The Global Financial Meltdown Thread

I've been really interested in how the bear market rally and the business news feed off each other. Through this last month, the business news seems to have taken a really positive turn. I know this is in part because of the way the press likes to tell a long-term story of progress and setbacks and exciting twists and turns.

Today, it was announced that foreclosures hit a record in Q1. Economic recovery initiatives centered around keeping people in their homes either aren't working or the positive effect has been overwhelmed by the crisis. Obviously, that was bad news, reported as bad news.

Yesterday, it was announced that retail sales had dropped 1.1% from the previous month. The story that didn't seem to get as much play is that retail is actually down 9.4% from a year earlier.

Today, business news is reporting that housing starts were down 10.8 percent from February. Obviously, the news is bad, but to me the focus is off: housing permits fell 45% from March 2008 and housing starts fell nearly 50% from March 2008.

Year on year, the data that really matters, the housing market is still in a freefall. For this reason, I don't completely understand the positive spin on banking profits either.

One of the reasons banks are showing good numbers is that a few weeks back they successfully lobbied to change the marked to market accounting rule for many of their "toxic" assets. In other words, the fundamental health of the banks hasn't changed in the slightest, but the way they report it has. The financial sector is trading up right now on an accounting rule change.

Given the housing market, how can banks really hope to recover. They are flooding the market with foreclosed properties, driving prices down further, discouraging home building still further.

So to sum up:

unemployment is heading toward double digits.
The housing market is down nearly 50% from a year ago when it was already deep into a recession.
Consumer spending is down nearly 10% year on year
consumer prices are weak to deflationary.
The equities markets are marginally up for the year.


Where is the current consensus coming from, exactly, that the economy will start to grow again in the second half of 09?

 

Wherever it's coming from, I think it's good. Isn't optimism the most important incentive for recovery?

You really want things to get worse, don't you... Just so you can be visionary

 

Based on I have read in the WSJ, the recovery consensus comes from GDP figures. It has been contracting, but at decreasing rates.

Yet these are all "predictions", so who knows really. As far as stocks go, the DOW has hovered around the 8,000 mark these past few weeks.. hasn't been able to rise much higher. But that better than a constant decline.

 

You really want things to get worse, don't you... Just so you can be visionary

I prefer the term "secular doomsday prophet."

Aside from that, however, I think misplaced optimism is one of the reasons that speculative bubbles develop in the first place. If a lot of people are making money doing something and there doesn't seem to be a downside other than the warning that there is always a downside and there doesn't seem to be any risk other than the pessimists crying out that there are risks, then the optimistic investor goes for it.

Pessimists have a more realistic outlook on life by and large, but misplaced optimism is probably a key to individual happiness.

 

I would disagree, though, that the housing drop is neccessarily a bad thing.

Granted, I view that when you get a house, the intent should be "I am going to live in that for quite a while unless my plans change" and not "I'll buy it then sell it in a couple years when the value went up"

So in that sense, once you've budgeted for a house, and start paying on it, if its value increases or decreases shouldn't have an effect. However, the prices dropping has had profound effects on people that couldn't own homes at the high prices. Yet another one of my friends is in the process of closing escrow right now on a house right now, and he's able to do so because the prices have dropped. Actually my current count at this point is that I know one person who has had other family members hit hard enough by the recession to lose homes, and I know between half dozen to a dozen people that have been able to get a house since this started that had been having trouble getting the money to do so before now.

 

I think that's right. Housing payments as a ratio of earning were at historical highs and essentially unaffordable. Housing prices have to come down, and over the long-term they have to stay at sustainable prices relative to national income levels or fewer people will own homes. And come to think of it, fewer people should probably be owning homes.

If I wrote "bad" I think what I meant was that we're not going to see GDP growth in the second half of 09 given these conditions. Housing is off by 50% from a year ago in terms of volume and maybe 20% in terms of median prices (although of course it varies by region). No matter how you slice it, housing is still a critical component of the economy and trillions of dollars have evaporated from it.

