Paul Kedrosky sees the bright side of the U.S. financial crisis: Direct-mail offers for mortgages and home equity fell by 30 percent in 2007, while credit-card mailings have dropped 19 percent since October of last year. He quips:

Imagine how peaceful it would be if we ever had an outright depression. You could go back to checking your mailbox again.

I guess that's one way to look at it.

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Henry Pulizzi delves a little too deep into the Federal Reserve's newly released transcripts from 2002:

Former Chairman Alan Greenspan offered a tantalizing tidbit on his days as a saxophone player, when Cleveland Fed President Jerry Jordan mentioned a visit to Covington, Kentucky, where Mr. Greenspan’s jazz band once played. "I don't know if I should admit to this, but in the back room there were very peculiar things going on," Mr. Greenspan said in September 2002. "So we heard!" Mr. Jordan replied. The details, alas, remain a mystery.

It's probably for the best.

DMITRY ASTAKHOV/AFP/Getty Images

As many of you know, I have been blogging this week from the Salzburg Global Seminar’s session on Russia: The 2020 Perspective.

Most of what I've written so far has been focused on U.S. policy toward Russia. But the United States can only influence Russian domestic developments on the margins. So, what does Russia itself need to do over the next 12 years?

If I were president of Russia, my absolute top priority would be to strengthen property rights, which will make it possible for Russia to diversify its economy away from oil and gas, build a real middle class, and bring in much-needed foreign investment and advanced technology. There is much work to do. Exhibit A: the case of Hermitage Capital Management Limited, which until recently was the top portfolio investment fund working in Russia.

Hermitage CEO Bill Browder, you may recall, made news in 2005 when he was suddenly barred from reentering Russia. Browder had been making too much noise about "shareholder rights," and in doing so he apparently stepped on some powerful toes. The fund has since pulled its $4 billion worth of investments in Russia, but new details are emerging that paint a disturbing picture of the business environment in the country. Last week, Hermitage updated its investors on a campaign of "administrative harrassment" in Moscow that could have ended with corrupt local officials absconding with hundreds of millions of dollars worth of the fund's assets.

According to Hermitage, the story goes like this. In summer 2007, its offices were raided by the Moscow Interior Ministry, supposedly as part of an investigation into Kameya, a company owned by one of Hermitage's clients. The allegation was that Kameya owed $48 million in taxes. When Kameya's people went to clear things up with the Tax Ministry, officials there confirmed in writing that in fact, the company was eligible for a refund and owed no back taxes. Meanwhile, when one of Hermitage's lawyers complained about the raid's questionable relevance to Kameya, he was beaten by Interior Ministry goons, arrested, and fined 15,000 rubles for his insolence.

So, what was going on? Hermitage alleges that "a more sinister agenda" was at work. The real purpose of the Kameya raid was for Moscow Interior Ministry officials to get their hands on documents that could be used to seize the fund's assets.

Here's how the attempted scam worked. The Moscow Interior Ministry official in charge of the "investigation" launched what Hermitage calls a "fishing expedition" to locate the fund's assets -- demanding all records from four foreign banks that might lead him to the prize. At the same time, somebody used the captured documents to fraudulently change the ownership of three investment vehicles owned by British bank HSBC, a Hermitage trustee. From there, it gets complicated, but the bottom line is that a mysterious team of lawyers representing "their" companies then assented to a fake court ruling that would have put the three HSBC entities on the hook for $380 million. Luckily for Hermitage, the vehicles were "dormant" and held no assets, so the would-be millionaires came up empty.

"The more we learned, the more unbelieveable it became," Hermitage says. The fund's management passed along their findings to Russia's finance minister in Davos, which were then put in front of President-elect Dmitry Medvedev and a pair of investigations has begun. The year before, though, Medvedev had personally assued Browder in Davos that his visa troubles would be cleared up, and he couldn't deliver. Now, Hermitage says the officials involved in the attempted theft are making "spurious claims" and feeding misinformation about the fund to the press -- so the fund is going public with the story.

