Posted by
Ed
16 yrs ago
It goes without saying that the ongoing global financial crisis and its impact on everything from job security to home ownership is the dominant issue on everyone’s mind. Personally I am far more concerned about this current crisis compared to the dotcom crisis (and is saying a lot coming from someone employed in the tech industry…). The dotcom crisis, although disruptive, was more of a tempest in a teacup in that it directly impacted a relatively minor industry (at the time) and getting over it was like recovering from a bad hangover. The current crisis goes much deeper in that the banking system, the foundation of all global economy has been gravely wounded all every single industry is now in jeopardy. And unlike the dotcom crisis you cannot simply write off the losses and get back to business. The effects of these disgusting lending practices in the States will linger and have knock-on effects across the board for years.
But then this is water under the bridge, it’s spilt milk.
What each of us needs is a plan forward to cope with this crisis and to hedge ourselves against the worst economy in 100+ years. And the only way to do this is to be well-informed and get as much advice as possible.
I’ll kick this off with a question:
Government Guarantees on Bank Deposits: Even if gov’t guarantees your deposit does that mean you will be able to access the cash at any time in the event of total collapse? Or does it mean you can get at your cash ONLY when the country whose currency you hold recovers (of course if it doesn’t recover and any major countries are bankrupted cash will be wallpaper and, in the words of a former bond trader I communicated with today ‘In that case, if a country more significant than Iceland goes bankrupt, we are into chaos/anarchy – think Mad Max.’)
As a follow on to this, assume the worst, you remove your cash, does it have any value? Or does inflation kick in quickly making it worthless?
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Ed
16 yrs ago
This is the full reply that I received regarding the safety of cash positions - you will note that heaven and earth will be moved to prevent a major country from going bankrupt.
I don’t know exactly what happened to cash during the depression – I do know that the result was the agency that insures deposits was setup, so not sure if the govt stepped in to guarantee those deposits or not prior to the agency being established. What I see happening is that some countries will backstop their banks no matter what. So what happens if the country goes bankrupt as you ask?
In that case, if a country more significant than Iceland goes bankrupt, we are into chaos/anarchy – think Mad Max. I don’t see a significant government going under, there will be a concerted effort by world governments and world banks to backstop each other because if one goes, it will be a domino effect. Remember that the govts of China, Russia, Japan, Taiwan, Korea, Singapore, Dubai, UAE have huge amounts of “sovereign funds” and bank reserves (my guess is that this list has $4 Trillion+ in reserves) so that could sop up a lot of bad debt, or bonds issued by governments such as the US.
The only thing that may be better than cash is gold – if you are real concerned about it, then buy gold – maybe the world goes back to the gold standard where currencies are based on their value to gold.
Its weird stuff – we are in a historical period my friend. Remember when HK truly bounced back after hitting the skids in 2000? It was SARS that put a bottom into the market in 2003, there was no more selling to be done, everyone was “irrationally” scared.
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Ed
16 yrs ago
I agree that every time we have an economic crisis some people will say its the end of the world as we know it.
Personally I have never thought that (see the article I penned on the home page) however the only parallels I can see for this is the Great Depression, and if that repeats this will be a cataclysmic event as opposed to the usual convulsion.
The parallels are very ominous if you examine what precipitated the Depression (see http://en.wikipedia.org/wiki/Great_Depression).
Substitute leveraging on the stock market for leveraging on the property market and you have virtually the same scenario playing out (car sales collapsing massive job losses etc...)
The only major difference is that governments are taking a proactive stance flooding the market with liquidity. And it so far is not working... no matter how many payloaders you line up with sand you simply cannot hold back the ocean...
My fear is that we use up all the bullets and it all crashes around us anyway - and we have no powder left to shock the patient back to life... Great Depression One was ended by WW2... we've already got two major wars underway so the economic activity of war is already factored in.
As much as I want to believe this will be just another cyclic downturn, my gut and my head say we are in for a world of pain :(
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Ed
16 yrs ago
Thanks for correcting me on the New Deal info.
One has to wonder if Paulson is wrong (after all he and his peers at the top of other investment banks were not wise enough to see this coming - while many others did...so why should we be overly confident in his ability to resolve this) and his bailout is simply delaying the inevitable, and making it more difficult to bring forth The Newer Deal because they've bet the bank on the current intervention.
It might be better to yank the tooth rather than endure the cavity for years until the tooth finally falls out...
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Ed
16 yrs ago
I don't think anyone is claiming America is going to fail. In fact I think that there is only a very small chance that any major economy will fail because the consequences are unthinkable.
However I respectfully disagree in saying there is no way this is gonna be over in 3 months. In my humble opinion, this is the tip of the iceberg.
Auto companies are the verge of bankruptcy and people are buying nothing but essentials which means more layoffs snowballing the crisis... wait till people stop paying credit card debt (USD8000 per card average in the US) and other debt like auto loans etc... and what happens when prime mortgages go bad as people stop making payments when they have no cash after being laid off...
I agree to a certain extent that irrational pessimism can be self-fulfilling but there is not much reason to be optimistic at the moment.
So I think this thread serves a very useful function in that it allows our members to discuss the issue and get advice on how to prepare themselves for whatever outcome. Burying our heads in the sand will, unfortunately not make this go away.
At the end of the day I don't think that we are being irresponsible and contributing to taking down the economy (we don't quite have that level of influence...).
You may want to take more issue with CNBC running a flashing ad throughout their broadcast the other night 'Is Your Money Safe?' over and over - they may as well have screamed 'hurry to your bank and pull your cash'
I am holding some gold as a hedge for our business and believe me, this is one investment I will be overjoyed to see halved in value over the next few months - because that means we have avoided the worst and we will only have a deep recession to deal with. I might add, I did not purchase any gold as the dotcom industry crashed...
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Ed
16 yrs ago
DB > as sure as the sun will rise tomorrow this will pass.
As someone with experience in the finance industry would you agree that this is the worst economic crisis we have faced since the 1930's?
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Ed
16 yrs ago
This came into my email yesterday. Reminds me a bit of Ken Lay urging his employees to keep buying Enron stock while he was unloading his holdings
http://www.asiaxpat.com/relax-the-crisis-is-over-says-lehman.pdf
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Ed
16 yrs ago
Indeed the US car industry has been in trouble for years. The problem now is who is going to fund the billion dollar quarterly deficits which will certainly be even larger now that car sales are grinding to a halt.
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Ed
16 yrs ago
I was brushing up on the history of the Great Depression trying to get a better understanding of what is going on with the current economy; there are some very disturbing parallels.
Extreme leveraging was the catalyst and the knock on effects that caused huge job losses created an unstoppable snowball.
The only significant difference I can see between then and now is that the US and other countries governments are throwing cash at the problem - if this doesn't work then what?
The head of a major hedge fund was quoted the other day as saying 'this is too big for governments to be able to head it off'
This leaves me wondering if we should have just let the dominoes fall and then step in with massive stimulus to shock the patient back to life. My concern is that this cash infusion keeps a dying patient on life support and delays the inevitable.
Here's the wiki info on the Great Depression:
http://en.wikipedia.org/wiki/Great_Depression
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Ed
16 yrs ago
I am not keen on big government and am particularly shocked with the massive deficits that have been run up in the past 8 years in America particularly when the overall economy was growing. When the US economy sneezes we all get sick so this should be of concern to all of us.
With regard to oversight on the economy and banking, I would not like to see too much intervention, but on the other hand we have seen what we get when we let the chicken into the coup.
The markets must be allowed to function but I do think that government must play some role in slapping down those who would abuse the system, taking huge packets home then leaving a mess every five or six years.
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Ed
16 yrs ago
Lehman > one of my favourite words is hubris, it has it's origins in Greek and it refers to overwhelming self-confidence/arrogance; in my opinion, it is mankind's greatest weakness.
It is primarily hubris, with a dash of greed and a dollop of corruption, that have got us on the precipice of the worst financial crisis in modern times.
I will agree that there is a better understanding of economics but I am not overly confident that we will be able to overcome this crisis because this is not the depression. And the markets are infinitely more sophisticated and intertwined now than they were in 1929.
Paulson was one of the architects of this mess - if he was so smart then why didn't he head it off? He had the opportunity as head of Goldman; he was warned many times as treasury secretary yet he did nothing. And now he is guessing. He simply hasn't got a clue.
Bernanke, a student of the Depression, is applying financial solutions based on what we know about the causes of the Depression. In theory what he is doing may work but as we all know theories more often than not fail.
The point is, if we were such masters of the economy we would not be in this situation - so it would be hubris not to protect oneself from a possible meltdown and assume that our leaders will come up with something that heads off the worst.
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Ed
16 yrs ago
Moving beyond the causes and culprits what are you doing or would you recommend others do to protect themselves (other than buying canned goods – I don’t think many think it will com to anarchy).
For instance should spare cash be used to pay down debt to protect against inflation?
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Ed
16 yrs ago
This was in my mail this morning...
When The Music Stops
Now that the party is over, a crisis of confidence will lead to a crisis of credibility for many of the world's high-flying bankers.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” Chuck Prince, chief executive of Citi, the world’s biggest bank, said in July 2007, three months before he was sacked.
There have been plenty of occasions in the past 25 years when the music has paused and bankers, brokers, traders and fund managers have sat down for a rest. This happened in the 1987 crash amid insider dealing scandals, and again in the recession in the early 1990s and the emerging market crises at the end of that decade.
Then there was the telecom and dotcom boom and bust at the turn of the century, when Wall Street analysts pretended to give impartial advice to investors, while corporate financiers lined their pockets with fee income given for advising on deals that were economically pointless but pushed a company’s share price higher. For at least a decade, there has been a focus on shareholder value which aligns corporate pay with stock price performance.
In fiction, these financial masters of the universe have been lampooned by Tom Wolfe in The Bonfire of the Vanities, demonised by Bret Easton Ellis in American Psycho, and epitomised by Gordon Gekko in Oliver Stone’s Wall Street. These masters of the universe have rarely been admired or praised, except by proud parents, aspiring new entrants or a colluding or gullible financial press. Instead, they have been parodied or despised as pretentious yuppies, scheming snake-oil salesmen, automated number fixers, forked-tongue con-artists, heartless destroyers of local communities and national economies, or simply braying or smug but always self-obsessed tossers.
Yet, each time they survive. Bad apples are apparently discarded, new business models are paraded, fresh visions are revealed and new heroes emerge. Their wealth and power intimidates. It invites envy and an uncomfortable feeling that maybe they are what they say they are or at least imply: alpha men and women, winners, a warrior Aryan race reaping financial rewards as they make the world a more efficient and therefore better place.
But this time it’s different. The lights have been switched on, sobering them up, making them wonder if they’ve made fools of themselves. And then they notice the partner they’ve been shimmying in front of or, worse, gyrating against, is actually a bit of a trog. But worse, far worse: they have an audience.
Everyone’s watching: from the people who serve them in or have been priced out of their cities, to the countries they’ve lectured to about discipline and hard choices, while pleading for no restrictions on their own 24-hour partying.
How can you believe it when they next come round selling a structured product, giving investment advice based on probability-based risk models that have certainly failed, touting stock picks or asset allocations backed by often arbitrarily chosen discount factors or finger-in-the-wind macro forecasts, claiming credit for betting red rather than black, writing explanatory guides about esoteric financial instruments or evangelical tracts on the path to management success.
This loss of confidence within the financial system must surely mean a loss of credibility for many of its practitioners.
There are the articulate salesmen – experts at bluffing through half-digested briefs, who spin persuasive stories, earning status within the bank and six- or seven-figure sums from its shareholders by closing deals that shift unwanted positions from his trader’s books to a softened-up punter, while pretending to be honest advisers.
Then there are the preening, vain investment bankers who search for the corporate killing as globe-trotting mercenaries, earning vast fees for advising on mergers and acquisitions based on company synergies when it suits, or diversification benefits when it doesn’t.
There are the analysts who are under pressure to produce papers, interpretations and forecasts – weekly, daily or even hourly. How thought out, reflective or even objective are these reports? It’s easier to decide your conclusion first, then work backwards. On a holler-box driven trading floor in a Bloomberg world, a message, a view is all important – at least until the next one a few seconds later.
And finally there are the fund managers who go through the motions of investment processes to win asset allocation mandates from US pension fund consultants, when it’s always so much more ad hoc, where hunches are disguised by vapid power point bullet points or slipped by credulous colleagues with a chin-stroking display of conviction. Their self-importance is too often elevated by flattery, attention and entertainment from brokers and their sidekick analysts, wheeled out to provide gravitas as a counter-balance to the salesman’s good-old-boy levity.
If history repeats, as it often does, these well-groomed bankers and analysts with over-trained presentation voices will reappear. In fact they are still with us, explaining what went wrong and what should be done now. But how can you believe them? It’s like listening to drunk drivers responsible for a motorway pile-up giving advice about road safety while blaming the pub landlord for serving them.
It’s hard to be impressed. The bespoke suits of still aspirant bankers, the polo shirt and chino casuals of adolescent hedge fund managers or the crumpled affectation of billionaire old-timers now look like vulgar bling.
Nor can their cheerleaders be ignored. Financial journalists who struggle with a calculator but parrot phrases and words fed by bankers; admonished investors who had been too slow, hence too unsophisticated, to buy products (such as CDOs) they themselves couldn’t hope to understand; or the academic type, proselytising for magazines and newspapers with a free-market agenda, issuing sage, world-weary advice predicated on theoretical models to businessmen, bankers, governments, multinational agencies. Yet, they often possess so little practical experience that tying up a shoe lace is the extent of their manual labour and finding a cheap copy of Freidrich von Hayek’s The Road to Serfdom on the internet is the limit of their entrepreneurial flair.
Of course, the problem has been the raising of financial jobs to a status they never deserved. “A high-flying banker” should be an oxymoron, when his world is made up of so much smoke and so many mirrors. Yet, spurious qualifications have sprouted to provide an appearance of professionalism. In reality they teach little beyond a superficial understanding of difficult concepts, and instead a holiday guide-book knowledge of an arcane language that other travellers can also pretend to comprehend.
In the past, the stockmarket crises have been blamed on rogue traders, unethical mavericks, parvenu broking or investment firms, or, desperately, computers. Even more desperate, and certainly egregious, it’s been “foreigners” – that is “corrupt spendthrift Asia, corrupt ill-disciplined Latin America or corrupt gangster-ridden Russia”.
But western financiers are now struggling to find “not us” scapegoats. There is the insidious undercurrent that it was the poor black and Hispanic house-buyers who started it all, despite the lofty pundit talk about the Fed’s loose monetary policy, global financial imbalances and layers of derivative securities that hid rather than spread risk.
The problem is that now the music stopped and the lights have come on, the grown-ups are also seen standing amid the detritus of the party. Regulators, central bankers, government officials and the normally shy multinational elite of bureaucrats who police and control the financial world have been caught in an embarrassing glare. Rather than bouncing undesirable intruders or throwing out drunks, they had been giving a welcoming wink and supplying the liquor. Yet now they’re calling for order. Perhaps they’ll get away with it.
http://www.financeasia.com/article.aspx?CIaNID=86655
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Ed
16 yrs ago
When the first bail out plan was approved in the States I was watching for a big drop in the Libor rate as I think that is the key barometer measuring banks' expectations for the success of the bail out. Libor rate increased after the bail out was approved.
Here we have round two. A revised package is announced, stock markets rally, the Libor rate has dropped 7 basis points. Would this be considered a significant drop?
If not then I would think that this is a very disturbing signal...
Thoughts?
Oct. 13 (Bloomberg) -- Money-market rates in London fell after policy makers offered banks unlimited dollar funding and European governments pledged to take ``all necessary steps'' to shore up confidence among lenders.
The London interbank offered rate, or Libor, for three-month dollar loans dropped 7 basis points to 4.75 percent today, tied for the largest drop since March 17, the British Bankers' Association said. The one-month dollar rate declined to 4.56 percent, while the one-week euro rate fell to 4.34 percent, the BBA said. There was no overnight dollar price today because of the Columbus Day holiday in the U.S.
The Federal Reserve said today central banks around the world will offer as much dollar funding as required. Leaders of the 15 nations using the common currency agreed yesterday to guarantee new debt from financial institutions and use taxpayers' money to keep lenders afloat. The three-month rate banks charge for euro loans dropped by the most since Dec. 28.
``Taken together, the latest moves increase the chances that we will begin to see some relaxation of the intense funding stresses that have prevailed in commercial paper and inter-bank markets,'' a team including Dominic Wilson, senior global economist at Goldman Sachs Group Inc. in New York, wrote in an investor report today. ``This is because bank solvency risk should decline as the government offers protection.''
Markets Frozen
Credit markets remained frozen last week even as policy makers jointly cut interest rates for the first time since 2001 and continued to inject cash into the banking system. The Group of Seven nations pledged measures at the weekend to stem a market panic that sent the MSCI World Index of stocks plunging 20 percent last week. Stocks rallied today, with the index jumping the most since Sept. 19.
The Fed, ECB, Bank of England and Swiss National Bank will hold one-week, one-month and three-month dollar auctions at a fixed interest rate, the Washington-based Fed said on its Web site today. Central banks ``can provide U.S. dollar funding in quantities sufficient to meet their demand'' into 2009, it said.
Three firms are finalists to be the U.S. Treasury's ``master custodian'' for Secretary Henry Paulson's program to aide financial institutions, Treasury Assistant Secretary Neel Kashkari said. Paulson's program to buy equity in these companies will be optional and aimed at ``healthy'' firms, Kashkari, who oversees the $700 billion Troubled Asset Relief Program, said in Washington today. The selected firm will be announced within 24 hours and will serve as the program's prime contractor, he said.
Loan Guarantees
The three-month dollar rate is still 325 basis points more than the Fed's target of 1.5 percent. The difference was a record 332 basis points on Oct. 10. The rate was 82 basis points more than the Fed's target on Sept. 15, the day Lehman Brothers Holdings Inc. collapsed.
``Policy officials have won this fight, but not the war,'' said Lena Komileva, head of G7 Market Economics at Tullett Prebon Plc in London. ``Risks remain and it's crucial that governments move ahead with recapitalization and the introduction of bank debt guarantees soon. It is early days still, but the freeze is starting to thaw.''
France, Germany, Spain and Austria today committed 1.1 trillion euros ($1.5 trillion) to guarantee bank loans and take stakes in banks equal to 3 percent of their economies, racing to prevent the collapse of the financial system.
Germany has pledged 400 billion euros in loan guarantees and set aside 20 billion euros to cover potential losses. It will also provide as much as 80 billion euros to recapitalize banks. France will guarantee 320 billion euros of bank debt and set up a fund that could spend up to 40 billion euros. Spain's government will guarantee up to 100 billion euros of bank debt and buy shares in banks in need of capital.
`Restore Faith'
``Extraordinary measures are necessary under such extraordinary market conditions,'' the German Finance Ministry said in an e-mailed statement. ``The central task is to restore faith between market participants.''
In Hong Kong, where the government has refrained from guaranteeing bank debt, interbank lending rates stayed at the highest in a year. The three-month rate climbed 3 basis points to 4.44 percent. Singapore's three-month dollar loan rate increased for a fifth day, rising more than 5 basis points to 4.79 percent. That's the highest since Dec. 27.
The dollar Libor-OIS spread, a gauge of demand for cash, narrowed 4 basis points to 360 basis points. It was at 105 basis points on Sept. 15. The spread was 24 basis points on Jan. 24.
Guessing Libor
Libor, set by 16 banks in a survey conducted by the BBA each day in London, determines rates on $360 trillion of financial products worldwide, from home loans to derivatives. Member banks provide estimates on how much it would cost to borrow in 10 currencies for terms between one day and a year.
While the estimates that go into Libor used to be based on actual transactions between banks, they have become little more than guesswork since credit markets froze, three people with knowledge of how interbank rates are set said last week.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 7 basis points to 457 basis points, down from the most since Bloomberg began tracking the data in 1984.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRZTg5IzBnI0&refer=home
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Ed
16 yrs ago
I received this about a year ago - and I dumped out of the market soon after...
Advance warning - there is some profanity on this powerpt... but nevertheless it lays out why we are where we are quite well
http://dump.attack11.com/mortgage-crisis.pps
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Ed
16 yrs ago
History lesson for today: The US markets rallied by 50% in 1930....
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Ed
16 yrs ago
Could the worst be yet to come re: mortgage defaults?
Credit crisis needs a Churchill
A bulldog spirit is required, says Hong Kong hedge fund manager Paul Sheehan, who puts forward a proposal for addressing the credit crisis.
Paul Sheehan is CEO of Hong Kong hedge fund Thaddeus Capital. He arrived in the alternatives world with a unique background, having in the past worked as a bank examiner at the Federal Reserve in the US, followed by stints as a bank equity analyst at the ill-fated firms Bear Stearns and Lehman Brothers.
Here he presents his manifesto for resolution of the credit crisis.
Letter to America: Action this day
Winston Churchill, upon assuming office as British Prime Minister at the beginning of World War II, would prod a slow-moving government corpus with demands for “Action This Day”, the order that was attached to his most urgent missives.
Observing the collective market reaction to the policies of the US government in its attempts to resolve the current credit crisis, it would seem that a box of Churchill’s stickers, to be dispensed liberally, is in order.
The G7 and the IMF are anxiously petitioning America for further aggressive action to stem the progress of the credit crisis which began in the US, and is now affecting the entire world.
As we in Asia are not only impacted by the crisis, but know a thing or two about banking crises ourselves, perhaps it is an appropriate time to return the favours of 1997-98 and advise the US on appropriate steps to take.
First, let us review the underlying problem, and the root causes of the crisis:
Credit crisis: Root causes
American consumers are broadly over-leveraged relative to income. This borrowing has been used to finance consumption, and is one of the reasons for the preternaturally-resilient American economy over the past ten years. The US economy is now dependent on consumer spending well above the normal trend as a percentage of GDP.
The major increase in borrowing has been via secured lending with residential property as collateral. This has been encouraged by government promotion of home ownership, regulatory capital calculations which assume only nominal loss on all first-lien mortgage lending, and ratings agency somnolence. It has also been embraced by borrowers themselves, accustomed by steadily-rising property prices to being able to refinance their way out of any problems servicing debt, and thus looking to maximise their gains by taking on as much property as they could possibly finance.
With little recent history of loss and the acquiescence of bank regulators, underwriting standards slipped greatly. At the peak of the property bubble it was possible for borrowers not only to make no down-payment when buying a new home, but actually to take money out immediately from the first mortgage, over and above the cost of the house. This new loan might not only have a low “teaser” interest rate, but also negative-amortisation features which would cause the principal balance to actually rise each month for the first several years. By the time interest rates reset and the loans began amortising, both borrowers and lenders assumed that the collateral would be worth much more.
The chain of mortgage losses
As these badly originated mortgages season, they are defaulting at a high rate. In addition, negative-amortisation and/or low-teaser-rate loans will be resetting in large numbers through 2010, and are much more likely at that point to also begin defaulting. The initial collateral values backing these loans either were never accurate, or have since fallen substantially. Thus, mortgage-holders will incur substantial loss, even before accounting for the large costs of foreclosure and resale.
Sales or overhang of foreclosed property will further depress property prices. This effect by itself will lead to additional mortgage defaults, as consumers price the option of default very efficiently. Falling property prices and foreclosures will lead to less consumer spending, resulting in a potentially very severe recessionary cycle, as rising unemployment and depressed property prices are likely to lead to a second wave of delinquencies and defaults in late 2009-2010.
So far, the anticipated effects of these losses have been mainly felt via mark-to-market of securities and derivatives based on mortgages, which are held by trading entities or in the available-for-sale or trading books of commercial banks, where they must be marked-to-market, or in the absence of real prices, to model which is meant to approximate market. We have not yet seen - for the most part - the effects of losses on the raw underlying loans, which are generally held in accrual books and not marked-to-market. The capital support and pricing read-through from WaMu and Wachovia indicate that these losses are substantial, and they will be widespread as almost every US bank has exposure to mortgages.
Most institutions are therefore either holding mortgage-related assets at accrual price, or marking to model at unrealistically-high prices. How do we know they are too high? Banks and broker/dealers have an immense incentive to get these assets off their books, and if they could sell at the current (written-down) book values they would surely do so to eliminate investor and counterparty concerns.
There certainly exist investors who would buy these assets at some price and who have cash. As no one is selling, we can conclude that the prices are in general higher than true market. Anecdotal evidence, such as a view of the bids for Lehman assets in bankruptcy, supports this view.
Therefore, we can conclude that most financial institutions have undisclosed uncertain (and not easily calculable with public data) losses – hence the uncertainly of investors and counterparties. All we know is that the published balance sheets are wrong.
Why Tarp is not a solution
The Tarp (Troubled Asset Relief Program) will of course help to some extent, but it is inefficient and does not target the underlying problems of the economy and credit markets.
First, it is oriented, at least in its original conception, towards purchase of mortgage securities and mortgage derivatives. This will not help the underlying mortgage borrowers, and it is their failures which will contribute to the severity of recession, as well as causing the cascade of losses from raw loans up to securities and their derivatives. So, it might rescue some institutions, but they will be primarily the highly-levered trading ones rather than direct credit-extending ones. If the objective is to restart the flow of credit in the economy, bailing-out traders rather than lenders is less than optimal.
Secondly, the discussion around the price at which assets will be purchased has been highly disingenuous.
If the Tarp buys assets at true market value, the selling institutions will incur additional losses as these are very likely to be below their book value. The institutions most in need of assistance are the ones least able to absorb such losses — or they would have already sold. If the Tarp buys at market value from healthy institutions, it will create reference transactions which will have to be used instead of mark-to-model at other institutions holding the same or similar assets, and by forcing the realisation of losses probably reveal insolvencies elsewhere.
Likewise, if the Tarp buys assets at book values, it will most reward those who have been least honest, and it will be buying assets for more than their worth to prop up distressed institutions. This will as above create false marks which will be used elsewhere, and thus perpetuate the uncertainty of true balance sheet values. If the desire is to effectively give away money to failing banks, it should be done openly and without creating a false market and its associated inefficiencies.
The meretricious idea that there is some magical “held-to-maturity value” of the assets being purchased by the Tarp, which value is not evident to the market (including PIMCO, pension funds, endowments, insurance companies, and others with essentially permanent capital and long-term investment horizons), but which will be discoverable by Secretary Paulson or his designees, and which is enough above true current market value to prevent institutions which sell at such a price from incurring lethal losses, is ostensibly laughable.
What more can be done?
The financial sector has two separate but related problems stemming from the credit crisis: a solvency issue and a confidence issue. The steps thus far taken are intended to address the latter, but have not yet made any impact on the former, and thus in isolation are bound to fail. Four proposed steps which would collectively restore some order to the financial system:
Step 1: Stem financial sector panic
Interbank rates are essentially notional at this point, as no banks are lending to each other; instead, the Fed is a single counterparty to the entire industry. To combat this, the Fed should on a temporary basis explicitly guarantee all interbank lending with maturity of less than one year, as well as bank and bank holding company commercial paper. This would remove fear without much incremental cost, as the Fed is clearly not prepared to let any bank fail if it would take down other insured institutions as well.
Step 2: Quantify the losses
Uncertainty is the killer of financial markets, much more so than losses. Given that there are massive undisclosed losses within the financial system yet and that hardly anyone’s balance sheet is what it appears, it is perfectly rational for market participants to fear lending to each other. We must identify where the losses are in order to address them, resolve their owners if necessary, and remove suspicion from those who remain healthy. Banks must be forced or strongly encouraged to sell bad assets in the market in arms-length transactions, and to recognise the losses — whatever their magnitude.
There is ample precedent for this from the S&L crisis, where banks were encouraged to sell their mortgage portfolios at market, even if they subsequently bought back similar assets in the market. I have no doubt but that the same might happen in this instance.
There will undoubtedly be resistance to selling at “fire-sale prices”, but unfortunately it is almost axiomatic that the bottom of the market will be where and when these holders sell – holding longer in hopes of a market upturn will only prolong the agony. This is validated not only by previous experience in the US, but by our own Asian crisis experiences in Thailand, Indonesia, Korea, Japan, and so forth. The requirement to sell at the bottom is also mitigated by the ability for banks to get out there in the market and buy the troubled assets of others as and when they see compelling value.
Step 3: Provide capital support
If institutions are going to be forced to potentially reveal their insolvency, the government must be prepared to correct it in some way, or no one will comply, as it would be corporate suicide. This can take the form of regulatory forbearance, as during the S&L crisis, where the government agrees to let banks take realised losses for tax purposes (and thus claim substantial refunds from prior year profits) but amortise the losses for regulatory capital purposes over 10 or 15 years.
In the current environment, forbearance alone is not likely to be sufficient, and so capital injections will be required as well. If this is done via preferred shares with potential conversion options or warrants (as was the case in Japan), or via a combination of common and preferred equity as the UK authorities have this week proposed, it should be sufficient.
Step 4: Address the underlying problem
All the while, these weak mortgages are still out there, and still defaulting. Propping up property prices is difficult (some wacky proposals include buying foreclosed houses en-masse and bulldozing them), and risks re-inflating the bubble. Buying raw loans at discounted prices from banks does not directly help the problem either.
As unpalatable as it is, the best solution is to recast mortgages to keep people in their houses. It is a distorting subsidy, but at least one which does not prop up property prices in general, and it would be a broad subsidy from taxpayers to taxpayers. With T-Bill rates at very low levels, the government could in effect pass along its cost of borrowing (via re-finance of mortgages via the GSEs or subsidy to existing mortgage holders) to borrowers on owner-occupied, first mortgages originated between, say, 1Q04 and 1Q08, for the next 10 years.
These rate-subsidised mortgages would not be transferable or assumable, so they would not stimulate anyone to go out and buy new houses. They do not cut the principal amount due, although that should also be considered when it is the best response, as encouraged by the Frank-Dodd housing bill last summer. Over time, as people move or refinance, all the loans will disappear or reset to market rates.
Even with these actions, the US will continue to see a high level of foreclosures and will most likely have to endure a stiff recession. Consumers will have to cut back, begin to save once more, and repair their own personal finances, even as banks do likewise. Trust in the financial system and its major actors will not fully return for a long time, if ever. However, if comprehensive action is quickly taken, perhaps we will be able to say that this is at least the end of the beginning, rather than the beginning of the end.
http://www.asianinvestor.net/article.aspx?CIaNID=86604&eid=13&edate=20081510&eaddr
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Ed
16 yrs ago
Personally when I saw that Paulson was rejecting offering equity for the bail out cash I felt that he was playing an angle to protect the wealthy (and perhaps himself - does he have any ownership in Goldman?) at the expense of the general public.
Why should shareholders benefit from the cash with no dilution and all the upside if things turn around?
Obviously this has changed somewhat with the new bailout terms but the article above raises some very disturbing issues...
As I have said previously my gut says we should have let this fail because it cannot be stopped...we should have held back the 100's of billions that are being thrown 'like shovels of sand tring to fill in the ocean' and used that money to initiate massive infrastructure projects that would have created jobs, and shocked the patient back to life.
Is this not how the Great Depression was stopped - with the Great Deal that was put in place after the crash?
Should Mr Bernanke not have been wiser and concluded that this cannot be stopped, but what we can do is step in much sooner to jump start things after the rot is hacked out?
Perhaps he knows that but perhaps politically that is not a feasible position....
My greatest fear is that we are just prolonging the inevitable - and we will have no dry powder when fan meets _____....
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Ed
16 yrs ago
Greed with oversight might be good but unchecked greed is not good because taken to its logical conclusion, you would have to agree robbing a little old ladies so you have enough money to buy a Benz is good.
Another logical conclusion would be that those who are responsible for this economic disaster are good because they in effect robbed little old ladies so they could pay for their yachts.
I disagree with bankers in general are corrupt or bad people - but there certainly are a significant number who will, if given the chance, twist rules and engage in legal but corrupt activities in the name of greed.
And banking does not have a monopoly on such people...
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Ed
16 yrs ago
Shall we call it sheer stupidity because surely it is stupidity to a) give huge mortgages to people who did not have income to justify them and b) then allowing them borrow against the increase value of their home allowing them to spend like sailors on shore leave?
Essentially those behind all of this re-created almost exactly the same conditions that lead to the Great Depression.
I have heard the argument that we all benefited from this insanity and I am not at all good with that
Those behind this arrogantly gambled with the future of every person on this planet without their knowledge and without their consent.
Yes, some might have done well out of this but is there any solace when most of their nett worth may be wiped out?
If you are going to take my pension money and go to the tables in Macau, pocket 20% on the front end then gamble the rest taking another cut off every winning hand until finally losing the lot (and knowing full well the house always wins eventually) I really, really need you to ask me beforehand if this is ok...
Yes people are to a certain extent to blame for taking on outrageous debt, but they were lead down the garden path and there was complicity all along the line from the guy who sold the mortgage to the einsteins who packaged this garbage and unloaded it knowing full well that it was toxic and fundamentally dodgy.
People are naive and often stupid so if you tell them don't worry buddy, this is a win win situation what do you expect them to do? Of course they will want the million dollar house on the 50k per year salary with no money down. And when you say hey buddy your house is now worth 1.1M, how about a low interest loan for 100k so you can buy a nice new Hummer? Most people are going to say sounds good to me, where do I sign!
Why did those on this assembly line of deception do it?
I do not think they are at all stupid. They were chasing commissions and bonuses.
On a higher level, how was this allowed to happen?
I have no doubt that regulations were rolled back by finance industry lobbyists shuttling politicians to the Super Bowl on private planes, contributions to campaigns etc...
Will anyone face the music over this?
No, because there is not one person or persons you can finger - its the result of a system that is corrupted and the system needs to be fixed so these things cannot re-occur.
Will that happen?
It's been pointed out that this is an industry changing event. The government now holds board seats.
But it seems that whenever you try squash greed it simply morphs and finds another way around the roadblock because ultimately greed is corrupting and there will be those that try to find ways around well-intentioned attempts to reign in abuses.
So we will drop in some new regulations and we will move along and then we'll repeat the cycle in 5 or 6 years as we always do. Hopefully though we can limit the heavy duty messes to once/century or so....
You might get a chuckle out of this but it is the definitive explanation of how we got where we are - I suggest everyone download this and email it around to friends
http://dump.attack11.com/mortgage-crisis.pps
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Ed
16 yrs ago
Agree across the board with you DB.
There will always be people in every industry that push the envelope or who engage in outright illegal or immoral behaviour.
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Ed
16 yrs ago
AXGuy > I completely agree, this is not the first and it will not be the last time we witness stupidity/hubris/incompetence that results in destruction of wealth (or false wealth).
We will have to take the good with the bad.
Beyond this though there are plenty of crises on the horizon that are potentially catastrophic and little is done about them
What's the US debt now - 13 trillion? What happens when the world pulls the plug on funding that?
As pointed out above the US military spending is out of control and the companies whose business is war suck many of the best minds who are put to work creating better guns. This is completely senseless to be spending more than the entire world combined on arms and for those who think it is an important employer, its about as productive as building a pyramid... or angkor wat... it saps cash and energy from the economy... and it encourages more war.
Then you have the cost of medical care and the pension plan in the US which will effectively bankrupt the country some day if not dealt with ...
And then there's global warming - the arctic will be ice free in summers in about 5 yrs...
Time for some radically new ideas and leaders...
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Ed
16 yrs ago
But banks are not privately owned... anymore.
On military spending, no doubt some technological advances came out of building Angkor Wat but it was a gross misallocation of resources and it ultimately brought down the civilization... more recently military misadventures and the need to keep up with the US militarily were major factors in the collapse of the Soviet Union... overspending deprives the economy of resources and it is a brain drain.
If you want jobs, tech advances, and security, take a chunk of military spending and throw it at a massive project to develop alternative energy...
But that is a divergence... back on topic:
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Ed
16 yrs ago
Libor rate is still sky high...need a microscope to see return on tbills.... it's all about confidence and you have to wonder if the cnbc crew have been told not to focus on this because they definitely are avoiding acknowledging the 10 ton elephant in the room...
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Ed
16 yrs ago
However there is a saying that 'if its in the news its in the price'
My concern is that the markets and the banks have detailed information on the bail out package - and the interbank rates are not moving....
What do they know or fear that is stopping them from lending?
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Ed
16 yrs ago
Much appreciated if you could ask that question on the property forum. Thanks
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Ed
16 yrs ago
This article from the BBC:
BANKS ARE STILL NOT LENDING:
Something very strange and worrying is going on in money markets.
First the good news.
The two trillion pounds of taxpayers' money that governments all over the world have put behind the banking system, both in the form of capital injections and guarantees for lending between banks, has reduced the perceived risk of banks going bust.
This reduction in the probability of banking failure is measurable, in that the price for insuring bank debt in the credit-default-swaps market has roughly halved over the past few days.
Here's what you've been expecting: the less good news.
Banks are still not lending to each other at anything like a normal rate of interest relative to official rates.
The statistics (kindly updated for me by Barclays Capital) are extraordinary.
Back in the first half of 2007, before the onset of the credit crunch, the gap between what banks charge each for three-month loans, the three-month sterling LIBOR rate, and the average of expectations of the overnight interest rate for the following three months (the OIS rate), was 0.09 percentage points.
In other words, the three-month lending rate was closely aligned to expectations of what the Bank of England would charge for overnight money.
And that's where the gap stayed for months - until the onset of the credit crunch in August of that year, when the gap widened to 0.23 percentage point, or 23 basis points in bankers' lingo.
Which was wider than normal, but not devastatingly so.
Since then this interest-rate gap, known as the three-month sterling LIBOR-SONIA spread, has risen and fallen as the money-markets have become more or less stressed.
The more stress, the wider the gap or spread.
But the spread never got much above 1 percentage point, or 100 basis points.
Or at least not till September of this year.
Since when the gap has been widening and widening.
Last Friday, the spread reached what was probably an all-time record, of 219 basis points. That was a staggering 2.19 percentage points.
And it's only narrowed a very little since then, to 202 basis points, or 2.02 percentage points.
You may think "so what?"
Well the "what" is big.
It means that banks are only prepared to lend to each other for three months at an interest rate that is a full two percentage points above the rate at which they expect to be able to borrow funds from the Bank of England over those three months.
Which means they just don't want to lend to each other.
And, of course, if they're not prepared to lend to each other for less than 2 percentage points above the expected policy rate, what chance that they'll lend at a keener rate to consumers, households or businesses?
Slim to none, seems a fair bet.
A glance at the chart of the LIBOR-SONIA spread shows that last week's half percentage point cut in the Bank of England's policy rate has been more-or-less totally absorbed: almost none of that interest-rate cut has been passed on in the form of lower interest rates charged by banks when lending to each other.
Which is why only a relatively small number of mortgage rates and business lending rates have been reduced by the full half percentage point.
That's distressing, because it seems to indicate that monetary policy has become toothless, ineffective.
At a time when we're in a recession, it's particularly worrying if cuts in interest rates by the Bank of England aren't leading to reductions in the cost of credit for real people and real businesses.
And don't forget that in the last few weeks, central banks - including the Bank of England - have literally been spewing loans of short-term and medium-term maturity into the banking system. And these central banks have been providing these loans in return for more and more eccentric and eclectic collateral.
Yet although there's a ton of cash or liquidity sloshing through the system, banks want to hoard it rather than lend it.
What's going on?
Well the widening in the interest-rate spread may in part reflect the margin demanded for the new interbank lending guarantees demanded by the Treasury.
But that would seem to me to be a relatively minor factor.
It may simply be the case that banks are so badly shaken by the 14 months of crisis in their industry that they have lost almost any appetite to lend.
They've made a decision to lend less, to deleverage, and no amount of cajoling or even bullying by the authorities is going to persuade them to do otherwise.
Which is highly undesirable, to put it mildly, when the real economy is showing every symptom of having caught a very bad cold from the sickness in the financial economy.
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/banks_still_not_lending.html
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Ed
16 yrs ago
Nevertheless, banks are not lending which would I assume means they don't like the bail out and that it might fail.
If this doesn't change quickly then the few people will not buy anything but necessities because they cannot get loans for big ticket items such as cars which looks disturbingly similar to the path followed in the 1930's...
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Ed
16 yrs ago
Let's hope that gets sorted before half the companies in the world are bankrupted.
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Ed
16 yrs ago
If it's a recession I think we will be fine.
We know what it takes to make it through hard times having survived the dotcom crash and SARS; we run a very lean business model so are not top heavy on operating expenses (we have a business philosophy that we picked up from reading Ayn Rand of maintaining high margins so that we have cash flow to buy Molson).
Surprisingly, during SARS our business actually improved because when ad budgets came under pressure, some of our bigger clients increased exposure with us because they didn't have cash to do justice to their message in traditional media such as print. As we are probably the lowest cost item on most ad budgets (and we deliver by far the best eyeballs of any media in the entire universe http://www.asiaxpat.com/promos/survey-results/) hopefully we will be the last item cut as belts tighten...
I am not so certain what would happen if we went into an economic depression, something that I think is a real risk. We're holding substantial cash and have hedged with enough gold to keep the web making machine running for at least a year if everything goes totally sideways.
Fingers crossed not only for the people who work with us but people around the world; I cannot begin to imagine the level of suffering should we have to resort to cashing that gold in desperation...
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Ed
16 yrs ago
Thanks for the advice.
To clarify, we have far more cash (HKD) than gold on hand.
The rationale for holding gold (which I discussed with our board which is top heavy on bankers) was to hedge against total economic meltdown - the so-called 'Mad Max syndrome' outlined at the top of this thread.
Quite frankly I will be very happy to see the gold holdings halved because that means there will be no Mad Max... We can always make back that loss when things turn around...
One other factor to consider is the ROI that our board gets from holding this gold which is down at Tai Fook being cast into a necklace studded with diamonds - each board member gets to wear this when they go clubbing one day per month. This actually was the deciding factor when the proposal went to a vote with 5-0 in favour.
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Ed
16 yrs ago
That's a great question DB - with a multi-dimensional answer.
We are actually launching new businesses on a regular basis - but all of them are directly related and benefit from the main business and our substantial traffic. Our preference is to focus on synergistic businesses that keep our focus on what we know best – and that involve ideas vs heavy lifting.
For example, we cranked out an entirely new property site a year or so ago which is now a tremendous revenue and content driver for us. Likewise with careers which is gaining solid traction.
We continue to grow the bottom line at a clip of about 50% per year with minimal staff and hassle. And life is too short to fill it with unnecessary stress eh… TGIF.
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Ed
16 yrs ago
The King of Satire, Jon Marsh weights in with some comments on the crisis - see the lower part of this http://hongkong.asiaxpat.com/articles/signature-columns/its-confession-time:-singapore-is-nice/
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Ed
16 yrs ago
While on the topic of war and peace... I notice the article below online this morning... perhaps this crisis can have a silver lining - peace in the world.
Recall how in the past European countries were often at war but once their economies became interconnected it became unthinkable to go war because of the implications for each countries economy.
The Great Iceland Meltdown
Who knew? Who knew that Iceland was just a hedge fund with glaciers? Who knew?
If you’re looking for a single example of how the globalization of finance helped get us into this mess and how it will help get us out, you need look no further than British newspapers last week and their front-page articles about the number of British citizens, municipalities and universities — including Cambridge — that are in a tizzy today because they had savings parked in Icelandic banks, through online banking services like Icesave.co.uk.
As Dave Barry would say, I’m not makin’ this up.
When I went to the Icesave Web site to see what it was all about, the headline read: “Simple, transparent and consistently high-rate online savings accounts from Icesave.” But then, underneath in blue letters, I found the following note appended: “We are not currently processing any deposits or any withdrawal requests through our Icesave Internet accounts. We apologize for any inconvenience this may cause our customers.”
Any “inconvenience?” When you can’t withdraw savings from an online bank in Iceland, that is more than an inconvenience! That’s a reason for total panic.
So what’s the story? Around 2002, Iceland began to free its banks from state ownership. According to The Wall Street Journal, the three banks that make up almost the entire banking system in Iceland “grew quickly on easy credit” and “their combined assets rose tenfold in five years.” The Icelandic banks, while not invested in U.S. subprime mortgages, had gone on their own borrowing and lending binges, wooing savers from across Europe with 5.45 percent interest savings accounts.
In a flat world, money can easily seek out the highest returns, and when word got around about Iceland, deposits poured in from Britain — some $1.8 billion. Unfortunately, though, when global credit markets closed up, and the krona fell, “the Icelandic banks were unable to finance their debts, many of which were denominated in foreign currencies,” The Times reported. When depositors rushed to get their money out, the Icelandic banking system had too little reserves to cover withdrawals, so all three banks melted down and were nationalized.
It turns out that more than 120 British municipal governments, as well as universities, hospitals and charities had deposits stranded in blocked Icelandic bank accounts. Cambridge alone had about $20 million, while 15 British police forces — from towns like Kent, Surrey, Sussex and Lancashire — had roughly $170 million frozen in Iceland, The Telegraph reported. Even the bobbies were banking in Iceland!
So think about it: Some mortgage broker in Los Angeles gives subprime “liar loans” to people who have no credit ratings so they can buy homes in Southern California. Those flimsy mortgages get globalized through the global banking system and, when they go sour, they eventually prompt banks to stop lending, fearful that every other bank’s assets are toxic, too. The credit crunch hits Iceland, which went on its own binge. Meanwhile, the police department of Northumbria, England, had invested some of its extra cash in Iceland, and, now that those accounts are frozen, it may have to reduce street patrols this weekend.
And therein lies the central truth of globalization today: We’re all connected and nobody is in charge.
Globalization giveth — it was this democratization of finance that helped to power the global growth that lifted so many in India, China and Brazil out of poverty in recent decades. Globalization now taketh away — it was this democratization of finance that enabled the U.S. to infect the rest of the world with its toxic mortgages. And now, we have to hope, that globalization will saveth.
The real and sustained bailout from the crisis will happen when the strong companies buy the weak ones — on a global basis. It’s starting. Last week, Credit Suisse declined a Swiss government bailout and instead raised fresh capital from Qatar, the Olayan family of Saudi Arabia and Israel’s Koor Industries. Japan’s Mitsubishi bank bought a stake in Morgan Stanley, possibly rescuing it from bankruptcy and preventing an even steeper decline in the Dow. And Spain’s Banco Santander, which was spared from the worst of this credit crisis by Spain’s conservative banking regulations, is purchasing America’s Sovereign Bankcorp.
I suspect we will soon see the same happening in industry. And, once the smoke clears, I suspect we will find ourselves living in a world of globalization on steroids — a world in which key global economies are more intimately tied together than ever before.
It will be a world in which America will not be able to scratch its ear, let alone roll over in bed, without thinking about the impact on other countries and economies. And it will be a world in which multilateral diplomacy and regulation will no longer be a choice. It will be a reality and a necessity.
We are all partners now.
http://www.nytimes.com/2008/10/19/opinion/19friedman.html?_r=1&em&oref=slogin
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Ed
16 yrs ago
In my humble opinion, I feel that the American government, particularly those who pushed for deregulation of the finance industry (as they push deregulation of medicare and virtually all industries) are to blame.
I have no doubt that they were motivated to take this position because lobbyists dropped large donations into their campaigns on behalf of industries who wanted to push for deregulation.
But there is such a thing as integrity and there is a saying 'just say no.'
Mankind is inclined towards greed and if the gatekeeper facilitates opportunities to make money legally most will jump at the chance - even knowing that the scheme is a total scam that will collapse.
And that is what has happened with the mortgage crisis.
Why don't we have the same problem in Hong Kong? Because government regulations require that when purchasing a property you generally must have 30% down and a certain level of income to justify a mortgage.
We need to keep financial markets in check with good government.
If you want to fling blame look no further than those in the US government that have been behind deregulation...
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Ed
16 yrs ago
I don' think we are disagreeing on any of these issues DB.
Whatever you want to call it, this it is the fault of government.
It is sheer madness to think any industry will 'do the right thing' if left to its own devices. It's like opening the door to the chicken coop and telling the wolf not to eat the chickens...
There are indeed lobbyists for every industry and they use what is essentially bribery in many instances to get their way. This is not finance industry-specific.
If you want culprits look for politicians who have pushed for deregulation and who claimed the markets were self-regulating... I think you will find the biggest proponent of this running for president...
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Ed
16 yrs ago
Op Ed in the IHT today - no doubt this is a major reason why the Libor remains high...
The bubble keeps on deflating
By now everyone knows that reckless and even predatory mortgage lending provoked the financial meltdown. But bad lending did not stop there. The easy money also fed a corporate buyout binge, with private equity firms borrowing huge sums to buy up public companies and pay themselves big dividends.
The process was much like a homeowner who borrowed big for a house and then refinanced to pull out cash. In corporate buyouts, however, the newly private company was left with the fat loan, while the private equity partners got the cash.
In keeping with the mania of the era, banks lowered their lending standards as they competed fiercely to make buyout loans. Lenders also did not worry much about being repaid, because they made money by slicing and dicing the buyout loans and selling them off in pieces to investors.
All of this means that the United States needs to brace for yet another round of trouble: a potentially sharp increase in corporate bankruptcies. This time, U.S. government officials and Congress must not be taken by surprise. So far, relatively few companies have gone bust. But that is not necessarily a hopeful sign. Instead, loose lending has very likely allowed many troubled companies to postpone a day of reckoning - but not forever.
Under the lax terms of many buyout loans (deemed "covenant lite"), borrowers could delay payments, say, by issuing IOUs in lieu of payment or adding the interest to the loan balance rather than paying it. But when the loans come due and need to be repaid or refinanced, terms will no longer be so easy. The likely result will be defaults and bankruptcies.
A rash of corporate bankruptcies would obviously be very bad news for employees and lenders, and for stockholders at troubled public companies, like the carmakers. It could also rock the financial system anew.
As with mortgages, huge side bets have been placed on the performance of corporate debt via derivative securities, like credit default swaps. Derivatives are unregulated, so no one can be sure how widely a big or unexpected default would reverberate through the system.
Various measures indicate elevated default risk at a range of businesses, including retailers, media companies, restaurants and manufacturers. A survey released this month by the Federal Reserve and other regulators is especially sobering.
It looked at $2.8 trillion in large syndicated corporate loans held by U.S. banks at the end of June. Compared with a year earlier, the share of loans rated as problematic had risen from 5 percent to 13.4 percent.
Regulators must continue to monitor possible bankruptcies. Even if they cannot prevent a failure, they can soften its impact by ensuring that it does not come as a shock, further spooking investors.
Congress must prepare to deal with higher unemployment from corporate failures. In the coming lame duck session, lawmakers must extend jobless benefits for people who have exhausted their previous allotment. Congress must also be prepared to investigate large or particularly disruptive bankruptcies to identify both possible unlawful activity and regulatory lapses.
So far, inquiries into the collapses of Bear Stearns, Lehman Brothers and American International Group have been little more than public hazings of corporate executives. What is needed is a serious effort to determine accountability and figure out what reforms are needed to make sure these disasters don't happen again.
http://www.iht.com/articles/2008/10/19/opinion/edbubble.php
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Ed
16 yrs ago
Re: obama on free trade.
If you watched the last debate Obama made his position on free trade crystal clear. He has no intention of closing the borders of America.
He indicated that he would evaluate each free trade issue on a case by case basis and make decisions based on benefits on a macro level to the US. He will not simply sign off on trade agreements without examining them thoroughly.
What he is going to do, so he says, is have tax policies to encourage companies who keep jobs in the US rather than them to take jobs offshore (I think I saw on Forbes recently that 70% of the biggest US companies are paying virtually no US taxes). You can argue against this but then that opens a huge kettle of worms about how countries force currencies down and subsidize production to encourage exports etc... etc...
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Ed
16 yrs ago
Bankrupt institutinos begging for handouts then distributing large portions of the hand outs in the form of bonuses...
Joe The Plumber (who btw is a loser who doesn't have a plumbing license, owes back taxes and would be ahead of the game $500 if obama were elected) is not going to like this one bit...
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Ed
16 yrs ago
How long will the recession last?
Here's a telling statistic. During 2005 - 06 US home owners were pulling out 175 billion per quarter against the increased value of their homes. This fueled a buying binge...
Last quarter that figure dropped to 9 billion and change...Q4 will not doubt be near 0.
Not only has spending dried up but those who took cash against increased property values have to pay that back and in the meantime their properties are worth much less.
And to top it off, people have already lost their jobs or are fearful of losing their jobs...
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Ed
16 yrs ago
Going through the news this morning - looks like we have http://www.heastonchurch.org/snowball.gif
More Home Foreclosures
A week into the big bailout, banks are beginning to charge each other less for loans and companies are finding it easier to borrow short term. The Dow has been up and down, but so far this week, it is back above 9,000. So has the worst passed? Probably not.
The unfortunate reality is that as long as millions of Americans continue to default on their mortgages and housing prices continue to slide, banks will continue to suffer big losses. Unless something is done quickly to help homeowners avoid foreclosure and stay in their homes, those losses could swamp the bailout effort by exceeding the sums being spent to rescue the banks.
Despite the danger posed by foreclosures, the Bush administration and Congress are still depending on banks and other participants in the mortgage industry to voluntarily modify troubled loans, say, by giving borrowers more time to pay or by reducing interest rates.
The voluntary approach hasn't been enough to stanch foreclosures. As things now stand, some 3.2 million homeowners will likely lose their homes to foreclosure this year and next, and millions more will struggle to catch up on delinquencies.
Unfortunately, the bailout legislation does not require banks to modify loans in exchange for the infusion of taxpayer dollars. That means the administration and Congress will have to turn up the political pressure on financial institutions that avail themselves of the government's largess.
Both John McCain and Barack Obama have recognized that this crisis won't be solved until a way is found to keep many more Americans in their homes.
McCain's plan is to buy troubled mortgages from banks at full value and replace them with mortgages at the house's lower market price. That may sound humane, but it is an unjustifiable waste of taxpayer money - it doesn't require the lender to accept any loss before the government buys up a bad loan.
Obama has a better idea. Rather than relying solely on the banks to do what is right and needed, he supports legislation that would allow bankruptcy judges to modify mortgages for bankrupt borrowers. That makes far more sense. But the bankruptcy fix faces stiff political opposition, and even if passed, would help only about 500,000 homeowners, versus the millions now in distress.
Obama has also called for federal agencies to work more closely with the states on efforts to modify mortgages. Attorneys general in 11 states recently imposed the first mandatory loan modification program on Countrywide Financial as part of a legal settlement over what the states said was predatory lending. More lawsuits and more settlements could lead to more modifications, and with them, a more stable financial system.
Still, it may get to the point, early in the next administration, when the president and Congress will have to require lenders to modify bad loans and take the losses.
Mandatory modifications, bankruptcy, lawsuits - no one likes them, but they are tough tools for a tough problem. The bailout has dealt with only half of the problem: the credit freeze. Unless the government deals as aggressively with foreclosures, the system will likely face the abyss again.
http://www.iht.com/articles/2008/10/22/opinion/edbailout.php
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Ed
16 yrs ago
Compounding the problem - many major companies are on the verge of bankruptcy
For hundreds of U.S. companies, the federal bailout may be too little, too late. Bankers, lawyers and credit analysts say the government's plan to invest billions into the nation's banks is doing little to ease the credit crunch for U.S. businesses. The result, they say, is that many companies now struggling to get financing may soon be out of business. "In the past few weeks, lending has been getting tighter, not looser," says Larry Flick, a partner at law firm Blank Rome, which helps companies get financing. "All the moves the government is making to end the credit crisis may have a trickle-down effect, but I am not seeing it yet."