I wrote earlier in this thread or maybe one of the other similar ones that the economy really can't start growing before the housing market finds a bottom. The housing market will have a hard time finding a bottom until the job market finds a bottom. The job market won't find a bottom until consumer spending finds a bottom. Consumer spending can't really find a bottom until people work through all their consumer debt issues. Collectively, once the nation has paid off its credit card debt, or all those who never will be able to have gone bankrupt, then consumers can start saving for the big purchases like homes and cars.

If there's a part of me that's optimistic, it's in the idea that people can really adjust their consumption, spending and savings habits over time, and there's evidence that people are paying down their unsecured consumer debt.

 

After Senator Dick Durbin warned that the Senate was "owned" by the banks, the Obama-backed anti-foreclosure bill was defeated 45-51.

Now that the economy has, hopefully, bottomed-out and can begin to recover... what actions should be taken to make sure we are building a solid foundation for our economy? President Obama used a Biblical metaphor, saying we must build our house on a rock, instead of on the sand this time. He has proposed more regulations for the banks and for Wall Street. It does look like Congress will pass the Credit-Card holder's "bill of rights," thought.

But what else should be done?

I think these are two radical ideas, but should be given some thought:
-Sustainable Housing bill: we should pass legislation that requires all new houses to be built to energy efficiency and environmental standards, and give Americans a tax credit if they renovate existing homes to be more efficient and environmental.
-Cap on Interest Rates: interest rates on loans, whether it's college loans or auto loans or mortgages, suck a lot of money out of people. Muslim nations actually ban Usury altogether, and other nations used to have periodic debt-forgivness holidays. We may not be able to go that extreme, but couldn't we at least put a cap on how high interest rates can go, say 10%?

 

Congress should repeal the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

 

I think what's forgotten here is that banking for the purposes of housing is only one part of the banking system, and possibly not the overwhelming part of it, either. The reason so many banks have collapsed is fundamentally because of the derivatives founded on mortgages, not because banks stand or fall by the housing sector alone. They don't want to lend to each other because they have suspicions about the level of debt from these instruments, not because they stand or fall by the housing industry itself.

What does drive the banking industry IMHO is loans made to businesses. There are thousands - even millions - of businesses which depend on loans simply to preserve their cash flow from month to month, or even week to week. That doesn't mean the business is bad, merely that its income stream doesn't match the expenses stream chronologically. A business can still be making enough money to support itself as a going concern, it just doesn't have those funds right at that moment.

The housing industry ultimately will recover. It will take quite some pain for anybody in the grinder right now, but you don't have enough poverty in the United States that nobody can ever buy a house. Quite the reverse. Eventually prices will hit a level where people will be able to start buying them. People who patiently saved their money for such a day. This is the fundamental incentive by which economies rise and fall: when prices get low enough, things start to recover. Always have. And it usually isn't the bankruptcy of the entire country that does it.

In the present context, with greatest respect I think sustainable housing is a silly idea. You'd basically be setting up a number of imposts and charges and an entire (presumably federal) bureaucracy that ultimately is going to raise the costs of construction of a house. That's not what you want to do to an industry that is already competing with fire sale foreclosure prices -- people won't pay for a sustainable house, they'll pay for a house that's maybe 5-10 years old which is available for the same price or less than the sustainable house. Introduce sustainable housing laws when the market's in recovery -- maybe -- but one would have to ensure that the long term benefit of doing so actually matches, in inflation terms, the cost of what you're doing to the house to make it sustainable. Renovating existing homes to be more environmentally friendly is an interesting idea, but giving tax credits has to be looked at carefully because the government money you lose from providing tax credits has to come from somewhere. And the US is already stepping into a deficit that it'll take two generations to pay off, if at all.

(As a side note, it's my personal view that the correct way to stave off a crisis of this kind is to cut taxes, not introduce a deficit that will ensure taxes are raised to pay for it over the life of the debt. The reason one does that is to encourage entrepreneurship, to make it more inviting for someone to start their own business. That rebuilds growth.)

