SPIEGEL: Mr. Woolley, you were fund manager for many years, but went on to found a research institute at the London School of Economics to study why financial markets repeatedly go haywire. Now speculators are once again betting against the euro, and share prices for big companies are falling by 20 percent in a day only to shoot back up again. What is going on?

Woolley: The developments in recent weeks have made it quite clear that the markets don't function properly. Things are spinning out of control and are potentially dangerous for society. Only a fraternity of academic high priests connected to the finance markets is still speaking of efficient markets. Still each market participant is pursuing their own selfish interests. The market isn't reaching equilibrium - it's falling into chaos.

SPIEGEL: You've compared the finance markets to a cancer. What do you mean by that?

Woolley: The finance sector can - and is - growing until it overwhelms the economy. In good years the US finance industry cashes in on more than 40 percent of all corporate profits. In bad years they are saved by the taxpayers. The agents are doing a devilishly good job of developing innovative, complicated new products that people can't understand. It gives them the opportunity to earn excess returns and attract the best talent. While they are acting rationally, the result is a catastrophe.

Beyond that point, latest indications put Irene on a path extremely close to or over the mid-Atlantic coast and New York City before plowing into western New England. Irene is expected to track near the mouth of the Chesapeake Bay and Delmarva coast Saturday night, then could pass within 30 miles of New York City Sunday evening as a weakening Category 2 hurricane.

Such a path would lead to severe impacts that could prompt officials to force evacuations. All residents and visitors in the path of Irene should heed these orders if issued and prepare homes and businesses for Irene's onslaught in the meantime. On its current forecast path, Irene would spread destructive hurricane-force winds (gusts between 80 to 100 mph) across the Delmarva coast, eastern New Jersey, New York City, western Long Island and southwestern New England.

A track directly over Atlantic City, N.J., and New York City would bring these intense winds westward to Philadelphia. The strongest and most sustained hurricane-force winds will be measured in the immediate vicinity of Irene's center. Widespread tree damage, major power outages and structural damage to buildings and homes would ensue. Glass windows could shatter along the sides of New York City skyscrapers.

Damaging tropical storm-force winds (winds between 40 and 70 mph) will extend 150 miles westward and nearly 250 miles eastward from Irene's center. These winds will likely reach Richmond, Virginia, Baltimore, Maryland, Philadelphia, Pennsylvania, Albany, New York, and nearly all of New England, threatening to cause significant tree damage and power outages. The winds will have no trouble downing trees where recent flooding and record rainfall has saturated the ground in areas such as Philadelphia and New York City.

Irene will also cause extremely rough surf to pound the entire mid-Atlantic and New England coastline with severe beach erosion and significant coastal flooding an almost certain guarantee. A flooding storm surge will further inundate the coastline.

Local media reported it was felt 82 miles (133km) to the north-west in the capital Washington, as well as in northern Virginia and Maryland. Tuesday's earthquake, one of the most powerful to hit the east coast since 1897, had been felt as far away as Alabama and Boston. In Washington, it opened a small crack near the top of the Washington Monument, prompting officials to indefinitely close the structure.

The National Cathedral lost part of its towering neo-Gothic spires and suffered cracks in its flying buttresses, while many schools and older buildings across the region suffered minor damage. Two nuclear reactors were taken offline as a precaution near the epicentre of the original quake, but no damage was reported.

Fiscal union - the coordination of tax and spending - has not yet arrived but it has moved a giant step closer. Sure it was just a proposal but there was plenty of detail. This new government, according to President Nicolas Sarkozy, "will be made up of heads of state and government that will meet twice a year and more often if necessary. It will elect a stable president for two and a half years." The eurozone and the EU can still give the appearance that it is a Franco-German enterprise.

The Paris summit was intended to send a signal that these two leaders recognise that if the single currency is to work it will require closer economic integration. That is surely true but these changes will involve countries surrendering sovereignty and it will be interesting to see whether voters will be consulted.

