In this week's cover of Newsweek International, we explored whether Shanghai is the new Detroit. Now, I'm beginning to wonder if it may soon be the new Wall Street. As I've written and blogged in the past, the fact that the world's top three banks by market capitalization are now Chinese isn't as big a deal as it might seem -- they are still local, commercial players, not global investment banks a la Morgan Stanley or Goldman Sachs.

But this week, Liu Tienan, Deputy Director General of China's National Development and Reform Commission, announced his country's intention to create by 2020 a financial center "appropriate to China’s economic power and the international status of the RMB." Liu stressed that China’s financial sector should be not just "big, but strong." Despite the market downturn, the Chinese are launching their own version of NASDAQ later this month, in order to help fund small and mid sized businesses that aren't benefiting as much from the massive stimulus package (yet still create the majority of jobs). They are also moving ahead with developing more complex securities (though not those crazy credit default swaps that tanked markets over here), and making their currency more convertible. For more on this, check out a longer story on the topic by our Shanghai correspondent Duncan Hewitt in next week's international magazine.

All of it underscores just how economically competent and confident the Chinese are. They could have used the financial crisis as a reason to turn their back on capital market reform -- instead, they are pushing ahead with it, and will likely gain global financial market share as a result. Wen Jiabao recently said as much when he told the Chinese that this is a moment for "more, not less" reform. It's such a cliché, but I'm reminded yet again of the fact that the Chinese use the same character to write "danger" and "opportunity."

From Megan McArdle, on BofA's Ken Lewis:

I don't find it hard to believe that Ken Lewis genuinely believed that he was singlehandedly saving the US financial system [by absorbing Merrill Lynch]...But that doesn't really matter.  If my husband sacrificed our child to save thousands of people, I might recognize, at some abstract level, that he had done the right thing. But we wouldn't stay married.

Ouch. That's a vaguely Biblical analogy. But if Ken Lewis is Abraham and Bank of America the sacrificial Isaac, then who's God?

Stripped: During a shareholder meeting that at times seemed more like a circus, investors voted to strip Ken Lewis of his chairmanship of the board. The embattled financier will remain CEO of the company -- for now, at least.

"You Sneeze, You Go Home": That's the rule at Mexico City brokerages, where stock traders slip on face masks in between client phone calls.

Look On the Bright Side: Hidden amongst yesterday's dismal GDP report were some promising figures. Consumer spending was up, for instance, and the price index rose enough to dispel fears of deflation.

Can the SEC Do Anything Right?: Apparently not, according to the Wall Street Journal. The regulator has started hiring specialists to investigate particular types of financial wrongdoing, moving away from a generalist model. This threatens to creat a "'silo' system in which different groups benefit from not sharing information with each other."

Hedge-Clipping: A new proposal to regulate hedge funds and private equity firms in the EU has some Londonites up in arms.

We humans get confused by large numbers. So how large is $100 million in the context of the U.S. budget? One blogger shows us using stacks of pennies:

Related: Here's one person's effort to visualize what $1 trillion looks like.

(Hat tip: Megan McArdle)

Wow, the GDP figures released today are abysmal: the economy shrank at an annualized rate of 6.1 percent last quarter. "GDP has now dropped for three straight quarters for the first time since 1974-1975," according to Reuters.

This is much worse than what economists expected (a 4.9 percent drop), but pretty close to Goldman Sachs' prediction of a seven-percent decline. But there is hope in sight: Goldman expects "only" a three percent drop this quarter. So if their predictions are as good this time as they were last quarter, then the economic gloom may start to lift a little.

Rahm Emanuel famously said what everyone was thinking when he noted earlier this year that "a crisis is a terrible thing to waste." The financial industry has been bruised and battered. There's a golden opportunity to refashion a fairer and more stable system, one less susceptible to "the reemergence of an American financial oligarchy," as Simon Johnson so memorably put it in a recent article in The Atlantic. 

What we need in order to accomplish this -- aside from better government oversight -- is a new generation of financial innovators to fix today's broken system. This is what happened in the energy sector when, as oil prices climbed to $150/barrel and climate-change worries crescendoed, venture capitalists sensed a once-in-a-lifetime opportunity and poured money into clean technology. Although oil prices have since collapsed, that money is still at work, and might yet produce the Google or Microsoft of the cleantech world.

The same should happen in the financial world, but I'm increasingly skeptical that it will. One reason for the skepticism is that the SEC and other government agencies charged with regulating the financial sector are in no way set up to encourage Silicon Valley-style innovation. In fact, they often discourage it.

I'm thinking about this topic after a recent meeting with Chris Larsen, the CEO of Prosper.com. Prosper, along with its main competitors, Lending Club and Zopa, is a peer-to-peer lender. These companies enable people to lend directly to one another online. Because there's not a bloated bank sitting in between the two parties, borrowers and lenders tend to get a better deal than they would by going through more traditional channels.

Financial innovations tend to be either unquestionably good (ATMs, credit cards) or arguably malevolent (credit default swaps), and peer-to-peer lending is widely considered to be among the former. It is the internet era's version of community banking, in which borrowers actually know their bankers, and it's also, in this time of tight credit markets, an alternative way for consumers and small businesses to get access to money when they need it.

But the SEC isn't making it easy for peer-to-peer lending to, ahem, prosper. Last summer, as the mortgage crisis waxed and the regulatory agencies' failures became more apparent, the SEC overcorrected and effectively shut down Prosper, requiring the company to enter a "quiet period" while it registered with the federal government. (While that process continues, on Tuesday, California regulators gave permission for Prosper to start operating again within the state. Lenders from in-state and borrowers from anywhere in the U.S. can use the site as they did before, with the addition of some important features.) Zopa, a UK-based P2P lender, sensed the changing regulatory winds and retreated back to the rainy Isles. To date, only Lending Club has "gone through all the legal pain needed to get full SEC registration."  

Larsen is pretty good-natured about the ordeal, largely because Prosper has enough backing ($40 million in venture capital money) to pay the legal and accounting fees associated with SEC registration. But he's fully aware that most young innovators and venture capitalists in the country's technology hubs aren't willing to put up with months or years of regulatory limbo and the associated costs. When the government wanted to print out Prosper's regulatory filings, they sent the bill for all the paper to Larsen. It came to $75,000. The average, fresh-out-of-college entrepreneur might be able to comprehend the mysteries of solar panels and gas-electric hybrids, but understanding -- or affording -- the SEC? Forget about it. And the time for that to change, and for financial innovation to make headway against today's incumbent oligarchs, is swiftly dwindling, according to Larsen. The window is open, but it will only last 18 months, he says:

Either you’re going to have a total collapse or the existing incumbents are going to reestablish themselves. They’re crawling all over Washington, they’re lobbying, because they get it, too -- they’re under threat right now. Things are going to change but they’re going to change one of two ways: fundamentally, or on the margin. You know, tighten up this, tighten up that, and you’ll have another crisis in 10 years. This has been a meltdown. And it should be a call to actual innovators to come up with new things. 

Stressful Days: Bloomberg reports that six of the country's 19 largest banks will be told to find more capital when the results of the stress quiz, er, test are revealed next week.

Know Thyself: after the Great Crash of 1929, Congress set up the Pecora Commission to investigate the shady financial activities that took place in the 1920s. An op-ed columnist in the WSJ doesn't see anything similar happening this time around because it would force Congress to investigate itself.

How the Sausage Gets Made: The New Yorker has a long profile of Peter Orszag, Obama's budget director. The article is light on economics and heavy on insight into the political process, but we do learn why Obama couldn't make a dent against farm subsidies. (Hint: Rich farmers!)

Another Day, Another Madoff: The SEC has arrested California financier Danny Pang, who allegedly defrauded investors of hundreds of millions.

Twelve Reasons to be Optimistic: Including this gem, #11: "Condé Nast has decided to shutter Portfolio after two years of struggle. The introduction of the glitzy magazine about Wall Street launched in the spring of 2007 marked the end of the bull market. Now its demise may mark the end of the bear market."

Just ask the Brazilians who rank among the top exporters of pork. Brazil has already seen its pork exports plummet 20 percent this year because of the world economic crisis. Just 24 hours after news of swine flu outbreak went viral the shares of the country's main exporters, like JBS, Mafrig and Minerva, dropped between 2 and 10 percent on the São Paulo stock exchange, Bovespa. Would the double whammy of recession and contagion break this multibillion dollar industry?

Perhaps not. Outbreaks, like economic breakdowns, tend to have a devastating short term impact on global markets, but then dissipate when the initial panic subsides. By late Tuesday, the stock markets gave back a good part of the share price they'd chopped off Brazil's biggest meat dealers.

But the Brazilians weren't taking any chances. Fearing further losses brought on by a wave of consumer panic, the Brazilian pork industry trade association, known by the indigestible acronym ABIPECS, has appealed to the authorities of scientific nomenclature. Their solution: rebrand the disease.

"The denomination the World Health Organization chose for the outbreak of A/H1N1 is hurting pork producers the world over and could cause them serious losses," association director Pedro de Camargo Neto wrote the WHO today. 

The Brazilians have suggested changin the name from swine flu to Mexican flu, based on the origin of the latest outbreak. Muy amigo, as they say in these latitudes.

The vegans were thrilled.

More on that Freaky Swine Flu: This Reuters blogger has a good take on how past flu outbreaks affected the economy, and how this one might stack up. If you just can't get enough, they also have a full coverage page with all the latest updates, photos, and backgrounders your panicked heart could desire.

Shall We Call Them Stress Quizzes?: Results of the stress tests applied to 19 banks will be published Monday, but it looks like there won't be a hopping release party. The Fed and critics alike are downplaying the tests as a series of inconclusive what-if scenarios, which wouldn't restore confidence as hoped. That has one anonymous bank exec worrying that next week "could feel like September all over again."

RIP Countrywide: Countrywide Home Loans officially became Bank of America Home Loans, after BofA deemed the fallen giant's brand too toxic to resusitate. Meanwhile, in other BofA news, former Merrill Lynch chief John Thain is finally having his say about the bank, which informed him in January that his services were no longer necessary.

Petrodollars and Land Grabs: Arid Gulf States have been pouring millions into vast tracts of greener pastures in Africa and Asia, where they can grow their own food. But at least in Cambodia, local farmers sense they are getting shafted; why, they wonder, doesn't Kuwait just buy the stuff from local growers? Good question.

Somalia, Inshallah, Getting Its Act Together: Sometimes hope can come from the least likely of places. Today, that would be Somalia, where the new president has managed to pass the first budget since 1991 and collected $213 million from a donor conference in Brussels.

Masks and Handcuffs in Pakistan: And so not in the way you think...

It's a sign of exactly how complicated our current situation is that even as straightforward a task as tallying how much money the U.S. government has spent so far on bailouts is nearly impossible. Last week, Paul Kiel over at ProPublica's very good Eye on the Bailout blog surveyed three of the latest estimates of the total bailout "cost" thus far. I put "cost" in quotes because, as the various analyses make clear, the true cost ranges anywhere from $3.2 trillion to $12.8 trillion--leaving a gap of $9.6 trillion.

Part of that gap is easily explained away. Some studies look at just how much the U.S. has actually spent so far, others include funding promises and loan guarantees in the total, which results in a much higher figure. Here's a summary of the three recent analyses:

• The equity research division of financial firm Keefe, Bruyette & Wood estimates that the U.S. has spent $3.2 trillion and allocated $10.8 trillion. This includes bailouts financed by the Treasury, the Fed, the FDIC, and HUD.
• Bloomberg says the U.S. has spent $4.17 trillion and allocated $12.8 trillion. Kiel says that "Bloomberg’s total is higher because it includes things like tax breaks for banks and both stimulus packages (President Bush’s 2008 tax rebates and Obama's 2009 bill)."
• The Congressional Oversight Panel chaired by Harvard's Elizabeth Warren tallied things slightly differently and says the U.S. has spent $4.4 trillion so far.  (They didn't offer an allocation figure.)

There are so many numbers to quibble with it's pointless to even try. But that's never stopped us before! To take just one example, the COP credits Treasury with a $700 billion contribution -- that's the original TARP authorization. That leaves out the Fannie/Freddie bailouts, however, which add another $400 billion. Why was that sum left out? Who knows.

