said in a recent conference call in which he announced a 9% decline in third-quarter earnings.

Shoppers are even buying toilet paper differently. “When they get to the end of the month, and they’re out of paycheck, they may buy a smaller-count pack,” Mr. Falk said. “You’re seeing that shift in consumer behavior during a pay-period cycle more than we maybe have in the past.”

Retailers are also sensing more shopper experimentation. This fall, supermarkets Safeway Inc. and Kroger Co. noted that sales of their store brands are on the rise. “In this economy, customers are much more willing to try a private-label item, and we’re seeing signs that this is happening more and more as the year progresses,” Kroger CEO David Dillon said on a conference call.

To be sure, overall sales of name-brand goods are still higher than those of store brands. Still, about 40% of primary household shoppers said they started buying store-brand paper products because “they are cheaper than national brands,” according to a September report by market-research company Mintel International, which interviewed 3,000 consumers. Nearly 25% of respondents reported that it is “really hard to tell the difference” between national brands and store brands of paper products. Store brands on average cost 46% less than name-brand versions, Mintel found.

“This is one category where people can definitely trade down strictly for budgetary reasons and not have to think twice about it,” says David Lockwood, Mintel’s director of research. “And upper-income people are changing their patterns the same way that lower-income people are.”

Paper napkins suffered the steepest declines over the past year, followed by facial tissue and paper towels. “Not surprisingly, toilet tissue is holding up the best,” Mr. Lockwood says.

Laundry habits are changing, too. Early signs indicate shoppers are switching to cheaper detergents and softeners, a rare shift in one of the most brand-loyal product categories.

Sales of private-label detergent rose 12% over the 52-weeks ended Sept. 6, to $189 million, according to market-data company Information Resources Inc., or IRI. Lower-priced brand-names are posting gains, too. Last week, Procter & Gamble Co. reported that volume sales of its bargain-priced Gain detergent rose 10% in the quarter ended Sept. 30, offsetting weaker results for the market-leading and pricier Tide.

Meanwhile, estimated retail sales of value-oriented Purex fabric softener, owned by Henkel AG, rose more than 60% over the past six months, the company says. “We view the economic slowdown as an opportunity for our brand,” says Greg Tipsord, senior vice president of Henkel’s U.S. laundry care. “It’s causing the consumer to rethink what had become a habit.”

To win over shoppers, Purex has tried to keep the price of its detergent and fabric softener roughly 50% or more below the price of competing premium brands, says Mr. Tipsord. Large sizes are in higher demand as consumers try to cut down on shopping trips and get a better price per ounce, he says.

Though low-income consumers have been cutting back for the past several months, now upper-income shoppers — those with household incomes of $100,000 or more — also are making significant changes, according to a new survey by IRI.

The report, titled “Shopper in Crisis,” found that 41% of upper-income consumers reduced spending on nonessential groceries, and a fourth of these consumers said they gave up favorite brands over six months in 2008. Nearly one-third of high-income shoppers said they bought more private-label products during the second quarter, up from about 20% in the first quarter of this year.

“This isn’t belt-tightening, it’s belt-notching,” says Thom Blischok, president of consulting and innovation for IRI. “These ritual changes are much deeper and happening much faster than we expected.”

Meanwhile, 52% of consumers at all income levels said they tried to make personal-care products last longer, and a quarter of respondents said they now share more personal-care items, such as shampoo, with other household members, the IRI survey of 1,000 respondents found. Nearly half of all consumers said they went to spas and salons less often, while one-third of consumers reported doing more beauty treatments at home.

Indeed, unit sales of at-home hair-color treatments are on the rise, up 2.21% in the three months ended June 29 compared with a year ago. Though that figure has flattened in the three months ended Sept. 29, an IRI spokeswoman attributes that to women stocking up on the product in the previous period.

Meanwhile, private-label versions of soap and other bath products are up 23% in the 52-weeks ended Sept. 6, to $168 million, according to Nielsen Co. Private-label versions of skin-care items are up 16% to $182 million during the same period.

Shoppers’ changing behavior prompted Procter & Gamble, the world’s biggest advertiser, to alter its marketing approach and focus on in-store promotions. “More decisions are made in the store, and we have to be competitive,” CEO A.G. Lafley said on a conference call with investors last week.