In a report released Tuesday, ratings agency Standard & Poor's says there are 140 large U.S. companies in danger of not being able to pay their bills in the next few months, up nearly twofold from the beginning of this year. Among the troubled firms on the agency's list are such household names as clothing retailer Eddie Bauer, amusement park operator Six Flags and pizza chain Sbarro. Also on the list are doughnut baker Krispy Kreme and mobile technology titan Palm, as well as a number of the nation's largest airlines, including JetBlue and the corporate parents of United and American.
"We are seeing companies across a wide variety of sectors that are struggling," says Sam Rovit, who heads up Bain Corporate Renewal, the optimistically named restructuring division of Bain & Company. If the credit squeeze doesn't loosen up quickly, he expects a "tidal wave of bankruptcies among large companies."
Analysts say dozens of smaller businesses have the same or worse predicament. "If the biggest companies in the nation are having a tougher time getting financing, then it's going to be much more difficult for smaller firms to get credit," says Martin Fridson, whose firm Fridson Investment Advisors analyses corporate bonds.
Of course, plenty of large U.S. companies are still able to get loans. A number of banks, such as JPMorgan Chase and Wells Fargo, who were not hit as badly by losses in the mortgage market, say their lending business never slowed.
But the sudden disappearance of some big financial companies as well as a cutback in lending activity at many banks has made it tougher and more expensive for companies to get funding. Hedge funds, too, which are having their worst year on record, have retreated from the lending business. And observers say the government's bailout plan won't change the problems companies are having getting funding anytime soon.
The problem is that many of the moves so far, like insuring money-market mutual funds, have been made to shore up the nation's commercial paper markets. But small companies or those that are short on capital cannot access the commercial paper market, which is generally reserved for companies with good credit. What's more, while the Treasury is urging banks to boost lending in the wake of the government's $250 billion investment into these firms, industry observers are skeptical that it will actually happen. "The idea that more capital is going to influence how much banks lend is a misconception of how banking works," says John Simons of Corporate Fuel Partners, who has spent 35 years in the commercial banking business. "Banks look at the economic outlook when deciding to make a loan, and the outlook is looking a whole lot worse."
With fewer banks making loans, more companies are turning to other sources of capital. Gerald Joseph, president of asset-based lender [i.e., lending secured by an asset] Gerber Finance, says his phone has been busy lately with calls from executives who used to get loans from banks. But, like other non-bank lenders, Joseph says he is being much more selective about which companies he does business with. "We are tightening our lending criteria," says Joseph. "We are turning away many more new clients than we used to." GE Capital, one of the nation's largest non-bank lenders, has also reportedly decided to curtail its lending practices for the rest of the year.
For companies that have loans that are coming due in the next few months and need to refinance, the continued credit crunch could mean they will be forced to file for bankruptcy or shut down. Bain's Rovit estimates that there will be 75 bankruptcies this year among companies with at least $100 million in assets, up from just 13 last year. He expects the number of bankruptcies to continue rising next year as well. S&P says its watch list used to be filled mostly with homebuilders or mortgage companies. But the latest additions are coming from industries such as retailing and media that are generally far removed from the mortgage and housing bust.
http://www.time.com/time/business/article/0,8599,1852671,00.html
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Ed
16 yrs ago
Which leads me to this question - is it immoral for the media, particularly banking pundits to get in front of millions of people and state day after day after day that the bottom has been reached - now is time to buy - or it looks like the interbank rates are coming down - even though it is still very high and nobody is lending - they even use graphs that are skewed to make it appear that there is a big drop
This behaviour encourages people to invest more of their money into a bad market - not only unsophisticated people but even those who are very informed - I received a comment from one person (who is heavily invested) when the market rallied after the revised bail out was announced saying to the effect - it seems the problems have been solved...
I can understand that they are trying to inspire confidence but is it moral to be advising people (lying?) to jump into a market when these people know, or should know, that there are very big perhaps insurmountable problems to come?
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Ed
16 yrs ago
This is one of the best articles I have seen yet on what the crisis will mean to ordinary people.
Life Without Credit (What Deleveraging Really Means)
At ByDesign Financial Solutions, a debt-counseling service in Modesto, Calif., they're working overtime these days. "Our call volume went up 97% in the past five weeks, which has left us scrambling," says Martha Lucey, president of the nonprofit agency. "[The callers] are close to the max on their credit cards, and they just can't figure out how to manage. We've seen credit-card companies decreasing lines of credit, and the [debtors] don't have any room left. They just can't juggle things like they used to."
At Keller's, a popular Modesto housewares store, the end of that profligacy is shockingly apparent to owners Cherie and Joyce Keller. Sales are evaporating, and they are worried about the Christmas shopping season. "It was sudden death — there were no people shopping," says Joyce Keller. "It took the crash for people to understand that this wasn't just a problem in California."
Economic reality, in other words, is settling in across the nation. Every tumultuous period of financial boom and bust comes to be defined by a word or catchphrase. Tulipmania. The Great Depression. The dotcom bubble. The word that could define the financial times we are now living through — and the economic pain that has begun — is leverage.
Leverage was the mother's milk of Wall Street — and of Main Street — for the past 20 years. Leverage meant debt, specifically the number of dollars you could borrow for every dollar of wealth you had. It meant borrowing other people's money to invest in something you wanted to invest in, or to buy something you wanted to buy. On Wall Street, debt funded investments in pretty much everything a financial firm could bet on, including the toxic mortgage-backed securities that led the way into this crisis. On Main Street, it meant borrowing to buy a house or a condo — maybe two — then perhaps borrowing again off the increasing value of that property to pay for something else: a flat-screen TV, a new set of golf clubs, your daughter's braces.
The debt binge was fueled by easy money and the belief that prices of assets — those of houses in particular — never went down; only interest rates did. That era is over. It will be replaced by what will be one of the more painful, and consequential, economic chapters in our history: the great deleveraging of America. On Wall Street, the largest financial institutions on the planet are reducing their debt and trying to build up capital, which once upon a time was the seed corn of their business, and now must be again. Retail banks like Wachovia and investment banks like Morgan Stanley have been so burned by their own reckless use of debt that only recently — and after unprecedented government intervention — have they been willing to once again make the most basic short-term loans to one another. The gradual thawing of the overnight-lending market, which seemed to begin on Monday, Oct. 20, was the first sign that Wall Street's credit markets were, however haltingly, regaining some sense of equilibrium after the previous, harrowing month.
But the credit crunch is not anywhere near over. "It took 20 years for us to get into this situation — leveraged to the hilt — and it will take more than a couple of years to unwind it," says Paul Ashworth, senior U.S. economist at Capital Economics. "And even when we get back to normal, that normal is not going to be the same. We won't have this sort of freely available credit that we had before for households and businesses. It's going to be a different reality — a more austere one — when we come out on the other end of this."
The one exception, though, is Uncle Sam. Even before the financial crisis forced the government's hand, the U.S. had again become addicted to deficit spending — relying on the kindness of strangers (in this case, mainly Chinese and Japanese central bankers) to finance its spendthrift ways. In September the Congressional Budget Office's baseline deficit forecast for 2008 was $407 billion. Now, with the Treasury's massive intervention in support of banks and financial markets ($700 billion at a minimum) and with a second economic-stimulus package a political certainty, the government deficit could soar next year to $1 trillion.
In the short term, that may be a necessary price to pay to pump life into the economy, but the effects of deleveraging on Wall Street and Main Street still threaten the steepest recession in the U.S. since the early 1980s, when unemployment peaked at 10.8% in 1982. Here's why that's so, and how we can still emerge from this crisis a little bit wiser — and, eventually, a lot more solvent — for our trouble.
Wall Street's Newfound Virtue
In February 2000, one of the street's most powerful executives petitioned the Securities and Exchange Commission (SEC) to allow his firm and other investment banks to raise their levels of leverage. He wanted the commission to alter something called the net-capital rule, which he said was "the single most important factor in driving significant parts of our business offshore."
That exec was Henry Paulson, then the CEO of Goldman Sachs, now U.S. Treasury Secretary. Four years later, the SEC complied, amending the rule; the effect was to allow Wall Street to borrow even more money to finance its businesses. At the most aggressive investment banks, leverage ratios reached 30 to 1. That is, for every dollar in equity capital the firm had, it borrowed $30.
Now those ratios are being unwound with a vengeance. In interviews, Wall Street executives, like John Mack, CEO of Morgan Stanley, talk of reducing their leverage to a ratio of 12 to 1 — a regulatory requirement, now that both Morgan and Goldman have turned themselves into commercial rather than investment banks — as if there were some button they could push to make it happen. But the truth is that for U.S. banks, reducing their use of debt and rebuilding their devastated balance sheets is a long and painful process. Deleveraging is part of what creates a credit crunch: institutions that have been hammered by the decline in real estate prices will be making fewer loans available to businesses and consumers alike.
We've seen this movie before, and it's not a happy one. Japan's financial sector imploded in the 1990s as bubbles in real estate and stock prices (sound familiar?) burst. Eventually, Japan's central bank drove interest rates to near zero to stimulate the economy. But it was, as the economists say, "pushing on a string." Banks were reluctant to lend because they needed to hoard capital to repair their balance sheets — just as they need to do now in the U.S. Economic growth slowed, and demand for the credit that was available diminished. The result was Japan's infamous Lost Decade: 10 years of low or no growth.
Is that what the U.S. is in for? Not necessarily. One crucial difference is that the Federal Reserve under Ben Bernanke, a scholar of the Great Depression, has reacted to this crisis much more swiftly than his Japanese counterparts did in the 1990s. His nickname is "Helicopter Ben," because he believes it's the government's job to litter the landscape with money, if necessary, to prevent economic collapse. No surprise, then, that he endorsed the Treasury's plan to inject capital directly into the banks and this week backed yet another stimulus package for the economy.
Main Street's Pullback
For millions of Americans, the prospect of living within their means is a meaner one by the day. And it has consequences that are already showing in the bankruptcies of retailers such as Linens 'n Things, Mervyns, Steve & Barry's, Shoe Pavilion, Goody's and Sharper Image and in the possibility of poor holiday sales. The overleveraged consumer is the biggest economic problem the country faces, because debt has been the rocket fuel that has propelled growth for most of the past decade. Two-thirds of the $14 trillion U.S. economy is driven by consumer spending, and the relentless shopper has also been critical to the growth in once booming exports led by economies like China's.
American consumers had become more addicted to debt than Wall Street was. Total household debt at the end of last year was $13.8 trillion, up 20% since 2005. At the same time, the household savings rate ticked down close to zero; the rocket's engine was running on empty.
Now consumers everywhere are reeling. Christopher Adams is an architect who lives with his wife Rachel in a North Miami Beach condo project in which fully 25% of the 244 units are in foreclosure. That means higher maintenance fees for those — like the Adamses — who continue to pay their mortgages. And as his monthly payments have gone up, Adams' income has gone down. His firm has lost three projects over the past year as commercial developers canceled jobs. As a result, he and his wife make decisions that ripple through the economy. He cashed out of his 401(k) to pay bills. A plan to buy a new car? History. They took their son out of an expensive private school. Credit cards? They don't use them anymore. "Debit cards and cash only," says Rachel.
For a U.S. company in retail — the country's second largest industry, employing some 25 million Americans — those are about the most depressing words you can hear. And millions of Americans are now on the same page. Consider Maria Calderon, a single mother of two in Greenacres, Fla., who works for the Palm Beach County public defender's office. Two months ago, she lost a second, part-time job that had helped pay the bills. She soon surrendered to the gods of credit-card debt. She visited a West Palm Beach credit-counseling service to deal with some $20,000 in unpaid bills. "I wasn't ashamed," says Calderon. "I had to tighten up. It was a decision I had to make to take care of my two kids."
The great risk, as consumers like Calderon cut their spending, is that bad economic news begets more bad news. Bernanke recently called this the "adverse-reaction loop": as consumers spend less, the economy weakens more, unemployment rises, mortgage foreclosures increase, putting more pressure on the financial system, and on the downward spiral goes. Capital Economics' Ashworth acknowledges that the "scenario is out there. It can't be totally dismissed. This deleveraging process could get very, very scary."
Washington's Answer: Charge!
This, you'll not be surprised to learn, is what the government is trying to avoid at all costs. "We're going to see an evaporation of concern about fiscal restraint simply because the threat of an economic collapse is so great," says Robert Reischauer, president of the Urban Institute, a public-policy think tank. In other words, as the real world sheds debt, the government takes on more and more in the hope that at some point the economy will stabilize and then begin growing again.
The good news is that most economists believe all the weaponry the government is throwing at the problem will eventually have an effect. Interest rates are low and probably headed lower. More fiscal stimulus is on the way. Many economists are currently forecasting a couple of quarters of outright economic contraction. But many see a resumption of slow growth by the second half of next year. The sky, in other words, is not necessarily falling.
It just looks that way right now. "This is the worst economy I've seen since I've been in business," says Tom Slater, owner of Slater's Home Furnishings in Modesto. He's been in business for 39 years. Slater's behavior reflects the malaise: he has cut his personal spending at restaurants and retailers. But he realizes he's part of the solution too. "You can't stop and say, I'm going to keep my fingers crossed that someone's going to do business with me," he says. "We just have to do better business."
Less-leveraged business, in fact. The irony is that in the deleveraged society the U.S. is in the process of becoming, it's the careful consumer who may ultimately bail out the economy. Ashworth believes the U.S. savings rate will rise to 5% of GDP over the next two to three years. "We're going to save more and spend less, because now we don't have a choice," he says. That increase in savings, he figures, will amount to some $1 trillion — about the projected size of next year's deficit.
That would eliminate the need for foreigners to fund our deficits. The hope is that as we sober up from our debt binge, we'll at least be able to do it ourselves. An era of thrift may be necessary now, but at some point, Americans are going to have to feel like spending again for the economy to grow. It's just hard to see, amid the current economic gloom, when that day will come.
http://www.time.com/time/business/article/0,8599,1853129-1,00.html
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Ed
16 yrs ago
Pakistan is two weeks from defaulting on sovereign debt. And there are quite a number of big US companies carrying huge debt related to M&A activity - combine that burden with much lower earnings prospects and the banks would rather befriend a leper than extend further credit to such companies.
Confidence is very shaky so no doubt a major default could be the proverbial straw on the camels back.
Did anyone see Jack Welch ranting and raving on CNBC last night anytime anyone made a negative comment? Seems as if they are trotting out all the big names to try to inspire confidence however what's that saying about protesting too much...
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Ed
16 yrs ago
NF > perhaps you could enlighten us on this damaging headline - there are so many...
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Ed
16 yrs ago
I'd be more than happy to take a bet with Warren Buffet that he has not bought at the bottom - but I doubt he'd take that bet because he's too smart to be that certain...
Let's not get into name calling here - leave that to Imelda Palin...
Please keep the discussion constructive.
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Ed
16 yrs ago
I am the Founder.
And I control the world from pool-side at my secret compound in the mountains of Ubud in Bali commuting by helicopter from time to time to replenish my Molson supply at Carrefour.
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Ed
16 yrs ago
NF > as indicated I live in a very remote, secret location in the mountains - my communication with the world is via a direct satellite uplink installed by the Canadian government...
Back to reality - I have noticed on the Property Correction thread on the HK site that some owners are really digging in on their position that the property market will not be affected much by this crisis. In fact when some post dissenting views backed up with powerful info and arguments there have been requests to remove such comments as being too negative...
I think that phenomenon goes a long way to explaining why we are in this crisis. It's called denial + greed.
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Ed
16 yrs ago
I would agree that Buffett's buy had a component of trying to install confidence in the market (he will of course never say that for obvious reasons). If the money he puts in heads off the worst it will have proved to be a great hedge strategy...
Same reason that Welch was on CNBC last night talking things up.
They of course have personal agendas (Buffett is not sacrificing billions to try to build confidence - I am sure he expects to make money) but their interests in seeing things smooth out are in all our interests so good on them.
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Ed
16 yrs ago
Nova > we are all friends here... if you insist on posting inflammatory comments on the forums you will no longer be considered a friend...
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Ed
16 yrs ago
I thought it was hubris... but Savant Idiocy is appropriate...
Alan Greenspan, ''Savant Idiot''
n 1914, John Alexander Smith, professor of moral philosophy at Oxford, addressed the first session of his two-year lecture course as follows:
"Gentlemen, you are now about to embark on a course of studies that (will) form a noble adventure…let me make this clear to you…nothing that you will learn in the course of your studies will be of the slightest possible use to you in after life--save only this--that if you work hard and intelligently, you should be able to detect when a man is talking rot, and that, in my view, is the main, if not the sole purpose of education."
I happened upon Professor Smith long years ago, in the 1980 edition of John Julius Norwich's Christmas Cracker, and his words have stayed with me ever since. And never more frequently and more intensely than in conjunction with the public utterances of Alan Greenspan.
I have encountered Greenspan in the flesh but twice. The first occasion was at a small lunch some 20-odd years ago at a foundation that concerned itself with the great issues of what we used to call "political economy." Greenspan was then a Wall Street consultant, not yet at the Federal Reserve. For the better part of two hours, I listened carefully to what Greenspan had to say and studied him closely. I concluded as I left that here was a prize, chateau-bottled phony and opportunist. A prime example of a talker of rot.
Nothing since has inspired a change of mind. In 1998, I was privileged to write a savage review of Bob Woodward's Maestro, a study of Greenspan that gave new resonance to the phrase "boot-licking." I noted the interesting factoid that Greenspan attended the same Bronx high school as that other singular figure of the postwar era, Henry Kissinger--a virtual doppelganger when it comes to opportunism and blather--and wondered whether there might be something in the water up there. More importantly, I also rendered the opinion that the Great Man's policies were based on specious, if not outright false, assumptions. Now we know.
And now, apparently, so does Greenspan.
The Great Man's mea culpas before Congress are a matter of record. The consequence of his convictions, considered broadly, can be observed deeply woven into the current financial and economic mess. No news there. But there is another aspect to Greenspan's intellectual rise and fall that bears thinking about.
As credit has contracted, markets have fallen and national economies have become constrained, a kind of urban legend has grown up that much of this flows from the handiwork (principally in the mortgage and derivatives "spaces") of very smart people. Well, I am here to tell you that this is not so.
The fine fix we find ourselves in is mainly the work of idiots. Idiots with Ph.Ds. Idiots of a rather specialized genus, whom I call savants idiots, of whom the former Fed chairman is perhaps the most visible and emblematic example.
Most halfway-educated people know about idiot savants, people who are dyslexic, autistic or otherwise gravely impaired by "normal" cognitive and psychological metrics, but who can reel off complex algorithms and theorems or intuit great scientific truths.
I submit that there is a corollary genus, the savant idiot. This is one who is festooned with credentials, diplomas, laurels and prizes both professional and academic, who pontificates and expounds impressive-sounding "truths" and explanations--what a friend of mine used to call "chinstrokers"--that in the fullness of time and markets prove to be utter b.s. The idiot savant produces substance out of apparent ignorance; the savant idiot produces ignorance from apparent substance.
Lord only knows how the present crisis will play out. Many hard lessons will be learned. Among them must be a restored capacity for perceiving when men in power are speaking rot. This is a capacity beyond the grasp of idiots. Stupidity, like misery, loves company.
http://www.forbes.com/home_asia/2008/10/24/alan-greenspan-idiot-oped-cx_mt_1024thomas.html
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Ed
16 yrs ago
Here's something I hunted down after noting some comments on this above - surely this should not be permitted:
No curbs on Wall Street pay despite meltdown
By RACHEL BECK and JOE BEL BRUNO – 3 hours ago
NEW YORK (AP) — Despite the Wall Street meltdown, the nation's biggest banks are preparing to pay their workers as much as last year or more, including bonuses tied to personal and company performance.
So far this year, nine of the largest U.S. banks, including some that have cut thousands of jobs, have seen total costs for salaries, benefits and bonuses grow by an average of 3 percent from a year ago, according to an Associated Press review.
"Taxpayers have lost their life savings, and now they are being asked to bail out corporations," New York Attorney General Andrew Cuomo said of the AP findings. "It's adding insult to injury to continue to pay outsized bonuses and exorbitant compensation."
Banks will decide what to pay out in bonuses in the coming months. Just because they've been accruing money for incentive pay doesn't mean they will pay it out in full.
That there is a rise in pay, or at least not a pronounced dropoff, from 2007 is surprising because many of the same companies were doing some of their best business ever, at least in the first half of last year. In 2008, each quarter has been weaker than the last.
"There are, of course, expectations that the payouts should be going down," David Schmidt, a senior compensation consultant at James F. Reda & Associates. "But we haven't seen that show up yet."
Some banks are setting aside large amounts. At Citigroup, which has cut 23,000 jobs this year amid the crisis, pay expenses for the first nine months of this year came to $25.9 billion, 4 percent more than the same period last year.
Even if you subtract what the bank has shelled out in severance pay and other costs related to the job cuts, overall pay is only slightly lower this year.
Typically, about 60 percent of Wall Street pay goes to salary and benefits, while about 40 percent goes to end-of-the-year cash and stock bonuses that hinge on performance, both for the individual and the company, said Brad Hintz, a securities industry analyst at Sanford Bernstein and a former chief financial officer at Lehman Brothers.
"The fundamental goal of the compensation plan is to allow an employee to get wealthy," Hintz said. He also pointed out that the workers' pay is supposed to be "exposed to the risk of the parent company."
This should be the year where that structure is tested. The financial crisis, brought about by mountains of bad mortgage-related assets, caused banks to falter or fail and lending to dry up and prompted Congress to pass a $700 billion bailout package. As part of that, government is pouring $125 billion through stock purchases into the nine large financial companies cited in AP's review of compensation.
Besides Citigroup, those include Bank of New York Mellon, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America, Merrill Lynch, Wells Fargo & Co., and State Street. Another $125 billion will be made available to other banks.
Those taking cash from Uncle Sam must follow guidelines limiting executive pay, including a ban on golden parachutes for departing executives. No restrictions are placed on across-the-board pay.
In total, those nine banks had pay-related costs of $108 billion for the first three quarters of the year. The average increase came to just shy of 3 percent, according to AP figures.
Some banks have set aside less.
Merrill Lynch's costs for pay were $11.2 billion for the first nine months of the year, 3 percent less than last year. That nearly matches the company's $11.7 billion overall loss so far this year.
Merrill spokesman William Halldin told the AP that the company thought a better measure would be to compare the 2008 compensation expense with the first three quarters of 2006. That would reflect an 18 percent decline from Merrill's last profitable year, he said.
Bank of New York Mellon sharply curtailed its bonus expenses in the third quarter. That cost was $242 million for the three months, down 30 percent from the second quarter and off 37 percent from last year. Spokesman Ron Gruendl said the decline was "due to operating results and a reaction to the current market environment."
But at the same time, the bank's total compensation cost has climbed 44 percent to nearly $4 billion because of higher salaries.
If companies decide to reduce bonuses, that could be a boon to the banks' finances because that would help the bottom line, said Jack Ciesielski, who writes the financial newsletter The Analyst's Accounting Observer.
Already, lawmakers are doing all they can to shame the banks out of paying anything. House Financial Service Committee Chairman Barney Frank, D-Mass., has called for a freeze on all Wall Street bonuses. Sen. Carl Levin, D-Mich., wrote this week to U.S. Treasury Secretary Henry Paulson saying it was "unacceptable for financial institutions ... to maintain past levels of compensation."
On Wednesday, insurer American International Group agreed to freeze payouts from a $600 million bonus pool and compensation packages for the company's chief executive and chief financial officers, as well as cancel unnecessary corporate trips and junkets.
AIG, which is not part of the AP review of bank compensation costs, has received government loans topping $120 billion to keep it from collapse. Cuomo calls it a "test case" for stopping unfair pay.
Certainly, workers are uneasy about whether the bonus money will really come. Many traders, bankers and financial advisers have received little or no word about how big their bonuses might be, or whether they will come at all.
http://ap.google.com/article/ALeqM5hHMjh4OJRaj63DrvbRGMptW6rkawD94148CO0
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Ed
16 yrs ago
DB > Hang on a sec... how can it be said he did not know.
He certainly knew (as did many others) that mortgages were being awarded to people with little or nothing down...and that to service these mortgages would sap 50% or more of their income.
Not only did he know this, he encouraged this by making cheap money available.
Many people warned of this - in fact the most successful money manager of the past 10 years was featured in Fortune Mag recently - he made a fortune off this situation getting in when he saw the housing boom coming - and another fortune when he saw this mortgage crisis coming over 2 years ago and moved into commodities making another fortune.
If the average guy on the street didnt see this coming fair enough - but I expect leaders to be the best and the brightest - good leadership is about making smart decisions and seeing beyond the trees...
This was a no brainer - if he did not see this coming then he is incompetent or he was pressured to allow this to continue because economic growth provides a good environment for re-election (I always wondered how we seemed to rather quickly get over the dotcom crash - now I know why)
In my opinion that author is spot on - very smart people who actually believe that if they spew enough bs they really can make a circle a square. I call that hubris - the author calls it Savant Idiocy... either way a circle cannot be made a square.
As for bonuses if I were an American taxpayer I would be incensed if even one penny of my money were paid to anyone in a bailed institution.
To be quite frank, I was sceptical of this entire bail out the moment I saw the talking heads try to justify not diluting shareholders in the banks with the bail out cash. What's with that - you want to borrow cash to keep afloat then if they survive they pay back the cash with a few points on it and go on their merry way....
Hang on, that's not the way it should work - if my business goes into the toilet and I go in search of funding, an investor will want equity so they can participate in the upside as the economy recovers.
Why should the American taxpayer not have been offered the same opportunity? Of course that's also a no-brainer - its because that would dilute the shareholders of the banks.
And now we have the absurdity of paying bonuses using bail out money... this goes beyond insulting and it should not be allowed.
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Ed
16 yrs ago
DB > whilst I agree that individuals and corporations must accept blame for piling on debt (and I also have zero sympathy for those that did) just as that one must take responsibility for a crack cocaine habit.
But without the crack cocaine dealer there would be no crack cocaine habit... so the ultimate responsibility lies with the policy makers and the enablers.
And I might add that I did not puff the pipe so I am not hypocritical when I point fingers.
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Ed
16 yrs ago
I agree that media headlines are deceptive - and that most people dont bother to read the entire story (we live in a sound bite culture of the uninformed, unthinking)
However on this issue if I were a taxpayer and even one cent was paid out to anyone in any company that received a bail out I would be livid.
How is this justified - these are insolvent companies!
The electorate is being begged to recapitalize them so that they can stay alive - and once they get the funding they immediately disperse a big chunk of it to their staff.
Call me crazy but is this not bordering on total insanity?
If you don't pay them bonuses what are they going to do - go work for Lehman?
Between this election and this bail out bs I am feeling like I'm caught in an episode of the Twilight Zone - Sarah Palin and bonuses to the bankrupt - someone wake up eh!
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Ed
16 yrs ago
Perhaps begging is an exaggeration but I seem to recall Mr Paulson and Mr Bernanke desperately pleading with congress to approve their bail out plan...
And I am not convinced that this bailout is the right thing to do at all (many have said this is 'bigger than government')
All due respect to the two architects but they failed to act until the patient had full blown aids - and even when they did act (or react...) in has been in fits and starts with them changing their mind almost day by day - they don't exactly inspire confidence. Thats not an idictment - we are breaking new ground and nobody knows the way out...
I completely agree that there is a culture of excess in the world (a 'me' generation that says screw everyone else as long as I get more) that has to be addressed - the pie is only so big and we have to learn to live and be happy with a smaller piece - there's something wrong when a person is willing to take a loan or save half their salary for 3 months in order to buy a handbag....
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Ed
16 yrs ago
Begging congress...begging the electorate... its still begging.
What do I propose?
I propose letting the pieces fall where they may and taking the sharp pain and ripping the rotten tooth out as opposed to enduring a long drawn out throbbing tooth ache delaying what I think is likely inevitable anyway.
Then doubling or tripling the 7 billion and initiating a massive stimulus package that involves rebuilding the collapsing infrastructure in America - and similar stimulus packages around the world - and clawing our way out of this mess.
There is no evidence that throwing money at the problem before it tanked in the 30's would have stopped that - but there is evidence that a massive stimulus package afterwards was a good tonic...
Not a very palatable solution but perhaps the only solution - that remains to be seen.
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Ed
16 yrs ago
So When Will Banks Give Loans?
“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”
It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.
Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.
The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.
Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.
In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.
(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)
“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”
Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.
It is starting to appear as if one of Treasury’s key rationales for the recapitalization program — namely, that it will cause banks to start lending again — is a fig leaf, Treasury’s version of the weapons of mass destruction.
In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, “the government wants not only to stabilize the industry, but also to reshape it.” Now they tell us.
Indeed, Mr. Landler’s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”
Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City’s books.
As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.
I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.
http://www.nytimes.com/2008/10/25/business/25nocera.html?_r=1&em&oref=slogin
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Ed
16 yrs ago
DB> I understand that the consequences of what I have suggested would be catastrophic - but as indicated I am not confident that anything can prevent a massive collapse - and I wonder if we would not be better keeping the powder dry rather than using up all the bullets trying to stop the unstoppable.
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Ed
16 yrs ago
The problem is, as I see it, is the global economy of 2009 is infinitely more complex and interconnected than the world of the 1930's.
It sounds nice to point to the causes and solutions of of the Great Depression and assume we can sort this out based on studies of that crisis.
But that remains to be seen
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Ed
16 yrs ago
I for one do not wish the financial system to fail. My concern is that we are propping up a house of cards that will fall no matter what we do - and if that happens we will have used up many of our options making the collapse longer and worse.
Now I am not suggesting that we do nothing - I agree we must do everything we can to try to head this off - but I am not confident we can stop this.
Back to the bonuses... I pay bonuses to my staff and dividends to shareholders only when we make a profit. If we are bankrupt or are break even then there are of course no bonuses (and hypothetically if the HK govt were to bail out HK businesses including AX the last thing I would ever consider doing is using that cash to pay bonuses because I would consider that theft).
These banks that are paying bonuses are bankrupt - they didnt just lose money they are insolvent - how can anyone possibly justify paying out bonuses under these circumstances?
Base salaries are what - minimum USD100k a year?
I am sure the American public will be very understanding to hear that someone on wall street is struggling along on their base pay this year and agree that a chunk of the bailout cash should go to help them get by....
If these bonuses are paid something is clearly rotten.
Again - what are they going to do if they dont get the bonus - quit? There are qualified people lined up around the block so if I were running that show and someone whined the door would open our real quick...
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Ed
16 yrs ago
If a bank is insolvent and received bail out money to stay in business then no bonuses should be paid under any circumstances.
Leave? Where are they headed - Lehman Brothers?
There is no rain to be made - IPO's and M&A are non-existent and will remain non-existent for a long long time...
If a bank made money and did not need the bail out (it was forced on Western Union I understand) then no problem with them paying bonuses.
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Ed
16 yrs ago
These are not normal times where if you don't pay a bonus someone leaves.
I forget the details but CNBC stated there had not been an ipo or m&a deal in months and there would be none anytime soon.
I'd like to know who these guys are who would be ok with dipping into that pool of cash to pay their bonus in such times... that's where the whole problem lies... the guys company is bankrupt and taking a hand out - he knows people are hurting - and he's going to threaten to quit because he didnt get a bonus?
I guarantee you under the current circumstances if I was head of a bank and someone came into my office and bitched about a bonus threatening to quit I'd send him out the door and I'd get on the horn to the NY Times CNN etc etc... and that guy would be a pariah by the end of the day.
And somehow I dont think its the superstars who are moaning about bonuses... a lot of those guys are very high profile and have political aspirations (notice how Felix Rohatyn the supreme rainmaker of all time is all over the news... and Jamie Dimon is mentioned as Obamas treasury secretary...)
There is something called principles... one does not take a handout and kick it out to people when a company is bankrupt regardless of who that is.
And one does not demand a share of that money when the did not earn it and when some people are about to be eating dog food for breakfast lunch and dinner.
Anyway the entire point would be moot if Paulson would simply do the right thing and say all banks getting cash are restricted from paying bonuses for a certain period.
Then everyone is on a level playing field - end of story.
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Ed
16 yrs ago
I am aware of how banking bonuses work - but how do you pay a bonus out of a pool that does not exist because you are bankrupt? Bonuses are paid out of profits - so are the banks booking the bail cash as profits? I am all for giving them a bonus on this formula - pool of 100% of after tax profits = 100% of 0 = ZERO.
As indicated there is a very simple solution to this - Paulson simply has to say - no bonuses to be paid by those banks that receive bail outs.
But then Paulson is the same guy who was initially refusing to allow the tax payer to participate in the upside if things are turned around with the bail cash (did I hear the word dilution?) - he only changed his tune when the markets reacted more positively to Gordon Brown's plan.
I have a lot of trouble with those controlling this - it would be a simple matter of putting the no bonus condition on the package - I do not understand why that is not a gimme.
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Ed
15 yrs ago
A good article on this issue in Time:
Uncle Sam has a new name on Wall Street — Sugar Daddy. Bonuses for investment bankers and traders are projected to fall by 40% this year. But analysts, compensation consultants and recruiters say the drop would be much more severe, perhaps as much as 70%, had it not been for the government's efforts to prop up the financial firms. "Year-end pay on Wall Street will be higher than it would have been had it not been for the government and mergers," says Alan Johnson, a leading compensation consultant. "You would expect it to be down much more."
Johnson predicts the average managing director at an investment bank, a title typically earned around eight years on the job, will receive a bonus of $625,000. That's down from nearly $1.1 million last year, but it is still 15 times the income of the average American household. Top bankers could receive as much as $1 million. Even a bond trader just out of business school could see his or her bank account enriched by as much as $170,000 this Christmas. "The firms have had an extremely difficult year," says Joan Zimmerman, a Wall Street career coach. "But they can't afford to lose talent either."
While the government rescue limits the salaries of five top executives of each of the participating financial firms, Congress did nothing to restrict Wall Street firms from using taxpayer funds to boost the compensation of rank and file investment bankers. "Some people might argue that these bankers should not be penalized if they weren't personally involved in the risky mortgage-backed securities," says Sarah Anderson, project director of the Global Economy Project at the Institute for Policy Studies, a progressive think tank in Washington. "My response is that average taxpayer wasn't either, but she is being asked to take a hit."
Earlier this month, the government announced that it plans to quickly inject $125 billion of the $700 billion economic rescue package into nine of the nation's largest financial firms, including Wall Street titans Goldman Sachs and Morgan Stanley as well as Bank of America, which recently acquired securities firm Merrill Lynch. That along with other Treasury Department moves to rescue Wall Street will mean many wallets of investment bankers will be fatter than they would have been.
"It's not the government's money directly, but in the case of Morgan Stanley and Goldman Sachs, they were facing a severe crunch," says analyst Brad Hintz, who covers financial firms at Sanford Bernstein, and is a former chief financial officer of Lehman Brothers. "Had it not been for the government's help in refinancing their debt they may not have had the cash to pay bonuses." When asked, the U.S. Treasury would not comment directly on Wall Street's bonus plans, though spokeswoman Brookly McLaughlin did reiterate the bailout's intent: "There is broad agreement that the Treasury's capital purchase program was intended to strengthen the financial system and increase lending," she said.
One factor mitigating the financial industry's bonus intentions is the fact that there could be far fewer employed Wall Streeters by the time year-end payouts are made. Goldman Sachs reportedly plans to cut 10%, or 3,250 workers, from its payrolls. Barclay's, too, is expected to eliminate 3,000 jobs from the former investment banking division of Lehman Brothers, which it acquired in September. And Merrill Lynch's John Thain recently said he expects thousands of job cuts in the wake of his firm's acquisition. All told, Hintz expects Wall Street employment to fall by 25%, which could mean a loss of 43,250 jobs in New York City alone, and over 200,000 jobs nationwide, by the end of 2009.
Even with those cuts, Wall Street bonuses may still look inflated in light of the industry's dismal performance in 2008. For example, so far this year, Wall Street has underwritten $1.5 trillion in bonds. Sounds like a lot. But it is $500 billion less than what Wall Street did in debt back in the same time period in 2002, which was the last time Wall Street had a significant downturn. And that year Wall Street bonuses were just $8.6 billion, or $5.4 billion less than they are expected to be this year.
On the plus side, investor panic (which translates into hyperactive trading), and executives scrambling to do deals, have boosted Wall Street revenue. In the first half of the year, which is the latest available data from the Securities Industry and Financial Markets Association, the total fees the investment banks and brokerage firms collected were nearly $166 billion. That's more than triple the $55.5 billion the firms had in revenue back in the first half of 2002. But the big difference is that in 2002 Wall Street was making money — nearly $8 billion in the first half of that year. This year financial firms are deeply in the red. They lost more than $15 billion in the first half of the year alone, and that was before the market's big plunge in the past few months. Says Frank Bruconi, chief economist in the New York City Comptroller's office: "Had the federal government not stepped in with a bailout plan and other moves, the pay and the employment situation on Wall Street would be much worse."
That may make Wall Streeters — and some Manhattan restaurateurs — happy. But it will likely leave a sour taste with taxpayers for some time to come.
http://www.time.com/time/business/article/0,8599,1853846,00.html
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Ed
15 yrs ago
I'm no so sure I'd be looking at it that way... if there were such great deals to be had would the HSI wouldn't be down 13 pts today... obviously institutional money doesn't think there is much value at current prices - and retail money is not participating...
This is a highly risky use of funds - so obviously the return potential needs to be enormous.
This guy has called things right so far and he's calling for a massive implosion shortly...
As stock markets headed off a cliff again last week, closely followed by currencies, and as meltdown threatened entire countries such as Hungary and Iceland, one voice was in demand above all others to steer us through the gloom: that of Dr Doom.
For years Dr Doom toiled in relative obscurity as a New York University economics professor under his alias, Nouriel Roubini. But after making a series of uncannily accurate predictions about the global meltdown, Roubini has become the prophet of his age, jetting around the world dispensing his advice and latest prognostications to politicians and businessmen desperate to know what happens next – and for any answer to the crisis.
While the economic sun was shining, most other economists scoffed at Roubini and his predictions of imminent disaster. They dismissed his warnings that the sub-prime mortgage disaster would trigger a financial meltdown. They could not quite believe his view that the US mortgage giants Fannie Mae and Freddie Mac would collapse, and that the investment banks would be crushed as the world headed for a long recession.
Yet all these predictions and more came true. Few are laughing now.
What does Roubini think is going to happen next? Rather worryingly, in London last Thursday he predicted that hundreds of hedge funds will go bust and stock markets may soon have to shut – perhaps for as long as a week – in order to stem the panic selling now sweeping the world.
What happened? The next day trading was briefly stopped in New York and Moscow.
Dubbed Dr Doom for his gloomy views, this lugubrious disciple of the “dismal science” is now the world’s most in-demand economist. He reckons he is getting about four hours’ sleep a night. Last week he was in Budapest, London, Madrid and New York. Next week he will address Congress in Washington. Do not expect any good news.
Contacted in Madrid on Friday, Roubini said the world economy was “at a breaking point”. He believes the stock markets are now “essentially in free fall” and “we are reaching the point of sheer panic”.
For all his recent predictive success, his critics still urge calm. They charge he is a professional doom-monger who was banging on about recession for years as the economy boomed. Roubini is stung by such charges, dismissing them as “pathetic”.
He takes no pleasure in bad news, he says, but he makes his standpoint clear: “Frankly I was right.” A combative, complex man, he is fond of the word “frankly”, which may be appropriate for someone so used to delivering bad news.
Born in Istanbul 49 years ago, he comes from a family of Iranian Jews. They moved to Tehran, then to Tel Aviv and finally to Italy, where he grew up and attended college, graduating summa cum laude in economics from Bocconi University before taking a PhD in international economics at Harvard.
Fluent in English, Italian, Hebrew, and Persian, Roubini has one of those “international man of mystery” accents: think Henry Kissinger without the bonhomie. Single, he lives in a loft in Manhattan’s trendy Tribeca, an area popularised by Robert De Niro, and collects contemporary art.
Despite his slightly mad-professor look, he is at pains to make clear he is normal. “I’m not a geek,” said Roubini, who sounds rather concerned that people might think he is. “I mean it frankly. I’m not a geek.”
He is, however, ferociously bright. When he left Harvard, he moved quickly, holding various positions at the Treasury department, rising to become an economic adviser to Bill Clinton in the late 1990s. Then his profile seemed to plateau. His doubts about the economic outlook seemed out of tune with the times, especially when a few years ago he began predicting a meltdown in the financial markets through his blog, hosted on RGEmonitor. com, the website of his advisory company.
But it was a meeting of the International Monetary Fund (IMF) in September 2006 that earned him his nickname Dr Doom.
Roubini told an audience of fellow economists that a generational crisis was coming. A once-in-a-lifetime housing bust would lay waste to the US economy as oil prices soared, consumers stopped shopping and the country went into a deep recession.
The collapse of the mortgage market would trigger a global meltdown, as trillions of dollars of mortgage-backed securities unravelled. The shockwaves would destroy banks and other big financial institutions such as Fannie Mae and Freddie Mac, America’s largest home loan lenders.
“I think perhaps we will need a stiff drink after that,” the moderator said. Members of the audience laughed.
Economics is not called the dismal science for nothing. While the public might be impressed by Nostradamus-like predictions, economists want figures and equations. Anirvan Banerji, economist with the New York-based Economic Cycle Research Institute, summed up the feeling of many of those at the IMF meeting when he delivered his response to Roubini’s talk.
Banerji questioned Roubini’s assumptions, said they were not based on mathematical models and dismissed his hunches as those of a Cassandra. At first, indeed, it seemed Roubini was wrong. Meltdown did not happen. Even by the end of 2007, the financial and economic outlook was grim but not disastrous.
Then, in February 2008, Roubini posted an entry on his blog headlined: “The rising risk of a systemic financial meltdown: the twelve steps to financial disaster”.
It detailed how the housing market collapse would lead to huge losses for the financial system, particularly in the vehicles used to securitise loans. It warned that “ a national bank” might go bust, and that, as trouble deepened, investment banks and hedge funds might collapse.
Even Roubini was taken aback at how quickly this scenario unfolded. The following month the US investment bank Bear Stearns went under. Since then, the pace and scale of the disaster has accelerated and, as Roubini predicted, the banking sector has been destroyed, Freddie and Fannie have collapsed, stock markets have gone mad and the economy has entered a frightening recession.
Roubini says he was able to predict the catastrophe so accurately because of his “holistic” approach to the crisis and his ability to work outside traditional economic disciplines. A long-time student of financial crises, he looked at the history and politics of past crises as well as the economic models.
“These crises don’t come out of nowhere,” he said. “Usually they arrive because of a systematic increase in a variety of asset and credit bubbles, macro-economic policies and other vulnerabilities. If you combine them, you may not get the timing right but you get an indication that you are closer to a tipping point.”
Others who claimed the economy would escape a recession had been swept up in “a critical euphoria and mania, an irrational exuberance”, he said. And many financial pundits, he believes, were just talking up their own vested interests. “I might be right or wrong, but I have never traded, bought or sold a single security in my life. I am trying to be as objective as I can.”
What does his objectivity tell him now? No end is yet in sight to the crisis.
“Every time there has been a severe crisis in the last six months, people have said this is the catastrophic event that signals the bottom. They said it after Bear Stearns, after Fannie and Freddie, after AIG [the giant US insurer that had to be rescued], and after [the $700 billion bailout plan]. Each time they have called the bottom, and the bottom has not been reached.”
Across the world, governments have taken more and more aggressive actions to stop the panic. However, Roubini believes investors appear to have lost confidence in governments’ ability to sort out the mess.
The announcement of the US government’s $700 billion bailout, Gordon Brown’s grand bank rescue plan and the coordinated response of governments around the world has done little to calm the situation. “It’s been a slaughter, day after day after day,” said Roubini. “Markets are dysfunctional; they are totally unhinged.” Economic fundamentals no longer apply, he believes.
“Even using the nuclear option of guaranteeing everything, providing unlimited liquidity, nationalising the banks, making clear that nobody of importance is going to be allowed to fail, even that has not helped. We are reaching a breaking point, frankly.”
He believes governments will have to come up with an even bigger international rescue, and that the US is facing “multi-year economic stagnation”.
Given such cataclysmic talk, some experts fear his new-found influence may be a bad thing in such troubled times. One senior Wall Street figure said: “He is clearly very bright and thoughtful when he is not shooting from the hip.”
He said he found some of Roubini’s comments “slapdash and silly”. “Sometimes the rigour of his analysis seems to be missing,” he said.
Banerji still has problems with Roubini’s prescient IMF speech. “He has been very accurate in terms of what would happen,” he said. But Roubini was predicting an “imminent” recession by the start of 2007 and he was wrong. “He hurt his credibility by being so pessimistic long before it was appropriate.”
Banerji said on average the US economy had grown for five years before hitting a bad patch. “Roubini started predicting a recession four years ago and saying it was imminent. He kept changing his justification: first the trade deficit, the current account deficit, then the oil price spike, then the housing downturn and so on. But the recession actually did not arrive,” he said.
“If you are an investor or a businessman and you took him seriously four years ago, what on earth would happen to you? You would be in a foetal position for years. This is why the timing is critical. It’s not enough to know what will happen in some point in the distant future.”
Roubini says the argument about content and timing is irrelevant. “People who have been totally blinded and wrong accusing me of getting the timing wrong, it’s just a joke,” he said. “It’s a bit pathetic, frankly. I was not making generic statements. I have made very specific predictions and I have been right all along.” Maybe so, but he does not sound too happy about it, frankly.
http://business.timesonline.co.uk/tol/business/economics/article5014463.ece
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Ed
15 yrs ago
I'm on a run with Jon Stewart at the moment up here in the Mountains Of Gianyar... they now have full episodes online for those interested in some amusement during these unamusing times...
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=189132
Will check that link out later - thanks
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Ed
15 yrs ago
Xpat Guy > I'd like to address the article.
I see the role of government as creating infrastructure and laws that allow for a thriving economy so that all classes will benefit.
In addition to providing the above, I strongly feel that all citizens should have access to quality higher learning and medical coverage.
I do not believe in creating welfare state and that an able bodied person should work. Ayn Rand's books are on my list of favourites... and Warren Buffett is the most noble man in America.
The problem in the US is that the government has been governing in behalf of the very wealthy providing tax cuts which has dramatically polarized income levels.
You have the rich having access to superb universities and health care, the middle class shrinking and struggling on less real income than they had in the late 70's to pay medical bills and keep their heads above water - then you have the poor in America who are living lives as bad as many in the third world - and more importantly with about as much chance of escaping their drudgery as they do of winning a lottery.
Trickle down is apparently not working - or some policies are purposely preventing it from working.
America now has the highest concentration of wealth in its entire history.
When I read the article about the end of prosperity I have to laugh.
Prosperity in America will not end because the tax cuts on the rich are rolled back or any of the other things the author blames - it will end because the infrastructure is falling apart - many people do not have access to education or health care - and it will fail because the government is failing to do its job overseeing the economyproviding proper laws and regulations.
The system is not working although the wealthy might think it is - and it has been for them for some time now - but it will bring them crashing down as well.
Let's not get sidetracked - a good question above - one should someone do if they have HKD1M in their bank account?
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Ed
15 yrs ago
qpzmgh > However should we not assume that if (when) the USD collapses the HKD will unpeg?
And if one lives in Hong Kong and has primarily HKD costs, is it more prudent to hold HKD vs speculating in other currencies?
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Ed
15 yrs ago
At what point would you think gold makes sense? If the USD and HKD implode - what are the odds of any currency retaining value?
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Ed
15 yrs ago
The property market correction thread with nearly 24,000 views is the most popular on the site (although this one should eventually overtake it)
http://hongkong.asiaxpat.com/forums/hong-kong-property/threads/114674/hong-kong-property-market-correction?/
A lot of people appear to be waiting for the lemmings to run off the cliff then swoop in for deals.
Does it make sense to hold HKD then when the market hits a point one is comfortable with buying, use that cash to buy property?
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Ed
15 yrs ago
You can buy gold at the Hang Seng Bank and Bank of China - I believe there are limits on what you can purchase at HS but not at BOC provided you have an account at BOC (you can reserve what you want to purchase in advance at BOC).
You can also buy at jewelry shops but it is my understanding that if you redeem the gold with a jewelry shop they hit you with a much higher fee than the banks
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Ed
15 yrs ago
ONT > if virtually nobody will qualify for a mortgage I assume that the entire market will dry up and property prices will crash 80% or more - meaning 1M will get someone a place on the Peak with no financing...
What happened to the US property market in the 1930's?
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Ed
15 yrs ago
Indeed - much of the US GDP is related to goods and services that were ephemeral in that the demand was created by a massive credit bubble - which is now exploding...
I think we are not going to see a downturn in consumer demand in the next few months - we are going to see an implosion - the vapour that was funded by credit is going to burn off rapidly + people have no savings so this will compound the problem
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Ed
15 yrs ago
xpatguy > the flat tax is an interesting concept - I would probably be ok with that if it was flat across all profits including dividends and capital gains.
In HK we of course do not pay taxes on dividends and I think that is totally absurd and unfair. The irony of the situation is that some business leaders take pride in their $1 a year salary both here and in the US making it appear as if they are motivated by some higher force - ya, there's a much higher force - paying 0 taxes on the 100 million they take as dividends...
I guarantee you - if the flat tax was applied across the board that would be the last we would hear of that idea...
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Ed
15 yrs ago
DB > higher education might be available but when lower education involves going to schools with armed guards at the door the odds of higher education drop significantly....
It's easy to say rise above it but I think its a much different situation when one is on the other side of the fence...
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Ed
15 yrs ago
Tax accountants would of course have their lobbyists knocking on doors to put a stop to this...
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Ed
15 yrs ago
Some are saying that we have been in a 20 year bubble and the markets have a long way to go before they reach fair value....
Are stocks the bargain you think?
Some of the most famous investors in the United States, including Warren Buffett and John Bogle, have started to make the case that it's time to dive back into the stock market.
They are usually careful to add that they don't know what stocks will do in the short term. Yet their basic message is clear enough: stocks are now cheap, irrational fears have been driving the market down lately, and people who buy today will be glad that they did.
After a day like Tuesday, when the market rose 11 percent, it's easy to see the merits of the argument.
But there is another argument that deserves more attention than it has gotten so far. It's the bearish argument that is based neither on fears that the country may be sliding into another depression nor on gut-level worries about the unknown. It is based on numbers and history, and it has at least as much claim on reason as the bullish argument does.
It goes something like this: Stocks are truly cheap only relative to their values over the last 20 years, a period that will go down as one of the great bubbles in history. If you take a longer view, you see that the ratio of stock prices to corporate earnings is only slightly below its long-term average. And in past economic crises — during the 1930s and 1970s — stocks fell well below their long-run average before they turned around.
Some of the most famous investors in the United States, including Warren Buffett and John Bogle, have started to make the case that it's time to dive back into the stock market.
They are usually careful to add that they don't know what stocks will do in the short term. Yet their basic message is clear enough: stocks are now cheap, irrational fears have been driving the market down lately, and people who buy today will be glad that they did.
After a day like Tuesday, when the market rose 11 percent, it's easy to see the merits of the argument.
But there is another argument that deserves more attention than it has gotten so far. It's the bearish argument that is based neither on fears that the country may be sliding into another depression nor on gut-level worries about the unknown. It is based on numbers and history, and it has at least as much claim on reason as the bullish argument does.
It goes something like this: Stocks are truly cheap only relative to their values over the last 20 years, a period that will go down as one of the great bubbles in history. If you take a longer view, you see that the ratio of stock prices to corporate earnings is only slightly below its long-term average. And in past economic crises — during the 1930s and 1970s — stocks fell well below their long-run average before they turned around.
By 1932, the ratio had fallen to 6. In 1982, it was only 7. Then, of course, the market began to self-correct in the other direction, and stocks took off.
After Tuesday's big rally, the ratio was just a shade below 16, or almost equal to its long-run average. This is a little difficult to swallow, I realize. Stocks are down 40 percent since last October, and every experience from the last 25 years suggests they now have to bounce back.
But that's precisely the problem. Since the 1980s, stocks have always bounced back from a loss, usually reaching a high in relatively short order. As a result, the market became enormously overvalued.
As Robert Shiller, the economist who specializes in bubbles, points out, human beings tend to put too much weight on recent experiences. We think the market snapbacks of 1987 and the current decade are more meaningful and more predictive than the long slumps of the 1930s, 1940s and 1970s. Of course, anyone who made the same assumption in 1930 or 1975 — this just has to turn around soon — would have had to wait years and years until the investment paid off.
Now, Buffett, Bogle and their fellow bulls know all this history, and they're still bullish. (Though I'd be more bullish, too, if I could get the favorable terms that Buffett did. In exchange for his money and his good name, Goldman Sachs and General Electric each guaranteed him an annual return of at least 10 percent.)
So on Tuesday afternoon, I also called Bogle, the legendary founder of the Vanguard Group, the investment firm whose low-cost index funds have made a lot for a lot of people.
He, too, prefers the 10-year price-to-earnings ratio, he said, but he didn't think that it necessarily had to fall to the same bargain-basement levels it reached in the 1930s and 1970s.
You can certainly see why that would be the case. Investors are well aware that the market fell to irrationally low levels during past crises, and they may not allow it to become so cheap this time around.
Bogle also thinks that corporate profits will rebound nicely within a couple of years and likes the fact that interest rates are low. Low rates have often — though not always — accompanied bull markets.
But it was his last argument that I think is the main one for most investors to focus on. "I'm not looking for a great bull market," he said. There are some reasons to be optimistic about stocks, he said, "and I also look at the alternative."
And, really, how attractive are the alternatives? Savings accounts and money market funds will struggle to keep pace with inflation. Bonds may, as well.
Stocks, on the other hand, are paying an average dividend of about 3 percent, which is better than the interest on many savings accounts, and stocks are also almost certain to rise over the next couple of decades.
If that is your time frame — decades, rather than months or years — this will probably turn out to be a perfectly good buying opportunity. In the shorter term, though, it's a much tougher call, and it involves a lot more risk.
http://www.iht.com/articles/2008/10/29/business/29leonhardt.php
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Ed
15 yrs ago
Uh - what's with this? http://www.iht.com/articles/2008/10/29/opinion/edloans.php
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Ed
15 yrs ago
Debt linked to huge buyouts is tightening the vise
Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys "R" Us.
The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time.
So, like homeowners with an adjustable rate mortgage that just went up, some of private equity's titans are facing a huge squeeze. And that is coming at the same time consumers are staying home with their wallets closed.
Already this year, big retailers backed by private equity, like Linens 'n Things, Mervyn's and Steve & Barry's, have filed for bankruptcy.
Analysts expect an even broader array of companies backed by private equity — including resorts like Harrah's Entertainment and lenders like GMAC, the financing arm of General Motors — to face even more pressure as profits shrivel and creditors come knocking.
"There's absolutely going to be a lot of pain to go around," said Josh Lerner, a professor of investment banking at Harvard Business School. "The big question is how apocalyptic it will be."
Private equity firms, which are lightly regulated, use investors' money to buy undervalued public companies and take them private. The difficulty of companies that have been acquired by private equity firms to get new credit could have enormous implications for the economy.