All these digits make me nostalgic for the good ol' days of August 2008, before $700 billion started to sound like a small number.

I Iz in Ur Fed, Meeting Wit Ur Bank Execs:  Want to know exactly what Tim Geithner was up to the day Lehman failed? Or when Fed officials said the economy was sound? Courtesy of a FOIA request, now you can. Think retroactive Twitter. Here's one take on the company he kept.

Spreading the Risk (and the Blame): Why just blame Wall Street when you can blame Washington, too? After re-reading minutes from the meetings of the Financial Stability Oversight Board, the WSJ thinks Messrs. Bernanke and Paulson, the "men who nearly ruined Bank of America," have some serious explaining to do.

Cash, Gold, and Global Institutions: This story sounds familiar, no? The IMF and World Bank want more money for the poor. Skeptics are reliably skeptical. But what's different this time, the Economist says, is that it actually matters.

Greedy Bankers, Part MMDCCXCVIII: Get your rage ready for action again. Fat Wall Street paychecks are back, and Paul Krugman thinks this is bad, bad, bad. Beyond that, he also thinks the justifications are utter baloney.

The Business of Swine Flu: FT breaks down the economic impact of pandemic worries. Hey look, so do we!

So Long, Farewell, Auf Wiedersehen, Goodbye: A memorial service for the staples of America's recently passed Gilded Age.

Where are the protesters when you need them?

What's most notable in Washington this weekend, as the spring meetings of the IMF and World Bank commence, is the calm in the streets. On Friday afternoon, only a smattering of colorfully garbed youths occupied the small park across from World Bank headquarters, and the lone microphone I could hear was in the hands of a rather addled young man who bleated out a warped version of the song "Feelings" (for reasons known only to him).

Compared with the late '90s and early '00s, the anti-globalization movement seems to have petered out. And oddly enough, at a time when you might think a successor movement would  rear its head in the United States--like an anti-greedy bankers movement--the streets are silent. Oh, for the days of the April 2000 meetings, when an activist scrawled a 75-yard-long graffito along the Whitehurst Freeway: "Outlaw bankers," it began, then proceeded to demonize property rights and debt, ending with the exhortation: "String up CEOs with Bankers' Guts." This message was later punctuated by a load of horse manure, which was dumped in front of the Bank's pristine white-faced headquarters. Atop it a demonstrator plunked a sign: "World Bank Meet Stinks."

None of that now, at least here (the G-20 gathering in London at the beginning of the month was a bit more raucous). The weirdest thing of all is that the most virulent protests -- at least in Washington -- seemed to take place when the economy was booming. Now that we are in a major recession, no one cares. And unlike in the '90s and early '00s, the kinds of decisions being made at gatherings like this really could determine what happens to all of us down the line -- especially whether big bad Wall Street will be allowed reconstitute its old institutions and trading practices and simply pick up where it left off, billions richer in taxpayer money. Judging from the serious differences between Americans and Europeans, as well as other members of the new G-20 elite, over everything from stimulus to regulatory reform, not a lot;is likely to get done here. We could sure use some protesters about now.

Sinking...Like a Rock: The auto industry's woes continue. Chrysler will likely file for bankruptcy next week. Meanwhile, Ford lost $1.4 billion last quarter, on top of a $14.6 billion loss in 2008, but says it still won't need a government bailout.

What's His Motivation?: A Madoff movie is already in the works. Elsewhere, the Daily Beast has a photo gallery of its dream cast, with Dustin Hoffman in the lead role.

All That Glitters: China revealed that its gold reserves have risen by 75 percent in the last few months, another sign that the country is starting to diversify away from the dollar.

Why Innovate When You Can Shop?: The Economist is troubled that in 2008 the U.S. granted more patents to foreigners than to its own citizens.

Echoes of Dickens: Bad times in the UK mean boom times for vermin, "with shuttered shops and half-built housing sites to live in, rotting piles of uncollected garbage for dinner and fewer exterminators sent out to kill them."

Get a Brazilian...Bond: Pimco says Brazilian and Mexican government debt are great places to invest.

Because this quarter, in the midst of -- say it with me now -- the worst global recession in 70 years, profit at Amazon.com grew by 24 percent, to $177 million.

You read that right. Amazon's financials didn't stagnate, hold steady, or even increase slightly -- they flew off into the stratosphere. Sales also grew by a whopping 25 percent, ignoring currency fluctuations, according to the quarterly results announced today.

Although these particular numbers come as a shock, it's no surprise that e-commerce is benefiting from the downturn. Anemic consumer spending is choking off the weakest brick-and-mortar retailers. Circuit City, Linens 'n Things,  The Sharper Image, CompUSA and other major chains have joined the extinction list in the last year and a half, and online vendors like Amazon are wooing their former customers.

However, I do wonder how much of this stunning performance is due to a one-time Kindle Effect. Amazon released the second generation of its revolutionary e-reader in February to lots of critical praise and better-than-expected sales. Exactly how popular the Kindle is, however, remains a state secret. (For proof of Bezos's tsar-like reticence, witness Charlie Rose trying to charm the answer out of him. Skip to 34:15 for the pertinent bit, although the whole conversation is interesting.) If Amazon's strong profit growth this quarter was really due mostly to the Kindle, Bezos will have to channel Steve Jobs and iterate the hell out of his next-gen reading tablet in order to keep producing these kinds of results. 

The reason he'd prefer a seat of power in Beijing over Washington right now is that the task for China's leaders is to encourage consumer spending, telling their citizens, in effect, to "Enjoy a little more." Obama, of course, has the opposite task, and "is going to have to encourage Americans to save more." Selling swimming pools is a lot more fun than selling mutual funds.

Obviously Owens is exaggerating somewhat. I, for one, would probably take Obama's spot over Hu's. China has plenty of problems other than a too-high savings rate. Around a third of the country's 1.3 billion people live on less than the international poverty standard of $1.25 a day -- that amounts to hundreds of million of people. The environmental issues confronting the country, from algae-clogged lakes to brown skies, are staggering. China could lose hundreds of billions off its investment in U.S. Treasuries. Oh, and then there's the looming specter of democratic revolution. 

I was reading "Alice In Wonderland" to my daughter last night and came across these lines.

The White Queen: Can you do addition? What’s one and one and one and one and one and one and one and one and one and one?

Alice: I don’t know. I lost count.

This put me in mind of the week's profit news from the major American banks--$3 billion in first quarter profit at Wells Fargo, $1.8 billion at Goldman, $2.1 billion at JPMorgan Chase, $4.25 billion at Bank of America. Looks good, till you really start adding. Let’s start with the most glaring problems: even as Bank of America was chalking up its profits, it was also warning that it faced growing credit losses, due to a decline in credit quality across all of its businesses (the Bank’s provisions for credit losses rose to $13.4 billion in the first quarter from $8.5 billion in the last quarter of 2008). "Make no doubt about it," said BOA chairman Kenneth Lewis, "Credit is bad, and it will eventually get worse before it stabilizes and improves."

At least he's up front about it. Goldman Sachs’ chairman Lloyd Blankfein certainly went to no great lengths to illuminate his firm's accounting sleights of hand, which I’ve already written about. Plenty of smart people believe that the improved profits of not just Goldman, but most of the big banks in question are in large part down to relaxed accounting rules. Early in April, after much lobbying by banks, who claimed that it was unfair to have to write down troubled assets when the market for them was so illiquid (uh, isn’t the fact that nobody wants to buy this stuff the point?), the Financial Accounting Standards Board alternated stringent mark-to-market rules, allowing banks to write some of those assets back up. Bottom line: there’s less clarity than ever about what the remaining junk on bank balance sheets is truly worth.

As you might imagine, Ken Lewis isn’t the only one expecting more write-downs. The IMF now expects that total losses in the global financial sector will reach $4.1 trillion dollars (with $2.7 trillion of that coming from the U.S.). Banks are expected to carry two thirds of those losses, with insurance companies, pension funds, hedge funds and others taking the rest.

Another recent report by McKinsey takes a similarly bleak view, noting that U.S. banks still hold over $2 trillion in toxic assets. Perhaps the most disturbing thing noted by the McKinsey authors is that most of the write-downs that have been taken by banks to date have been on assets that are clearly marked to market. McKinsey notes, however, that about 60 percent of the credit on the balance sheets of U.S. banks isn’t marked to market, but to those ever-nebulous financial models that got us into all the trouble to begin with. That murky portion of bank’s balance sheets is where most of the future losses are likely to occur.

If only, as the Duchess in Alice said, banks would "be what they seem to be." (Btw, for more on this topic, check out my Global Investor column in the coming edition of Newsweek International).

Reconsidering the Reconsideration of Aid: Two recent books have put aid to Africa on trial, arguing that it often does more harm than good. The idea has become vogue in the do-gooder zeitgeist, but Johannesburg-based Greg Mills says it's not the whole story.

Another One on the Up: Credit Suisse joined Goldman Sachs and JP Morgan in returning to profitability. The Swiss bank posted a quarterly profit of $1.7 billion after having lost over $5 billion last fall and shed some 5,100 jobs.

World's Biggest Frenemies: Former Secretary of Defense William Cohen editorializes that China and the U.S. form a de facto G-2 and have no choice but to get along. He lays out some points of commonality where they might get the ball rolling.

Polyannas vs. Cassandras: Lex wonders why the IMF insists on being such a sourpuss while politicians are doing their darndest to promote a recovery story.

Don't Tread on Me: Fed up with countries like China and Japan dumping cheap imports that hinder local industry, India is imposing an anti-dumping tax on stainless steel products. It will also hit South Africa, the EU, South Korea, Taiwan, Thailand, and the US.

As promised, here's a more well-digested take on the Nielsen consumer trend report. The basics: Nielsen aggregated consumer trend data from 11 major GDP countries to come up with the key performance indicator (KPI) chart at left (tip for how to read the thing: the greener, the better). The index was weighted based on dollar sales and unit sales, but also took into account things like how often people were shopping, how much they were buying each time, to what extent they were buying generic brands, and how confident they were that the end is near (in a good way).

See all those gray horizontal arrows? Nielsen VP James Russo sees them as a sign that we're either at or very close to a bottom in the recession. Consumer spending is leveling off from its massive drops--in fact, in Germany, it even rose slightly. It's not because people are suddenly buying up Porches again. Rather, they're snatching up essentials in bulk. "The big thing is that we're not seeing the significant swings we did before," he told me. "There is spending going on--it's restrained spending, and it's on essentials. But that's potentially a good thing. We've moved from denial and panic to acceptance. There's a new way of keeping up with the Joneses."

Certainly, some spending is better than no spending. But hinting at a bottom? Call me cynical; I wouldn't read too much into this one. Consumer tastes are notoriously fickle animals (see Exhibit A: the rapid rise and sensational fall of the Snuggie). It has been quite some time since we heard any ugly, shocking, earth-shattering news about banks and bailouts. But if stress tests were to expose emperors without their clothes, I doubt everyone will still feel as chipper about the recession's supposed bottom. At the same time, plenty of folks--including Russo--point to green shoots in economic fundamentals to support a bottoming-out argument at a more foundational level. They may very well be right. But on that, too, we're still seeing bad news decelerate more than we're seeing any good news accelerate. The usual suspects--Krugman, Roubini, et. al.--aren't holding their breath.

At the end of the day, I think FT's Chrystia Freeland has the right idea: "If ordinary Americans, whose pension savings were devastated last fall, are burned by a dead-cat bounce this spring, US faith in shareholder capitalism could be damaged for a long time."So let's manage expectations. It's fantastic that consumers the world over don't think the sky is falling anymore. But holding patterns, stockpiling, and wishful thinking do not a ray of sunshine make.

Merle Hazard is the self-proclaimed "first and only country singer to write about mortgage-backed securities, derivatives, and leveraged buyouts." His latest ditty is "Mark to Market," dedicated to "the courageous men and women of the Financial Accounting Standards Board."

Hat tip to our illustrious photo editor Kathy Jones.

Banks with Chutzpah: Treasury is up for a fight on the Detroit front, after banks and other lenders came back with a meager counteroffer on canceling most of Chrysler's debt. Word on the street is that the big dogs--JP Morgan and Citi--were convinced by the little guys to be more aggressive. Apparently they didn't get the memo about not biting the hand that feeds.

