Depression risk might force U.S. to buy assets

By John Parry

NEW YORK (Reuters) - Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

In the late 1980s and early 1990's Connolly worked for the European Commission analyzing the European monetary system in the run up to the introduction of the euro currency.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.

Legal changes would be needed to give the Federal Reserve and the U.S. government the authority to buy stocks. Currently the Federal Reserve can buy only debt issued by the Treasury, as well as U.S. agency debentures and mortgage-backed securities.

While Connolly already sees some parallels with the 1930s, he expects that a more pro-active central bank and government will probably help avert a repeat of that scenario today.

The build up of a credit bubble in recent years was similar to the late 1920s run-up to the Great Depression, he said.

Then, investors were very optimistic about new technologies, and stocks rose against a backdrop of low inflation, and a trend toward globalization. There was even an equivalent of the modern day subprime mortgage debt meltdown in the form of U.S. loans to Latin American countries which had to be written off.

"The big difference is the attitude of central banks and specifically the attitude of the Fed," Connolly said.

Some economists have blamed the U.S. economy's travails in the 1930s on the Federal Reserve's hesitation to inject reserves into the banking system.

However, today's Fed has tried to preempt the danger of a protracted economic slump and has responded swiftly to a credit crunch in the past year and gathering signs of deterioration in the economy, Connolly said.

The Fed has stepped up its temporary additions of reserves to the banking system, and swiftly slashed its benchmark fed funds target rate to 3.0 percent from 5.25 percent in September. Analysts expect at least another 0.5 percentage point cut in next month.

At the same time, "the fed funds rate can't stay significantly above the 2-year note yield," Connolly said.

On Tuesday, the 2-year Treasury note yield was at 2.00 percent, not far above the lowest level since 2004.

The Fed "almost certainly" has to cut the funds rate to 2.0 percent by the end of this monetary easing cycle, he said. If conditions in the banking sector worsen, the Fed could cut the funds rate to 1.0 percent, a low last seen in June 2004.

Global banks have already written down more than $100 billion of bad debts associated with the U.S. subprime mortgage debt meltdown and housing

However, Fed rate cuts alone are unlikely to avert a prolonged period of economic weakness because the danger still exists that a burdened banking sector will choke off credit to consumers and households.

"The Fed probably can't fix it all on its own now," Connolly said. "There is a chance the Fed gets forced into unconventional cooperation with government," which could involve buying a range of assets to reflate their value.

That would be reminiscent of some steps the U.S. government took in the 1930s when the economy was mired in deflation and high unemployment.

One turning point came when agricultural prices were restored to their pre-slump levels, Connolly said. Such measures were among the New Deal programs that President Franklin D. Roosevelt launched to bolster the economy.

Either way, investors face bleak prospects now without some kind of further government intervention, he said.

Those steps might offer clues to investors in stocks and commodities, which Connolly expects the government might be ultimately force to step in and buy to stabilize markets. He expects that a depression may be averted, but only by the state and the Fed reinflating the price of such assets.

Beleaguered housing, non-government fixed-income securities and even the now overvalued Treasury market have little hope of generating substantial returns for investors over the next few years, he said.

"If we don't avoid depression, the only thing worth holding is cash," he added.

(Reporting by John Parry; Editing by Tom Hals)

Orihginal here

After months of delay from privacy and civil liberty advocates, the U.S. is now moving forward with its plan to use spy satellites for law-enforcement an domestic security missions.

Sources within the U.S. Department of Homeland Security (DHS), who requested anonymity, told AP that a plan for an office within the DHS to use overhead and mapping imagery from existing satellites is in the final stage of completion. The new program, called the National Applications Office, explicitly states that existing laws prohibiting the government from spying on U.S. citizens would remain in effect, the official said, adding that under no circumstances would the program be used to intercept verbal and written conversations.

The new program largely follows recommendations outlined in a 2005 independent study group headed by Keith Hall, former chief of the National Reconnaissance Office and current vice president of the consulting firm Booz
DHS is currently awaiting approval of the new program from federal executive agencies. However, the program’s future will likely come up for discussion on Wednesday when DHS Secretary Michael Chertoff presents his department’s spending plan on Capitol Hill.

Last year, during a debate over rules governing eavesdropping on phone calls and email communications of terror suspects, top Democrats on the House Homeland Security Committee asked DHS to suspend the program until clear legal framework was in place on how the program would operate

.
Government use of these surveillance technologies within the United States is not new. For years domestic agencies such as the Federal Emergency Management Agency (FEMA) and Interior Department have had access to satellite imagery for scientific research, to assist in natural disasters and to map out vulnerabilities during major public events. Requests for these images were made through the Civil Applications Committee, a federal interagency group, since 1974.

Under the new program, these types of uses will continue, but DHS would become the new clearinghouse for the requests, with availability of satellite images expanded to additional agencies in support of homeland security missions. The DHS official said details of how law enforcement agencies could use the satellite images during investigations would be determined once legal and policy questions have been resolved.

Constitutional issues could arise in cases where an agency might request infrared imaging of a home, for example, such as a suspected methamphetamine laboratory. For cases such as these, law enforcement agencies would still be required to go through the normal process of obtaining a warrant and satisfying all the legal requirements. The National Applications Office would also mandate that all laws are observed when using new imaging technology.

Satellite image requests would be receive even more scrutiny than under the Civil Applications Committee, with all requests reviewed by an interagency group that includes Justice Department officials to ensure there are no violations of civil rights and civil liberties.

Original here

Rudd's apology to indigenous Australia

TEXT of the formal apology to Indigenous Australians to be made in federal parliament by Prime Minister Kevin Rudd at 9am (AEDT), Wednesday February 13.

"Today we honour the Indigenous peoples of this land, the oldest continuing cultures in human history.

We reflect on their past mistreatment.

We reflect in particular on the mistreatment of those who were stolen generations - this blemished chapter in our nation's history.

The time has now come for the nation to turn a new page in Australia's history by righting the wrongs of the past and so moving forward with confidence to the future.

We apologise for the laws and policies of successive Parliaments and governments that have inflicted profound grief, suffering and loss on these our fellow Australians.

We apologise especially for the removal of Aboriginal and Torres Strait Islander children from their families, their communities and their country.

For the pain, suffering and hurt of these stolen generations, their descendants and for their families left behind, we say sorry.

To the mothers and the fathers, the brothers and the sisters, for the breaking up of families and communities, we say sorry.

And for the indignity and degradation thus inflicted on a proud people and a proud culture, we say sorry.

We the Parliament of Australia respectfully request that this apology be received in the spirit in which it is offered as part of the healing of the nation.

For the future we take heart; resolving that this new page in the history of our great continent can now be written.

We today take this first step by acknowledging the past and laying claim to a future that embraces all Australians.

A future where this Parliament resolves that the injustices of the past must never, never happen again.

A future where we harness the determination of all Australians, Indigenous and non-Indigenous, to close the gap that lies between us in life expectancy, educational achievement and economic opportunity.

A future where we embrace the possibility of new solutions to enduring problems where old approaches have failed.

A future based on mutual respect, mutual resolve and mutual responsibility.

A future where all Australians, whatever their origins, are truly equal partners, with equal opportunities and with an equal stake in shaping the next chapter in the history of this great country, Australia. "

Original here