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More suicides? Fewer male births? Less back pain? More laxative sales?

Data points litter the landscape as economists, sociologists, psychologists and marketers examine the societal changes, big and small, trivial and traumatic, that accompany a bad economy. And with this particular version of a troubled economy — a stock market that goes into convulsions at 3 p.m., a looming global recession, a $700 billion bailout plan that may or may not work, and a jittery public wondering what is coming next — changes should flow as freely as profits in good times.

It’s one thing to measure changes in society, however, and another to ascribe causes. But if the causal link is elusive, you still might expect to see slack soda sales, more frequent car thefts and meaning-laden tunes at the top of the pop charts during a recession.

Terry F. Pettijohn II, a professor of psychology at Coastal Carolina University, is one of those who sees popular tastes shift with economic conditions. Take beauty, for example. “What we find attractive is not a stable currency,” said Mr. Pettijohn, who has studied how economic and social factors shape preferences in popular music, movie stars and Playboy models. “It’s affected by the environment, by what’s happening in society, and what makes us feel more comfortable in threatening times.”

Looking at Billboard No. 1 songs from 1955 to 2003 for a study to be published in the journal Psychology of Music, he found that in uncertain times, people tend to prefer songs that are longer, slower, with more meaningful themes.

“It’s ‘Bridge Over Troubled Water,’ and ‘That’s What Friends Are For,’ ” he said. “In better times, it’s more likely to be faster, upbeat songs like ‘At the Hop’ or ‘My Sharona.’ ”

The correlation isn’t perfect. The song Mr. Pettijohn’s raters called most meaningless, “Macarena,” was a hit in a relatively bad year.

The Environmental Security Hypothesis that he and his colleagues have been testing, positing that people look for reassurance in worrying times, also helped explain why Playboy magazine’s Playmate of the Year in bad times tended to have a more mature appearance — that is, to be older, heavier, taller and less curvy — than those selected when times were good. Similarly, in a study of American movie stars from 1932 to 1955, he found actresses with mature features — small eyes, large chins, and thin faces — more popular in hard times.

Buying patterns too, can be predicted in economic downturns, according to Leo J. Shapiro, who has tracked consumer behavior since he was a young man in the late 1930s.

“DURING a recession, laxatives go up, because people are under tremendous stress, and holding themselves back,” said Mr. Shapiro, now chief executive of SAGE, a Chicago-based consulting firm. “During a boom, deodorant sales go up, because people are out dancing around. When people have less money, they buy more of the things that have less water in them, things that are not so perishable. Instead of lettuce and steak and fruit, it’s rice and beans and grain and pasta. Except this time the price of pasta’s so high that it’s beans and rice.”

A recent Nielsen report listed tobacco, carbonated drinks and eggs as especially vulnerable to recession, and candy, beer and pasta sauce as recession-proof. On Thursday, Hershey’s announced third-quarter sales and income higher than last year’s. (“We offer a tremendous variety of affordable indulgences, and people love chocolate, even in hard times.” said Kirk Saville, a company spokesman.)

Almost anything can be an economic indicator. Back in the 1920s, the economist George Taylor conceived the hemline index, finding that skirts got longer as the economy slowed. These days, there’s been talk of a haircut index, with short locks signaling a market drop.

The economic downturn could signal significant changes in American life.

“A stunning statistic is that unlike in past epochs, the higher up the income ladder you go, the more hours you work,” said Dalton Conley, a sociology professor at New York University. “More and more, things that used to be outside the marketplace are in the economy. Instead of mom or dad coming home with groceries, they go out, or order in.”

A downturn, then, could result in benefits unmeasured by the market. “If people eat out less, the G.D.P. goes down,” Mr. Conley said, “but nothing in the G.D.P. captures what you gain if you cook and eat in a leisurely way with your kids.”

In a study of coffee growers in Colombia, Grant Miller, who teaches health policy at Stanford’s medical school, found that infant and child mortality rates fell as coffee prices slumped, and concluded that it was because parents had more time to take care of their children.

By most accounts, bad times herald an upturn in at least some crime.