This case will be a key test for Medvedev,  a lawyer by training who has vowed to tackle Russia's property rights and corruption problems when he takes office in May. But as European Commissioner for External Relations Bentia Ferrero-Waldner put it to us in Salzburg this week, "Ultimately the world will assess Mr. Medvedev on his deeds, not just on his words." It's showtime, Dmitry.

Blake Hounshell is Web Editor of ForeignPolicy.com. He has been blogging this week from the Salzburg Global Seminar session on Russia: The 2020 Perspective.

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George Soros, speaking in a conference call hosted by the New America Foundation today, had some interesting remarks about the state of the world economy. Given that the first sentence of his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, reads: "We are in the midst of a financial crisis the likes of which has not been seen since the Great Depression of the 1930s," I was prepared to hear some dire predictions about the road ahead.

Instead, on a number of occasions throughout the call, Soros stated that he believes the "most acute phase of the crisis is now over," and that the markets are breathing a sigh of relief following the Bear Stearns bailout. Of course, that's not to say that the fallout is over just yet, or that the boom-bust cycle that has recurred consistently since markets began to become unregulated will cease.

Soros was keen to note that the "scariest unregulated market" now is the credit default swap market, with outstanding contracts amounting to $45 trillion today. (Credit default swaps are a form of contract insurance that has been widely sold by hedge funds.) Writing in the Financial Times yesterday and repeating the warning today, Soros says, "The [CDS] market is totally unregulated and those who hold the contracts do not know whether their counterparties have adequately protected themselves. If and when defaults occur, some of the counterparties are likely to prove unable to fulfil their obligations. This prospect hangs over the financial markets like a sword of Damocles that is bound to fall." It will cause what will essentially amount to banks running on banks. The solution, Soros argues, is to urgently set up a clearinghouse or exchange where the the deals can be registered and settled. Without this type of step, the "entire banking system [will remain] weighed down with bad assets" and stay paralyzed. Even then, there is still little hope that this fallout can play out without significant effects on the real economy.

Soros's concerns extend well beyond the current financial crisis -- although he did mention that it was this crisis that forced him out of retirement. His argument is philosophical and is explained thoroughly in his fascinating new book. But the crux of it is that the idea that markets fall into equilibrium like events in the natural world is a complete myth; humans can't know "truth" and thus expectations and human actions inevitably change how the system functions, which can -- and does (hence boom-bust cycles) -- lead to non-equilibrium outcomes. The solution is finding a balance between regulation and unfettered markets. Soros is highly critical of market fundamentalism, and condemned regulators for failing to do their jobs. They have the tools, he said, but didn't use them. He believes the two Democratic presidential hopefuls are on the right track with dealing with the financial mess and re-regulation, but was careful to highlight the dangers of going to extremes either way.

One of the most interesting points Soros made was his take on the the coming fuel for the global economy:

We've had the American consumer acting as the motor of the world economy and that is what is coming to an end... [We] need a new motor. And I believe we have a tremenous challenge with global warming, where you need to make tremendous investment to reduce carbon emissions... The investments necessary to avoid global warming could replace the excess consumption by the U.S. consumer as the motor of the world economy.

Although Soros certainly didn't try to downplay the seriousness of the current crisis, I'm still left feeling slightly hopeful that the economy will improve and things could get better soon(ish). And I'm now certainly keen to buy those stocks in renewable energy companies.

Anders Åslund predicts in today's Moscow Times that Russia's oil revenues and current account surplus will help it weather the subprime storm. In fact, the country may become increasingly attractive to Western investors:

What better safe haven for investors is there than Russia? First, the ruble is undervalued. Second, Russian equities rose moderately last year and are quite cheap by any comparison. Third, commodities are scarce and their prices have surged for long. As they have become securitized, they can easily be purchased by ordinary people. They are likely to be a prime object of speculation or just safekeeping. As a consequence, Russia's export revenues might soar even more and the economy will flourish, rendering all kinds of Russian assets -- real estate, stocks and bonds -- attractive to foreign investors. At the same time, the country's macroeconomic indicators will continue to ride and further attract investors.

The main worry, Åslund feels, is that excessive capital inflows will create a "resource curse" the fosters corruption and thwarts efforts at reform.