And the (Closest Thing We Have to a) Winner Is...: Mohamed El-Erian is very much looking forward to the release of the results from bank stress tests. He lays out five ways they ought to go down.

German Toxic Waste Seeking Dump: Merkel is getting moving on a plan to take care of banks' toxic assets, which will most likely end up in a series of bad banks rather than one centralized dumping ground. Analysts expect the plan to come together by the summer.

Platinum Concerns: After the polls close and celebrations die down in South Africa, the new government will inherit big troubles in the country's huge mining industry, which employs some 5 million people and has been hit hard by the slump in global demand.

Billionaires No More: Russia's billionaire club has sunk to a third of its size during the boom years, with the country's richest shedding some 70 percent of their wealth.

Who Invited This Guy?: The IMF cut its expectations for global growth--into the negative. Announcing that the world economy had fallen into a severe recession, it announced that the world economy would contract 1.3 percent this year and that financial markets would take longer than expected to stabilize.

A consensus seems to be emerging about crime rates during the recession. First there was this post from Peter Orszag, whose day job involves heading up the Office of Management and Budget.  Then there was this data digest from the Wall Street Journal. The upshot was that property crimes tend to rise during a recession, but violent crimes aren’t correlated. I was skeptical. Sure, rape and recession may have little to do with each other, but could it actually be that the streets aren’t getting a bit meaner overall this year?

Nope, says Sudhir Venkatesh, the underground economy scholar whose escapades with drug-dealing gangs were recounted in a section of Freakonomics. (Ironically enough, Orszag actually cited Steve Levitt, the author of Freakonomics, to support his conclusion.) I called him up to ask for clarification, recalling that he’d told Forbes a few weeks back that “the recession is engendering more violence.” Here’s the problem, he says: violent crimes are often economically motivated, but that tends to be reported much less frequently than property crimes. In fact, he’s seeing more violence among the sex workers and drug dealers he tracks, as well as in other forms of a rapidly expanding underground economy. “Your desire to address the grievance is mitigated by the fact that you’re involved in some sort of off-the-books activity. But animosities can really flare,” he told me.

Of course, observations like that wouldn’t hold up to the scrutiny of economic data-crunchers—and nor should they, as Venkatesh himself notes. But that doesn’t mean the crimes aren’t happening. In recessions, the working poor often lose contact with institutions of all stripes—making it tough for any of the data-crunchers to reflect a realistic image of the world. In restaurants, bars, cleaning services, construction, and landscaping, to name but a few, firms are switching overnight from formal to informal relationships with their employees to cut down on costs. “We’re not seeing anything about this person’s life in any systematic kind of way, so I’m sort of worried in this time period that we’re not really seeing the full extent of the problem,” he said. We might--might--be starting to see some green shoots with the big indicators now. But combine what Venkatesh has to say with reports of squeezed budgets and shrinking police forces, and it becomes doubly irresponsible to paint too rosy a picture at the micro level.

Anyway, while we’re on the subject, check out his NYT post from earlier today on the booming loan shark business. Interestingly enough, as he told me the other day, that biz makes for a notable exception to the rising violence levels he's seeing in other parts of the underground economy. At the end of the day, it just doesn't pay to hurt the person who owes you money. Not a bad lesson for some financiers everywhere to learn!

Today in encouraging news: Obama has called credit card CEOs to the White House. They'll meet on Thursday and, according to McClatchy, Obama will "stress the need for greater clarity in the way that credit cards are marketed and administered."

This of course is a preliminary step in reining in shoddy lending practices, which extended not just to mortgages but credit cards and other consumer loans. And it's a good sign that the Administration is willing to expend some political capital on reforming sectors not quite as toxic as subprime mortgages.

Of course, the bears and pessimists might view this as evidence that credit card debt is about to explode and take down a bank or two, and the Administration is starting triage. As I wrote a couple of months ago, I think this is a red herring. Banks have already taken writedowns on their credit card debt holdings (although in the credit card biz they're called chargeoffs). And the credit card sector is less than one-tenth the size of the mortgage sector ($1 trillion versus $11 trillion), so even if defaults skyrocket, banks don't have nearly as much at risk.  

Making Sense of Bank Profits: You know it's been a bad year when the word profit sets off waves of cynicism. NPR puts it all in perspective--the known knowns, the known unknowns, and the unknown unknowns.

Recession Nostalgia: Having declared the financial misery of the last two years over, the chairman of London & Oxford Capital Markets lays out all the benefits of the recession we'll miss once it's gone. Lower prices, home-grown veggies, and leisure time make the cut. Mass foreclosures are mysteriously absent...

A Graying Dragon: Remember China's draconian population control measures? Not only did they spell bad news for baby girls, but also for a society that will see the elderly account for 30 percent of the population by 2050. The coming retirement avalanche puts additional weight behind efforts to expand China's social safety net.

Playing Oil Hardball: OPEC leaders are making noise about cutting supply after months of weak prices, accusing consumer countries of stockpiling. That would be the U.S., which is sitting on its biggest inventories since 1990.

It's the Iqtisad, Stupid: Investors are stepping up their efforts to grow sustainable businesses in Iraq. It's too soon to tell how they will fare, but there may be some green shoots to convince Iraqis their lot is better with the factory than the insurgency.

Is financial innovation good for society? In a speech last week, Federal Reserve Chairman Ben Bernanke gave a qualified yes. Financial innovation really picked up after 1980, and "I don't think anyone wants to go back to the 1970s," he said.

Ryan Avent, the new blogger-in-chief over at Portfolio's Market Movers, thought that statement rather funny:

According to Bernanke, no one, "wants to go back to the 1970s," but neither could Bernanke point to a truly helpful piece of financial innovation developed after that decade. His examples of successful financial products? Credit cards, for one, which date from the 1950s. Policies facilitating the flow of credit to lower income borrowers was another, for which he credited the Community Reinvestment Act of 1977. And, of course, securitization and the secondary mortgage markets developed by Fannie Mae and Freddie Mac in...the 1970s.

Have there been any beneficial financial innovations since then? Interest-rate swaps and currency swaps gained traction in the 1980s, and these are generally considered positive advances, because they let companies unload some of their risks to places like hedge funds that are happy to roll the dice.

Credit default swaps are trickier. They act like insurance on a bond in case a borrower goes bankrupt, and in doing so, they expand access to credit. After all, I'm more likely to buy a home if I know I can get reasonably priced insurance on it, because that lessens the risk of being a homeowner. The logic is similar if I'm a big pension fund considering whether to make a loan to an auto parts manufacturer. If I know I can buy insurance on all or part of the loan, I'm more likely to make it in the first place.

But now there are signs that credit default swaps are encouraging bankruptcies. Last week General Growth Partners, the nation's second-largest mall operator, declared bankruptcy. Lawyers dealing with the bankruptcy say that "credit default swaps are the problem -- mainly, bondholders who have purchased CDS on this debt have little incentive to negotiate or play ball, since the CDS, if the counterparty honors the agreement, makes them whole."

This is our old friend moral hazard at work. To extend the analogy I used before, if I know I can get fire insurance at a decent price, I'm more likely to build my home near a hill full of dry brush, and less likely to clear that brush before the dry, hot winds hit in September.

Here's a key line in the Bernanke speech:

We should be wary of complexity whose principal effect is to make the product or service more difficult to understand by its intended audience.

The story of General Growth Partners shows that it's not at all easy to determine who the "intended audience" is. In this case, the swaps may work perfectly fine for the counterparties: the bondholders will (presumably) get paid according to their contracts. But the results are worse than they otherwise would be for GGP and, arguably, for the economy at large. As the Fed sets about regulating the derivatives market, we should probably have a wider definition of "intended audience."

America Is "Fill in the Blank": We've already heard that America is Russia, America is Japan, and America is a developing country. Here's another hat to try on: Krugman says America is Irish. (And it has nothing to do with how much Guinness we drink.)

Really? Another One?: Bank of America is the latest bank to post strong first quarter earnings. When will the backlash against bank profits begin?

Don't Blame the Engineers: The financial crisis is just a pothole on the road to technological progress! Writing in the Wall Street Journal, L. Gordon Crovitz says, "The innovators who thought up the elevator, the cotton gin and space travel didn't intend to kill or injure people as they perfected the technologies. Likewise, today's financial engineers never imagined their miscalculations could result in a global recession."

Sprucing Up the Shantytowns: One way Brazil is tackling the downturn: by investing in infrastructure (fresh water, cable car systems) in some of the worst of Rio's favelas.

No Crisis in Microcredit: Banco Compartamos, the Mexican microcreditor which achieved derision when it went public, is now Mexico's second-best performing stock, and it expects to benefit from the downturn.

Go on, have that spicy tuna roll -- do it for the economy.

Me Too!: Citigroup follows in Goldman Sachs's footsteps and says it had its best quarter since 2007. Is it just coincidence that the banks sprung to sudden health as soon as mark-to-market rules were relaxed? Things didn't look nearly so good at GE, where profits plunged 35 percent. And Google ended its 11-year growth streak.

Party Pooper: In honor of the tea parties held on Wednesday to protest U.S. tax policy, Forbes looks at the historical tax rates and concludes that Americans are undertaxed relative to the citizens of other countries and relative to the past.

Dept. of Odd Opinions: Financial-data provider Bloomberg finds its sleazy side in a column that somehow compares the U.S. economy to Tara Reid's breast implants.

The Sincerest Form of Flattery: Just like the U.S., Russia is moving to put a strict cap on executive salaries at state companies and firms receiving government aid.

Someone at the Financial Times has caught a serious case of the sillies. The Lex column, in case you are not a regular reader (and for shame, sir!), bills itself as FT's "agenda-setting column on business and financial topics." But yesterday, dear friends, the lords of finance behind Lex were concerned not with property and commerce, but with skewering President Barack Obama in an awkwardly hysterical fake speech. Excerpts:

Phew, we’ve been busy! It looks like my administration has been doing a million things at once – but I promise we’re in control.

First, let’s agree blame for this meltdown lies equally with Wall Street, Washington and Main Street. But mostly Wall Street.

Let me be straight: we will spend and save at the same time.

My word! Whatever was in the tea at the G20 summit must have made its way over to the Southwark Bridge. Next thing you know, headlines like "New era dawns: minds blown" will start hitting the front page. Wait, what?

Some good news today for anyone holding emerging markets equities: JP Morgan's chief emerging market strategist in Hong Kong is expecting stocks in the 23-country benchmark to surge a whopping 39 percent this year, according to a report he released today. He's feeling so good about prospects for the developing world, in fact, he argued that they may be better off than they were before Lehman tanked last summer.

That's pretty dramatic, but we can't say it's terribly shocking. Like Rana argued in her ink-on-paper column this week, this so-called "global recession" isn't exactly global after all. Rather, it's a rich world thing--and if the developing world plays its cards right, it has a lot to gain out of the current unpleasantness. As she notes, JP Morgan isn't the only one singing the emerging markets' praises. Goldman Sachs now thinks the BRICs' combined GDP could overtake that of the G7 a full decade earlier than they forecasted a few years back (the new projection is 2027, in case you were wondering). I can practically hear Lula asking if America likes apples...

(Photo credit: Give Up Internet!)

Phew! We at the WON blog congratulate you on making it through a particularly taxing tax season.

No Más: Spain's central bank chief says basta on any further fiscal stimulus, arguing the injections have reached a point of diminished returns. Unemployment in Spain is already at 15 percent and expected to worsen, making it the highest rate in the 27-country European Union.

Monroe Doctrine, Kaput: China steps up its game in Latin America, where it is the second-biggest trading partner, a move one analyst says is possible because of the lack of attention shown during the Bush administration. That is likely to be on Obama's mind when he meets with LatAm's leaders this weekend, especially since, as we learned recently, the Chinese are not the only ones eyeing the region's markets.

Foreclosure Tempest: The U.S. foreclosure floodgates opened in March as moratoriums expired. One out of every 159 households got hit with a foreclosure filing. It's not letting up anytime soon; analysts say the effect of the Obama mortgage bailout may not be seen until autumn.