“I’ve never been able to find any relationship between violent crime and the economy,” said Stephen Raphael, an economics professor in the School of Public Policy at the University of California at Berkeley who specializes in urban and labor economics. “But there is a relationship with property crime. Whether it’s burglary, larceny or motor vehicle theft, they all go up with unemployment.”

And already, the market drop has created many personal crises.

“We’ve never had this level of call volume” said Dr. Richard A. Chaifetz, chief executive of ComPsych, the largest provider of employee assistance programs, covering 27 million people. “It’s been going up gradually all year, but then it spiked and we’re up 20, 30 percent since late July. And where relationships and personal psychology issues used to the be the No. 1 reason people called, it’s now financial and legal issues that are No. 1.”

In a typical downturn, young people flock to higher education, especially lower-cost alternatives like community colleges, state universities and trade schools, to bolster their employability. At the same time, parents and students nationwide are agonizing over choices between public schools and private schools and what loans they can afford or even qualify for.

And although Americans have a hard time paying their medical bills and preventive medical care takes a hit in a poor economy, some economists say that there are positive health effects.

“People are physically healthier in times of recession,” said Christopher Ruhm, an economist at the University of North Carolina at Greensboro. “Death rates fall, people smoke less, drink less and exercise more. Traffic fatalities go way down, which is not a surprise when people drive less. Heart attacks go down. Back problems go down. People have more time to prepare healthier meals at home. When the economy weakens, pollution falls.”

This Panglossian view has its limits.

“People are healthier, but they’re not happier,” Mr. Ruhm said. “Suicide rises, and mental health may deteriorate.”

Generally, though, poverty is associated with bad health. And since economic downturns have so many effects, it is often impossible to sort out what mechanism might be responsible for what health result.

Some economists are skeptical of Mr. Ruhm’s findings.

“This is a very complicated area,” said Ralph Catalano, a professor of public health at Berkeley. “If you’re looking at people anticipating economic adversity, worrying about losing their job, some of them will spend less money on alcohol, take fewer risks, do more things that are good for them. So, in some places, the net effect may be fewer people having acute traumatic illness. But if you look at the people who’ve actually lost a job, or lost a business, they are more likely to have adverse health outcomes. When you get to saying there must be fewer people driving, so there must be fewer traffic accidents and cleaner air, that’s what I’d call econometric imagination.”

Mr. Catalano, who found in an earlier study, based on data from Germany, that a bad economy was linked with a decline in male births, cautioned against predicting how this recession would reshape society.

“What we don’t know is what’s going to happen next,” he said. “We don’t know yet how anxious people are going to get, or how many people are going to lose their jobs. The experience we’re going through is unprecedented. The last time we had this kind of experience was in the 1930s, and we didn’t have data.”

Mr. Conley, too, harked back to the Great Depression in suggesting that the current downturn could lead to a more equal America, if the richest people suffer the greatest economic losses.

“Nineteen twenty-nine was the peak of inequality,” he said. “It’s almost like things get too top-heavy, and they topple over.”

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At People’s Pawn in Springfield, Mass., the collection of DVD players, televisions and other electronics just keeps getting bigger.

As many as 200 a people a day come in to “sell all their stuff so they can get gas money,” said Efren Rivera, who works at the shop. “Some people have to pay their mortgages.”

The story is similar at EZ Cash Pawn in West Palm Beach, Fla., where the shelves are so stacked with electronics, musical instruments, guns, fishing poles, scuba gear — you name it — that people are being turned away.

“I have no choice,” said Robert DeSantis, the shop’s owner. “I have tools in the warehouse now — every single tool you can think about.”

With the economy in the tank and high energy prices eating away at Americans’ paychecks, pawnshops are prospering.

Unlike the bank, where tough times make it harder to get a loan, “with us, doesn’t matter what your credit is like,” said Todd Faircloth, owner of Georgia Loan and Pawn in Albany, Ga. “You can come in and borrow from us if you’ve got merchandise.”

Sometimes, pawning’s a good option
When you pawn an item, you are really taking out what financial professionals call a “secured non-recourse loan.” Sometimes, according to Jean Chatzky, a financial columnist and author of “Pay It Down: From Debt to Wealth on $10 A Day,” that loan might be your best option to cover an important bill.

