200 Moody's warns of 'social unrest' as sovereign debt spirals

(1) The North Dakota Model for Capitalizing Community Banks - Ellen Brown
(2) Australia's Debt volcano
(3) It's Debt, Debt, Debt for Australia! - by Steve Keen
(4) The pretence of normalcy - How angry will Americans get? James Howard Kunstler
(5) Moody's warns of 'social unrest' as sovereign debt spirals
(6) Paul A. Samuelson - 'I don't care who writes a nation's laws if I can write its economics textbooks'

(1) The North Dakota Model for Capitalizing Community Banks - Ellen Brown

From: Ellen Brown <ellenhbrown@gmail.com> Date: 05.01.2010 06:30 PM

Escape from Pottersville: The North Dakota Model for Capitalizing Community Banks

http://www.huffingtonpost.com/ellen-brown/escape-from-pottersville_b_409813.html

Best wishes and happy 2010! 

 Posted: January 4, 2010 02:30 PM

    The recent proposal to vote with our feet by shifting our deposits from Wall Street to community banks is a great start. However, community banks are not suffering from a lack of deposits so much as from a lack of the capital they need to make new loans, and investment capital today is scarce. There is a way out of this dilemma, demonstrated for over 90 years by the innovative state of North Dakota -- a partnership in which community banks are backed by the deep pockets of a state-owned bank.

Our fearless editor and leader Arianna Huffington just posted an article that has sparked a remarkable wave of interest, evoking nearly 5,000 comments in less than a week. Called "Move Your Money," the article maintains that we can get credit flowing again on Main Street by moving our money out of the Wall Street behemoths and into our local community banks. This solution has been suggested before, but Arianna added the very appealing draw of a video clip featuring Jimmy Stewart in It's a Wonderful Life. In the holiday season, we are all hungry for a glimpse of that wonderful movie that used to be a mainstay of Christmas, showing daily throughout the holidays. The copyright holders have suddenly gotten very Scrooge-like and are allowing it to be shown only once a year on NBC. Whatever their motives, Wall Street no doubt approves of this restriction, since the movie continually reminded viewers of the potentially villainous nature of Big Banking.

Pulling our money out of Wall Street and putting it into our local community banks is an idea with definite popular appeal. Unfortunately, however, this move alone won't be sufficient to strengthen the small banks. Community banks lack capital -- money that belongs to the bank -- and the deposits of customers don't count as capital. Rather, they represent liabilities of the bank, since the money has to be available for the depositors on demand. Bank "capital" is the money paid in by investors plus accumulated retained earnings. It is the net worth of the bank, or assets minus liabilities. Lending ability is limited by a bank's assets, not its deposits; and today, investors willing to build up the asset base of small community banks are scarce, due to the banks' increasing propensity to go bankrupt.

It's a Wonderful Life actually illustrated the weakness of local community banking without major capital backup. George Bailey's bank was a savings and loan, which lent out the deposits of its customers. It "borrowed short and lent long," meaning it took in short-term deposits and made long-term mortgage loans with them. When the customers panicked and all came for their deposits at once, the money was not to be had. George's neighbors and family saved the day by raiding their cookie jars, but that miracle cannot be counted on outside Hollywood.

The savings and loan model collapsed completely in the 1980s. Since then, all banks have been allowed to create credit as needed just by writing it as loans on their books, a system called "fractional reserve" lending. Banks can do this up to a certain limit, which used to be capped by a "reserve requirement" of 10%. That meant the bank had to have on hand a sum equal to 10% of its deposits, either in its vault as cash or in the bank's reserve account at its local Federal Reserve bank. But many exceptions were carved out of the rule, and the banks devised ways to get around it.