I would only add that if Dmitry Medvedev's government plans to attract foreign investment during the financial crisis, shakedown tactics, such as those it is currently employing against BP's Russian venture, need to go.

When you don't have a plan, call for an expert panel:

Democrat Hillary Rodham Clinton called on President Bush on Monday to appoint ''an emergency working group on foreclosures'' to recommend new ways to confront the nation's housing finance troubles.

The New York senator said the panel should be led by financial experts such as Robert Rubin, who was treasury secretary in her husband's administration, and former Federal Reserve chairmen Alan Greenspan and Paul Volcker.

Volcker is a good choice, and he has had some smart things to say of late. Alan Greenspan and Robert Rubin are undoubtedly brilliant, accomplished men who know a great deal about the financial markets and are generally well-respected in Washington. But with all due respect to Senator Clinton, they're not the right people to lead such a mission. Greenspan, after all, was the one whose slashing of interest rates helped spark the housing bubble. And Robert Rubin has been on the board of Citigroup, making him neither the most disinterested observer nor a particularly prescient one. Citigroup was up to its ears in subprime mortgages.

Greenspan and Rubin still might have some good ideas for getting us out of the current mess, even if they helped to cause it. But think of it like this: If your doctor missed tell-tale signs that you had cancer until it was nearly too late, wouldn't you start looking for advice elsewhere?

Americans aren't the only ones with housing woes. The global credit crunch is hitting the Kazakh construction industry hard, and new homebuyers in the once booming economy are finding themselves with big mortgages on houses and apartments that construction companies can't afford to finish:

Kazakh construction companies had sold 280 billion tenge ($2.32 billion) of unfinished apartments by September, including 170 billion tenge financed by mortgages, according to government statistics.

"There was a sense the boom was going to go on,'' said Anna Walker, a senior analyst at the Economist Intelligence Unit in London. "Then, almost overnight, lending to the banks from overseas dried up.'' [...]

"The problems that hit the Kazakh construction industry are due to the world financial crisis,'' said Aigul Aspandiarova, spokeswoman for the mayor's office in Almaty. "It's obvious that [major construction company] Kuat won't complete its projects on time.''

There are going to be a lot of stories like this before we climb out of this financial crisis.

Anders Åslund of the Peterson Institute for International Economics argued recently that the real problem with so-called sovereign wealth funds is not that Arab, Chinese, and Russian governments are buying up great swathes of Western economies, but that these state-owned funds are liable to make bad investments.

China is a case in point. Last year, China Investment Corp. bought nearly 10 percent of both Blackstone and Morgan Stanley, neither of which is doing so hot right now. Blackstone has since fallen by half and Morgan Stanley by a quarter. And Citic, a Chinese bank run by the government, was all set to purchase nearly 10 percent of Bear Stearns until Friday's debacle. The only thing that saved Citic from making a terrible deal? Bureaucratic red tape in Beijing.

The Financial Times published three stories yesterday that represent more bad news about the U.S. economy: the dollar is reaching new lows against the euro and a trade-weighted basket of currencies; the Federal Reserve is so concerned about U.S. growth that Chairman Ben Bernanke signaled there would be yet another rate cut in March, in spite of inflation risks; and U.S. manufacturing data revealed that orders were the lowest in five months, and home sales reached a 13-year low. As Nouriel Roubini argues in the cover story of the latest issue of FP, this spells grave news -- not just for the United States, but for the rest of the world.

Roubini argues that the impending U.S. recession will cause global economic mayhem. He lays out five triggers that will form the roots of sharp economic downturn in countries around the world, if not a full-fledged global recession: a drop in trade, a weak dollar, the bursting of housing bubbles around the world, a fall in commodity prices, and a faltering of financial confidence.

From recent reports, Roubini's gloomy outlook looks increasingly prescient. It's too early to tell if trade is decreasing (the latest WTO figures are from 2006), but the factors that Roubini highlights will lead to that outcome are being realized. Output and demand is stagnant or falling, the dollar is sinking, and financial confidence is shaky. Housing markets in various countries continue to look precarious. Commodity prices are still rising, but this seems to be the effects of a weak dollar combined with a possible lag in demand signals.