Pawnshop loans charge interest, anywhere from 5 percent to 20 percent a month, depending on the merchant’s assessment of the merchandise and the reliability of the customer. At 20 percent, a $75 30-day loan repaid on time would cost the customer $15. By comparison, penalties for bounced checks and late credit card payments average double that.

“Pawning can be a relatively less expensive option,” Chatzky said — but only if you pay back the loan on time. If you don’t, “you’re going to pay another month’s interest,” plus a storage fee, she said.

The National Pawnbrokers Association said 80 percent of customers reclaim their pawned property on time, providing a steady stream of interest income that increases as the economy worsens. With more people being driven in the doors by hard times, it’s a good time to own pawnshops.

The business has become so lucrative that First Cash Financial Services Inc. announced plans this month to shut its auto lending division so it could focus on its pawnbroker operations. The company, which operates more than 250 pawnshops and payday lending shops, said its pawnshop profits rose by 26 percent in the first quarter of the year, topped by a 39 percent rise in the second quarter.

“Our core pawn business is tremendously profitable and continues to grow at record levels,” said Rick Wessel, chief executive of the company, which expects to open 10 to 20 new U.S. stores by the end of the year.

Likewise, Cash America International Inc., which operates more than 500 pawnshops in 21 states under the Cash America Pawn and SuperPawn brands, reported that second-quarter profits rose by 52 percent over the same quarter last year. It projected that profits would rise by another 13 percent to 20 percent over that when it reports third-quarter results later this month.

“Higher loan demand continued our trend of increased revenue from pawn loans, and we experienced better-than-expected retail sales activity during the quarter,” said Daniel Feehan, the company’s president and chief executive.

‘Grills for bills’
Those retail sales are another way pawnbrokers make money.

Loans are typically made for about about half the value of an item. Whenever a customer defaults, the pawnbroker can offer shoppers a bargain while making a profit on the loan.

“Pawnshops have always done consistently very well in a down market,” said Randy Stormberg, owner of Bend Pawn and Trading Co. in Bend, Ore., who said business was up by 30 percent in his store. “They are there with merchandise at about half the price of new.”

Much of that merchandise is gold coins and jewelry. With the price of gold fluctuating between $800 and $900 an ounce, many pawnbrokers won’t even bother to offer a gold item for sale; instead, they will have it melted down for its raw metal, Stormberg said.

Pawnbrokers say they’re getting a lot of unexpected items from people hoping to cash in on the boom in gold.

Fort Myers Estate Jewelry and Pawn in Fort Myers, Fla., hit the headlines earlier this year when it reported that an unidentified athlete had pawned the gold medal he won at the 1980 Olympic Games. And across town at Larry’s Pawn Shop, Ryan Champagne does a brisk business in “grills for bills” — gold teeth.

“When somebody comes in, you don’t want to be handling their teeth. So I grab a paper towel and just weigh it like anything else,” Champagne said.

A couple of years ago, it was unheard of for someone to come in offering his or her gold teeth for sale, but “now, it’s a little more frequent than it was two years ago, there’s no question about that,” said DeSantis of EZ Cash in West Palm Beach.

“I expect to see a lot more — a whole lot more,” he said. “It’s not getting better. It’s getting worse.”

[Via - MSNBC]

The Day The Credit Died. How Americans Will Have To Live Without Visas And MasterCards

Too Big To Bail

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An inflatable gorilla beckoned from the roof of Don Brown Chevrolet in St. Louis, servers doled out free bowls of pasta and a salesman urged potential customers to “come on up under the canopy and put your hands on” a new set of wheels.

But sitting across from a salesman in a quiet back room, Adrian Clark could see it would not be nearly that easy. This was the ninth or tenth dealership for Clark, a steamfitter looking for a car to commute to a new job. Every one offered a variation on the discouragement he was getting here: Without $1,000 for a downpayment, no loan.

“It’s just rough times right now,” Clark said. “Rough times.”

For Clark, and for a nation of consumers heavily dependent on credit, there are growing signs that those rough times could prove to be more than just a temporary problem, that they could be the beginning of a stark, new reality.

Is America’s long era of easy credit over?

Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today’s crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

“I think we’re undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue,” said Greg McBride, senior analyst at Bankrate.com. “This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity.”