The Big Engine That Could: Although growth in China's reserves has slowed, Brad Setser says they're still growing--and by more than you think. Nonetheless, that slowdown has led to a slowdown in its purchases of U.S. assets.

Raining on the India Parade: Indians should give Manmohan Singh the boot in today's elections, says Razeen Sally, aiming to deflate the "India hype" peddled by "smooth-talking" elites. Because the present government has failed to enact necessary reforms, he argues, India should be counted in the same league as China as an emerging superpower.

The Bailout of 1825: Brad DeLong takes to the pages of The Week to give us an English history lesson on bubbles and bailouts. The story has a happy ending.

I went to see the new production of West Side Story at the Palace Theatre this weekend. The singing (much of it in Spanish this time round) and the dancing were amazing (female viewers will immediately want to buy flouncy skirts and take mambo lessons). But the storyline -- love and ethnic gang warfare in 1960s Manhattan -- left me thinking not so much about Romeo and Juliet as about the future of New York city, post financial crisis. In the musical, the Jets and Sharks duke it out in what was then a gritty urban jungle, now the Lincoln Center area, a sanitized tourist zone in which Doc's Candy Shop has been replaced by Barnes and Noble's and Pottery Barn. With the demise of Wall Street, there's been a lot of soul searching about whether New York City could ever go back to those bad old days, or even face bankruptcy, as it did in the 1970s.

My verdict is no, although I do think that the city is never again going to be as completely defined by Wall Street as it has been over the last few years. One of the chief reasons for this, pointed out by mayor Bloomberg in a speech recently, is that New York City entered the financial crisis in much better shape than it entered the recession of the 1970s. "We are going through an economic downturn," he told folks at a panel on the future of New York, "but we are going through it from a much higher base than ever before."

It's true that NYC tax revenues were at record levels pre-crisis, but since the downturn, they've plummeted. Wall Street accounts for about 12 percent of the City's tax base, and 20 percent of New York state's. This year, about $1 billion in tax revenue will be lost thanks to squashed bonuses. This isn't likely to be a short term phenomenon, because stricter regulation is going to change how banks do business. I spoke today to Jim Reynolds, the chairman of Loop Capital Markets, a Chicago based investment bank, and a member of Obama's finance team during the campaign. His take was that return on equity (a measure of income) for banks will go from the boom days rates of 30 to 40 percent down to 12 to 15 percent, and that the shift will be permanent, as banks go back to the basics -- vanilla trading, giving M & A advice, underwriting debt, etc. Bottom line - lower income equals lower tax revenue.

What's New York to do? Clearly, diversify, as Chicago and other cities have down in downturns. Bloomberg is already moving on this, a mark of difference between the 1970s, when the city government was fairly ineffectual. Bloomberg is setting up a fund to help laid off bankers start businesses, and talking up the potential for new green industries in New York. He's also negotiating with the unions to cut labor costs on much needed infrastructure improvement projects -- in my view, one of the most important things that needs to be done to improve prospects for the City. I live in Brooklyn, and am reminded of New York's third-world infrastructure every time I drive across pot-holed streets to take a flight from one of our aging airports. It's not quite as dismal as West Side Story's under-the-bridge rumble ground, but close.

Green Acres: Two-thirds of Japan's full-time farmers are 65 or older, and some are hoping that mounting job losses in the corporate sector result in younger workers going back to the fields.

Crime and Punishment: Do economic hard times lead to more crime? Yes and no. Burglaries, thefts and the like tend to rise with unemployment, but violent crimes show little to no correlation.

In the Department of Scary Sentences: Bankrupt bank Lehman Bros. "is sitting on enough uranium cake to make a nuclear bomb as it waits for prices of the commodity to rebound, according to traders and nuclear experts."

Government Sachs: An op-ed contributor offers a good rundown of Goldman Sachs's strangely rosy first quarter earnings, and the suspicions that accompany their announcement.

Where Did It All Go?: ProPublica, the non-profit journalistic outlet funded by philanthropy, has a new site/blog chronicling how the bailout money has been spent, and even lets you search by recipient.

Don't Look Back in Anger: Edmund Phelps, winner of the 2006 Nobel Prize in economics, argues that the financial crisis should not be a reason to turn our backs on capitalism.

Migrant workers are among the most vulnerable in any nation. There's been a lot of worry during this financial crisis that growing unemployment in the U.S., Europe and elsewhere would result in a wave of migrant job losses, forcing immigrants to return to their home countries (and back to even more precarious situations). That has a knock on economic effect, because in many poor countries, remittances, or money sent home from migrant workers, represents a major source of national income -- in Mexico, for example, remittances are the biggest contributor to the economy after oil revenues. And indeed, they are already falling -- Dilip Ratha, the lead economist at the World Bank, recently noted on his blog that remittances around the world will likely fall by 5 to 8 percent in 2009.

But a close read of Ratha's post indicates that the situation isn't as bleak as it might appear. For starters, net migration flows around the world are still up, ironically in part because migrants are scared to go home due to a rise in anti-immigration sentiment. As Hania Zlotnik, the director of the United Nation's Population Division told me last month, "They are afraid now that once they leave, they'll never be able to come back in." Since overall remittance payments depend on the absolute number of immigrants abroad, rather than just how many are entering new countries in a given year, there's a good chance that remittances will pick up in 2010, as the financial crisis (hopefully) eases.

What's more worrisome is the tightening of border controls in both the U.S and Europe, tougher entry requirements and the threat of labor protectionism implicit in both. This isn't just political, its very much an economic issue. As my colleague and fellow blogger Barrett Sheridan wrote in a Newsweek International piece recently, freer migration has the potential to contribute more to the global economy than freer trade. While completing the onerous Doha Round (stick with me here, we're almost done...) of trade negotiations would increase global GDP growth by only 0.04 percent, some economists believe that freer migration could add over one full percentage point to global growth. By allowing workers to go where they need to go to find jobs, we are actually helping create more work for everyone. Tell that to anybody who worries about migrants taking their jobs.

Floyd Norris blogged the Goldman Sachs conference call this morning. For those that don't know, Goldman is in the news this week for making a reported $1.8 billion profit in the first quarter of 2009. This has been interpreted as a sign that the ailing financial sector might be ready to leap from its sickbed. But some suspicious smells still hover over the patient. For one, Goldman switched its reporting schedule from a fiscal year ending Nov. 30 to a calendar year ending Dec. 31. The first quarter of the reporting year, which normally would have been Dec.-Feb., became Jan.-Mar., in other words. That left December as an "orphan month," and it was a terrible month indeed -- Goldman suffered a $0.8 billion loss in December. Some suspected foul play, surmising that Goldman squeezed its writedowns and losses into December, making January, February and March look better than they actually were.

In addition, Goldman was the beneficiary of $12.9 billion of government money funneled through AIG, which the insurer used to pay off banks (such as Goldman) with which it had derivatives contracts. Analysts wondered: Was Q1 so healthy-seeming because of these one-time cash injections?

The answer was a cautious no. "Most of the impact was in December," according to Norris. "For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero."

And what effect did the calendar change have? Little to none, says the company. They wrote down the value of some toxic assets in December, and they did further writedowns in Q1. Which leads us to a good question. In Norris's words:

So how did they make money? One answer is that this is a great time to be in the banking business — if you ignore what we politely call legacy assets. Customers are desperate for cash, and will pay for it. Fees are up. If underwriting volumes continue to rise, this could be a great, great year. Assuming, of course, that the write-offs are over.

From a year of cataclysm to a year of plenty in just a month? This is one reason I don't believe the talk that the financial sector is going to shrink tremendously, at least not absent significant government reform. 

Want a 22,000% Rate of Return on Your Investment?: Hire a lobbyist.

Down and Out in Germany: Some in the German government are thinking about setting up state-funded companies in which other firms can "park" their "redundant" workers while they ride out the recession. Read it along with this NYT analysis of the decline of Germany's automobile manufacturing industry.

Dumb Wars: The FT's Clive Crook dissects the US war on drugs and concludes it is "criminally stupid." Considering that decriminalization could bring in an extra $100 billion each year, he says, it's high time someone at the White House took a serious look at overhaul.

IMF Loosens Up: In an effort to remove the borrowing "stigma" that soured relations with many emerging markets, the IMF is doing away with its strict structural reform requirements. Countries in need of funds will now be able to continuing borrowing from the IMF even if they have not yet implemented all agreed-upon policy reforms.

The Greatest Depression: What and when was the deepest economic collapse in any non-communist, non-wartime, fully industrialized country since the 1930s? Tyler Cowen at Marginal Revolution knows. Do you?

Thanks for all the comments about my recent post, "If Jobs Are Being Cut, Why Aren't Paychecks, Too?," including this one, from Mac101:

"The average American worker has been losing money in their paychecks for quite a while. My parent's generation managed well on one paycheck, but now even in families where both work, people can't make ends meet...wage growth, for most people, has been a myth even before the current recession."

Our reader has a point. While its true that hourly earnings are up year on year, workers have been pocketing a smaller share of the nation's wealth for some time. As my colleague Tony Emerson and I wrote in a cover story for Newsweek International entitled "A Heavier Burden," back in 2004, "wage share," or the percentage of national income that gets paid out to workers, has been flat or decreasing not only in the U.S., but in most developed countries, for the last two decades.

The forces behind this trend -- mainly globalization and technological advancement -- are still with us, and given that wages were shrinking even when corporate profits were going up, there's no reason to think that the situation will get better now, as they are falling. In fact, I have spoken to analysts who expect the outsourcing trend, which had actually fallen off a bit as developing country wages caught up with those of the U.S. and Europe, to surge back, as companies look for any possible way to cut costs.

Clearly, some of our readers are already feeling the pinch, like the "PrairePrankster," who writes:

"I am not sure where the author lives, but I can say that where I work, wages are frozen and the organization's contribution to our 401k accounts have been suspended until further notice. In effect, our wages are being cut since these actions were announced about 4 months ago. With a nasty inflationary spiral awaiting as the stimulus causes our government to print more dollars, our frozen wages will be worth less in the coming years. Maybe that 3.4% wage increase referenced counts all the bonus money paid to the brain dead, greedy MBAs who mismanaged the banks and financial services industry in their zeal to destroy what's left of America's industrial heartland."

Actually, the 3.4 percent increase in national hourly earnings from last year to this year doesn't include any bonus money -- it's just good old fashioned wages, a large chunk of which would have been paid out to workers in the Heartland. Still, I agree that as nearly every central bank in the world goes into over-drive printing money, we are certainly in for a period of much higher inflation. And I have to admit that, as a New York City homeowner, I'm desperately hoping that Wall Street doesn't totally collapse. After all, many years from now, I'm counting on some MBA to buy my house and fund my future retirement if my 401K doesn't cut it.

Many think so. Former IMF chief economist Simon Johnson wrote in the Atlantic recently that "from 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits...this decade, it reached 41 percent." He calls it a "quiet coup." Felix Salmon at Reuters complains that "financial services companies are meant to be intermediaries, middlemen. And any time that the middleman is taking 41 percent of the total profits in what’s meant to be a highly competitive industry, there’s something very wrong." And the New York Times this weekend wrote almost gleefully of an impending shift in job demand among students at the nation's top universities. "Early indications suggest new career directions that are tethered less to the dream of an immediate six-figure paycheck on Wall Street than to the demands of a new public agenda to solve the nation’s problems," the paper declared.

Color me skeptical. For all the TARPs and PPIPs, Congress and the Administration have so far done nothing in the way of long-term, structural reform of the financial sector. There are some proposals on the table, but unless the new regulation is dramatic, I don't think the lure of billions will soon give way to the lure of science labs and Teach For America. There will be a hiccup, to be sure, since there are fewer jobs on the Street this year, but what's to prevent the rubber band from snapping back to its original shape after the economy stabilizes?

I don't think pay caps are the answer. They're too easily thwarted, and there's a first-mover disadvantage -- if the U.S. limits executive pay, European banks (or Chinese ones?) will quickly snag all the top talent.

Dean Baker suggests a financial transactions tax. "A tax of 0.25 percent on a stock trade, or a 0.02 percent tax on the purchase of an option or future, will have almost no impact on those looking to invest in the stock market or hedge their wheat crop. However, it will impose a heavy cost on short-term traders, and therefore will substantially reduce the volume of trading."