Martin Wolf, the FT's chief economics commentator, recently urged readers to take Roubini's warnings seriously. He draws a more hopeful conclusion about the Fed's ability to come up with solutions than Roubini, but nonetheless, even the most optimistic analysts refuse to assert that the current financial crisis will not cause a great deal of pain. It will -- and has. The question is: How bad will it get? And will the United States' troubles infect the rest of the world?

Can we please stop calling China a communist state now?

The million-dollar bonus has arrived in China’s financial services industry as local firms, buoyed by the spectacular boom in the country’s markets, compete to hire from the small pool of experienced staff. [...]

Although a small group of well-known dealmakers has been paid large compensation packages over the past decade, the seven-figure bonus is relatively new for most of China’s financial sector.

The fund management industry has seen an explosion in assets under management from $40bn in 2005 to around $450bn by the end of 2007, the result of rising share prices and massive inflows of retail money.

It seems the world has found a new hero in Jérôme Kerviel, the "rogue" French trader who helped lose more than $7 billion of Société Générale funds last week when he allegedly exposed nearly $74 billion to risk without anyone else's knowledge. The chastened French bank duly posted an "explanatory note about the exceptional fraud" on its Web site, but not everyone is engaging in the same type of public hand-wringing.

In fact, a number of Internet groups have already emerged to canonize Kerviel for his dastardly feat, according to Charles Bremner of The Times of London. His fans consist of two camps: banking industry folks, who mercilessly mock the French traders for missing such a large fraud—most likely due to their harrowing 30-hour work weeks—and French anti-capitalist types who delight in any anti-establishment activities conducted by the new Che Guevara of the finance world. 

The overnight star even has his own fan group on Facebook: "Jerome Kerviel should be awarded the Nobel Prize in Economics." And ladies, click here to buy your "Jérôme Kerviel's Girlfriend" T-shirts.

I'm glad to see all that free Château Lafite isn't going to Financial Times columnist Gideon Rachman's head:

Another problem for me at Davos is that, whilst I keep bumping into famous people, I can never think of anything to say to them. This morning the first person I saw as I left my hotel was George Soros. I fell into step with him, and after a long pause said something like: "It's looking quite bad on the markets, isn't it." He agreed. Definitely a bit dodgy. I've heard it from Soros himself.

Ouch. The Fed just dropped interest rates by a whopping three quarters of a point. I think Chairman Ben Bernanke needs an aspirin:

ALEX WONG/Getty Images News

(OK. so technically that photo is from last week, and he was probably just rubbing his eye... but still. The man can't be sleeping well.)

It's generally hazardous to extrapolate too much from one day's numbers. Stock prices are inherently volatile, and Monday's selloff can set the stage for Tuesday's rally. Having said that, I think it's safe to say that traders around the world have finally realized just how shaky the U.S. economy really is. The New York Times has a handy infographic that shows just how bad it is out there:

The question everyone is asking now is, just how much does the rest of the world depend on continued U.S. growth? We'll have some expert answers from Harvard economist and National Bureau of Economic Research chief Martin Feldstein later this week. But for now, the markets have weighed in, and it doesn't look good.

Greg Mankiw catches Congresswoman Marcy Kaptur (D-OH) confusing Fed Chairman Ben Bernanke with Treasury Secretary Hank Paulson during yesterday's House Budget Committee hearing:

MARK RALSTON/AFP/Getty Images

In 2005, China's trade surplus was "only" $102 billion. In 2006, it jumped to $177.5 billion. And now the numbers for 2007 have just come out: Last year, China's trade surplus jumped 47 percent and is now an astonishing $263 billion. 

But before you go jumping on the alarmist bandwagon about cheap Chinese goods flooding the global markets, know that in the last three months, import growth actually exceeded export growth. That means that means that the trade imbalance may be peaking. And that could be a good thing for everyone. Obviously, trading partners such as the United States have their own interests in seeing the trade surplus slow down. But inside China, there are also worries that the economy is growing too fast. Inflation in China is the highest it's been in 11 years, and according to a recent public opinion survey, the number one thing that Chinese are most worried about is the rising prices of consumer goods.

