Deal Or No Deal

As expected, the Sunday Night Deal to save Citigroup is a go.

Citigroup Inc is looking at putting risky assets in a "bad bank" -- a step to reassure investors that the rest of its assets were safe, the Wall Street Journal reported on Sunday.

The "bad bank" might take on some of Citigroup's more than $1.23 trillion of off-balance sheet assets. Citigroup might bear the initial losses on the assets, and the government might cover losses beyond a particular threshold, the newspaper reported, citing people familiar with the matter.

U.S. financial markets are waiting for some sort of Citigroup announcement this weekend, and if nothing happens, the bank's stock is likely to plunge further on Monday, analysts said.

Let me emphasize that one more time so that it sinks in: Citigroup has more than $1.23 trillion of off-balance sheet assets. One and a quarter trillion (with a T!) in toxic derivatives as "assets" means this bank is effectively insolvent. It means our entire economy is effectively insolvent, because the second Citigroup goes under, those "assets" which are nothing more than fancy IOUs get called into question.

Citigroup is just one bank. It holds well over one trillion in IOUs. The IOUs are accepted as having worth because of the confidence that those IOUs will be paid, and every bank it sitting on a pile of them.

Globally those IOUs, these derivatives, are valued at over a quadrillion dollars...a thousand trillion. One million billion dollars.

If Citigroup goes under, then it will take this entire system down with it. More banks will fail. Their chunk of the derivative nightmare will fail too. If those IOUs are being defaulted on, then they become worthless. Only the agreed upon value of these derivatives gives them value. If the confidence that these IOUs have value evaporates, then the actual value of the derivatives evaporates as well.

One quadrillion dollars of theoretical global money vanishing.

Poof. And our global financial system poofs along with it. Yes, this is some scary stuff.

Citigroup is now on the clock. The stock will drop low enough to force another bailout worth tens of billions if not more. If Citigroup fails, it will take the global system with it.

Deal or No Deal. No Deal here means the end of the game.

And so more billions will be thrown to the banks. And the underlying rot at the foundation, the toxic weight of tens upon hundreds of trillions in derivatives, will continue to crush the financial sector. More banks will fail. More will be spent to save them.

Eventually, another Lehman Brothers will happen. Obama can't stop it. His hands are tied. There's nothing he can do, and his choice of Tim Geithner as Treasury Secretary strongly suggests he has chosen to continue the path of bailouts and more bailouts.

But Obama will have to end the bailouts eventually. He will be forced to do so when China and Saudi Arabia can no longer afford to front us the cash.

When that happens, all bets are off.

[UPDATE] The US government and Citigroup are frantically trying to seal the deal before the markets open tomorrow.

The U.S. government and Citigroup are working feverishly to hammer out a rescue plan for the beleaguered bank. If all goes according to plan, there will likely be an announcement of some type of plan in a couple of hours.

The exact nature of plan remains unclear, but the government is leaning towards some sort of cash infusion into Citigroup. The plan will probably be a multi-layered one, which means the government could backstop losses on Citigroup's troubled assets as well. In exchange, Citi may issue preferred stock to the government

Sources with knowledge of the negotiations say "everything is on the table", meaning that even the government plan of buying the troubled assets could be revived.

The problem with buying the assets from Citi is political: People close to the deal know that other firms will line up and ask the government to purchase their troubled assets as well. Brokerage stocks got crushed when Treasury Secretary Hank Paulson reversed his plan on the TARP to direct capital infusions to the banks and away from buying troubled assets.

The Bottom line: This is very fluid and the situation may change again. But as of now, the government is getting cold feet on plan to buy troubled assets, which leaves direct capital infusion on the table.

They have no choice.

They will have no choice when the next major bank goes under.

And the next.

And the next.

[UPDATE 2] The Citigroup deal is expected to be a direct cash infusion of $10-$20 billion for starters, CNBC reports.

A Taxing Problem

Turns out Obama has no intention of rolling back the Bush tax cuts just yet.

President-elect Barack Obama may delay the rollback of high-income tax cuts for the wealthiest Americans, two of his aides said Sunday.