People who work for companies owned by private equity firms could lose their jobs as firms cut costs to meet their debt obligations. And private equity firms like Apollo Management, which owns Harrah's and Linens 'n Things, face deep markdowns on the value of their holdings.
Pension funds and college endowments that invested their money into in these funds in recent years hoping for big returns are likely to suffer as well, and many of those investors could face a cash squeeze, as they are forced to hold onto their investments for years until the economy recovers.
"The dangling other shoe is now about to drop," said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management.
When the economy was booming, the firms made huge profits by cutting costs at their new acquisitions, improving operations and then turning around and selling them. In 2007, at the height of the bubble, such deals totaled $796 billion, or more than 16 percent of the $4.83 trillion in all the deals made globally that year, according to data from Dealogic.
Firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, faced an image problem at the height of the bubble for excessive compensation and beneficial tax treatment, but their returns were so high that even investors like pension funds were drawn in. Now these firms, built on enormous amounts of debt, are being forced to go back to the financial markets just as those markets have nearly frozen up.
If history is any guide, the worst may be yet to come. Steven Kaplan, a professor at University of Chicago Graduate School of Business, found that nearly 30 percent of all big public-to-private deals made from 1986 to 1989 defaulted. Afterward, private equity players were called to testify before Congress, and movies like "Wall Street" and "Other People's Money" depicted financiers as greedy criminals.
To be sure, many companies that were not purchased by private equity firms are also struggling. Circuit City, the longtime seller of consumer electronics, is trying to avoid filing for bankruptcy. And publicly traded automakers like General Motors are troubled, too. (GM wants to merge with Chrysler, which is owned by a private equity firm.)
Many industry insiders and analysts contend that companies backed by private equity will not suffer nearly as much as those in the late 1980s because the firms pushed for better financing conditions that allow them to keep operating even if they cannot make their debt payments.
For example, in an effort to save cash, six of Apollo's portfolio companies, including Claire's Stores, Harrah's and Realogy, have announced this year that they will pay some of their bonds' interest by issuing more debt.
Kaplan said he believed that while "it isn't going to be pretty," today's deals "are much less fragile and used less leverage." He contended that "on a relative basis to investment banks and hedge funds, private equity may be in a better place" because of its long-term focus.
Stephen Schwarzman, chairman of Blackstone Group, remains committed to the future of private equity. "The people rooting for the collapse of private equity are going to be disappointed," he said. While some companies may find themselves in trouble, he said, many more will be able to ride out a downturn in the economy because of the less restrictive financing conditions that banks agreed to earlier.
He added that he believed that now may be the best time for private equity because of the investment opportunities amid the crisis. "Historically, downturns are when the most money gets made," he said. Shares of Blackstone are hovering at around $10, down from the $31 they were at when Blackstone went public in June 2007. (Fortress Investment Group, another big firm, is trading at $4.90 a share, down from its initial price of $35 in February 2007.)
Lerner, of the Harvard Business School, said that trouble among private equity firms would probably "precipitate hard questions about the compensation and fee structure" in the industry. The firms generally take fees of 2 percent of all money managed and 20 percent of profits. "I would not be surprised if they try to head off the criticism by returning capital," he said.
The problem for the past deals is that many firms waded into economically sensitive sectors like retailing and restaurants. Firms like Apollo, Cerberus Capital Management and Sun Capital Partners purchased several troubled companies to turn around from 2004 through the first half of 2007.
In the case of Linens 'n Things, a longtime also-ran to Bed, Bath & Beyond, Apollo knew that it had a tough job ahead of it, yet it still added heavy debt. Two months before Linens 'n Things was acquired, it reported $2.1 million in long-term debt; by Dec. 31, 2007, that amount had exploded to $855 million.
At the time, private equity firms assumed that they could refinance their portfolio companies' debt cheaply. But many appear to have been blindsided by the size and severity of the credit market meltdown, which has left lenders unable or unwilling to provide more money.
In what seems a worrisome trend, many bonds of private equity-backed companies have recently plummeted in value, signaling worries about their solvency. These include Michaels, the crafts store co-owned by Bain Capital and the Blackstone Group; Dollar General, a low-price retailer taken private by Kohlberg Kravis Roberts; and Realogy, the parent company of the real estate brokerage firms Coldwell Banker and Century 21 that is owned by Apollo Management.
The bonds issued by Harrah's Entertainment, for example, were trading at 16.5 cents on the dollar, indicating investors' belief that the company was drawing closer to a potential default. Harrah's, too, was saddled with a lot of debt when it was taken private. A month before the completion of the Harrah's takeover, the company reported $12.4 billion in long-term debt. By June 30, that figure had swollen to $23.9 billion. Harrah's has already begun making selective staff cuts and has begun scaling back costs, even cutting back hours in its VIP lounge and the complimentary rooms and meals for its best customers.
"Unfortunately, the worst-case scenario is now looking like the best case scenario," analysts from CreditSights, a research firm, wrote in a research note on Oct. 17 about Harrah's. "While the company could be able to pull through unscathed, the market is giving little credit to do so."
http://www.iht.com/articles/2008/11/03/business/03equity.php
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Ed
15 yrs ago
LGV > I think that if GM fails this will break the camels back - this will put millions out of work because you have to factor in not only GM employees but those of other companies that supply GM....
ONT > funding is a huge worry but so too is the fact that retailers in the US have been unable to sell their Fall inventories - even when they put it on sale early - and Christmas inventory is now arriving....
That's one big snowball that is starting to roll eh
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Ed
15 yrs ago
LGV > I thought I saw that GM directly employs 2M people - and indirectly many more who work with their various suppliers.
These are people with mortgages, kids college loans, car loans...
If GM goes out of business what happens to those people?
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Ed
15 yrs ago
It would seem that a little government regulation can work ... eh
Why Canada's Banks Don't Need Help
In the midst of the worst financial crisis since the Great Depression, Canada has joined the ranks of governments that in recent weeks stepped up to help banks cope with more fallout from bad subprime mortgages. In Canada's case, however, the reason for the assistance is a little different from some of its G7 partners. Unlike banks in the U.S., Britain and Germany, which needed to be bailed out with hundreds of billions of dollars in new capital, Canada's major banks are solid and solvent. They don't need any help to work through their subprime exposure.
So why did Ottawa agree to insure the money they routinely borrow from other banks, a practice that keeps their credit operations liquid? Ironically, the troubled non-Canadian institutions that received capital injections and loan guarantees in other countries now carry a government seal of approval that tilts the playing field in their favor when it comes to borrowing. That left Canada's big banks, including Scotiabank, TD Bank Financial Group, RBC Royal Bank and CIBC, at a competitive disadvantage. So the government acted to level the field, not to aid troubled banks. (See pictures of the global financial crisis.)
Why has Canada withstood the subprime tornado better than other countries, and should the Canadian banking system be a model for G7 and G20 leaders when they gather in Washington on Nov. 15? Consider that the Geneva-based World Economic Forum, an influential think tank whose annual conference attracts the likes of Bill Gates and Tony Blair, earlier this month ranked Canada's banking system as the soundest in the world. The U.S. came in at No. 40, Germany and Britain ranked 39 and 44 respectively. (Switzerland was No. 16 just ahead of Namibia.) "For Canadian banks, having higher capital ratios than anyone else in the world is a source of pride," says analyst Mario Mendonca with Toronto-based investment bank Genuity Capital Markets. (Read "Four Steps to Ending the Foreclosure Crisis.")
The average capital reserves for Canada's Big Six banks — defined as Tier 1 capital (common shares, retained earnings and non-cumulative preferred shares) to risk-adjusted assets — is 9.8%, several percentage points above the 7% required by Canada's federal bank regulator. That's a little better than major U.S. commercial banks like Bank of America, but significantly higher than an average capital ratio of about 4% for U.S. investment banks and 3.3% for European commercial banks.
Another factor that helped make Canada the new gold standard in banking was Ottawa's decision in the late 1980s to allow commercials banks to acquire investment dealers on Toronto's Bay Street, the country's financial hub. As a result, these institutions are subject to the same strict rules as commercial banks, while U.S. investment dealers are only subject to light supervision from the Securities and Exchange Commission. Morgan Stanley and Goldman Sachs, of course, will now be under the Federal Reserve's supervision since they have been chartered as bank holding companies.
Canada's banks make bad investments on occasion. When Toronto-based CIBC, Canada's most aggressive big bank, took $3.5 billion in charges against the U.S. subprime debacle, federal regulators quickly arrived on the scene. But here's the difference: CIBC ended up selling $2.94 billion worth of its own shares in the first quarter of this year to shore up capital reserves. "The relationship between government and banks is a positive one," says federal Minister of Finance Jim Flaherty. "We have a lot of discussions and regular meetings. The common goal is a sound financial system."
There is of course a flip side to Canada's regulatory system, and when the global economy was flying high, Canadian banks complained about not being allowed to merge to become more significant international players. "In hindsight, that decision may have saved Canada from having a Royal Bank of Scotland on its hands," says Lawrence Booth, a finance specialist at the University of Toronto's Rotman School of Management, referring to the overly ambitious bank's bailout earlier this month by the British government.
Says Finance Minister Flaherty, "The credit crisis we're facing is the result of unbridled greed. We need to bridle greed." Perhaps when world leaders sit down in Washington next month to forge a 21st-century New Deal for the global financial system, it may have more than a smattering of Canadian banking know-how.
http://www.time.com/time/business/article/0,8599,1855317,00.html?imw=Y
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Ed
15 yrs ago
Yes everyone will be dragged down by this mess - my reason for posting that info was to demonstrate to those that fear more government involvement in regulating banks going forward that it can be done without strangling the economy.
Makes you wonder if this opposition to govt involvement is a product of loads of spin dropped on us by those with an agenda i.e. those who benefit from having no regulation? You will note that in Canada the govt did not give in to the pressure...
Kinda like how we have been force fed this trickle down rubbish for decades... just another way to justify tax cuts on the very wealthy. And to head off the arrows, you might recall that Warren Buffet pretty much agrees with the previous sentence...
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Ed
15 yrs ago
I see AIG's bail out is now being nearly doubled to 150B.... hmmmm..... sounds like trying to fill in the ocean by throwing handfuls of sand....
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Ed
15 yrs ago
Interesting article - in my opinion we cannot - no matter what terms are offered the fact is people are losing jobs and cannot pay their mortgages which causes a further spiral in housing prices - this is all compounded by consumer demand grinding to a halt causing more job losses + bankruptcies which further harm banks as companies default - one hell of a mess that just keeps getting worse....
Financial crisis? More like Financial Calamity...
Can Anyone Halt The Mortgage Meltdown?
Fifteen months into the worst credit crisis in decades, major banks and the federal government are coming together on a solution for struggling mortgage borrowers.
The goal is to hasten the process for renegotiating hundreds of thousands of delinquent loans, either those held by major banks or held by Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), the mortgage finance giants that faltered and were taken over by the government this summer.
Renegotiating loans for struggling homeowners has taken on more urgency as jobless claims rise and the economy declines. Housing prices continue to fall, leaving many with mortgages greater than the value of their homes, and banks continue to suffer major credit losses as a result.
Citigroup (nyse: C - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and Bank of America (nyse: BAC - news - people ) have separately announced plans to help ailing borrowers. On Tuesday, the Federal Housing Finance Agency, the regulator for Fannie and Freddie, announced its own sweeping plan.
The agency is targeting delinquent borrowers who haven't filed for bankruptcy. The goal is to modify mortgages for borrowers who can support payments but make sure those payments don't make up more than 38% of income.
James Lockhart, head of the agency, urged U.S. mortgage servicing firms--companies that process payments of loans rather than owning them outright--to adopt the plan as a national standard.
For the government, halting the steady slide in housing prices is the holy grail of all of its big plans to prop up the ailing banking system. It is throwing trillions of dollars at shoring-up banks caught in the housing mess, but nothing has, so far, put a floor under the plunging housing prices at the heart of the credit crisis. Going at the problem from the perspective of a borrower is yet another way to achieve that end.
The government studied the Federal Deposit Insurance Corp.'s approach to modifying loans of failed IndyMac Bank and used that as the model for this broader program.
Neel Kashkari, the Assistant Treasury Secretary in charge of the department's $700 billion Troubled Asset Relief Program, said the plan will take pressure off mortgage servicing companies, "helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them."
Earlier on Tuesday, Citigroup announced its loan modification plan. The bank is stopping foreclosures for borrowers who live in their own homes and have enough income to stand a chance at repaying a renegotiated loan. It will also expand the program to include mortgages for which the bank collects payments but does not own.
Over the next six months, Citi will contact 500,000 borrowers who are not currently delinquent but close to falling behind to see if those loans could be modified.
Two weeks ago, JPMorgan said it would expand its mortgage modification program to an estimated $70 billion in loans, representing 400,000 borrowers. That is on top of the $40 billion in mortgages JPMorgan has rewritten since early 2007.
Bank of America will begin next month modifying 400,000 loans held by Countrywide Financial, the troubled lender it acquired this year. The plan, which starts Dec. 1, is part of an $8.4 billion legal settlement with 11 states.
Loan modifications have been complicated by the way the banking industry has approached mortgage lending in recent years, selling their loans off to other banks that bundle and resell them as securities rather than holding all loans separately.
For the banks, modification plans are self-preservation. Virtually no bank has been left untouched by the credit crisis, and Citi, JPMorgan, Bank of America and others will undoubtedly have rising credit costs for the next few quarters. Any plan to blunt those costs would be welcomed.
http://www.forbes.com/home/2008/11/11/mortgages-fannie-freddie-biz-wall-cx_lm_1111citi.html
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Ed
15 yrs ago
What if stocks have been dramatically over-valued for the past two decades having been prodded upwards by cheap credit?
And what we are seeing is a massive correction based on an economy that will never again offer cheap and easy credit. And once we get through the crisis we see slow, stable, relatively risk free growth in businesses (the way it should be?) with share prices reflecting this.
Here's my anecdote for today - lunch with a friend who is involved in luxury property development - he played golf with a senior dude at a big Aussie bank over the weekend - he anticipates the worst and the words breadlines and gold came up...
Well... what would he know eh...
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Ed
15 yrs ago
Re: impeachment comments (dont get me wrong - I actually prefer criminal charges or war crimes charges against Bush and Cheney) - please start a thread in THINK!
This thread is dedicated to the financial crisis
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Ed
15 yrs ago
HKKid > to reiterate, my inclination continues to be as it has been from day one of this crisis not to bail out anyone - let the collapse happen - then IMMEDIATELY unleash massive public works programs to stimulate economies around the world.
I suspect that Paulson hasn't the slightest clue what he is doing - and that he is biased because of his background so therefore is incapable of making the right decisions - and that by propping up the world he is actually making it a far deeper ditch to climb out of...
Rather than accepting the inevitable I wonder if he is bankrupting the country and causing something much worse than what was experienced in the 1930's...
Can we just make this an episode of The Twilight Zone.... please
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Ed
15 yrs ago
Not sure about that theory but what I do know is CNBC guys are now openly talking about a depression - something that they have been avoiding for obvious reasons...
And we now have this http://www.reuters.com/article/Finance08/idUSTRE4AB7HT20081112
In the event of things getting that bad, what's the strategy? What would one do with cash if operating under the assumption of the worst case scenario?
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Ed
15 yrs ago
Word of the day - limbo....
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Ed
15 yrs ago
The auto industry is a little more than that http://www.time.com/time/business/article/0,8599,1859511,00.html
I think letting that go down will trigger an economic catastrophe - however I don't think a bail out will save this industry. These companies were already on the road to bankruptcy before this crisis.
If they are to be saved, I think the only way that can be accomplished is with a very radical plan. Merge them into one, continue with funding a re-tooling for energy efficient cars and most importantly GUARANTEE a market for these cars - to do that I believe that there must be a tax on gasoline to ensure it NEVER goes below a certain level - the cash from that funds the re-tooling - and anyone who wants to buy a gas guzzling pig should get hammered with a massive tax which again goes to re-tooling for fuel efficient cars or other energy conservation programs.
If there is anyone who can have the vision to see beyond simply throwing good money after bad it is Obama - this crisis provides him with the opportunity to move forward with radical yet vital changes across the board...
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Ed
15 yrs ago
I think Obama is far too smart to chuck good money after bad at the auto companies.
I would expect if he bails them out it will be with a long term goal in mind - perhaps not what I have suggested above - but something that attempts to address multiple problems at once... he has said energy is one of his top priorities as of course is the economy - so I would expect this to be a holistic solution - now it may not work but simply shoveling over billions to the auto makers and hoping they can use it to fix themselves will fail.
And I doubt that will be the government policy...
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Ed
15 yrs ago
Again, I dont see this happening.
Obama is a very bright guy who is surrounding himself with very wise advisers - I simply do not envision a knee-jerk reaction that might pander to populists but that actually does more damage than good.
I am confident the new administration will be far more thoughtful in the way that they assist the auto industry - and the many problems across the economy, environment etc...
What is needed is nothing less than a revolution of thought to right the ship. What is needed is leadership...
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Ed
15 yrs ago
This is a good video re: what is needed http://hk.youtube.com/watch?v=SVmJpM_UFVs
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Ed
15 yrs ago
Boon Pickens interview here http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=210170
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Ed
15 yrs ago
Sorry - this thread mistakenly was moved to Feedback...
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Ed
15 yrs ago
Back to the discussion.
Lots and lots of banter going on but doesn't this all come down to this - banks are not loaning to companies and banks are not loaning to individuals in America.
Why?
Could it be that they know what is likely on the way - and they have come to the conclusion that virtually all lending is high risk?
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Ed
15 yrs ago
Drill Baby Drill... How about Conserve eh
What we have is a complete failure of leadership - on virtually every issue.
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Ed
15 yrs ago
IMHO the US Auto Industry must be left alone - no bail out.
They have had years to change their tune and what did they do - kill electric and give us the Hummer.
Bailing them out sends the wrong message - it rewards failure and it perpetuates a failed business model/vision/management.
Further, if you bail them they will 100% be back for more in 2009 (just like AIG has been back to the trough a second time already) because if you think people are not buying cars now wait another 6 months.
So let them go into Chapter 11 - and if that doesn't work they must be left to fail completely.
Other car companies will step in to pick up the demand (whatever is left of demand) and the bail cash can be used to extend benefits to those who lose jobs + fund much needed infrastructure projects that provide jobs.
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Ed
15 yrs ago
Let Detroit go bankrupt
If General Motors, Ford and Chrysler get the bailout that their chief executives asked for on Tuesday, you can kiss the American automotive industry goodbye. It won't go overnight, but its demise will be virtually guaranteed.
Without that bailout, Detroit will need to drastically restructure itself. With it, the automakers will stay the course - the suicidal course of declining market shares, insurmountable labor and retiree burdens, technology atrophy, product inferiority and never-ending job losses. Detroit needs a turnaround, not a check.
I love cars, American cars. I was born in Detroit, the son of an auto chief executive. In 1954, my dad, George Romney, was tapped to run American Motors when its president suddenly died. The company itself was on life support - banks were threatening to deal it a death blow. The stock collapsed. I watched Dad work to turn the company around - and years later at business school, they were still talking about it. From the lessons of that turnaround, and from my own experiences, I have several prescriptions for Detroit's automakers.
First, their huge disadvantage in costs relative to foreign brands must be eliminated. That means new labor agreements to align pay and benefits to match those of workers at competitors like BMW, Honda, Nissan and Toyota. Furthermore, retiree benefits must be reduced so that the total burden per auto for domestic makers is not higher than that of foreign producers.
That extra burden is estimated to be more than $2,000 per car. Think what that means: Ford, for example, needs to cut $2,000 worth of features and quality out of its Taurus to compete with Toyota's Avalon. Of course the Avalon feels like a better product - it has $2,000 more put into it. Considering this disadvantage, Detroit has done a remarkable job of designing and engineering its cars. But if this cost penalty persists, any bailout will only delay the inevitable.
Second, management as is must go. New faces should be recruited from unrelated industries - from companies widely respected for excellence in marketing, innovation, creativity and labor relations.
The new management must work with labor leaders to see that the enmity between labor and management comes to an end. This division is a holdover from the early years of the last century, when unions brought workers job security and better wages and benefits. But as Walter Reuther, the former head of the United Automobile Workers, said to my father, "Getting more and more pay for less and less work is a dead-end street."
You don't have to look far for industries with unions that went down that road. Companies in the 21st century cannot perpetuate the destructive labor relations of the 20th.
This will mean a new direction for the UAW, profit sharing or stock grants to all employees and a change in Big Three management culture.
The need for collaboration will mean accepting sanity in salaries and perks. At American Motors, my dad cut his pay and that of his executive team, he bought stock in the company, and he went out to factories to talk to workers directly. Get rid of the planes, the executive dining rooms - all the symbols that breed resentment among the hundreds of thousands who will also be sacrificing to keep the companies afloat.
Investments must be made for the future. No more focus on quarterly earnings or the kind of short-term stock appreciation that means quick riches for executives with options.
Manage with an eye on cash flow, balance sheets and long-term appreciation. Invest in truly competitive products and innovative technologies - especially fuel-saving designs - that may not arrive for years. Starving research and development is like eating the seed corn.
Just as important to the future of American carmakers is the sales force. When sales are down, you don't want to lose the only people who can get them to grow. So don't fire the best dealers, and don't crush them with new financial or performance demands they can't meet.
It is not wrong to ask for government help, but the automakers should come up with a win-win proposition. I believe the federal government should invest substantially more in basic research - on new energy sources, fuel-economy technology, materials science and the like - that will ultimately benefit the automotive industry, along with many others.
I believe Washington should raise energy research spending to $20 billion a year, from the $4 billion that is spent today. The research could be done at universities, at research labs and even through public-private collaboration. The federal government should also rectify the imbedded tax penalties that favor foreign carmakers.
But don'task Washington to give shareholders and bondholders a free pass - they bet on management and they lost.
The American auto industry is vital to our national interest as an employer and as a hub for manufacturing. A managed bankruptcy may be the only path to the fundamental restructuring the industry needs. It would permit the companies to shed excess labor, pension and real estate costs.
The federal government should provide guarantees for post-bankruptcy financing and assure car buyers that their warranties are not at risk. In a managed bankruptcy, the federal government would propel newly competitive and viable automakers, rather than seal their fate with a bailout check.
http://www.iht.com/articles/2008/11/19/opinion/edromney.php
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Ed
15 yrs ago
So.... the Big 3 auto dealer CEO's travel to Washington... in private jets...
What are they thinking
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Ed
15 yrs ago
Prostitution, Corruption and the Sub- Prime disaster http://www.businessweek.com/magazine/content/08_47/b4109070638235.htm?chan=rss_topEmailedStories_ssi_5
Quite a story...
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Ed
15 yrs ago
It's a symptom of the problem - and arrogance... They are broke and they are flying around in private jets looking for a handout. Unbelievable
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Ed
15 yrs ago
Citi - what are they exposed to that is putting them on the edge?
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Ed
15 yrs ago
An interesting concept...
Nationalisation Threat To Banks
Banks are told to do their bit for the economy / Downing Street considers 'nuclear option' to make lenders release cash
The Government is using the threat of a wholesale nationalisation of banks in an attempt to force institutions to lend billions to small companies struggling to survive as Britain slips into recession.
Downing Street yesterday made plain its fury over high street banks which refuse to use the massive injection of taxpayers' money they have received to come to the rescue of businesses hit by the credit crisis. Lenders have also faced criticism over interest rates charged to homeowners and for stepping up repossessions.
Meanwhile, Gordon Brown dismissed suggestions that he should take advantage of his reviving popularity by calling a June general election, insisting he was fully focused on steering Britain out of the downturn, starting with Monday's pre-Budget report.
It will spell out plans for tax cuts and assistance for the country's 4.7 million small firms. The aid will be funded by increases in government borrowing, which is on course to exceed £100bn next year. Alistair Darling, the Chancellor, will also announce that taxes will have to rise in the medium term to reduce the national debt. The financial stimulus package is designed to breathe new life into the economy but Mr Darling fears the behaviour of the banks could undermine the moves.
He is expected to announce controlson the interest rates charged on small business loans, as well as measures to stem the rising tide of repossessions.
Ministers are irritated that banks the Treasury bailed out are dragging their feet over passing on the money. The Treasury took stakes in HBOS, Lloyds TSB and Royal Bank of Scotland in return for £37bn of public funds. The banks promised to return lending to last year's levels. John McFall, the chairman of the Treasury select committee and an ally of Mr Brown and Mr Darling, raised the prospect of state control, saying: "If the banks do not play ball, and will not resume lending, then the demand for full-scale nationalisation may well grow."
No 10 refused to rule out such a step, regarded by officials as the "nuclear option". Mr Brown's spokesman said: "In these circumstances, of course we have got to look at all the options. But we want to work constructively with the banks to ensure they fulfil the commitments they have entered into."
Asked a second time about full nationalisation, he replied: "It would clearly be foolish for anybody to rule out specific options at this stage."The Government has made little effort to disguise its frustration at the behaviour of banks towards small businesses and mortgage-payers.
Mr Darling is preparing to use his pre-Budget report to fire a shot across their bows with tough demands on lending. He is not expected to impose further legal sanctions on banks, such as the appointment of a powerful watchdog to monitor lending rates, but officials want to keep options in reserve if the banks fail to respond.
As figures from the Council of Mortgage Lenders showed a 12 per cent increase in house repossessions in the third quarter, Mr Brown signalled further help was on the way for families at risk of losing their homes. He acknowledged that Northern Rock, which is already in public hands, was among the worst offenders. "We have been talking to Northern Rock about its practices and I think you will see some changes ... very soon," he said.
Mr Brown dismissed suggestions he could call a general election on 4 June, to coincide with European and local elections, if Labour's recovery in the polls is sustained into next spring. "My undivided attention is on the economy, I'm not thinking about anything else, it's 100 per cent of my attention and you just discount all these stories. I'm actually not thinking about anything related to internal politics."
Angela Knight, the chief executive of the British Bankers' Association, insisted that lending to small firms was at the same level as last year.
Meanwhile, Honda said that production would halt at its Swindon plant for two months, but none of its 4,800 workers would be laid off.
http://www.independent.co.uk/news/uk/politics/nationalisation-threat-to-banks-1029887.html
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Ed
15 yrs ago
A friend who ran bonds for a Canadian bank in Asia for years (so knows a thing about debt...), as the Tarp was being voted on, had some very sound advice on this.
First, he agreed that this is a massive, massive problem and that no one should underestimate the potential impact. He was concerned enough to raise the issue of a default on sovereign debt by a major country - if that were to happen he referred to the scenario that would play out as 'Mad Max' (the movie).
He expects that all countries are aware of this and will move heaven and earth throwing everything possible at this to prevent a major economy from submerging. Countries with substantial surpluses will be forced to use those assets to attempt to prop up failing economies because its a domino effect - once one goes they all go.
The table is definitely set - what remains to be seen is can we 'hold back the ocean'
If you are not confident that we can, then I am told that it is prudent to convert 20-25% of your spare cash in actual gold (you can buy taels at BOC or Hang Seng Bank).
I think it probably makes sense to hold cash in the currency of the country in which you are living because, at the end of the day, most of your primary expenses will be in that currency...
I have had a bad feeling for many years about this polluted culture of excess - employees (yes employees because CEO's are employees) making hundreds of millions/year... obsession with materialism...lobbyists.... Iraq... more more more me me me...the Hummer instead of the electric car... secretaries spending 3 months salary to buy a bag... all symptoms of something bad on the way
And here we are.
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Ed
15 yrs ago
1.1 Trillion eh... Well isn't that nice... it would seem the Tarp is a bit underfunded...
Re Gold - I think one would be buying that to protect against the Mad Max scenario - normally as an investment I dont think holding gold bricks makes much sense...
HSBC tells me that there is no fine print that would prevent one from accessing safety deposit boxes - however if the government stepped in that would be another story...
At some point I would think it makes sense to empty boxes and stash everything in a home safe ya?
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Ed
15 yrs ago
The article in the Populist is heavy duty...
I am gonna post this again - if you want to boil your innards take a few minutes to read it - its total bs when the finance industry say they had no idea what was happening. The investment banks were gobbling up the sleaze ball mortgage companies and gorging - as if they had no idea that they were employing bimbos and crooks and as if they had not idea that this was all so wrong - the decision makers definitely knew what was going on and in a fair world they would be sentenced to life in prison
http://www.businessweek.com/magazine/content/08_47/b4109070638235.htm?chan=rss_topEmailedStories_ssi_5
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Ed
15 yrs ago
Not my words - in the Business Week article they actually go further implying the bimbos that were hired to carry out this business were, in effect, prostituting themselves to get business.
To top it off many of the investment banks bought these mortgage companies so to say they didnt know what was happening stretches the imagination incredibly.
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Ed
15 yrs ago
On a positive note, I think this crisis will yet serve a useful purpose in that there will be more receptivity to drastic changes in the way the world is run.
I think we are about to see transformational change from the Obama administration - in the past there would have been huge resistance but now what choice do we have?
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Ed
15 yrs ago
At the end of the day the president must surround himself with experienced, capable people - and at the end of the day its the same congress and senate - change must come from the leader and it must come by convincing the old guard to go along with you....
I believe that this crisis will enable change - the world is looking for a way forward and they will embrace visionary leadership.
I expect we are going to see some radical new energy policies in 2009 as part of a massive stimulus package - sell your Exxon shares eh...
To get a handle on the big picture of why we are where we are I would suggest reading this book
http://en.wikipedia.org/wiki/The_Assault_on_Reason
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Ed
15 yrs ago
Fully agree with onemorething - as much as nobody wanted the Asian financial crisis to happen, happen it did and I recall traveling to Jakarta afterwards and it was dire... it was not 'Mad Max' and I am doubtful we will have complete anarchy however there will be massive suffering if this fails.
I think the concern has to be just how big is this problem... someone posted that Citi has 1.1 TRILLION of off balance sheet losses... that's just one company... is this truly an ocean of debt that we are supposed to believe we can hold back with the Tarp?
The chief of a massive hedge fund made the comment when Tarp was being voted on that he felt this disaster was 'bigger than government' and that he feared for his personal finances...
I agree its certainly not very nice to be having this discussion however there are some big unanswered questions and some very clear and disturbing facts so we cannot stick our heads in the sand...
Was discussing this over lunch earlier and it occurred to me that one reason why the stock markets have not completely come crashing down is that many people have cash tied up in superannuation funds such as the 401ks and even though the value has plummeted, because of tax implications and because these investments are meant for retirement, most people are not liquidating them and instead are hoping that by the time they retire things will have swung around...
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Ed
15 yrs ago
That is correct however when the former chairman of Goldman says this is far more complicated and probably going to be far worse than the Great Depression one certainly has to question whether any policy will be able to head off a disaster.
The problem I see with this is that we are unwilling to accept the pain that I think must be endured as payment for what got us into this - and that weak companies must be allowed to fail.
If we continue to prop things up it simply delays the inevitable and it leaves us less capable of recovery in the aftermath because we are using up our resources propping up losers.
I suggest we let the cards fall where they may, THEN stand ready with massive stimulus packages to get things move again... I think one of the mistakes made during the 30's was the failure to step in with govt money sooner...
In any event this is 2008, not the 1930s'... and this is a unique situation... so any attempts to deal with it are experimental
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Ed
15 yrs ago
Good article from Thomas Friedman in the Trib today...
"I don't want to see Detroit's auto industry wiped out, but what are we supposed to do with auto executives who fly to Washington in three separate private jets, ask for a taxpayer bailout and offer no detailed plan for their own transformation?"
Full: http://www.iht.com/articles/2008/11/23/opinion/edfriedman.php
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Ed
15 yrs ago
Citi almost bought Wachovia 2 months ago... and now Citi is being bailed out. Something doesn't sound right...
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Ed
15 yrs ago
I wonder if the ratings agencies will be allowed to downgrade US gov't debt... surely there will be pressure put on them not to using the justification that such a move would 'not be in the national interests'
Sort of like how the real GDP growth in the PRC is anticipated by many to be more like 2% next year?
http://www.iht.com/articles/2008/11/25/opinion/edbowring.php
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Ed
15 yrs ago
I believe that gold is also an insurance policy against financial implosion... note that the price is creeping up again even though there is no threat of inflation anytime soon
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Ed
15 yrs ago
Nice... In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000."
Here's the full story:
Thomas L. Friedman: All fall down
I spent Sunday afternoon brooding over a great piece of New York Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn't the right word. The front-page article, entitled "Citigroup Pays for a Rush to Risk," actually left me totally disgusted.
Why? Because in searing detail it exposed - using Citigroup as Exhibit A - how some of America's best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn't only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.
So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.
Citigroup was involved in, and made money from, almost every link in that chain. And the bank's executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank's risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.
These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic.
But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences - many, many, many.
Also check out Michael Lewis' superb essay, "The End of Wall Street's Boom," on Portfolio.com. Lewis, who first chronicled Wall Street's excesses in "Liar's Poker," profiles some of the decent people on Wall Street who tried to expose the credit binge - including Meredith Whitney, a little-known banking analyst who declared, more than a year ago, that "Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust," wrote Lewis.
"This woman wasn't saying that Wall Street bankers were corrupt," he added. "She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they'd fetch in a fire sale ... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You're wrong. You're still not facing up to how badly you have mismanaged your business."
Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.
"Long Beach Financial," wrote Lewis, "was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000."
Lewis continued: Eisman knew that subprime lenders could be disreputable. "What he underestimated was the total unabashed complicity of the upper class of American capitalism ... 'We always asked the same question,' says Eisman. 'Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk.' He called Standard & Poor's and asked what would happen to default rates if real estate prices fell. The man at S&P couldn't say; its model for home prices had no ability to accept a negative number.
'They were just assuming home prices would keep going up,' Eisman says."
That's how we got here - a near-total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins.
I used to say our kids will pay dearly for this. But actually, it's our problem. For the next few years we're all going to be working harder for less money and fewer government services - if we're lucky.
http://www.iht.com/articles/2008/11/26/opinion/edfriedman.php
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Ed
15 yrs ago
The End
by Michael Lewis
This is the definitive article on this topic...
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom
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Ed
15 yrs ago
Doesn't the essay by the author of Liar's Poker make you absolutely cringe...
It confirms that those who say nobody knew what was coming are deluded, lying or plain stupid... perhaps those who are the gears in the machinery that allowed this to happen (lawyers and other minions) but those who shift the levers definitely knew what they were doing...
Wondering when AIG will be back for more...
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Ed
15 yrs ago
I just watched a newscast from the CBC in Canada that said shipping rates have dropped by 90% because cargoes are stuck on docks around the world because banks are not providing credit facilities.
Seized consumer demand is one issue however this would appear to be a new can of worms - what happens when stores run out of stock?
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Ed
15 yrs ago
Posted on another thread:
The bank said the damage caused by the financial excesses of the last quarter century was forcing the world's authorities to take steps that had never been tried before.
This gamble was likely to end in one of two extreme ways: with either a resurgence of inflation; or a downward spiral into depression, civil disorder, and possibly wars. Both outcomes will cause a rush for gold.
"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist.
"The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock.
"Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop. We don't think this is the more likely outcome, but as each week and month passes, there is a growing danger of vicious circle as confidence erodes," he said.
"This will lead to political instability. We are already seeing countries on the periphery of Europe under severe stress. Some leaders are now at record levels of unpopularity. There is a risk of domestic unrest, starting with strikes because people are feeling disenfranchised."
"What happens if there is a meltdown in a country like Pakistan, which is a nuclear power. People react when they have their backs to the wall. We're already seeing doubts emerge about the sovereign debts of developed AAA-rated countries, which is not something you can ignore," he said.
Gold traders are playing close attention to reports from Beijing that the China is thinking of boosting its gold reserves from 600 tonnes to nearer 4,000 tonnes to diversify away from paper currencies. "If true, this is a very material change," he said.
Mr Fitzpatrick said Britain had made a mistake selling off half its gold at the bottom of the market between 1999 to 2002. "People have started to question the value of government debt," he said.
Citigroup said the blast-off was likely to occur within two years, and possibly as soon as 2009. Gold was trading yesterday at $812 an ounce. It is well off its all-time peak of $1,030 in February but has held up much better than other commodities over the last few months – reverting to is historical role as a safe-haven store of value and a de facto currency.
Gold has tripled in value over the last seven years, vastly outperforming Wall Street and European bourses.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3526645/Citigroup-says-gold-could-rise-above-2000-next-year-as-world-unravels.html
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Ed
15 yrs ago
Difficult to buy that one considering the US growing US deficit...
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Ed
15 yrs ago
I tuned into CNBC last night and watched a heated argument between the two presenters.
One side of the argument was that government in the markets is distorting reality and simply delaying the inevitable - the mother of all crashes.
On the other side the argument was that government intervention will slow the train for the inevitable crash into the wall.
I am wondering if there is a third option - that intervening makes the crash worse.
Interesting that consensus seems to now be for a train wreck...
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Ed
15 yrs ago
I would have to agree - let it fall - then step in with stimulus on a massive scale.
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Ed
15 yrs ago
I suspect quite a few people knew there was something wrong as it's not like there were not warnings from people in the financial community, but just like with Global Warming, people get mired in inertia and do not react until often it is too late.
At present there are loads of other huge problems on the horizon in the US and there are voices constantly warning about not facing them sooner than later (medical care, social security etc...). Same - same. The warnings are out there but they are being ignored.
Could it be that there are warnings about so many things they become 'white noise'
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Ed
15 yrs ago
I do not think that anyone has the ability to 'fix' this problem without a lot of pain... and that seems what they are trying to do and understandably so.
What can be done is the governments need to put together a plan that helps us pick up the pieces - a new, New Deal....
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Ed
15 yrs ago
Shall we refer to this as the 'S&M Solution' to the financial crisis.
Having the Great Depression to look back on, I think that the pain would be relatively short because we know what it takes to get out of the pain... by staying the course on the current plan I think we prolong the pain - and in fact we waste resources that would be better spent on recovery.
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Ed
15 yrs ago
Consider this - retailers are heavily discounting designer goods (up to 70% off http://www.iht.com/articles/2008/12/04/style/04shopping.php). Seems that is what it takes to move merchandise during this gift giving season.
What happens after Christmas passes when people have much less motivation to shop?
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Ed
15 yrs ago
There is the saying pushing on a string... how about pulling on a rope... The US has this big rope tied to China and the rest of the world ... and it is dragging us into a big hole... I estimate that the rope is around 4-6 months long....
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Ed
15 yrs ago
Grim news overnight:
China's Manufacturing is Seizing Up - http://www.forbes.com/home_asia/2008/12/01/china-manufacturing-slowdown-markets-econ-cx_jb_1201markets2.html
Massive Jobs Losses http://www.iht.com/articles/2008/12/05/business/jobs.php
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Ed
15 yrs ago
Debt of the US is 10 trillion http://www.brillig.com/debt_clock/ + the government has also taken on trillions more in guarantees for junk paper + they will pile on at least a trillion more in stimulus.
Multiply that by 24.
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Ed
15 yrs ago
Excellent article. Thanks
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Ed
15 yrs ago
Dire forecast for the global economy and world trade
WASHINGTON: The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries forecast to plunge 50 percent.
The projections are among the most dire in a litany of recent gloomy prognostications for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.
Even more troubling, several economists said, there is no obvious locomotive to propel a recovery.
American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side-effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.
"The financial crisis is likely to result in the most serious recession since the Great Depression," said Justin Lin, the chief economist of the World Bank, summarizing the projection
The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.
"You don't need negative growth in developing countries to have a situation that feels like recession," said Hans Timmer, who directs the bank's international economic analyses and projections. He predicted rising joblessness and shuttered factories in many developing countries.
The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.
Net private flows of capital to developing countries are projected to decline to $530 billion in 2009, from $1 trillion in 2007.
The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.4 percent in 2009 from 13 percent in 2007.
Several countries are also being hurt by the decline in the prices of oil and other commodities — a phenomenon the World Bank characterizes as the end of a five-year commodities boom — though the decline in food and fuel costs has relieved the pressure on people in other countries.
The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.
"They'll have to roll over that debt, one way or the other," said Simon Johnson, a former chief economist of the International Monetary Fund. "That's going to put a huge squeeze on these countries."
Johnson said the calmer atmosphere in foreign markets belied the gravity of the situation. Spreads on credit default swaps — a common yardstick for whether a country's government is in danger of default — continue to signal potential trouble for Ireland, Italy, and Greece.
The authorities in Greece are battling violent street protests in Athens and its suburbs, fueled in part by the deteriorating economy.
Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.
If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.
As the World Bank's experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s.
"It is not just a supply shock," Lin said. "It is not just a drop in demand; it is a lack of availability of credit."
Deutsche Bank, in a forecast issued this week, was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity.
China, which grew 11.9 percent in 2007, will slow to 7 percent this year, the bank projects, and 6.6 percent in 2010, when the rest of the world is slowly recovering. "It's not going to be the spark that reignites global demand," said Thomas Mayer, the chief European economist for Deutsche Bank. "We're almost in an air pocket, where we don't have a new global driver of growth."
http://www.iht.com/articles/2008/12/10/business/10global.php
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Ed
15 yrs ago
Investors buy U.S. debt at zero yield
When was the last time you invested in something that you knew wouldn't make money?
In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world's safest investment, United States government debt, that they agreed to accept a zero percent rate of return.
The news sent a sobering signal: in these troubled economic times, when people have lost vast amounts on stocks, bonds and real estate, making an investment that offers security but no gain is tantamount to coming out ahead. This extremely cautious approach reflects concerns that a global recession could deepen next year, and continue to jeopardize all types of investments.
While this will lower the cost of borrowing for the United States government, economists worry that a widespread hunkering-down could have broader implications that could slow an economic recovery. If investors remain reluctant to put money into stocks and corporate bonds, that could choke off funds that businesses need to keep financing their day-to-day operations.
Investors accepted the zero percent rate in the government's auction Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much.
In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.
In these times, it seems, the abnormal has now become acceptable. As America's debt and deficit spiral from a parade of billion dollar bailouts and stimulus packages, fund managers, foreign governments and big retail investors reckon they will get more peace of mind by stashing their cash, rather than putting it toward any of the higher-yielding risk that is entailed in stocks, corporate bonds and consumer debt.
The rapid decline in Treasury yields — which since summer have headed toward lows not seen since the end of the World War II — also renders the Federal Reserve less effective, as investors and banks stuff the money that the central bank is pumping into the financial system into Treasuries, rather than fanning it out across the broader economy.
"The last time this happened was the Great Depression, when people are willing to accept no return on their money, or possibly even a negative return," said Edward Yardeni, an independent analyst. "If people are so busy during the day just protecting the cash they have, it's not a good sign."
Stocks fell sharply as investors digested the implications. The Dow Jones industrial average dropped 242.85 points, or 2.72 percent, to 8,691.33, and the Standard & Poor's 500-stock index declined 2.31 percent, to 888.67. The Nasdaq composite index lost 1.55 percent, to 1,547.34.
If there is a silver lining to the Treasury market's gyrations, it is that the United States can borrow money more cheaply from investors, whether they be the governments of China or Japan, or big fund managers. That could help Washington finance various programs intended to revive the ailing economy.
Borrowing by the Treasury has already ballooned since Congress approved the $700 billion financial rescue plan, and policy makers expect the federal budget deficit to swell further next year as the Big Three automakers and other industries look for support.
"That sucking sound is all the world's capital going into the U.S. Treasury market," Yardeni said, "which means the Treasury and the Fed can tap into that liquidity pool to finance TARP and offer mortgages at 4.5 percent."
While that may offset some of the expense of the bailouts, economists say the fact that the United States must borrow so much to prop up large parts of the economy is a big cause for concern.
There are several explanations for the flight to safety in the bond market. The world of short-term money market funds, for instance, is still reeling from troubles at the Reserve Primary Fund, a money market fund frozen in September after it lost money on investments in Lehman Brothers. Since then, individual and large investors have put more than $200 billion into money funds that only invest in safe Treasury bills, according to iMoneyNet, a financial data publisher. At the same time, investors have withdrawn nearly $400 billion from prime funds.
That has forced portfolio managers to buy Treasury bills, driving down yields. "That group of investors has to invest in something," said Max Bublitz, chief strategist at SCM Advisors. "They don't have the luxury of saying, 'I will stick it in the mattress.' "
Yields for longer term Treasury securities have also slumped, with the 10-year now yielding 2.64 percent, down from 2.7 percent Monday and 3.75 percent a month earlier. That decline appears to reflect several other forces. Many investors are seeking safety because they believe that the economy is in its worst recession since the Depression. Rather than inflation, which was a worry for some a few months ago, many are now worried about deflation, or falling prices.
Thomas Atteberry, a bond fund manager, said at current prices the market is predicting that the United States will suffer the kind of "lost decade" that Japan suffered in the 1990s.
"I have a hard time justifying that," said Atteberry, a partner at First Pacific Advisors. "The Fed seems much more upfront about boosting its balance sheet by creating money."
Another reason, analysts say, that Treasury yields may be falling is that foreign investors are using American government securities to protect themselves against the falling value of their own currencies. Many investors are also pulling money out of mutual funds and hedge funds, forcing portfolio managers to sell more risky assets and hold Treasuries, which are easier to sell.
And some fund managers are simply looking to dress up their portfolios before the year ends.
"There is no doubt that there is potentially some hoarding of cash in anticipation of potential redemptions," said David Kovacs, a strategist at Turner Investment Partners. "People want to own it to show that they played it safe by year-end."
http://www.iht.com/articles/2008/12/10/business/10yield.php?page=2
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Ed
15 yrs ago
HKKid > I am not sure there is a way out of this - former Goldman Sachs chairman said recently that try as he might he cannot foresee a solution to preventing 'depression-like' conditions....
That is a bile-inducing thought...
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Ed
15 yrs ago
It hardly needs to be said that the global economic situation is growing more worrisome by the day. Although governments across the planet are stepping up measures to ward off the worst of the financial crisis, from a structural perspective, they can only be of limited use. As the economist Robert Samuelson wrote today, “Private behavior is neutralizing public policy.”
Indeed, The Economist’s editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to central banks was not finding its way into the private sector. Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that central banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend. Only once they regain confidence can an excess supply of money be created.
So current measures are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for responses is limited.
As to my expectations for how deep the recession is expected to be and what its impact will be on financial markets, how long is a piece of string? My guess is that the world economy is going to “L” and stay there until at least the end of 2009. Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof). I do not expect lenders to budge for a long, long time.
The Federal Open Markets Committee next week is likely to deliver zero rate policy and more quantitative easing from Fed Chairman Ben Bernanke. As Samuelson points out, “”The Fed’s new loans and credits easily exceed $1 trillion.”
Whether it will do any good is debatable. The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.
The current bailout packages are creating scary consequences down the road. On the fiscal side, the US federal budget deficit will balloon above its already scary levels. On the monetary side, the Fed has moved far beyond being a lender of last resort. In fact, it now looks like a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!
http://asiasentinel.com/index.php?option=com_content&task=view&id=1604&Itemid=590
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Ed
15 yrs ago
Good article in the Asian Sentinel today:
The Ghost of Christmas Future
The first quarter of 2009 is going to look frightening to Asia's exporters
In the United States they used to say that no retailer ever goes bankrupt before Christmas. The consumers flooding into the stores during the holiday season provided even sagging stores with a last dose of income and hope. The closing days of 2008 appear to be putting an end to such dreams, and not just for Detroit's distressed automakers.
The retail blight in the US is likely to spell big trouble across the Pacific for the thousands of factories that supply consumer goods to the west. The upshot could be a hard landing for China, despite official projections of 8-9 percent gross domestic product growth.
As many as 6,500 retail shops are estimated to be closed for good in the US by the end of the year. US consumers habitually slow their spending to a minimum for the entire quarter of the year. Many retailers who claw their way through a slow Christmas season will now be closing in greater numbers, synapsing their way up and down the food chain — to advertising agencies, newspapers and magazines, shopping mall owners and factories in Asia that supply them with gadgets, gizmos and finery.
The United States, Europe and Japan – all three of which are descending into recession – account for at least 56 percent of China's exports, which went negative in November for the first time in seven years. Although exports to emerging markets grew by 20 percent in the first 10 months of 2008, these economies are also slipping. China’s imports from other Asian countries are intermediate goods used as imports for export processing, meaning they will have little impact on the regional economies. China can be expected to face an export collapse in the first quarter of 2009, perhaps by as much as 19 percent to 20 percent from the cyclical high and a fall of perhaps 3 percent year on year for 2009, according to an estimate by Qu Hongbin, China chief economist for global banking for HSBC.
China's exporters are already in trouble, particularly in the export-driven Pearl River Delta. For more than a year, squeezed by rising labor costs and falling margins, manufacturers have been facing a mounting crisis. Now, as bankruptcies and store closures rise in the west, fears are rising that the credit facilities on which the Asian supply chain is built will be severely strained.
"All the decoupling theory is total bunk," says a top figure in Hong Kong's outsourcing industry. "People are holding out China as the locomotive that is going to pull the rest of the world through. But China is just one big factory export processing zone for low-cost goods, based on western demand and cheap credit. It isn't going to work."
The pace of western retailing bankruptcy is rising. The most recent collapse was KB Toys, a toy chain in the eastern United States that filed for protection on Dec. 11, saying it planned to hold going out-of-business sales at hundreds of stores. It has 4,400 full-time employees and 6,515 seasonal employees. In the same week, Woolworths, the venerable British chain, greeted its 100th anniversary year by announcing that it would appoint administrators in an attempt to sell its stores for cash.
In November the US electronics retailer Circuit City announced it would file for Chapter 11 protection and close 155 of its locations, leaving some 8,000 employees jobless. Spectrum Brands, which sells batteries, lawn care equipment, pet supplies, grooming products and many other items, was said by Morningstar, Inc. to be in serious distress. Although it was not filing for protection, Office Depot, which sources most of its supplies in Asia, announced on December 10 that it would close 126 stores and 33 distribution facilities in 2009.
Joseph Skrupa, editor in chief for RIS News, which follows the retail industry, told the Washington Post in December that an estimated 6,500 retail stores will close.
Consumer spending accounted for 72 percent of the US economy in 2007, built personal debt that ran to 133 percent of disposable income by the end of 2007. With the US economy headed down, average per capita bank credit card debt was US$5,710 as of November, the equivalent of two months average salary. As an example of how consumers stopped spending, toy traffic through the ports of Los Angeles and Long Beach, which handle about half of US consumer imports, has declined by 10.3 percent as measured by tonnage according to IHS Global Insight.
China makes nine of every 10 toys sold in American stores. In 2007 it exported US$14.2 billion worth of leather products, more than half the world's shoes, according to the US Department of Agriculture.
China and India between them produce well over half the world's textiles, according to the USDA. Consequently the shoe manufacturers, textile producers and toy makers of the Pearl River Delta, on whom a large extent of China's torrid prosperity has rested, face even more frightening times going forward than they have faced over the last two years.
Exacerbating the fact that there are fewer orders – and substantial questions whether the strapped or bankrupt retailers at the other end of the supply chain are going to be able to pay off what already has been shipped – is the credit crisis. Certainly, Hong Kong'sbanks are continuing to ratio credit despite the fact that the Hong Kong Monetary Authority has pourd almost HK$130 billion into the system since September Hong Kong dollar lending has virtually stopped, with loans going negative in October. Credit facilities are being withdrawn in China and Hong Kong as well, a growing problem for export-oriented companies.
This can be expected to play itself out with the loss of hundreds of thousands of jobs in export-oriented industries in China and other Asian countries, and growing concern over social unrest.
There is plenty of room for the leaders to get worried. According to a study of migrant workers reported by the highly respected Caijing Magazine, only a fraction of the unemployed have returned to their villages. Some 10 million peasant workers have lost their jobs, according to the report, but the more severe impact is expected after the spring festival, when the thousads of closed factories don't open up again.Riot police have already had to make their appearance in southern cities to contain laid-off — and unpaid — workers. The scenario is a vast army of angry jobless workers wandering the streets of once-prosperous southern China with little to eat and no prospects.
That could be the ghost of revolution past.
http://asiasentinel.com/index.php?option=com_content&task=view&id=1616&Itemid=590
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Ed
15 yrs ago
Posted by DahHKid on another thread
Saxo Bank Predicts 2009 Will Hit all Economic Lows
PRNewswire LONDON and COPENHAGEN December 17
Crude trading at $25. S&P 500 falls 50% to 500. China's GDP growth falls to zero. EURUSD falls to 0.95. Italy to leave the ERM. If Saxo Bank's 10 outrageous claims for the year ahead transpire, economic conditions will worsen dramatically in 2009. "The good thing is, overall, we predict 2009 will be a turning point because it can't get much worse" says Chief Economist David Karsbol.
LONDON and COPENHAGEN, December 17 /PRNewswire/ -- Crude trading at $25. S&P 500 falls 50% to 500. China's GDP growth falls to zero. EURUSD falls to 0.95. Italy to leave the ERM. If Saxo Bank's 10 outrageous claims for the year ahead transpire, economic conditions will worsen dramatically in 2009. "The good thing is, overall, we predict 2009 will be a turning point because it can't get much worse" says Chief Economist David Karsbol.
The Copenhagen-based online trading and investment specialist's predictions are an annual attempt to predict rare but high impact 'black swan' events that are beyond the realm of normal market expectations. Compiled as part of the bank's 2009 Outlook, the thought exercise this year present a dismal view of the global financial landscape.
Saxo Bank's Outrageous Claims for 2009:
1) There will be severe social unrest in Iran as lower oil prices mean that the government will not be able to uphold the supply of basic necessities.
2) Crude will trade at $25 as demand slows due to the worst global economic contraction since the great Depression.
3) S&P will hit 500 in 2009 because of falling earnings, vaporizing housing equity and increased cost of funds in the corporate sector.
4) The EU is likely to crack down on excessive government budget deficits in several member states, and Italy could live up to previous threats and leave the ERM completely.
5) The AUDJPY will drop to 40. The decline in the commodities markets will affect the Australian economy.
6) EURUSD will fall to 0.95 and then go to 1.30 as European bank balances are under tremendous pressure because of exposure to the faltering Eastern European markets and intra-European economic tensions.
7) Chinese GDP growth drops to zero. The export driven sectors in the Chinese economy will be hurt significantly by the free-fall economic activity in the Global Trade and especially of the US.
8) Pre-In's First Out. Several of the Eastern European currencies currently pegged or semi-pegged to the EUR will be under increasing pressure due to capital outflows in 2009.
9) Reuters/ Jefferies CRB Index to drop to 30% to 150. The Commodity bubble is bursting, with speculative excesses so large they have skewed the demand and supply statistics.
10) 2009 will see the first Asian currencies to be pegged to CNY. Asian economies will increasingly look towards China to find new trade partners and scale down their hitherto US-centric agenda.
David Karsbol, Chief Economist at Saxo Bank, comments:
"It is not even outrageous to call this the worst economic crisis ever. We have, regrettably, been rather precise in almost all predictions from last year. What used to be outrageous now seems to be the norm", says Karsbol.
"In a year when markets and economies have fluctuated more widely than ever before nothing seems out of the ordinary or impossible. We believe that 2009 will be equally unpredictable and therefore have made ten outrageous predictions largely focusing and what might happen to global indices and currencies. The good thing is, overall, we predict 2009 will be a turning point because it can't get much worse" says Karsb0l.