That was when the Bank for International Settlements stepped in and imposed "capital requirements." The BIS is the "central bankers' central bank" in Basel, Switzerland. In 1988, its Basel Committee on Banking Supervision published a set of minimal requirements for banks, called Basel I. No longer would "reserves" in the form of other people's deposits be sufficient to cover loan losses. The Committee said that loans had to be classified according to risk, and that the banks had to maintain real capital - their own money - generally equal to 8% of these "risk-weighted" assets. Half of this had to be "Tier 1" capital, completely liquid assets in the form of equity owned by shareholders -- funds paid in by investors plus retained earnings. The other half could include such things as unencumbered real estate and loans, but they still had to be the bank's own assets, not the depositors'.

For a number of years, U.S. banks managed to get around this rule too. They did it by removing loans from their books, bundling them up as "securities," and selling them off to investors. But when the "shadow lenders" - the investors buying the bundled loans - realized these securities were far more risky than alleged, they exited the market; and they aren't expected to return any time soon. That means banks are now stuck with their loans; and if the loans go into default, as many are doing, the assets of the banks must be marked down. The banks can then become "zombie banks" (unable to make new loans) or can go bankrupt and have to close their doors.

The final blow to the easy credit provided by U.S. banks came with another stricture on capital, called Basel II. It manifested in the U.S. as the "mark-to-market" rule, which required a bank's loan portfolio to be valued at what it could be sold for (the "market"), not its original book value. In today's unfavorable market, that meant a huge drop in asset value for the banks, dramatically reducing their ability to generate new loans. When the announcement was made in November 2007 that this rule was going to be imposed on U.S. banks, credit dried up and the stock market plunged. The market did not begin to recover until 2009, when the rule was largely lifted. However, on December 17, 2009, the Basel Committee announced plans to impose even tighter capital requirements. The foreseeable result is the collapse of yet more community banks and the drying up of yet more credit on Main Street.

Anchoring Community Banks to State-owned Banks

Where can our floundering community banks get the capital to make room on their books for substantial new loans? An innovative answer is provided by the state of North Dakota, one of only two states (along with Montana) expected to meet its budget in 2010. North Dakota was also the only state to actually gain jobs in 2009 while other states were losing them. Since 2000, North Dakota's GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but in 2009 it had a budget surplus of $1.3 billion, the largest it ever had -- not bad for a state of only 700,000 people.

North Dakota is the only state in the union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919 specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. Its populist organizers originally conceived of the bank as a credit union-like institution that would provide an alternative to predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND now chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve.

However, the BND differs from the Federal Reserve in significant ways. The stock of the branches of the Fed is 100% privately owned by banks. The BND is 100% owned by the state, and it is required to operate in the interest of the public. Its stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.

Although the BND is operated in the public interest, it avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate. The secondary market provided by the "shadow lenders" is provided in North Dakota by the BND, something other state banks could do for their community banks as well.

Other services the Bank provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program. When North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.

A New Vision for a New Decade

A state-owned bank has enormous advantages over smaller private institutions: states own huge amounts of capital (cash, investments, buildings, land, parks and other infrastructure), and they can think farther ahead than their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.

The BND is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. The BND's return on equity is about 25 percent. It pays a hefty dividend to the state, projected at over $60 million in 2009. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes.

By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts funds from other depositors. These copious deposits can then be used to plow money back into the state in the form of loans.

Although the BND operates mainly as a "bankers' bank," other publicly-owned banks, including the Commonwealth Bank of Australia, have successfully engaged in direct commercial lending as well. This has proven to be a win-win for both the borrowers and the government. The public bank model also offers exciting possibilities for refinancing the state's own debts and funding infrastructure nearly interest-free. For a fuller discussion, see "Cut Wall Street Out! How States Can Finance Their Own Recovery."

For three centuries, the United States has thrived on what Benjamin Franklin called "ready money" and today we call "ready credit." We can have that abundance again, by generating our own credit through our own state and local banks. Just as George Bailey needed a visit from an angel to point the way, so we just need the vision to see the possibilities.