The tax cuts were instated by President Bush and discontinuing them was a key promise of Obama's campaign for the presidency.

Obama's political strategist David Axelrod was asked by Fox News's Chris Wallace if the measure could be allowed to expire on schedule after 2010 and avoid an immediate repeal.

"Those considerations will be made," said Axelrod, who has been selected as Obama's senior White House adviser.

Bill Daley, an adviser to Obama and commerce secretary under former President Bill Clinton, said on NBC's "Meet the Press" that the 2010 scenario "looks more likely than not," Reuters reported.

The change in policy may suggest that Obama is wary of imposing more taxes during a financial crisis or that he is looking to boost Republican support for his recovery measures.

Or that the people running his financial program have no more idea how to fix the problem than the current occupants.

Obama has no need for the Left now. He's running for 2012 as a moderate Republican before he's even sworn in as a Democrat.

The Reality Of Obama's Foreign Policy

I've said on a number of occasions that my biggest problem with Obama is foreign policy. He never saw the US war on Iraq as wrong on moral reasons, but on strategic ones. No person allowed to win the Presidency and the role of Commander-in-Chief would ever tell America that using military force is morally wrong.

Obama sees Bush policy for the most part as incompetent and poorly executed, not wrong. Obama plans to do everything that Bush couldn't do: catch Bin Laden, draw down the "wrong" war in Iraq, and concentrate on the "right" war in Afghanistan and Pakistan. Same quagmire, different location.

Which brings us to the grim realization that -- surprise! Obama's a Clintonian interventionist centrist.

Mr Obama has moved quickly in the last 48 hours to get his cabinet team in place, unveiling a raft of heavyweight appointments, in addition to Hillary Clinton as his Secretary of State.

But his preference for General James Jones, a former Nato commander who backed John McCain, as his National Security Adviser and Arizona Governor Janet Napolitano, a supporter of the war, to run the Homeland Security department has dismayed many of his earliest supporters.

The likelihood that Mr Obama will retain George W Bush's Defence Secretary, Robert Gates, has reinforced the notion that he will not aggressively pursue the radical withdrawal of all combat troops from Iraq over the next 16 months and engagement with rogue states that he has pledged.

Chris Bowers of the influential OpenLeft.com blog complained: "That is, over all, a centre-right foreign policy team. I feel incredibly frustrated. Progressives are being entirely left out of Obama's major appointments so far."

Markos Moulitsas, founder of the Daily Kos site, the in-house talking shop for the anti-war Left, warned that Democrats risk sounding "tone deaf" to the views of "the American electorate that voted in overwhelming numbers for change from the discredited Bush policies."

A spokesman for the President-elect was forced to confirm that Mr Obama holds to his previous views. "His position on Iraq has not changed and will not change."

But the growing disillusionment underlines the fine line Mr Obama must walk between appearing to reach out to former opponents and keeping his grassroot supporters happy.

Mr Obama seems conscious of the need to move fast, to reassure a watching world that he will be ready to hit the ground running on foreign and economic policy.

He will wait until Friday before formally announcing his national security team, but he will on Monday formally unveil his economic team, with New York Federal Reserve bank chairman Timothy Geithner as Treasury Secretary and the New Mexico Governor, Bill Richardson, in the Commerce portfolio.

There's a pretty large difference between "better than McCain" and "change we can believe in." Hillary, the word has it, is already cleaning house of the folks who actually thought Obama was going to keep his word to progressives on the war.

Before Hillary Clinton has been formally offered the job as Secretary of State, a purge of Barack Obama's top foreign policy team has begun.

The advisers who helped trash the former First Lady's foreign policy credentials on the campaign trail are being brutally shunted aside, as the price of her accepting the job of being the public face of America to the world. In negotiations with Mr Obama this week before agreeing to take the job, she demanded and received assurances that she alone should appoint staff to the State Department. She also got assurances that she will have direct access to the President and will not have to go through his foreign policy advisers on the National Security Council, which is where many of her critics in the Obama team are expected to end up.