As for capping interest rates ... again, in my view a bad idea, because you basically hobble the banking system. Banks profit from the following fundamental equation:

Profit = (Interest payments on loans made to the bank's debtors) - (Interest payments made on savings deposited by the bank's creditors).

That is, the bank takes the money you save with it, loans it to somebody else, and then pays you back with a bit of interest, whilst charging the debtor a higher rate of interest. It is when the second factor, interest payments to creditors, exceeds or comes close to exceeding interest payments from debtors, that a bank collapses and when you get huge queues outside the bank for people to withdraw their money.

So. You cap the interest rate payable on loans (i.e. made to the bank's debtors) at 10%. What rate of interest do you provide to depositors?

It has to be a rate better than inflation, which is the missing factor here and which renders t

 

In regard to the proposals:

1) I would give the proposal more thought, as I'm not sure where I would stand on in principal. However, it's my understanding that renovations to one's home are tax deductible anyway. So, in a way, we already have this, though it doesn't discriminate between environmentally friendly and unfriendly home remodeling.

2) I'd disagree. There are people who want to take very risky loans (either because the venture is itself risky, or they have a poor track record of paying people back), and it makes sense that they should have to pay a higher interest rate. If we restricted loans and credit to only those that would be profitable at a 10% interest rate, I imagine you'd pretty significantly circumscribe the amount of credit available. Remember that lending institutions have to earn enough to absorb the cost of defaults. That said, I think the Obama team has gone in the right direction. They shouldn't be able to arbitrarily raise interest rates if you've done nothing to indicate that you represent a risk. There's a real difference between incidentally using earnings from one area to cover costs in another, and just trying to pass on all expenses to consumers so that the company can keep it's preferred profit margin. If they're losing too much money on defaulted loans and credit, the solution is not to jack up the rates of responsible borrowers--it's to be more competent about who you decide to loan money to in the first place.

 

doom n gloom update.

One third of mortgaged homes in the U.S. are now underwater according to Bloomberg, or more than a fifth of all homes. What this means I think in practical terms is that home prices can't stabilize yet and the banks still face immense pressure.

I track the estimated value of my home on Zillow, admittedly not a very accurate way to assess it, but even so the Zillow value of my home has declined on average about $5,000 every 2-3 weeks since I've been tracking it. It's unlikely that the value will fall to the price I paid for it, and even unlikelier that my mortgage will go underwater since I made a significant down payment and have built up some added equity, but it's within the realm of the possible.

And I think this continual downward ticking of home prices, while necessary, means that recovery is farther away than some people think. Many Americans have seen a short-term gain in their net worths over the past few months as the equities markets have recovered, but that gets balanced against the steady downward valuation of a lot of people's homes and uncertainty about the job market. So, consumer spending will likely remain sluggish for the rest of 2009. The job market won't begin to recover until 2010, and the housing market may not fully bottom out nationally until 2010 or 2011, with a recovery to 2005 levels perhaps decades away.

Robust economic growth won't happen before 2011.

 

This is my first post on this thread, so there are subjects I haven't read in the last 24 pages. If I cover something that has already been covered, that's the reason.

I think that the most significant cause of the latest financial and energy crises was not so much that the price of energy went up and the value of housing in the US has dropped, but that much of it was because of sprawl development. After WWII, sprawl development became normal for American cities... not solely American cities and it was not THE cause of the economic problems. Low density, poorly planned urban areas were cheap to place and easy to maintain with cheap fuel and low interest rates on housing loans; but suburban regions have become more vulnerable to the latest energy and financial problems.

As low density development became the normal way of urban land planning, more Americans chose to buy their own homes and many fewer wanted to live in rental property within crumbling central cities. With lower density comes automobile dependence, higher utility costs per capita, higher service costs, and more homes purchased with loaned capital.