Although the Chinese government has been making some moves in recent months to curb inflation—Prime Minister Wen Jiabao froze energy prices earlier this week, and Beijing has also been letting the yuan run up modestly—some economists think it's not enough. Check out "China's Currency Crunch" in the latest issue of FP. Marvin Goodfriend and Eswar Prasad argue that China needs to let the yuan float completely—not just because it would ease American concerns about unfair practices, but because it would be good for the Chinese themselves. Check it out.

Bloomberg reports on a growing trend: Greenspan-bashing. 

Hailed as perhaps the greatest central banker who ever lived when he left the Federal Reserve in 2006, Greenspan is under attack from critics ranging from the New York Times to economists at the American Enterprise Institute for his handling of the 2000-2005 housing boom.

Where were you guys in January 2005?

More trouble at Citigroup:

Two of the biggest names on Wall Street are going hat in hand, again, to foreign investors.

Citigroup Inc. and Merrill Lynch & Co., two companies that just named new chief executives after being burned by the troubles in the U.S. housing market, recently raised billions of dollars from outside investors. Now, they are in discussions to get additional infusions of capital from investors, primarily foreign governments.

Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments.

CHINA PHOTOS/Getty Images

I happened to catch Republican presidential candidate Ron Paul's rambling concession speech after last night's loss in the New Hampshire primary. He had many crazy things to say (closing down the Federal Reserve?), but returned to one of his major campaign themes: a call to return to the gold standard of yesteryear as a means of combating the falling dollar.

Well, Dr. Paul isn't going to like this news:

China's gold futures advanced as much as 10 percent on the first day of trading as the world price of the metal climbed to a record on a weak dollar and concern rising energy and food costs will spur inflation.

Gold for June delivery, the most active contract, rose as much as 21 yuan, or 10 percent, to 230.99 yuan a gram, or the equivalent of $988 an ounce, in Shanghai. That's almost $100 more than the $891.70 peak reached by the world gold price today.

Photo: JOHN THYS/AFP/Getty Images

Last, week, the European Central Bank (ECB), the Federal Reserve and other central banks flooded markets with cash. Then on Tuesday, the ECB infused another $500 billion into the market.

The banks are trying to alleviate a credit crunch and restore confidence in world markets after the fallout from the subprime mortgage market spread to the wider economy earlier this year. On its face, that's a good thing. But if you ask me, this needs to stop. Why? The market needs to correct itself. The central banks have to come to terms with the fact that a recession is possible if not likely no matter what they do. Here are a few reasons to let the markets be:

Wall Street is not going to be happy not matter how much cash is infused or how low interests rates go. The Fed's rate cut on Dec. 12 is the perfect example of how spoiled Wall Street has become. It gets a cut, and it trades the market down 300 points because it wasn't big enough. This follows an autumn during which the market traded up irrationally on hopes of a rate cut. Wall Street needs to start expecting that the good times it has had over the last few years can't last forever.

As interest rates go down, chances of inflation go up. Despite news that inflation was flat in November, there is a real risk that prices could rise if interests rates keep getting cut and if oil prices stay high. The Fed acknowledged this risk in a statement accompanying its latest cut. And the Fed apparently had no problem with subprime borrowing when the market was up. It didn't act then. It shouldn't act now.

Buyer beware. Investors bet on instruments backed by subprime mortgages because they were risky; they could make a lot of money or lose a lot of money. For a while, they made buckets of money. Now, they're losing it. It is not the job of central banks to bail out that made bad investments.

Buyer beware II. The same principle applies on the homeowner side, apart from those who were suckered into these kinds of loans (and now it looks like the right kind of protections are being put in place). Many subprime borrowers were homeowners who wanted to upgrade to a bigger house or borrow against the value of their house. They took out these loans betting that the value of their homes would continue to rise. When housing prices started to plateau and eventually decrease, these owners got stuck with payments they couldn't make. Others should not have to pay for their mistakes.

Recessions are painful, but, just like good times, they don't last forever. They're an ordinary part of the market cycle. The actions by the ECB and Fed are simply prolonging the inevitable, whether it be a recession or simply a brief correction. Either way, it's time to let the market take its natural course.