Arianna's vision for moving our money from the large banks into our local community banks is a very admirable first step. However, those community banks are not likely to have sufficient capital to free up credit for their local businesses and other customers without the partnership of state-owned banks, or the publicly-owned banks of counties and larger cities, which also have ample capital assets. A number of states, counties, and cities are actively exploring this option. The BND model shows us how government-owned banks and community banks can work together to get money flowing back to Main Street again.

(2) Australia's Debt volcano

From: CEC Media Release <mediareleases@cecaust.com.au> Date: 30.12.2009 01:43 PM

Debt volcano swells before eruption

Australians now know the price of Rudd's bank bailout over the last year—the biggest household debt in history.

Australian household debt has soared to over $1.2 trillion, and is now bigger than national GDP.

Every Australian adult's share of the debt is $74,000, compared with adult median wages of just over $40,000 a year, and many people struggling to pay debts without a job at all.

The surge in household debt was driven by the Rudd government's First Home Owner Grant scheme.

Citizens Electoral Council leader Craig Isherwood pointed out the enormous household debt is the cost of the Rudd bank bailout:

“Kevin Rudd has saddled Australian households with enormous, unpayable debts, in order to bail out the banks that he lied were 'sound',” Mr Isherwood said.

Australians now know the price of Rudd's bank bailout over the last year—the biggest household debt in history.

Australian household debt has soared to over $1.2 trillion, and is now bigger than national GDP.

Every Australian adult's share of the debt is $74,000, compared with adult median wages of just over $40,000 a year, and many people struggling to pay debts without a job at all.

The surge in household debt was driven by the Rudd government's First Home Owner Grant scheme.

Citizens Electoral Council leader Craig Isherwood pointed out the enormous household debt is the cost of the Rudd bank bailout:

“Kevin Rudd has saddled Australian households with enormous, unpayable debts, in order to bail out the banks that he lied were 'sound',” Mr Isherwood said.

“In October 2008, Australia's banks were all set to crash: they were trapped between over $600 billion in foreign borrowings that their foreign creditors were unable to roll over, and a falling Australian property market into which the banks had on?lent their foreign credit.

“We in the CEC warned the banks were bankrupt, but while Rudd lied that the banks were 'sound', he sprang to their aid with a government guarantee for their foreign borrowings, and a huge cash injection into the domestic property market to drive the prices up.

“This was disguised as first homeowners assistance, when in fact it has made property even more unaffordable than it was, which was the intention.”

Mr Isherwood observed that household debt is not only bigger than GDP, but now ranks in size to foreign debt, the sum of all Australian borrowings—government, corporate and personal—overseas.

“It's debt, debt, and more debt,” he said, “we're a nation drowning in debt.

“The global financial crisis is in essence an unpayable debt crisis, but under orders from the bankrupt private banks, governments all over the world have bailed them out by creating even more debt.

“It's a swelling volcano, and it is set to blow,” the CEC National Secretary warned.

(3) It's Debt, Debt, Debt for Australia! - by Steve Keen

From: John Hermann <hermann@picknowl.com.au> Date: 02.01.2010 01:15 AM

Published in December 29th, 2009

Posted by Cassander in Debtwatch

http://www.debtdeflation.com/blogs/2009/12/29/it%e2%80%99s-debt-debt-debt-for-australia/

Last weekend's Sunday Telegraph pointed out a new record for Australia: our ratio of household debt to GDP is now higher than the USA's. I've written the following commentary on this dubious “gold medal” (or is it really lead?) for the ABC's The Drum.

In all the self-congratulations over how Australia has managed to sidestep the GFC, an inconvenient truth has been overlooked: the crisis was caused by too much debt, and Australian households have had a stronger and longer love affair with debt than even the Americans.

As of the latest RBA figures, Australian households now owe the equivalent of an entire year's GDP3% more than Americans ever owed. We grew our debt pile much faster than Americans did. We are continuing to go deeper into debt, while American households have started to reduce theirs. And in one of the great travesties of our GFC sidestep, the most recent growth in household debt has been deliberately engineered by government policy.