Auto dependence came about because low density reduced the need for public transportation. From this came much higher traffic congestion in inner cities, longer commutes, and greater demand for foreign oil. Public transportation depends upon high population density to be effective, which makes alternative means of transportation impractical for many American cities. Light rail depends on electricity, which can come from many energy sources. Many dense American cities with public transportation have minimal ridership, so population density is not the ONLY thing that makes alternate transportation systems viable.

Portland only has about 4000 people per square mile, but its transit system works because it was developed around its light rail. Of the commuters on a daily basis, only a fraction use public transportation; but it was designed to reduce the number of cars a working family MUST have by offering effective alternative means of transit. High population density and mixed zoning has advantages by A) having a more effective transit system that increase riders and destinations at fewer stops. B) Reducing the average commute time by decreasing the distance between destinations. C) By having high population density concentrated near light rail stations, minimal parking demands are not enforced. D) Retail benefits by having day and night customers closer than if they needed a car. E) Pedestrian travel improves average health and reduces the number of trips a person must make on a daily basis.

This is an example of where low population density (compared to the average European city) could use mass transit, but Portland is much denser than most American cities. In Chicago, the mass transit along certain lines is VERY effective, but this city suffers from a number of issues in regards to its population density. Although the loop represents buildings that soar dozens of stories, its high population density of over 30,000 per square mile doesn't mean that its mass transit will be the best or the most cost effective.

The loop's population makes it very viable for mass transit, but it's mostly from the extreme density gradient between Chicago and its suburbs that the L rail isn't more successful. The Sears Tower has its own zip code, but when its L rail lines link to stations that only serve up to 5000 residents; all the stations on the line have to be able to support the capacity of the Loop's stations. Although these suburbs may have a high enough population density to support mass transit, those systems have to be designed to work with the stations in the Loop. In other words... more stations with higher potential capacity carrying fewer people is less effective. If you placed Portland's light rail system into Chicago's Loop, it would not have the capacity to provide for the sheer number of riders. If you built an L train in Portland, the system's operating costs would greatly exceed the return

 

Nice analysis. It never ceases to amaze me that a little Austrian town like Graz can field technology like this:

[image=http://www.bombardier.com/files/en/supporting_docs/image_and_media/products/BT-1785-GrazHR.jpg]

whereas a city like Chicago with an economy basically bigger than all of Austria is still using equipment like this:

[image=http://www.railroadpix.com/images/passenger/pas_img_12/metra_01.jpg]

Whenever I'm in Graz or Vienna I feel like a visitor from Somalia or Albania; lucky to be wearing shoes.

 

Another new Senate poster, thats wonderfull.

 

Thanks, but you may find that I'm not very flexible on matters when I've taken a side.

I intensely dislike people who take a side I perceive as wrong and refuse to reflect upon facts because they conflict with anecdotal evidence that they interpret as a model for the rest of the world. When I tried presenting this before, I went head on against a Chicago resident and I didn't present my side very well. S/he said s/he disproved my side when I simply failed to prove my point. And when I take on a VERY elaborate subject like density/economics/politics, I often don't cover all my points and the opposite side interprets that as though I hadn't taken that into consideration.

I haven't included crime rates here; I can't counter that.

I didn't include desirability; public transit isn't effective if it is deteriorating and there are more favorable alternatives.

I didn't include public/private sectors; there is no point in investing tax money into a system where private sectors have already been set up. Private security and commuter shuttles come to mind.

Chicago has vast parking facilities (check google map) there are many parking ramps up to seven levels high and ramps built into the infrastructure not seen from the sky. My counter argument to take into consideration the sheer size of the skyline. The towers in New York and Chicago's Loop are not small; they're enormous. Compare the floor areas of dozens of floors to that of auto-dependent office parks... compare that to their parking facilities and Chicago/Portland/New York have a lower per capita land area for parking.