A prolonged period of tighter credit is ahead, experts say.

U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and downpayments will be required. Interest rates are also likely to rise.

Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.

The changes cap three decades in which U.S. consumers - along with businesses and government - have run up ever-increasing debt. Americans became accustomed to financing purchases large and small with plentiful credit cards, easily approved loans for cars and the latest conveniences, and by siphoning the equity in their homes. Lenders did far more than just make credit plentiful. They aggressively marketed it as a necessity, a way for the smart consumer to leverage themselves into a better lifestyle.

The financial meltdown has made clear the role an increasingly global economy played in facilitating U.S. consumers’ borrowing, with banks packaging and selling debt to investors, providing cash to people who once would have been considered too risky to get a loan.

The expansion of credit has, in many ways, been a good thing. It has allowed many more people to buy homes. At a time when household incomes have stagnated, borrowing has made it possible for many people to afford purchases and cover short-term expenses they might otherwise have had to delay or abandon.

But all that borrowing came at a heavy cost.

- Americans are more reliant on debt then ever before.

The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations - like car lease payments and homeowner’s insurance - are added in, about one of every five household dollars is now claimed by bills.

The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled - to $61,000 per person - from what it was before the law was passed.

“We are going to have to cut back,” said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. thinktank. “We’ve really been living beyond our means.”

- Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.

The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA. The lack of savings is a sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.

Now, many families spend virtually all of their incomes covering living expenses, and even that is not enough.

“In the credit era, which is like living on steroids, you’re not saving money, you’re not breaking even. You’re actually borrowing 20 to 30 percent,” said Robert Manning, author of “Credit Card Nation: The Consequences of America’s Addiction to Credit.”

The new era of tighter credit will largely be a mandate, as consumers are forced to adjust to tougher rules and tighter limits. But consumers have also begun showing signs of a change in mind-set, putting off purchases, buying less expensive substitutes, going out to eat less, and rethinking their propensity to do so on credit.

Consumer borrowing fell for the first time in more than a decade in August, the Federal Reserve reported this week. The decline, at annual rate of 3.7 percent, reflected a sharp drop in the category of borrowing including auto loans and a smaller decline in the category including credit cards.

The tightening of credit will force American families to cut their spending, mindful of their current paychecks instead of borrowing against future ones, said Frank Badillo, senior economist with TNS Retail Forward, a consulting and market research firm in Columbus, Ohio.

“We’re going to see some fundamental changes in consumer behavior,” he said.

Badillo and others compare the psychology to the way people reacted after gasoline reached $4 a gallon last summer. Prices have eased considerably since then, but consumers seem to have decided that the good old days of very cheap gasoline are over. In response, people have moved to buying smaller, more efficient cars, and trying to reduce the miles they drive. Demand for homes in outlying suburbs has declined.

Like gasoline prices, the availability of credit should improve once the current crisis eases. But consumers are confronting what some see as a long-term change.

After years of living off one income and drawing on credit to fill the gap, Portland, Ore., legal assistant Susie Shepherd and her partner, Kaite Chase, are rethinking their finances. In the past few years, they regularly ran up debt to pay Chase’s tuition and repeatedly refinanced their home, pulling out equity to pay bills and drawing on lines of credit to cover expenses.

But Shepherd was caught short this fall when her brother asked for help in paying moving expenses. She tried to draw on a credit card, but found her line of credit had been cut in half. The only way to help, the couple decided, was to sell some household items.

“We’d been living on credit for so many years,” Shepherd said.

Borrowing against the future has always been part of the American story.

“How did those religious English people get to this country on the Mayflower? They came on what we would call the installment plan,” said Lendol Calder, author of “Financing the American Dream: A Cultural History of Consumer Credit.”

But the Great Depression chastened consumers. After World War II, and the explosive growth of the suburbs, consumption rose sharply. But the modern era of easy credit really began with the deregulation of the late 1970s.

In a 1978 Supreme Court decision, banks won the right to charge whatever interest rate their home state allowed and to do so across state lines. States repealed usury laws capping interest rates. Banks began pursuing consumers in ways they hadn’t before.