Back in 1990, American households had twice our level of household debt60% of GDP versus 30%. But after just 15 years, Australians had caught up: by 2005, both countries had household debt to GDP ratios of 86%. Just as the media started to focus on the Subprime Catastrophe in the USA, American household debt began to stabilise, while ours continued to growpeaking at 99% of GDP in March of 2008, versus the USA's all-time high of just under 97% one year later.

We actually began to reduce our debt levels before Americawith household debt falling from 99% to 96% of GDP in March 2009. but then the federal government's First Home Owners' Boost began to kick in (it was introduced in October 2008, and I railed against it at the timesee “ Rescuing the Economy or the Bubble?”). This enticed new entrants into mortgage debt in record numbers: during the life of the Boost, over 1 percent of the Australian population took the government's additional $7,000 bribe down to the bank, and levered it up five or more times with a mortgage. Even though households were reducing other forms of debt, total household debt rose until it cracked the mark of 100% of GDP in the last month.

The good newsfor the rest of usfrom this First Home Buyers debt binge was that their borrowing was one of three domestic contributors to Australia avoiding a technical recession in 2009 (China's own stimulus package was an important fourth factor). The additional $40 billion of mortgage-backed money combined with the $30 billion impact of Rudd's stimulus packages, and the close to $40 billion boost from the RBA's rate cuts, to dramatically increase both household incomes and spending. Gerard Minack from Morgan Stanley, who estimated that the last two factors increased household disposable incomes by 9% last year, commented that “If that's a recession, bring it on!”

The bad news is that spending boost from additional mortgage debt is, in the immortal words of Paul Keating, a souffle that is unlikely to rise twice. There just aren't that many more First Home Buyers who can be enticed into the market in 2010, even if the Federal Government follows NSW's lead and extends its Boost for another six months. Property spruikers may be confident that the Great Australian House Price Bubble is back, but the market is unlikely to fly in the absence of deliberate government manipulation of demand and a renewed reluctance by buyers to go into debt.

That's not to say that the banks and the property lobby aren't doing their best to keep the bubble flying. Thanks to Kris Sayce from Money Morning magazine for bringing the following to my attention some months back: many lenders are now offering loans of 110% of the value of a property, so long as there's a guarantor. Needless to say, the following excerpt from Home Loan Experts is not a product endorsement:

Guarantor home loan

Guarantor loans are now the only way to borrow 100% of the purchase price as no deposit home loans have been withdrawn from the market. Did you know that there are stark differences between the guarantor supported loans offered by different lenders?

With the help of a guarantor you can borrow over 100% of the purchase price which will allow you to buy a home and consolidate debts or renovate the property at the same time.

How much can you borrow?

First home buyer guarantor loan: 110% of the property value.

Second home buyer guarantor loan: 110% of the property value.

Refinance guarantor loan: 100% of the property value.

Debt consolidation & purchase guarantor loan: 110% of the property value.

Investor guarantor loan: 105% of the property value.

Construction guarantor loan: 100% of the property value & cost of construction.

Low doc guarantor loan: Not available with a guarantor mortgage. See below for our 80/20 method of financing low doc loans with the help of a family member… Shades of Japan's “99 year mortgages” at the height of their Bubble Economy back in 1990! While this could surely help boost the bubble, practically I doubt that there will be many takers. So one of the four props that kept our economy up in 2009 is unlikely to work in 2010. The interest rate prop is now working in reverse, as the RBA resumes its eternal fight against the consumer price inflation dragon, leaving only fiscal stimulus and China to counteract the decline in credit-based spending.

This is the real folly of boosting the economy by enticing households to take our more debt. Since spending is the sum of income plus the change in debt, increasing debt levels provide a strong boost to the economy. But that same process can work in reverse if households decide that they're carrying too much debt: then their attempts to reduce their debt”deleveraging”necessarily reduces their spending.