"In 2008 the S&P 500 has fallen well over 25% below its 1182 high of 2007, world oil prices got close to the predicted high of $175, and UK growth has turned negative. Who knows which of our 2009 forecasts will prove to be right but judging by previous years some of them most certainly will," he adds.
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Ed
15 yrs ago
This pulled up in my mailbox this am - diverge from the crisis for a few moments with one of the funniest Robin Williams gigs in history!!!
http://hk.youtube.com/watch?v=puMz1Q3E000&eurl=http://politicalirony.com/2008/11/30/robin-williams-on-obamas-election/
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Ed
15 yrs ago
Looking for someone to blame for the mess.....
Bush drive for home ownership fueled housing bubble
WASHINGTON: "We can put light where there's darkness, and hope where there's despondency in this country. And part of it is working together as a nation to encourage folks to own their own home."
- President George W. Bush, Oct. 15, 2002
The global financial system was teetering on the edge of collapse when Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, "scared the hell out of everybody."
It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Bush had agreed to pump $85 billion into the failing insurance giant American International Group.
The president listened as Ben Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.
Then his Treasury secretary, Henry Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.
"How," he wondered aloud, "did we get here?"
Eight years after arriving in Washington vowing to spread the dream of home ownership, Bush is leaving office, as he himself said recently, "faced with the prospect of a global meltdown" with roots in the housing sector he so ardently championed.
There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.
But the story of how the United States got here is partly one of Bush's own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.
From his earliest days in office, Bush paired his belief that Americans do best when they own their own homes with his conviction that markets do best when left alone. Bush pushed hard to expand home ownership, especially among minority groups, an initiative that dovetailed with both his ambition to expand Republican appeal and the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.
Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Bush chose to oversee them - an old school buddy - pronounced the companies sound even as they headed toward insolvency.
As early as 2006, top advisers to Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Bush and his team misdiagnosed the reasons and scope of the downturn. As recently as February, for example, Bush was still calling it a "rough patch."
The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.
"There is no question we did not recognize the severity of the problems," said Al Hubbard, Bush's former chief economic adviser, who left the White House in December 2007. "Had we, we would have attacked them."
Looking back, Keith Hennessey, Bush's current chief economic adviser, said he and his colleagues had done the best they could "with the information we had at the time." But Hennessey did say he regretted that the administration had not paid more heed to the dangers of easy lending practices.
And both Paulson and his predecessor, John Snow, say the housing push went too far.
"The Bush administration took a lot of pride that home ownership had reached historic highs," Snow said during an interview. "But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost."
For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security, a government retirement and disability benefits program. The housing market was a bright spot: Ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.
Lawrence Lindsay, Bush's first chief economic adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Bush meet housing goals.
"No one wanted to stop that bubble," Lindsay said. "It would have conflicted with the president's own policies."
Today, millions of Americans are facing foreclosure, home ownership rates are virtually no higher than when Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions of dollars.
As the economy has shed jobs - 533,000 last month alone - and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.
Never once, Paulson said in a recent interview, has Bush overruled him. "I've got a boss," he explained, who "understands that when you're dealing with something as unprecedented and fast-moving as this, we need to have a different operating style."
Paulson and other senior advisers to Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. "There is not any playbook," Paulson said.
The White House issued an unusually extensive, and highly critical, response to The Times article on Sunday, saying that it had shown "gross negligence" in its reporting and that the story "relies on hindsight with blinders on and one eye closed."
"The Times's 'reporting' in this story amounted to finding selected quotes to support a story the reporters fully intended to write from the onset, while disregarding anything that didn't fit their point of view," the statement said.
In recent weeks Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash - "Wall Street got drunk," he has said - and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie.
Last week, Fox News asked Bush if he was worried about being the Herbert Hoover of the 21st century. "No," Bush replied. "I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing."
A policy gone awry
Darrin West could not believe it. The president of the United States was standing in his living room. It was June 17, 2002, a day West recalls as "the highlight of my life." Bush, in Atlanta to introduce a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.
West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment - just the sort of creative public-private financing Bush was promoting.
"Part of economic security," Bush declared that day, "is owning your own home."
A lot has changed since then. West, beset by personal problems, has left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across the United States, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Bush's tour. "I just don't think what he envisioned was actually carried out," she said.
Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating home ownership is hardly novel; Bill Clinton's administration did it, too. For Bush, it was part of his vision of an "ownership society," in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.
But for much of Bush's tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put home ownership increasingly out of reach for first-time buyers like West.
So Bush had to, in his words, "use the mighty muscle of the federal government" to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.
Concerned that down payments were a barrier, Bush persuaded Congress to spend as much as $200 million a year to help first-time buyers with down payments and closing costs.
And he pushed to allow first-time buyers to qualify for government insured mortgages with no money down. Republican congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as West did. Many economic experts, including some in the White House, now share that view.
The president also leaned on mortgage brokers and lenders to devise their own innovations. "Corporate America," he said, "has a responsibility to work to make America a compassionate place."
And corporate America, eyeing a lucrative market, delivered in ways Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment. But Bush populated the financial system's alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.
Like minds on laissez-faire
The president's first chairman of the Securities and Exchange Commission promised a "kinder, gentler" agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general's report.
As for Bush's banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.
The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina's attorney general, said, "They took 50 sheriffs off the beat at a time when lending was becoming the Wild West."
The president did push rules aimed at requiring lenders to explain loan terms more clearly. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.
In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Bush's re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not complete the new rules until last month.
Today, administration officials say it is fair to ask whether Bush's ownership push backfired. Paulson said the administration, like others before it, "over-incented housing."
Hennessey put it this way: "I would not say too much emphasis on expanding home ownership. I would say not enough early focus on easy lending practices."
Kitty Bennett contributed reporting.
Rich Addicks/The Atlanta Journal-Constitution
Bush unveiled a plan to increase home ownership by members of American ethnic minorities in a speech in Atlanta in June 2002.
http://www.iht.com/articles/2008/12/21/business/admin.php?page=1
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Ed
15 yrs ago
Perhaps some people might find it cathartic to place the blame on someone for this mess... I think they feel impotent in the face of what is happening and there is some use to identifying the causes and discussing them.
Cheap money directed at housing combined with deregulation were directed by Bush and they have resulted in near economic collapse.
Causes of the crisis have been discussed endlessly on this thread - but I find this especially interesting because the catalyst has been identified.
As has been pointed out, this incompetent moron was elected not once but twice - so it is important to drive home the message that people think before they vote - because the consequences can be very dire if an idiot is put into the highest office on earth....
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Ed
15 yrs ago
None of this unexpected - but no less disturbing...
AIG CEO on TV last night would not guarantee that they would not be asking for more bail out money - and he must have mentioned 3x his concern about how impossible it is for corporations to get debt financing.
It's impossible to get debt financing because banks are extremely risk adverse in the best of times - and as you can see they know what is on the way... massive companies are on the way to bankruptcy.
Who can blame the banks for not lending?
Which brings us back to the bail out money. Banks have squirreled that away in mattresses and trillions have probably been wasted.
Which brings us back to - do we let it fall because there's no way to prop it up - and hold the trillions for a massive stimulus and recovery package?
Are we simply delaying the inevitable with these bail outs?
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Ed
15 yrs ago
Nice... http://img.iht.com/images/2008/12/23/edoliphant170mmweb64.jpg
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Ed
15 yrs ago
http://img.iht.com/images/2008/12/25/edtoles170mm.jpg
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Ed
15 yrs ago
At Washington Mutual, a relentless urge to approve any loan.... http://www.iht.com/articles/2008/12/28/business/wamu.php
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Ed
15 yrs ago
'Big picture' op-ed on why we are .... where we are
http://www.alternet.org/democracy/86973/america%27s_democratic_collapse/?comments=view&cID=924137&pID=923339
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Ed
15 yrs ago
Michael Lewis hits the nail on the head with this follow up on the crisis - nobody has come close to him on getting to the bottom of the causes of this....
This is an outstanding read and it indicts Wall Street, the SEC and the Ratings Agencies which are clearly rotten and incestuous to the core...
FINANCIAL LUNATICS?
The end of the world as we know it
Americans enter the New Year in a strange new role: financial lunatics. We've been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics had been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: For a long time now half the planet's college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence.
Good God, the world seems to be saying, if they don't know what they are doing with money, who does?" Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
Full Article http://www.iht.com/articles/2009/01/04/opinion/edlewis.php
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Ed
15 yrs ago
Picked this quote off a news site:
"There is a 55–45 percent chance right now that disintegration will occur." Igor Panarin, dean of the Russian Foreign Ministry's diplomat academy, predicting the demise of the United States by 2010
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Ed
15 yrs ago
No - Time Magazine is quoting him on their home page this morning and I am posting that on the forum.
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Ed
15 yrs ago
Including CNN, BBC, and particularly Fox... I tend to watch Al Jazeera news to get both sides of the story.
But lest we digress this thread is not about media - it is about the financial crisis.
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Ed
15 yrs ago
Absolutely.
I have read on a recent article (cant recall the source but I think one of the two below) how governments often in cahoorts with corporations have massaged rates of inflation for PR purposes (see how great job we are doing!) and for more sinister purposes (replace items in the inflation basket with items less prone to inflation to create a lower rate of inflation and pay workers less)
With regard to the current crisis very few are stating how dire the situation is - for obvious reasons. One must dig for the truth...
http://www.iht.com/articles/2009/01/04/opinion/edlewis.php
http://www.alternet.org/democracy/86973/america%27s_democratic_collapse/?page=entire
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Ed
15 yrs ago
Mark Haines tells it like it is on CNBC but recently he looks as if someone is standing next to him with a cattle prod waiting to zap him if he says the wrong thing... definitely some muffling going on there.
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Ed
15 yrs ago
Howdy - not sure what you are referring to - I am not anti American at all - I am and have been concerned well before this disaster with the direction that the US has been headed.
I would suggest that those who refuse to acknowledge the grave problems and speak up against them are anti American. Because failure to do so will bring this country down.
And look where we are....
You may not like reading reality checks like those below - I certainly do not because when the US screws up the world suffers.
What we have now is a product of greed, corruption and bad government in the US. If it's anti American to point this out then sorry to say but the US is doomed.
http://www.iht.com/articles/2009/01/04/opinion/edlewis.php
http://hongkong.asiaxpat.com/forums/think!/threads/122753/op-ed-of-the-year:-a-coup-detat-in-slow-motion/
We can put head to sand as we have done and end up in an economic cataclysm or we can discuss, acknowledge and hopefully deal with the problems and come out of this in a better place.
At the end of the day nobody wants Russia or similar leading the world - do we?
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Ed
15 yrs ago
2009 Will Be Very, Very Bleak
Nouriel Roubini
It is clear that 2008 was not a very good year, and it is official that the current recession started in December 2007. So how far are we into this recession that has already lasted longer than the previous two (the 1990 and 2001 recessions lasted eight months each)? I believe the U.S. economy is only half way through a recession that will be the longest and most severe in the post-war period. U.S. gross domestic product will continue to contract throughout 2009 for a cumulative output loss of 5% and a recession that will last close to two years.
Let us look at the picture in detail:
Personal Consumption
The resilient U.S. consumer started to give up the ghost in the third quarter of 2008, when for the first time in almost two decades, personal consumption contracted. With personal consumption making up over two-thirds of aggregate demand, the outlook for the U.S. consumer is at the center of the dynamics that will play out in the real economy in 2009.
In my view, personal consumption will continue to contract quite sharply throughout 2009 as a result of negative wealth effects from housing and equity market losses, the disappearance of home equity withdrawal from the second half of 2008, mounting job losses, tighter credit conditions and high debt servicing ratios (the debt to income ratio went from 70% in the 90s, to 100% in 2000, to 140% now). This retrenchment of the U.S. consumer will result in a painful rebalancing in the economy that will eventually restore the savings rate of a decade ago.
The wealth losses for households related to the fall in home prices are roughly $4 trillion so far, and are clearly bound to increase further as home prices continue to fall--eventually reaching the $6-8 trillion range (compatible with a 30-40% fall in home prices peak to trough). With a negative wealth effect of 6 cents on the dollar, the reduction in personal consumption could amount to a whopping $500 billion. And negative wealth effect from fall in equity prices--on the wake of a bleak 2009 for corporate profits--will also contribute to the contraction in personal consumption by an estimated $100 billion (compatible with a 25% contraction in the stock markets).
Housing Sector
The fourth year of housing recession is well on course.
Total housing starts have plunged from the 2.3 million seasonally adjusted annual rate peak of January 2006 all the way to the 625,000 SAAR of November 2008 (the last data point available), an all-time low for the time-series that started in January 1959. Single-family starts built for sale are down 75% from their Q4 2005 peak.
Comment On This Story
On the demand side, new single-family home sales are down 65% from their July 2005 peak. Both demand and supply of homes are therefore still falling very sharply, which does not bode well for inventories. Inventories are the mortal enemy of prices for any goods-producing sector, including housing.
Starts need to fall substantially below sales so that the excess supply in the housing market is reabsorbed. Inventories persist at record highs and the gap between one-family starts (for sale) and one-family sales is at levels that cannot promote a fast work-off of inventories. To put these numbers in perspective, compare this with a measure of vacant homes for-sale-only. Vacant homes for-sale-only were at 2.2 million in Q3 2008, an all-time high. In the decade between 1985 and 1995, it oscillated around 1 million units on average and 1.3 million units between 2001 and 2005. This implies that we have to deal with an excess supply that ranges between 0.9 and 1.2 million units, of which roughly 85% are single-family structures.
The sharp and unprecedented fall of starts might not have reached a bottom yet. In this economy-wide recession, weakness on the demand side is bound to persist, and we believe that supply will have to fall further, given also the great wave of foreclosures that is adding to the excess of supply in the market. I see starts falling another 20% from current levels and believe that home prices will not bottom out until the middle of 2010.
Labor Markets
With the continued credit crunch and significant cut-down in consumer and business spending, the monthly job losses will continue in the 400,000 to 500,000 and 300,000 to 400,000 range during the first two quarters of 2009 respectively, bringing the unemployment rate to 8% by mid-2009. The severe contraction in private demand until early 2010 will keep layoffs high and the unemployment rate elevated over 8%.
Economy-wide job cuts are expected, with big corporations and small enterprises, residential and commercial construction, financial services and manufacturing continuing to shed jobs at a strong pace. Moreover, with structural shifts in the economy since the last recession, job losses this time will be more severe in the service sector, including retail, business and professional services and leisure and hospitality. Unless the fiscal stimulus addresses the deficit problem for state and local government, job losses at the government level will also gain pace. In turn, income and job losses will further push up default and delinquency rates on mortgages, consumer loans and credit cards. Moreover, the loss of high-paying corporate and financial sector jobs will be a big negative for tax revenues over the next two years.
Layoffs are bound to continue thereafter as cost-cutting gains pace with the beginning of the (sluggish) recovery period in early 2010. Even as consumer demand might show some signs of recovery, firms, as in the past, will begin by hiring only part-time and temporary workers initially. The unemployment rate might peak at close to 9% in Q1 2010, almost two years after the recession began. However, the hiring freeze across industries that began in late 2007 will continue at least until 2010, causing discouraged workers to leave the work force and containing the extent of the spike in the unemployment rate. Further, the decline in labor utilization will add to the deflationary pressure in the economy. An aging labor force, lower capital spending and potential growth over the next few years might also result in lower productivity growth and an increase in the natural rate of unemployment.
Capital Expenditure
Firms have been drawing down inventories beginning in Q4 2008. As the slump in domestic and foreign demand and difficulty in accessing short-term credit persist over the next four quarters, business investment is bound to contract in double-digits throughout 2009. Industrial production, spending on equipment and durable goods will also remain in the red through 2009. Moreover, with a sluggish recovery in private demand even during 2010, firms will start building inventories and contemplate capital expenditure plans only at a slower pace.
Trade
Exports contraction that began in late 2008 will gain pace in 2009 as more and more emerging economies slip into slowdown following the G-7 countries. On the other hand, easing oil prices and secular downward trends in consumer spending and business investment will help imports to shrink. In fact, this might cause the trade deficit to contract in 1H 2009 since the contraction in imports might well exceed the decline in exports, thus containing any negative contribution of trade to GDP growth.
Dollar Outlook
The fate of the dollar in 2009 rests on the global growth outlook. After profit-taking on long dollar positions ends, and trading volumes pick up as investors return from their holidays, the dollar may temporarily recover its relative safe-haven status in H1 2009. Since markets have yet to fully appreciate the impact of the commodity slump and financial crisis on the rest of the world, risk appetite may collapse again on signs of a deeper- or longer than expected recession outside the U.S. Further de-leveraging of dollar-denominated liabilities could provide an additional boost to the dollar as a funding currency.
The bond-yield outlook could be a further source of strength: While the Fed is already at a zero interest rate policy, other central banks will cut rates further to stimulate growth, putting downward pressure on currencies like the euro.
Alternating with these upside risks to the dollar may be downside risks from 1) a supply crunch in commodities that lifts commodity prices and producers' economies, and 2) the inability of the market to absorb increased Treasury supply at low yields.
http://www.forbes.com/opinions/2009/01/07/recession-stimulus-spending-oped-cx_nr_0108roubini.html
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Ed
15 yrs ago
Article on the Bush legacy and the crisis. http://english.aljazeera.net/focus/thebushlegacy/2008/12/20081215181711926895.html
Not since 1929 have we had such a polarization of wealth in the US - ironically we shoot ourselves in the foot when we take away from the middle classes in the manner described in this article because ultimately their spending power is crushed which brings down the economy...
So much for the trickle down theory of economics... it's a load of garbage and we've been digesting this dogdoo for decades. And its now manifesting itself as the self serving lie that it is
The economy is driven by fair taxation across the board and rule of law - and using tax revenues to create the infrastructure required by business to grow - it is not driven by enriching the already wealthy by cutting taxes and neglecting infrastructure.
This is what happens when you have 8 years of the worst government the US has ever seen
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Ed
15 yrs ago
All very disturbing
AIG CEO recently implied in a recent statement that they would be back for more if the credit squeeze doesn't loosen its death grip.... banks are too concerned about shoring up their toxic positions to even think about funding companies who by the act of accepting bailout cash confirm they are in big big trouble... I have read that this is what is behind worsening problems as Citi.
As much as one tries to be optimistic and believe those who say all will be back on track in the second half, when one looks at the facts its very difficult to buy in...
My biggest concern is what is the worst case scenario? Are we looking at 'Mad Max'
The US is bleeding jobs exacerbating things and to top it off commercial mortgage problems are now manifesting themselves.
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Ed
15 yrs ago
It is complete madness that we have not moved off oil.
The cost of a gallon of gasoline is not a buck and change - or even 3 bucks and change when oil peaked at $150. It is MUCH MUCH higher.
You have to factor in the hidden costs of each tank of gas... work out the trillion spent on the Iraq War so far... the costs of defending the US against terrorist attack (which btw are related to oil and the presence of the US in the middle east)... the list goes on and on.
And then there are the ultimate costs that you cannot put a $ value on - thousands of dead and maimed US soldiers and civilians...
Then add to this the health costs related to people ingesting the toxins that are released when we breathe burned fossil fuels. And to top it off add in the costs of global warming - literally trillions - and then there is the possibility that we have already reached the tipping point on the environment - scientists are warning that if when the ice melts in the arctic that will release enough carbon to cause immediate catastrophic irreversible global temperature spikes.
I am sure there are many other costs that if added to the buck and a half a gallon would inflate the cost to 10 or 20x that number.
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Ed
15 yrs ago
Agreed - lets move this back on topic.
Bloomberg is speculating that Citi is about to be broken up.
Other financial stocks are taking a beating - something's up that we are not being told about....
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Ed
15 yrs ago
And what is the worst case prediction?
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Ed
15 yrs ago
Jeno > your comments have been deleted.
If some of these big banks come tumbling down no sane person will be laughing...
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Ed
15 yrs ago
HD - on the contrary, many in the media are biting their tongues and trying to talk the market up.
I would think that the government has issued a directive that 'it is in the national interest not to broadcast doom reports' and asked that media refrain.
When this crisis broke in the fall there was almost an overnight change in the commentary on the major business news programs. They obviously don't want to create self-fulfilling prophesy...
Just off an email with friend who was head of the bond division of a major bank in Asia - keep in mind he's not selling anything...
'I think in a few months we will also hear of more bankruptcies and companies unable to raise $ when their funding (bonds) come due in this part of the world. So, yes, all thesh*t has not yet hit the fan…I think.'
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Ed
15 yrs ago
Apparently it won't take months - this hot off the wire - Notel is bankrupt (and barely a mention of it on CNBC this evening)
http://www.bloomberg.com/apps/news?pid=20601087&sid=aEtTC7XRrK6Y&refer=home
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Ed
15 yrs ago
Banks lining up for more bailout - wonder how AIG is doing...
http://www.nytimes.com/2009/01/15/business/15bank.html?ref=business
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Ed
15 yrs ago
You might note that Nortel was a penny stock and the impact of the downturn (companies are not spending) has killed them - essentially they were left with no choice - and they are not re-organizing they are being busted up and sold off in a garage sale (I expect most of the jobs to go as most of their business units appear to be non-viable in this economy)
http://www.theglobeandmail.com/servlet/story/RTGAM.20090114.wnortelstaff0114/BNStory/Technology/home
When deciding how to react to this crisis this article, which was posted some time ago, surely raises some alarm bells.
Bank or America and Citi are on the ropes - I don't know exactly what it means if such companies are bankrupted but I am sure that is not a good place to go....
NEW YORK (Reuters) - The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.
Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.
"I think it would be worse than the depression," Whitehead said. "We're talking about reducing the credit of the United States of America, which is the backbone of the economic system." Whitehead encountered plenty of crises during his 38 years at the investment banking firm and was a young boy during the 1930s.
Whitehead warned the country's financial strength is at risk due to the sweeping demand for tax relief and a long list of major government spending plans.
"I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America," said Whitehead, who served as chairman of the Lower Manhattan Development Corp after the World Trade Center was destroyed during the September 11, 2001 attacks.
Whitehead, who helped make Goldman a top-tier Wall Street firm and led its international expansion, left in 1984 to become a deputy secretary of state under Ronald Reagan.
He warned that the country's record deficit is poised to balloon as the public calls on government for more support.
"Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds," he said. "Eventually U.S. government bonds would no longer be the triple-A credit that they've always been."
There are at least ten "trillion dollar problems," facing the United States, he said, including social security, expanding health insurance, rebuilding infrastructure and increased spending on green energy. At the same time, the public does not want to pay for it.
"The public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs -- all very costly and all done by the government," he said.
Large deficits can weaken the country's credit and increase its borrowing costs, which already constitute a significant part of funding to cover expenses. Whitehead said it could take "several years" for the current problems to be resolved.
Whitehead said he is speaking out on this topic because he is concerned no lawmakers are against these new spending programs and none will stand up and call for higher taxes.
"I just want to get people thinking about this, and to realize this is a road to disaster," said Whitehead. "I've always been a positive person and optimistic, but I don't see a solution here."
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Ed
15 yrs ago
On the topic of gold - actual physical gold - I've been informed that Bank of China are no longer selling taels of gold. I believe BOC and Hang Seng were the only two banks selling metal.
Maybe the rhino (Spiderman cartoons circa 1970's) has all the gold that he was busting into banks (thwarted by spidey) to build his suit of gold....
Anyway, the fact that they don't have any at BOC when a couple of months ago they did is rather disturbing...
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Ed
15 yrs ago
A reminder to those who would insult participants on the forums - please follow the rules - we are all friends here http://hongkong.asiaxpat.com/forums/rules.asp
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Ed
15 yrs ago
Everyone is wondering why the banks are not lending - I think we have our answer - they have no cash to lend.
Add to that the fact that the Tarp is quickly being sucked dry, trillions of dollars are pledged against bad debt, auto companies will be back in a couple of weeks + then theres the trillion dollar stimulus...
When does it end - and where does all this money come from? I can't see how other countries can fund this debt - surely their surpluses are being drawn down and even in good times would not cover these massive requirements...
http://www.time.com/time/business/article/0,8599,1871869,00.html
And why is it that we never see any of these non-lending bankers on the business channels to explain why it is they are not lending? I see everyone from Jack Welch to the CEOs of the auto companies appearing regularly so surely it should not be difficult to get some of these bankers on.
Could it be because what they have to say is not for public consumption?
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Ed
15 yrs ago
Paul Krugman: Wall Street voodoo
Old-fashioned voodoo economics - the belief in tax-cut magic - has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
To explain the issue, let me describe the position of a hypothetical bank that I'll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets - say, $400 billion worth - are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it's still operating, but the reality is that it has already gone bust. Its stock isn't totally worthless - it still has a market capitalization of $20 billion - but that value is entirely based on the hope that shareholders will be rescued by a government bailout.
Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don't want a repeat performance, Gotham has to be kept functioning. But how can that be done?
Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham's current shareholders - and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what's now supporting Gotham's stock price.
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: It seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, Resolution Trust Corp.; paid off enough of the banks' debts to make them solvent; and sold the fixed-up banks to new owners.
The current buzz suggests, however, that policy makers aren't willing to take either of these approaches. Instead, they're reportedly gravitating toward a compromise approach: moving toxic waste from private banks' balance sheets to a publicly owned "bad bank" or "aggregator bank" that would resemble the Resolution Trust Corp., but without seizing the banks first.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., recently tried to describe how this would work: "The aggregator bank would buy the assets at fair value." But what does "fair value" mean?
In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.
Now, maybe private buyers aren't willing to pay what toxic waste is really worth: "We don't have really any rational pricing right now for some of these asset categories," Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying "fair value," whatever that means, would be enough to make Gotham solvent again?
What I suspect is that policy makers - possibly without realizing it - are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as "fair value" purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word - nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover.
Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I'm wrong, but I suspect that taxpayers are about to get another raw deal - and that we're about to get another financial rescue plan that fails to do the job.
http://www.iht.com/articles/2009/01/19/opinion/edkrugman.1-410933.php
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Ed
15 yrs ago
Just because Obama is in charge one can't rule out the martial law/state of emergency scenario - remember JFK.. I doubt Rove and Cheney are playing checkers these days...
I am still grappling with what it means for governments to pledge trillions to back stop failed enterprises. Surely, if we don't end up in 'Mad Max' it will result in a dramatic drop in the standard living of wealthy countries?
And that means that we will be mired in years of no or more likely negative growth as we contract to levels commensurate with our ability to consume.
Searching for something positive but it's difficult to envision an acceptable outcome.
Quite the stage that has been set for Mr Obama...
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Ed
15 yrs ago
Watched an interesting interview with Jim Rogers who says that prosperity in the UK was driven first by North Sea Oil (which is nearly run out) and financial services which relocated to The City after Sarbanes Oxley pushed companies out of the US and are now collapsing.
Here's more on this on Bloomberg:
Jim Rogers says 'UK is Finished'
Jan. 20 (Bloomberg) -- The pound dropped to a record low versus the yen and the weakest level since 2002 against the dollar on concern the government will have to rescue more banks as the economy slips into its worst recession since World War II.
Jim Rogers, chairman of Singapore-based Rogers Holdings, said the “U.K. is finished” and investors should sell the currency. Commonwealth Bank of Australia said there was a high risk of a cut to the country’s credit rating outlook and lowered its pound forecast. Prime Minister Gordon Brown authorized a 100 billion pound ($142 billion) bailout for banks.
“I would urge you to sell any sterling you might have,” said Rogers. “It’s finished. I hate to say it, but I would not put any money in the U.K.” Rogers correctly predicted the start of the commodities rally in 1999.
The pound slid to 127.44 yen, the weakest since at least 1971, as of 2:23 p.m. in Tokyo from 130.71 yen yesterday in London, according to data compiled by Bloomberg. It declined 2 percent to $1.4133, the lowest since March 2002, and last traded at $1.4185. The currency slid 1.1 percent to 91.58 pence per euro.
Rogers said the currency will fall below its record low of $1.0520 reached in February 1985.
Yesterday’s package to stabilize the financial sector comes after October’s 50 billion pound bank recapitalization program, which includes a 250 billion pound bank credit line.
Commonwealth Bank of Australia, the nation’s biggest bank, lowered its forecast for the pound to $1.50 by the end of June from a previous estimate of $1.60.
U.K. debt may now be greater than forecast due to the additional bank bailout plans announced by the government since the publication of the government’s pre-budget report on Nov. 24, wrote Sydney-based Richard Grace, chief currency strategist at Commonwealth Bank in a research report today.
http://www.bloomberg.com/apps/news?pid=20601087&sid=agxlt5ZPtyLA&refer=home
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Ed
15 yrs ago
I respectfully disagree.
If the US defaults China implodes - in fact I believe the entire world economy implodes and we will almost certainly have the 'Mad Max' scenario.
I have no idea what world leadership would look like when we emerged from what would be an utter catastrophe but I am quite certain that the country with the most nuclear weapons can never be considered irrelevant...
And on that pleasant note, I shall retire to my box of Molson that is icing nicely and toast Barrack Obama. Its like New Year all over again.
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Ed
15 yrs ago
I've been advised by someone with 20 years in the bond markets that if the US or any other major economy defaults that it would be wise to be holding physical gold because it is likely that in addition to the massive global depression that will result, there is almost certainly going to be unrest in some countries and violent regime change in others.
I do not think you can unplug the biggest economy and expect that it will be business as usual within a year or two. If the US economy crashes it will take the world down a vortex because it will result in tens of millions being unemployed around the world.
I dont think it will be the end of the world economy but it will go beyond messy to a situation that I think would best be described as dangerous.
As for the nuclear issue, who says Obama will be in control if the US economy collapses...
Obviously nobody knows what could happen because it's never happened - but I go back to the article penned by the former Goldman chief who says this has the potential to be far worse than the Great Depression.
Enough of the doom and gloom - how about some best case scenarios?
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Ed
15 yrs ago
Agree - we are not going back to bartering skins and beads... I think the 'Mad Max' connotation would refer more to political unrest vs total anarchy.
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Ed
15 yrs ago
I wonder when there will be some criminal charges laid for such activities - surely this must be classified as fraud?
I saw that Mr Thain actually asked for 30 million bonus (not 10 as originally reported).
Recall Anderson Cooper 360's Top Ten Villains of the crisis - the media should jump on this and publish the names of those who handed out these bonuses - and shame them into getting the money back
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Ed
15 yrs ago
Jon Stewart on the crisis - amusing as usual http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=215925
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Ed
15 yrs ago
And for a serious link - it would appear the only solution is nationalizing the banks... note Hank Paulson's role in causing this mess... not sure if he is a stupid clown or just plain greedy but he had no business being involved in the Tarp decisions - recall how he initially rejected the notion of diluting shareholders in return for bail cash....
http://www.time.com/time/business/article/0,8599,1874702,00.html
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Ed
15 yrs ago
This would be what you would call .... leadership. It is refreshing to see a politician for once do 'the right thing' I also understand anti-trust legislation is on the way to break up the concentration of media groups into the hands of few.
Obama calls Wall Street bonuses 'shameful'
WASHINGTON: President Barack Obama branded Wall Street bankers "shameful" on Thursday for giving themselves nearly $20 billion in bonuses as the economy was deteriorating and the government was spending billions to bail out some of the nation's most prominent financial institutions.
"There will be time for them to make profits, and there will be time for them to get bonuses," Obama said during an appearance in the Oval Office with Treasury Secretary Timothy Geithner. "Now's not that time. And that's a message that I intend to send directly to them, I expect Secretary Geithner to send to them."
It was a pointed — if calculated — flash of anger from the president, who frequently railed against excesses in executive compensation on the campaign trail. He struck his populist tone as he confronted the possibility of having to ask Congress for additional large sums of money, beyond the $700 billion already authorized, to prop up the financial system, even as he pushes Congress to move quickly on a separate economic stimulus package that could cost taxpayers as much as $900 billion.
This week alone, American companies reported as many as 65,000 job cuts, and public anger is rising over reports of profligate spending by banks and investment firms that are receiving help from the $700 billion bailout fund. About half of that $700 billion is still available, but the new administration has yet to announce how it will use it, and many analysts think it will take far more money to stabilize the banking system.
Should Obama have to go to Congress to seek more money for the bailout fund to avert the failure of more banks, he would most likely encounter opposition within both parties and demands for tighter restrictions on pay for executives of institutions that receive government assistance.
Geithner has already signaled a willingness to impose stricter compensation limits as part of a revamped approach to dealing with the banking crisis, but with his strong words on Thursday, Obama seemed intent on reassuring Congress and the public that he would step up the pressure on bankers before granting them additional assistance.
Obama was reacting to a report by the New York State comptroller that found financial executives had received an estimated $18.4 billion in bonuses for 2008, less than for the previous several years but the same level of bonuses as they received in 2004, when times were flush.
"That is the height of irresponsibility," Obama said. "It is shameful. And part of what we're going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility."
The Obama administration and lawmakers have begun to consider ways to control executive pay; the bailout fund, known as the Troubled Asset Relief Program, or TARP, would be the main vehicle for exerting such control. The administration of former President George W. Bush issued guidelines last October to try to control executive pay at companies receiving government help, but so far they have done little to curb large salaries.
During his confirmation hearings, Geithner said the administration is preparing rules that would require executives at companies receiving taxpayer money to agree that any compensation above a certain amount — he did not specify how much — be "paid in restricted stock or similar form" that could not be liquidated or sold until the government had been repaid.
Some lawmakers, meanwhile, have said they are considering so-called "clawback" provisions that could be invoked by the government to take back bonuses and executive pay from officials at companies that encountered problems.
In the meantime, public outrage is already forcing some companies to rein in their lavish spending. John Thain, the former Merrill Lynch executive who was forced out of Bank of America, said this week he would reimburse Bank of America for an expensive renovation of his office that included an $87,000 area rug and $35,000 commode.
But it took the urging of the Obama administration to force Citigroup, which received an infusion of taxpayer funds last year, to abandon plans to buy a $50 million corporate jet. On Thursday, Obama made reference to the jet, without singling out Citigroup by name; his remarks came one day after the president met at the White House with business leaders, including Richard Parsons, the new chairman of Citigroup.
On Capitol Hill, Senator Christopher Dodd of Connecticut, the chairman of the Senate Banking Committee, issued his own warning on Thursday, saying companies would be summoned to Capitol Hill if taxpayer money was involved.
"Whether it was used directly or indirectly, this infuriates the American people and rightly so," Dodd said. "So I say to anyone else who does it, if you do it, I'm going to bring you before the committee."
There is also political pressure to rein in pay in industries beyond banks and investment firms. The pressure reflects the substantial disparities between pay increases for senior executives, the low rate of wage growth for workers and the frequent disconnect between compensation and the long-term strategic success or failure of corporations.
Obama's message on Thursday was reinforced by Vice President Joseph R. Biden Jr., who pledged in an interview with CNBC and The New York Times that the government would spend the remaining $350 billion of the troubled assets money "wisely and prudently and transparently."
Biden said that he, like the president, was outraged by reports of large bonuses going to Wall Street executives.
"I'd like to throw these guys in the brig," he said. "They're thinking the same old thing that got us here, greed. They're thinking, 'Take care of me.' "
http://www.iht.com/articles/2009/01/29/business/30obama.php
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Ed
15 yrs ago
Note the last comment....
This fear is exactly why the investment advice that we have provided our subscribers gains of over where Investors should park their money:
a) Currencies.
For now, the dollar is the safe haven currency. I disbelieve recent strength in "commodity currencies" like the Australian and New Zealand dollar: with an excess supply of goods, there is NO reason to expect demand for commodities to rise strongly. Equally, the yen will remain strong until risk appetite has returned and investors re-visit multi-currency carry trades.
b) Commodities.
Avoid them for the same reason that I am cautioning you against buying commodity currencies. The only commodity worth considering is gold as a safe haven.
c) Stock markets
If you agree with my assessment of the global Economic Time, and thus agree with my key investment objective of wealth protection, then do NOT play around in stock markets.
I know that many people perceive there to be great value out there. So do I, but I also would add that this is value at risk. There is plenty of bad news not yet factored into markets.
For instance, the low PE ratio is going to rocket once the "E" sails south yet again, so that destroys the argument that there is great value out there.
d) Bank deposits
This is the BIG difference to previous crises: this time it is different in that people don't really trust the banks in which they have put their money. Indeed, recent news on the shenanigans of office decorations and yet another corporate jet at major banks supports this suspicion.
Thus, if your bank is not government-guaranteed, find one that is. Equally, even if it is government-guaranteed, read the fine print and see if your money really is safe.
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Ed
15 yrs ago
That came off Asian Sentinel website...
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Ed
15 yrs ago
I think the relevant question regarding bank guarantees on deposits is when will you get the money in the event of a bank insolvency.
If everything goes bad and banks are failing I can't imagine everyone will get their cash quickly...
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Ed
15 yrs ago
If one bank is failing I would assume there would be quick action - but if there were failures across the board....?
At the end of the day IMHO here's the situation. The world has perhaps at least 25% overcapcity/overinvestment in everything - shopping malls, factories, etc etc etc.... as a product of cheap and easy money since Bush turned on the spigot during the last recession.
All of this oversupply carries over to the the labour force - too many employees at all levels from people in the car factories in the US, people in the toy factories in China, MBA's, lawyers, bankers etc... etc...
I believe that it takes at least 2% growth to absorb new entrants in the job market and maintain a healthy unemployment rate.
If we assume our labour supply is oversupplied by double digits then what rate of growth (once we we have growth) is required to generate jobs for those who have lost them and those who are entering the work force?
We will never see the rates of growth we have seen in the last 7 years because it was all false.
How do we generate growth in the near term when we are readjusting the labour pool downwards by hundreds of thousands each month - and those who lose their jobs are unable to pay their mortgage/car/student loan/credit card compounding the banking problem - which further reduces consumer spending
Take all this to the logical conclusion and where does that leave you?
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Ed
15 yrs ago
Paul Krugman: Teetering on the edge
A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate here in the U.S. about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.
It's as if the dismal economic failure of the last eight years never happened - yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there's a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.
Somehow, Washington has lost any sense of what's at stake - of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.
It's hard to exaggerate how much economic trouble we're in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the U.S., but around the world.
Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving - a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, because they aren't selling enough to use the capacity they have. And exports, which were one of the U.S. economy's few areas of strength over the past couple of years, are now plunging as the financial crisis hits America's trading partners.
Meanwhile, our main line of defense against recessions - the Federal Reserve's usual ability to support the economy by cutting interest rates - has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.
It's no wonder, then, that most economic forecasts warn that in the absence of government action we're headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that "absent a change in fiscal policy ... the shortfall in the nation's output relative to potential levels will be the largest - in duration and depth - since the Depression of the 1930s."
Worst of all is the possibility that the economy will, as it did in the '30s, end up stuck in a prolonged deflationary trap.
We're already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.
As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.
And deflationary traps can go on for a long time. Japan experienced a "lost decade" of deflation and stagnation in the 1990s - and the only thing that let Japan escape from its trap was a global boom that boosted the nation's exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?
Would the Obama economic plan, if enacted, ensure that America won't have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that's why the efforts of Republicans to make the plan smaller and less effective - to turn it into little more than another round of Bush-style tax cuts - are so destructive.
So what should Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.
It's time for Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation's future at risk. The U.S. economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.
http://www.iht.com/articles/2009/02/06/opinion/edkrugman.1-424175.php
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Ed
15 yrs ago
I noticed an article that I-Level has $5B in debt to roll over and nobody will touch that... You are right - there are many big names that will not be able to obtain refinancing because the banks doubt their ability to repay as consumer demand is non-existent.
Not good.
I disagree that Obama is using the money to reward people - where did you get that info? I understand that they are being very transparent in where the money goes and that there are details online.
All I am hearing from the GOP is the usual mantra of slash taxes. Slashing taxes does nothing for someone with no job. And slashing taxes was tried - under Bush - and look where that got the US - and the world.
I suspect the GOP had it their way there would be no taxes whatsoever and people would pay for everything themselves (i.e. privatization). Not bad if you are a multi-millionaire living in a gated community but ultimately destructive for the country (see the crumbling infrastructure and terrible public education system as examples of what happens when taxes are too low or tax money is wasted on making a better bomb).
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Ed
15 yrs ago
Congratulations George W. Bush and Dick Cheney. What a fantastic job you have done ruining the world...
IMF Chief Says Nations in 'Depression'
International Monetary Fund chief Dominique Strauss-Kahn said the world's advanced economies -- the U.S., Western Europe and Japan -- are "already in depression," and that the IMF could slash its global growth forecasts further. The "worst cannot be ruled out," he said.
The IMF managing director's comments to reporters after a speech in Kuala Lumpur, Malaysia, represent the most dire estimate thus far of the state of the global economy by a major political figure, and were far more pessimistic than forecasts released by the IMF as recently Jan. 28.
Political figures generally avoid using the word depression because of the association with the Great Depression of the 1930s, when unemployment hit 25% in the U.S. and economic output fell even more steeply. Last week, when British Prime Minister Gordon Brown used the word "depression" to describe the global economy, his aides quickly said it was a slip of the tongue.
In the U.S., chief White House economic adviser Lawrence Summers said that while the economic situation was serious, it wasn't as bad as Mr. Strauss-Kahn seemed to suggest.
"We were really in a very different situation than" the Great Depression, he said on ABC television's "This Week with George Stephanopoulos."
Since the events of the 1930s, there hasn't been a widely accepted definition of economic depression.
Former IMF Chief Economist Simon Johnson, a professor at MIT's Sloan School of Management, said the term refers to a significant contraction that lasts around five years. Under that definition, he said, Japan during the 1990s could have been classified as having been trapped in a depression.
Whatever the definition, by using the word "depression," Mr. Strauss-Kahn, a 59-year-old former French finance minister who has worked for decades on economic issues, has achieved shock value.
That could increase political pressure on national leaders on at least two fronts, Mr. Johnson and several IMF officials said.
The IMF has been campaigning for months to get governments in many countries to boost fiscal spending by about two percentage points to fight the global downturn. It has recently pressed governments again to repair their banking systems, even at a steep cost.
But it has been frustrated by what it feels is an inadequate response, especially in Europe, where governments worry that additional spending will lead to unmanageable inflation. U.S. plans have brought more applause by IMF officials.
The IMF also has also begun to campaign to double its lending war chest to $500 billion, from $250 billion. The declaration of a depression could help Mr. Strauss-Kahn pressure reluctant IMF board members to pitch in and fund that plan. The IMF is close to finalizing a deal with Japan for a $100 billion loan that could be tapped in emergencies, and plans to call on other countries with large reserves, such as China and Saudi Arabia, to make emergency loans available too.
In addition, the IMF is considering issuing bonds for the first time in its history. It's likely that such bonds would be sold only to governments or central banks; in that way, they would become part of those nations' official reserves. The holders of the bonds could sell them to other nations, though probably not on the open market. That would make the bonds a more liquid version of loans to the IMF.
Issuing bonds is seen as a more controversial measure by some IMF members, especially the U.S., Germany and the Netherlands, which prefer to keep the IMF on a tighter leash by limiting its ability to lend.
http://online.wsj.com/article/SB123412011581660991.html?mod=googlenews_wsj
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Ed
15 yrs ago
Couldn't agree more. From the beginning of what is now an economic depression, my instinct said we cannot prevent this crash and that the best medicine was to take the pain and start over.
Some will say oh yes and we will have 25% unemployment if we do that. Well, we'll probably still have double digit unemployment - but it will only be delayed.
And in the meantime we'll have piled on trillions more debt...
There is a simple analogy for this - Mr X buys a Mercedes, a kickass flat in Repluse Bay, and maxes out 3 credit cards buying his wife and mistresses LV bags, Chanel dresses and fancy Bulgaria watches. He gets so in over his head that he cant make his payments and is insolvent.
Does his bank say hey X, sorry to hear you can't make your payments - here's a credit line of another 10 big ones - go buy a new car and some more bags buddy.
Of course not - Mr X loses his pad, his car and his babes. And he puts his back into the plow and he starts all over. And hopefully this time around he understands that living beyond ones means can have dire consequences.
For a complete and realistic ongoing analysis of the depression watch Jon Stuarts bits on ClusterF... to the Poor House. http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=217677
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Ed
15 yrs ago
When I need a laugh I turn on Fox News (formerly incorporated as Pravda until it lead to the collapse of another empire at which time it applied for a back door listing and was reinvented as Fox) and the presenters in their in-depth analysis claim that obama and his team are idiots and will sink the economy....
Funny thing, isn't the economy already sunk?
I too think that no amount of bailout money will save this - and I have always been inclined to think we step away, let it go and start over (see posts a mile up this thread).
But politically it would be suicide to admit defeat and do nothing.
Further I am not sure it even matters that they throw cash at this - the world is bankrupt already - I dont see how throwing more money on the fire makes any difference. Bankrupt is bankrupt weather its 15 trillion or 20 trillion.
I am not sure we make it any worse by trying to solve it.
You battle to the end regardless of if you are an individual, a small or large business or the leader of the world - otherwise you are a quitter.
If I recall this was started by the Bush genius policy of low taxes, less regulation and endless money at very low interest rates....
Al Gore warned of the darkening sky in his book Assault on Reason some years ago - at the time I posted this on our home page with a recommendation to read - he didn't call the specifics but he did point out the dangers of the Republican regime and the stupidity/ignorance movement ... and this was not a Bush-specific deal... lets not forget who McBush chose for his running mate...
Excerpt from Gore's book here http://www.time.com/time/nation/article/0,8599,1622015,00.html
Enough of my rant - off to see who's got gold in stock this morning so I can complete my p-diddy necklace.
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Ed
15 yrs ago
Give us your money or the money you gave us will be worth nothing.... (gotta make a bigger necklace... gotta make a bigger necklace....)
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Ed
15 yrs ago
It is rather difficult to force complete change when the GOP's position is that the solution to the problem is tax cuts (Bush's tax cuts + his deregulation policy + easy money + stupidity lead to this economic depression in the first place - and history shows that tax cuts do not stimulate in recessionary times).
Either you compromise or they filibuster the senate vote (cutting off their nose to spite their face) and the brittle economy shatters into a million pieces.
At the end of the day you cannot make a circle a square - Obama is in a lose lose lose situation because there is no solution.
Even Einstein could not find a solution. We are bankrupt as simple as that.
Bush created it - he had his chance to fix it and it was a joke - and its an even bigger joke when the GOP start throwing darts at Obama and clattering on like so many donkeys - they started it, they had their shot - THEY FAILED so they can sit in the stands like the rest of us and watch the game.
That said, Obama will not be able to fix it.
He and his team will do their best but in the words of the former chairman of Goldman - I am an optimistic person by nature but try as I might I can see no way out of this. It potentially could be worse than the 1930's.
So the government tries its best to make a circle a square - with minimal chances of success - but you try.
The alternative is to let it fall to pieces - perhaps that is the way to go but as I have said, you cannot be seen to give up.
Can you imagine the donkey clatter if Obama were say 'Sorry but we've looked at this and we have no ideas so we will let things implode and start again from ground zero.'
Political suicide that would be
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Ed
15 yrs ago
At the end of the day if you ask 10 experts they will all have different suggestions.
But I suspect that if we tried each suggestion we'd have the same conclusion - we cannot make a circle a square...
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Ed
15 yrs ago
Ready for More Bad News?
In the past week, the stock market reacted erratically to two huge government actions intended to shore up economic confidence. As this five-day chart of the Dow Jones industrial average shows, stocks rallied last Thursday and Friday as a deal over fiscal stimulus crystallized. The mere anticipation of the passage of an $800 billion-plus stimulus package was enough to get people whistling "Happy Days Are Here Again." But on Tuesday, stocks surrendered most of those gains after Treasury Secretary Tim Geithner laid out the latest plan to stabilize the faltering financial industry.
What accounts for bipolar response? These were twin, aggressive efforts to deal with the woes affecting the whole economy and the pathetic financial sector. Why would Geithner's Treasury plan worry Wall Street while the stimulus plan didn't? As a public speaker, Geithner is no Obama. Geithner could learn to be more upbeat, but that wouldn't be useful. Investors have lost faith in the financial system precisely because policymakers and executives engaged in the classic post-bubble reaction of promising a swift return to profitability. (In my forthcoming e-book, Dumb Money, I dub the realization that the titans of finance were a bunch of clueless oafs "The Slow Unmasking.")
Geithner is realistically pessimistic about the economic crisis while the rest of Washington—even President Obama—hasn't caught on to how bad it is yet. From the rhetoric surrounding the stimulus bill, you'd think the American economy is already stabilized, able to breathe on its own, and ready to get up and start walking. The bill itself is called the Economic Recovery and Reinvestment Plan. Its success will be measured, Obama noted in his press conference last night, through positive milestones, most notably the saving or creation of 4 million jobs. That number, which he used six times, was the justification for the size of the package and its urgency: "It's important for us to have a bill of sufficient size and scope that we can save or create 4 million jobs." Obama might want to retire that line, for this reason. The takeaway: Things are tough and might get somewhat worse. But this plan is a plan for recovery and job creation.
Geithner struck a different tone in his speech. The patient he diagnosed is nowhere near ready for ambulatory care or physical therapy. Rather, it's struggling to breathe without life support. Worse, it is still in danger of infecting the whole hospital. The financial sector, pro-cyclical on the way up—easy money begat more easy money—is also pro-cyclical on the way down. "Instead of catalyzing recovery, the financial system is working against recovery," he noted.
For Geithner, the plan is more about stabilization and triage rather than recovery. Look at the language he uses. The initiative's Web site is FinancialStability.gov. "We're going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term," Geithner said. Merely stabilizing the patients under his care, Geithner said, would be an expensive and lengthy process. "This strategy will cost money, involve risk, and take time," he said. Even when the course of treatment is complete, a recovery may still be a long way off. "As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation." (Here's the fact sheet.) The takeaway: The financial sector is still in meltdown. The best we can hope for is that these hundreds of billions of dollars in new spending and support will help stabilize things.
The great challenge for Obama now is that the economy at large is beginning to resemble the financial sector. The latest readings on job losses, auto sales, and overall economic growth show an economy that is spiraling downward. Politicians may be hoping that the economy is like a bungee-cord jumper, who, after experiencing a sickening drop, experiences great relief as he bounces back sharply. But they might want to temper the promises they make about recovery. Many economists believe we need a bigger stimulus package, not a smaller one. Obama's rhetoric about recovery may be reassuring, but, at this point, Geithner's pessimism is more credible.
http://www.newsweek.com/id/184266
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Ed
15 yrs ago
Brilliant interview with Roubini
It is pretty much consensus now that 2009 will be a zero growth year for the world economy (something that you forecast well in advance). It seems that the major risk for the following years is having a lost decade of Japanese-style stagnation but on a worldwide basis. How are the governments in US and Europe faring so far in their effort to avoid that?
Marco, Sao Paulo
Nouriel Roubini: To avoid a Japanese style multi-year L-shaped near-depression or stag-deflation (a deadly combination of stagnation, recession and deflation) the appropriate, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents (households and non-financial companies) is necessary.
The eurozone is well behind the US in its efforts as: a) the ECB is behind the curve in cutting policy rates and creating non-traditional facilities to deal with the liquidity and credit crunch; b) the fiscal stimulus is too modest as those who can afford it (Germany) are lukewarm about it and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it as they already have large budget deficits; c) there is lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions.
The U.S. has done more (with its aggressive monetary easing and large fiscal stimulus putting it ahead) but two key elements are key to avoid a near-depression and still missing: a proper clean-up of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks; and a more aggressive and across-the-board solution to the unsustainable debt burden of millions of insolvent households.
Thus, I would say the L-shaped near-depression scenario is possible.
FULL INTERVIEW: http://www.ft.com/cms/s/0/89829f7a-f1d1-11dd-9678-0000779fd2ac.html?nclick_check=1
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Ed
15 yrs ago
Jon Stuart on the crisis....
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=217691
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=217702
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Ed
15 yrs ago
How Banks Are Worsening the Foreclosure Crisis
The bad mortgages that got the current financial crisis started have produced a terrifying wave of home foreclosures. Unless the foreclosure surge eases, even the most extravagant federal stimulus spending won't spur an economic recovery.
The Obama Administration is expected within the next few weeks to announce an initiative of $50 billion or more to help strapped homeowners. But with 1 million residences having fallen into foreclosure since 2006, and an additional 5.9 million expected over the next four years, the Obama plan—whatever its details—can't possibly do the job by itself. Lenders and investors will have to acknowledge huge losses and figure out how to keep recession-wracked borrowers making at least some monthly payments.
So far the industry hasn't shown that kind of foresight. One reason foreclosures are so rampant is that banks and their advocates in Washington have delayed, diluted, and obstructed attempts to address the problem. Industry lobbyists are still at it today, working overtime to whittle down legislation backed by President Obama that would give bankruptcy courts the authority to shrink mortgage debt. Lobbyists say they will fight to restrict the types of loans the bankruptcy proposal covers and new powers granted to judges.
The industry strategy all along has been to buy time and thwart regulation, financial-services lobbyists tell BusinessWeek . "We were like the Dutch boy with his finger in the dike," says one business advocate who, like several colleagues, insists on anonymity, fearing career damage. Some admit that, in retrospect, their clients, which include Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM), would have been better off had they agreed two years ago to address foreclosures systematically rather than pin their hopes on an unlikely housing rebound.
In public, financial institutions insist they've done their best to prevent foreclosures. Most argue that giving bankruptcy courts increased clout, known as cramdown authority, would reward irresponsible borrowers and result in higher borrowing costs. "What we're trying to do now is target the bill to make it as narrow as possible," says Scott Talbott, a lobbyist for the Financial Services Roundtable. On the defensive, the industry nevertheless benefits from one strain of popular opinion that home buyers who took on risky mortgages—even if the industry pushed those loans—don't deserve to be rescued.
AN INDUSTRY IN DENIAL
However the skirmish ends, the industry's contention that it has done as much as possible to limit foreclosures seems hollow. Some statistics it cites appear to be exaggerated. Even pro-industry figures such as Steven C. Preston, a Republican businessman who headed the Housing & Urban Development Dept. late in the Bush Administration, concede that many lenders have dragged their heels. "The industry still has not stepped up to the volume of the problem," Preston says. One program, Hope for Homeowners—which Bush officials and banks promised last fall would shield 400,000 families from foreclosure—has so far produced only 25 refinanced loans.
Meanwhile, an already glutted market sinks beneath the weight of more foreclosed homes. Borrowers whose equity has evaporated have nothing to tap into if the recession costs them their jobs. Some lawmakers and regulators are calling for a foreclosure moratorium. "People are falling through the cracks," Preston says. "That's bad for communities, bad for the individuals losing their homes, and bad for investors."
In early 2007, as overextended borrowers began to default on too-good-to-be-true subprime mortgages, housing experts sounded an alarm heard throughout Washington. Christopher Dodd (D-Conn.), chairman of the Senate Banking Committee, wanted to push a bill requiring banks to modify loans whose enticingly low "teaser" interest rates soon give way to tougher terms. But he knew that with Republicans strongly opposed, he lacked the muscle, according to Senate aides. So Dodd did what politicians often do. He convened a talkfest: the Homeownership Preservation Summit.
FULL STORY http://www.businessweek.com/magazine/content/09_08/b4120034085635.htm?chan=top+news_top+news+index+-+temp_top+story
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Ed
15 yrs ago
Indeed this is The World of AsiaXPAT, it is the real world... an escape from the illusion of that surrounds us. Without we are...... nothing.