The result, he hopes, will be "a financial sector small enough to drown in a bathtub."

Watching the protests in Thailand over the weekend brought back some distant memories for me—of covering the pro-democracy protests in that country nearly 17 years ago, in May of 1992. Then, as now, the country was paralyzed, but the story line was a lot simpler in those days. Then it was a nascent middle class clamoring for Thailand’s emergence from military autocracy, making use of technologies like fax machines and cell phones to spread the word and undermining official state TV. It was all part of that simplistic “end-of-history” model we were enthralled with back then. Once people got a taste of prosperity, they wanted open political expression. And boy, were they becoming prosperous in the ‘90s, or so we thought. Western-style open-market economies had dominated in the great cold war contest of alternative ideologies. Even Vietnam found itself surrounded by Asian Tigers -- the cold war dominoes had fallen the other way. The end of the cold war was nigh, as was the collapse of the Soviet Union (that would take place six months later). The ultimate victor, we all knew, would be freedom. And not some abstract concept of freedom -- instead, we all were coming to the belief that the freedom to think and vote and act freely was intrinsically linked to the freedom to invent some hot new technology or to start up your own business. It was a moment of history when the truth really did seem simple.

Now we know better. And nothing demonstrates how complex things have become than the travails of Thailand. The latest protests, after all, are not just a story of brave freedom-seeking demonstrators versus evil authoritarians. Yes, the target of their immediate ire is the latest military coup, the one that toppled Prime Minister Thaksin Shinawatra in 2006. But Thaksin was also corrupt, and the economic inequalities he did little to ameliorate during his increasingly authoritarian tenure have become acute with the latest economic crisis. And as Thaksin faces charges at home, the former telecom magnate has been funneling money to the protesters, known as Red Shirts, who have their own satellite TV channel. Many Thais genuinely want a return to democracy, but Thaksin is hardly the hero of the future.

The deeper problem is the flaws in that rapidly obsolescing old globalization model—free-markets produce democracy which in turn produces general happiness—still need to be addressed. The model is long overdue for rethinking and rejiggering. In the wake of the subprime mortgage fallout, we have realized that simply letting capital flow freely—the global financial system we have depended on—isn’t working. We’ve also known for years that while free trade is generally good, the world is not flat, that globalization has deepened income inequalities rather than narrowed them. Overall globalization is still the way to go: No country, not even would-be rogues like Iran and Russia, has found a way around the iron law of the post-cold war global order: in order to be influential or powerful, a nation must be prosperous; and in order to be prosperous, its economy must take part in the international system. But simply coasting on those verities won’t cut it any more. I’m not sure what the answer is exactly, but to try to find out I’ve begun reading a book by Joseph Stiglitz that for too long I’ve ignored: “Making Globalization Work.”

Scrub Up: The Treasury Department is preparing General Motors for a fast, "surgical," bankruptcy.

Earnings Season: Some big names announce earnings this week, including Goldman Sachs and Citigroup. Markets are expected to sink today on worries over the financial health of major companies.

Wrong, Wrong, Wrong: More than a year into the financial crisis, Der Spiegel looks at which world leaders, business minds and pundits were right in their economic predictions -- and which were blindingly wrong. Bush, Bernanke, Trichet, and Merkel fall into the latter category; Buffett, Soros, Greenspan, and Roubini get bragging rights.

Money Managers Are at Fault, Too: It's not just the banks, mortgage brokers, and borrowers that sank the economy. Blame your pension fund and university endowment, too. Big funds own 70 percent of large public companies, and they failed to police them. "These managers arguably played a major role in allowing the managers of our public corporations to exploit the advantages of their own agency," says the legendary founder of Vanguard.

It's Friday afternoon and there's little chance you're interested in another probing, insightful blog post, so how about a little satire from McSweeney's instead?

To: AIG Executives
From: AIG Corporate Security
Subject: Updated Security Notification

Due to a growing sense of public attention fueled by increased media scrutiny, AIG Corporate Security would like to highlight certain protective measures all employees can take in order to increase their overall safety and security. This memorandum is specifically tailored toward our top-level executives, and contains information unavailable to regular AIG employees.

• Be mindful at all times of your surroundings, especially if you are surrounded by a large group of very angry people you do not recognize. These are taxpayers.

• Be smart! In a "fight or flight" situation, it is almost always best to retreat. Do not take unnecessary risks. For many of you, this will be impossible.

Read the rest here.

All Dug Up and Nowhere to Go: U.S. farm exports are feeling the recession's squeeze this year, a big shift for farmers who benefited from the rest of the world's perfect storm last year. While agricultural land prices in the States have remained solid (as we learned here a couple of weeks ago), the dollar's rise and world demand's slump have cut both the volume and the price of food exports--prompting worries that 45,000 jobs could be lost.

Untouchable Engines of Growth: India's legions of Mushahar, or untouchables, may be the very folks keeping the country's economy from falling into the global recession pit, the WSJ says. Investments in rural states in recent years have equipped "Old India" to buoy stalling growth in new sectors like information technology and securities trade.

Nukes and Terrorism, So 2008: Pentagon officials held the first-ever war game to prep for economic warfare, the Politico reports. Rather than bullets and bombs, the military brass--and their guests from the finance world--played out scenarios involving dollar dumps and gas prices. Think you can guess which country came out on top...?

It's Not Me, It's You: New data on the ongoing export slump in China has reopened debate over how much the slowdown is externally driven versus homegrown. According to researchers at the Hong Kong Monetary Authority, the effects of the export sector are even bigger than they appear, and growing over time.

Code Pink strikes again! This time while Larry Summers is trying to talk about policy choices and deflation at the buttoned-up Economic Club of Washington, D.C. But it sounds like they run out of steam after about fifteen seconds, probably because they didn't expect to be onstage for any longer than that (reasonably enough).

This small sliver of sunshine comes to us courtesy of our business guru, Dan Gross. --KP

Sun Bancorp, a small bank based in New Jersey, yesterday became one of the first banks to repay the TARP funds received from the Treasury department (the press release can be seen here).

On January 9, the Treasury Department bought 89,310 of preferred stock form the bank for $1,000 each. Yesterday, Sun Bancorp bought back the shares and paid $657,000 in interest, a return of about .74 percent in three months.

Lets play this out as an investment. The Treasury Department borrowed money from taxpayers in January for three months, when three-month Treasury bills were yielding about .11 percent. It lent the money to Sun Bancorp at a much higher rate (about 3 percent). Sun Bancorp repaid the loan with interest three months later, leaving the taxpayer with a tidy profit on the transaction.

Besides the economic forecasts, which seem to get bleaker by the minute, the big news to come out of the Federal Open Market Committee's minutes today was that board members were divided on plans to pump money into the system by buying up mortgage and Treasury securities. (They ultimately did, by the way--more than $1 trillion of them).

Paul Ashworth, an economist with Capital Economics, called it a "scatter gun" strategy; fire enough bullets and one of them will probably hit the target. "One [FOMC] member only wanted to buy mortgage-backed securities and another member only wanted to buy treasury-backed securities, so the collegial thing to do was to say, OK, we'll just buy both," he said. He then gave the plan another nickname I liked even less: the experimental teenager approach.

But experimental or not, the minutes show that certain members of the board were pushing for even more purchases of long-term assets, so it wouldn't be surprising to see them buy up bundles in months ahead --especially if the TALF and PPIP plans don't flush out financial waste as hoped. So, given that impulse, there is some kind of basis for their thinking on this, right?

"All of these quantitative easing programs are unprecedented, because even the bank in Japan never tried anything on this scale. There's no roadmap here," said Ashworth. "Central bankers have decades and decades of experience in gauging how one tiny movement up or down in the interest rate affects output and inflation. But they have zero experience in calibrating the effects of quantitative easing."

Great. Cross your fingers. Because it sounds like the Fed's board members are already crossing theirs.

This is the latest post from our man in Rio de Janeiro, Mac Margolis. --BS

With new management in the White House and most of the world still awash in Obamamania, a meeting of leaders in the Western Hemisphere should be a love fest. But as nearly three dozen heads state from the U.S., Latin America and the Caribbean head to Trinidad and Tobago next week for the Fifth Summit of the Americas, the mood couldn't be blacker.

While Latin America is fitter than ever to face economic turmoil, thanks to more than a decade of sound economic brickwork, the international economic meltdown has still gutted growth across Central and South America. Even if the world's richest nations shrug off recession later this year, the major countries in Latin America are in for another half decade of sweat and tears, according to a recent report by the Inter-American Development Bank. 

The IDB projects a mere 1.9 percent annual growth for the seven largest economies in the region through 2013. The same countries grew by 5.8 percent on average in 2003-2007. If the wealthiest nations take longer to recover, IDB president Luis Alberto Moreno warned a gathering at the Council on Foreign Relations in New York today, Latin America could be in for a reprise of a familiar nightmare: another lost decade.

For Latin America, where birth rates are high and millions of young people hit the job market every year, growing by 2 percent is the same as flatlining. Worse, the first casualties will be those who have only recently clawed their way over the poverty line. "Every one percent drop in GDP means another 15 million people will fall back into poverty," Moreno said.

The good news is that several governments in the region have implemented creative social programs, based on direct cash transfers to the poor, such as Bolsa Familia in Brazil, Chile Solidario in Chile, and Mexico's Oportunidades. Just how much cash poor nations can muster for these programs in times of financial Armageddon is an open question.

It's not just charity. Latin America's antipoverty programs not only provide safety nets in countries where institutionalized welfare is threadbare at best. They can also boost economic growth, because the poor immediately spend their cash on food, clothing and basic necessities. That's something the stimulus package architects gathering in the Caribbean may want to keep in mind.

Green Shoots Turn to Weeds: Or at least that's how the Financial Times interprets the minutes from the last Federal Reserve meeting, which were bleaker than expected. Warren Buffett is feeling a bit of the bleakness himself, now that Moody's, a ratings agency he part-owns, downgraded his investment vehicle, Berkshire Hathaway. Felix Salmon doesn't think this is such a bad thing.

Rotting Apples: The Treasury Department wants to regulate venture capitalists as if they were hedge funds in order to protect against systemic risk. But a Wall Street Journal editorial asks, what systemic risk? VCs fund companies like Apple and Google in their early years; they don't engage in complicated derivatives transactions with multiple counterparties. Will regulation choke a vibrant source of innovation?

"Lehman Shock" in Japan: Unemployment has always been low by world standards in Japan -- even during the country's "lost decade" unemployment never broke 5.5 percent. That may change this year. The jobless rate will reach 5.7 percent by next March, according to a Bloomberg survey, and homelessness is on the rise. Some are calling it a ripple effect of "Lehman Shock."

Is the U.S. Causing Global Hunger?: Poor nations need investment, not aid, says Foreign Policy.

What About the IMF?: Dan Rodrik asks, what would it take to make international finance safe? A true lender of last resort, he says. But didn't the IMF just get another $1.1 trillion in funding at the G20 Summit? "It still remains to be seen how the IMF will operate and whether the new resources at its disposal will be adequate in light of the scale of the financing needs emerging and developing countries face." 

The H-1B visa is one of those policies that everyone loves to hate. It gives skilled immigrants -- scientists, engineers, researchers, etc. -- the right to live and work in the U.S. for six years, so nativists hate it right off the bat. But in fields that attract too few American citizens, such as computer programming, it has become an essential part of the hiring process. But tech executives and globalization advocates loathe it because the cap is too low, and it's devilishly hard to get one. The U.S. gives out only 85,000 each year, and 20,000 of those are reserved for applicants with advanced degrees. The demand for these visas is so strong that generally all 85,000 are given out within the first couple days of filing, which begins April 1.

But not this year. Today U.S. Citizenship and Immigration Services took the rather unprecedented step of announcing that, after a full week of accepting applications, it still hadn't reached the cap.

There are two ways to look at this. The half-glass-full explanation would be that this is just a supply issue. The U.S. job market is the worst it's been in 70 years, and unemployment is expected to hit 10 percent by the end of the year. There are simply fewer jobs for immigrants, skilled or not, to apply to, and thus less need for H-1B visas.