The first victims of Mrs Clinton's anticipated appointment will be those who defended Mr Obama's flanks on the campaign trail. By mocking Mrs Clinton's claims to have landed under sniper fire in Bosnia or pouring scorn on her much-ballyhooed claim to have visited 80 countries as First Lady they successfully deflected the damaging charge that he is a lightweight on international issues.

Foremost among the victims of the purges is her old Yale Law School buddy Greg Craig, a man who more than anyone led the rescue of his presidency starting the very night Kenneth Starr's lurid report into the squalid details of the former president's sex scandal with Monica Lewinsky were published on the internet in 1998. Despite his long and loyal friendship with the Clintons, Mr Craig threw his lot in with Mr Obama at an early stage in the presidential election campaign. As if that betrayal to the cause of the Clinton restoration was not enough, Mr Craig did more to undermine Mrs Clinton's claims to be a foreign policy expert than anyone else in the some of the ugliest exchanges of the battle for the Democratic nomination.

Underneath the catty sniping is the truth: Obama's foreign policy won't differ from Bush or Clinton. Hillary must have realized that her best shot at the White House isn't around Obama...but through him.

The wars will rage on until economic circumstances force something else.

StupidiNews, Weekend Edition

• Obama's weekly address outlines a 2.5 million job public works program.
• Could Janet Jackson's famous Super Bowl "wardrobe malfunction" case hit the Supreme Court?
• The Saudis declare war on Somali Pirates.
• The one Dow stock that's really cooking in this "soup line" economy? Campbell Soup.
• Apple's iPhone 2.2 OS is out with some new Google Maps love.

It's Geithner

NBC is leaking that NY Fed Chair Tim Geithner is Obama's pick for SecTreas.

Barring last minute changes, the nominee for Treasury Secretary will be NY Fed President Tim Geithner -- a career Treasury official under both Bob Rubin and Larry Summers -- who actually had worked at the Treasury in three administrations under five Secretaries -- going back to 1988.

Geithner has been a key player in the current economic crisis -- helping Treasury Secretary Hank Paulson and his team manage the wall street bailout.

Former Treasury Secretary Summers -- also considered for the post -- might still play a major future role in the Obama administration, according to sources. Summers came under fire from women's groups because of controversial comments he made about gender issues while President of Harvard, but sources say the decision to choose Geithner had more to do with Obama's interest in "change" and getting someone new on the team.

Also expected Monday -- an announcement that former U.N. Ambassador and Energy Secretary in the Clinton administration, New Mexico Governor Bill Richardson, will be Commerce Secretary.

How BAD is this pick?

The Dow shot up almost 500 points on the news in the last hour of trading.

I can't get over how hideous of a pick this is. You might as well leave Hank Paulson in charge. There will be no appreciable change in economic policy in the Obama administration, more bailouts for Wall Street, more money thrown down the rabbit hole.

Geithner is literally the worst pick Obama could have made short of letting Paulson keep his job. Not only is he part of the same Ben Bernanke/Alan Greenspan Fed team that got us into this mess, as New York Fed Chairman, there's no single bigger government cheerleader for Wall Street itself than this man.

Obama's message is clear: Wall Street, not Main Street. I hope this is wrong. Honestly, I do. Because if this is true, Obama just sold America down the river, and he most likely has no intention of making the hard choices that have to be made in order to save the economy. Geithner's been the point man for the bailout on the Treasury/Fed side of the deal and while he has made noises about the US economic position being in trouble, his actions speak to supporting the same useless Fed actions that produced this debacle. If anything, Geithner was showing Bernanke "the ropes" 16 months ago.

Among executives of the district banks, Geithner, 46, has the most extensive background in responding to upheavals. During the Clinton years, he was an aide to Robert Rubin and Lawrence Summers, who both served as Treasury secretary. In that role, Geithner helped broker emergency loans for Thailand, Indonesia, South Korea, Russia and Brazil when their currencies sagged. While he was at the Treasury, the U.S. participated in interventions to strengthen the yen in 1998, and the euro in 2000.