Back to the Crisis discussion... this from the world's greatest newspaper (well, FT gives it a go)
Someone asked what the worst case scenario was some time ago - the following two articles given an indication of possibilities...
I think top economist Krugman hits the nail on the head - it is indeed rich that the GOP's solution is tax cuts...
David Brooks: The worst-case scenario
Between 1990 and 2007, the total mortgage debt held by Americans rose from $2.5 trillion to $10.5 trillion. This rise was part of a societal credit bubble that burst in 2008. To cushion the pain of that collapse, federal authorities decided to replace private debt with public debt.
In 2008, the Bush administration increased spending by about $1.7 trillion, and guaranteed loans, investments and deposits worth about $8 trillion.
In 2009, the Obama administration spent $800 billion on a stimulus package, $1 trillion on a second round of bank bailouts and committed another trillion on health care reform and other bailout plans.
Americans generally welcomed the burst of public activism. In "Democracy in America," Alexis de Tocqueville wrote about what happens to a people beset by anxiety: "The taste for public tranquility then becomes a blind passion, and the citizens are liable to conceive a most inordinate devotion to order."
In normal times, Americans would have been skeptical of proposals to double or triple the size of federal programs, but amid the economic fear, that skepticism fell away.
Wall Street traders hungered for a huge federal bailout replete with strings. Economists produced models that assumed that government could efficiently spend huge amounts of money, and these models were accepted.
The Obama administration was staffed with moderates who found that there was no reward for moderation. Liberals attacked them for being tepid. Republicans attacked them because it was enjoyable to see Democrats attacked.
Over time, the administration drifted left and created what you might call Split Level Technocratic Liberalism.
President Barack Obama defended spending initiatives in broad terms. He had enormous faith in the power of highly trained experts and based his arguments on models and projections.
The actual legislation was cobbled together by Democratic committee chairmen, often acting beyond the administration's control.
During 2010, the economic decline abated, but the recovery did not arrive. There were a few false dawns, and stagnation.
The problem was this: The policymakers knew how to pull economic levers, but they did not know how to use those levers to affect social psychology.
The crisis was labeled an economic crisis, but it was really a psychological crisis. It was caused by a mood of fear and uncertainty, which led consumers to not spend, bankers to not lend and entrepreneurs to not risk.
No amount of federal spending could change this psychology because uncertainty about the future remained acute.
Essentially, Americans had migrated from one society to another - from a society of high trust to a society of low trust, from a society of optimism to a society of foreboding, from a society in which certain financial habits applied to a society in which they did not.
In the new world, investors had no basis from which to calculate risk.
Families slowly deleveraged. Bankers had no way to measure the future value of assets.
Cognitive scientists distinguish between normal risk-assessment decisions, which activate the reward-prediction regions of the brain, and decisions made amid extreme uncertainty, which generate activity in the amygdala. These are different mental processes using different strategies and producing different results. Americans were suddenly forced to cope with this second category, extreme uncertainty.
Economists and policymakers had no way to peer into this darkness.
Their methods were largely based on the assumption that people are rational, predictable and pretty much the same. Their models work best in times of equilibrium. But in this moment of disequilibrium, behavior was nonlinear, unpredictable, emergent and stubbornly resistant to Keynesian rationalism.
The failure to generate a recovery led to a collapse of public confidence. Obama's promises of 3.5 million jobs now seemed a sham and his former certainty a delusion. The political climate grew more polarized. That meant it was impossible to tackle entitlement debt.
That and the economic climate meant it was impossible to raise taxes or cut spending or do anything to reduce the yawning deficits. Federal deficits were 15 percent of GDP and growing.
Far from easing uncertainty, the exploding deficits led to more fear. The United States could not afford to respond to new emergencies, like hurricanes or foreign crises. Other nations sensed American overextension. Foreign debt-holders grew nervous. Interest rates rose. Congress indulged its worst instincts, erecting trade barriers and propping up doomed companies. Scholars began to talk about the American Disease, akin to the British Disease of the 1970s.
The nation had essentially bet its future on economic models with primitive views of human behavior. The government had tried to change social psychology using the equivalent of leeches and bleeding. Rather than blame themselves, Americans directed their anger toward policymakers and experts who based estimates of human psychology on mathematical equations.
http://www.iht.com/articles/2009/02/13/news/edbrooks.php
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Ed
15 yrs ago
Paul Krugman: Failure to rise
By any normal political standards, this week's congressional agreement on an economic stimulus package was a great victory for President Barack Obama.
He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!
Or maybe not. These aren't normal times, so normal political standards don't apply: Obama's victory feels more than a bit like defeat.
The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Obama's post-partisan dreams.
Let's start with the politics.
One might have expected Republicans to act at least slightly chastened in these early days of the Obama administration, given both their drubbing in the last two elections and the economic debacle of the past eight years.
But it's now clear that the party's commitment to deep voodoo - enforced, in part, by pressure groups that stand ready to run primary challengers against heretics - is as strong as ever.
In both the House and the Senate, the vast majority of Republicans rallied behind the idea that the appropriate response to the abject failure of the Bush administration's tax cuts is more Bush-style tax cuts.
And the rhetorical response of conservatives to the stimulus plan - which will, it's worth bearing in mind, cost substantially less than either the Bush administration's $2 trillion in tax cuts or the $1 trillion and counting spent in Iraq - has bordered on the deranged.
It's "generational theft," said Senator John McCain, just a few days after voting for tax cuts that would, over the next decade, have cost about four times as much.
It's "destroying my daughters' future. It is like sitting there watching my house ransacked by a gang of thugs," said Arnold Kling of the Cato Institute.
And the ugliness of the political debate matters because it raises doubts about the Obama administration's ability to come back for more if, as seems likely, the stimulus bill proves inadequate.
For while Obama got more or less what he asked for, he almost certainly didn't ask for enough. We're probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn't nearly enough to bridge that chasm.
Officially, the administration insists that the plan is adequate to the economy's need. But few economists agree. And it's widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have - that Obama compromised in advance in the hope of gaining broad bipartisan support. We've just seen how well that worked.
Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration's plans on that front, which also came this week, landed with a dull thud.
The plan sketched out by Tim Geithner, the Treasury secretary, wasn't bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going.
Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers' expense? Or will the required "stress test" act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
Overall, the effect was to kick the can down the road. And that's not good enough.
So far the Obama administration's response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses.
It's early days yet, but we're falling behind the curve.
And I don't know about you, but I've got a sick feeling in the pit of my stomach - a feeling that America just isn't rising to the greatest economic challenge in 70 years.
The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.
There's still time to turn this around. But Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can't.
http://www.iht.com/articles/2009/02/13/news/edkrugman.php
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Ed
15 yrs ago
There is no such thing as freedom of speech except in your head...and if you would like to debate that I think its already in play on Think!
I'd much appreciate if we could stop interrupting our discussion of how to solve the crisis - I have it on good authority Geitner and Obama recently registered as members of AX and that they monitor this thread on their Blackberries... so it is very important that we stay focused - BECAUSE THE WORLD IS COUNTING ON US!!!!
And also, I get a year end bonus if I achieve a certain number of account bans and unlike the banking industry I actually dont get the bonus (paid in Molson) if I don't hit the targets...
So please stay on topic or move on cuz my trigger finga is gettin itchee....
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Ed
15 yrs ago
Just occurred to me that Hitler was a product of the circumstances of the Great War as much as he was allowed to happen because of the Great Depression. Right wing madness embraced by the welcome arms of a democracy in Germany eh...
If things get very bad one has to wonder what will emerge in the US... wonder what Diabolical Dick Cheney and his band of neocon madmen are thinking right now.... hmmmm....
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Ed
15 yrs ago
"The United States banking system is effectively insolvent," Mr. Roubini said.
Economist who predicted financial crisis says its time to nationalize insolvent banks
Zombie banks are effectively stalking the economy, killing off the potential for economic recovery.
Nouriel Roubini (regmonitor.com) is calling for drastic action to stop zombie banks from further damaging the global economy through waves of financial crisis. Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, has been one of the few to predict the warp and woof of the damage to the economy. Mr. Roubini estimates thal losses on loans financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, up from his previous estimate of $2 trillion.
Nobel-winning economist Paul Krugman termed it thusly in the New York Times: The plan sketched out by Tim Geithner, the Treasury secretary, wasn’t bad, exactly. What it was, instead, was vague. It left everyone trying to figure out where the administration was really going. Will those public-private partnerships end up being a covert way to bail out bankers at taxpayers’ expense? Or will the required “stress test” act as a back-door route to temporary bank nationalization (the solution favored by a growing number of economists, myself included)? Nobody knows.
Roubini: A year ago I predicted that losses by US financial institutions would be at least $1 trillion and possibly as high as $2 trillion. At that time the consensus such estimates as being grossly exaggerated as the naïve optimists had in mind about $200 billion of expected subprime mortgage losses. But, as I pointed out then, losses would rapidly mount well beyond subprime mortgages as the US and global economy would spin into a most severe financial crisis and an ugly recession. I then argued that we would then see rising losses on subprime, near prime and prime mortgages; commercial real estate; credit cards, auto loans, student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and massive losses on all of the assets (CDOs, CLOs, ABS, and the entire alphabet of credit derivatives) that had securitized such loans. By now writedowns by US banks have already passed the $1 trillion mark (my floor estimate of losses) and now institutions such as the IMF and Goldman Sachs predict losses of over $2 trillion (close to my original expected ceiling for such losses).
But if you think that $2 trillion is already huge, our latest estimates RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be at their peak about $3.6 trillion. The U.S. banks and broker dealers are exposed to half of this figure, or $1.8 trillion; the rest is borne by other financial institutions in the US and abroad. The capital backing the banks assets was last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to brink back the capital of banks to the level they had before the crisis; and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector. So these figures suggests that the US banking system is effectively insolvent in the aggregate; most of the UK banking system looks insolvent too; and many other banks in continental Europe are also insolvent.
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Ed
15 yrs ago
Since this crisis started I've watched as the talking heads predicted 9 then 8 then 7% growth in China - and I've wondered are they out of their minds? Growth driven by what? We've been watching consumer demand plummet in the two biggest markets for China. And the rest of the world is quickly following. How can an economist possibly predict any growth nevermind 7% with the mess that is unfolding around us? Perhaps they do this to try to keep people positive - because we see numbers redone downwards across every industry again and again....
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Ed
15 yrs ago
Nobody warned... right... http://www.youtube.com/watch?v=RYX1AgEV0vo
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Ed
15 yrs ago
Cutting off the nose to spite the face... or tearing down one's country to ...
What is wrong with these people?
Republican Taliban declare jihad on Obama
The president wants bipartisanship; the right has promised him all-out war
Goodbye to all that? Washington, it appears, has other ideas. Barack Obama campaigned on a platform of pragmatic liberalism and an end to frothy ideological warfare in Washington. From the beginning of the campaign he went out of his way not to engage in Republican-bashing or even Clinton-bashing. He was intent on bringing reason and open-mindedness to America’s often fraught ideological debates. He was incandescently clear that he rejected the toxic partisan atmosphere that had dominated the Bill Clinton and George W Bush years.
Since November he has largely walked the walk. Yes, there is a down payment on future government spending in the stimulus bill - on healthcare, the environment and education. But given the urgency of the economic downturn and the few tools left to counter it, a little overshooting is not the worst option in the next 18 months. And he did his best to accommodate Republican concerns - adding deeper and wider tax cuts than his own party was comfortable with.
He went to Capitol Hill to talk directly with members of the other party in the more ideological House of Representatives – spending more time with them than even Bush did. He asked three Republicans to be a part of his cabinet, including Robert Gates, Bush’s defence secretary. He went to dinner with key Republican columnists before reaching out to those who had supported him in the election. And this open hand was met with a punch in the face.
From the outset, the Republicans in Washington pored over the bill to find trivial issues to make hay with. They found some small funding for HIV and sexually transmitted diseases prevention; they jumped up and down about renovating the national mall; they went nuts over a proposal - wait for it - to make some government buildings more energy-efficient; they acted as if green research and federal funds for new school building were the equivalent of funding terrorism. And this after eight years in which they managed to turn a surplus into a trillion-dollar deficit and added a cool $32 trillion to the debt the next generation will have to pay for. Every now and again their chutzpah and narcissism take one’s breath away. But it’s all they seem to know.
John McCain gives you the flavour. Fresh from a dinner in his honour hosted by Obama, he abruptly dismissed the stimulus package as the “same old” spending of the distant Democratic past. His closest Republican ally, Senator Lindsey Graham, declared: “This bill stinks.”
Pete Sessions, chairman of the Republican congressional committee, explained that the Republican strategy was going to be modelled on jihadist insurgency. “I’m not joking,” he added. “Insurgency we understand perhaps a little bit more because of the Taliban.”
Rush Limbaugh, the dominant figure among the Republican base, fresh from broadcasting a ditty called Barack, the Magic Negro, declared in the first week of the new Congress that he hoped the new president would fail. The stimulus bill got no Republican votes in the House, and only three Republicans - all from the Obama-voting states of Pennsylvania and Maine - backed him in the Senate. McCain went to the floor of the Senate to growl that three votes did not make the bill bipartisan.
Bitter? At the end of last week we saw just how bitter. One of the Republicans who had agreed to serve in Obama’s cabinet, Senator Judd Gregg of New Hampshire, abruptly pulled out, after what he described as “fair warning” to the president.
Gregg had been under intense pressure from the Republican base, especially in his home state, for cooperating with the devil. He claimed the reason for his sudden withdrawal was that he couldn’t stomach the stimulus. Yet only a week earlier he had said: “We need a robust [stimulus package]. I think the one that’s pending is in the range we need. I do believe it’s a good idea to do it at two levels, which this bill basically does, which is immediate stimulus and long-term initiatives which actually improve our competitiveness and our productivity.” He then tried to argue that his authority over the 2010 census as commerce secretary had been compromised. But that turned out not to be true, either: it was just that a census that could well add millions of Hispanic voters to the rolls had the Republicans eager to prevent a Republican imprimatur on it.
Gregg was a victim of fast-shifting Republican politics. Reeling from the election, watching a new president coopt some of their number and get alarmingly high approval ratings from the public, members of the opposition party made a decision to become an insurgency.
From the disciplined House vote against any stimulus bill to the Gregg withdrawal, they are busy trying to revive the clear ideological warfare of the 1990s. As they did with Clinton 16 years ago, they are going to war. The context – the worst global downturn in decades - is irrelevant. If you have safe Republican seats in a party dominated intellectually by rigid ideologues, then your path of least resistance is total political warfare. It is certainly easier than forging difficult and messy legislative compromises that might even redound to the president’s advantage if the economy recovers.
It’s not clear, however, that total war on the president is going to be a better way forward. Before the latest twist, a Gallup poll found that Obama’s handling of the stimulus package had almost twice the public support of the Republicans’. In a period of acute economic anxiety, Americans outside the Republican base may not be so thrilled to find a replay of the 1990s. Obama won in part because he seemed not part of that drama.
The Democrats and the liberal base have responded to all this with a mixture of cynicism and their own partisanship. They rolled their eyes at Obama’s outreach to Republicans; they hated the inclusion of the other party in the cabinet and had to swallow hard not to complain about the postpartisan rhetoric. Their cynicism is well earned. But my bet is that Obama also understands that this is, in the end, the sweet spot for him. He has successfully branded himself by a series of conciliatory gestures as the man eager to reach out. If this is spurned, he can repeat the gesture until the public finds his opponents seriously off-key.
Ask yourself this question: who, in the end, won the partisan warfare of the 1990s - Clinton or the Republicans? In 1993 the Republicans thought they had dispatched Clinton for good; he won re-election hands down three years later and left office, even after Monica Lewinsky, with high ratings. Obama may not believe that history repeats itself. But he’s surely aware that it often rhymes.
http://www.timesonline.co.uk/tol/comment/columnists/andrew_sullivan/article5733405.ece
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Ed
15 yrs ago
That would seem more realistic... electricity consumption is often used as a more accurate measure of growth in China and it's well down...
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Ed
15 yrs ago
Schiff's having a harder time making the call on where to invest in the downturn - he suggested getting out of the USD (bad move) and into non-US equities - also bad.
However that would be expected because it's much more difficult to predict where things will go now... predicting the crash was the easy part - saw an article in Fortune about people who are in dire straights - one guy had two jobs as a cleaner and I forget the other one - his wife also was hard working - between them they had 100k per year before taxes in income - they were given a mortgage on a property worth 750k with NO MONEY DOWN!!! He's in default...
One only had to have knowledge that this was happening on a significant scale to predict a massive crash eh.
BBC Biz News - RBS expected to announce USD40B loss + 20,000 job cuts... Lloyds is also massively in the hole.
US car companies ought to be lining up for more gold soon ... AIG cant be far behind...
Word of the day is - Gordian Knot.
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Ed
15 yrs ago
You are not alone in that - scroll up this massive thread and you will find a comment from the former chairman of Goldman who says virtually the same thing.
I see Japan is on target for 12% annualized negative growth...
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Ed
15 yrs ago
"Ben Stein, waste of space now riding a bike on his new paper route."
Meanwhile many others who took the same position walked away with millions - or are still in their jobs collecting bonuses...
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Ed
15 yrs ago
I've all day for Michael Lewis articles... most excellent stuff
Man Up! Hedge-Fund Man’s Advice for Wall Street
Feb. 13 (Bloomberg) -- Before I quit my job trading bonds for my former Wall Street employer and set up my first hedge fund, I thought long and hard.
I stared at the ceiling every night, unable to sleep, and asked myself, over and over, many difficult questions. For example: “How sincerely do I want to grow my net worth from $10 million to $100 million?” And: “How much pleasure might be had from the envy of others?”
One question I didn’t ask myself, however, was “What will I do if people off Wall Street try to take away my money?” It just never crossed my mind. I assumed they’d know better.
Clearly they don’t.
Everywhere I turn I hear people who know nothing about Wall Street complaining about how much Wall Street people get paid -- as if a few million at the end of the year is excessive as opposed to the barest necessity. Barack Obama’s rant about bonuses I can understand: The guy never recovered from passing up Goldman Sachs Group Inc. to become a community organizer.
What’s more disturbing -- what has provoked me to the point where I am willing to take extremely valuable time away from shorting Spain to write a column for Bloomberg -- is that people on Wall Street are actually paying attention to what people off Wall Street think.
Crime Against Nature
In the past year I’ve witnessed more crimes against financial nature committed than in the previous 20 combined: former Merrill Lynch & Co. traders writing op-eds for the New York Times questioning Wall Street’s right to bonuses; Wall Street CEOs afraid to show their faces in Davos: Wall Street firms canceling their boondoggles in Las Vegas out of concern for appearances; former investment bankers telling journalists how much happier they are having more time to spend with the family.
It’s gotten so bad that Michael Moore, saying how encouraged he has been by financiers who have written to him, is now mass e- mailing Wall Street employees in search of even more guys who want to confess their sins to his cameras.
Even as I write I am watching the eunuchs now posing as Wall Street CEOs bend over backward before some congressional committee to prove that the operation was a success, and they are now well and truly without testicles.
John Mack swore that he and everyone else at Morgan Stanley have only a secondary interest in money -- that the guys at Morgan Stanley love to bank so much that if necessary they’d do it for free. Vikram Pandit went out of his way to apologize for ordering up a single corporate jet. “I get the new reality,” he said.
Get It
No, Vikram, you don’t. You think the new reality is cowering and simpering before elected officials so that they’ll quit being mean to you and maybe even let Tim Geithner give you more money. The new reality is that you need to grow a pair. Here’s how:
-- Play the hand you’ve been dealt rather than the hand other people insist that you hold.
Pandit and Mack and the rest have completely swallowed “the people’s” line that because they’ve taken taxpayer money they are somehow now required to care how “the people” feel about them.
Think about this. Some fool comes along and gives you $15 billion, no strings attached. The fool doesn’t own you. You own him. Mack needs to stand up and say, “We at Morgan Stanley are pleased by your investment. Now, if you ever want to see a dime of it back, go away. We’ll call you if we need you.”
Thain’s Right Idea
John Thain had the right idea: The minute these numb nuts started to meddle in his affairs he demanded a $10 million bonus after spending $35,000 on an antique commode. Thain’s mistake was his last-second failure of nerve. The minute he was exposed in the newspapers he panicked like a 6-year-old caught trying to steal an extra cookie. Which brings me to my second point:
-- Don’t allow yourself to feel guilty.
America is supposedly outraged by your behavior. See America’s outrage and raise it. “You blame Wall Street for this financial crisis?” Ken Lewis might ask, as only Ken Lewis might.
“I’m not the guy who walked away from the house he bought but can’t afford. I’m not the guy who reneged on his debts. All I did was make it possible for you ingrates to live large, like me.”
Having established this pose of righteous indignation (poor people should be thanking Wall Street for agreeing to have anything at all to do with them) seek opportunities to extend it.
Guilt Kills
For instance, John Thain might point out that the thoughts he had while admiring his commode paid for the thing many times over and so he wished only he had spent even more money on the thing. Vikram Pandit might insist that Citi Field not only remain Citi Field but that Citi’s subprime-mortgage traders should throw out every first pitch. Lloyd Blankfein might demand further compensation from the Treasury for allowing former Goldman employees to spend so much valuable time on the public’s business.
The main point is that guilt is financially counterproductive. To combat yours you need to identify exactly the sort of things that cause the average congressman to say “these Wall Street guys just don’t get it,” and do as many of them as possible.
Which brings me to my third and final point:
-- Embrace your manhood.
We’ve all been hearing a lot lately about the dangers of testosterone. A preposterous idea is gaining traction: that the problem with Wall Street is that it is run exclusively by men. News flash: Wall Street always has been run exclusively by men. If this crisis is worse than previous ones it may be because, for the first time in financial history, women were let in. Remember Erin Callan, Zoe Cruz, Sallie Krawcheck?
Some of this advice is, I realize, ahead of its time. Most of it is counterintuitive. But if you step back from your situation you’ll see that it requires a radical re-think. Above all, you need to keep on paying yourself as much as you can.
No one really liked you when you were making $45 million a year. How do you think they’ll treat you when you’re poor?
(Michael Lewis, author of “Liar’s Poker,” “Moneyball,” “The Blind Side” and the fictitious hedge-fund man, is a columnist for Bloomberg News. The opinions expressed are his and hedge-fund man’s own.)
http://www.bloomberg.com/apps/news?pid=20601039&sid=aZruAW7s2eLI&refer=home
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Ed
15 yrs ago
Anyone watch House of Cards on CNBC? If that doesnt make you livid with anger...
The best report I have seen on this crisis to date - shocking greed and stupidity - and without question people at all levels knew this was going on (bankers admit as much in one of the segments) - they simply didnt care because they were making hundreds of millions out of this ponzi scheme.
From the ratings agencies to Greenspan cheering them on - truly sickening to watch...
Some segments are online but the best one's don't appear to be particularly the one with the rad hippy dude with the grade 3 education in his mansion with his Ferrari who was making SD5 million a month at the height of the scam
This guy - who predicted it all and made billions - is featured http://www.bloomberg.com/apps/news?pid=20601170&refer=special_report&sid=adp5UMQkZfwc
http://www.cnbc.com/id/28892719
Broadcast times in Asia as follows:
Monday, February 16th 8p | 11P SIN/HK
Tuesday, February 17th 4a SIN/HK
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Ed
15 yrs ago
I think it is on again tonight - check the CNBC site link above - no doubt it will also be loaded to a torrent...
David Faber will surely win some awards for that documentary - it is superb.
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Ed
15 yrs ago
Perhaps Greenspan should be delivering newspapers too eh.... is he Chauncey the Gardner or what????
http://www.youtube.com/watch?v=5THpC1yDQG4&NR=1
As for punishment, the buck stops with Bush. The one banker in the CNBC vid clearly states that this all started with the Bush administration and it really took off in 2002 because of Bush policy.
There are a million excuses but the Bush administration must take the blame. They facilitated all of this.
That's what you get when you elect incompetent people. From day one I knew that there would be repercussions from putting these fools into power - and look where we are...
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Ed
15 yrs ago
Isn't ironic that 'John Galt' destroyed the machine as opposed to saving it....
Greenspan or shall I say Chauncy the Gardener says this morning in a speech in NY: No Need to Cut More Jobs. The Downturn Cannot Last Cannot Last.
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Ed
15 yrs ago
Be careful what you wish for... Japan had deflation for 10 years...
I am more partial to Mark Haines on CNBC than Chauncey the Gardener - he likens the problem to having a gangrenous appendage - it needs to be cut off but instead we keep trying to save it....
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Ed
15 yrs ago
Chauncey the Gardener has weighed in:
Alan Greenspan, the former Federal Reserve chairman told the Financial Times that the U.S. government may have to temporarily nationalize some banks in order to ensure credit flow, restore the confidence and fix the financial system. More republicans are favoring the U.S. bank nationalization.
Greenspan told FT that the nationalization of U.S. banks may be the last "bad option" to fix this economy.
"It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," he said. "I understand that once in a hundred years this is what you do."
"Speaking to the FT ahead of his speech to the Economic Club of New York last night, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism," reports FT.
According to the newspaper Lindsey Graham, a Republican senator for South Carolina, said that many of his colleagues, including John McCain, agreed with his view that nationalization of some banks should be “on the table”.
“You should not get caught up on a word [nationalisation],” he told the Financial Times in an interview. “I would argue that we cannot be ideologically a little bit pregnant. It doesn’t matter what you call it, but we can’t keep on funding these zombie banks [without gaining public control]. That’s what the Japanese did.”
Barack Obama, the president, who has tried to avoid panicking lawmakers and markets by entertaining the idea, has recently moved more towards what he calls the “Swedish model” – an approach backed strongly by Mr Graham.
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Ed
15 yrs ago
I cannot see Obama's mortgage solution working. For every owner who is able to stay above water on their property, many others will default - because there are hundreds of thousands losing jobs who will default on mortgages.
The problem with this problem is that it is too massive making it intractable
On one hand you have the housing crisis - on another hand you have the insolvent banks - on the other hand you have credit card, auto, student and other loans that will not be paid - then on another hand you have auto companies that have no hope of a near term recovery - then on yet another hand you have the overcapacity across the board because people were cashing in on false housing gains and buying stuff with the cash - and on another hand you have countries getting nervous about financing trillions of more debt and on and on...
Hang on - that's too many hands - more like tentacles.
Obama would need to be Houdini to figure a way out of this eh
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Ed
15 yrs ago
I don't know specific details but I would expect that those who lied about income and are holding homes with carry costs massively beyond their means - and which are dramatically in negative equity will not benefit from this - they will have tossed the keys in the ditch already or will soon do so.
I would think this helps people who are on the edge and need a break.
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Ed
15 yrs ago
Found some info supporting the above here http://www.iht.com/articles/2009/02/18/business/leonhardt.php
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Ed
15 yrs ago
Ah... sorry misread that....
To a certain extent he is correct that they were lied to - watch House of Cards. The brokers were preying on unsophisticated people telling them not to worry...
However I would like to see a line drawn at those who lied about their income... that is an entirely different matter
Either way - its all moot. This is a gordian knot.
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Ed
15 yrs ago
ONT - I agree, the first reaction from those who didn't 'dance while the music was playing' is anger (it definitely would be mine).
Not sure if you saw CNBC last night but Mark Haines made exactly your point. Why should he subsidize these bozos who bought houses they couldn't afford (Note: at the time they didn't have full details of the plan and were making assumptions that are now confirmed)
All members of the panel while they understood his sentiments, the consensus was that if the bozos aren't bailed out all homeowners suffer because foreclosures drive down the value of their houses + potentially crash the entire economy.
There are parallels to the banking crisis - why bail out the bozos who created that mess?
I can appreciate both positions on this but I do think its a moot point. There is no magic bullet.
Re: Auto Industry. Since the beginning of this I have been sceptical of bailing them out. In times of easy credit where people flipped cars every year or two they were bankrupt. Now conditions are far worse and will not get better soon. Throwing good money after bad and delaying the inevitable me thinks
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Ed
15 yrs ago
There are no parallels for what is happening. You can look at Russia or the Latin America collapses and you can look at the Japanese recession. And you can look at the Asian crisis.
But none are similar because with all of those they were geo-specific for the most part and other parts of the world bailed them out once they reset.
This time its the whole world....
What does it mean for HK. Tough times and a crash of assets?
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Ed
15 yrs ago
Here's a stat for you.
If you factored the value of all the remortgaging of homes that went on from 2000 - 06 (which went to buying Hummers and Big Screen TVs) you get 3 years of 0 growth and 3 years of 1% growth in the States.
Consider what that means going forward... economists suggest you need 2.5% growth just to absorb NEW entries into the job market...
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Ed
15 yrs ago
Latest SPIKE is in and going up on the home page shortly. I thought I would post this here because it deals with some of the causes of why we are where we are. Marsh is dead on with this:
I’m a celebrity - for God’s sake ignore me!
Spike columnist Jon Marsh remains baffled about the cult of the celebrity and salutes China’s bid to get the masses bonking.
When historians eventually get round to sifting through the entrails of the early 21st century, they will have cause to scratch their heads in wonder at our many follies. How did they make such a mess of the world?
Chief among many lines of inquiry will include questions as diverse as how did Americans come to elect George Bush, why were incompetent Wall Street bankers allowed to dish out bonuses to their mates after helping to destroy the world’s financial system, and, perhaps most baffling of all, how can you possibly explain our obsession with celebrity?
Bush can be blamed on general American weirdness (they should get out more) fuelled by a cultural phenomenon called Fox News. The bankers’ folly can be put down to sheer greed and being completely unaware of the rest of the planet’s desire to poke red hot needles into their most sensitive orifices, slowly.
But it is the third issue that may cause the most confusion in decades to come. Why do we care so much about celebrities, especially the minor variety? Take, for example, the case of Jeremy Clarkson, who presents a popular UK television programme called Top Gear. His job is to assess the merits of different types of cars.
And yet, he recently made huge headlines for sharing his thoughts about the British Prime Minister, Gordon Brown. He described him as a “one-eyed Scottish idiot,” for his handling of the economic crisis, thereby offending politicians, the blind and the Scots at a single stroke. Mr Brown, who may or may not be an idiot, lost an eye playing rugby as a teenager.
Mr Clarkson has previous. He opened a recent show by suggesting that truck drivers only cared about fuel prices and murdering prostitutes. Nice one.
By why do we care what the car-tester has to say about Mr Brown or anything else outside the realm of cars? Because he’s a celebrity, stupid.
While the nightmare that is reality TV is to blame for much of this nonsense, the classic example of the cult of celebrity is, of course, Paris Hilton, who is famous for being famous despite the fact she has done nothing at all of note in her entire life.
Actually, that is actually not quite true. She once allowed herself to be filmed servicing her boyfriend and her oral skills were soon known to the world after the tape found its way on to the internet. Let there be no doubt that Ms Hilton is good at something.
And if there was any doubt that the horror of reality television will be with us for many years to come, consider this news snippet. “Producers of NBC's The Biggest Loser are considering a return to the single-contestant format that launched the reality hit, but with a localised twist. They intend to cast single competitors from cities topping an annual Fattest Cities in America list.” God Save America (at least it helps explain Bush).
Meanwhile, Mr Clarkson, the deep political thinker, is heading for Hong Kong to promote his car show. Please don’t all rush.
Lie back and think of Edison
China has launched a national sex education campaign aimed at breaking down traditional taboos. The fact that bonking is now official Communist Party policy should be enough to put a smile on the face of the even the crinkliest old cadre.
At least it should make the self criticisms more interesting and it also puts a new slant on the expression party member.
The campaign, “The sunshine project to care for gender health” (sexy title, baby), will feature posters, competitions and sponsor an international sex fair in Beijing. True to form, Hong Kong celebrity couple Yvonne Yung and her husband Will Liu (great name), have been signed up to lead the charge.
This is surely the campaign’s first mistake. With all due respect to Yvonne and Will, there is a candidate who is much better qualified in this area. Take a bow Edison Chen.
The Hong Kong singer and actor knows a thing or two about promoting the concept of wholesale rumpy-pumpy. This is the man who shagged his way though half the A list of Hong Kong’s finest singers and actresses and recorded all the action for good measure. Unfortunately, the images stored on his laptop were copied by a guy in a computer repair shop who shared them with humanity via the internet.
Edison has endless footage he could use in “how to” programmes, complete with background biographies of his starlet shag of the day. Sex and celebrity – what could be better for the TV ratings? People would be patriotically poking one another in no time at all.
There is one snag. Young Edison is still holed up in Canada and refuses to come back to Hong Kong to face the music (and the chopper). Now that’s one self criticism that would be worth listening to.
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Ed
15 yrs ago
Housing Crisis Moves Beyond Subprime Borrowers
You might have noticed a particular word missing from the speech President Obama gave on Wednesday in rolling out the Administration's massive housing-rescue plan. That word is "subprime." That might ring a little odd, considering how religiously we've been talking about the "subprime mortgage crisis" — all the loans made to borrowers with bad credit who couldn't really handle them. The thing is, subprime isn't the entire story. In fact, looking forward, it's not even the biggest problem. While the raw percentage of subprime loans in delinquency and foreclosure still far outstrips any other sort of mortgage, the types of loans that are now going downhill the fastest are ones that were generally sold to more credit-worthy borrowers. (See the top 10 buzzwords of 2008.)
What's changed? The economy. Subprime loans were written to the weakest borrowers, so they stumbled first, especially since many were set-up with an interest-rate spike after two or three years. In January, nearly 40% of all subprime loans were either behind on payments or in foreclosure. Now, though, with companies cutting back work hours and unemployment hitting 7.6%, borrowers of all stripes are running into trouble. "Originally, the loan product was driving a lot of the delinquencies," says Steve Berg, managing director of loan-tracker LPS Applied Analytics. "Now you have widespread house-price deterioration and people losing their jobs. If you lose your job, it doesn't matter if you have a good loan product, you still might not be able to make your payment."
It's easy to see the shift by looking at bands of FICO scores — a popular measure of a borrower's creditworthiness. In January, 18.58% of loans associated with a FICO score below 688 were delinquent by one measure — a large number, but just half a percent more than in December. By contrast, the number of delinquent loans in the top tier (752 or higher), jumped by nearly 7% in January. The overall percentage of problem loans remained small by comparison — the delinquency rate rose from 1.45% to 1.55% — but the quickening pace of homeowners falling behind on their payments signifies more trouble ahead. "Those are tomorrow's foreclosures," says Ted Jadlos, senior managing director of LPS, which provided the numbers from its database of 40 million home loans, which covers about 70% of all mortgages. (See 25 people to blame for the financial crisis.)
Among prime borrowers, those with jumbo mortgages — ones that have traditionally been for more than $417,000 — are seeing delinquencies accelerate the fastest. In January, 3.32% of such borrowers were behind on their payments, up from 1.75% in August. (That doesn't include the 1.1% of borrowers already in foreclosure.) Since Fannie Mae and Freddie Mac don't buy these large loans, it's been tougher for homeowners to refinance their way out of trouble — and the new housing-rescue package, which specifically excludes jumbo loans, won't do anything to change that dynamic.
Delinquencies are also getting much worse among holders of option adjustable-rate mortgages (option ARMs). These loans, typically made to borrowers with prime or near-prime credit scores, let soon-to-be homeowners pick from a menu of monthly payments — often including an option that didn't even keep up with the interest due. As home prices have fallen, the number of option ARM borrowers running into trouble has surged, with 15.25% of loans delinquent and another 7.46% in foreclosure. Some analysts think the problem in option ARMs could eventually rival the size of the subprime meltdown. (See pictures of crime in Middle America.)
In other words, the trauma is far from over. Just consider the uptick in the delinquency rate of loans written in 2003 and 2004. A borrower who falls behind on payments typically does so within the first two or three years, but now the problems are reaching ever further back. "These older vintages should be out of the woods, but they're not," says Jadlos. That's partly because dropping property values have driven homes, on average, down to what they cost four years ago. Add in all those home equity loans people used to free up cash, and you're left with a situation where more than 18% of homeowners now owe more than their house is worth, according to First American CoreLogic. When the crappy economy causes your household income to take a hit, good luck trying to refinance or sell.
Which means even if you didn't sign up for a subprime loan at the height of the housing bubble, the math can still come back to bite you. And it is.
http://www.time.com/time/business/article/0,8599,1880968,00.html
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Ed
15 yrs ago
The CNBC documentary is replaying on Saturday at 10pm and Sunday at 11.
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Ed
15 yrs ago
I wonder if China will at some point instead begin to focus on bottom fishing for hard assets particularly resource based ones - rather than US treasuries.
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Ed
15 yrs ago
The US Predicament Grows - Peter Schiff
Overseas lenders buy into an ever bigger mess
It is time for the overseas lenders who continue to provide the financial heroin that keeps the United States addicted to ever-increasing foreign funds to pull the plug. Stop the flow of money into the US. It is time to pull the plug, or suffer the consequences. It doesn’t appear it is going to happen, unfortunately. Sunday, U.S. Secretary of State Hillary Rodham Clinton, during her visit to China, asked China to continue investing in the United States because the two countries' financial futures are closely tied together, and China has largely agreed to doing just that.
A look at what is going on in Congress will tell why. With millions of United States homeowners now struggling to repay money they clearly never should have borrowed, the country’s leaders have been righteously wagging fingers at predatory lenders who allegedly enticed innocent borrowers, and the country, into a financial snake pit. While the mortgage industry clearly deserves a good share of the blame, unindicted co-conspirators abound. The ringleaders are still at large and are, in fact, busy hatching a plan to dwarf the earlier mistakes. It is a plan that risks trouble not just for the United States but the world because it is crucial if the US economy, the world’s biggest, continues to flag, its ability to tow the rest of the world with it, will founder.
Contrary to the message bouncing off the marble walls of the US Capitol in Washington, DC, most borrowers in the inflating housing bubble clearly understood the terms of their loans. Most knew that they could not afford their mortgage payments once their teaser rates expired, but enthusiastically jumped into the debt pool anyway, believing that guaranteed real estate appreciation, or a quick and profitable sale, would keep them afloat.
Although both lenders and borrowers were acting in their own perceived self-interest, what can we say of our economic policymakers who are expected to protect the good of all? Their actions encouraged the whole sad circus. Were it not for the excessively low interest rates provided by the US Federal Reserve, the lax lending standards and moral hazards supplied by Congress courtesy of Freddie, Fannie, and the FHA and the many real estate subsidies built into the tax code, none of these predatory loans would have been possible.
Had lenders exercised better judgment and had borrowers avoided overly burdensome debt loads, both parties would clearly be in better financial positions today. Instead, as borrowers were demanding the credit to fuel their dreams of instant real estate riches, lenders were being ordered to accommodate them.
In past generations, homebuyers were required to save for down payments and postpone their purchases until they could actually afford conventional 30-year fixed mortgages. But in recent years, as home ownership became a matter of public policy, the government accused lenders of discrimination and urged lower standards and easier terms. With government guarantees in place, the mortgage industry was happy to both expand their revenues and promote a better society.
But by denying credit, even if it requires borrowers to forgo something they clearly want, lenders not only provide a valuable service to borrowers, but to society. Given the mess in which we now find ourselves due to the bad loans made during the real estate bubble, this lesson should have been well learned. Unfortunately it hasn't, as the same dynamic is now playing out on a much larger scale.
Faced with a prospect of downgrading its lifestyle, the US government is instead borrowing trillions of dollars to artificially inflate its deflating bubble economy. The money is being used to both expand the size of government and finance additional consumer spending. Given the increasingly frightening US financial position, this is the exact opposite of what it should be doing.
America’s global creditors are now making the same mistakes made by subprime mortgage lenders. They are loaning the country money that it will never be able to repay. In the process, they are enabling the largest expansion in the size of government since the New Deal and crippling an economy already suffering from excess consumption.
Although it may sound harsh, it would be far better for all involved if all of America’s foreign friends simply cut the country off. Since their loans are merely fueling the growth of the US government and artificially pumping up consumer spending, their savings will not only be lost but their sacrifice will severely exacerbate the US’s problems as well.
Just as homebuyers did earlier in this decade, the US government will borrow as much money as the world is foolish enough to lend, and it will use those funds to smother the life out of the economy. At this point the government is growing like a cancer, feeding mainly off the funds it borrows from abroad. In the process, it is placing a horrific debt burden on its people, committing them to either a lifetime of crippling interest payments or run-away inflation.
There is nothing inherently wrong with foreign lending. If funding were directed toward private business to enable capital investments, the loans would not only benefit lenders, but they would benefit our nation as well. The funds would fortify the country’s industrial base and provide the necessary foundation upon which to rebuild a viable economy.
If foreigners were to cut the US off, there would be some immediate pain, but tough love is exactly what the country needs right now. Forcing Americans to live within their means, particularly the US government, will be just as beneficial to the long-term health of the economy as similar restraint would have been had it been exercised by mortgage lenders. It's too bad so few of seem capable of making this connection, or learning anything from the mistakes of the past – even when the ink in the history books has barely dried.
http://asiasentinel.com/index.php?option=com_content&task=view&id=1739&Itemid=590
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Ed
15 yrs ago
Excellent video on 60 Minutes similar to House of Cards http://www.cbsnews.com/video/watch/?id=4803928n
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Ed
15 yrs ago
Lots of good reading this morning... another excellent take on why this happened:
How Far Down the Economic Hole Are We Headed?
And so on the 29th day of his presidency, Barack Obama signed the stimulus bill. But the earth did not move. The Dow Jones fell almost 300 points. G.M. and Chrysler together asked taxpayers for another $21.6 billion and announced another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen Stanford, was accused of an $8 billion fraud with 50,000 victims.
“I don’t want to pretend that today marks the end of our economic problems,” the president said on Tuesday at the signing ceremony in Denver. He added, hopefully: “But today does mark the beginning of the end.”
Does it?
No one knows, of course, but a bigger question may be whether we really want to know. One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news. We are plugged into more information sources than anyone could have imagined even 15 years ago. The cruel ambush of 9/11 supposedly “changed everything,” slapping us back to reality. Yet we are constantly shocked, shocked by the foreseeable. Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.
This phenomenon could be seen in two TV exposés of the mortgage crisis broadcast on the eve of the stimulus signing. On Sunday, “60 Minutes” focused on the tawdry lending practices of Golden West Financial, built by Herb and Marion Sandler. On Monday, the CNBC documentary “House of Cards” served up another tranche of the subprime culture, typified by the now defunct company Quick Loan Funding and its huckster-in-chief, Daniel Sadek. Both reports were superbly done, but both could have been reruns.
The Sandlers and Sadek have been recurrently whipped at length in print and on television, as far back as 2007 in Sadek’s case (by Bloomberg); the Sandlers were even vilified in a “Saturday Night Live” sketch last October. But still the larger message may not be entirely sinking in. “House of Cards” was littered with come-on commercials, including one hawking “risk-free” foreign-currency trading — yet another variation on Quick Loan Funding, promising credulous Americans something for nothing.
This cultural pattern of denial is hardly limited to the economic crisis. Anyone with eyes could have seen that Sammy Sosa and Mark McGwire resembled Macy’s parade balloons in their 1998 home-run derby, but it took years for many fans (not to mention Major League Baseball) to accept the sorry truth. It wasn’t until the Joseph Wilson-Valerie Plame saga caught fire in summer 2003, months after “Mission Accomplished,” that we began to confront the reality that we had gone to war in Iraq over imaginary W.M.D. Weapons inspectors and even some journalists (especially at Knight-Ridder newspapers) had been telling us exactly that for almost a year.
The writer Mark Danner, who early on chronicled the Bush administration’s practice of torture for The New York Review of Books, reminded me last week that that story first began to emerge in December 2002. That’s when The Washington Post reported on the “stress and duress” tactics used to interrogate terrorism suspects. But while similar reports followed, the notion that torture was official American policy didn’t start to sink in until after the Abu Ghraib photos emerged in April 2004. Torture wasn’t routinely called “torture” in Beltway debate until late 2005, when John McCain began to press for legislation banning it.
Steroids, torture, lies from the White House, civil war in Iraq, even recession: that’s just a partial glossary of the bad-news vocabulary that some of the country, sometimes in tandem with a passive news media, resisted for months on end before bowing to the obvious or the inevitable. “The needle,” as Danner put it, gets “stuck in the groove.”
For all the gloomy headlines we’ve absorbed since the fall, we still can’t quite accept the full depth of our economic abyss either. Nicole Gelinas, a financial analyst at the conservative Manhattan Institute, sees denial at play over a wide swath of America, reaching from the loftiest economic strata of Wall Street to the foreclosure-decimated boom developments in the Sun Belt.
When we spoke last week, she talked of would-be bankers who, upon graduating, plan “to travel in Asia and teach English for a year” and then pick up where they left off. Such graduates are dreaming, Gelinas says, because the over-the-top Wall Street money culture of the credit bubble isn’t coming back for a very long time, if ever. As she observes, it took decades after the Great Depression — until the 1980s — for Wall Street to fully reclaim its old swagger. Not until then was there “a new group of people without massive psychological scarring” from the 1929 crash.
In states like Nevada, Florida and Arizona, Gelinas sees “huge neighborhoods that will become ghettos” as half their populations lose or abandon their homes, with an attendant collapse of public services and social order. “It will be like after Katrina,” she says, “but it’s no longer just the Lower Ninth Ward’s problem.” Writing in the current issue of The Atlantic, the urban theorist Richard Florida suggests we could be seeing “the end of a whole way of life.” The link between the American dream and home ownership, fostered by years of bipartisan public policy, may be irreparably broken.
Pity our new president. As he rolls out one recovery package after another, he can’t know for sure what will work. If he tells the whole story of what might be around the corner, he risks instilling fear itself among Americans who are already panicked. (Half the country, according to a new Associated Press poll, now fears unemployment.) But if the president airbrushes the picture too much, the country could be as angry about ensuing calamities as it was when the Bush administration’s repeated assertion of “success” in Iraq proved a sham. Managing America’s future shock is a task that will call for every last ounce of Obama’s brains, temperament and oratorical gifts.
The difficulty of walking this fine line can be seen in the drama surrounding the latest forbidden word to creep around the shadows for months before finally leaping into the open: nationalization. Until he started hedging a little last weekend, the president has pointedly said that nationalizing banks, while fine for Sweden, wouldn’t do in America, with its “different” (i.e., non-socialistic) culture and traditions. But the word nationalization, once mostly whispered by liberal economists, is now even being tossed around by Lindsey Graham and Alan Greenspan. It’s a clear indication that no one has a better idea.
The Obama White House may come up with euphemisms for nationalization (temporary receivership, anyone?). But whatever it’s called, what will it mean? The reason why the White House has been punting on the new installment of the bank rescue is not that the much-maligned Treasury secretary, Timothy Geithner, is incapable of getting his act together. What’s slowing the works are the huge political questions at stake, many of them with consequences potentially as toxic as the banks’ assets.
Will Obama concede aloud that some of our “too big to fail” banks have, in essence, already failed? If so, what will he do about it? What will it cost? And, most important, who will pay? No one knows the sum of the American banks’ losses, but the economist Nouriel Roubini, who has gotten much right about this crash, puts it at $1.8 trillion. That doesn’t count any defaults still to come on what had been considered “good” mortgages and myriad other debt, whether from auto loans or credit cards.
Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.
Nationalization would likely mean wiping out the big banks’ managements and shareholders. It’s because that reckoning has mostly been avoided so far that those bankers may be the Americans in the greatest denial of all. Wall Street’s last barons still seem to believe that they can hang on to their old culture by scuttling corporate jets, rejecting bonuses or sounding contrite in public. Ask the former Citigroup wise man Robert Rubin how that strategy worked out.
We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.
http://www.alternet.org/workplace/128266/how_far_down_the_economic_hole_are_we_headed/?page=entire
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Ed
15 yrs ago
Can you post the link to the duplicate one here so I can check into this.
I was expecting AIG to be back for more money and here there are needing more than ever.
I just heard that Germany expects negative 5% for 2009 (assume that is wrong as everyone is being conservative in their predictions and readjusting downwards later...).
They have never shrunk more than 1% since WW2....
The House of Cards is tottering.....
(btw I think the documentary by that name is being replayed on CNBC Saturday 11 and Sunday 10 - if you haven't yet seen it its a must watch)
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Ed
15 yrs ago
Perhaps we are sending out two notices when there should be one... I will look into it
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Ed
15 yrs ago
Since it would appear that nobody will be able to make a circle a square, let's revisit how we got into this .... this pretty much says it all...
http://www.youtube.com/watch?v=dNTtOrpLuk8
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Ed
15 yrs ago
Wonder how much influence forums have on the property markets... our Property Advice Forum has a thread discussing the market that has nearly 50,000 views... that represents thousands of people monitoring reductions in rent that others post - who then hold out for at least as good a % reduction from their landlords....
I suspect that is a major factor in pushing rents down.
Hong Kong Tenants Play ‘Hardball,’ Pushing Rents to 2-Year Low
Feb. 26 (Bloomberg) -- Raif Cabbabe said his property agent thought he was crazy to offer only HK$20,000 ($2,600) a month for a two-room apartment in Hong Kong’s trendy Soho district. The flat went on the market two months earlier for HK$45,000.
Bargaining for the 900-square-foot (84-square-meter) home worked. Cabbabe said he sealed the deal in November at HK$25,000 for the 2-year-old pad, which has a 250-square-foot terrace. Since then, prices have fallen further, with January capping six straight months of declines, according to data from real estate agency Centaline Property Agency Ltd.
“The property market has fallen off a cliff, so people are playing hardball now,” said Cabbabe, 28, a steel trader who moved to Hong Kong from Australia. “My friends renegotiating their rents are telling their landlords, we’ll just walk away if you don’t give us a discount.”
Rents began falling in the city in August, a month before the collapse of Lehman Brothers Holdings Inc. sparked off a global banking crisis. Home leases may fall as much as 15 percent to 20 percent this year, said analysts including Simon Lo at Colliers International Ltd. Hong Kong slid into its first recession since 2003 in the third quarter, leading companies to rein in costs by firing workers.
Unemployment in Hong Kong jumped 0.5 percentage points to 4.6 percent in the three months through January, the largest increase in a decade, as companies such as Citigroup, HSBC and PCCW Ltd. cut staff. Gross domestic product may shrink 2 percent to 3 percent in 2009, Financial Secretary John Tsang said yesterday. He said the government will refund taxes, suspend property rates and boost spending on infrastructure to mitigate the slump.
More Choices
“If you have the same budget as last year, you can get a place that is at least 30 percent bigger and you definitely have more choices,” said Lo, director of research at Colliers.
Average domestic rents for the three months to January fell 16 percent to HK$13.3 a square foot, the lowest since December 2006, Centaline said this week.
Read More http://www.bloomberg.com/apps/news?pid=20601080&sid=asoZu0ThVUtc&refer=asia
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Ed
15 yrs ago
Does anyone know any circumstances under which customers would be denied access to safe deposit boxes?
If a bank is insolvent and closes the doors what happens to people's valuables in safe boxes?
I've checked with the manager at my branch and am told that access would never be denied... but nice to make sure...
Just a note on slagging off the bank staff - many of the questions here are very specific and no doubt most employees you get on the phone will not have the answer - rather than try to navigate the maze I suggest you go to your branch and speak to one of the relationship managers - if they dont have the answer then they will likely know who does...
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Ed
15 yrs ago
I am not so sure the USD will crash. If the economy collapses the USD (or treasuries) will be the perceived as the best of a bad lot of options.
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Ed
15 yrs ago
Jon Stewart's take on CNBC - this is PURE GENIUS!!!
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220250
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Ed
15 yrs ago
Thats the colbert report - wrong link?
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Ed
15 yrs ago
Does anyone get the feeling they are watching FOX News when watching CNBC? Unfortunately I cant get Bloomberg in the mountains of Bali... so I have no choice...
I have to turn the morons off every 20 minutes or I blow a gasket listening to them blame the crashing stock market on Obama policies, possibly the stupidiest comment I have ever heard.
Using that logic we should give Bush a call and ask him to take over things because the stock market did rather well under his policies.... Yes, lets get Bush back, he really knows how to get housing prices moving eh...
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Ed
15 yrs ago
Friedman presents an interesting sub-plot on the crisis in the article below.
I saw a Jack Welch interview a few years ago and the presenter asked him if the current model of growth could continue indefinitely. He had full confidence that we could overcome all limitations with technology and continue to grow 'forever'.
I wonder if he has changed his tune at all.
Thomas L. Friedman: The Great Disruption
Sometimes the satirical newspaper The Onion is so right on, I can't resist quoting from it. Consider this faux article from June 2005 about America's addiction to Chinese exports:
FENGHUA, China - Chen Hsien, an employee of Fenghua Ningbo Plastic Works Ltd., a plastics factory that manufactures lightweight household items for Western markets, expressed his disbelief Monday over the "sheer amount of [garbage] Americans will buy. Often, when we're assigned a new order for, say, 'salad shooters,' I will say to myself, 'There's no way that anyone will ever buy these.' ... One month later, we will receive an order for the same product, but three times the quantity. How can anyone have a need for such useless [garbage]? I hear that Americans can buy anything they want, and I believe it, judging from the things I've made for them," Chen said. "And I also hear that, when they no longer want an item, they simply throw it away. So wasteful and contemptible."
Let's today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it's telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall - when Mother Nature and the market both said: "No more."
We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese ...
We can't do this anymore.
Full Story http://www.iht.com/articles/2009/03/08/opinion/edfriedman.php
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Ed
15 yrs ago
So many problems...
EAST EUROPEAN DEBT
Subprime Europe
The 1931 collapse of the Austrian bank Creditanstalt provoked financial panic across Europe and almost single-handedly turned a bad downturn into the Great Depression.
Last week, when I read about the brewing European banking crisis, I suddenly began to dread that history might be repeating itself.
You might think that my worries are a bit late. After all, losses on subprime mortgages in the United States have already caused a Depression-like banking collapse.
Well, believe it or not, Europe's current crisis is scarier. For while losses on Eastern European debts may be only a small fraction of those on subprime mortgages, the Continent's problems are politically harder to solve, and their consequences may prove to be much worse.
Much as in our subprime mess, Eastern Europe's problems began with easy credit. From 2004 to 2008 Eastern Europe had its own bubble, fueled by the ready availability of international credit.
In recent years countries like Bulgaria and Latvia borrowed annually the equivalent of more than 20 percent of their gross domestic product from abroad. By 2008, 13 countries that were once part of the Soviet empire had accumulated a collective debt to foreign banks or in foreign currencies of more than $1 trillion. Some of the money went into investment, much of it into consumption or real estate.
When the music stopped last year and banks retrenched, the flow of new capital to Eastern Europe came to an abrupt halt, and then reversed direction.
This credit crunch hit the region just as its main export markets in Western Europe were going into free fall. Moreover, with so much of the debt denominated in foreign currencies, everyone in Eastern Europe has been scrambling to get their hands on foreign exchange and local currencies have collapsed.
Most of the Eastern European debt is held by Western European banks. It also turned out that some of the biggest lenders to Eastern Europe were Austrian and Italian banks - for example, loans by Austrian banks to Eastern European countries are almost equivalent to 70 percent of Austria's GDP. Now, Italy and Austria can't afford to bail out even their own banks.