The glass-half-empty explanation would paint this as a demand issue. Perhaps the U.S. has finally made life so difficult for the aspiring immigrant, what with airport security and visa caps and legally-permissible xenophobia, that they've decided enough is enough. Besides, job opportunities have improved greatly in home countries like India and China. Why bother with the hassle of being an immigrant in America when you can make nearly as much in your birth country? Recent research by Vivek Wadhwa of Duke University supports this idea. America is becoming a less attractive destination for the highly-educated immigrant. That will damage our competitiveness in the long run.

I bet the half-glass-full reason explains about 80 percent of this year's slack demand for the visas. But if I were a congressman, I'd start thinking very seriously about why my country is no longer as attractive to the rest of the world.

Aaron Favilla / AP

Two weeks ago our crack digital team released a package on the history of greed, which included a photographic parade of some of the greediest figures of all time. Nestled amongst the likes of Genghis Khan, Charles Ponzi and Bernie Madoff was the Philippines' own Imelda Marcos, the widow of former dictator Ferdinand Marcos, who ruled the country from 1965 to 1986. During that time, Ms. Marcos achieved notoriety for her fashionable taste -- while the average Filipino lived on less than $2 a day, Ms. Marcos jetted to New York and Rome for $5 million shopping sprees, and built up an impressive collection of 3,000 pairs of shoes.

It seemed fitting, then, to open the gallery with the above image of Ms. Marcos, her rouged cheeks, jade earrings and blinged-out ring fingers a perfect glimpse into modern materialism.

Apparently, Ms. Marcos doesn't disagree. NEWSWEEK's selection of her provoked a bit of controversy back in the Pacific island nation, enough that Ms. Marcos eventually had to address the issue herself:

I plead guilty. For me, greedy is giving. I was first lady for 20 years, you have to be greedy first to give to all. It is natural. The only things we keep in life are those we give away.

Righhhtttttt. Check out the video of her "defense" here. (Her English-language statement starts about 35 seconds in; footage of some glorious shoes and jewels is just after the minute mark.) Something tells me that the perfectly matching flower brooch and purple necklace she's wearing, should she choose to "be greedy" and "give to all," could support several Manila families for quite some time.

But give her points for being a First Amendment fan: She says she won't sue NEWSWEEK for the honorific.  

That’s been the big question ever since the financial crisis started – is the U.S. going into a period of long term stagnation, like the Japanese did after their banking crisis in the 1990s? We’ve written quite a lot about this topic; my favorite piece on the subject is by our columnist Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, who said back in October, “the best hope for the U.S. is stagnation.” His view at the time was that we might be in for a much steeper and sharper correction. According to Sharma and many others, a decade of zero percent growth would actually be good news (remember, Japan is still the world’s second largest economy, even after their crisis). Sharma believed Hayek – that long forgotten Austrian economist who thought that major bubbles had to be corrected by Depression like periods of pain – might just be right.

But now that there are signs of some economic pick-up in both the U.S. and the world at large, it’s time to revisit the question of whether the U.S. is indeed turning Japanese—or whether we might pull out of this crisis sooner rather than later. I recently read an interesting research note today from RBC Capital Markets in London, which pointed out that as the financial crisis in the U.S. has progressed, the parallels with Japan’s post bubble period “appear to have deepened and multiplied.” The parallels, in case you’ve forgotten, would include: massive dysfunction in the banking sector, regulatory ineptitude, the scale of losses involved, the total collapse of bank lending, exploding budget deficits, and interest rates that are effectively at zero, meaning that central bankers have little room for any further maneuvering of monetary policy.

But the report also notes a number of very important differences in Japan and the U.S., the key one being the speed at which the crisis is unfolding. In Japan, bankers and government officials alike spent years trying to cover up the magnitude of the problem. The Japanese banking sector wasn’t really put back on its feet until 2005, fifteen years after the crisis began—that fact more than any other is what prolonged the pain. While there’s certainly there’s been plenty of dysfunction in dealing with the current financial crisis on Wall Street and in Washington, there has also, within a mere 18 months, been a fair bit of restructuring and ring fencing of toxic assets (there are some people, like economist Ann Lee, who actually believe that U.S. banks will emerge post crisis stronger and more financially dominate around the world – more on that in another post).

All this points to the fact that there are major cultural differences between the U.S. and Japan. America is still quite an open society, despite any protectionist posturing. In Japan, nearly two decades on from the crisis, minor foreign takeovers and outside investment into domestic companies still provoke hand wringing, and admitting fault still carries a stigma. If we want to stay on track to avoid our own Lost Decade, perhaps the best takeaway from the Japanese experience is that we should face up to our problems early and often – even when they seem insurmountable.

It’s the big question hanging over America’s beleaguered economy: Whence is the next great wave of growth going to emerge? After the dotcom bubble burst at the end of the ‘90s, we moved immediately to the great Wall Street bubble of the ‘00s. First the investment dollars and best minds flowed into Silicon Valley and its various satellites around the country. Then they washed in great manic waves into the world of derivatives and financial arcana. Now that that is gone too, it’s not clear what’s next. What’s going to be the New New Thing? But Energy Secretary Steven Chu, a Nobel Prize-winning physicist, says that the question should not be posed quite so starkly. The information technologies that drove the dotcom phenomenon are still with us, he points out, and they will supply a good part of the revival of the U.S. economy when it comes—especially in driving innovation in the environmental and energy sectors. “Over the long term, the computer-slash-internet technologies have dramatically changed the way information has been used,” Chu told me in a recent interview. One outcome of the dotcom bubble, for example, is that “Google is now a verb,” Chu says. Another example of how both the dotcom and housing bubbles left some permanent progress behind, Chu says, is in the large number of fiber-connected homes, which surpassed 2 million at the height of the housing mania in 2007. Maybe this is just more happy talk from an administration that is ever-eager to jawbone up the economy, especially considering that the tech sector is still hurting (Sun Microsystems, which never fully recovered from the dotcom burst, has been engaged in wary talks with IBM). Still, Chu’s take is something to think about. Maybe bubbles aren’t all bad after all.

Under the (Black) Sea: Italy and Russia cemented ties with a flurry of business deals yesterday, including a $4.1 billion sale involving Gazprom, Russia's national oil giant. Vladimir Putin watched over the dealings. Silvio Berlusconi was set to attend, but instead remained in earthquake-hit Italy. At a time when most European countries have cooled relations with Russia, the transaction strengthens a partnership planning to jointly construct a pipeline underneath the Black Sea.

Nuclear Finances, Busted: A New York-based prosecutor has issued a 118-count indictment of the head of a Chinese firm for using front companies and aliases to circumvent U.S. sanctions against Iran--essentially, using the U.S. banking system to facilitate the sale of materials used to build nuclear weapons. Iran is (perhaps not incidentally), a major supplier of oil and gas to China. It could be a sticky spot for Hillary Clinton, who has been cozying up to Chinese offficials.

Making the Rich Pay: The Economist has a solid, well-reasoned post (shock!) about the relative merits of progressive taxes and consumption taxes. A good follow-up to Clive Crook's point from last week that the U.S. tax structure is more progressive than it's given credit for, due to Europe's high consumption taxes. America should consider a VAT that can reinforce, not undermine, the progressive approach, they argue.

Thumbs Up on Geithner: Everybody chill--the O-team is providing steady, rational leadership, says Ricardo Caballero, the head of MIT's econ department. He argues the systemic overhaul some of his colleagues have been clamoring for will need to wait until after the worst of the storm has passed. Worth reading to the end for a particularly note-worthy point: this ain't Japan, folks.

To Print or Not to Print: The inflation v. deflation divide widened yesterday, as the ECB's Juergen Stark criticized the G20's decision to boost the IMF's SDRs, calling it "helicopter money." Reuters econ bloggers have an interesting point about the spat; while the Great Depression serves as the America backdrop for all things cataclysmic, the hyperinflation of the 1920s informs the German view. As they put it, think wheelbarrows.

This piece in Foreign Policy says yes. Those that agree like to point out that after World War II, Great Britain, glorious empire though it may have been, was extravagantly in debt; the U.S. was a net creditor to the world, and Britain's most important source of financing. When Egypt nationalized the Suez Canal in the 1950s, Britain wanted to fight back. But the U.S. made clear that its financial support was contingent on the UK's withdrawal from the canal. Britain had to choose between financial ruin and geopolitical power. And so the mantle of global leadership was passed from debtor to creditor.

Now, of course, the U.S. is leveraged to the hilt -- the national debt recently surpassed $11 trillion -- and the world's top creditor nation is China, which sits on about $2 trillion worth of reserves. According to the FP, the story of today's financial crisis has the U.S. "playing the role of Britain -- the exhausted debtor economy -- and China taking the place of the United States as the world's largest creditor."

I think such a stark comparison is wrong for a number of reasons, including the fact that the U.S. lets the dollar float freely, and so doesn't have to prop it up artificially like Britain did in the 1950s. Moreover, even though China has a large treasure chest, it's not in the same position today as the U.S. was in the 1950s. It doesn't have a well-developed domestic financial system, and it's still a very poor country, with most of its population living in rural poverty.

Tyler Cowen, the ur-econoblogger and George Mason University professor, goes so far as to say that "the United States is, relatively speaking, a countercyclical asset." In other words, when things are going really well, the U.S. loses ground on a relative basis -- witness the emerging-markets boom of 2002-2007, when even Vietnam saw a surge of investment, and the dollar hit record lows against the euro. But "the worse things go for the world as a whole, the more the United States gains in relative power and influence." There are three reasons for this:

1. Size. "In bad times, international cooperation tends to break down, which increases the relative influence of larger economic and political units."

2. Demographics. Japan and Europe are starting to shrink, and China is a demographic time bomb because of its one-child policy. Only the U.S. has a healthy profile in this area.

3. Political stability. France has had five constitutions since 1789, and China has suffered a Cultural Revolution, a Great Famine, a Communist takeover and more -- all in the last half-century. Russia is even worse. America has "one of the oldest and most durable nation-states."

Walter Russell Mead made a similar argument in The New Republic in February. Crises tend to reinforce Anglo-Saxon capitalism, in part, he says, because much of the rest of the world is only "half-heartedly capitalist," and a crisis in capitalism strengthens the political extremists and despots who wreck countries in the long run. Both pieces are worth your time.

Many Newsweek readers already know that our columnist Barton Biggs, the legendary Wall Street strategist and hedge funder, believes markets are set for a new bull run. Today, I took a first read of Barton's latest piece (watch out for that on the site later this week) in which he notes further signs of an economic thaw. The key point is that an economic indicator known as the Purchasing Managers Survey, or PMI, is on the up-tick globally. Historically, this has been the most prescient indicator of both the condition of the economy, and the performance of the stock markets. The bottom line: Biggs now believes there's very firm data to show that the world is pulling out of its economic nose dive.

It's funny, because you wouldn't know it from the mood of investors. Institutions and individuals alike are still fleeing the market in droves, after one of the worst performances in ten years. As always, herd mentality reigns. But as Barton asked me, "Whatever happened to buy low, sell high?"

Very interesting op-ed piece in the Financial Times today which questions the conventional wisdom that countries can spend their way to economic growth. The piece, by Minxin Pei and Ali Wyne, two researchers at the Carnegie Endowment for International Peace in Washington, looks in particular at China's struggles to increase consumer spending at home -- something that's crucial to rebalacing the global economy, as I have written frequently on this blog.

The authors speculate that perhaps it's not the fear of poverty (never far away for many people in China) or the emphasis on exports that stymies spending, but the fact that the Middle Kingdom is an autocracy. Looking at data across a number of countries, the researchers found that 71 percent of nations that have experienced a growth in consumer spending in recent years also became freer and more democratic.

There are two explanations: One, free nations tend to be safer, which makes consumers feel more secure and ready to part with their dosh. Second, developed, democratic nations also tend to have strong social safety-nets in the form of state medical care and education, which encourages people to pull money out from under the mattresses. All the more reason for the Obama administration to keep plugging ahead with health and education plans even as they try to bail out the banks.