When debt levels are lowas they were back in the 1950s and 60sthis isn't a major problem. But when debt is as high as it is nowliterally 100% of GDP for households and another 60% for businessesthen deleveraging can cause a dramatic fall in demand.

This is the force that is driving the downturn in the rest of the OECD, and by adding to household debt, we have simply delayed its arrival herewe have not stopped it.

(4) The pretence of normalcy - How angry will Americans get? James Howard Kunstler

From: Paul de Burgh-Day <pdeburgh@harboursat.com.au> Date: 29.12.2009 11:36 AM

Forecast for 2010

By James Howard Kunstler

"The Center does Not Hold . . . But Neither Does the Floor"

http://kunstler.com/blog/2009/12/forecast-2010.htm

How dysfunctional is our nation? These days, we lie to ourselves perhaps as badly the Soviets did, and in a worse way, because where information is concerned we really are a freer people than they were, so our failure is far less excusable, far more disgraceful. That you are reading this blog is proof that we still enjoy free speech in this country, whatever state of captivity or foolishness the so-called "mainstream media" may be in.  By submitting to lies and illusions, therefore, we are discrediting the idea that freedom of speech and action has any value.  How dangerous is that?

Where We Are Now

2009 was the Year of the Zombie. The system for capital formation and allocation basically died but there was no funeral. A great national voodoo spell has kept the banks and related entities like Fannie Mae and the dead insurance giant AIG lurching around the graveyard with arms outstretched and yellowed eyes bugged out, howling for fresh infusions of blood... er, bailout cash, which is delivered in truckloads by the Federal Reserve, which is itself a zombie in the sense that it is probably insolvent. The government and the banks (including the Fed) have been playing very complicated games with each other, and the public, trying to pretend that they can all still function, shifting and shuffling losses, cooking their books, hiding losses, and doing everything possible to detach the relation of "money" to the reality of productive activity.

But nothing has been fixed, not even a little. Nothing has been enforced.  No one has been held responsible for massive fraud. The underlying reality is that we are a much less affluent society than we pretend to be, or, to put it bluntly, that we are functionally bankrupt at every level: household, corporate enterprise, and government (all levels of that, too).

The difference between appearance and reality can be easily seen in the everyday facts of American economic life: soaring federal deficits, real unemployment above 15 percent, steeply falling tax revenues, massive state budget crises, continuing high rates of mortgage defaults and foreclosures, business and personal bankruptcies galore, cratering commercial real estate, dying retail, crumbling infrastructure, dwindling trade, runaway medical expense, soaring food stamp applications.  Meanwhile, the major stock indices rallied. What's not clear is whether money is actually going somewhere or only the idea of "money" is appearing to go somewhere.  After all, if a company like Goldman Sachs can borrow gigantic sums of "money" from the Federal Reserve at zero interest, why would it not shovel that money into the burning furnace of a fake stock market rally?  Of course, none of this behavior has anything to do with productive activity.

The theme for 2009 - well put by Chris Martenson - was "extend and pretend," to use all the complex trickery that can be marshaled in the finance tool bag to keep up the appearance of a revolving debt economy that produces profits, interest, and dividends, in spite of the fact that debt is not being "serviced," i.e. repaid.  There is an awful lot in the machinations of Wall Street and Washington that is designed deliberately to be as incomprehensible as possible to even educated people, but this part is really simple: if money is created out of lending, then the failure to pay back loaned money with interest kills the system.

That is the situation we are in. ...

This depression will be a classic deleveraging, or resolution of debt. Debt will either be paid back or defaulted on.  Since a lot can't be paid back, a lot of it will have to be defaulted on, which will make a lot of money disappear, which will make many people a lot poorer. President Obama will be faced with a basic choice.  He can either make the situation worse by offering more bailouts and similar moves aimed at stopping the deleveraging process - that is, continue what he has been doing, only perhaps twice as much, which may crash the system more rapidly - or he can recognize the larger trends in The Long Emergency and begin marshalling our remaining collective resources to restructure the economy along less complex and more local lines. Don't count on that.