``It is a team that is new to the challenge, but it is a pretty smart group,'' said Harris. Bernanke ``really studied for the job. He is familiar with the history of the Fed, the policy errors, and he is a Great Depression buff.'' Bernanke contributed to Depression research with a 1999 paper co-authored with Mark Gertler and Simon Gilchrist on how financial markets can worsen economic downturns.

With Friday's action, Bernanke and his colleagues have ``tip-toed in'' and are ``trying to strike the right balance between doing nothing and riding to the rescue,'' said Gary Schlossberg, senior economist at Wells Fargo Capital Management in San Francisco, which oversees $200 billion in assets. ``They've left the door open to a full-blown easing of monetary policy. The results are mixed so far, and early returns suggest we're not out of the woods yet.''

That worked out well, huh guys?

Geithner's a clueless twit, just like the rest of the Fed crew. Obama's just hung a sign on Wall Street this afternoon: "Under New Management, Same Old Business."

Clinton is arguably strike one, but Geithner is definately strike two for Obama. Two and a half weeks and he's already showing major signs that "Change you can believe in" is the same goddamn thing as Bush.

I am pissed.

[UPDATE]More Geithner is Great! quotes...

I would say the market is going to like it," said James Awad, managing director of Zephyr Capital. "[Former Clinton Treasury Secretary Larry] Summers was more controversial. People will view it as a safe choice, an experienced guy.

"There's a little bit of a question because he's associated with the bailout," Awad added, "and that's still a work in progress and not totally successful. There will be a few who'll be upset because he's associated with the TARP."

"Geithner is a solid choice. He has shown more independent thinking," said Former Sen. Don Riegle, who chaired the Senate Banking Committee during the savings and loan crisis. "He has also seen this financial system meltdown from the inside ... he can offer highly skilled and pragmatic advice to Obama."

"He will understand the urgent necessity of assembling a world class team at Treasury ... and be able to attract the talents he needs," Riegle continued. "This choice will also facilitate close cooperation between the Treasury Department and the Federal Reserve, [which is] much-needed given the increasing scale of the economic crisis."

"He is battle-tested with Rubin and Summers and has done an excellent job orchestrating the Fed's response to the worst financial crisis since the Great Depression," said Chris Rupkey, economist at Bank of Tokyo-Mitsubishi. "A crisis manager par excellence who will hit the ground running, as he has been on the case since the Global funding crisis began way back in July 2007. I cannot think of a better choice who will mesh seamlessly with the Fed and FDIC."

If you actually think the Fed has done a excellent job in any way, shape, or form, then yes, Geithner's your man.

Spin Citi

No go on the Citigroup rebound. Stock's down another 20% to around $4 a share and falling here at 10:45 AM or so. Dan Wilchins at Reuters is already running down the list of what the Gubment can do, which boils down to four choices:

1. Government buys a crapload MORE of Citi preferred stock,
2. An AIG style multi-billion "loan",
3. An FDIC liquidation, WaMu style,
4. Government guarantees all Citigroup debts and derivative obligations.

Number 2 is the most likely, 3 cannot be allowed to happen, but I'm assuming the government will screw around with 1 first.

Which means of course option 4, the option that would actually work, won't be considered. Once the government starts acting as derivative counterparty for Citi, every bank in the country will want the same exact guarantee, period. It's the derivative obligations that are going to kill the banks, and they both know it...but eventually this is what will be have to be done. Banks still refuse to come clean on derivative debt and the fact the banks are basically insolvent because of it.

So yeah, we'll stick with 2. Big old loans. They've worked GREAT so far. Obama's Treasury Secretary is going to be the worst job on Earth.

But at least it's a job.

Dear America:

"Quit complaining about the economy. We'll be fine, just as soon as you realize there's nothing fundamentally wrong with the global financial picture and you get your ass to Wal-Mart like you've been doing and deal with the fact Obama's going to fail to keep any of his domestic spending promises and will have to slash spending across the board like McCain was going to do anyway."

--Irwin Stelzer

The Enemy Of My Enemy

Seems the universe has an unlikely ally in fighting those pesky Somali pirates off the Horn of Africa: militant Somali Islamists.