This just in from Newsweek's Man in Brazil, Mac Margolis, stationed amongst one of the most robust middle classes of all the emerging economies. Given that, we wonder: could this be a red flag for what's to come elsewhere? --KP

The respected Brazilian polling firm Ibope and the publicity firm Nova S/B have just released a survey on the habits of Latin America's largest middle class, the 23 million or so Brazilians who have clawed their way from the ranks of the poor over the past decade to become the nation's majority class. The survey, conducted from September to November of last year, was full of promise, and showed that nearly three quarters of the 500 people surveyed had no plans to cut back their spending in light of the looming crisis.

Of course, if surveys are meant to hold a mirror up to society, this mirror was in need of a polish. The pollsters gave each interviewee around $45 a month to use as he or she pleased. Even as economic horizons blackened, 72 percent hit the High Street, using the ersatz stimulus checks to shop instead of pay down debts. It helped that none of the 500 people surveyed was unemployed at the time. Pollsters seemed to think the results could be interpreted generally, even though the rest of society wasn't getting an unearned bonus each month, and many were losing their jobs.

So what's really happening to the Brazilian middle class? It's shrinking. Since December, nearly one million jobs have been erased in Brazil as industrial output dropped 14 percent in the first quarter of this year. The vaunted Brazilian middle classes shrank from 54 percent of the population in December to 52 percent a month later. For a full picture of the wreckage, visit Latin American expert Alex Kazan's new blog.

The Brazilian unraveling is a cautionary tale for pundits and poll takers. Just a few months ago, talk was bright about the emerging global middle classes. And no wonder. Rising prosperity through the last decade had hoisted hundreds of millions out of the ditch of poverty and into the aisles of malls and supermarkets. The World Bank last year projected that middle incomers would double to 16 percent of world population by 2030, while the Brookings Institute spoke of a billion more people set to join the middle class by 2020, ready to buy gadgets, meat and drink, even private school education and health care. When the crisis passes, the incipient bourgeoisie may yet rise again. But for now, at least, Mammon will have to wait.

Happy Days Are Here Again?: Obama's still got it: Two-thirds of Americans approve of his job performance, according to a new New York Times poll. And though 70 percent of respondents said they were worried about layoffs affecting their families, the percentage of people who thought the country was on the right track jumped from 15 percent pre-inauguration to 39 percent today. That's the highest it's been since early 2005.

Prodigal Son: The son of ex-Treasury Secretary Henry Paulson is staying busy during a down economy trying to bring a Major League Soccer franchise to Portland, Oregon. He's committed $50 million of his father's fortune (which he earned in his pre-government role as CEO of Goldman Sachs), but he wants the city to pony up $65 million. He's finding it a tough sell, especially since Oregon, as we learned yesterday, is the saddest state in the nation.

Reverse Offshoring: The head of Sallie Mae, a U.S.-based student lending company, has said it will bring back to the U.S. 2,000 jobs that had previously been offshored to places like India, Mexico and the Philippines. 

Elections as Economic Stimulus: And you thought Obamamania was excessive -- Indonesian politicians are handing out loads of trinkets, baseball caps and food packages to win votes. The total could add one a percentage point boost to GDP this year. Compare that to the U.S., where last year's campaign expenditures reached 0.3 percent of GDP.

And Now For the Bad News: Economists Barry Eichengreen and Kevin H. O'Rourke say that while the recession in the U.S. is not yet as bad as the Great Depression, if you look at the global picture, the data look just as grim -- or worse. Globally, "the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak," they write. Andrew Leonard of Salon snarks that the most useful phrase of the last six months -- "the worst ___ since the Great Depression" -- may need to be replaced by "the worst ____ since the Dark Ages."

MainStreet.com (a personal-finance-oriented offshoot of TheStreet.com) just released its Happiness Index, a Prozac-addled tweak on the famous Misery Index. The latter, which combines unemployment and inflation statistics, captured the prevailing worries of the stagflation-prone 1970s; now that inflation has been tamed, MainStreet.com clearly felt it was time to throw housing into the mix. 

The list ranks the fifty states and Washington, D.C. on three measures: unemployment, foreclosures and non-mortgage debt. It's a bit silly to call it the "Happiness Index," since, as we all know, money doesn't buy happiness (although maybe credit card debt could...). But it does provide a quantitative and fairly substantive accounting of the states hardest-hit by the housing bust.

So which states were most miserable? Not surprisingly, Sunbelt States like California, Nevada and Florida make up most of the bottom 10, largely because of their high foreclosure rates. The most miserable state was a bit surprising though: Oregon. Maybe it's all the rain?

If you're in need of a pick-me-up, skip the pharmaceuticals and move to Nebraska, the happiest state on the list. (Personally, I'd settle for the fourth-happiest state: Hawaii.)

“Oil prices' recent highs were fueled in large part by the fact that speculators comprised a massive share of those "investing" in oil. Fears of U.S. war with Iran if McCain was elected and the subsequent shutdown of the Straits of Hormuz, a massive world oil trade route, drove prices way, way up to their highs of between $100 and $150 U.S. per barrel. So the "highs" that we recently saw were really not that reflective of the true value of a barrel of oil.”

That’s true – violence and the threat of supply cut offs are always a big factor in oil prices, although the fundamental reason behind the most recent run up (West Texas crude peaked at an all time high of $147 last July) was a lack of investment into the industry. In the 1990s, oil prices went as low as $12 a barrel. A lot of smart people left the business, the number of new geological engineering grads fell, offshore rigs sat around rusting, and companies simply didn’t put much new money into research and development. The result: when prices began to rise, and demand picked up, the industry wasn’t ready to deal with it. When I interviewed then BP CEO John Browne back in 2006, prices were rising sharply, and he was having trouble finding offshore rigs for $500,000 a day. The same investment problem could eventually force prices up again; this time around, the issue is that big multinational firms only have access to about 20 percent of the world’s known reserves, thanks to major oil nationalization during the recent price run up. Bottom line: they don’t have many places left to put money, even if they wanted to.

On a different note, reader Rich Monk makes the following point:

“The war in Iraq and Afghanistan is about oil! The Niger Delta war in Africa is about oil! Besides religion…oil is the culprit in human suffering to this day!”

Putting aside that fact that most of us (unless we’re totally off the grid) use oil in some form every day, he’s got a point. UCLA professor Michael Ross has done research showing that while conflict around the world has been decreasing over the last couple of decades, conflict in oil states is going up. Reason enough to hope for a Green Revolution….

The Smoot-Hawley Tariff has become a bogeyman in economics circles, a piece of misguided, Depression-era legislation that raised tariffs to exorbitant rates and choked the world trade system near to death. I was surprised, then, to find this piece in Prospect magazine, by highly regarded development expert Ha-Joon Chang, who teaches economics at Cambridge, arguing that Smoot-Hawley actually did little to worsen the Great Depression. "The '1930s: never again' story assumes that protectionism is always bad," Chang writes. "But this is not true."

I asked Jagdish Bhagwati, a professor at Columbia University, senior fellow at the Council on Foreign Relations, and one of the best-known defenders of globalization if he cared to respond. He agrees that Smoot-Hawley didn't cause the Depression, but it did "accentuate" it. "When we say today that we must avoid repeating history and succumbing to protectionism, we are basically saying that, yes, we have repeated 1929 (the crash has already occurred) but we should not go on to repeat 1930 through 1934 (i.e. spreading protectionism)."

Further, Smoot-Hawley has become a great marketing tool. "Al Gore, who could not get the Senate to ratify the Kyoto Treaty on Global warming -- they were opposed to it 99-1 under the Clinton regime --- managed to get the world to change its mind on the subject because of the melting glaciers, the penguin film and the polar bears!  We free traders have Smooth-Hawley to play the same role! It is too important to be undermined by misleading argumentation."

Newsweek's daily serving of news and view from around the world:

Obama's Budget Conundrum: Think the G20 was a big deal? Not compared to the U.S. budget debate, says FT's Clive Crook, and he's not happy with Congress. They've all but nixed the main revenue-raising idea, while ensuring the most expensive proposal--health care reform--will pass with or without Republican support. As is, a budget gap would remain ten years out.

Inflation in an Emerging Market, Like the U.S.: Over at the Baseline Scenario, Simon Johnson reasons that the IMF's concerns about inflationary pressures in middle-income emerging markets could also apply for the American economy.

Beating the Treasury War Drums: Banks' board members could be next to get the ax from the federal government, Tim Geithner warned in an interview with CBS on Sunday. He also described GM's restructing plan as "not quite there yet."

China's Smooth Operating: Bob Samuelson says China is heavily implicated in the failings of the globe's dollar-based economy (yes, the same ones they've criticized), citing the artificially depressed currency that long kept Chinese export prices low. But despite cooperative rhetoric at the G20, they're looking out for #1 in how they maneuver themselves out of the fix.

The Communist Comeback?: Not quite. The Russian Communist party hoped to draw 5 million people to its rally in Moscow on Saturday, but the Moscow Times reports that only one or two thousand showed up. Given the predictions for the Russian economy in '09, perhaps they'll have better luck in October.

The following comes to us courtesy of our correspondent in Rio de Janeiro, Mac Margolis. --BS

Every world class crisis needs a good gaffe artist. At that, George W. (“Mission accomplished”) Bush was au concours. But now that W is out of range, at least we have Luiz Inácio Lula da Silva. The megapopular Brazilian president – “my man,” Barack Obama exclaimed - draws deserved kudos for (so far) keeping the world’s 9^th largest economy from going over a cliff. But lately the onetime lathe operator has developed a reputation for opening his mouth only to change feet.

Last week, on the eve of the G20 consort, standing beside Gordon Brown, the Brazilian leader went off script and managed to make even the pasty complexioned British prime minister blanch by telling a sea of reporters that the world financial meltdown was the work of  “blue eyed white people.” Fortunately, cooler heads prevailed and eugenics was not included in the G20 recovery package. But the remark caused a stink. “Brazil’s Lula too Weird to be a Global Leader,” was the headline of Alexandre Marinis’s Bloomberg column.

Marinis went on to recall some other of Lula’s lulus. “My mother was born illiterate,” Lula once remarked, in a comment meant to encourage adult education. On another occasion, on a visit to Windhoek, he found the Namibian capital “so clean it doesn’t even look like it’s in Africa.” This from the man who advertizes his efforts to forge closer “South to South” ties.

Maybe it’s the klieg lights. After all when the pressure is on and the world is watching even the most adored of global rainmakers can misspeak, a habit that keeps the media in red meat 24/7. But if Lula regretted his faux pas, he wasn’t letting on. After all, the former union leader cut his teeth on the picket lines, hurling barbs and broadsides at the captains of industry and government on the other side of the barricades. And even though to the delight of international investors and lenders, he has mostly shed that woolly past and kept Brazil admirably solid and solvent, he still occasionally slips back into that ornery default mode, his intemperance rising like Peter Sellar’s errant arm in Dr. Strangelove.

By the end of the G20 talks, after rubbing shoulders with the mighty and a photo op with Queen Elizabeth, the Brazilian leader was positively radiant. He even offered to help top up the International Monetary Fund’s coffers with Brazil’s cache of hard currency reserves. “I started my career marching and carrying signs saying “Down with the IMF!” Lula recalls. “Don’t you think it’s positively chic that now we are offering to lend money to the IMF?” How do you say touché in Portuguese?

AP Photo / Scott Sady

This is a sentence you don't ever want to read:

"The quality of the US census may be undermined because of rising numbers of people living in garages, tents, basements and motels as the financial crisis deepens."

That's from the Financial Times, which says that "there is little data on the rise in 'non-traditional' housing, which is something the Census Bureau will generate for the first time as it seeks people out this year." The Bureau will hire 2,000 additional census-takers to deal with this population, which is usually small enough to fly under the radar.

And if the rise in "non-traditional" housing in the U.S. is large enough to impact a census that will count over 300 million people, I wonder what the impact has been in hard-hit developing nations like those in Eastern Europe?

For more on the human impact of the housing bubble's burst, view our photo gallery.