The Austrians quickly indicated they were not prepared to relinquish completely their ability to set economic policy for the sake of closer integration. "The agreement is very, very far away - I don't see it yet," said Maria Fekter, the finance minister. Chancellor Angela Merkel and President Sarkozy want all eurozone nations to enact constitutional amendments requiring balanced budgets by the summer of 2012. The Germans have insisted on this. The French were far less keen. And there may well be protracted arguments in various national parliaments over this. Agreement by next year seems ambitious.

But fierce resistance will lie ahead, particularly from financial institutions which are lined up to take a hit on their lending to Greece. The City of London, which is Europe's main financial centre, will be particularly wary. Ireland will insist that any new financial transaction tax applies to all 27 members of the European Union. The UK will oppose this. What was on offer yesterday was a long-term political plan intended to show closer integration of the eurozone. What it did not do was to address the current debt crisis that so unnerves investors.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure 10 million pounds of the state-backed lender's bonds against default is now 343,540 pounds. The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

"The problem is a shortage of liquidity - that is what is causing the problems with the banks. It feels exactly as it felt in 2008," said one senior London-based bank executive. "I think we are heading for a market shock in September or October that will match anything we have ever seen before," said a senior credit banker at a major European bank.

"Militarily, China's sustained modernization program is paying visible dividends," the report says. "During 2010, China made strides toward fielding an operational anti-ship ballistic missile, continued work on its aircraft carrier program, and finalized the prototype of its first stealth aircraft." The report cautions that the Chinese military continues to lack key military capabilities, is equipped with large amounts of outdated hardware, and lacks operational experience. But the report concludes that the army "is steadily closing the technological gap with modern armed forces."

By the end of this decade, China will be able to project military power and sustain a modest-sized force of naval and ground forces for smaller conflicts "far from China." That assessment was not included in earlier annual reports to Congress. China recently began sea trials of a refurbished Soviet-era aircraft carrier and is developing a ballistic missile to target ships at sea, the report says. It also is continuing aggressive cyber-intelligence gathering and has targeted numerous computer systems around the world, the report says, noting the intrusions "appear to have originated within" China.

"These intrusions were focused on exfiltrating information," the report says, adding that the same skills can be used for "computer network attacks" in warfare. China's cyberwarfare capabilities likely would serve future military operations by gathering intelligence, constraining enemy action or slowing their response, and bolstering conventional attacks during a crisis or conflict. Chinese military writings state that China plans to use its cyberwarfare weapons to achieve information superiority and to counter a stronger foe.

"The pace and scope of China's sustained military investment have allowed China to pursue capabilities that we believe are potentially destabilizing to regional military balances, increase the risk of misunderstanding and miscalculation, and may contribute to regional tensions and anxieties," said Michael Schiffer, deputy assistant defense secretary for East Asia, in releasing the report at the Pentagon.

The agreement is the latest part of HMRC's efforts to track down and tax money hidden in offshore bank accounts. It follows a similar deal agreed earlier this month between Germany and the Swiss authorities. UK officials said the agreement was a landmark one. "The world has changed for tax evaders," said Dave Hartnett of HMRC.

"A few years ago, nobody would have anticipated that we would conclude an agreement with Switzerland to tackle tax evasion. We will secure significant sums of tax that some had thought we would never see," he added. Meanwhile, David Gauke, Exchequer Secretary to the Treasury, said the "historic agreement will enable us to collect billions of pounds from those who have for too long evaded their responsibility to pay UK tax by abusing Swiss banking secrecy".

From 2013 the account holders will also face an annual levy of between 27% and 48% on the income from their accounts, depending on whether it has arisen as capital gains, dividends or interest. The UK authorities will also have the right to request the banking details of 500 UK individuals a year for further investigation. Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA) said the deal was "very innovative". "This is a wake up call to tax dodgers, and will flush some of them out of the woodwork," he said.

"I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EU's workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central bank's independence," he said.

"This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market," he said, speaking at a forum of half the world's Nobel economists on Lake Constance to review the errors of the profession over recent years. Mr Wulff said the ECB had gone "way beyond the bounds of their mandate" by purchasing 110 billion euros (96.6 billion pounds) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.