Dozens of Somali Islamist insurgents entered a port on Friday in search of the pirate group behind the seizure of a Saudi supertanker that was the world's biggest hijack, a local elder said.

Separately, police in the capital Mogadishu said they ambushed and shot dead 17 Islamist militants, in the latest illustration of the chaos in the Horn of Africa country that has fueled a dramatic surge in piracy.

The Sirius Star -- a Saudi vessel with a $100 million oil cargo and 25-man crew from the Philippines, Saudi Arabia, Croatia, Poland and Britain -- is believed anchored offshore near Haradheere, about half-way up Somalia's long coastline.

"Saudi Arabia is a Muslim country and hijacking its ship is a bigger crime than other ships," Sheikh Abdirahim Isse Adow, an Islamist spokesman, told Reuters. "Haradheere is under our control and we shall do something about that ship," he said.

Islamists on one side, pirates on the other, and we're stuck in the middle. Lovely.

I'm assuming then standard US operating procedure and asking "So, which side do we start bribing first to kill the other?"

A Smidge Of Good News On Housing

As Fannie and Freddie are suspending foreclosures until after the New Year.

The six-week halt will begin Nov. 26, a day before the U.S. Thanksgiving holiday, and last through Jan. 9, the companies said in separate statements today. The hiatus is designed to give servicers more time to implement a streamlined loan modification program for struggling borrowers.

“It’s a giant time out,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said today in a Bloomberg Television interview. “I wouldn’t be surprised to see this across the board.”

Fannie and Freddie, government-sponsored enterprises that own or guarantee $5.2 trillion of the $12 trillion U.S. home mortgage market, were placed under federal control Sept. 6. They have since been pushed to work harder at modifying troubled single-family and multifamily mortgages to curtail foreclosures.

Better than nothing, especially if other mortgage lenders follow suit. But six weeks from now, folks will still be underwater on their mortgages and out on the streets in January.

And a hell of a lot more people will follow over the next 18 months.

StupidiNews!

• Attorney General Michael Mukasey collapsed after a speech last night and has been hospitalized.
• Obama's personal cell phone records have been compromised by Verizon employees.
• Hillary Clinton will indeed be named Secretary of State next week.
• US military contractors in Iraq could soon be facing charges under the new agreement worked out this month.
• Will California soon be testing a statewide electric car charging grid?

Global No Confidence Vote: The Naked Citi

Economically we're approaching another fateful moment, another fork in the road...and quite likely another cliff ahead. The Dow tumbled to near 7,500 today, representing a devastating loss in the last week as the auto bailout has stalled out until December.

Far more sinister is the collapse of Citigroup, the number 2 bank in the US. Announcing 53,000 layoffs on Monday, the bank's stock has now imploded under the vital $5 a share point where institutional investors like pension plans and hedge funds aren't allowed to tread. This could trigger a massive selloff that will sink the company, and indeed Citi is now shopping itself around in a last ditch effort to get above the $5 mark.

It's the latest company to play "Deal or No Deal."

Citigroup Inc., which fell 26 percent in New York trading today, is considering selling off pieces of the bank or the whole company, the Wall Street Journal reported online, citing people familiar with the matter.

Talks are preliminary and don’t suggest that New York-based Citigroup is backing away from its insistence that it has sufficient capital and funding, the Journal said.

Buffeted by four straight quarterly losses, Citigroup has raised about $75 billion since December by selling assets and equity stakes, including a $25 billion injection from the U.S. Treasury. The government will do whatever it takes to stabilize Citigroup, including pouring more money into the company, because of the threat its failure would pose to the global economy, said Peter Wallison, a fellow at the Washington-based American Enterprise Institute.

“There is no question that Citigroup will not be allowed to fail,” said Wallison, who was Treasury Department general counsel under former President Ronald Reagan. “I would not think it is a good idea to restore the ban on short selling,” he said.

Citigroup declined $1.69 to a 15-year low of $4.71 on the New York Stock Exchange at 4:15 p.m. It has fallen 84 percent this year.