But there's more to that story. Wealth of Nations' own Mike Hirsh actually talked to Swagel for his column this week. In the process, he learned that Geithner's new plan for toxic legacy assets had its roots in an idea Warren Buffett proposed to Paulson back in October, backed by PIMCO's Bill Gross and Goldman Sachs' Lloyd Blankfein. But Paulson rejected the idea, instead placing his bets on fast-track capital injections as the financial world crumbled around him. Why does this matter now? Mike says the issue goes straight to the heart of a still-unresolved philosophical divide--even within the Obama administration--over just how broken the Street's machinery really is. Pretty fundamental stuff, really.

To recap: Swagel gives you the inside view. Mike gives you the big picture. Both are must-reads.

(Photo of Philip Swagel by Haraz N. Ghanbar / AP)

G20 Recap: The biggest win was an additional $1.1 trillion in funding for international aid agencies, and Jeffrey Sachs said simply that the results were "deeply heartening." Dani Rodrik called it a "a victory for the Europeans." Felix Salmon at Reuters said the resultant statement was "more substantive and harder-hitting" than most. Paul Krugman, who had veered toward pessimism lately, called the results  "substantive and important ." But a New York Times editorial felt the whole thing "fell short." Across the pond at the Guardian, Mark Thoma said that the failure to arrive at an international stimulus package was "bad for the US, and bad for the world more generally."

Slowdown? What Slowdown?: McKinsey expects China to have more than four million "wealthy" (i.e. an annual income greater than $36,500) households by 2015, up from 1.6 million last year. That would give it the fourth-highest number of wealthy families living within its borders, after the U.S., Japan and Britain.

Say Goodbye to Another 663,000 Jobs: A total of 5.3 million jobs have been lost in the U.S. since the start of the recession. Unemployment hit 8.5 percent in March, the highest figure since 1983.

Havens No More: Four countries were publicly shamed by the G20 as offshore tax havens -- the Philippines, Malaysia, Costa Rica, and Uruguay -- and they're already implementing damage control.

Tweet Tweet: No, this news isn't directly related to the global crisis, but some of you might consider it a crisis of culture: Google is in talks to acquire Twitter. Insert your own joke about how the deal's announcement will have to be made in 140 characters or less. 

(Photo by Jeff J Mitchell/Getty Images)

As playwright Arthur Miller once observed, “an era can be said to end when its basic illusions are exhausted.” That’s exactly what Newsweek columnist Ruchir Sharma (who happens to have the rather impressive day job of running emerging markets for Morgan Stanley Investment Management when he’s not cranking out copy for us) recently observed to me. Sharma’s take is that all of the basic illusions that defined the late global economic boom – easy money, endlessly rising houses prices, etc – have been exhausted. All but one, that is – the notion that oil prices are going to skyrocket soon, and stay high permanently, thanks to shrinking supply and the rise of the big emerging markets, like China.

I’ve blogged and written myself many times about the case for high oil. But Sharma points out something pretty spectacular and wholly overlooked. While there are going to be peaks and valleys, if you look at the price of oil over a 200-year period, it actually hasn’t gone up AT ALL. Inflation adjusted, the price of oil today is the same as it was in 1976, and before that, in the 1870s, which is when it was first used industrially in the U.S. What’s even more amazing is that the same goes for nearly every commodity you can think of (for more on this, look out for Sharma’s upcoming feature on the topic in Newsweek, where he will explain all!).

None of this is to say we won’t see price spikes in the short term – the energy industry is notoriously volatile. But the fact is that in the long run (bear with me here, and forget Keynes!) automation, technological innovation, and the replacement of one commodity with another (coal with oil, oil with gas, etc) will inevitably drive down prices. Who says we only bring you bad news here on the WON blog?

Former AIG CEO Maurice "Hank" Greenberg is clearly still in the first of the Five Stages of Grief. As he told the Wall Street Journal: 

"I don't feel any responsibility at all."

That's a bold statement for a man who spent 38 years building AIG into an international powerhouse, started the financial-products unit responsible for its implosion and left the firm only in 2005 -- at which point "the unit had already sold about half of the swaps that caused the biggest problems."

Despite all the promises today at the G20 to ban tax havens, stop protectionism, and hold those greedy bankers accountable, the truth is that world leaders missed the boat. The only issue that matters – and the only one on which they made absolutely NO progress – is rebalancing the global economy. Until Americans stop spending so much, and China and Germany and all the rest of the surplus countries start spending more, we’re all in a sinking ship.

Who cares how many millions people are stashing in offshore bank accounts in Hong Kong and Macao? Whatever the figure, it’s a drop in the bucket compared to the $2 trillion in reserve cash that’s sitting underground somewhere in China. I suspect that French President Nicolas Sarkozy is only banging on about tax havens because it’s a way to signal his annoyance with the Chinese, without really having to do the hard work of fixing chronic imbalances in the global economy that led us all into this mess to begin with. Tax havens are just a symptom of the problem – the real issue is the bulimic global economy.

What’s ironic is that while the Chinese, with their vast pools of savings, seem to have the upper hand now, they may ultimately suffer more if they can’t rebalance their own economy, and cut their reliance on exports. Historically, it’s always been the surplus countries, rather than the deficit countries, that suffer most in recessions/depressions.

For more on that, check out these two very smart pieces from Newsweek’s own Stefan Theil, and Peking University professor of finance Michael Pettis.

You've probably heard by now that the G20 reached a consensus, and we bet you're probably sneaking clandestine glances at the news when your boss isn't watching. We applaud that. Because we don't want you to get caught, we've pulled out the two juiciest clauses from the plan for a quick read. Big questions for now: What about stimulus coordination? And where in the world is all of this money coming from? FT has its suspicions that the world's currency printing presses will be getting quite a workout soon. More to follow...

Strengthening the IMF: Point #5
The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR [IMF special drawing rights] allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs [Multilateral Development Banks], to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy. Together with the measures we have each taken nationally, this constitutes a global plan for recovery on an unprecedented scale.

Building Global Regulators: Point #15
To this end we are implementing the Action Plan agreed at our last meeting, as set out in the attached progress report. We have today also issued a Declaration, Strengthening the Financial System. In particular we agree:
· to establish a new Financial Stability Board (FSB) with a strengthened mandate, as a successor to the Financial Stability Forum (FSF), including all G20 countries, FSF members, Spain, and the European Commission;
· that the FSB should collaborate with the IMF to provide early warning of macroeconomic and financial risks and the actions needed to address them;
· to reshape our regulatory systems so that our authorities are able to identify and take account of macro-prudential risks;
· to extend regulation and oversight to all systemically important financial institutions, instruments and markets. This will include, for the first time, systemically important hedge funds;
· to endorse and implement the FSF's tough new principles on pay and compensation and to support sustainable compensation schemes and the corporate social responsibility of all firms;
· to take action, once recovery is assured, to improve the quality, quantity, and international consistency of capital in the banking system. In future, regulation must prevent excessive leverage and require buffers of resources to be built up in good times;
· to take action against non-cooperative jurisdictions, including tax havens. We stand ready to deploy sanctions to protect our public finances and financial systems. The era of banking secrecy is over. We note that the OECD has today published a list of countries assessed by the Global Forum against the international standard for exchange of tax information;
· to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards; and
· to extend regulatory oversight and registration to Credit Rating Agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.

This just in from our Man In London, William Underhill, fresh from the G20:

April 2, aaaaand we're back to reality. Here's Newsweek's daily serving of news and views from around the world, G20-style.

Let the Games Begin!: Starting off with a mea culpa press conference wasn't enough to get Obama off the hook. Resistance to U.S. plans is coming in from all directions, but especially from a newly chummy France and Germany, who are calling for regulatory overhaul. As the WSJ put it, Obama had an easier time with former Cold War combatants than he's having with his allies. Their best bet for consensus is on tax havens. Yikes.

G20's Dirty Little Secret: No, seriously, it gets worse. FT's wicked smart Gillian Tett writes that the G20 big dogs are (shock!) failing to address the crisis-causing elephant in the room: toxic assets. As she quotes one anonymous "senior global policy official" griping: "The Americans are hiding behind stimulus and the Europeans are hiding behind regulatory reform. But that misses the real issue."

Forking It Over: The IFC, the World Bank's private sector arm, is coughing up $5 billion for banks that finance trade in developing countries, hoping their move will inspire altruism among the other reps at the G20 summit.

A New Chinamerica: Last week, we linked to Brad Setser's RIP post for Chinamerica. This week, we bring you an alternative view from PostGlobal's John Pomfret, who sees Obama and Hu positioning themselves as the twin saviors of the global economy. Perhaps it's the end of a beautiful friendship, but just the beginning of love.

Avoiding Another 'Trillion-Dollar War': Hark! The U.S. government has a plan to contain Iran, keep the Middle East stable, and keep costs in check. Sound too good to be true? It should, because it involves selling lots of military hardware to these guys. David Axe thinks through the long-term costs and benefits.

Pals Hugo Chavez and Muammar Kaddafi in Doha. Photo: Venezuela Presidency / AP

 

Baby steps toward independence, he said. South Americans have long wanted to step out from the U.S. shadow. In recent years, with about $4 trillion in GDP behind them, left-leaning governments like Brazil, Venezuela, Bolivia, Chile and Argentina are finding that's finally possible. And these days, as rest of the world is making the region seem like a model of economic stability (which is really saying something), they have plenty of reason to court new friends.

The Arab League, for one, has taken note. That's especially good news for South America, Delgado told me, since Arab governments are sitting on enormous capital reserves--a mouth-watering treasure chest for countries with a long tradition of spending rather than saving (here's lookin' at you, Argentina). What's more, Arab countries are big food importers--so much so that certain Gulf countries have begun buying up farmland in Africa to sustain their consumption. For Argentina and Brazil, which have more corn, soy, and wheat than they know what to do with, that's gold. In fact, in the three years since the first summit, Brazil's trade balance with the Arab world shot up from $8 billion to more than $20 billion. Argentina's climbed from $1.8 billion to $4.5 billion. And Chileans, who import about 90 percent of their oil, have reasons of their own to cozy up to the Middle East.

As expected, yesterday's summit produced more grandstanding than it did specifics (did I mention the entertainment value...?). Leaders broadly called for increasing trade, removing tariffs, setting up an Arab-South American bank, facilitating visas, and--of course--taking on the developed world. And what about that developed world? As Mac Margolis, my colleague in Brazil, reported recently, young Latin Americans are big Obamaniacs and much more accepting of free trade ideas than their parents. Delgado says the Obama team has already begun to change minds in South America about rebuilding relations with the States. But, he added, they have a long way to go in tamping down on protectionism and bolstering dialogue if they're going to woo the region back. It might be a good time to start.

I just came across a fantastically interesting paper from Christopher Crowe, an economist at the IMF. (Hat tip to Zubin Jelveh at Economix.) Citing Robert Shiller's work on "irrational exuberance," Crowe sets out to test the hypothesis that "the housing cycle should be more muted in areas with high concentrations of households whose beliefs or 'values' make them less prone to participating in a speculative mania."

And who better to test the idea on than evangelical Protestants, whose fervent belief in Scripture, one would assume, dampens the human greediness necessary for rampant speculation. Evangelicals "embrace a unique set of economic values that is suspicious or even hostile toward wealth accumulation," writes Crowe.

He finds that in areas with a higher proportion of evangelical residents, the variability in housing prices is less extreme. In other words, less boom, but also less bust.

Christopher Crowe

The economy is back on track and economists expect global growth of four percent this year. Happy April Fool's Day!

Apocalypse Now: On the eve of the G20 Summit in London, protesters take to the streets. "Four marches, led by representations of horsemen of the apocalypse, converged on the Bank in the Financial Fools’ Day protest," reports the Financial Times. The rest of the FT's G20 coverage, found here, is excellent.

Say It Ain't So, Joe: Joseph Stiglitz throws his hat in the ring with Krugman, et al. in criticizing the Obama Administration's toxic asset repurchase program. "It’s the kind of Rube Goldberg device that Wall Street loves," he writes. "Clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets."

No Help For the Neediest: Many world leaders have come out in favor of expanding the IMF's giving power, but the Wall Street Journal is having none of it. "No one should mistake this as charity for the deserving poor."

It's Okay to Laugh: In order to "broaden the revenue base," the Economist has decided to open a theme park dubbed Econoland. (Remember to check today's date before pre-ordering tickets.)