The debt crisis in Eastern Europe is much more than an economic problem. The wrenching decline in the standard of living caused by this crisis is provoking social unrest. American subprime borrowers who have had their houses foreclosed on are not - at least not yet - rioting in the streets. Workers in Eastern Europe are. The roots of democracy in the region are not deep and the specter of right-wing nationalism remains a threat.
Full story http://www.iht.com/articles/2009/03/09/opinion/edahmad.php
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Ed
15 yrs ago
Well thank the lord the crisis is over - 5% increase in the US markets overnight. CNBC is calling it a 'rally.' Fantastic! I guess I'll delete this thread and start buying stocks this morning....
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Ed
15 yrs ago
My tongue is still stuck in my check eh...
Totally agree - so what Citi ran a profit - I guess they are saying 'if the taxpayers can take all current and future billions/trillions of losses off our balance sheet we are a strong company again'
Likewise AIG, BOA, etc etc etc...
If only we could pretend all that never happened and start over again it would be happy days again.
It's ludicrous and it's even more ludicrous that CNBC is acting as a cheerleader and this is not proper journalism (it's bordering on Fox and I am turning it off - sadly Bloomberg is not available in the Mountains of Gianyar). Nothing wrong with optimism but false reporting of this nature is irresponsible because less sophisticated people make bad decisions based on this garbage.
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Ed
15 yrs ago
8% growth in 2009....really?
Recession Slams Chinese Exports Again
China exports dropped an "ugly" 25.7% in February after January's 17.5% fall. The government is trying to boost domestic spending to alleviate the pain
New data about China's economy is providing further evidence that the global recession is making the once mighty Chinese export machine sputter badly. After falling 17.5% in January, exports plunged a further 25.7% year-on-year in February, the government announced on Mar. 11. The drop was worse than what most analysts expected; a Merrill Lynch research note described it as "an ugly number." And the way things are shaping up in the rest of the world, the figure for this month isn't going to look very pretty either. While stock markets across most of Asia rallied on the strength of the previous day's rebound in the U.S., the Shanghai Stock Exchange fell 0.91%.
Full Story http://www.businessweek.com/globalbiz/content/mar2009/gb20090311_129382.htm?chan=top+news_top+news+index+-+temp_news+%2B+analysis
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Ed
15 yrs ago
I couldn't agree more. I have never paid much attention to CNBC because I always thought it was utterly ridiculous for 'experts' to predict what was going to happen to the market. It's kinda like trying to predict the weather for next month - you can say 'we're due for rain' cuz it hasnt rained in a few weeks... but its all guess work. Then one of these 'experts' guess turns out to be correct (while his other 10,000 guesses over the years turned out to be wrong) he's suddenly a genius.
You simply cannot predict the stock market.
However I have tuned in to try to get some news on the financial crisis (because I cant get Bloomberg which is proper journalism). Its gotten worse and worse and now I cannot stand to listen - the coverage is infantile, often irresponsible and its gone completely right wing.
Like I said earlier, if the stockmarket is the judge of good government then we should bring back Bush - because the market was well up during his time in office... its down because it is punishing the world for allowing a corrupt moron to run it... and it will not come back up because of Obama policy.
This is a superb bit from a story on TIME that makes a complete mockery of the CNBC presenters and their awe of 'THE MARKET' ooooh lets worship THE MARKET!!!
This means that CNBC looks at everything, particularly politics, in terms of how it will affect "the Market." The commentators on CNBC murmur about the Market as if it were the Island on Lost: a mystic force that must be placated, lest it become angry and punish us. "The Market doesn't like ..." "What the Market wants to see is ..."
And, oooh, is the Market cranky at Obama! The Market doesn't like raising taxes on the wealthy (even if Buffett does). The Market doesn't like government health-care reform or cap-and-trade environmental policy or big budgets or limiting bonuses at bailed-out banks. And don't get the Market started on bank nationalization. That ticks the Market off!
You can get the whole story here http://www.time.com/time/arts/article/0%2C8599%2C1884328%2C00.html
These guys like to shoot their fat mouths off and pat each other on the back like college frat boys - but when Jon Stewart invited rick santelli on he backed down like the coward he is...
Stewart is a genius!
Stewart aped Santelli's newsgrabbing shouty-faced blubber from the Chicago Mercantile Exchange, coyly admitting, "I have to say, I find cheap populism very arousing." And then, for eight minutes, Stewart at his arch best (with the help of the crackerjack Daily Show research team) went on an absolute tear and burned CNBC right down to the doorframes. "If only I'd followed CNBC's advice, I'd have a million dollars, provided I'd started with a hundred million dollars."
http://www.alternet.org/blogs/mediaculture/131159/jon_stewart_continues_his_smackdown_on_market-worshipping_jim_cramer_and_cnbc/
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Ed
15 yrs ago
CNBC meets Jon Stewart http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220533
That was precipitated by this http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220250
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Ed
15 yrs ago
Uncensored version
Jon Stewart Demolishes CNBC's Jim Cramer in Daily Show Showdown
http://www.alternet.org/blogs/video/131463/jon_stewart_demolishes_cnbc%27s_jim_cramer_in_daily_show_showdown_(uncensored)/
Note the two short clips that Stewart's minions dug up on Kramer's unethical behaviour as a hedge fund manager... recall the article in TIME posted on these forums some time ago that indicated that with as little as USD9B oil prices could be manipulated dramatically...
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Ed
15 yrs ago
And here's Kramer recommending buying Bear Stearns shortly before it collapsed... after watching this guy in action as a hedge fund manager one has to wonder if he's not financially benefiting from passing out this garbage advice
http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220284
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Ed
15 yrs ago
Report on CNN ... Stewart's ratings are up 20% since the feud started... Kramer's down 24%.
A monkey could do a better job at stock picking than Kramer.
This is a good piece on kramer http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220508
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Ed
15 yrs ago
Being an expert on the Great Depression has minimal bearing on the current crisis. This is an entirely different problem - I think a far worse problem than was faced in the GD.
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Ed
15 yrs ago
This showed up in my mail today:
Hi All,
As we try to uncover why this is happening I came across the following analogy that explains current global issues in simple terms.
Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around and as a result increasing numbers of customers flood into Heidi's bar. Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.
He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar. However they cannot pay back the debts. Heidi cannot fulfil her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95 %. PUKEBOND performs better, stabilizing in price after dropping by 80 %.
The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties. The funds required for this purpose are obtained by a tax levied on the non-drinkers.
Finally an explanation we can all understand...
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Ed
15 yrs ago
AIG Bonuses.
Why not refuse to pay and allow the people who brought the company down yet are still willing to accept these sue the government - and expose themselves?
Hard to believe any of these people (most of whom dont even work for AIG anymore) would come out of the woodwork to moan to a packed court room about how they deserve their millions... Front Page Pariahs is what we'd have...
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Ed
15 yrs ago
Excellent article re: AIG bonuses.
ASIAN LESSONS Off with the bankers
AI.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they're needed to retain employees who are crucial for winding down transactions that are "difficult to understand and manage." In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.
There is no reason to believe this.
Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.
In South Korea, cozy relationships between banks and the large conglomerates called chaebols were a major reason for the crisis. But after the crisis hit, Korean bankers and companies insisted that the complexity of chaebols like Samsung and LG — with their many separate but interwoven businesses — meant that outsiders would not be able to distinguish good loans from bad.
In Thailand, some argued that the preponderance of family-owned businesses — and the lack of clarity about precisely which family members were really in charge — meant that only bankers already working in big institutions like Bangkok Bank and Siam Commercial Bank could determine which borrowers were creditworthy.
The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses.
The South Korean government also demanded that the banks and the chaebols make a clean break. This generated a great deal of political noise — particularly when foreign managers were brought in, as when the Carlyle Group bought a stake in KorAm Bank in 2000 and Lone Star Funds purchased the Korea Exchange Bank in 2003.
But these reforms made all the difference. Banks became healthy and resumed lending within a few years after the crisis broke. The chaebols that survived are stronger than they were before the crisis. They are now withstanding the severe pressure of the global recession because they were forced to become better regulated, and more separate from banks.
Indonesia did not respond to the crisis so wisely, and the costs were severe. In 1997, Bambang Trihatmodjo, a son of President Suharto, had to close his troubled bank, Bank Andromeda, but proceeded to continue essentially the same operation under a different bank's name. The new bank was only a small player in the overall economy, and the ruling elite seemed to think that no one would care. But Indonesia lost the support of the United States when it reneged on promises to replace failed bankers with more competent and honest ones.
The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out.
Traders are hardly in short supply, and you don't need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.
If A.I.G. wants to argue that complex transactions, hedging positions and counterparty relationships require employees who are intimately familiar with those trades, it should at least provide evidence that the arguments for doing so are sounder than the ones made in Indonesia in 1997, when leading bank-owning conglomerates claimed that only they understood their financing arrangements, which certainly were complex. Or the Russian bankers in 1998 who were convinced that only they and their friends could possibly close the deals that they had taken on. We heard variants of the same idea in Poland in 1990, Ukraine in 1994 (and in the Ukrainian crises subsequently), and Argentina in 2002.
Any grain of truth in these arguments must be weighed against the costs of allowing discredited insiders to manage institutions after they have blown them up. Even if the conclusion is that a few experts need to be retained, offering guaranteed bonuses to virtually the entire operation is hardly the way to achieve the desired results. We should not let people think that the best way to guarantee job security is to lose lots of money in a really complicated way.
The argument that A.I.G.'s traders are the people that we must depend on to save the United States economy is as weak and self-serving as it was in Thailand, Korea or Indonesia. A.I.G. is essentially advocating survival of the weakest. Thankfully, the American people are not buying it.
Simon Johnson is a professor at the M.I.T. Sloan School of Management and a former chief economist at the International Monetary Fund. James Kwak is a student at Yale Law School.
http://www.iht.com/articles/2009/03/20/opinion/edjohnson.php
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Ed
15 yrs ago
Great article.
The moment Paulson said no equity for bailout cash (when Warren Buffet was getting a sweetheart deal) it was rather clear, at least to me, whose side he was on.
I wonder how much the government guarantees of these toxic assets will end up costing the taxpayer... my suspicion is it will bankrupt the global economy.
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Ed
15 yrs ago
Hopefully this will stop the bleeding but I am sceptical.
Is one trillion dollars even close to enough?
Nobody seems to have any idea how much toxic waste is on the banks balance sheets. And more toxic waste is piling up every day as people hand back their keys to their homes as they lose their jobs - and default on other debts.
I am left wondering if this is a futile push against a sea of debt that cannot be held back...
Hopefully not because if this doesn't work then what's left in the arsenal?
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Ed
15 yrs ago
Leading economist Paul Krugman weighs in - and his take on this?
It won't work....
Paul Krugman: Financial policy despair
Over the weekend newspapers reported leaked details about the Obama administration's bank rescue plan, which is to be officially released this week.
If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the "cash for trash" plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.
This is more than disappointing. In fact, it fills me with a sense of despair.
After all, we've just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn't do anything, and anyway it was someone else's fault.
Meanwhile, the administration has failed to quell the public's doubts about what banks are doing with taxpayer money.
And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they're doing.
It's as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.
Let's talk for a moment about the economics of the situation.
Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.
As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there's a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: The government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.
That's what Sweden did in the early 1990's. It's also what we Americans did after the savings and loan debacle of the Reagan years. And there's no reason we can't do the same thing now.
Full Story http://www.iht.com/articles/2009/03/23/opinion/edkrugman.php
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Ed
15 yrs ago
This... is not good.
Japan posts another record fall in exports (49.4% DOWN)
Japan's exports plunged a record 49.4 percent in February from a year earlier, government data showed on Wednesday, as global demand for Japanese goods like cars and electronics evaporates amid a deepening financial crisis.
But the trade balance swung into surplus in February for the first time in five months, as a sharp fall in imports offset the sharp drop in exports.
It was the fifth straight month of annual drops in exports, following the previous record fall of 45.7 percent in January and larger than the median forecasts from economists for a 47.1 percent drop.
Imports fell 43.0 percent, more than an expected 38.5 percent decline, largely due to falls in oil prices, bringing Japan's trade balance to a surplus of ¥82.4 billion, or $841.6 million, against economists' forecasts for a deficit of ¥10.9 billion.
The trade surplus comes after Japan posted its largest trade deficit ever in the typically slow export month of January.
"Prices of imports have been falling due to the appreciation of the yen," said Kyohei Morita, chief economist at Barclays Capital. "Weakness in the Japanese economy will pull down imports from next month, and this is a sign of weakness in domestic demand.
"Large declines in exports will probably continue for March and April. After that, stimulus in the Chinese economy will probably help this negative margin decline."
Exports to the United States dropped 58.4 percent in February after a record 52.9 percent fall in January, and exports to Asia plummeted 46.3 percent after a 46.7 percent fall in January.
http://www.iht.com/articles/2009/03/25/business/25yen.php
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Ed
15 yrs ago
Classic on the AIG dude who wrote his whine letter...
Here's an excerpt
But all of this is really secondary to the tone of DeSantis' letter. He acts like he's a victim because he didn't get to keep his after-tax bonus of $742,006.40 in the middle of a global depression. And he really loses his f*cking mind when he writes:
"None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house."
First of all, Jake, youa**hole, no plumber in the world gets paid a $740,000 bonus, over and above his salary, just to keep plumbing. Second, try living on a plumber's salary before you even think about comparing yourself to one; you're inviting a pitchfork in the gut by even thinking along those lines. Third, Jake, if you were a plumber, and the electrician burned the house down -- well, guess what? If you and that electrician worked for the same company, you actually wouldn't get paid for that job.
Out in the real world, when your company burns a house down, you're not getting paid by that client. It's only on Wall Street, where the every-man-for-himself ethos is built into an insanely selfish and greed-addled compensation system, that people like you expect to get paid in a bubble -- only there do people expect their performance bonuses no matter how much money the shareholders lose overall, no matter how many people get laid off after the hostile takeover, no matter how ill-considered the mortgages lent out by your division were.
Full Story
http://www.alternet.org/workplace/133627/aig_exec_whines_about_public_anger%2C_and_now_we%27re_supposed_to_pity_him_yeah%2C_right/
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Ed
15 yrs ago
It would appear to me that the US society is corrupted in a manner that at all levels there is a failure to face reality. And this failure makes it difficult to get through this crisis.
Everyone wants to live the high life - and they want easy money - and low or no taxes. And that's what they have been increasingly getting. But it has been a false prosperity, and we have to realize that.
Instead we stick fingers in the dike and try to 'reinflate' the economy under the false premise that we can get back on track again.
You only need turn on the biz news (Rico Hizon on BBC Asia Biz News was all smiles when the market surged 8% - as if the party is ready to start all over again - I can only imagine what the wonks are saying on CNBC but I dont watch that nonsense channel).
I have questioned from day one whether these bail outs made sense - my sense was that we let things fall and THEN we step in with massive stimuliiiii and get back to business. I continue to wonder if we are delaying the inevitable - and in the meantime using up all the gun powder...
Pulled this from one of the links someone posted above:
In the old days, “panics” and “depressions” ended fairly quickly… at least unemployment tended to be short-term. There were no elaborate social welfare systems then. No unemployment compensation.
No food stamps or “independence” cards. People had to make do.
So, when a depression hit, wages fell quickly and people got back to work. They earned less, but the whole economy would adjust, with lower prices for everything.
There were no bailouts and no stimulus plans, either. Mistakes were corrected relatively quickly. Businesses went broke. Men were “ruined” and had to drink themselves to death.
Now, things are better. If their businesses go broke, they can go on almost as if nothing had happened… as long as they owe money to the right people. Heck, they might even get a bonus.
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Ed
15 yrs ago
Interesting read from the son of Galbraith - one thing he doesn't mention is that the US was the 'China' of the 1930's and were running a huge surplus - so they could fund massive stimulus programs...
Also, the question remains - does stimulus work when you continue to prop up insolvent businesses particularly banks - or is it simply wasted?
This Crisis Is Way Bigger Than Dead Banks and Wall Street Bailouts
By James Galbraith, Washington Monthly. Posted March 23, 2009.
Why the economic crisis, and its solution, are bigger than anyone has so far admitted.
http://www.alternet.org/workplace/132849/this_crisis_is_way_bigger_than_dead_banks_and_wall_street_bailouts/?page=entire
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Ed
15 yrs ago
Was thinking about this while driving earlier today - the reason we are in this pickle is because people were allowed to own homes beyond their means starting in around 2002. This created a massively bubble and enormous false wealth that poured into the US economy. In short turning on the money tap and getting rid of the regulators did exactly what Bush wanted - it lit an afterburner on the economy and helped him get re-elected.
But lets leave that bumbling corrupt stooge to stew in the fact that now and for all time history will judge him and his band of crooks and torturers as the worst administration in the history of the United States.
Let's instead point the finger at the media. Where were they when a gardener was signing off on a 500k house - or when a cleaning lady in a hospital had amassed a mini empire of rental properties (both true stories - reported after they went bankrupt of course).
Surely the media would have know this was going on just as surely everyone in America must have known this was one big ponzi scheme.
Sadly I can tell you where they were - reporting on whether or not a bimbo singer who cant sing was wearing panties... or some other worthless lead story.
Again, just as with the Iraq War, the media questioned none of this because who's going to be the one to rain on the parade when a booming economy regardless of how false it is means ad dollars. Nobody wants to break the bad news...
Good journalism is dead in the US and what you have is differing shades of Geraldo and Springer...
I have no empathy for these media empires that are going bankrupt - they sowed the seeds of their demise by failing to question this ponzi scheme and they unfortunately are now paying the price.
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Ed
15 yrs ago
I seldom every watch CNBC either and if I flip there and Kudlow is on I throw a brick at the TV...
Agree on all other points as well and find it incredible that people think (some say within 2009) go back to the good old days of 2002 - 07 1/2.
Lets have a reality check.
This prosperity was false and driven by Bush's housing policy - it resulted in oversupply of malls, ships, factories, MBAs, lawyers, bankers, autos, and on and on and on.
Now the money is cut off and it will never come back to the levels that fueled this false prosperity, at least not in my lifetime (it took 70+ years before the lobbyists greased the wheels enough to unwind the regulations put in place to prevent GD2).
It all comes back to supply and demand. This affects employment compensation and prices on goods and services - and there is currently and will be for some time a massive oversupply of all of these.
I've mentioned earlier that it takes 2.5% growth just to absorb new job market entrants - so what does it take to absorb new plus retrenched people?
I think the best case scenario is we stabilize and just hope that things dont get a lot worse.
And when you find yourself getting irrationally exhuberant after listening to someone present a great case for return to prosperity on the biz news, remember that most of those saying that need to say that because thats the only way THEY return to prosperity...
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Ed
15 yrs ago
This is an excellent read
The Quiet Coup
One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.
The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.
Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.
But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.
No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.
In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.
But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.
The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.
Full Story http://www.theatlantic.com/doc/200905/imf-advice
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Ed
15 yrs ago
A bit of humour from Jon Marsh in the form of the latest SPIKE column:
Why Kim Jong-il and Wall Street bankers have a lot in common
Spike columnist JON MARSH applauds the latest failure of North Korea to do anything properly and pays tribute to one of the worst CEO’s of all time, Rick Wagoner of GM.
North Korea’s leader, Kim Jong-il, he of the mad hair, would make a great Wall Street banker. He has a giant ego, enjoys a lifestyle of supreme luxury, and, just like America’s masters of the universe, has little grasp of reality.
Take the launch of the “satellite” at the weekend that has got the UN’s knickers in such a twist. North Korea has about as much need for a satellite as it does banjo players and bull fighters. The country is on its knees. Its impoverished people are controlled by the most brutal dictatorship in the world and many are seriously short of food and basic medical services.
Undaunted, that ever chirpy cheerleader in chief, the Korean Central New Agency, reported that: “The successful satellite launch, symbolic of the leaping advance made in the nation’s space science and technology, was conducted against the background of the stirring period when a high-pitched drive for bringing about a fresh great revolutionary surge is under way throughout the country to open the gate to a great prosperous and powerful nation.” With a final flourish, the Pyongyang news agency boasted of how the satellite was sending back to earth revolutionary music, including the chart-topping Song of General Kim Jong-il.
In the mumbo jumbo stakes, this nonsense is about on a par with the investment banking strategy of giving huge mortgages to poor people and then selling the resulting complex asset-backed derivatives to the rest of the world. The “satellite”, just like the bankers in their investments, crashed and burned.
The launch was, in fact, cover for testing long-range missile technology. It was also a complete failure. Whatever it was that left the launch pad almost certainly ended up at the bottom of the Pacific Ocean.
God help the man who was given the job of telling Kim the bad news. This, after all, is a man who is used to getting what he wants. (Kim once had South Korean film director Shin Sang-ok and his actress wife, Choe Eun-hui, kidnapped so they could help him make movies.)
A pleasure-seeking playboy, he lives like a king while his people starve. But, just like the bankers, his time will come. While Kim comes to terms with the latest abject failure of his monstrous regime, a curious scene was played out a few days ago in Washington that again reminds us of the similarities between “The Dear Leader,” as he is known, and the gentlemen from Wall Street.
The CEOs of the most powerful financial institutions in the world were called to the White House to justify paying high salaries to their employees and themselves. “These are complicated companies,” offered one. “We’re competing for talent on an international market,” said another.
President Barack Obama was having none of it. “Be careful how you make those statements, gentlemen. The public isn't buying that,” he said. “My administration is the only thing between you and the pitchforks.”
Kim knows that one day he will probably have his own date with the pitchforks and, hopefully, there will be no one there to protect him.
No wheels on Rick’s GM wagon
Spike knows a thing or two about failure. Newspaper launches that did good impersonations of North Korean rockets, a magazine or two that fell to earth, a buy high sell low investment strategy – failure, if not a constant companion, has always been within hailing distance.
That’s why it is time to doff our caps to Rick Wagoner, the former CEO of General Motors and a man who has taken failure to previously unexplored areas of the corporate land mass. His failure is of truly magnificent, dizzying proportions.
Here are a few highlights of his eight-year stewardship of an American icon:
GM’s stock down 83%
GM has lost $82 billion in the last four years (that’s around $40 million a week)
In the past eight years, the company’s market cap has dropped by $37 billion.
GM market share has fallen from 33% to 18%
In 1908, the Ford Model-T got better mileage - 25 miles per gallon - than many of GM’s current gas-guzzler models (The Hummer gets 11-12 miles to the gallon)
He used a GM corporate jet to fly to Washington to ask Congress for a bail out
His salary was2.2 million in 2008
He is eligible for a retirement plan worth $20.2 million.
Rick Wagoner, failures around the world salute you. You are simply the best.
Jon Marsh is a Hong Kong-based journalist who has also worked in the UK, New York, Bangkok and Sydney. He was the editor of Spike magazine.
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Ed
15 yrs ago
Classic finishing line...
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Ed
15 yrs ago
When this all started I recall the head of a large hedge fund's comment 'this is bigger than government'
Government is trying to prove him wrong...
Here's the story on the 4 trillion fears from Reuters:
US STOCKS - Futures falter on fresh toxic asset fears
NEW YORK, April 7 (Reuters) - U.S. stock index futures pointed to a lower open on Tuesday after it was reported the International Monetary Fund was set to forecast toxic assets on the balance sheets of financial corporations could reach $4 trillion.
Wall Street Journal
Every time the IMF issues an estimate for the cost of the losses from toxic assets at the world’s financial institutions, the numbers get worse.
According to the Times, “;Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.”
The information may be the most powerful yet that banks are in for growing losses as 2009 wears on and the a recovery of the credit markets is still in the distant future. That could undermine the federal government’s new public/private program to buy toxic assets from banks, particularly if the concern grows that the value of these assets will fall further.
The IMF projections also seem to argue that the size of the money needed for the TARP will grow.
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Ed
15 yrs ago
This is a book that we featured on our home page as our pick of the year.
It predicted that America was, under the corrupt, incompetent dunces in the Bush administration, in great peril. And how correct all of this turned out to be.
This is a tremendous read and even more relevant given the disasters that Bush left behind and how we are paying for electing this monster of a man.
In “The Assault on Reason” Al Gore excoriates George W. Bush, asserting that the president is “out of touch with reality,” that his administration is so incompetent that it “can’t manage its own way out of a horse show,” Full Review Here:
http://www.nytimes.com/2007/05/22/books/22kaku.html
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Ed
15 yrs ago
Thanks for that - it gazumps my previous top headline to get the Number One Spot on the news - although I prefer not to link to the NY Racist Post...
http://www.guardian.co.uk/business/2009/apr/08/cramer-roubini-mad-money-bear-sterns
Kramer is a symptom of what is wrong with journalism i.e. proper journalism is dying and being replaced with garbage aka Jerry Springer, E TV, Geraldo, Limbaugh and the King of Garbage, FOX 'NEWS'
Assault on Reason - Al Gore. Highly recommended.
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Ed
15 yrs ago
Saw a debate on the tube recently where one of the participants wondered why banking had become some complicated. His comment was 'you take in deposits and pay interest, you lend it out at a higher rate of interest - and you profit on the spread'
I assume that is what Krugman is getting at in this article:
Making Banking Boring
Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.
In the years that followed, of course, banking became anything but boring. Wheeling and dealing flourished, and pay scales in finance shot up, drawing in many of the nation’s best and brightest young people (O.K., I’m not so sure about the “best” part). And we were assured that our supersized financial sector was the key to prosperity.
Instead, however, finance turned into the monster that ate the world economy.
Recently, the economists Thomas Philippon and Ariell Reshef circulated a paper that could have been titled “The Rise and Fall of Boring Banking” (it’s actually titled “Wages and Human Capital in the U.S. Financial Industry, 1909-2006”). They show that banking in America has gone through three eras over the past century.
Before 1930, banking was an exciting industry featuring a number of larger-than-life figures, who built giant financial empires (some of which later turned out to have been based on fraud). This highflying finance sector presided over a rapid increase in debt: Household debt as a percentage of G.D.P. almost doubled between World War I and 1929.
During this first era of high finance, bankers were, on average, paid much more than their counterparts in other industries. But finance lost its glamour when the banking system collapsed during the Great Depression.
The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative for those who ran it. Banking became boring, partly because bankers were so conservative about lending: Household debt, which had fallen sharply as a percentage of G.D.P. during the Depression and World War II, stayed far below pre-1930s levels.
Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.
After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.
As these changes took place, finance again became a high-paying career — spectacularly high-paying for those who built new financial empires. Indeed, soaring incomes in finance played a large role in creating America’s second Gilded Age.
Needless to say, the new superstars believed that they had earned their wealth. “I think that the results our company had, which is where the great majority of my wealth came from, justified what I got,” said Sanford Weill in 2007, a year after he had retired from Citigroup. And many economists agreed.
Only a few people warned that this supercharged financial system might come to a bad end. Perhaps the most notable Cassandra was Raghuram Rajan of the University of Chicago, a former chief economist at the International Monetary Fund, who argued at a 2005 conference that the rapid growth of finance had increased the risk of a “catastrophic meltdown.” But other participants in the conference, including Lawrence Summers, now the head of the National Economic Council, ridiculed Mr. Rajan’s concerns.
And the meltdown came.
Full Story http://www.nytimes.com/2009/04/10/opinion/10krugman.html?_r=1&em
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Ed
15 yrs ago
Excellent video - some disturbing predictions...
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Ed
15 yrs ago
A good PBS video on fraud in the banks http://www.pbs.org/moyers/journal/04032009/watch.html
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Ed
15 yrs ago
Goldman, Give It All Back
While the bank is returning the government's $10 billion, why not also return the $13 billion it got from the U.S. through AIG's bailout?
If Goldman Sachs CEO Lloyd Blankfein wants to put his money where his mouth is, he won't stop with just giving back the $10 billion in federal bailout money the investment firm got last autumn. He'll also offer to return some of the $13 billion Goldman (GS) got from the U.S. government by way of the bailout of American International Group (AIG).
Goldman's decision to sell shares and raise the necessary cash to repay the government is being seen by some as a show of strength. That's especially so after the firm posted a better-than-expected profit for the first quarter of $1.81 billion—largely driven by its proprietary trading desk. That's the same group of bond and commodity traders responsible for much for Goldman's outsized profits during the credit boom. So everything old is new again at Goldman. Right?
But more than anything, the move to repay the TARP money is being motivated by Blankfein's desire to free his firm of all those nettlesome government mandates on executive compensation and bonuses. Now there's nothing wrong with Goldman giving back the TARP money if it really doesn't need it. After all, government officials have always said they expected the banks to repay Treasury at some point.
AIG's CDOs: How Different from TARP?
Still, if Blankfein really wants to help U.S. taxpayers out, he can go the extra mile and give back some of that AIG money the firm got, too. If the government had allowed AIG to file for bankruptcy, Goldman likely would have incurred an even bigger fourth-quarter loss than it reported. So Blankfein owes a bit of gratitude to Uncle Sam. And as my BusinessWeek colleague Roben Farzad pointed out on CNBC on Mar. 27, Blankfein can thank taxpayers by forking over its AIG largesse.
Now we know Goldman will object that the AIG bailout money is different from TARP. The firm will argue that the dollars that passed through AIG were nothing more than money it was owed on all those credit default swaps it had purchased to insure some of its portfolio of collateralized debt obligations, or CDOs. In Goldman's world, all the government was doing was allowing AIG to live up to its contractual agreements.
But, as we have seen in this financial crisis, some contracts can be broken. Maybe it was a smart move for the government to indirectly bail out AIG's trading partners to prevent a systemic financial collapse. But the government didn't have to make firms such as Goldman completely whole by paying face value for the CDOs that AIG had insured.
If nothing else, maybe Goldman should now take the haircut it probably should have taken on those CDOs at the time of the AIG bailout. The bank could start by offering to give some of that $13 billion back, too.
http://www.businessweek.com/bwdaily/dnflash/content/apr2009/db20090414_212338.htm?chan=top+news_top+news+index+-+temp_top+story
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Ed
15 yrs ago
This was posted by another member on Think! overnight:
General Growth files historic real estate bankruptcy
Thursday April 16, 2009, 4:02 pm EDT
Buzz up! Print By Ilaina Jonas and Emily Chasan
Reuters - A woman leaves a restaurant at Tyson's Galleria shopping mall in McLean, Virginia, April 16, 2009. REUTERS/Jim Young ...
NEW YORK (Reuters) - General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on Thursday in the biggest real estate failure in U.S. history.
Ending months of speculation, General Growth, along with 158 of its 200-plus U.S. malls, filed Chapter 11 while it tries to refinance its debts.
But the ongoing global financial crisis made it impossible for General Growth to restructure outside of bankruptcy and could signal further troubles for other financial institutions who are General Growth creditors.
The collapse underscores the pressure on U.S. commercial real estate with few sources of available funding.
Chicago-based General Growth, which owns such valuable properties as South Street Seaport in New York, Fashion Show in Las Vegas and Faneuil Hall Marketplace in Boston, listed total assets of $29.56 billion and total debts of $27.29 billion.
The collapse marks a sad chapter for a company that has been growing since 1954, when brothers Martin and Matthew Bucksbaum decided to expand their family's grocery business and build a shopping center in Cedar Rapids, Iowa.
The company expanded steadily through both building and buying malls, the largest acquisition being the 2004 purchase of high-end mall owner Rouse Cos for $14.2 billion. That deal, financed entirely with debt, added 37 valuable U.S. malls to its portfolio, but also added enormously to its debt load.
"There are quite a few companies out there on the buyside who can now buy properties at a deep discount," said Anthony LoPinto, chief executive of real estate executive search firm Equinox Partners. "A lot of fortunes are going to be made out of the Bucksbaums' misfortune."
Since November, General Growth had been warning it might seek protection from its creditors due to its failure to refinance maturing mortgages. Earlier this month, the company had tried to restructure Rouse bonds, but failed to get the necessary support.
"When we did not achieve the necessary amount of agreement on the bond solicitation, at that point we recognized that it was conceivable that we would not get the time outside of bankruptcy that we had hoped for to work on a restructuring," General Growth President Thomas Nolan told Reuters.
The company's collapse is not expected to be an isolated event. About $814 billion of commercial mortgage debt is expected to mature over the next two years, according to real estate research firm Foresight Analytics.
"We will see a significant rise in delinquent and defaulted mortgages in commercial real estate above and beyond what we already experienced," said Sam Chandan, president and chief economist at research firm Real Estate Economics.
SEARCHING FOR ANSWERS
General Growth said in a statement that it would keep exploring strategic alternatives during bankruptcy protection, from which it is seeking to emerge as quickly as possible through a reorganization that preserves its national business.
Its filing in the U.S. Bankruptcy Court in Manhattan makes it one of the largest nonfinancial companies to succumb to the global financial crisis and is the biggest bankruptcy of a U.S. real estate company, according to BankruptcyData.com.
General Growth had previously put several of its flagship properties, including all three of its Las Vegas malls, up for sale. (ID:nBNG465138)
Analysts and other real estate experts have speculated that mall owners Simon Property Group Inc -- the largest U.S. mall owner -- and Australia's Westfield Group would be interested in buying some of General Growth's assets from bankruptcy.
"Their stock of malls in the U.S. is pretty good -- they are decent quality retail real estate. And I imagine the market reaction if there are any sales of their assets will be positive," said Bruce Nutman, UK head of retail capital markets at CB Richard Ellis.
General Growth said its properties would be open for business and operating as usual.
"Our core business remains sound and is performing well with stable cash flows," General Growth Chief Executive Adam Metz said in a statement. "While we have worked tirelessly in the past several months to address our maturing debts, the collapse of the credit markets has made it impossible for us to refinance maturing debt outside of Chapter 11."
General Growth has received a debtor-in-possession financing commitment of about $375 million from Pershing Square Capital Management LP as agent.
Pershing Square, the hedge fund run by William Ackman, owns about 25 percent of General Growth shares and had been urging the company to file for bankruptcy. Ackman has said its shares could rise even in bankruptcy because the market value of its assets far exceeds their book value.
At the end of 2008, about $15.17 billion of General Growth's debt consisted of mortgage loans that had been securitized into commercial mortgage-backed securities, according to research firm Trepp.
"This underscores that real estate companies are most vulnerable to refinancing risk rather than market risk," said Nomura's London-based property analyst Mike Prew.
General Growth shares were halted on the New York Stock Exchange on Thursday, but in premarket trade, they had fallen some 43 percent to 60 cents. The shares hit a 52-week high of $44.23 in May 2008 and a lifetime high of more than $67 in early 2007.
The bankruptcy helped push down the entire real estate investment trust sector, as the benchmark MSCI U.S. REIT Index fell 2.1 percent.
While General Growth bonds were not trading, Rouse's 5.375 percent notes due 2013 rose to 37.5 cents on dollar versus 29.25 cents on Wednesday, according to MarketAxess.
SETTING UP A TEAM
General Growth's refinancing troubles led to the firing of former CFO Bernard Freibaum in October. John Bucksbaum, who succeeded his father Matthew in 1999, stepped down as CEO the same month, but he remained chairman.
The company has hired law firms Weil Gotshal & Manges and Kirkland & Ellis to represent it, according to court papers. Pershing Square has hired law firm Jones Day and lead attorney Robert Profusek to represent it.
The case is In re: General Growth Properties Inc, U.S. Bankruptcy Court, Southern District of New York, No. 09-11977.
http://finance.yahoo.com/news/General-Growth-files-for-rb-14945510.html
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Ed
15 yrs ago
Flipping through yesterdays tribune and I came across this rather bizarre article on the state of the US economy - is it just me or does it seem as if the headline was forced on the reporter and he's struggling with writing a story that agrees with that headline?
I also notice that the headline in the Herald Tribune newspaper (international version of the NYT Times) is slightly less optimistic than the headline for the same story in the US version NY Times online (I assume the NY Times online is same as their print)
IHT: In some areas of the US, signs the decline is easing
NY Times: Fed Report Hints That Pace of Decline Is Easing
Hmmm.... if we print enough positive headlines indicating that the crisis is over and we are at the bottom, can we in fact convince ourselves that it is so and ergo it is over? That would be nice - however I am not sure how this concept obviates the fact that amongst other major problems, AIG which apparently cannot be allowed to fail is still insolvent, that Chrysler is likely gone in a couple of weeks and that the government looks to be left with no choice but to walk GM through a highly uncertain bankruptcy at the end of May.
Hopefully things are not going to get worse and its all uphill from here but as this thread is dedicated to Coping with the Crisis I think its more important than ever to read critically because as you can see from this article when you read between the lines, and beyond the headlines, there appears to be more than one message (and in this case plenty of contradictions) being communicated:
Though the American economy is in a rut, some areas of the country, from San Francisco to Kansas City to New York, are seeing hints that the pace of economic declines is leveling off.
That was one conclusion of a region-by-region economic snapshot released Wednesday by the Federal Reserve. The survey of a dozen Federal Reserve districts, known as the beige book, again described a landscape of continuing economic woe, one marked by rising job losses, declines in manufacturing and lower prices.
But the assessment this time was a shade less dreary. Five of the Fed’s 12 districts said the downward slide was slowing, and others glimpsed signs that different sectors of the economy were coming to rest at lower levels.
Home sales and retail spending edged up in some areas. Manufacturing in Chicago and Kansas City was falling at a slower clip, and orders for high-technology equipment “firmed somewhat” in Dallas and San Francisco, although at very weak levels, the Fed said.
The grace notes in the report added one more glint to the “glimmers of hope” in the economy that President Obama and other policy makers have cited as they try to build confidence in the government’s economic agenda and rescue measures.
But analysts were cautious of the Fed’s report, pointing out that an economy falling at a slower rate was still heading down.
“A reduction in the pace of declines does not simply equate to economic rebound,” Dan Greenhaus, an analyst in the technical strategy group at Miller Tabak & Company, wrote in a note. “This is a crucial difference and one that in many months and years, people will be wondering why everyone on the block didn’t realize this.”
The Fed also noted continuing downward pressure on prices, from cheaper raw materials to lower prices for products and services like accounting in Dallas or hotels in San Francisco.
The Labor Department confirmed the data in its consumer price report for March. The agency said that for the first time since 1955, consumer prices in the United States were lower than they were a year ago.
Consumer prices in March were 0.4 percent lower than the same month last year, reflecting a steep drop in oil prices, which peaked above $145 a barrel last summer before collapsing as the financial crisis took hold.
Last month, consumers paid far less for gasoline and home heating oil than they did in March 2008. While the price of dairy products, used cars, computers, lodging and transportation also fell as cheaper oil and reduced consumer demand rippled through the system, fears about outright deflation are ebbing.
Economists expect inflation to remain low for the rest of the year as rising unemployment keeps consumer spending low and demand weak. In its report on Wednesday, the Labor Department said that its Consumer Price Index unexpectedly fell 0.1 percent in March from February, largely because of a 3 percent decrease in energy costs.
But the so-called core rate of inflation, which excludes food and energy prices, was 0.2 percent. Sixty percent of the gain in core prices was because of an 11 percent increase in tobacco costs.
Despite the overall decline in prices from March 2008, core prices excluding food and energy were 1.8 percent higher in March than a year ago, muting some concerns that the economy was sliding toward a deflationary spiral of lower prices, falling wages and vicious economic contraction.
“We’re in the zone of price stability,” said Stuart Hoffman, chief economist at PNC Financial. “I view these as good numbers. I don’t see any numbers that would indicate deflation and depression.”
As the financial crisis erupted at the end of 2008, some economists and even Federal Reserve policy makers began to worry about the threat of deflation, a factor in the Great Depression.
Seeking to revive the economy, the Fed slashed interest rates to record lows near zero percent and expanded its balance sheet to more than $2 trillion. Consumer spending and prices for food, gasoline and other household goods have stabilized in the last two months, dimming the specter of a downward cascade of wages and prices.
“We’re not in that spiral,” said Nigel Gault, chief United States economist at IHS Global Insight. “I don’t think we’ll get into that spiral, but that’s more of a risk than inflation is at the present time.” Other economists say that the Fed’s aggressive measures amount to creating money from whole cloth, and could catalyze a rapid rise in prices and a weakening of the dollar once the economy gets back on its feet.
“The real risk to this economy is inflation,” said Ken Mayland, president of ClearView Economics. “When the Fed doubles — and is en route to — tripling its balance sheet, I don’t fear deflation.”
Still, at the most recent meeting of the Fed’s Open Market Committee meeting in March, some members “expressed the view that inflation was likely to persist below desirable levels.”
The Federal Reserve expects inflation to run at a rate of 0.3 percent to 1 percent for the rest of the year and pick up slightly in 2010 as the economy begins growing again at a slow pace.
On Tuesday, the government reported that producer prices slipped 1.2 percent in March after ticking up for the first two months of the year, largely because of the decline in energy costs from falling gasoline prices. The core producer price index, which excludes food and energy, was unchanged for the month.
The Federal Reserve also reported Wednesday that industrial production fell at an annual rate of 20 percent over the first three months of the year, showing a virtual shutdown in manufacturing plants, materials makers and in construction. Industrial production fell 1.5 percent in March from a month earlier.
The Fed’s measure of how much industrial infrastructure is being put to work fell to its lowest levels on record in March, to 69.3 percent. Economists said measures of capacity utilization were likely to fall even further this year as manufacturers, mines, factories and other industrial companies cut costs and reduce their outputs.
http://www.nytimes.com/2009/04/16/business/economy/16econ.html
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Ed
15 yrs ago
FYI - this popped up on Bloomberg...
Treasury Says ‘No Basis’ to Report on Bank Testing (Update2)
Share | Email | Print | A A A
By Vincent Del Giudice and Nick Baker
April 20 (Bloomberg) -- A U.S. Treasury spokesman said there’s no basis to a blog posting that buffeted financial stocks by saying that most of the nation’s largest banks are insolvent.
Andrew Williams, a Treasury spokesman, dismissed the report from Hal Turner of North Bergen, New Jersey, “particularly given we don’t have stress test results yet.” Turner has advocated violence against blacks, Jews and immigrants on his Web site and Internet radio show, according to the Anti- Defamation League, created in 1913 to monitor anti-Semitism.
The Financial Select Sector SPDR Fund, an exchange-traded fund tracking banks, brokerages and insurers, fell to $10.62 from $10.75 in six minutes after FlyOnTheWall.com cited Turner’s blog post at 8:14 a.m. in New York. At 8:30 a.m., FlyOnTheWall advised readers to disregard the earlier story.
The XLF, as the financial ETF is known, sank to $9.87 at 4 p.m. in New York after JPMorgan Chase & Co. said banks worldwide are likely to realize about $400 billion more in losses on soured assets, requiring further injections of government capital.
In his blog posting, Turner said 16 of the banks are “already technically insolvent.” He mentioned HSBC Holdings Plc as one of the lenders. HSBC isn’t among the 19 banks being examined, according to the government.
Reached by telephone, Turner declined to say who would have given him the government’s so-called stress test of the 19 biggest U.S. banks. The Federal Reserve has said it plans to release results on May 4.
Turner, when asked if one of the quotes on the ADL Web site sounded like something he once said, replied that “it certainly fits the niche of the radio show at the time.”
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Ed
15 yrs ago
And then you have:
The Administration official also says the Treasury Department may need to pump more money into the banks than it currently has left in its $700 billion financial-rescue fund. But the Treasury Department has no plans to ask for the money immediately.
http://www.time.com/time/business/article/0,8599,1892401,00.html
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Ed
15 yrs ago
Watching BBC Business News and a China Analyst from CLSA was on.
Summing up his comments:
Exports in China have fallen off a cliff and the economy is being propped up by the government's spending spree - which he feels cannot last. As for the real growth number in China, it is what the government says it is - even if it's not...
As for the global economy he says there is much deleveraging still to come - whatever Geitner says he does not believe nor does will he put much faith in the stress tests for banks - he refers to the IMF's estimate of 4 trillion of bad debt on their books - he expects we will hit a new bottom, and if we dont we will stay on a flat line for a long time to come - he was very concerned about the job losses in the States and how, as people's savings are depleted they throw in the towel on their homes and other debt.
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Ed
15 yrs ago
Further to my recent comments re: the media's attempt to put forth a brave (and false) face, there was a news story putting trying to tack on a positive twist to the horrible export numbers out of Japan.
48.7% was the expected drop, and the actual drop was 48.4%
This gets painted as a tremendous victory as it indicated the 'pace of slowing was slowing'
Ah....ok....
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Ed
15 yrs ago
Hilarious expose on CNBC's Larry Kudlow who was fired by Bear Stearns because of drug use
http://www.alternet.org/mediaculture/137955/the_rant%3A_cnbc%27s_lawrence_kudlow_--_a_new_low_in_right-wing_trash_talk_and_hypocrisy/
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Ed
15 yrs ago
Where are the experts parking their money?
Charlie Morris, head of absolute return at HSBC Global Asset Management
The best way to invest during this "truly awful macro-economic situation" is by splitting your portfolio into three, suggests Charlie Morris. "You have one third doing absolutely nothing, one third buying things that are dirt cheap and one third in high conviction trades," he says. "For me, the high conviction trade is gold bullion."
Mr Morris prefers to buy actual gold rather than opting for a specialist fund that invests in mining shares. "You get more liquidity and less volatility by owning gold bullion," he says.
More: http://www.independent.co.uk/money/invest-save/where-do-experts-choose-to-stash-their-cash-1673908.html
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Ed
15 yrs ago
That is a classic article - Kudlow is one of the main reasons I turned off CNBC US version some months ago.
The article puts him and his ilk completely in perspective - the guys had it all handed to him and he spooned it up his nose - then he rants day after day about how the unions need to be busted and how we need to lower taxes on the rich.
Larry Kudlow - a embarrassment to the human race
http://www.alternet.org/mediaculture/137955/the_rant%3A_cnbc%27s_lawrence_kudlow_--_a_new_low_in_right-wing_trash_talk_and_hypocrisy/
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Ed
15 yrs ago
Some valid pts from Krugman
Money for Nothing
On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.
Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.
All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.
Why is this disturbing? Let me count the ways.
First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”
I’m not just talking about the $600 billion or so already committed under the TARP. There are also the huge credit lines extended by the Federal Reserve; large-scale lending by Federal Home Loan Banks; the taxpayer-financed payoffs of A.I.G. contracts; the vast expansion of F.D.I.C. guarantees; and, more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.
http://www.nytimes.com/2009/04/27/opinion/27krugman.html?em
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Ed
15 yrs ago
Here's an interesting idea on how to punish banks that participated in bad lending practices - and at the same time prevent further collapse - you wonder why the so-called master of the universe didn't come up with something like this instead of trying to bail out his buddies (or maybe you dont wonder eh)...
A better reason for refusing to bail out banks is its dire effect on incentives. The alternative must then be bankruptcy. Jeremy Bulow of Stanford University and Paul Klemperer of Oxford University have advanced a scheme that would do this neatly. Valuable banking functions of each institution would be split off into a new “bridge” bank, leaving liabilities (apart from deposits) in the old bank. Creditors left behind would be given equity in the new bank. Governments could “top up” some creditors beyond this level, without making all creditors whole, as now.
Full Article: http://www.ft.com/cms/s/0/94f9640e-3436-11de-9eea-00144feabdc0.html
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Ed
15 yrs ago
Don't Count Your Recoveries Before They're Hatched
Excerpt: But the world should have received a wakeup call on April 23 – just a day after Goldman's rosy forecast – when the State Energy Regulatory Commission released statistics showing that power output for the first three weeks of April fell 4 percent year on year after a drop of 1 to 2 percent in March. Industrial production accounts for 70 percent of energy usage. China is reporting first-quarter industrial output growth figures of 8.3 percent. With energy usage so closely tied to industrial production it is very difficult to figure out how production could rise that fast while energy use is falling.
Another jolt came Monday, when the Shanghai government said gross domestic product growth for the province, China's richest, would fall to 3.1 percent, well below its 9 percent target. It is one of the rare times in memory that a provincial government reported lower growth than the central government itself. Despite Beijing's perennial warnings against the practice of fudging growth figures upward, provincial government leaders have traditionally based their chances for promotion on rosy GDP figures. The government has warned against the practice again and again, offering penalties against offenders. Nonetheless, in most past years, adding up provincial growth figures and comparing their aggregate to national GDP showed the provinces were running far in advance of the country as a whole, an indication that too often the figures were simply made up.
Full Article: http://asiasentinel.com/index.php?option=com_content&task=view&id=1846&Itemid=422
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Ed
15 yrs ago
A philosophical reality check for this holiday morning
For a happier life, shake off your misplaced optimism
By Alain de Botton
Published: April 30 2009 19:11 | Last updated: April 30 2009 19:11
It has been clear for a while, at least since the first talk started about “green shoots” of recovery, that what we have to fear above all is hope. Attempts to trust that the worst is over and to stop frightening ourselves seem doomed to project us into yet worse disappointment. We are not only unhappy but – believing calm and happiness to be the norm – unhappy that we are unhappy.
It is time to recognise how odd and counter-productive is the optimism on which we have grown up. For the last 200 years, despite occasional shocks, the western world has been dominated by a belief in progress, based on its extraordinary scientific and entrepreneurial achievements. On a broader perspective, this optimism is a grave anomaly. Humans have spent most of recorded history drawing a curious comfort from expecting the worst. In the west, lessons in pessimism have derived from two sources: Roman Stoic philosophy and Christianity. It may be time to revisit some of these teachings, not to add to our misery but precisely so as to alleviate our sorrow.
To focus on the first of these sources, the philosopher Seneca should be the author of the hour. Living in a time of financial and political upheaval (Nero was on the Imperial throne), Seneca interpreted philosophy as a discipline to keep us calm against a backdrop of continuous danger. His consolation was of the stiffest, darkest sort: “You say: ‘I did not think it would happen.’ Do you think there is anything that will not happen, when you know that it is possible to happen, when you see that it has already happened ... ?” Seneca tried to calm the sense of injustice in his readers by reminding them – in AD62 – that natural and man-made disasters will always be a feature of our lives, however sophisticated and safe we think we have become.
If we do not dwell on the risk of sudden calamity, in the money markets or elsewhere, and pay a price for our innocence, it is because reality comprises two cruelly confusing characteristics: on the one hand, continuity and reliability lasting decades; on the other, unheralded cataclysms. We find ourselves divided between a plausible invitation to assume that tomorrow will be much like today and the possibility that we will meet with an appalling event, after which nothing will ever be the same again. The Goddess of Fortune can scatter gifts, then watch as with terrifying speed a 50-year-old company disappears or a balance sheet is destroyed by toxic assets.
Because we are hurt most by what we do not expect, and because we must expect everything (“There is nothing which Fortune does not dare”), we must, argued Seneca, hold the possibility of the most obscene events in mind at all times. No one should make an investment, undertake to run a company, sit on a board or leave money in a bank without an awareness, which Seneca would have wished to be neither gruesome nor unnecessarily dramatic, of the darkest possibilities.
Given our financial prowess, we have for too long thought of ourselves as in control of our destiny. We have trusted in the mathematical geniuses who promised us “risk management” and fashioned derivatives so complex we dared not look inside. Such trust could not be further from a Stoic mindset. We must, stressed Seneca, expand our sense of what may go wrong in our lives: “Nothing ought to be unexpected by us. Our minds should be sent forward in advance to meet all the problems, and we should consider, not what is wont to happen, but what can happen. What is man? A vessel that the slightest shaking, the slightest toss will break. A body weak and fragile.”
Christianity only backed up the Stoic message. It pointed out that while humans might strive for perfection, it is a problem – indeed a sin – to suppose that such perfection can ever occur on earth. Nothing human can ever be free of blemishes. There cannot be an end to boom and bust, mayhem and death.
We have tended to cast such gloomy messages aside. The modern bourgeois philosophy pins its hopes firmly on two great presumed ingredients of happiness, love and work. But there is vast unthinking cruelty discreetly coiled within this magnanimous assurance that everyone will discover satisfaction here. It is not that these two entities are invariably incapable of delivering fulfilment, only that they almost never do so for too long.
When an exception is misrepresented as a rule, our individual misfortunes, instead of seeming to us quasi-inevitable aspects of life, weigh down on us like particular curses. In denying the natural place reserved for longing and disaster in the human lot, the bourgeois ideology denies us the possibility of collective consolation for our fractious marriages, unexploited ambitions and exploded portfolios, and condemns us instead to solitary feelings of shame and persecution for having stubbornly failed to make more of ourselves.
We should, of course, instead remember the great pessimistic voices of history. There are two quotes I cherish for these sorts of times. One is from Seneca: “What need is there to weep over parts of life? The whole of it calls for tears.” The other is from the French moralist Chamfort: “A man should swallow a toad every morning to be sure of not meeting with anything more revolting in the day ahead.”
http://www.ft.com/cms/s/0/8c222362-35b1-11de-a997-00144feabdc0.html
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Ed
15 yrs ago
Change?
Since taking office Obama has followed through on commitments including declaring war on lobbyists, reducing taxes on 95% of Americans and now, as promised, he's closing down loopholes that allow corporations to avoid paying taxes by hiding profits offshore:
WASHINGTON – The White House Monday unveiled a far-reaching crackdown on offshore tax avoidance, targeting many U.S.-based multinational corporations and wealthy individuals.
President Barack Obama fleshed out a proposal included in his February budget blueprint seeking to curb the practice of parking foreign earnings in offshore tax havens indefinitely. By some estimates, $700 billion or more in U.S. corporate earnings have accumulated in overseas accounts in recent years.
[Barack Obama]
Barack Obama
The plan announced Monday aims to change the legal treatment of offshore subsidiaries and structures that companies have used to avoid not only U.S. taxes, but taxes in other developed countries as well.
http://online.wsj.com/article/SB124144387757983265.html#mod=asia_home
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Ed
15 yrs ago
Banks Won Concessions on Tests
The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation's biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits.
The overall reaction to the stress tests, announced Thursday, has been generally positive. But the haggling between the government and the banks shows the sometimes-tense nature of the negotiations that occurred before the final results were made public.
Government officials defended their handling of the stress tests, saying they were responsive to industry feedback while maintaining the tests' rigor.
When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.
At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.
More http://online.wsj.com/article/SB124182311010302297.html
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Ed
15 yrs ago
Another disturbing article:
One reason the employment losses slowed somewhat in April was that the government added 72,000 jobs, most of them temporary hires as part of the preparation for the 2010 Census. The private sector dumped 611,000 jobs. Moreover, the Labor Department revised the job losses for March upward, from 663,000 to 699,000, and for February, from 651,000 to 681,000. Some 5.7 million jobs have been lost since the start of the recession in December 2007.
More http://www.nytimes.com/2009/05/09/opinion/09herbert.html?_r=1&em
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Ed
15 yrs ago
Was It a Sucker's Rally?
The Dow Jones Industrial Average has bounced an astounding 30% from its March 9 low of 6547. Is this the dawn of a new era? Are we off to the races again?
I'm not so sure. Only a fool predicts the stock market, so here I go. This sure smells to me like a sucker's rally. That's because there aren't sustainable, fundamental reasons for the market's continued rise. Here are three explanations for the short-term upswing:
- Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.
On Feb. 10, Treasury Secretary Timothy Geithner rolled out another, much hyped bank rescue plan. It was judged incomplete -- and the market sold off 382 points in disgust.
Citigroup stock flirted with $1 on March 9. Nationalizations seemed inevitable as bears had their day.