When inflation soared in the early ’80s, banks aggressively marketed credit cards to struggling consumers as a good deal. The interest rates were high, but not as high as inflation. In the recession of 1990-91, banks who saw their profits tightening seized on the margins available by lending more to consumers. When Congress eliminated income tax deductions for interest on credit cards, banks pushed home equity loans, encouraging people to take money out of their homes to pay off the credit cards.

As families took on debt, they were encouraged to follow a rule of thumb: It’s OK as long as you don’t devote more than 25 percent of income to borrowing costs.

Lenders, though, found a way around that. The 20-year home loan was repackaged as a 30-year loan and lenders stretched three-year car payment schedules to seven, masking the extent of the debt load.

Consumers “think they’re doing fine by their parents’ standards,” Manning said. “But boy, have they fallen far behind.”

The industry came up with subprime loans in the 1990s, then used them to encourage consumers with checkered credit history to buy homes. When very low interest rates early this decade sent home prices skyrocketing, and Wall Street demanded even more lending to feed a market for mortgage-backed securities, lenders went into overdrive. Consumers could buy with no money down and no documentation of income and were encouraged to borrow against the rising value of their homes.

Before the housing bubbled popped, many consumers were pulling money out of their houses to pay for expenditures - from boats to big-screen TVs - well beyond ordinary living expenses.

Over the years, economists have tried to figure out when, if ever, consumers might finally reach their debt limit. But each time, Americans have proven far more resilient than pessimists imagined, financing their spending by borrowing.

The credit crunch, though, may be the breaking point.

Dolores Holmes took out an interest-only $515,000 loan two years ago to buy a bed and breakfast in Lambertville, N.J., a Delaware River town popular with weekend antique hunters. Once the business took root, she planned to refinance into a fixed-rate loan and cut her cost. But as the economy declined, she had trouble filling rooms.

That increased pressure on her to find a way to cut her mortgage payments. But her accountant and financial adviser say her hopes of getting a more affordable loan are slim without a profit that convinces a lender she’s worth the risk.

“I’ve been cutting back on anything personal,” she said. “It’s like everything I have has to go back into the business.”

In Kansas City, Mo., David and Norine Piet were surprised to get a letter in September from USAA Federal Savings Bank that it was freezing their $40,000 home equity line of credit. The bank told the couple it was doing so because their home’s value had plunged from $310,000 to $141,200.

The couple had been poised to refinish their basement to add a bedroom and make it suitable for visitors - a place to have people over and play cards, shoot pool and cook. Now that plan has been shelved.

“It’s kind of like we had this $40,000 cushion there, that if anything happened we had an emergency fund,” David Piet said. “At least we had a source of funds there, and now that’s gone. That has caused us to cut back and try to put more money into savings, and be cautious on what we’re spending money on.”

The Piets are comfortable enough financially to have retired early. But for consumers of more modest means the new restrictions on credit are cutting into their ability to make what would have been relatively ordinary purchases.

Clark, the steamfitter shopping for a car, returned home to Fairview Heights, Mo., in January after a 12-month tour of duty with the U.S. Army in Afghanistan. He found a new job and expected that a regular paycheck would be enough to secure a loan for the car he needs to commute.

At the dealership last weekend, Clark and his wife, Flora Rivera, settled on a Dodge Stratus with 8,000 miles on the odometer. But the dealership was looking for a $1,000 downpayment and Clark had just $200.

The problem is that Clark, 22, has almost no credit history, a problem compounded by the time he spent serving overseas. A few months ago, multiple banks would have been happy to give such a consumer a loan, salesman Scott Ziegler said. But now only companies offering pricier subprime loans are interested, and that still doesn’t solve the problem of the downpayment.

Clark left the dealership without a loan, but decided to put down his $200 as a deposit and try to find another source for the remainder of the downpayment. In recent weeks, such scenarios have become the norm, said the dealership’s loan manager, Jarrod Campbell.

“I’m getting a lot more customers who are saying, ‘I’ve been to 10 other car lots,’” Campbell said, “and no one will give me a loan.”

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“Bankruptcy of Neo-Capitalism,” shouted a headline in Wednesday’s Paris press. Scarcely since Hitler blew his brains out has the type been bigger or the contentment broader.