Like AIG, Citigroup will not be allowed to go under. Hundreds of billions will be poured into it over the next few days by Hank Paulson and friends. Another loaded Weapon of Financial Destruction has been pointed at the global financial system, and as sure as Jack Bauer saves the day in "24" the government will save the floundering company. Bank of America, the number one bank in the US, has slid to $11.25 or so.

The largest banks in the US are failing.

But even more sinister than that, the S&P 500 hit its lowest close since 1997.

"It was pretty brutal," said Phil Orlando, chief equity market strategist at Federated Investors.

He said the market is at a critical point, with the S&P having "tested" or closed below the lows of the previous bear market. Investors will be looking closely at the next few sessions to see if stocks can hold those key levels.

Since peaking at an all-time closing high of 1,565.15 on Oct. 9, 2007, the S&P 500 has lost 52%. The Dow has lost nearly 47% since closing at an all-time high of 14,164.53 on the same day. Since hitting a bull market high of 2,859.12 on Oct. 31, 2007, the Nasdaq has lost 54%.

"The wealth destruction is phenomenal," said Tom Schrader, managing director at Stifel Nicolaus.

Cut in half and still falling. Nobody knows what to do. We're out of rate to cut. We're not running on fumes, we're running on OTHER COUNTRY'S FUMES.

It's rather depressing. What's worse is I don't see a bottom to this yet. The housing crash rolls on, unemployment is rising sharply, and the consumer-driven economy is running out of consumers to consume.

It's a race to see who gets bailed out first, the automakers or Citigroup. I'm betting Citi, and I'm betting a deal will roll around before Monday, stoking another lovely bear market rally that will run smack into the reality of a dismal holiday shopping season come a couple weeks or so.

Citigroup will not be long for this earth in its current form. Bank of America is most likely next. These institutions are testing multi-year lows this week. We're down to a massive decision point here. Too Big To Fail is about to be tested.

Citigroup shares lost more than one-quarter of its market value on Thursday as investors questioned the banks ability to handle potential credit losses and writedowns in 2009.

The bank has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Citigroup has access to U.S. Federal Reserve funds, is working at insuring some of its debt and is reducing its balance sheet faster than any other company in the banking industry, said analyst Bove who believes these steps backstops the bank's liabilities.

"It would take a Depression every bit as large and long as the 1930s debacle to shake this company's viability," Bove said.

Care to test that theory? Nevermind...we're testing that right now.

Be prepared.

Cross-posted at the Frog Pond.

Waxman On, Waxman Off

Democrat Rep. Henry Waxman, that is. He's now the Chair of the mega-powerful House Energy and Commerce Committee after taking the spot from Michigan Rep. John Dingell.

Rep. Henry Waxman (D-Calif.) will become the next chairman of the House Energy and Commerce Committee after House Democrats voted to replace current Chairman John Dingell (D-Mich.).

Waxman won 137-122 in the secret ballot vote.

The dramatic intra-party showdown for the coveted position signals a leftward turn for the Democratic agenda. The outcome was a blow to the seniority system and a victory, at least in perception, for House Speaker Nancy Pelosi (D-Calif.).

Though her aides denied it, many saw the hand of Pelosi in Waxman’s challenge for the post, which conveys great power over how the Democratic agenda of President-elect Barack Obama will be implemented.

Waxman is considered more liberal on issues like climate change, energy and business regulation, and potentially more aggressive on healthcare. Dingell, the longest-serving House lawmaker, is close to the auto industry and autoworkers.

Dingell has long been the main obstacle on the Democrat side of the aisle to reforming the auto industry and to clean energy technology. He fights for his home district of Detroit deep in UAW country and he's fought for it well, but he's put the auto industry's needs ahead of America's for decades now. It's time for the country to move on. Environmental and energy reform are far more important now, not to mention badly needed reform of interstate trade laws and REAL climate change legislation. This committee would handle health care reform legislation on the House side too, most likely working hand in hand with Ted Kennedy and presumptive HHS Secretary Tom Daschle.