Of course, this downscaling will happen whether we want it or not. It's really a matter of whether we go along with it consciously and intelligently - or just let things slide. Paradoxically and unfortunately in this situation, the federal government is apt to become ever more ineffectual in its ability to manage anything, no matter how many times Mr. Obama comes on television. Does this leave him as a kind of national camp counselor trying to offer consolation to the suffering American people, without being able to really affect the way the "workout" works out? Was Franklin Roosevelt really much more than an affable presence on the radio in a dark time that had to take its course and was only resolved by a global convulsion that left the USA standing in a smoldering field of prostrate losers?

One wild card is how angry the American people might get.  Unlike the 1930s, we are no longer a nation who call each other "Mister" and "Ma'am," where even the down-and-out wear neckties and speak a discernible variant of regular English, where hoboes say "thank you," and where, in short, there is something like a common culture of shared values.  We're a nation of thugs and louts with flames tattooed on our necks, who call each other "motherfucker" and are skilled only in playing video games based on mass murder. The masses of Roosevelt's time were coming off decades of programmed, regimented work, where people showed up in well-run factories and schools and pretty much behaved themselves. In my view, that's one of the reasons that the US didn't explode in political violence during the Great Depression of the 1930s - the discipline and fortitude of the citizenry.  The sheer weight of demoralization now is so titanic that it is very hard to imagine the people of the USA pulling together for anything beyond the most superficial ceremonies - placing teddy bears on a crash site.  And forget about discipline and fortitude in a nation of ADD victims and self-esteem seekers.

I believe we will see the outbreak of civil disturbance at many levels in 2010. ...

(5) Moody's warns of 'social unrest' as sovereign debt spirals

http://www.telegraph.co.uk/finance/economics/6819470/Moodys-warns-of-social-unrest-as-sovereign-debt-spirals.html

Moody's warns of 'social unrest' as sovereign debt spirals

Britain and other countries with fast-rising government debts must steel themselves for a year in which “social and political cohesiveness” is tested, Moody's warned.

By Edmund Conway
Published: 7:35PM GMT 15 Dec 2009

In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.

It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”.

It added that the sheer quantity of debt to be raised by Britain and other leading nations would increase the risk of investor fright.

Strikingly, however, it added that even if countries reached agreement on the depth of the cuts necessary to their budgets, they could face difficulties in carrying out the cuts. The report, which comes amid growing worries about Britain's credit rating, said: “In those countries whose debt has increased significantly, and especially those whose debt has become unaffordable, the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.”

It said the main obstacle for fiscal consolidation plans would be signs not necessarily of economic strength but of “political and social tension”.

Greece, where the government has committed to drastic cuts in public expenditure, has suffered a series of riots over the past year which are thought to have been fuelled by economic pressures.

(6) Paul A. Samuelson - 'I don't care who writes a nation's laws if I can write its economics textbooks'

Paul A. Samuelson, Economist, Dies at 94

By MICHAEL M. WEINSTEIN

Published: December 13, 2009

http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html

In 1996, President Clinton awarded the National Science and Technology medal to Mr. Samuelson.

His death was announced by the Massachusetts Institute of Technology, which Mr. Samuelson helped build into one of the world's great centers of graduate education in economics.

In receiving the Nobel Prize in 1970, Mr. Samuelson was credited with transforming his discipline from one that ruminates about economic issues to one that solves problems, answering questions about cause and effect with mathematical rigor and clarity.

When economists “sit down with a piece of paper to calculate or analyze something, you would have to say that no one was more important in providing the tools they use and the ideas that they employ than Paul Samuelson,” said Robert M. Solow, a fellow Nobel laureate and colleague of Mr. Samuelson's at M.I.T.