I also considered that the US has more land than we need for agriculture to feed ourselves. Why not lay out a city horizontally? The problem with this idea is that commuters end up having to cross every single piece of property everytime they go to work and that requires a higher per capita demand for energy when millions of others are adding to traffic congestion. This also goes to mass transit, as one side of a track is pushed to peak capacity while the opposite side not demanded as significantly. The best solution to this is to provide a better balance of two-way traffic.

What of electric/plugin hybrids? Although electric cars are good for energy independence, they would actually add to energy demands if they push powerplant peak capacity during the day. They do work well in capturing wasted electricity during night hours, but would push peak demand if they can be recharged during the day.

Hydrogen power? Already dismissed, as they return only 45% of the energy from hydrolysis. Even if that goes up, the only benefit they provide is the means to capture/store energy during off/peak hours.

----

The point of all this is to show an easy way to reduce total energy/infrastructure costs through reduction. This has consequences and drawbacks, not to mention unfavorable alternatives than improved energy/cost efficiency; but it provides a definite and reliable solution than technologies still in development. It's not the way many go about providing a solution to a problem, but reduction is really the most significant means to solve most American economic/environmental/transportational problems. It doesn't go to politics or desirability, but higher population density is really the fastest improvement we as Americans can make for our state.

 

These are great thoughts. Maybe you'd consider possting your full analysis in the global energy thread. The public transportation discussion seems to make the most sense there.

 

http://finance.yahoo.com/tech-ticker/article/262168/Ten-Things-That-Could-Still-Go-Wrong-with-the-Economy?tickers=dia,spy,qqq,xlf

Ten Things That Could Still Go Wrong with the Economy

The recent buoyancy of the financial markets has created a sense of calm about the economy. The overall sense of panic has gone.

But there's still a wariness in the air, a feeling that the fragile "green shoots" of the recovery might be stomped out by some new crisis. People are waiting for the next shoe to drop.

Here we suggest 10 things that might stymie our recovery. Some are purely financial events. Others are geopolitical. And one involves these little piggies.

Did your favorite nightmare scenario make the cut?

1. Swine Flu Second Wave: Typically, influenza outbreaks come in waves, getting worse with each one. The very ease with which we seem to have survived the first wave of swine flu may make us vulnerable to a horrific second wave.

2. Commercial Real Estate Collapse: Various commercial real estate deals face trillions in refinancing obligations over the coming years. But the market is practically closed, ensuring massive bankruptcies and restructuring.

Why are lenders so freaked out? Because existing loans are going sour at a pace unlike anything we've seen in history. Because of that, even commercial real estate properties with strong cash flows are finding financing extremely difficult to come by.

3. The Option Adjustable Rate Mortgage Explosion: Anyone referring to the "subprime crisis" has got to get with the program. The subprime wave of defaults is basically over. Now the question is, what about all the other types of mortgages? You know, Option ARM, Alt-As and of course, good old fashioned prime mortgage.

The big wave of Option ARM resets has yet to come, and given the drop in home prices, refinancing won't be realistic. Let's hope the homeowners can afford their new monthly payments.

4. Global Food Crisis: As we saw last year, the global food supply teeters on the edge of adequacy. Any serious shock--floods in the Midwest, a war in Asia, social unrest in China, political upheaval in Thailand or Egypt--could result in shortages in countries that import large amounts of their food.

5. Israel Bombs Iran: The Obama administration's openness to the Iranian regime may have the perverse effect of emboldening its nuclear ambitions. Very likely, the fears of the nuclear Iran are over-stated. It would probably behave like most members of the global nuke club, cowed by its own destructive power into behaving responsibly.

But Iran isn't the only country to worry about in the region. Israel may not be willing to tolerate a nuclear armed Iran, and may choose to strike out to destroy Iran's nascent nuclear capabilities. This would obvious raise tensions throughout the Middle East. At the very least, oil prices will likely spike and remain elevated following any military action against Iran. This, in turn, will slow the global economy.

