The Big Zero

For the first time ever, four-week US Treasury bills sold at zero percent interest. Zero.

Investors fearful of deflation and riskier assets scrambled to hand over cash to the US Treasury in return for no interest at an auction Tuesday, while some T-bill rates fell below zero in the market.

Pressures on fund managers to stock up on the safest possible assets in advance of year-end book-balancing added to the bid for government securities, traders said.

The U.S. Treasury Department said it sold four-week bills at a high rate of 0.000 percent, a level never before seen, in a $30 billion auction.

When Treasury bill rates turn negative it shows that investors are so concerned about the safety of other assets that they are willing to effectively pay the U.S. government a fee to look after their money.

Rates for three-month bills in the market fell below zero, according to fixed-income trading platform Tradeweb.

"There is just a continuing flight to safety with money that needs to be invested," said Lou Brien, a market strategist with DRW Trading Group in Chicago. "Money funds want it to be invested rather than under the mattress, which is continuing to push rates lower."

The view that the Fed will use other methods in addition to cutting short-term interest rates to ease monetary conditions drove prices of long-dated Treasuries prices higher as well, sending yields on those maturities toward five-decade lows.

This is a classic liquidity trap scenario, where even with dirt cheap interest rates (and the Fed is expected to cut rates to 0.50% next week) and massive liquidity in the form of bailout billions has been pumped into the system, the economy is stalled out like a car with a flooded carburetor. Banks are hoarding cash rather than loaning it out because short term investments are way too volatile and dangerous. The practical upshot is that the economy grinds to a halt and deflation sets in.

We're headed down that road. The interest rate in this country will effectively be zero soon if not zero already. As such, the next step is deflation, and deflation means anybody in a lot of debt now will be only in worse debt later. That situation describes basically every company and most American families out there.

This is turning into a textbook disaster. Remember, it wasn't inflation that caused the Great Depression, but a catastrophic deflationary spiral. Prices dropped. Wages dropped as a result. People were laid off. Demand for goods dropped, causing prices to drop more...and the cycle continued for most of the 30's. It took us almost 20 years and World War II to recover from it.

We're heading into another situation like that now.

And One Last Thing

Blagojevich has no intention of resigning over this.

Illinois Gov. Rod Blagojevich has no plans to resign after being indicted on a raft of corruption charges, including the alleged "sale" of former Sen. Barack Obama's Senate seat.

Blagojevich's attorney Sheldon Sorosky told reporters outside the courthouse where the governor was arraigned that the governor has no plan to resign.

"He didn't do anything wrong," Sorosky told reporters. "A lot of this is just politics."

Blagojevich should be in the office Wednesday, his attorney added.

This will get a whole lot worse, and quickly.

Blagogate Is Obama's Whitewater

I'm glad I'm not the only one who sees this whole Blago/Rezko baloney as Obama's Whitewater. Digby weighs in:

The minute I heard about Fitzgerald's press conference, I knew this would follow shortly: Questions Arise About the Obama/Blagojevich Relationship. That's Jake Tapper, not making any charges but bringing up all kinds of cross currents in Illinois politics to suggest that there are "questions." And all over TV they are talking about "corrupt Chicago politics," which is being splashed onto Obama.

It's natural that Obama and many of his staff have crossed paths with the players in this scandal. But according to Lynn Sweet of the Tribune, who has followed Obama for some time and is not a sycophant, says the campaign put a mile between itself and Blagojevich, not even allowing him to speak at the Democratic convention. They are not close.

I don't know if this will go anywhere. At this point, I think there's just too much news and too many problems for a phony scandal to have any legs. But, as I wrote almost a year ago, these Chicago shennanigans have elements of a perfect right wing smear by association if they have the energy to launch one and the press decides it's sexy enough.

Count on it. Taking down Obama is a national sport among the Village. Every single one of them wants to be the next Bob Woodward and write their own ticket for the next 35 years. You can absolutely count on story after story trying to tie Obama to Blago and "the Corrupt Chicago Machine."

The same people who ignored Bush scandal after Bush scandal are the same ones who will spend four years trying to gotcha Obama over this.

As I've said time and time again, if you thought the Village hated the Clintons, wait until you see what they do to Obama.

It starts today. The press honeymoon is certainly over. They know they can turn this into 24/7 Blagogate and control Washington once again...and that's exactly what they are going to do.

Blago-Sphere

Blagogate continues to get more and more interesting by the hour. First of all, Obama is looking more and more like the Good Guy here.

Marcy Wheeler catches local Chicago press reporting that Rahm Emanuel may have tipped off federal investigators that Gov. Rod Blagojevich (D) was engaging in corrupt acts. Jack Conaty, a Chicago reporter for the local Fox affiliate, said on-air that Rahm Emanuel might have been responsible for causing federal investigators to act quickly to apprehend Blagojevich this morning:

CONATY: We did receive a tip this morning that perhaps all of this came together so quickly because the Governor may have reached out to Rahm Emanuel, the president-elect’s chief of staff, in attempting to leverage filling the Senate seat. And it may have been Rahm Emanuel who tipped the scale and made this move as quickly as it did.

Second of all, Emanuel may have been cooperating with the Feds all along.

Third of all, the person Blago was going to appoint if Obama didn't play ball, the so called "Senate Candidate 5" is looking more and more like Jesse Jackson, Jr.

Capitol Fax's Rich Miller updates the state of the speculation on the identity of "Senate Candidate 5," the public official who -- from the complaint -- appears to be in the most jeopardy, aside from Blagojevich and Harris. "Senate Candidate 5." He thinks its either Emil Jones or Jesse Jackson, Jr., though it's conceivable that others would fit the description.