Still, the Treasury bought time by announcing on the same day as Mr. Geithner's underwhelming rescue plan that it would conduct "stress tests" of 19 large U.S. banks. It also implied, over time, that no bank would fail the test (which was more a negotiation than an audit). And when White House Chief of Staff Rahm Emanuel clearly stated on April 19 that nationalization was "not the goal" of the administration, it became safe to own financial stocks again.
It doesn't matter if financial institution losses are $2 trillion or the pessimists' $3.6 trillion. "No more failures" is policy. While the U.S. government may end up owning maybe a third of the equity of Citi and Bank of America and a few others, none will be nationalized. And even though future bank profits will be held back by constant write downs of "legacy" assets (we don't call them toxic anymore), the bears have backed off and the market rallied -- Citi is now $4.
- Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?
Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.
- Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.
A rising market means that banks are able to raise much-needed equity from private money funds instead of from the feds. And last Thursday, accompanying this flood of new money, came the reassuring results of the bank stress tests.
The next day Morgan Stanley raised $4 billion by selling stock at $24 in an oversubscribed deal. Wells Fargo also raised $8.6 billion that day by selling stock at $22 a share, up from $8 two months ago. And Bank of America registered 1.25 billion shares to sell this week. Citi is next. It's almost as if someone engineered a stock-market rally to entice private investors to fund the banks rather than taxpayers.
Can you see why I believe this is a sucker's rally?
The stock market still has big hurdles to clear. You can have a jobless recovery, but you can't have a profitless recovery. Consider: Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . . Shall I go on?
Until these issues are resolved, I don't see the stock market going much higher. I'm not disagreeing with the Fed's policies -- but I won't buy into a rising stock market based on them. I'm bullish when I see productivity driving wealth.
For now, the market appears dependent on a hand cranking out dollars to help fund banks. I'd rather see rising expectations for corporate profits.
http://online.wsj.com/article/SB124208415028908497.html
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Ed
15 yrs ago
One has to wonder if another bubble is being created...
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Ed
15 yrs ago
A bubble in the stock market. There are absurd amounts of money sloshing around in the markets once again - instead of leverage we now have trillions of government dollars artificially creating a market. That said, I doubt this will be a long term effect because reality will at some point hit home and the treasury cannot print forever.
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Ed
15 yrs ago
I would say that Obama is between a rock and a hard place... He had the choice of letting the economy collapse or throwing the kitchen sink at it and hoping things turn out alright. The jury is still out.
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Ed
15 yrs ago
Doesnt seem retail is going to return to recent levels anytime soon - excellent article in the IHT this am:
Cargo Ships Treading Water Off Singapore, Waiting for Work
SINGAPORE — To go out in a small boat along Singapore’s coast now is to feel like a mouse tiptoeing through an endless herd of slumbering elephants.
One of the largest fleets of ships ever gathered idles here just outside one of the world’s busiest ports, marooned by the receding tide of global trade. There may be tentative signs of economic recovery in spots around the globe, but few here.
Hundreds of cargo ships — some up to 300,000 tons, with many weighing more than the entire 130-ship Spanish Armada — seem to perch on top of the water rather than in it, their red rudders and bulbous noses, submerged when the vessels are loaded, sticking a dozen feet out of the water.
So many ships have congregated here — 735, according to AIS Live ship tracking service of Lloyd’s Register-Fairplay in Redhill, Britain — that shipping lines are becoming concerned about near misses and collisions in one of the world’s most congested waterways, the straits that separate Malaysia and Singapore from Indonesia.
The root of the problem lies in an unusually steep slump in global trade, confirmed by trade statistics announced on Tuesday.
China said that its exports nose-dived 22.6 percent in April from a year earlier, while the Philippines said that its exports in March were down 30.9 percent from a year earlier. The United States announced on Tuesday that its exports had declined 2.4 percent in March.
“The March 2009 trade data reiterates the current challenges in our global economy,” said Ron Kirk, the United States trade representative.
More worrisome, despite some positive signs like a Wall Street rally and slower job losses in the United States, is that the current level of trade does not suggest a recovery soon, many in the shipping business say.
“A lot of the orders for the retail season are being placed now, and compared to recent years, they are weak,” said Chris Woodward, the vice president for container services at Ryder System, the big logistics company.
Western consumers still adjusting to losses in value of their stocks and homes are in little mood to start spending again on nonessential imports, said Joshua Felman, the assistant director of the Asia and Pacific division of the International Monetary Fund. “For trade to pick up, demand has to pick up,” he said. “It’s very difficult to see that happening any time soon.”
Full Story: http://www.nytimes.com/2009/05/13/business/global/13ship.html
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Ed
15 yrs ago
I suppose the corks should be put back in the bottles...
The number of U.S. workers filing new claims for jobless benefits rose more than expected last week, government data showed Thursday, pushed up by auto plant shutdowns related to Chrysler's bankruptcy.
Initial claims for state unemployment insurance benefits increased 32,000 to a seasonally adjusted 637,000 in the week ended May 9, the Labor Department said, reversing an easing trend of the previous two weeks.
A Labor Department official said "a good part of the increase is due to automotive states and claims."
More - http://www.cnbc.com/id/30741524
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Ed
15 yrs ago
A follow on article - not Whitney's comments:
Banking analyst Meredith Whitney estimates that credit card lines in the U.S. will be cut by $2.7 trillion, or 50 percent, by the end of 2010, as banks try and deleverage and preserve capital. This will constrain consumer spending, hit company profits and spawn yet new defaults.
Advanta shows spreading U.S. credit woes http://www.guardian.co.uk/business/feedarticle/8507744
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Ed
15 yrs ago
Quote of the Day - Jim Rogers on why there is a bump in the markets "Give me 5 or 6 trillion and I will show you a good time...none of the underlying problems have been solved"
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Ed
15 yrs ago
How Mark-to-Model Rules Are Killing The Government's Plan to Buy Banks Bad Assets
Posted by: Adrienne Carter on June 04
Is the government putting off the day of reckoning?
The Wall Street Journal has a great story yesterday on how lobbyists pushed Congress to change the accounting rules. According to the WSJ, the financial services industry spent $27.6 million pushing lawmakers to help them relax the mark-to-market rules, which had forced banks and other financial firms to value bad assets at distressed prices. The rules have been at the center of huge losses at banks throughout the financial crisis. The lobbying paid off in the form of bigger profits in the past quarter and Wells Fargo, Citigroup, and other big banks. The whole story painted a pretty grim picture of what’s happening in Washington, as Felix Salmon notes in a recent blog post.
But the WSJ seems to miss the bigger picture, or at least a related issue. All of this lobbying was happening at the same time the government was setting up the Public-Private Investment Program or what’s affectionately known as PPIP. The two efforts fight each other. Banks don’t need to sell their bad assets if they can simply apply different accounting standards to the investments. By using mark-to-model accounting, they can increase the value of the assets. That way they’re no long a drag on the balance sheet—the whole reason the government set up PPIP in the first place. I don’t see how or why PPIP will ever work.
Of course, all this raises questions: If banks are holding on to their bad assets, does that mean there will be more trouble ahead? Or is it inhibiting their lending, thereby stifling the economy?
More.... http://www.businessweek.com/investing/wall_street_news_blog/archives/2009/06/how_mark-to-mod.html?chan=top+news_top+news+index+-+temp_news+%2B+analysis
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Ed
15 yrs ago
Foreclosure: Now an Upscale Blight
With the U.S. economy and financial markets showing signs of life, optimistic analysts are looking for a recovery in the all-important housing sector. They got some ammunition on June 2 from the National Association of Realtors, which said that its Pending Home Sales Index jumped in April by the most in more than seven years.
But housing can't revive as long as the market is being flooded with homes that are falling into foreclosure. And far from going away, the problem is broadening. It's not just about subprime anymore. Now, people with excellent credit who never dreamed of getting in financial trouble are being dragged down by a dangerous cycle of rising unemployment and falling home prices. That is going to prolong the foreclosure crisis and, inevitably, inhibit the recovery of the rest of the economy.
Any illusion that prime loans would emerge unscathed was shattered by a May 28 report from the Mortgage Bankers Assn. "For the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures," the bankers said. The grime in prime was responsible for the worst performance on record for the U.S. mortgage sector in the first quarter: Nearly 13% of loans were delinquent or in foreclosure, the most since the bankers started keeping tabs in 1972. The problems were worst in the bubble states of California, Florida, Arizona, and Nevada.
The biggest factor in this second wave of foreclosures is the inability of distressed homeowners to sell in order to pay off their debts. Prices in bubble cities such as Los Angeles, Phoenix, and Miami are down less at the high end of the market than at the bottom, according to data from Standard & Poor's/Case-Shiller home price indexes. But that's cold comfort to people who haven't managed to sell at all. According to research by the National Association of Realtors, there are enough $750,000-plus homes on the market to cover more than 40 months' worth of demand at the current rate of sales. That's four times the rate of oversupply in the housing market as a whole.
Unemployment is exacerbating the problems at the top of the market. The jobless rate for adults with a bachelor's degree or more may not sound too high at 4.4% in April given the overall April jobless rate of 8.9%. But it's more than double the rate of 2% a year earlier. And many families in that segment of the population built their finances on the assumption of continuous full employment, so they can't cover the mortgage when even one spouse is out of work.
More http://www.businessweek.com/magazine/content/09_24/b4135026913979.htm?chan=top+news_top+news+index+-+temp_top+story
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Ed
15 yrs ago
Salvation is at hand! AsiaXPAT signature columnist Jon Marsh weighs in on how to solve the financial crisis:
Dearly beloved, we are gathered here today to pray for – the economy!
Spike columnist Jon Marsh salutes the power of prayer with Hong Kong characteristics
Few will have missed the spiritual event of recent times – the self-styled Global Day of Prayer at the Hong Kong Stadium on May 31 – an occasion with a peculiarly Hong Kong flavour. It was held on Pentecost Sunday (aka Whit Sunday), which, to you legions of heathens out there, is a celebration of the receiving of the Holy Spirit by the early Christian church, 50 days after the resurrection of Jesus Christ.
So what, I hear you ask. Well, Spike’s attention was first drawn to this happy-clappy marathon by an advertisement on display in the MTR. Under the main headline was the prominent sub-head “Special prayers for the financial crisis.”
After muttering “Praise the Lord,” or something similar, Spike almost fell to his knees in awe. Only in grasping, money-crazed, venal Hong Kong, a place where Mammon, the false god of greed and avarice is worshipped like almost nowhere else on earth, could a religious gathering pray for the bloody economy.
But lo, it came to pass. Just imagine the scene. The master of ceremonies, or whatever one has at this type of gathering, leads the congregation in reciting Hong Kong’s very own version of the Lord’s Prayer.
Our Father, which art in Hang Seng
Hallowed be thy Gain
Thy kingdom come
Thy will be done, in Hong Kong as it is in Beijing
Give us this day our daily bread
And forgive us our accumulators,
As we won’t forgive the f****** bastard that sold them to us
And lead us not into negative equity
But deliver us from mini bonds
For thine is the leverage, and the profit, and the dividends, for ever and ever.
Amen
The proceedings were telecast live by a cable channel with the splendid name of GodTV and also received extensive coverage in religious circles. Here’s part of the breathless account of the event that appeared on The Gospel Herald website.
“Hundreds of thousands of Christians in Hong Kong gathered at the Hong Kong Football Stadium, uniting in one heart with Christians from 220 countries around the world to participate in the 5th annual Global Day of Prayers (GDOP), which is by far the largest prayer movement in the world. Despite the high humidity and the poor air quality, hundreds of thousands of Christians still gathered, which revealed their determination to participate in this historic event.”
The people who run The Gospel Herald, an evangelical, trans-denominational, Christian media company state that, among other things, they believe that “the return of Jesus Christ is imminent, and that it will be visible and personal”.
Well, it looks as though one of the first things Jesus is going to have to do on his return is to hire some accountants sharpish, or at least some people who can count. The last time Spike was at the Hong Kong Stadium, seeking spiritual inspiration at the Rugby Sevens, the capacity was around 40,000, so it would have been a bit of a squeeze for the hundreds of thousands of prayer merchants present on May 31. Evidence, perhaps, that Jesus had did one of his five loaves and fishes numbers especially for the occasion? Praise the Lord, it’s a miracle.
Interestingly, the website reported that Hong Kong government officials in attendance included Secretary for Justice Wong Yan-lung, Secretary for Mainland and Constitutional Affairs Stephen Lam and Secretary for Security Ambrose Lee.
Now it is easy to understand why Stephen Lam might be seeking salvation and absolution for his countless sins. This is, after all, the man responsible for geneflucting in front of the Beijing altar and doing everything in his power to slow the speed of democratic reform in Hong Kong. ¬¬But where was John Tsang, the Financial Secretary?
Judging by the latest stimulus package, this is a man who has only just realised that the economy, in biblical terms, is descending into the flames of Hell and is starting to resemble what’s left after a visit by a plague of locusts. Surely he too should have been there seeking God’s mercy. After all, as the events of Pentecost Sunday show, he certainly moves in mysterious ways these days.
Jon Marsh is a Hong Kong-based journalist who has also worked in the UK, New York, Bangkok and Sydney. He was the editor of Spike magazine.
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Ed
15 yrs ago
This is a great line:
Our Father, which art in Hang Seng
Hallowed be thy Gain
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Ed
15 yrs ago
Markets Float on a Tidal Wave of Cash
But that doesn't have anything to do with the fundamentals
Throwing vast quantities of cash at the markets has certainly rescued banking systems from total meltdowns and created a new boom in stock markets, particularly those in emerging markets such as China, and in commodities.
However, it looks ever less likely that fundamental problems are being resolved and a new day of reckoning may be getting closer.
Asia may be especially vulnerable despite its overall economic strength because it has recovered faster than most. India's index has more than doubled since early March while Hong Kong, lead by its mainland components, is up 70 percent, even more than Shanghai up 50 percent since it began its climb back in January. Even the more mature northeast Asian economies suffering heavy exports falls have rebounded, Taiwan by 37 percent, Korea and Japan by 40 percent. Elsewhere, Russia and Brazil have led a commodity-driven bounce.
On the one hand, markets have been rising at the same time as US bond yields have also been rising sharply despite continued bond-buying by central banks in Europe and Japan as well as the US. This suggests either that markets fear the return of inflation and/or that a recovery in the real economy is now underway.
On the other, evidence for real recovery is spotty and yet the necessary correction in external imbalances – a fundamental cause of the crisis – may have already come to a halt. Indeed, while the flood of new money from governments and central banks may have stabilized banking systems it has also been behind the rebound in commodity prices – and even real estate prices in Hong Kong – as investors seek real assets as safe haven.
That rise in turn is causing trade imbalances to rebound and will cut into consumption. Wall Street, on a good news roll, cheered the latest US retail sales pick up – a rise of 0.5 percent in May. But almost all of that additional spending was attributable to high gasoline prices. And that was before oil prices were back over $70.
Lower energy prices – let's say $45-50 a barrel – are crucial if trade imbalances are to be brought down to sustainable levels and US households continue to increase their savings without crushing demand for other goods and services.
So far it seems that US consumers have been wising up. Household savings is back to 5 percent of income despite rising unemployment. That is all to the good. But despite this the US trade imbalance is still running at near $30 billion a month. That is half its peak but still too much given the cost of debt service.
Full story http://asiasentinel.com/index.php?option=com_content&task=view&id=1931&Itemid=590
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Ed
15 yrs ago
Peter Schiff appearing on Jon Stewart - most excellent.
http://watch.ctv.ca/the-daily-show-with-jon-stewart/episodes/the-daily-show-with-jon-stewart---june-11-2009/#clip181212
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Ed
15 yrs ago
Excellent article in the IHT this moring:
Saving American Capitalism
During my four years as U.S. ambassador to France I saw how fascinated the French were by everything American; I believe that to be true of all Europeans. They are fascinated by the economic freedom that is fundamental to American capitalism, by its dynamic, and by the opportunities it offers.
The practice of American capitalism, however, has become very different from the theory.
Market-based capitalism requires a platform of political freedom, the creation of wealth and fairness in its distribution. These values were reflected in the American economy until the 1980s, when American capitalism and European social democracy created reasonably similar economic outcomes.
After Franklin Roosevelt’s New Deal and Lyndon Johnson’s Great Society, an implicit social contract among business, labor and government maintained economic stability, a strong social safety net and an increasingly broad distribution of wealth in America.
We began to diverge with Europe in the 1980s as a result of higher population growth rates in the United States coupled with significantly greater investments in research and technology.
By the 1990s, accelerating changes in our corporate culture and in the functioning of our financial markets, together with cheap money and easy speculation, resulted in the creation of astounding levels of wealth. These in turn led to serious legal and ethical abuses in the business world and to a breakdown in the concept of fairness.
In the late 1990s, as ambassador to France, I spent much of my time singing the praises of American capitalism. But back at home the system was changing. A booming stock market sent executive compensation soaring, but with very little accountability for performance. Deregulation, an easy monetary policy and media-driven hype about new information technologies created essentially “free money” and astronomic stock valuations. Speculation created the dot.com bubble and, in due course, brought about the collapse of much larger companies, with tragic results.
The results were usually the same. Management and directors collected hundreds of millions in bonuses and stock sales while tens of thousands of employees saw their jobs and their savings lost. Hundreds of thousands of stockholders were ruined.
These events struck at the very heart of the most basic requirements of market capitalism: transparency and fairness. In addition, the media treated finance like show business, creating stars out of executives and touting wealth as the sole standard of success. And neither the Securities and Exchange Commission, nor the Federal Reserve, nor the Congress, nor the administrations wanted the music to stop or tried to slow it down.
While no single event can be pinpointed as the start of the single cause of these developments, I believe a great deal of this began in the 1980s. Until then, overall corporate activity was still consistent with the evolution of a largely industrial economy, while the consolidation of the financial sector and the rise of institutional investors pointed to a major shift — late 20th Century finance capitalism.
The advent of the leveraged buyout radically changed the relationship of management to the corporation. As leveraged-buyout firms such as Kohlberg Kravis Roberts and Forstmann Little restructured American companies, they provided management with ownership levels never previously imagined. Time Magazine made it the symbol of a new age.
The 1980s also coincided with the adoption of large-scale stock options. I remember sitting on the boards of some large companies at the time, pressured by institutional investors who demanded changes in compensation packages aimed at greater stock interests for management and lower cash payouts. That meant more stock options.
Meanwhile, stock prices were shooting upward, with no consistent correlation to the performance of their companies.
The glamour of these new entrepreneurs and their new billions gave a new political dynamic to the notion of deregulation. The repeal of the Glass-Steagall Act allowed banks to re-enter the securities field from which they had been excluded since the Great Depression.
Energy deregulation brought new players into the staid utility field where traders such as Enron hooked up with the Internet to create a new culture of trading instead of investing.
More http://www.nytimes.com/2009/06/29/opinion/29iht-edrohatyn.html?_r=1&ref=global
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Ed
15 yrs ago
Interesting article in FT this morning (btw - I just bought a 2 year subscription to the print edition - FT and IHT - 2 best newspapers in the world!)
US consumer confidence drops in June
Confidence among US consumers dropped in June after two months of building optimism, surprising economists and knocking the wind from stock markets.
The Confidence Board, an industry group, said its index of consumer confidence dropped to 49.3 this month from a revised 54.8 in May. Economists had expected a figure of around 55, but consumers are feeling worse about the current state of the economy and about where they expect it to be in six months’ time.
Confidence built over the spring amid talk of “green shoots” in the economy and a rising stock market, but this month people say business conditions are worse and jobs are becoming harder to find.
Just 17.4 per cent of consumers surveyed said they expected more jobs to appear in the months ahead, down from 19.3 per cent in May.
The pace of lay-offs has lessened somewhat recently but the unemployment rate has leapt to 9.4 per cent, creating a swelling pool of people searching for a shrinking number of jobs.
“For consumers I think the light bulb finally went on and they said ‘you know, less bad is probably not good enough, “less bad” doesn’t pay the bills,’” said Mark Vitner, senior economist at Wachovia. “It may be that consumers need to see a tangible improvement in their own conditions before they buy into the idea the economy is improving.”
There was some positive news on Tuesday, though, as separate figures showed the pace of the US housing downturn abated in April.
House prices in 20 metropolitan areas fell 0.6 per cent month-on-month in April, according to the S&P Case-Shiller home-price index, following a 2.2 per cent decline a month earlier.
Prices were still 18.1 per cent lower than they were a year ago, in a sign of how savaged the housing market has been during this recession. Economists, however, were expecting a worse figure of 18.6 per cent.
“While one month’s data cannot determine if a turnaround has begun, it seems that some stabilisation may be appearing in some of the regions,” said David Blitzer, chairman of the S&P index committee. However, he warned that the spring and summer are traditionally stronger months for house prices, “so it will take some time to determine if a recovery is really here.”
Eight of the 20 areas recorded rising prices, including Dallas, Washington DC, San Francisco and Boston. Areas where prices were bumped up by speculative buying during the bubble years remained the hardest hit, such as Phoenix, Miami and Las Vegas.
The housing market has been at the epicentre of the US recession as collapsing prices kicked off a wave of defaults on parcels of mortgage debt held by banks. The Case-Schiller index has fallen by almost a third since the peak of the market in mid-2006, and many believe prices must stop falling before a broader economic recovery can begin.
Delinquency rates on the least risky mortgages more than doubled in the first quarter from a year earlier, indicating that the pain that began in the “subprime” area is spreading as more people struggle to meet their mortgage payments.
Prime mortgages 60 days or more past due climbed to 2.9 per cent, from 1.1 per cent at the same point in 2008, according to the Office of the Comptroller of the Currency and the Office of Thrift Supervision
“I’m very concerned about the rise in delinquent mortgages and foreclosure actions,” said John Dugan, Comptroller of the Currency, but added that he was heartened by the rising number of people modifying their mortgages to make them more manageable.
http://www.ft.com/cms/s/0/c9dd6ac0-657e-11de-8e34-00144feabdc0.html
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Ed
15 yrs ago
That's a great/disturbing read... particularly considering its written by the guy who predicted almost exactly what was coming well before it happened and was laughed at
http://www.youtube.com/watch?v=2I0QN-FYkpw
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Ed
15 yrs ago
The woes continue in American employment...good article in the WSJ
The Economy Is Even Worse Than You Think
http://online.wsj.com/article/SB124753066246235811.html
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Ed
15 yrs ago
I don't think you can villify any one firm... it's more the system that is allowing these things to happen and as Paul Krugman points on in this outstanding article, we have not fixed anything.
In fact Goldman's record profits would seem to indicate that not only has nothing changed but in fact banks are actually more, not less, to take on risk because they know that they are back-stopped by the American taxpayer.
Although the government did not by the letter of the law guarantee Fannie Mae and Freddie Mac securities, there was an implicit understanding that they did. And when in fact push came to shove the government in fact did backstop them.
This was a dangerous precedent on it's own but add to it the fact that the government bailed out the finance industry with trillions who can blame the big players for assuming - and more importantly acting - as if the government stands behind them no matter what.
I dont think you can allow these big firms to fail but I do think an opportunity has been missed to punish them. The government should, in exchange for this bailout money, negotiated harsh terms whereby they took equity in the banks. This would have diluted the shareholders and management sending the message that there will be some bitter medicine if you screw up.
Instead, the banks are falling over one another trying to pay back the tarp while they generate profits out of the money they received from the government and laughing all the way - to the bank...
Krugman is spot on with this article:
The Joy of Sachs
The American economy remains in dire straits, with one worker in six unemployed or underemployed. Yet Goldman Sachs just reported record quarterly profits — and it’s preparing to hand out huge bonuses, comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.
Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let’s start by talking about how Goldman makes money.
More http://www.nytimes.com/2009/07/17/opinion/17krugman.html?_r=1&em
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Ed
15 yrs ago
Another good article along the same lines...
Excerpt:
Instead of disowning the notorious policy of "too big to fail," the Fed will be bound to embrace the doctrine more explicitly as "systemic risk" regulator. A new superclass of forty or fifty financial giants will emerge as the born-again "money trust" that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club, will doubtless also shield a few of the largest industrial-financial corporations, like General Electric (whose CEO also sits on the New York Fed board). Whatever officials may claim, financial-market investors will understand that these mammoth institutions are insured against failure. Everyone else gets to experience capitalism in the raw.
This road leads to the corporate state -- a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify. Most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed.
Full Article http://www.alternet.org/politics/141373/a_dark_hole_of_democracy%3A_how_the_fed_prints_money_out_of_thin_air/?page=entire
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Ed
15 yrs ago
Make some time for this article from Joe Nocera - note the finishing line...
Looking Back in Anger at the Crisis
If the Bank of America hearings show anything, it is that Congress is taking away all the wrong lessons from the crisis.
All: http://www.nytimes.com/2009/07/18/business/18nocera.html
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Ed
15 yrs ago
Jon Stewart rips CNBC's Jim Kramer - again. This is excellent:
http://www.thedailyshow.com/full-episodes/233117/tue-july-14-2009-peter-mancall
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Ed
15 yrs ago
Colbert discussing the crisis with Huff and Puff - amuse yourself on this wonderful Friday with the Repport....
http://www.comedycentral.com/colbertreport/full-episodes/index.jhtml?episodeId=239964
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Ed
15 yrs ago
Jon Steward weighs in on Cash for Clunkers heheh http://www.thedailyshow.com/full-episodes/239892/mon-august-3-2009-ronald-kessler
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Ed
15 yrs ago
The latest SPIKE, hot off the presses...
The way of the world sucks…let’s count our blessings in Asia
Venal American bankers, the usual tales of incompetence and sloth from the UK a horrid little story about the power of spin – Spike columnist Jon Marsh suggests that we should perhaps count our expatriate blessings in Asia
Spike recently became a permanent resident of what passes for Asia’s World City. It’s not that big a deal –the two most obvious benefits are the right to cast a vote for a Hong Kong legislator with almost no power and less time wasted at passport control. But when the immigration officer announced that Spike, Mrs Spike and the two Spikelets were now permanent residents the man offered his sincere congratulations and I came over all warm and fuzzy – I belonged!
Perhaps we are sometimes too harsh on the politicians, bureaucrats, cadres and assorted chancers who run Hong Kong and the other major expat hangouts in Asia. Hong Kong certainly has its faults – pollution and a government in absentia to name but two – but there are occasions when you look around and realise that the grass is definitely not always greener on the other side of the world. Some events in the West beggar belief.
For example, after the global meltdown brought the financial system to the brink of collapse, it was generally hoped that we had all been taught an important lesson about excess (insanely high bonuses encourage bankers to take huge risks) and simple arithmetic (banks should not give large mortgages to people who have no money) and would not make the same mistakes again.
Think again.
According to a report released by New York attorney general Andrew Cuomo, nine of the financial firms that were among the largest recipients of US federal bailout money paid about 5,000 of their traders and bankers bonuses of more than US$1 million apiece for 2008.
Mr. Cuomo was quoted by The New York Times as saying the bonuses were particularly galling because the banks survived the crisis with the government’s support. “If the bank lost money, where do you get the money to pay the bonus?” he asked. Er, good question.
At Goldman Sachs, 200 people were paid a total of nearly $1 billion; at Morgan Stanley, US$577 million was shared by 101 people. The bonus pools at the nine banks that received bailout money totalled US$32.6 billion, while those banks lost US$81 billion.
What madness. It’s almost as if the meltdown never happened. No wonder the report was called “No Rhyme or Reason: The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture”.
Over in the UK, the weather has been dreadful despite a forecast of a “barbeque summer” by the Met Office. This is the same organisation that last year predicted an average summer with low risk of heavy rainfall. It later admitted it was in fact “one of the wettest on record across the UK” and then went on to forecast a milder than average winter which turned out to be the coldest in 13 years.
The solution? Reward staff with bonuses for the accuracy of their forecasts, of course. More than 1,700 employees are receiving a “forecast accuracy” bonus and some £1.1m (about HK$14.2 million) has already been awarded.
Still in UK, despite a government campaign to encourage healthy living, the Brits are lazier than ever, according a study by Nuffield Health, a not for profit health organisation. This will come as no surprise to anyone who have visited recently and witnessed so many parents and offspring alike waddling around like obese penguins, their snouts forever stuck in troughs of junk food.
The survey found that one in six people would rather watch a TV programme they didn't like than leave the sofa to change the channel if their remote control was broken. A third of the adults surveyed said they would not run to catch a bus and more than half would not walk up two flights of stairs to reach their office. More than half of dog owners did not walk their dogs and two-thirds of parents admit to being too tired to play with their children.
The epidemic of sloth does not stop there. Almost three-quarters of couples say they regularly do not have enough energy to have sex, with more than half blaming a lack of fitness.
For the record, Glasgow is the laziest city in the UK, with 75% of people admitting they don’t get enough exercise, followed by Birmingham and Southampton in joint second place, Bristol third and London in fourth.
According to Dr Sarah Dauncey, medical director of Nuffield Health: “Ready meals, remote controls and even internet shopping are all contributing to a dangerously lazy and idle Britain. The nation has fallen into a vicious circle of laziness that we must stop.”
Lastly, a curious and very nasty little story from the US about the power of spin. The story doing the rounds on the internet goes like this. A genealogy researcher discovered that powerful Democrat Senator Harry Reid’s great-great uncle, Remus Reid, was hanged for horse stealing and train robbery in Montana in 1889. The only known photograph of Remus shows him standing on the gallows.
A caption on the back of the picture read: “Remus Reid, horse thief, sent to Montana Territorial Prison 1885, escaped 1887, robbed the Montana Flyer six times. Caught by Pinkerton detectives, convicted and hanged in 1889.”
Asked for comment, the story went on, the politician’s staff sent back the following biographical sketch: “Remus Reid was a famous cowboy in the Montana Territory. His business empire grew to include acquisition of valuable equestrian assets and intimate dealings with the Montana railroad. Beginning in 1883, he devoted several years of his life to government service, finally taking leave to resume his dealings with the railroad. In 1887, he was a key player in a vital investigation run by the renowned Pinkerton Detective Agency. In 1889, Remus passed away during an important civic function held in his honour when the platform upon which he was standing collapsed.”
Spin incarnate – a work of genius – the story sounds almost too good to be true. And indeed, it is. No such relative existed and the photograph was of a man called Thomas “Black Jack” Ketchum, a criminal associated with Butch Cassidy and the Sundance Kid. It transpires that over the years similar e-mails have been widely distributed to discredit Hillary Clinton, Al Gore and Joe Biden, among others.
My point is that that given the culture of spin in Washington (and elsewhere) it was extraordinarily easy to accept the story at face value. In fact, it took a good deal of digging around on line to confirm that the story was false. It’s safe to assume that most of the people who received that e-mail probably believed it to be true.
Such is the world in which we live. Let’s hear it for Hong Kong…
Jon Marsh is a Hong Kong-based journalist who has also worked in the UK, New York, Bangkok and Sydney. He was the editor of Spike magazine.
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Ed
15 yrs ago
Deflation is indeed looking like a serious problem in the US and Europe... that hits close to home as it impacts China exports.
Consumer spending flat in July; slowing recovery
The Associated Press
Saturday, August 15th 2009, 4:00 AM
Consumer inflation was flat in July, good news for shoppers but also a sign that prices are being held in check by weak spending that's likely to slow any economic recovery.
Over the past 12 months, prices have dropped 2.1%, the most in nearly six decades as a result of the recession and lower energy costs.
Most of the past year's decline reflects energy prices falling 28% since peaking in July 2008, the Labor Department said on Friday.
Some economists have expressed concerns that the economy could be headed toward a dangerous period of falling prices, something the U.S. has not experienced since the Great Depression of the 1930s. However, many analysts believe the Fed has responded aggressively enough to battle the current downturn and prevent outright deflation.
But on Wall Street, stocks fell sharply as investors were disappointed by several economic reports, including that consumer confidence fell sharply in the first part of this month. Consumer spending is crucial for the recession to end since it accounts for about 70% of economic activity.
The Dow closed down 76.79 to 9,321.40 after falling as much as 165 right after the consumer sentiment survey was released.
The S&P 500 lost 8.64 to 1,004.09, and the Nasdaq dipped 23.83 to 1,985.52.
Also, the Fed said yesterday that production from the nation's factories, mines and utilities rose in July for the first time in nine months, driven by increased output of about 20% by automakers.
http://www.nydailynews.com/money/2009/08/15/2009-08-15_weakness_in_spending_is_slowing_recovery.html
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Ed
15 yrs ago
Good article... makes me wonder if the same thing is happening right before our eyes and next year we'll be having dejavu all over again...
Why some economists could see it coming
By Dirk Bezemer
Published: September 8 2009 03:00 | Last updated: September 8 2009 03:00
From the beginning of the credit crisis and ensuing recession, it has become conventional wisdom that "no one saw this coming". Anatole Kaletsky wrote in The Times of "those who failed to foresee the gravity of this crisis" - a group that included "almost every leading economist and financier in the world". Glenn Stevens, governor of the Reserve Bank of Australia, said: "I do not know anyone who predicted this course of events. But it has occurred, it has implications, and so we must reflect on it." We must indeed.
Because, in fact, many had seen it coming for years. They were ignored by an establishment that, as the former Federal Reserve chairman Alan Greenspan professed in his October 2008 testimony to Congress, watched with "shocked disbelief" as its "whole intellectual edifice collapsed in the summer [of 2007]". Official models missed the crisis not because the conditions were so unusual, as we are often told. They missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change habitat.
More - http://www.ft.com/cms/s/0/ec470a00-9c0e-11de-b214-00144feabdc0.html?nclick_check=1
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Ed
15 yrs ago
Hmmm.... gold busts over $1000 http://www.bloomberg.com/apps/news?pid=20601087&sid=aBqQ94d8QIuc
I assume this means people are fearful of a double-dip, inflation and/or a weakening USD.
Assuming its the weaker USD, and that the dollar continues to weaken, isn't that something that will cause the US consumer to crawl deeper into his shell because a weaker USD means higher costs for imports?
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Ed
15 yrs ago
Hunting around and found this additional info:
What's Behind the Gold Price Surge
Some analysts cite inflation fears and increased Chinese demand, while others say the market is ready for a correction
After spending the summer in the doldrums, the price of gold has started to perk up in September—enough to push the yellow metal near the $1,000-per-ounce mark. Last week, gold jumped 3.6% in just two days, peaking at $997.80 an ounce on Sept. 3. By the end of the week, it had pulled back slightly—the December futures contract on the New York Mercantile Exchange settled $1.60 lower, at $996.10 on Sept. 4.
There's no shortage of rationales that investment strategists and economists have offered for the biggest price spike in gold in six months—from increased purchases by China's central bank to inflation fears—but these seem like mostly after-the-fact justifications for what's occurred, according to Philip Klapwijk, chairman of Britain-based metals consulting firm Gold Fields Minerals Service (GFMS).
If gold fails to decisively break through $1,000 an ounce, it will be the third time since February that the metal has fallen short, and that could lead to a fairly quick reversal in investor sentiment, says Klapwijk. The retracing of crude oil prices back to $67 a barrel since failing to break through $75 the week of Aug. 24 augurs a similar pattern for gold if it can't break above $1,000, says Jacob Oubina, currency strategist at Forex.com.
Rumors of Chinese Demand
Klapwijk at GFMS says he's bullish about gold in the medium term and believes the "very lax" fiscal and monetary policies of governments trying to lift their economies out of recession eventually will result in inflation and lead to a much broader group of investors pushing gold prices above $1,000. But he doesn't see anything to justify such a move right now. "I'm a bit skeptical about this move, I must say, because I believe speculative positioning is already long. Commodity prices in general are overbought," he says. "There's room for a correction. I don't sense this is the long-awaited, decisive push through $1,000 an ounce."
What's driving the current rally? First, there's demand for the metal tied to its monetary value in times of uncertainty. The Chinese government is allegedly trying to diversify away from its massive U.S. dollar reserves by buying physical gold, but from its own production, not on the world market.
Some argue that gold is reacting to the likelihood of sustained deflationary pressure, with real interest rates remaining below zero, rather than any hint of inflation related to the ballooning federal deficit. It's hard to make the case for a looming inflation threat with the consumer price index down 0.2% in July (before seasonal adjustment), and 2.1% lower than a year ago, thanks to a 28% decline in the energy component of the CPI that has trumped a 0.9% rise in food and a 1.5% increase in the index for all items excluding food and energy.
Gold Could Hit $1,200
There was scant hint of any spiraling wage concerns in the August nonfarm payrolls report released on Sept. 4, which accompanied news that the U.S. unemployment rate hit a 26-year high of 9.7%. In August, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 6¢, or 0.3%, to $18.65. Over the past 12 months, average hourly earnings have climbed 2.6%, while average weekly earnings have risen by only 0.8%, due to declines in the average workweek, according to the Bureau of Labor Statistics.
Full story: http://www.businessweek.com/investor/content/sep2009/pi2009097_042500.htm
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Ed
15 yrs ago
Well worth watching:
http://www.youtube.com/watch?v=IH1bgWvRIgw
http://www.youtube.com/watch?v=rOcrthLJFbc
Worth reading:
http://www.ft.com/cms/s/0/90227fdc-900d-11de-bc59-00144feabdc0.html?nclick_check=1
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Ed
15 yrs ago
I have a solution to the problem (as I place my tongue firmly in cheek). Why doesn't Obama get on TV and urge Americans to shop?
That was Bush's solution to the last downturn in the economy and he backed it up by simultaneously releasing big money into the economy, creating a house boom which created massive amounts of wealth which people used to go shopping which .... oh right...
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Ed
15 yrs ago
Trying to digest all these positive and negative comments re: the economy... here's another one from a prominent economist http://www.bloomberg.com/apps/news?pid=20601087&sid=a9odwc3.kFwM
My question is this - when people such as Roach, Whitney and others say there is danger of another downturn, do they mean there is still danger of another economic collapse (i.e. a return to November with no way out) or do they mean we may go back into recession (assuming we recover from the current one).
If there is very minimal chance of the global economy hanging by it's finger tips from a cliff, can someone explain why.
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Ed
15 yrs ago
Certainly most of the experts are saying we cannot implode, but then most of the experts said that pre-November as well...
I think a lot of people would like a detailed explanation as to why that scenario is unlikely as the so-called experts don't seem to have a clue...
Is it because the US gov't has absorbed all those massive banking losses? Are they wiped off the balance sheets? Or are they hidden away while more losses pile up? I saw those links re: possible 25% drop in US housing and huge defaults continuing to pile up with more on the way. Then there is the commercial property problem...
I'd like to understand how the banks remain solvent with all this piling up against them.
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Ed
15 yrs ago
I caught Nouriel Roubini and Peter Schiff on programs last night and they provided clear explanations why it's unlikely we will head back to November.
Governments in Europe, the UK and the US have committed to not allowing any more major financial institutions fail - and they have backed that up with 20 trillion + dollars of taxpayer money. The assumption is that if another bank falters they will continue to do same.
Even if housing prices drop and there are more real estate defaults, the banks are tied to the word of major country's governments - and as long as they say they dont allow the banks to fail and people believe in their ability to stop failures, we don't collapse.
There are many problems associated with all this debt that the US is taking on but the consensus seems to be that in the short term, economic collapse is not one of them.
Roubini indicated there is still some risk down the road and that is the collapse of the US dollar. If the US economy does not recover and they continue to need to pour stimulus in other countries (China) may see this as a bottomless whole and may stop purchasing USD debt because they, as Schiff said, will realize they are never going to get their money back. I assume if this were to happen it would involve a move off the USD as the fiat currency which would not happen overnight....
Alas it would appear that the biggest concern is getting back to growth - the consensus seems to be that any growth will be anemic for at least the next couple of years
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Ed
15 yrs ago
It's payback time, Obama tells banks
Delivering a bruising lecture to Wall Street, President tells financial institutions not to stand in the way of reforms designed to prevent a repeat of the credit crunch
http://www.independent.co.uk/news/world/americas/its-payback-time-obama-tells-banks-1787338.html
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Ed
15 yrs ago
Video of the speech http://www.youtube.com/watch?v=KVs2xVXjz30&NR=1
Video of Bloomberg chat http://www.youtube.com/watch?v=IY5LjBiHJbM
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Ed
15 yrs ago
Wow! This thread has come off the hot threads home page display for the first time since it was started... the crisis must be over
Here's an amusing read from Stanley Bing
Our sick recovery
What this patient needs is sunshine, not more gloom from the experts.
By Stanley Bing
September 17, 2009: 3:18 PM ET
(Fortune Magazine) -- I visited our recovery in the hospital yesterday. I have to say, I'm not feeling all that optimistic about his prognosis.
He looked pretty good -- his cheeks were rosy and his breathing seemed fine. But there was something about his eyes, a certain wobbly quality. You see it in patients that have gone into a temporary remission that even they don't trust. That shook me, because recovery is all about confidence. No confidence, no recovery.
"How are you doing?" I inquired as I sat down by his bedside. He was propped up on several pillows provided by the administration. "You look marvelous," I told him. Sick people like to hear that.
"Yes," he said, grasping my hand with disquieting force. "I've had quite a scare. But I'm going to be all right now."
"Absolutely," I said with perhaps a tad too much jollity.
"My vital signs are improving," he said, gazing at me with huge, thoughtful eyes.
MORE: http://money.cnn.com/2009/09/17/magazines/fortune/stanleybing/economic_recovery.fortune/index.htm?postversion=2009091715
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Ed
15 yrs ago
Good article from Warren Buffett... since the HKD is pegged to the USD what does one do to hedge against the heavy duty inflation that is likely to come?
What are the investment options?
The Greenback Effect
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
More http://www.nytimes.com/2009/08/19/opinion/19buffett.html
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Ed
15 yrs ago
Interesting point raised in this op-ed re: Michael Moore's new movie:
In the film, Michael describes capitalism as evil. I disagree. I don't think capitalism is evil. I think what we have right now is not capitalism.
In capitalism as envisioned by its leading lights, including Adam Smith and Alfred Marshall, you need a moral foundation in order for free markets to work. And when a company fails, it fails. It doesn't get bailed out using trillions of dollars of taxpayer money. What we have right now is Corporatism. It's welfare for the rich. It's the government picking winners and losers. It's Wall Street having their taxpayer-funded cake and eating it too. It's socialized gains and privatized losses.
http://www.alternet.org/workplace/142777/barack_obama_must_see_michael_moore%27s_new_movie_%28and_so_must_you%29!
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Ed
15 yrs ago
Hmmmm.....
Why Are We Lying to Ourselves About Our Catastrophic Economic Meltdown?
Excerpt: In simple language, there is no sector that appears capable of pulling the economy out of its deep funk: manufacturing has virtually disappeared in this country; most service sector jobs pay dismally; the tech sector and “creative industries” can’t employ tens of millions; those hopes of green jobs appear to vanished with Van Jones; and there are no more bubbles that can be pulled out of the Federal Reserves’ bag of tricks, at least ones that trickle down to Main Street.
Full Story: http://www.alternet.org/blogs/peek/142975/why_are_we_lying_to_ourselves_about_our_catastrophic_economic_meltdown
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Ed
15 yrs ago
And lest we forget who caused all of this
http://www.bartcop.com/worst_president_ever_sm.jpg
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Ed
15 yrs ago
The demise of the dollar
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
More:
http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html
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Ed
15 yrs ago
Gold hit a record high today... China, Brazil, Russia, Middle East and other countries are having secret meetings to dump the USD...
Anyone know what's up with that? Are they planning to abandon the US, bite the bullet on their USD holdings and move on?
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Ed
15 yrs ago
Very insightful..
Investors had little choice but to keep on dancing
Most post-mortems of the financial crisis have diagnosed one of two causes of near-death: greed or stupidity. The greed school focuses on the excess of the world’s financiers and the spendthrift ways of American consumers and home-buyers. The stupidity camp zeroes in on the mistakes of individuals and institutions: the CEOs who did not understand their own off-balance sheet assets; the ratings agencies who believed sub-prime mortgages could be packaged into triple A securities; the regulators who missed Bernard Madoff’s fraud.
Both arguments are right. But individual ignorance and avarice are just sideshows; the biggest driver of the crisis was systemic. The boom – and bust – happened because investors obeyed the logic of financial markets.
That logic was what Chuck Prince had in mind when he made his notorious remark to the FT in July 2007. “When the music stops, in terms of liquidity, things will be complicated,” Mr Prince said, when asked about problems in the US sub-prime market and growing difficulties financing private equity deals. “But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
The vivid phrase helped scupper his captaincy of Citigroup – but Mr Prince was right. It would be nice if financial markets consistently rewarded sober-minded investors and prudent CEOs who are unmoved by the animal spirits of the crowd. But markets demand conformism. As investor Barton Biggs pointed out, in a line that may have been subconscious inspiration for Mr Prince’s quip: “Only fools are dancing, but the bigger fools are watching.” Keynes, himself, had warned that the market can stay irrational longer than you can stay solvent.
In a seminal 1997 paper on behavioural finance, economists Andrei Shleifer and Robert Vishny argued that being “right” about market fundamentals is not enough. Arbitrageurs who bet on a mis-pricing of assets can be forced out of the market if their bet is premature – by the time their view is vindicated, they may no longer be in business.
In an empirical study of the 2000 tech bubble, economists Markus Brunnermeier and Stefan Nagel found that even as tech stocks were becoming more over-valued, hedge funds increased the share of their portfolios devoted to the sector. “Hedge funds did not exert a correcting force on stock prices during the technology bubble,” they found. “Instead, they were heavily invested in technology stocks. This does not seem to be the result of unawareness of the bubble.”
Even more perversely, the most famous Cassandra was punished for his prescience. “The manager with the least exposure to technology stocks – Tiger Management – did not survive until the bubble burst,” Brunnermeier and Nagel point out.
The asset bubble, which burst in 2007-08, was likewise spotted in advance by many fund managers and CEOs. But shareholders and investors had little patience with those who bet against the bubble too soon: one reason Phil Purcell was ousted at Morgan Stanley was his unwillingness to take on as much risk as his rivals. Even John Paulson, whose bet against sub-prime was the biggest windfall of the crisis, had to endure white-knuckle losses before hitting the jackpot.
Last week, Alan Greenspan, the former Federal Reserve chairman, reiterated to the FT his now landmark admission that he was “shocked” that market participants had taken on too much risk, to their personal and institutional detriment. He also fell back on his more long-standing belief that the crisis was a “once in a century” event and that markets could be relied on to impose more cautious practices in the future.
Both views are wrong. It should not be a “shock” that market participants took on risk as the bubble grew: that is what the logic of financial markets required. Nor will today’s chastened investors be prudent for long. As Brunnermeier and Nagel conclude: “Our findings question the efficient markets notion that rational speculators always stabilise prices.”
The problem with requiring financial players to keep on dancing while the music plays is that only the very lucky and the very smart are quick enough to grab a chair when the music stops. That is why the wisest participants know it is in their interests – and those of the taxpayer – for a more powerful regulator to be established with the authority and courage to slow down the music for everyone.
http://www.ft.com/cms/s/0/7f7260c2-b43d-11de-bec8-00144feab49a.html
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Ed
15 yrs ago
Another excellent article (directly related to the above one):
Cracks in the Global Economy
Exuberance, irrational or not, temporarily rules the day
What's going on? Grave commentators in Asia as well as Europe and the US are warning that the global economy is not out of the woods, that a W rather than V-shaped recovery is in train. Disaster has been avoided but tough times still lie ahead.
On the other, stock prices are rising everywhere, gold is at new records, all commodities are up and even in London property prices have bounced back, and Australia has already started raising interest rates. Is this all just irrational exuberance? Or is the world really getting back to normalcy thanks to official stimulus and the natural buoyancy of Asia?
The answer seems to be that the exuberance is not irrational, but will not last. It is born of two factors: first, relief that the dire forecast of global depression and huge falls in trade volumes which seemed all too possible early in the year have not happened. Trade has at least partially recovered and with it profits. Secondly the sheer size of both monetary and fiscal stimulus unleashed everywhere as governments in the west have filled up gaping holes in bank balance sheets and those in China, India and most of Asia have pushed out huge fiscal stimulus whether to spur consumers or build infrastructure.
Money has to go somewhere and money supply everywhere has been increasing far faster than economies can effectively absorb it. Asset prices rises have been bringing back fears of inflation which in turn drive investors to put even more of their money into real assets. There has been no counterweight in the shape of rising bond yields as governments have been buying their own bonds to keep rates low and support property prices and banks.
More: http://asiasentinel.com/index.php?option=com_content&task=view&id=2091&Itemid=590
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Ed
15 yrs ago
I'd categorize this as a 'much watch' video....
http://www.pbs.org/moyers/journal/10092009/watch.html
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Ed
15 yrs ago
If that's got you depressed, you'll want to watch this amusing clip (which is 100% related...)
http://www.thedailyshow.com/watch/wed-march-4-2009/cnbc-financial-advice
Indeed putting brakes on these guys is necessary... but more importantly, when this all went down there needed to be consequences ... and there were none.
The bank shareholders and management needed to pay a big price for acting like cowboys... the government lent them money without taking equity... they should have taken a pound of flesh not just made some sweetheart loan... and to compound it, they are shoveling billion after billion of taxpayer money into the gaping maws at 0% interest indefinitely and they are making more money by no doubt investing that in high risk/high return opportunities...
Who can blame them because guess what... if those bets go right they get massive bonuses.... and if they go wrong ... the tax payer eats the losses.
This is just an appalling, unfair, disgusting system and unfortunately nobody seems to be able to do anything about it....
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Ed
15 yrs ago
Good Op-Ed in the NYT today...
I read recently that the top 1% in America have more wealth than the bottom 95% combined... I have to agree with the author that this cannot be a good thing for society... I believe this flies in the face of the founding fathers who tried in the country's charter to safeguard against creating the types of ultra-wealthy dynasties and monarchies that formed in Europe and were one of the motivators for migration to America in the first place...
A Billion Here, a Billion There
Past the initial schadenfreude, it’s hard to figure out what to think about the shrinking of the nation’s 400 most gilded fortunes. It is reassuring that the super-rich can lose money too — $300 billion in the last year, according to Forbes, bringing their total down to $1.27 trillion. It’s about the same percentage that was lost by Americans’ private pensions, whose assets dropped by about $1.1 trillion, nearly 19 percent.
It can hardly hurt as much. Warren Buffett lost $10 billion but still has $40 billion. Kirk Kerkorian has $3 billion left, after losing $8.2 billion. Citigroup founder Sanford Weill dropped off the billionaires list, but still has many millions.
Every year as I get worked up over Forbes’s latest billionaire review, I try to convince myself that accumulation of wealth at the top can serve a social function. I tell myself that inequality of income is a standard feature of capitalism, pushing the best and brightest into the most profitable jobs. It encourages people to study hard and work hard, or at least to become a banker. Big financial rewards push people to excel, and thus the economy to grow.
But $1.27 trillion? That’s a decade of health care reform in one of the more expensive versions. This isn’t garden-variety inequality — this is a winner-take-all deal that can destroy incentives for everyone except those in the upper crust.
Lawrence Katz, a labor economist at Harvard, sensibly points out that one could generate incentives to excel for less: “I don’t think the added incentive of earning $100 million over $50 million is very different than the incentive of making $10 million over $5 million,” he told me once.
Maybe the jolt of billion-plus losses can spur plutocrats to change. Ralph Nader just wrote a novel called “Only the Super-Rich Can Save Us!” in which Mr. Buffett (already a major philanthropist), Ross Perot and a few other billionaires go to Maui to “redirect” society onto the right path. Warren Beatty gets to run California. Wal-Mart workers unionize. Corporate greed is brought to heel.
There is no sign of such enlightenment on Wall Street. Financial markets are back up; bankers are scouring the horizon for new opportunity. The hottest new incomprehensible financial object is the “re-remic,” bundles of distressed mortgages repackaged in a way that banks and insurers can minimize how much cash they must set aside in case the investments go south, again. Amid all this it’s hard to see how our oligarchs could be persuaded to restrain their appetites.
Perhaps I’m being too pessimistic. We could promise that Mr. Nader wouldn’t have a say in the outcome. That would seem like a reasonable incentive.
http://www.nytimes.com/2009/10/05/opinion/05mon4.html?em
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Ed
15 yrs ago
Good article:
“Dow at 10,000 as Crisis Ebbs”
Wall Street Journal headline on Thursday
In January 1931, a lawyer named Benjamin Roth, 38 years old, solidly Republican, a solo practitioner in Youngstown, Ohio, decided to start a diary. Realizing that he was “living through an historic thing that will long be remembered” — as he put it in one early entry — he wanted to keep a record for posterity.
Mr. Roth’s diaries have just been published in book form — “The Great Depression: A Diary” — edited by his son Daniel, who worked in his father’s law practice for many years, and James Ledbetter, the editor of The Big Money, a financial site run by Slate. It is an eye-opening read, though not necessarily in the ways you might think.
Because it was written in the 1930s, Mr. Roth’s diary is not the kind of tell-all we’ve come to expect in this less restrained age. Although he mentions repeatedly the struggles of lawyers and other “professional men” during the depression — Mr. Roth always uses the lower-case “d” — he never shares how his family struggled through it, or how he was able to send his daughter to college in 1937. (Daniel Roth told me that his father, who died in 1978, later divulged that he had had a good life insurance policy, which he borrowed against to keep food on the table.)
Instead, every few days — or every few weeks during some stretches — Mr. Roth jotted down his thoughts and fears as the Depression deepened. “Banks are absolutely terrible in their insistence on payments of notes and mortgages,” he wrote in 1931. “It is the old story of lending you an umbrella when the sun is shining and then demanding it back when it rains.”
He recounts painful conversations with friends and acquaintances who had accumulated some wealth by speculating in the stock market, and then lost everything when stocks plummeted and they couldn’t meet margin calls. He is obsessed with the stock market; he is constantly noting the prices of the blue chips of his day, and his writing shows him to have the instincts of a good value investor, a term that hadn’t yet been invented. But, as he also constantly points out, he never has any money to invest, much to his chagrin.
Mr. Roth is horrified when the local banks fail (“I still cannot believe that the Dollar Bank — the Gibraltar of Youngstown — has closed its doors”) and points out that even after the banks reopen, customers aren’t allowed to withdraw more than a small fraction of their savings. He explains how entrepreneurs with money buy up people’s frozen passbook accounts for 50 cents on the dollar and how barter and scrip come to replace the money people no longer have.
Events that we know about from the history books he was reacting to in real time. He was furious to learn, thanks to a series of highly publicized Congressional hearings, that some of the nation’s most prominent bankers did terrible things during the Roaring Twenties. (“By manipulation the officers boosted and unloaded on the public their own stock in National City Bank as high as $650 per share when its book value was only $60.”) But he makes no mention of the Securities and Exchange Commission, whose birth was the direct result of those incendiary hearings.
Mr. Roth is skeptical of President Franklin D. Roosevelt’s New Deal programs, and worries that the president’s fondness for deficit spending will ultimately be disastrous. He keeps thinking inflation is right around the corner. He worries about the rise of Hitler. He writes about gangs of farmers who threaten sheriffs, judges and anyone else who tries to foreclose on a farm. He watches the rise of unions, another trend he finds troubling.
Mr. Roth, of course, is writing without the benefit of hindsight. Today, when we look back on the Great Depression, we have a clear narrative in mind — a narrative that has been fine-tuned this last year or so, as we’ve re-examined it through the prism of the current crisis. On Wednesday, for instance, I attended a forum at Columbia University, where one of the speakers was the historian Alan Brinkley, who has written several fine books about the Depression.