He did not explain what else the ECB could have done once the bond spreads of these two big economies began to spiral out of control in early August, posing an imminent threat to monetary union and Europe's financial system. The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECB's bond purchases and also warned that the EU's broader bail-out machinery violates EU treaties and lacks "democratic legitimacy".

The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.

The Outer Banks islands off North Carolina are being evacuated and people are stocking up on supplies in coastal areas of the US state. The huge storm has brought flooding and power cuts across the Caribbean. On Mayaguana Island, part of the Bahamas, Irene has damaged roofs and blown down trees and lampposts, leaving the island without electricity, Associated Press quoted Police Inspector Vernon Rahming as saying.

Captain Stephen Russell, the head of the National Emergency Management Agency in the Bahamas, told AP news agency that two southern islands have also been hard hit. Two settlements had been devastated on Acklins and Crooked islands, both of which have populations of several hundred, he said. Up to 12 inches (30cm) of rain was expected in parts of the Bahamas, making roads impassable in the capital, Nassau.

The Miami-based National Hurricane Center (NHC) warned that "an extremely dangerous storm surge will raise water levels by as much as seven to 11 feet (2.1 to 3.4 meters) above normal tide levels over the central and north-western Bahamas". The NHC said it expected Irene to grow into a category four storm on Thursday with winds of 135 mph.

The Metropolitan Police admits officers were "overwhelmed", but insists the threat they faced was unparalleled. The violence in Tottenham was sparked by the death of local man Mark Duggan, who was shot by police on Thursday 4 August. His death is under investigation by the Independent Police Complaints Commission (IPCC). His friends and family, angered by a lack of information from the police, marched to Tottenham police station on the afternoon of Saturday 6 August.

They remained outside for several hours, and frustration grew when no senior officer spoke to them. Violence erupted later that night, when a police car was set on fire, and shops were attacked and looted. David Gilbertson is a retired Deputy Assistant Commissioner at the Metropolitan Police who served as a senior officer in Haringey Borough, which includes Tottenham. Having spoken to the police who were on the ground that day, he is very critical of the behaviour of their senior officers.

"There was a disgraceful absence of visible leadership, and that should be shaming for the Metropolitan Police," he told BBC Radio 4's The Report programme. "With rank comes responsibility, and part of the responsibility is visible command. And secondly, there didn't appear to be a strategy [to deal with the demonstrators]. It's blindingly obvious to say that you push them away from target-rich environments; a shopping area, a retail park, all of the places that were trashed by the rioters." Local community leaders also insist the police should have been better prepared.

The prediction of an escalation in cases is being made by Jake Zamansky, the US attorney nicknamed "Jaws" who spearheaded the successful pursuit of the investment banks after the dotcom crash. It follows a move by Lloyd Blankfein, the chief executive of Goldman Sachs, to hire Reid Weingarten, one of America's top criminal defence lawyers, to help him address claims that the bank misled clients in the run-up to the financial crisis and, afterwards, Congress.

"I consider this to be a very significant event. For Lloyd Blankfein to be hiring a top criminal lawyer indicates that there may be allegations of wrongdoing forthcoming from the Department of Justice [DoJ]," Zamansky said. "Investors are asking why there have been no criminal cases against Goldman Sachs or any investment bank arising from the financial crisis. This may be a sign of more cases to come. It may be the beginning of a series of cases against Wall Street firms".

Back in 2001, as the internet bubble was bursting, Zamansky filed the very first lawsuit against Merrill Lynch's Henry Blodget, then a top-rated technology analyst caught pushing shares to investors which internal emails showed he actually rated as "dogs". The case proved to be a catalyst for a legal assault on Wall Street which resulted in the banks signing some huge cheques.

Shares in Goldman fell in late trading on Monday after Weingarten's appointment emerged - shedding 4.7% to $104.25, their lowest level since April 2009. They had dropped again on Tuesday.

The earthquake was one of the strongest ever recorded on the east coast of the US and forced the evacuations of parts of the Capitol, White House and Pentagon. There were no immediate reports of deaths, but fire officials in Washington said there were some injuries. The US Geological Survey said the quake registered magnitude 5.8 and was centred about 40 miles north-west of Richmond, Virginia.