6. A Wave of Municipal Defaults: Historically, cities and states don't default on their loans very much. But as Warren Buffett pointed out, historical results don't mean jack because muni insurance wasn't around. Unless it gets a bailout, California may go bankrupt, causing the muni market to seize up, bringing public works and spending to a halt, kneecapping GDP.

At that point, with no ability to borrow, the other states will rush to default themselves, sparing their taxpayers any more pain.

7. Another Bank Run: It seems unlikely, given the government's implicit guarantee of the banking sector, but it's always possible that investors or lenders could lose confidence in one of the banks again, prompting a financing run a la Bear Stearns.

If this happened, we'd be back to square one with all the confidence and bailouts since Lehman's collapse -- only, the government would have fewer bullets left in the gun.

8. Runaway Inflation: The Federal Reserve seems confident that it can "land the rec

 

11. Energy price volatility

Oil prices spiked near $150 a barrel, then plunged to below $50 a barrel and have now recovered to near $70/barrel, all within a startling one year period.

The viability of the entire airline industry as an ongoing concern is going to be impaired by a return of $100 oil. Volatility sends mixed signals to car buyers, to the extent there are any now. A return of expensive gas makes it harder to unload inventory of less fuel efficient cars, not that anyone should really be driving them anyway.

Also, truck transport, rail transport and air freight transport are down considerably from last year, 20% or more year on year in some cases. At the same time, however, the industry got some relief in the form of lower fuel prices. So, again there's a question of how badly the industry will be hurt with energy price increases even as transport of goods remains sluggish and recessionary.

 

That Yahoo piece is generous with it's 'accuracy', Ghost - Chinese bank bonds are currently paying a coupon of just over 3% and a yield of between 3 and 5%, depending on the duration.

Honestly, the US goverment could ride the yield curve and emerge a winner if #10 is true.

ES

 

How much longer could U.S. debt be in Asia's best interests, though? With the CBO projecting that President Obama's proposed health care bill will add another trillion dollars to Federal deficits over the next ten years, in addition to an already projected Federal budget deficits of one trillion plus for the next eight years, at what point do major U.S. creditors seriously begin to question the State's capability to service that debt? And by that I mean begin to take serious action, and not just words.

For example, if the CBO's estimates are correct, and interest rates somehow remain miraculously low, the interest payments needed to just service the debt will approach one trillion dollars eight or so years from now.

That's terrifying.

 

Aren't there figures out detailing that although Obama's plans move the government further into debt, it's but a fraction of the moves the previous administration took to drive it into deficit?

 

Not that I've seen. As a percentage of GDP, though, the President's current budget plans are much larger. His projections do show the deficits being reduced several years down the road, though.

 

12. Consumer Credit Crisis

American consumers have nearly $1 trillion in outstanding credit card debt. Much of this simply will never be paid back. The percentage of 90-day delinquent credit card accounts has hit a new record high of 6.5%, and credit card companies have quietly started negotiating deals with delinquent cardholders to pay back half or a third of whatever. Collection agencies who formally could get a a significant percentage return on bad credit card debt are now lucky to get 5 cents on the dollar.

This is terrible news for the global economy.

The average U.S. household has thousands in credit card debt. When times were good, people were amassing credit card debt then plowing it over into a refinanced home mortgage. That source of debt management has dried up.

Beleaguered consumer credit providers are reducing the amount of credit available to consumers, meaning that debt management options are reduced further for consumers, leaving solvent consumers with the last-ditch option of actually paying down their debt.

Consequently, solvent consumers are paying down debt now 1) because they want to reduce their debt overhang while they're still employed and 2) because more creative options to avoid repaying the debt have dried up.

So, even solvent consumers have moved more of their disposable income from consumer spending into credit card debt repayment.

At the same time, of course, many more consumers are either insolvent or about to become insolvent. New jobless claims dropped slightly, but is still at a level that, even when you trend out the most optimistic version of the decline in new claims, unemployment will likely peak no earlier than April or May of 2010. Again, this is a fundamentally optimistic outlook: unemployment will continue to rise for another 10 months.