Mr. Samuelson attracted a brilliant roster of economists to teach or study at the university, among them Mr. Solow as well as others who would go on to become Nobel laureates like George A. Akerlof, Robert F. Engle III, Lawrence R. Klein, Paul Krugman, Franco Modigliani, Robert C. Merton and Joseph E. Stiglitz.

Mr. Samuelson wrote one of the most widely used college textbooks in the history of American education. The book, “Economics,” first published in 1948, was the nation's best-selling textbook for nearly 30 years. Translated into 20 languages, it was selling 50,000 copies a year a half century after it first appeared.

“I don't care who writes a nation's laws — or crafts its advanced treatises — if I can write its economics textbooks,” Mr. Samuelson said.

His textbook taught college students how to think about economics. His technical work — especially his discipline-shattering Ph.D. thesis, immodestly titled “The Foundations of Economic Analysis” — taught professional economists how to ply their trade. Between the two books, Mr. Samuelson redefined modern economics.

The textbook introduced generations of students to the revolutionary ideas of John Maynard Keynes, the British economist who in the 1930s developed the theory that modern market economies could become trapped in depression and would then need a strong push from government spending or tax cuts, in addition to lenient monetary policy, to restore them. Many economics students would never again rest comfortably with the 19th-century view that private markets would cure unemployment without need of government intervention.

That lesson was reinforced in 2008, when the international economy slipped into the steepest downturn since the Great Depression, when Keynesian economics was born. When the Depression began, governments stood pat or made matters worse by trying to balance fiscal budgets and erecting trade barriers. But 80 years later, having absorbed the Keynesian teaching of Mr. Samuelson and his followers, most industrialized countries took corrective action, raising government spending, cutting taxes, keeping exports and imports flowing and driving short-term interest rates to near zero.

Lessons for Kennedy

Mr. Samuelson explained Keynesian economics to American presidents, world leaders, members of Congress and the Federal Reserve Board, not to mention other economists. He was a consultant to the United States Treasury, the Bureau of the Budget and the President's Council of Economic Advisers.

His most influential student was John F. Kennedy, whose first 40-minute class with Mr. Samuelson, after the 1960 election, was conducted on a rock by the beach at the family compound at Hyannis Port, Mass. Before class, there was lunch with politicians and Cambridge intellectuals aboard a yacht offshore. “I had expected a scrumptious meal,” Mr. Samuelson said. “We had franks and beans.”

As a member of the Kennedy campaign brain trust, Mr. Samuelson headed an economic task force for the candidate and held several private sessions on economics with him. Many would have a bearing on decisions made during the Kennedy administration.

Though Mr. Samuelson was President Kennedy's first choice to become chairman of the Council of Economic Advisers, he refused, on principle, to take any government office because, he said, he did not want to put himself in a position in which he could not say and write what he believed.

After the 1960 election, he told the young president-elect that the nation was heading into a recession and that Kennedy should push through a tax cut to head it off. Kennedy was shocked.

“I've just campaigned on a platform of fiscal responsibility and balanced budgets and here you are telling me that the first thing I should do in office is to cut taxes?” Mr. Samuelson recalled, quoting the president.

Kennedy eventually accepted the professor's advice and signaled his willingness to cut taxes, but he was assassinated before he could take action. His successor, Lyndon B. Johnson, carried out the plan, however, and the economy bounced back.

Adding Bite to Academia

In the classroom, Mr. Samuelson was a lively, funny, articulate teacher. On theories that he and others had developed to show links between the performance of the stock market and the general economy, he famously said: “It is indeed true that the stock market can forecast the business cycle. The stock market has called nine of the last five recessions.”

His speeches and his voluminous writing had a lucidity and bite not usually found in academic technicians. He tried to give his economic pronouncements a “snap at the end,” he said, “like Mark Twain.” When women began complaining about career and salary inequities, for example, he said in their defense, “Women are men without money.”