Berlin has little choice but to help German banks rid themselves of toxic assets at taxpayers' risk, write media commentators. But in doing so it must insist on a radical restructuring of the publicly owned state banks, or Landesbanken, which have outlived their usefulness.

 Clouds loom over Germany's top banks in Frankfurt, the financial capital. Germany moved closer to ridding its banking sector of toxic assets on Tuesday at a meeting of government ministers and financial regulators who said they expected to have a firm plan to set up "bad banks" -- waste dumps for junk securities that are weighing down banks' balance sheets -- in place by the summer.

The officials agreed to work on finalizing a draft law in the coming weeks, present it to Chancellor Angela Merkel's cabinet by mid-May and get it approved by parliament by the summer.

The value of toxic assets in German bank balance sheets is estimated to be in the hundreds of billions of euros. The bad banks plan, under which banks can set up state-guaranteed companies and transfer their junk securities into them, is aimed at regenerating the financial system and boosting the stalled flow of credit into the economy, which is in its worst recession since World War II.

British tourists are being encouraged to holiday on the South Coast this summer by two Dorset towns which will accept unwanted euros.

Businesses across Bournemouth and Poole will accept the European currency in a move to welcome holidaymakers that may shun trips to the continent.

Hotels, restaurants and guest houses are among the traders which plan to take on the scheme.

Tourism chiefs believe the move could be worth about £10m to the region.

The figure is based on the estimate of half a million tourists each spending 20 euros as a part of their holiday budget.

Chancellor Alistair Darling today gambled on a rapid economic recovery to rebuild Britain's battered finances as he revealed that borrowing this year would hit a record £175 billion.

In a grim Budget statement he outlined the full depth of the economic crisis.

Mr Darling warned that output would shrink by 3.5 per cent this year - more than doubling his previous forecast.

German Chancellor Angela Merkel met with industry, banking, government and union leaders in Berlin on Wednesday to discuss how to best cope with the fallout from the current economic crisis.  

A week before the German government is to issue its next economic forecast, Merkel called representatives from key businesses, banks and unions to a meeting in Berlin to try to assess the size of the crisis, and hammer out a course of action to avoid massive layoffs.

The government has already passed two stimulus packages it says are worth 81 billion euros ($104.7 billion), but the coalition is considering additional measures. It has, however, rejected calls from service-industry union ver.di and metal-workers' union IG Metall to finance a third, 100-billion-euro stimulus package.

Economics Minister Karl-Theodor zu Guttenberg said the "overwhelming majority" of participants at the meeting agreed that talk of a third stimulus package "lacks any foundation."

Many analysts and commentators are pointing out that the second derivative of economic activity is turning positive (i.e. economies are still contracting but a slower rather than accelerated rate) and that green shoots of an economic recovery are blossoming.

RGE Monitor's analysis of the data suggests that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.

Last year's economic consensus forecast of a V-shaped short and shallow recession has vanished. While the rate of economic contraction is slowing compared to the free fall rates of Q4 of 2008 and Q1 of 2009, we are still a long way away from the economic bottom and from a sustained recovery of growth.

In particular, in Europe and Japan there is little evidence of a positive second derivative of economic activity.

After noting that the action in the stock futures market has been moving around furiously since the big bank CEOs met with Obama, Jessie suggests the following:

To our minds, it is just as likely that we are being set up for a terrific leg down. In our experience the big dogs tend to dominate certain portions of the short side at the apogee of a stock market pump. Our target for a failure point on the SP June futures is about 858-864.

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Let's see if they can keep it floating up. This does not look like a sustained ramp however, but the pump that sets up the dump.

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The best probability based on the data at hand is that we are seeing a pump and dump, in order to provide some income to the beleaguered banks through their proprietary trading desks.

We have not been tracking it, but we wonder if Goldman Sachs has fully placed its large secondary equity offering designed to pay back their TARP funds. The markets often miraculously levitate in sympathetic conjunction with key IPOs and equity tranches.  If they have, then the pump and dump gains in likelihood.

Mr Darling is doing his best to clean up the mess left by his predecessor, Gordon Brown. The fiscal profligacy of Mr Brown, now prime minister, after New Labour's first term and his leadership since 1997 in the global financial regulatory race to the bottom have left the UK suffering from multiple imbalances. It is in its worst fiscal shape ever in peacetime - in the G8, only the US and Italy come close. It has a bloated financial sector, including a banking sector that is too large to save unless state support is restricted to the UK high street banking bits of UK-based global banking groups. It has a distorted and moribund housing sector and excessively indebted households.

...

Under the best possible scenario, taxes will have to be raised and/or public spending cut on a permanent basis by between 5 and 6 per cent of GDP to regain fiscal sustainability. The necessary permanent fiscal tightening could easily be larger. The pain will be widely felt. The ambition to bring British infrastructure back up to the level it achieved at the end of the 19th century has been postponed by another quarter-century. Education and health will suffer.

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Mr Darling will therefore need luck as well as skill and determination to get Britain through this Great Contraction without having to go another round in the financial crisis. I would consider the case for a government of national unity. It would help if Mr Brown - responsible more than any one for this debacle - were to resign.

So more and more I'm starting to thing there may be a single explanation after all, that the regulators of these markets were captured by powerful forces that wanted the game to continue.

The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior.

I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present.