Two nuclear reactors at the North Anna power station were taken off line. Around the tiny town of Mineral, Virginia, masonry crumbled. In Washington DC, thousands poured into the streets as offices, including in the Pentagon and the Capitol, were evacuated. The Holland tunnel under the Hudson River, which links New York and New Jersey, was closed, promising delays. Manhattan's forest of skyscrapers could be felt gently shifting from side to side. A press conference by the Manhattan district attorney Cyrus Vance, who was set to address the Dominique Strauss-Kahn case, was evacuated as it began. Pictures of panicked journalists fleeing the room were carried live. Mobile phone networks in New York and Washington DC also partially stopped working.

As in the real world, on Twitter fear soon gave way to humour. Some cracked jokes about the possible entry of the portly New Jersey governor into the 2012 presidential election contest. "I think Chris Christie just jumped into the race," tweeted Salon political blogger Alex Pareene. It also prompted a wave of mocking humour from people on America's west coast, where moderate quakes are common. "The entire west coast is laughing at us right now," tweeted Lisa Hoffman, a social media specialist in North Carolina.

The quake's biggest impact was perhaps to show that news is often about where something happens, and to whom. On Monday night, a quake struck in Colorado, far from any cities. It registered as a 5.3 and was the largest to hit the state in over a century, but barely merited a headline. Or, indeed, a tweet.

As concerns mounted that BoA will need to take huge additional write-offs on bad mortgages, the cost of insuring the group's debt jumped to record levels and investors became increasingly concerned that the financial system could be facing a fresh credit crunch. BoA's share-price fall followed a 7.9% drop on Monday, which took the stock to less than half its value at the start of the year - a decline that wiped about $65 billion from its market capitalisation.

"It does sap investor confidence to see a bank of this stature struggling so mightily," said David Dietze, chief investment strategist at Point View Financial Services in New Jersey. "It casts a shadow over the entire financial sector and puts a negative spin on the growth picture," added Nick Kalivas, of MF Global Research in Chicago.

Dennis Dick, of Bright Trading in Detroit, said: "Every day it's the same story. BoA keeps leading the charge down on financials and every trader is probably using that as an indicator to trade the rest of the financials too." BoA, which last week announced a further 3,500 redundancies, was forced to hold a conference call to appease more than 6,000 analysts and investors this month, in the wake of the group's tumbling share price.

Japan is preparing to elect its sixth leader in five years to replace unpopular Prime Minister Naoto Kan, under fire for his handling of the response to a March tsunami and subsequent radiation crisis at a crippled nuclear power plant. The downgrade, while not out of the blue, served as another reminder of the debt burdens that nearly all of the world's major advanced economies shoulder, even as policymakers struggle to agree on ways to stimulate sub-par growth without massive new spending.

The United States lost its top-tier AAA rating from Standard & Poor's earlier this month, and Moody's warned in June that it may downgrade Italy as Europe's sovereign debt crisis festers. Moody's new rating on Japan's debt is three notches below coveted AAA status, which Tokyo lost in 1998, but is still classified as high grade. Japan is now the same level as China, which surpassed it last year to become the world's second-largest economy, and one notch below Italy and Spain.

"Over the past five years, frequent changes in (Japan's) administrations have prevented the government from implementing long-term economic and fiscal strategies into effective and durable policies," Moody's said. Moody's had warned in May that it might downgrade Japan's Aa2 rating due to heightened concerns about faltering growth prospects and a weak policy response to rein in bulging public debt, already twice the size of its $5 trillion economy.

Early Wednesday, the hurricane is centered about 400 miles (650 kilometers) southeast of Nassau in the Bahamas and is moving west-northwest near 9 mph (15 kph). In North Carolina, tourists on Ocracoke Island, which is accessible only by boat, have been told to evacuate ahead of the hurricane. It will be a test of whether people in the crosshairs of what could be the first monstrous storm in years along the East Coast will heed orders to get out of the way.