A meaningful increase in consumer spending is simply impossible before home prices stabilize and unemployment peaks, and I'm not looking for either of those things to happen in 2009.

 

Jabbadabbado learns a new term.

The "exhaustion rate" is a U.S. department of labor statistic providing the average monthly exhaustions divided by the average monthly first payments of UI benefits and is meant to get at the percentage of people receiving state unemployment benefits who exhausted all the benefits to which they were entitled before finding a new job.

While monthly unemployment benefits paid have fallen from a record $8,155,283, in March, 2009, the exhaustion rate climbed to a record 49.17%.

http://ows.doleta.gov/unemploy/claimssum.asp

 

What does everyone think is the reason behind the increasing unemployment rates, even though the economy itself seems to have settled down?

I think if we have any more "stimulus packages" they should be devoted entirely and purely to infrastructure.



Also, I'm hearing rumors (just rumors right now) that Goldman Sachs in committing massive fraud and manipulation of the market, on a much bigger scale than Enron ever was. If that turns out to be true, what could the effects of that be on the world economy? http://blogs.reuters.com/commentaries/2009/07/05/a-goldman-trading-scandal/



There is also a growing movement in the Senate and the House to begin monitoring and auditing the Federal Reserve. I would think that they would already be monitored by the government?



Does anyone know what the effects of a strike on Iran would have on the economy? Saudi Arabia gave Israel permission to use their airspace to bomb Iran. http://www.timesonline.co.uk/tol/news/world/middle_east/article6638568.ece



The Pope is also calling for a new financial system in his third encyclical, before his meeting with Obama (after he's done visiting Putin and Medevdev) and the G-8 Summit:

http://news.yahoo.com/s/ap/20090707/ap_on_re_eu/eu_vatican_encyclical

Pope Benedict XVI called Tuesday for a new world financial order guided by ethics and the search for the common good, denouncing the profit-at-all-cost mentality blamed for bringing about the global financial meltdown.

In the third encyclical of his pontificate, Benedict pressed for reform of the United Nations and international economic and financial institutions to give poorer countries more of a say in international policy.

"There is urgent need (for) a true world political authority" that can manage the global economy, guarantee the environment is protected, ensure world peace and bring about food security for the poor, he wrote.

The document "Charity in Truth," was in the works for two years, and its publication was repeatedly delayed to incorporate the fallout from the crisis. It was released a day before leaders of the Group of Eight industrialized nations meet to coordinate efforts to deal with the global meltdown, signaling a clear Vatican bid to prod leaders for a financially responsible future and what it considers a more socially just society.

"The economy needs ethics in order to function correctly ? not any ethics, but an ethics which is people centered," Benedict wrote.

The German-born Benedict, 82, has spoken out frequently about the impact of the crisis on the poor, particularly in Africa, which he visited earlier this year. But the 144-page encyclical, one of the most authoritative documents a pope can issue, marked a new level of church teaching by linking the Vatican's long-standing social doctrine on caring for the poor with current events.

While acknowledging that the globalized economy has "lifted billions of people out of misery," Benedict accused the unbridled growth of recent years of causing unprecedented problems as well, citing mass migration flows, environmental degradation and a complete loss of trust in the world market.

He urged wealthier countries to increase development aid to poor countries to help eliminate world hunger, saying peace and security depended on it. He specified that aid should go to agricultural development to improve infrastructure, irrigation systems, transport and sharing of agricultural technology.

At the same time, he demanded that industrialized nations reduce their energy consumption, both to better care for the environment and to let the poorer have access to energy resources.

"One of the greatest challenges facing the economy is to achieve the most efficient use ? not abuse ? of natural resources, based on a realization that the notion of 'efficiency' is not value-free," he wrote.

Benedict said that the drive to outsource work to the cheapest bidder had endangered the rights of workers, and he demanded that workers be allowed