Though Fitzgerald warned us not to cast aspersions based on Blagojevich's version of other people's words, this is the damning quote: “We were approached ‘pay to play.’ That, you know, he’d raise me 500 grand. An emissary came. Then the other guy would raise a million, if I made him (Senate Candidate 5) a Senator.”

Here's what we know. Candidate 5 is:

-"publicly reported to be interested in the open Senate seat"

- not who Blagojevich thought Obama wanted

- not someone with whom, by November 10, Blagojevich had a "long, productive discussion"

- someone with fundraising wherewithal who could produce something "tangible up front"

- someone Blago was "getting a lot of pressure" not to appoint

- someone with whom Blago had "a prior bad experience...not keeping his word"

The complaint also says that on November 10, Blagojevich told an advisor to leak to the Sun-Times's Michael Sneed that Blagojevich "is seriously considering Senate Candidate 5 for the open Senate seat" and that the advisor agreed to call the Sun-Times to leak the story, apparently false, that Blagojevich end of the conversation Advisor A agreed to call the Sun Times columnist to leak the story had a “long, productive discussion” with Candidate 5.

One thing I do know is that this is far from over.

It's In The Blag

Illinois Governor Ron Blagojevich has been arrested by the Feds for, among other things, trying to sell Obama's vacated Senate seat to the highest bidder.

Illinois Gov. Rod Blagojevich was arrested on criminal charges on Tuesday, including trying to sell the U.S. Senate seat being vacated by fellow Democrat President-elect Barack Obama, federal prosecutors said.

Blagojevich was also accused of threatening to withhold substantial state assistance to the Tribune Company in connection with the sale of the Chicago Cubs' baseball home Wrigley Field "to induce the firing of Chicago Tribune editorial board members sharply critical" of him.

The 51-year-old Blagojevich and his chief of staff, John Harris, were charged in a 76-page federal indictment with conspiracy to commit mail and wire fraud and solicitation of bribery. Both were taken into custody at their homes in Chicago.

In Illinois, the governor selects a successor when there is a mid-term Senate vacancy. Obama resigned from the Senate soon after winning the Nov. 4 presidential election.

Blagojevich allegedly was caught on court-authorized wiretaps during the last month.

He was seeking a "substantial" salary for himself at a nonprofit foundation or union affiliated organization, a spot on a corporate board for his wife, promises of campaign cash, as well as a cabinet post or ambassadorship in exchange for his Senate choice, the FBI affidavit added.

The man prosecuting Blagojevich? None other than Chicago crimefighter US Attorney Patrick Fitzgerald (yes, THAT Patrick Fitzgerald).

Fitzgerald said the case required "unusual measures" because of actions Blagojevich was expected to take soon, including filling the vacant Senate seat. "There were a lot of things going on that were imminent," he said.

"We were in the middle of a corruption crime scene and we wanted to stop it," Fitzgerald said.

He said Blagojevich was looking to pull $8 million in funding for a children's hospital after the hospital's chief executive officer did not give a $50,000 contribution to the governor's campaign.

Also, Fitzgerald said, it was expected that Blagojevich would soon sign into law a bill that would direct a percentage of casino revenue to the horse racing industry -- a bill supported by someone who contributed $100,000.

"To let that bill be signed, to me, would be very, very troubling," Fitzgerald said.

One big question now is whether Blagojevich retains the right to name Obama's successor if he remains in custody or even under indictment. The answer is yes, according to Fitzgerald.

Jay Stewart, executive director of Chicago's Better Government Association, agreed. He said Blagojevich retains the right to fill the senate vacancy until he's out of office, which won't happen unless he quits or is removed from office by impeachment.

At a press conference Tuesday, Illinois Sen. Dick Durbin, a Democrat, said he wants the Illinois legislature to act quickly to pass a law setting a special election to fill Obama's seat, in order to prevent Blagojevich from making a tainted appointment or there being a lengthy vacancy in the Senate.

"No appointment by this governor under these circumstances could produce a credible replacement," Durbin said.

This is going to be Obama's Whitewater. The GOP and the right wing noise machine will be screaming about this for Obama's entire career. How much did he know about the scheme? All evidence so far appears to be "zero", but that won't stop them from looking for or creating links where there are none.

Way to go, Blago. Democratic Stupidity at its finest. New tag: Blagogate.

Out Of The Frying Pan...

...into the mortgage default. The newest report out this week from the Office of the Comptroller of the Currency shows that when the feds stepped in an intervened with mortgage payments to keep people in their houses, a large percentage ended up back behind in their mortgage payments again, sometimes within only a few months.

The OCC found that 58 percent of borrowers who received a modification in the first quarter have since missed at least one monthly payment. In the more recent group of borrowers who received modifications in the second quarter, 51 percent have missed a payment. The finding was based on data provided to the OCC and its sister regulator, the OTS, by 14 of the nation's largest banks, which account for about 60 percent of the mortgage market.

There's every reason to believe this is representative as a whole of the mortgage situation in the US. As the housing market continues to collapse these problems will continue until the housing market hits bottom, and there's no reason to believe that will happen anytime soon.

StupidiNews!

• Illinois suspends all activity with Bank of America in an unprecedented show of solidarity with laid off workers.
• The Fed has authorized China Construction Bank to operate in the US.
• Dems are pushing a $15 billion automaker bailout plan that would effectively nationalize the industry.
• Sony plans to lay off 16,000 Japanese workers as that company struggles with collapsing sales.
• Suspicious but harmless powder-filled letters were sent to at least six Governor's offices yesterday.