Waxman taking this committee over is a big neon sign that Obama's domestic agenda is on the front burner and cranked up to boil. This is huge folks, Dingell has been the ranking Democrat on this committee since Reagan and it means Obama's allies in Congress are gearing up swiftly and effectively to launch into signfiicant action come January. Going after Dingell is something even Clinton wouldn't contemplate, much less do. This is the kind of change we need.

Obama knows exactly who he needs to have going into the fights ahead...and he knows who he needs to have moved aside. I'm feeling better and better about the real prospect of effective environmental, energy, and health care legislation.

Indiana Jones And The Search For The Market Bottom

You don't have to be a world class archaeologist to figure out what's going on in the Dow this week. Earlier I warned that the Dow would indeed test the 8,000 mark again, and it did at the end of yesterday's session falling to just under the 8k level.

With an entire night to digest the numbers, Dow futures are having another meh day. It could go either direction, and this may actually be a vitally important day in the markets. If the Dow rallies once again or stays around the opening level then it's another sign the 8k level is the bottom for now. There's evidence that the market really wants to stay above 8,000. News this morning that Saudi prince Alwaleed Bin Talal Alsaud increased his stake in Citigroup to a full five percent of the company may be the rally point for today.

If it sinks big time however like yesterday, then all bets are off.

Plenty of evidence is there on the latter. The Fed is starting to see evidence that deflation may be the threat, not inflation.

Five years after Federal Reserve Chairman Ben S. Bernanke helped stamp out the risk of deflation, the threat is returning as the financial crisis and a worsening economic slump pull inflation lower.

Fed policy makers now predict the U.S. economy will contract until the middle of next year, according to minutes of their Oct. 28-29 meeting released yesterday in Washington. Government figures showed that consumer prices excluding food and fuel costs fell for the first time since 1982 last month.

The minutes, along with a slide in financial stocks to the lowest level in 13 years, increased the odds that the Fed will cut its benchmark interest rate next month. Bernanke may also need to revisit the unorthodox policy options, such as purchases of U.S. government debt, that he outlined as a board member in 2002-2003, Fed watchers said.

``The Federal Reserve put deflation back on the table as a significant policy concern,'' said Vincent Reinhart, former director of the Fed's Division of Monetary Affairs, who is now a visiting scholar at the American Enterprise Institute in Washington. ``There does not appear to be any barrier to lowering'' main rate below the current 1 percent level, he said.

Deflation, or prolonged declines in prices, hurt the economy by making debts harder to pay off and lenders more reluctant to extend credit. Japan is the only major economy to have suffered the phenomenon in modern times.

Things could go either way, short term. Long term however keep in mind things will get worse...much worse. We're getting closer and closer to the "Stagpression" scenario, a multi-year period of recessionary contraction that will cycle around the globe.

StupidiNews!

• The Obama cabinet continues to take shape with Arizona Governor Janet Napolitano as Homeland Security Secretary.
• If the GOP does have a leader, it's House Minority Leader John Boehner.
• It's all but official: Missouri got it wrong on November 4th for the first time in 48 years.
• After 17 years, Guns N' Roses has a new album out and it's launching on...MySpace?
• US corporations want a major rollback of pension plan rules to stay afloat.

Obamacare Is A Go

While much has been made of Obama's selections for AG and SecState, possibly the most telling and potentially important cabinet appointment was leaked today, that of Health and Human Services Secretary: Tom Daschle.

As Ezra Klein points out, this means Obama is dead serious about getting Obamacare signed into law.

CNN is reporting that Tom Daschle will not only be Health and Human Services Secretary, but also health reform czar under the Obama administration. This is huge news, and the clearest evidence yet that Obama means to pursue comprehensive health reform. You don't tap the former Senate Majority Leader to run your health care bureaucracy. That's not his skill set. You tap him to get your health care plan through Congress. You tap him because he understands the parliamentary tricks and has a deep knowledge of the ideologies and incentives of the relevant players. You tap him because you understand that health care reform runs through the Senate. And he accepts because he has been assured that you mean to attempt health care reform.

And I agree with his analysis 100%. Obama may be playing politics with Clinton and State, but he's playing politics to win with HHS.

Considering the seriousness he's taking this with, new tag: Obamacare.