Almost everyone everywhere is enjoying the show. Each headline brings more laughs. The financial markets give people neither what they expect nor what they want, but what they deserve. What a treat to see people getting it - good and hard.

Near to home, that galling “millionaire next door” - many will take pleasure in seeing his portfolio of stocks marked down. “Stocks for the long run,” he used to say, smugly; the silly old coot will be dead before his stocks come back! He’ll have to work until he drops dead, just like the rest of us.

On Wall Street, the masters of the universe - who had the pay slips to prove it! - are now getting blown up by their own debt bombs. The top five firms on Wall Street were thought to be “too big to fail.” But Bear Stearns has been blown to smithereens. Lehman is exploding into small pieces. Merrill ducked and missed the blast. Then, the last big capitalist desperadoes - J.P. Morgan and Goldman - waved the white flag. They petitioned the government to allow them to become regulated, deposit taking banks!

And George Bush will leave behind the biggest nationalization program in history. Surely, that’s worth a snide chuckle. The takeover of Fannie and Freddie alone leaves half the country living in what are effectively, government-subsidized housing projects. Meanwhile, the coordinated takeover of Wall Street, put together by his apparatchiks, left even the hardened lefties at France’s Liberation in shock and awe: “This enormous statist intervention…is the work of the most ideological and extremist administration that the US has ever had.”

How heartwarming to see that the meddlers and world-improvers get a second wind. It’s like driving around in a ‘33 Lincoln…or throwing rocks at the gendarmes in ‘68. The old, gray Bolshies feel young again! Impetuous! Brainless!

And every capitalist is behind the bail out program too. All over the world, markets are out - state-sponsored meddling is in. Free market principles are fine - until prices start going down!

And there’s the breathtaking chutzpah of it! After proposing a $700 billion program, in which the government buys up Wall Street’s mistakes - otherwise known as “cash for trash” - Henry Paulson says he had no choice: “We did this to protect the taxpayer,” said the former Goldman chief.

Even Russia got into the act. New to counterfeit capitalism, it’s getting the hang of it fast, pledging $20 billion in the fight to keep stock prices from falling to what they are really worth.

Then, not be left behind in general hysterical absurdity, SEC honcho Christopher Cox announced a list of 799 financial stocks on which shorting is banned until Oct. 2nd. In Britain, the FSA’s ban on shorting financial shares lasts until Jan 16. But Pakistan gets the King Canute Memorial Prize; by law in that benighted land, stocks can’t go below their August 27th close.

And what a bunch of numbskulls - Greenspan, Paulson and Bernanke! Every word they’ve said so far has been financial poison. “Greenspan relaxed about house prices…” reported the Financial Times in 2005. “Most negatives in housing are probably behind us…” said the same sage in October 2006. “We believe the effect of the troubles in the subprime sector…will be likely limited…” said Bernanke in March 2007. It’s “not a serious problem…I think it’s going to be largely contained,” added Paulson in April 2007.

But these are the same numbskulls who now say they are saving capitalism from itself. Ah, there’s the rub…amid all this giddy merriment is a serious threat. The feds have bailed out the bankers, the insurers, the mortgage lenders, and half of Wall Street. But who will bail out the feds?

Since 1971, the world’s money system rests on the dollar. And the dollar rests on nothing but faith, hope and the kindness of strangers. And while the full faith and credit of the United States of America is elastic, it can snap.

Last week, the price of gold popped up $120 in two days. Then, on Monday, it added another $43. Oil gushed up 44% in the space of barely a week. Investors felt the geyser of liquidity coming from Washington and beat a retreat from the dollar.

For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is, effectively, broke. Nevertheless, the debit side of its ledgers grow heavier and heavier. This year’s US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.

Where will the government get that kind of money? There are only two possibilities - one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It’s like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.

If, on the other hand, it merely prints the money - or if it creates it “out of thin air,” to use Lord Keynes’ handy phrase - the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world’s money system.

Sooner or later, this is just what will probably happen. Not because capitalism doesn’t work - but because it does. Capitalism is doing just what it should do - it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages…and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it…and that they would prefer to stiff their creditors rather than pay their bills. That is when deflation will gives way to inflation…and the world’s post-’71 dollar-based money system comes to an end.

Enjoy your weekend,

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva

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