* The economy: White House pulling out all the stops


Richard Moore


Bush convenes Plunge Protection Team
By Ambrose Evans-Pritchard, International Business Editor
Last Updated: 1:18am GMT 11/01/2008

Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to 
shower households with rebate cheques to head off a full-blown slump, and save 
the Bush presidency.

On Friday, Mr Bush convened the so-called Plunge Protection Team for its first 
known meeting in the Oval Office. The black arts unit - officially the 
President's Working Group on Financial Markets - was created after the 1987 

Read more from Ambrose Evans-Pritchard
Crisis may make 1929 look a 'walk in the park'
Financial outlook 2008: The experts' views

It appears to have powers to support the markets in a crisis with a host of 
instruments, mostly by through buying futures contracts on the stock indexes 
(DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means 
to fry "short" traders in the hottest of oils.

Hank Paulson has faced an economic slowdown since leaving Wall Street

The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a 
nose for market psychology, and includes Fed chairman Ben Bernanke and the key 
exchange regulators.

Judging by a well-briefed report in the Washington Post, a mood of deep alarm 
has taken hold in the upper echelons of the administration. "What everyone's 
looking at is what is the fastest way to get money out there," said a Bush aide.

Emergency measures are now clearly on the agenda, apparently consisting of a mix
of tax cuts for businesses and bungs for consumers. Fiscal action all too 
appropriate, regrettably.

We face a version of Keynes's "extreme liquidity preference" in the 1930s - 
banks are hoarding money, and the main credit arteries of the financial system 
remain blocked after five months.


"In terms of any stimulus package, we're considering all options," said Mr Bush.
This should be interesting to watch. The president is not one for half measures.
He has already shown in Iraq and on biofuels that he will pursue policies a 
l'outrance once he gets the bit between his teeth.

The only question is what the president can manage to push through a Democrat 

The Plunge Protection Team - long kept secret - was last mobilised to calm the 
markets after 9/11. It then went into hibernation during the long boom.

Goldman Sachs joins the US recession bandwagon
Wall Street backs the wrong horse in fight for The White House
Larry Summers bets on Harvards's Big Think

Mr Paulson reactivated it last year, asking the staff to examine "systemic risk 
posed by hedge funds and derivatives, and the government's ability to respond to
a financial crisis", he said.

It seems he failed to spot the immediate threat from mortgage securities and the
implosion of the commercial paper market. But never mind.

The White House certainly has grounds for alarm. The global picture is darkening
by the day. The Baltic Dry Index has been falling hard for seven weeks, 
signalling a downturn in bulk shipments. Singapore's economy contracted 3.2pc in
the final quarter of last year, led by a slump in electronics and 

The Tokyo bourse kicked off with the worst New Year slide in more than half a 
century as the Seven Samurai exporters buckled. The Topix is down 24pc from its 
peak. If Japan and Singapore are stalling, it is a fair bet that China's efforts
to tighten credit are starting to bite. Asia is not going to rescue us. On the 

Keep an eye on Japan, still the world's top creditor by far, with $3 trillion in
net foreign assets. The Bank of Japan has been the biggest single source of 
liquidity for the global asset boom over the last five years. An army of 
investors - Japanese insurers and pension funds, housewives and hedge funds 
borrowing at near zero rates in Tokyo - have sprayed money across the Antipodes,
South Africa, Brazil, Turkey, Iceland, Latvia, the US commercial paper market 
and the City of London.

The Japanese are now bringing the money home, as they always do when the cycle 
turns. The yen has risen 13pc against the dollar and 12pc against sterling since
the summer. We are witnessing the long-feared unwind of the "carry trade", 
valued by BNP Paribas in all its forms at $1.4 trillion.

The US data is now relentlessly grim. Unemployment jumped from 4.7pc to 5pc - or
7.7m - in December, the biggest one-month rise since the dotcom bust and clear 
evidence that the housing crunch has spread to the real economy.

"At this point the debate is not about a soft land or hard landing; it is about 
how hard the hard landing will be," said Nouriel Roubini, professor of economics
at New York University.

"Financial losses and defaults are spreading from sub-prime to near-prime and 
prime mortgages, to commercial real estate loans, to auto loans, credit cards 
and student loans, and sharply rising default rates on corporate bonds. A severe
systemic financial crisis cannot be ruled out. This will be a much worse 
recession than the mild ones in 1990-91 and 2001," he said.

Sovereign wealth funds stand ready to rescue banks, as they have already rescued
Citigroup and UBS. But as Moody's pointed out this week, the estimated $2,500bn 
in lost wealth from the US house price crash is more than the entire net worth 
of all the sovereign wealth funds in the world.

Add fresh losses as the property bubbles pop in Britain, Ireland, Australia, 
Spain, Greece, The Netherlands, Scandinavia and Eastern Europe, as they surely 
must unless central banks opt for inflation (which would annihilate bonds 
instead, with equal damage), and you can discount $1,500bn in further attrition.

Not even a Bush New Deal can hold back the post-bubble tide that is drawing in 
across the globe. What it can do is buy time. Fortunately for America - and the 
world - the US budget deficit is a healthy 1.2pc of GDP ($163bn). Washington has
the wherewithal to fund a fiscal blitz.

Britain has no such luxury. Our deficit is 3pc of GDP at the top of the cycle. 
Gordon Brown has shut the Keynesian door.

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