“The only way to break the economic deadlock brought on by the Depression was to shock it back to life,” said Mr. Brinkley, who then added that for all of Roosevelt’s willingness to experiment and spend, the reason the Depression lasted so long was that the president didn’t spend enough.
That, of course, is what most people believe today — and that dogma is the reason the government last year threw literally trillions of dollars at the banking system to keep it from collapsing.
Mr. Roth’s diaries have no narrative. But they are compelling reading nonetheless, because they force readers to reflect on both the similarities and the differences between then and now. What particularly struck me was watching Mr. Roth, in his diaries, grope from day to day, and year to year, searching for an answer that wouldn’t be clear until long afterward. He’s like the proverbial blind man who feels an elephant’s trunk and thinks elephants look like a rope. Not unlike the way we are today, as we grope our way through our own financial crisis.
Mr. Roth’s inflation fears are one good example. A rock-ribbed Republican, he can’t understand why Roosevelt’s New Deal programs — and the spending they require — don’t bring with them the kind of scary inflation that had occurred in Germany after World War I. He keeps waiting for it, predicting it, ever fearful that it will make an awful economic situation even worse. He is baffled that inflation remained subdued. He can’t get outside of his mental framework and see — as we can today — that Roosevelt’s programs are the only things keeping the economy alive.
Full article: http://www.nytimes.com/2009/10/17/business/17nocera.html
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Ed
15 yrs ago
Another good article:
What Happens If the Dollar Crashes
Trade wars could break out. Overexposed banks might collapse. And that's just for starters
The financial crisis taught us that markets can drop further and faster than anyone expects. Housing prices, for example, fell for three straight years starting in 2006, even though the conventional wisdom right up until the bust began was that prices would not fall even a little bit.
Let's apply some of our hard-won knowledge to the dollar, which is also supposed to be resistant to a bust. After weakening gradually since 2002, the greenback rose during the financial crisis last year. It has fallen roughly 15% since March as investors moved to higher-yielding currencies. The conventional wisdom is that at these levels the dollar is cheap and, if anything, due for a rebound. "Currencies don't go much more than 20% from their long-term averages in real [inflation-adjusted] terms. We're there already," says Michael Dooley, an economist who is co-founder and research chief of Cabezon Capital Management, a San Francisco investment firm.
But it's worth at least thinking about the possibility of a dollar bust. The reason the housing bust had such devastating consequences was a failure of imagination: Lenders, regulators, credit raters, and others simply couldn't believe that house prices would ever fall the way they did, so they were blindsided.
Bank Blowups Possible
Let's imagine the dollar quickly dropped by a further 25% against each major world currency, roughly parallel to housing's unprecedented 30% decline. That would mean it would take $2 to buy a single euro. On the good side, U.S. manufacturers would find it easier to compete globally, and foreign tourism would boom in the U.S. On the bad side, inflation in the U.S. would zoom because of the rising cost of imported products. Americans would have even more trouble getting a loan as foreign buyers pull out of the debt market.
Abroad, the cheap dollar would make it harder for other nations to export to the U.S., hurting their growth. China could face social unrest. Trade wars could break out. And there could be blowups at overexposed banks whose risk managers were sure no such dollar bust could happen. As investor Warren Buffett once said: "You only find out who is swimming naked when the tide goes out."
Federal regulators are monitoring banks for a wide variety of risks, including the threat of a dollar bust: "We're not looking quarter to quarter, we're looking hour to hour and minute to minute at what those risks are," says one regulator who requested anonymity.
From its spring peak, the dollar is down 11% against the Japanese yen, 16% against the euro, 21% against the Canadian dollar, and about 30% against the Brazilian and Australian currencies, which are benefiting from a commodity price spike. Against a broad market basket of all U.S. trading partners, and adjusted for inflation, the dollar has fallen 15% from its spring high.
Full Story + Video Interview: http://www.businessweek.com/magazine/content/09_43/b4152000801269.htm?chan=rss_topStories_ssi_5
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Ed
15 yrs ago
Thought provoking read on where the prospects for recovery and the job market in the States...
The New Untouchables
Last summer I attended a talk by Michelle Rhee, the dynamic chancellor of public schools in Washington. Just before the session began, a man came up, introduced himself as Todd Martin and whispered to me that what Rhee was about to speak about — our struggling public schools — was actually a critical, but unspoken, reason for the Great Recession.
There’s something to that. While the subprime mortgage mess involved a huge ethical breakdown on Wall Street, it coincided with an education breakdown on Main Street — precisely when technology and open borders were enabling so many more people to compete with Americans for middle-class jobs.
In our subprime era, we thought we could have the American dream — a house and yard — with nothing down. This version of the American dream was delivered not by improving education, productivity and savings, but by Wall Street alchemy and borrowed money from Asia.
A year ago, it all exploded. Now that we are picking up the pieces, we need to understand that it is not only our financial system that needs a reboot and an upgrade, but also our public school system. Otherwise, the jobless recovery won’t be just a passing phase, but our future.
“Our education failure is the largest contributing factor to the decline of the American worker’s global competitiveness, particularly at the middle and bottom ranges,” argued Martin, a former global executive with PepsiCo and Kraft Europe and now an international investor. “This loss of competitiveness has weakened the American worker’s production of wealth, precisely when technology brought global competition much closer to home. So over a decade, American workers have maintained their standard of living by borrowing and overconsuming vis-à-vis their real income. When the Great Recession wiped out all the credit and asset bubbles that made that overconsumption possible, it left too many American workers not only deeper in debt than ever, but out of a job and lacking the skills to compete globally.”
This problem will be reversed only when the decline in worker competitiveness reverses — when we create enough new jobs and educated workers that are worth, say, $40-an-hour compared with the global alternatives. If we don’t, there’s no telling how “jobless” this recovery will be.
A Washington lawyer friend recently told me about layoffs at his firm. I asked him who was getting axed. He said it was interesting: lawyers who were used to just showing up and having work handed to them were the first to go because with the bursting of the credit bubble, that flow of work just isn’t there. But those who have the ability to imagine new services, new opportunities and new ways to recruit work were being retained. They are the new untouchables.
That is the key to understanding our full education challenge today. Those who are waiting for this recession to end so someone can again hand them work could have a long wait. Those with the imagination to make themselves untouchables — to invent smarter ways to do old jobs, energy-saving ways to provide new services, new ways to attract old customers or new ways to combine existing technologies — will thrive. Therefore, we not only need a higher percentage of our kids graduating from high school and college — more education — but we need more of them with the right education.
As the Harvard University labor expert Lawrence Katz explains it: “If you think about the labor market today, the top half of the college market, those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations, have done great. But the bottom half of the top, those engineers and programmers working on more routine tasks and not actively engaged in developing new ideas or recombining existing technologies or thinking about what new customers want, have done poorly. They’ve been much more exposed to global competitors that make them easily substitutable.”
Those at the high end of the bottom half — high school grads in construction or manufacturing — have been clobbered by global competition and immigration, added Katz. “But those who have some interpersonal skills — the salesperson who can deal with customers face to face or the home contractor who can help you redesign your kitchen without going to an architect — have done well.”
Just being an average accountant, lawyer, contractor or assembly-line worker is not the ticket it used to be. As Daniel Pink, the author of “A Whole New Mind,” puts it: In a world in which more and more average work can be done by a computer, robot or talented foreigner faster, cheaper “and just as well,” vanilla doesn’t cut it anymore. It’s all about what chocolate sauce, whipped cream and cherry you can put on top. So our schools have a doubly hard task now — not just improving reading, writing and arithmetic but entrepreneurship, innovation and creativity.
Bottom line: We’re not going back to the good old days without fixing our schools as well as our banks.
http://www.nytimes.com/2009/10/21/opinion/21friedman.html?em
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Ed
15 yrs ago
Soros weights in on bank bonuses:
British banks have just five working days to show they have "got it". On Saturday, they must submit to the regulator – the FSA – their planned bonus awards, widely estimated to total £6bn. Prince Andrew may have said in an interview that he regards this sum as "minute in the scheme of things", but, as the economy still falters and unemployment rises, it was clear last night that the banks will grant themselves their billions in an increasingly hostile atmosphere.
George Soros (below) became the latest high-profile figure from the world of finance to condemn the bankers, and call for watertight restrictions on their activities yesterday. He said: "Banks are actually getting hidden subsidies of enormous amounts because of their ability to borrow at effectively zero, and buy 10-year government bonds at 3.5 per cent. So those earnings are not the achievement of risk-takers. These are gifts, hidden gifts, from the Government, so I don't think those monies should be used to pay bonuses. So there's a resentment which I think is justified."
And, as increasing numbers wonder why the United States' decisive action to cap bonuses in firms taking public money has not been matched in Britain, there are now signs of a hardening of attitudes towards bankers inside the City. The Square Mile grandee Sir David Walker, The Independent on Sunday understands, is now expected to call for them to be banned from paying guaranteed bonuses in his forthcoming report on corporate governance. He is believed to have been impressed by the growing acceptance among big institutional investors, and even the banks themselves, that paying out huge salaries and bonuses may have exacerbated and contributed to the banking crisis. One source said: "Everyone knows the levels of bonuses are quite insane. None of the banks dare break ranks and stop paying such big bonuses because they are frightened traders will jump ship to another bank, or overseas. That's why many actually want to be told what to do."
More: http://www.independent.co.uk/news/business/news/stop-the-fatcat-bonuses-george-soros-turns-on-the-bankers-1809138.html
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Ed
15 yrs ago
Trade turmoil brewing over the drop in the USD's drop http://www.theaustralian.news.com.au/business/story/0,28124,26257892-5018001,00.html
If the dollar keeps dropping and the job situation remains weak for years in America, do we see a repatriation of jobs that have been outsourced to China etc...
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Ed
14 yrs ago
See The Ascent of Money on the home page Features - that book details how defaults on debt/revaluing of currencies has been the norm rather than the exception in history... It's an excellent read
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Ed
14 yrs ago
Comment by Nouriel Roubini on Bloomberg this morning ... he reckons that it could take 2 years for what he feels is an asset bubble to burst because of the enormous amounts of money governments are dropping into the economy that are fueling that asset bubble...
It kinda goes back to what the Citi guy said 'you gotta dance while the music plays...'
Even if you know the fundamentals of what is going on are built on quicksand, it could be years before it sinks and in the meantime what to do what to do....
There were those correctly saying the economy was a ponzi scheme as far back as 2004... but it took until 2008 for it to bust...
Maybe the entire stock market is a big ponzi scheme (or at best it's ephemeral) with hot money jumping to the flavour of the day till things get out of whack, things implode (hopefully not taking down the world) and we move onto the next bubble ad nauseum...
Maybe this is just a symptom of our society... everyone wants MORE MORE MORE MORE.... they will not accept 3 or 4% on their money... they need double digits and if they dont get it they will shift their cash to someone who makes the promise of it (Bernie Mad-off anyone...). That puts the pressure on fund managers to take ever higher risks and for banks to offer ever insane products as they try to create the flavour of the day.
Like our environmental model, this doesn't appear to be sustainable - at least to me....
On the +++++ side, its hump day - only two days till TGIMolson...
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Ed
14 yrs ago
Wow.... I like the part about the author's and dog's breakfast...also the bit about the bookmaker's comment on the big money...
Our Economy Was a Scam and Now We're Dead Broke
America is broke. And the easy credit, phantom "growth" economy has been exposed for what it was: a credit scam.
When Barack Obama took office it seemed to some of us that his first job was to get the national silverware out of the pawn shop. Or at least maintain the world's confidence that it was possible for us to get out of debt. America is dead broke, the easy credit, phantom "growth" economy has been exposed for what it was. A credit scam. Even Hillary Clinton and Obama's best efforts have not coaxed much more dough out of foreign friends. But at least we again have a few friends abroad.
So now we must jackleg ourselves back into something resembling a productive activity. No matter how you cut it, things will not be as much fun as shopping and speculative "investing" were.
The fiesta is over, the economy as we knew it is dead.
The national money shamans have danced around the carcass of our dead horse economy, chanted the recovery chant and burned fiat currency like Indian sage, enshrouding the carcass in the sacred smoke of burning cash. And indeed, they have managed to prop up the carcass to appear life-like from a distance, if you squint through the smoke just right. But it still stinks here from the inside. Clearly at some point we must find a new horse to ride, and sure as god made little green apples one is broaching the horizon. And it looks exactly like the old horse.
Then too, what else did we expect? His economic team of free market billionaires and financial hotwires includes most of those who helped Bill Clinton sell the theory that Americans didn't need jobs. Actual labor, if you will remember, was for Asian sweatshops and Latin maquiladoras. We, as a nation one third of whose population is functionally illiterate, were going to transmute ourselves into an information and transactional economy. Ain't gonna sweat no mo' no mo' -- just drink wine and sing about Jesus all day.
Along with these economic hotwires came literally hundreds of K Street and Democratic lobbyists. Supposedly, every president is forced to hire these guys because no one else seems to have the connections or knows how to get a bill through Congress. Consequently, the current regime's definition of a recovery is more of the same as ever. A return of the mortgage market and credit to its former level -- the level that blew us out of the water in the first place. Ah, but we're gonna manage it better this time. There is no one-trick pony on earth equal to capitalism.
Somewhere in the smoking wreckage lie the solutions. The solutions we aren't allowed to discuss: adoption of a Wall Street securities speculation tax; repeal of the Taft-Hartley anti-union laws; ending corporate personhood; cutting the bloated vampire bleeding the economy, the military budget; full single payer health care insurance, not some "public option" that is neither fish nor fowl; taxation instead of credits for carbon pollution; reversal of inflammatory U.S. policy in the Middle East (as in, get the hell out, begin kicking the oil addiction and quit backing the spoiled murderous brat that is Israel.
Meanwhile we may all feel free to row ourselves to hell in the same hand basket. Except of course the elites, the top five percent or so among us. But 95 percent is close enough to be called democratic, so what the hell. The trivialized media, having internalized the system's values, will continue to act as rowing captain calling out the strokes. News gathering in America is its own special hell, and reduces its practitioners to banality and elite sycophancy. But Big Money calls the shots.
With luck we will see at least some reverse of the Bush regime's assault on habeas corpus, due process, privacy. Changing such laws doesn't much affect that one percent whose income is equal to the combined bottom 50 percent of Americans.
Beyond that, the big money is constitutionally protected. Our Constitution is first and foremost a property document protecting their money. In actual practice, our constitutional civil liberties, inspiring as they are in concept to people around the world, are mainly side action to make the institutionalization of the owning class more palatable. You can argue that may not have been the intent of the slave owning, rent collecting, upper class founding fathers. But you would be full ofsh*t. We can keep on pretending to be independent, free to keep on living in those houses on which we still owe $300,000. But they own and control the money that comes through our hands. And they plan to keep on owning it and charging us to use it.
On the positive side, there has probably been no more fertile opportunity to improve U.S. international relations since post World War II. Bush, Cheney, Rumsfeld and Bolton were about as endearing as pederasts at a baby shower. And now that we have shot up half the planet, certainly there is no more globally attractive person to patch up the bullet holes than Barack Obama (yes, I know Bill Clinton's feelings are hurt by that). Awarding him the Nobel Peace Prize (again Bill Clinton's feeling are sorely wounded) was an invitation to rejoin the human race.
Of course, there are a significant number of Americans still who could not give a rat's a** about world opinion of the good ole USA. Nearly every damned one of my neighbors back in Virginia, in fact.
The sharks are still running the only game in town and they have never had it better. To be sure, with the economic collapse some of the financial lords won't pile quite up as many millions this year. Others will however have a record year. All are still squatting in the tall cotton.
Their grandfathers who so hated FDR's reforms must be chugging cognac in hell celebrating today's America. America's unions have been neutered and taught to beg. At long last we have established a permanent underclass and deindustrialized the country in favor of low wage service industries here and dirt cheap labor from abroad. We've managed to harden the education and income gap into something an American oligarch can take pride in. Hell, my bank card is issued by Prescott Bush's Union Bank and my most recent mortgage was held by J. P. Morgan's creation. My electricity is generated by Rockefeller's coal and energy holdings and my Exxon gasoline credit card is issued by a successor to Standard oil. The breakfast I eat comes from Archer Daniels Midland. So did my dog's breakfast. We are the very products and property of these people and their institutions.
With peak oil, population pressure, vanishing world resources and global warming, we can never again be what we once were -- a civilization occupying a relative material paradise through a danse macabre of planetarily unsustainable growth. But no presidential candidate is going to run on the promise that "If we do everything just right, pull in our belts and sacrifice, we can at best be a second world nation in fifty years, providing we don't mind the lack of oxygen and a few cancers here and there." Better to hawk the myth of profitable pollution through carbon credits. Which Obama is doing.
We burn the grain supplies of starving nations in our vehicles. Skilled American construction workers now unemployed drive their big trucks into town and knock at my door asking to rake my leaves for ten bucks. There is nothing ironic in this to their minds. "Middle class" people making $150,000 a year will get a new tax break (as if we were all earning 150K). Energy prices are predicted to stabilize because we intend to burn the state of West Virginia in our power plants. The corpses of our young people are still being unloaded from cargo planes at Dover Delaware, but from two fronts now. Mortgage foreclosures are expected to double before they slacken. I cannot imagine debtors not getting at least temporary relief, if not decent jobs or affordable health care. Surely we will see more "change."
But never under any conditions will we be allowed to touch the real money, or get anywhere near it, much less redistribute it. Because, as a bookie friend once told me, "You got your common man living on hope, lottery tickets, or the dogs or the ponies, and you got operators. People who can see the whole game in play. They set the rules. Because they hold the money. That ain't never gonna change."
On the other hand national opinion changes almost hourly. But if the starting gate bell rang right now for the next presidential race, I'd have to put ten bucks on Obama to place. We cannot assume the Republican party will remain stupid. Assumptions don't work at all.
Remember what happened when we assumed the Democrats were capable of courage and leadership?
http://www.alternet.org/politics/143521/our_economy_was_a_scam_and_now_we%2527re_dead_broke?page=entire
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Ed
14 yrs ago
Good interview with a former Goldman Sachs MD... I don't think that most people are aware of the hidden bailouts that actually dwarf the TARP payments... the Fed is still feeding money into the banks with 0% interest...
Of note, the author indicates Paul Volcker has been screaming for Glass Steagal to be put back in place but that's fallen on deaf ears... more on that here http://www.nakedcapitalism.com/2009/10/volcker-glass-steagall-and-the-real-tbtf-problem.html
Excerpt:
NP: At one point, a total of $19.3 trillion comprised of $17.5 trillion deployed in some capacity for subsidizing or bailing out banks (including $3.7 trillion to back money market funds, which has now been taken off the table) compared to $1.8 trillion for citizen-related assistance, including some homeowner initiatives. I keep track of the changes to these figures on a monthly basis on my Web site: http://www.nomiprins.com/bailout.html (also on that page are regularly updated compensation figures for all the banksters). Today, the total bailout figure is (still) over $14 trillion, which is an immense private-sector subsidy by any historical standard.
Of the top three main recipients of the bailout: Bank of America still owes the government $63.1 billion, AIG sits on top of a $181.8 billion pile of federal help, and Citigroup has a $368.7 billion public cushion.
Other recipients of government aid include Goldman Sachs, who is on track to pay out $22.1 billion in total compensation compared to $10.9 billion in 2008 and $20.2 billion in 2007. Additionally, JPM Chase is on track to pay $29.1 billion, nearly what it would have paid out in compensation in the year before the crisis, had it owned Bear Stearns and Washington Mutual then. Goldman Sachs still floats on $54 billion of federal support, and JPM Chase $73 billion – even after repaying their TARP obligations. (Remember, the $700 billion TARP fund is but a fraction of the entire bailout and subsidization of the banking industry, despite Goldman, JPM Chase and the government wanting us to believe otherwise.)
All: http://www.alternet.org/workplace/143573/former_wall_street_player_reveals_the_inside_world_behind_shady_bailouts_to_bankers?page=entire
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Ed
14 yrs ago
India buys 200 tonnes of gold... what's with that? This guy calls it:
“This is safe-haven buying,” said Frank McGhee, head dealer at Integrated Brokerage Services LLC in Chicago. “Gold is decoupling from the dollar, which can make it even more bullish.”
What's that mean? Safe from what?
Full Article: Gold Surges to Record as Treasuries Fall; Stocks, Dollar Gain
Nov. 3 (Bloomberg) -- Gold climbed to a record, most U.S. stocks rose and the dollar rallied to the strongest level against the euro in a month. Treasuries fell before the Federal Reserve issues its policy statement tomorrow.
The U.S. currency appreciated on speculation Fed officials are discussing the outlook for record-low borrowing costs at their two-day meeting. U.S. stocks pared earlier losses after Warren Buffett’s Berkshire Hathaway Inc. agreed to buy railroad Burlington Northern Santa Fe Corp. for $26 billion. Crude oil rebounded from a two-week low and neared $80 a barrel.
Gold futures for December rallied $34.50, or 3.3 percent, to a record $1,088.50 in after-hours trading as the Reserve Bank of India bought 200 metric tons of the metal for $6.7 billion from the International Monetary Fund. Central banks, the biggest holders of gold, may diversify out of the dollar and buy bullion as surging U.S. debt and low interest rates weaken the currency.
“This is safe-haven buying,” said Frank McGhee, head dealer at Integrated Brokerage Services LLC in Chicago. “Gold is decoupling from the dollar, which can make it even more bullish.”
The metal outperformed stocks and bonds this year, rising 22 percent as it heads for a ninth straight annual gain. The Standard & Poor’s 500 Index rose 17 percent in 2009, while returns on the benchmark 10-year U.S. Treasury note are down 7.4 percent, according to a Merrill Lynch index.
‘Difficult Taskmaster’
About five stocks gained for every two that fell on the New York Stock Exchange. The Standard & Poor’s 500 Index added 0.2 percent to 1,045.41 at 4:11 p.m. in New York after falling as much as 0.9 percent. The Dow Jones Industrial Average decreased 17.53 points, or 0.2 percent, to 9,771.91. Stocks in Europe slid after UBS AG posted a wider-than-estimated loss.
“The market’s clearly trying to decide, the market being this really difficult taskmaster, where it wants to go,” said Michael Vogelzang, chief investment officer of Boston Advisors LLC, which manages $1.8 billion. “You have all kinds of conflicting problems and currents, the best of which is huge down markets overseas today, followed by Warren Buffett buying Burlington Northern.”
Fort Worth, Texas-based Burlington Northern jumped 28 percent to $97. The takeover is the largest ever for Berkshire. Railroad stocks Union Pacific and CSX gained more than 7.3 percent, while Norfolk Southern advanced 5.4 percent.
A group of 10 transportation stocks in the S&P 500 jumped 5.8 percent, the most since April. An index of industrial shares, which includes railroads, rallied 1.4 percent for the biggest advance among 10 industries.
Black & Decker
Black & Decker surged 31 percent to $62. The maker of DeWalt power drills and Price Pfister faucets agreed to be purchased by Stanley Works for $3.5 billion in stock. Stanley Works rallied 10 percent to $49.69.
Crude oil for December delivery climbed as much as 2.1 percent to $79.77 a barrel on the New York Mercantile Exchange after falling as much as 2 percent to $76.55 a barrel, the lowest level since Oct. 15. Prices rose 78 percent this year.
The dollar touched the strongest level versus the euro in a month as evidence that banks are struggling to shake off the effects of the financial crisis reduced demand for higher- yielding assets.
“When risk appetite falters, the dollar still catches a bid,” said Steven Pearson, the London-based head of G-10 currency strategy at Bank of America Corp., in a Bloomberg Television interview. “That is likely to remain the case for the foreseeable future as the dollar remains the defensive currency of choice.”
Volatility Climbs
The greenback appreciated 0.4 percent to $1.4724 per euro and touched $1.4626, the strongest since Oct. 5. The dollar gained 2.4 percent since reaching a 14-month low on Oct. 26.
Implied volatility on major currencies climbed to 14.27 percent, the highest level since July 13, according to data compiled by JPMorgan Chase & Co., indicating traders predict wider price swings in coming months.
“This is a huge, huge week,” said Lauren Rosborough, a foreign-exchange strategist at Westpac Banking Corp. in London. “Higher volatility reflects the uncertainty in the market and suggests potential for downside in risky currencies.”
More: http://www.bloomberg.com/apps/news?pid=20601087&sid=ahT8s5lfvu.8&pos=4
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Ed
14 yrs ago
Gold hits a new record:
December gold futures rose as high as $1,119.10 an ounce on the New York Mercantile Exchange Wednesday, before settling up $12.10 at $1,114.60.
http://www.google.com/hostednews/ap/article/ALeqM5hLdQzzkk_vLW3OsMLzbo-eZnRKbAD9BTJPKG0
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Ed
14 yrs ago
Good article on the China story:
China's record debt has economists worried
The nation is taking on record levels of debt to keep its economy humming. Some say that can't last.
In a world still awash in economic worry, China has stood apart as the one country that has come through the global slump with only the briefest of hiccups.
Last quarter the nation grew at a brisk 8.9% rate, and many economists expect it to expand even faster over the remainder of the year. Profits at large, state-owned companies that have benefited from Beijing's aggressive stimulus program are up sharply.
Li Xiaochao, spokesman for the National Bureau of Statistics, summed up the zeitgeist in China these days: "The overall situation of the economy is good."
A lot of global CEOs, of course, are on the thank-God-for-China bandwagon, and it might seem a little churlish to question one of the world's few good-news economic stories. Yet a growing number of observers believe that China is creating its own bubble economy. And they have a case to make.
The U.S. fueled its housing and consumption bubbles by providing easy credit. China seems headed in the same direction, although the victims would be different this time.
In the first nine months of the year, Beijing has shoveled $1.27 trillion in new loans into the economy, up 136% from the same period last year. That money has gone to three main areas: infrastructure, manufacturing, and real estate.
Full Article: http://money.cnn.com/2009/11/10/news/international/china_debt.fortune/index.htm
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Ed
14 yrs ago
The conundrum... The Americans cant raise its rates... China's imports are still falling in spite of a currency that tracks the USD downward making their exports even more competitive vis a vis other countries with floating currencies...
U.S. Dollar Has A Long Way To Fall
Gold is soaring Monday, trading at $1131 per ounce. President Obama is in China, calling for a new relationship. New relationship, indeed! On the surface of this visit everyone is smiling. Immediately below surface the dollar is falling--again.
There is tremendous global finger-pointing today. Liu Mingkang, head of China’s CBRC, said that the combination of a weak dollar and low U.S. interest rates has spawned: "A huge carry trade” that was having a “massive impact on global asset prices … [It] is boosting speculative investment in stock and property markets and will pose new, real and insurmountable risks to the global recovery and particularly to the recovery in emerging markets."
Mr. Liu implied that the U.S. was purposely inflating away its massive debt. On the other hand IMF head Dominique Strauss-Kahn suggested that China must float her currency to ease the pain of her Asian neighbors and the European Union countries.
There are no "best" alternatives. Raising interest rates in the U.S. would be extremely painful and would derail the recovery. The U.S. needs at least 5% growth in GDP to support its huge and increasing debt load. Raising U.S. rates to defend the dollar is political nonstarter.
Last Tuesday China said, somewhat begrudgingly, that it would allow the yuan to appreciate. China now pegs the yuan to the U.S. dollar. This announcement was likely in response to pressure from China’s Asian neighbors (Thou Shalt Not Beggar Thy Neighbor). The Euro Union leaders have also felt the pain of a jointly weaker dollar and yuan. Time will tell how serious China is about the floating the yuan. Today once again the dollar is weaker--across the board--except for the yuan, where the peg has been maintained.
More: http://www.forbes.com/2009/11/16/dollar-gold-china-markets-currencies-michael-berry.html
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Ed
14 yrs ago
Another good article... how amusing that the one guy quoted thinks this carry trade is a 'healthy sign' because it means people are willing to take risk.... no doubt they are willing because they know the government will pick up the pieces when it all falls apart again...
Low Interest Rates: Steroids for the Stock Rally?
The "carry trade" that helps fuel this global rally is fed by super-low interest rates—and the cheap capital they create. Should investors worry?
http://www.businessweek.com/investor/content/nov2009/pi20091116_146208.htm
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Ed
14 yrs ago
So I'm reading the Herald Trib bright and early this morning and I come across this story this morning...
$500 Million and Apology From Goldman http://www.nytimes.com/2009/11/18/business/18goldman.html and I am particularly focused on this comment:
Goldman insisted Tuesday that its new charitable initiative, the largest in its history, was not motivated by its current public relations headache.
and I'm thinking that they are thinking that people must be really stupid for them to say that....
and I'm thinking if they were really contrite and not doing this as damage control what they'd do is....
Give back the 13 BILLION in bailout money that Hank Paulson gave them through the back door as part of the bail out of AIG who returned 100 cents on the dollar to Goldman on a soured obligation...
That's what I'm thinking this morning... not that it matters much....
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Ed
14 yrs ago
This is so right....
The Big Squander
Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility — and put the broader economy at risk.
For the A.I.G. rescue was part of a pattern: Throughout the financial crisis key officials — most notably Timothy Geithner, who was president of the New York Fed in 2008 and is now Treasury secretary — have shied away from doing anything that might rattle Wall Street. And the bitter paradox is that this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.
About the A.I.G. affair: During the bubble years, many financial companies created the illusion of financial soundness by buying credit-default swaps from A.I.G. — basically, insurance policies in which A.I.G. promised to make up the difference if borrowers defaulted on their debts. It was an illusion because the insurer didn’t have remotely enough money to make good on its promises if things went bad. And sure enough, things went bad.
So why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.
But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout, which they could have done by accepting a “haircut” on the amounts A.I.G. owed them. Indeed, the government asked them to do just that. But they said no — and that was the end of the story. Taxpayers not only ended up honoring foolish promises made by other people, they ended up doing so at 100 cents on the dollar.
Could things have been different? Some commentators argue that government officials had no way to force the banks to accept a haircut — either they let A.I.G. go bankrupt, which they weren’t ready to do, or they had to honor its contracts as written.
But this seems like a naïve view of how Wall Street works. Major financial firms are a small club, with a shared interest in sustaining the system; ever since the days of J.P. Morgan, it has been common in times of crisis to call on the big players to forgo short-term profits for the industry’s common good. Back in 1998, it was a consortium of private bankers — not the government — that put up the funds to rescue the hedge fund Long Term Capital Management.
Furthermore, big financial firms have a long-term relationship, both with the government and with each other, and can pay a price if they act selfishly in times of crisis. Bear Stearns, the investment bank, earned itself a lot of ill will by refusing to participate in that 1998 rescue, and it’s widely believed that this ill will played a major factor in the demise of Bear Stearns itself, 10 years later.
So officials could have called on bankers to offer a better deal, for their own sake, and simultaneously threatened to name and shame those who balked. It was their choice not to do that, just as it was their choice not to push for more control over bailed-out banks in early 2009.
And, as I said, these seemingly safe choices have now placed the economy in grave danger.
For the economy is still in deep trouble and needs much more government help. Unemployment is in double-digits; we desperately need more government spending on job creation. Banks are still weak, and credit is still tight; we desperately need more government aid to the financial sector. But try to talk to an ordinary voter about this, and the response you’re likely to get is: “No way. All they’ll do is hand out more money to Wall Street.”
So here’s the real tragedy of the botched bailout: Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust.
http://www.nytimes.com/2009/11/20/opinion/20krugman.html
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Ed
14 yrs ago
The report on AIG all need to read
A ray of sunlight broke through the Washington fog last week when Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, published his office’s report on the U.S. government bailout last year of American International Group.
It’s must reading for any taxpayer hoping to understand why the $182 billion ‘‘rescue’’ of what was once the world’s largest insurer still ranks as the most troubling episode of the financial disaster.
And it could not have come at a more pivotal moment.
Many in Washington want to give more regulatory power to the Federal Reserve Board, the banking regulator that orchestrated the bailout of A.I.G.
Through this prism, the actions taken in the deal by Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time and is now Treasury secretary, grow curiouser and curiouser.
Of special note in the report: The Fed failed to develop a workable rescue plan when A.I.G., swamped by demands that it pay off huge insurance contracts that it could not make good on as the economy tanked, began to sink. The report takes the Fed to task as having refused to use its power and prestige to wrestle concessions from A.I.G.’s big, sophisticated and well-heeled trading partners when the government itself had to pay off the contracts.
The Fed, under Mr. Geithner’s direction, gave A.I.G.’s counterparties 100 cents on the dollar for positions that would have been worth far less if A.I.G.
had defaulted. Goldman Sachs, Merrill Lynch, Société Générale and other banks were in the group that received full value for their contracts when many others were accepting fire-sale prices.
On the question of whether this payout was what the report describes as a ‘‘backdoor bailout’’ of A.I.G.’s counterparties, Mr. Barofsky concluded: ‘‘The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.’’ The report said this was money the banks might not otherwise have received had A.I.G. failed.
The report zaps Fed claims that identifying banks that benefited from taxpayer largess would have dire consequences.
Fed officials had refused to disclose the identities of the counterparties or the details of the payments, warning ‘‘that disclosure of the names would undermine A.I.G.’s stability, the privacy and business interests of the counterparties, and the stability of the markets,’’ the report said.
When the parties were identified, ‘‘the sky did not fall,’’ the report said.
Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and the recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default— that, in effect, had A.I.G. cratered, Goldman would not have been damaged.
In short, there’s an awful lot jammed into the 36-page report.
Even before publishing the analysis, Mr. Barofsky had made a name for himself as one of the few truth-tellers in Washington. While others estimate how much taxpayers will make on various bailout programs, Mr. Barofsky has said that returns are extremely unlikely.
His office has also opened 65 cases to investigate potential fraud in various bailout programs.
‘‘When I first took office, I can’t tell you how many times I’d be having a sit-down and warning about potential fraud in the program, and I would hear a response basically saying, ‘Oh, they’re bankers, and they wouldn’t put their reputations at risk by committing fraud,’ ’’ Mr. Barofsky told Bloomberg News a little more than a week ago, adding: ‘‘I think we’ve done a good job of instilling a greater degree of skepticism that what comes from Wall Street isn’t necessarily the holy grail.’’ Mr. Barofsky said the Fed had failed to strong-arm the banks when it was negotiating payouts on the A.I.G. contracts.
Rather than forcing the banks to accept a steep discount, or ‘‘haircut,’’ the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G. That amounted to about $62 billion for the contracts, which the report described as ‘‘far above their market value at the time.’’ Mr. Geithner, who oversaw those negotiations, said in an interview Friday that the terms of the A.I.G. deal were the best he could get for taxpayers. He considered bailing out A.I.G. to be ‘‘offensive,’’ he said, but deemed it necessary because a collapse would have undermined the financial system.
‘‘We prevented A.I.G. from defaulting because our judgment was that the damage caused by failure would have been much more costly for the economy and the taxpayer,’’ Mr. Geithner said. ‘‘To most Americans, this looked like a deeply unfair outcome, and they find it hard to see any direct benefit.
But in fact, their savings are more valuable and secure today.’’ The report said that while bailing out Goldman and other investment banks might not have been the intent behind the Fed’s A.I.G. rescue, that certainly was its effect. ‘‘By providing A.I.G. with the capital to make these payments, Federal Reserve officials provided A.I.G.’s counterparties with tens of billions of dollars they likely would have not otherwise received had A.I.G. gone into bankruptcy,’’ the report stated.
As Goldman prepares to pay out nearly $17 billion in bonuses to its employees, it is important that an authoritative, independent voice like Mr.
Barofsky’s remind us how the taxpayer bailout of A.I.G. benefited Goldman.
A Goldman spokesman, Lucas van Praag, said that Goldman believed ‘‘that a collapse of A.I.G. would have had a very disruptive effect on the financial system and that everyone benefited from the rescue of A.I.G.’’ Regarding Goldman’s dealings with A.I.G., Mr.
van Praag said that Goldman believed that its ‘‘exposure was close to zero’’ because it had insulated itself from a downturn in A.I.G.’s fortunes through hedges and collateral it had already received.
(Goldman’s complete response is at www.nytimes.com/business.) The inspector noted in his report that Goldman had made several arguments as to why it believed it was not materially at risk in an A.I.G. default, but he was skeptical of the company’s reasoning.
http://www.mydigitalfc.com/news/report-aig-all-need-read-188
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Ed
14 yrs ago
The Dubai govt has been jailing expats who failed to pay their bills http://www.independent.co.uk/opinion/commentators/johann-hari/the-dark-side-of-dubai-1664368.html
And now they are the ones who are unable to pay the bills....
http://www.guardian.co.uk/world/2009/nov/26/dubai-first-domino-new-crash
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Ed
14 yrs ago
Requiem for the Dollar
Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head.
I wonder, though, just how far we have really come in the past 200-odd years. To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.
Full Article:
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html?mod=WSJ_hp_us_mostpop_read
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Ed
14 yrs ago
The phrase 'between a rock and a hard place' comes to mind when I read this....
Obama urges major new stimulus, jobs spending
By TOM RAUM (AP) – 22 minutes ago
WASHINGTON — President Barack Obama called for a major new burst of federal spending Tuesday, perhaps $150 billion or more, aiming to jolt the wobbly economy into a stronger recovery and reduce painfully persistent double-digit unemployment.
Despite Republican criticism concerning record federal deficits, Obama said the U.S. has had to "spend our way out of this recession" with so many people out of work but insisted he was still mindful of a need to confront soaring deficits. More than 7 million Americans have lost their jobs since the recession began two years ago, and the jobless rate stands at 10 percent, statistics Obama called "staggering."
Congressional approval would be required for the new spending.
"We avoided the depression many feared," Obama said in a speech at the Brookings Institution, a Washington think tank. But he added, "Our work is far from done."
It was the third time in a week the president had presided over a high-profile event on jobs, responding to rising pleas in Congress that he spend more time discussing unemployment as midterm election season draws near.
Obama proposed new spending for highway and bridge construction, for small business tax cuts and for retrofitting millions of homes to make them more energy-efficient. He said he wanted to extend economic stimulus programs to keep unemployment insurance from expiring for millions of out-of-work Americans and to help laid-off workers keep their health insurance. He proposed an additional $250 apiece in stimulus spending for seniors and veterans and aid to state and local governments to discourage them from laying off teachers, police officers and firefighters.
He did not give a price tag for the new package but said he would work with Congress on deciding how to pay for it.
On Capitol Hill, estimates of a potential jobs bill range from $75 billion to $150 billion, said Rep. Steny Hoyer of Maryland, the No. 2 Democrat in the House.
"100 billion, 150 billion, 75 billion — those are all figures that are being talked about," Hoyer told reporters.
Those billions would be on top of money for separate legislation for safety-net initiatives such as extending unemployment benefits for the long-term jobless and providing them health insurance subsidies.
Some lawmakers put the total cost of the new proposals at $200 billion or more.
White House economic adviser Jared Bernstein said the White House is considering spending $50 billion on infrastructure projects alone such as roads and bridges and water projects. Other figures, he said in an interview with The Associated Press, would be worked out with Congress.
Republicans ridiculed the president's speech and his parallel call for doing more to hold down government deficits.
"At least the president's proposal will result in one new job — he'll need to hire a magician to make this new deficit spending appear fiscally responsible," said Sen. Judd Gregg of New Hampshire, the senior Republican on the Senate Budget Committee. House GOP leader John Boehner of Ohio declared the president "out of ideas and out of touch."
While Obama did not propose the kind of direct federal public works jobs that were created in the 1930s, he said government action could set the stage for more job creation by private business. Many of his proposals would extend or expand programs included in the mammoth $787 billion stimulus package passed last winter.
While acknowledging increasing concerns in Congress and among the public over the nation's growing debt, Obama said critics present a "false choice" between paying down deficits and investing in job creation and economic growth.
"Even as we have had to spend our way out of this recession in the near term, we have begun to make the hard choices necessary to get our country on a more stable fiscal footing in the long run," he said.
To find money to pay for the new programs, the administration is pointing to the Treasury Department's report on Monday that it expects to get back $200 billion in taxpayer-approved bank bailout funds faster than expected.
Obama suggested this windfall would help the government spend money on job creation at the same time it eats into the nation's debt, which now totals $12 trillion.
He called the bank bailout, under the 2008 Troubled Asset Relief Program, or TARP, "galling."
"There has rarely been a less loved — or more necessary — emergency program," Obama said.
The program is due to go out of business at the end of this year, although Congress is expected to extend it to next October.
The perception that the program mainly bailed out Wall Street bankers while doing little to help ordinary Americans has fed anti-Washington sentiment across the nation.
In clear acknowledgment of this sentiment, Obama said the unexpected $200 billion in repaid loans and other savings "gives us a chance to pay down the deficit faster than we thought possible and to shift funds that would have gone to help the banks on Wall Street to help create jobs on Main Street."
But Republicans cried foul, claiming that the leftover and repaid TARP money must be used exclusively for deficit reduction or additional bank bailouts, as the law setting it up spells out, and not for what amounts to an expensive new stimulus program to create jobs.
"The stimulus money clearly was a spending bill. TARP was a loan — a loan to be paid back. And we know that a number of the banks are, in fact, paying it back," said Senate Minority Leader Mitch McConnell, R-Ky. "So I don't think raiding a loan program to launch another spending spree is the best way to create jobs."
David Walker, president of the Peter G. Peterson Foundation, a group that promotes fiscal responsibility, said that just because the government hasn't had to spend all the TARP money on banks "doesn't mean we should automatically spend it on something else."
Walker, former head of Congress' Government Accountability Office, said in an interview that clearly defined objectives or conditions were missing from both the $700 billion bank bailout law passed in October 2008 and this year's $787 billion stimulus package. He said, "You can't change history, but you need to learn from past mistakes to make sure that you don't repeat them."
Liberal groups praised Obama's new initiatives. "We think that Obama made a step in the right direction," said Karen Dolan of the Institute for Policy Studies. "He's finally tapping into that moral outrage of the American people at the Wall Street bailouts."
A major part of his package includes new incentives for small businesses, which account for two-thirds of the nation's work force. He proposed a new tax cut for small businesses that hire in 2010 and an elimination for one year of the capital gains tax on profits from small-business investments.
Obama also proposed an elimination of fees on loans to small businesses, coupled with federal guarantees of those loans through the end of next year. His proposal for new tax breaks for energy-efficient retrofits in homes is modeled on the now-expired Cash for Clunkers rebates for trading in used vehicles for more fuel-efficient vehicles. Some administration officials have dubbed the proposed new program "Cash for Caulkers."
Although the unemployment rate inched down to 10 percent in November from 10.2 percent in October, more of America's largest companies will shrink their staffs than will hire in the next six months, according to a new survey by the Business Roundtable.
A Labor Department report on Tuesday showed there were about 6.3 unemployed people, on average, for each job opening in October. Comparable November figures were not yet available.
http://www.google.com/hostednews/ap/article/ALeqM5jy6s4th2AWz2wvrF9UGpJs3t_WxgD9CFFRJG0
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Ed
14 yrs ago
The blame game... Americans continue to give credit to the man who deserves it...
http://www.nytimes.com/2009/12/15/us/15poll.html?_r=1&hpw
In terms of casting blame for the high unemployment rate, 26 percent of unemployed adults cited former President George W. Bush; 12 percent pointed the finger at banks; 8 percent highlighted jobs going overseas and the same number blamed politicians. Only 3 percent blamed President Obama.
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Ed
14 yrs ago
The Big Zero
Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. (Yes, I know that strictly speaking the millennium didn’t begin until 2001. Do we really care?)
But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true.
It was a decade with basically zero job creation. O.K., the headline employment number for December 2009 will be slightly higher than that for December 1999, but only slightly. And private-sector employment has actually declined — the first decade on record in which that happened.
It was a decade with zero economic gains for the typical family. Actually, even at the height of the alleged “Bush boom,” in 2007, median household income adjusted for inflation was lower than it had been in 1999. And you know what happened next.
It was a decade of zero gains for homeowners, even if they bought early: right now housing prices, adjusted for inflation, are roughly back to where they were at the beginning of the decade. And for those who bought in the decade’s middle years — when all the serious people ridiculed warnings that housing prices made no sense, that we were in the middle of a gigantic bubble — well, I feel your pain. Almost a quarter of all mortgages in America, and 45 percent of mortgages in Florida, are underwater, with owners owing more than their houses are worth.
Last and least for most Americans — but a big deal for retirement accounts, not to mention the talking heads on financial TV — it was a decade of zero gains for stocks, even without taking inflation into account. Remember the excitement when the Dow first topped 10,000, and best-selling books like “Dow 36,000” predicted that the good times would just keep rolling? Well, that was back in 1999. Last week the market closed at 10,520.
So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened.
For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing.
Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.”
So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.
What percentage of all this turned out to be true? Zero.
What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes.
Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage.
Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation.
So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned.
Oh, and happy New Year.
http://www.nytimes.com/2009/12/28/opinion/28krugman.html
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Ed
14 yrs ago
Pimco's Bill Gross Sees 2010 as Year of Reckoning
Pimco managing director Bill Gross not only oversees the world's biggest bond fund, his views often sway markets. In a late December interview with TIME's John Curran, Gross pointed to the second half of 2010 as a period when investors large and small will reckon with a new reality of poor economic growth and a Federal Reserve that is hard pressed to offer much help.
Read more: http://www.time.com/time/business/article/0,8599,1951623,00.html#ixzz0bnLbXKT6
Read more: http://www.time.com/time/business/article/0,8599,1951623,00.html#ixzz0bnL3Sx6M
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Ed
14 yrs ago
Catching up on my IHT papers that accumulated while away... yet another bleak story out of the US below... makes one wonder - we sort of got out of the dotcom collapse with Bush's ruinous easy money policies that lead to a housing and credit crisis... and we seem to be having deja vu all over again attempting to repair that crisis by flinging trillions of dollars at it... many are calling this a recovery yet where are the fundamentals? If there are no jobs how can there be a recovery - or am I missing something? And if people don't have jobs in America who buys the stuff from China?
As The Washington Post reported over the weekend, the entire past decade “was the worst for the U.S. economy in modern times.” There was no net job creation — none — between December 1999 and now. None!
More: http://www.nytimes.com/2010/01/05/opinion/05herbert.html?ref=todayspaper
Washington Post Article: http://www.washingtonpost.com/wp-dyn/content/article/2010/01/01/AR2010010101196.html
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Ed
14 yrs ago
Contrarian Investor Sees Economic Crash in China
SHANGHAI — James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true.
Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc.
As most of the world bets on China to help lift the global economy out of recession, Mr. Chanos is warning that China’s hyperstimulated economy is headed for a crash, rather than the sustained boom that most economists predict. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.
“Bubbles are best identified by credit excesses, not valuation excesses,” he said in a recent appearance on CNBC. “And there’s no bigger credit excess than in China.” He is planning a speech later this month at the University of Oxford to drive home his point.
As America’s pre-eminent short-seller — he bets big money that companies’ strategies will fail — Mr. Chanos’s narrative runs counter to the prevailing wisdom on China. Most economists and governments expect Chinese growth momentum to continue this year, buoyed by what remains of a $586 billion government stimulus program that began last year, meant to lift exports and consumption among Chinese consumers.
Still, betting against China will not be easy. Because foreigners are restricted from investing in stocks listed inside China, Mr. Chanos has said he is searching for other ways to make his bets, including focusing on construction- and infrastructure-related companies that sell cement, coal, steel and iron ore.
Mr. Chanos, 51, whose hedge fund, Kynikos Associates, based in New York, has $6 billion under management, is hardly the only skeptic on China. But he is certainly the most prominent and vocal.
For all his record of prescience — in addition to predicting Enron’s demise, he also spotted the looming problems of Tyco International, the Boston Market restaurant chain and, more recently, home builders and some of the world’s biggest banks — his detractors say that he knows little or nothing about China or its economy and that his bearish calls should be ignored.
“I find it interesting that people who couldn’t spell China 10 years ago are now experts on China,” said Jim Rogers, who co-founded the Quantum Fund with George Soros and now lives in Singapore. “China is not in a bubble.”
Colleagues acknowledge that Mr. Chanos began studying China’s economy in earnest only last summer and sent out e-mail messages seeking expert opinion.
But he is tagging along with the bears, who see mounting evidence that China’s stimulus package and aggressive bank lending are creating artificial demand, raising the risk of a wave of nonperforming loans.
“In China, he seems to see the excesses, to the third and fourth power, that he’s been tilting against all these decades,” said Jim Grant, a longtime friend and the editor of Grant’s Interest Rate Observer, who is also bearish on China. “He homes in on the excesses of the markets and profits from them. That’s been his stock and trade.”
Mr. Chanos declined to be interviewed, citing his continuing research on China. But he has already been spreading the view that the China miracle is blinding investors to the risk that the country is producing far too much.
“The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”
In December, he appeared on CNBC to discuss how he had already begun taking short positions, hoping to profit from a China collapse.
In recent months, a growing number of analysts, and some Chinese officials, have also warned that asset bubbles might emerge in China.
The nation’s huge stimulus program and record bank lending, estimated to have doubled last year from 2008, pumped billions of dollars into the economy, reigniting growth.
But many analysts now say that money, along with huge foreign inflows of “speculative capital,” has been funneled into the stock and real estate markets.
A result, they say, has been soaring prices and a resumption of the building boom that was under way in early 2008 — one that Mr. Chanos and others have called wasteful and overdone.
“It’s going to be a bust,” said Gordon G. Chang, whose book, “The Coming Collapse of China” (Random House), warned in 2001 of such a crash.
Friends and colleagues say Mr. Chanos is comfortable betting against the crowd — even if that crowd includes the likes of Warren E. Buffett and Wilbur L. Ross Jr., two other towering figures of the investment world.
A contrarian by nature, Mr. Chanos researches companies, pores over public filings to sift out clues to fraud and deceptive accounting, and then decides whether a stock is overvalued and ready for a fall. He has a staff of 26 in the firm’s offices in New York and London, searching for other China-related information.
“His record is impressive,” said Byron R. Wien, vice chairman of Blackstone Advisory Services. “He’s no fly-by-night charlatan. And I’m bullish on China.”
Mr. Chanos grew up in Milwaukee, one of three sons born to the owners of a chain of dry cleaners. At Yale, he was a pre-med student before switching to economics because of what he described as a passionate interest in the way markets operate.
His guiding philosophy was discovered in a book called “The Contrarian Investor,” according to an account of his life in “The Smartest Guys in the Room,” a book that chronicled Enron’s rise and downfall.
After college, he went to Wall Street, where he worked at a series of brokerage houses before starting his own firm in 1985, out of what he later said was frustration with the way Wall Street brokers promoted stocks.
At Kynikos Associates, he created a firm focused on betting on falling stock prices. His theories are summed up in testimony he gave to the House Committee on Energy and Commerce in 2002, after the Enron debacle. His firm, he said, looks for companies that appear to have overstated earnings, like Enron; were victims of a flawed business plan, like many Internet firms; or have been engaged in “outright fraud.”
That short-sellers are held in low regard by some on Wall Street, as well as Main Street, has long troubled him.
Short-sellers were blamed for intensifying market sell-offs in the fall 2008, before the practice was temporarily banned. Regulators are now trying to decide whether to restrict the practice.
Mr. Chanos often responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other “financial disasters” over the years.
“They are often the ones wearing the white hats when it comes to looking for and identifying the bad guys,” he has said.
http://www.nytimes.com/2010/01/08/business/global/08chanos.html
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Ed
14 yrs ago
Hope Mr Bush is enjoying his retirement... In addition to two disastrous wars here's his legacy:
Invitation to Disaster
We didn’t pay attention to the housing bubble. We closed our eyes to warnings that the levees in New Orleans were inadequate. We gave short shrift to reports that bin Laden was determined to attack the U.S. And now we’re all but ignoring the fiscal train wreck that is coming from states with budget crises big enough to boggle the mind.
The states are in the worst fiscal shape since the Depression. The Great Recession has caused state tax revenues to fall off a cliff. Some states — New York and California come quickly to mind — are facing prolonged budget nightmares. Across the country, critical state services are being chopped like firewood. More cuts are coming. Taxes and fees are being raised. Yet the budgets in dozens and dozens of states remain drastically out of balance.
This is an arrow aimed straight at the heart of a robust national recovery. The Center on Budget and Policy Priorities has pointed out that if you add up the state budget gaps that have recently been plugged (in most cases, temporarily and haphazardly) and those that remain to be dealt with, you’ll likely reach a staggering $350 billion for the 2010 and 2011 fiscal years.
This is not a disaster waiting to happen. It’s under way.
Without substantial new federal help, state cuts that are now merely drastic will become draconian, and hundreds of thousands of additional jobs will be lost. The suffering is already widespread. Some states have laid off or furloughed employees. Tens of thousands of teachers have been let go as cuts have been made to public schools and critically important preschool programs. California has bludgeoned its public higher education system, one of the finest in the world.
Michigan has cut some of the benefits it provided to middle-class families struggling with the costs of health care for severely disabled children — benefits that helped pay for such things as incontinence supplies and transportation to special care centers. The Grand Rapids Press quoted a state official who acknowledged that the cuts were “tough” and were hurting families. But he added, “The state simply doesn’t have the money.”
The collapse of state tax revenues caused by the recession is the sharpest on record. Steep budget cuts have not been enough to offset the unprecedented plunge in tax collections that resulted from unemployment and other aspects of the downturn. The shortfalls swept the nation. As the Rockefeller Institute of Government reported, “Total tax revenue declined in all 44 states for which comparable early data are available.”
State governments are not without fault. Very few have been paragons of fiscal responsibility over the years. California is a well-known basket case. New York has a Legislature that is a laughingstock. But for the federal government to resist offering substantial additional help in the face of this growing crisis would be foolhardy. You can’t have a healthy national economy while dozens of states are hooked up to life support.
The Center on Budget offered some insight into how the trouble in the states adds up to trouble for us all:
“Expenditure cuts are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals.
“In all of these circumstances, the companies and organizations that would have received government payments have less money to spend on salaries and supplies, and individuals who would have received salaries or benefits have less money for consumption. This directly removes demand from the economy.”
The Obama administration has provided significant help to states through its stimulus program, and it has made a difference. It prevented the crisis from being much worse. But much of that assistance will run out by the end of the year and states are fashioning budgets right now that will absolutely hammer the quality of life for some of their most vulnerable residents.
New York’s lieutenant governor, Richard Ravitch, has been trying to bring a measure of sanity to the state’s budget process. But as he told me this week, without additional federal help, many states will have no choice but to impose extreme budget cuts, or raise taxes, or — most likely — do both.
We need more responsible and less wasteful fiscal behavior from all levels of government. But the country is still faced with a national economic emergency, with tens of millions out of work or underemployed. We can hardly afford any additional economic shocks. Turning our backs on the desperate trouble the states are in right now is nothing less than an utterly willful invitation to disaster.
http://www.nytimes.com/2010/01/09/opinion/09herbert.html?ref=todayspaper
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Ed
14 yrs ago
The Other Plot to Wreck America
THERE may not be a person in America without a strong opinion about what coulda, shoulda been done to prevent the underwear bomber from boarding that Christmas flight to Detroit. In the years since 9/11, we’ve all become counterterrorists. But in the 16 months since that other calamity in downtown New York — the crash precipitated by the 9/15 failure of Lehman Brothers — most of us are still ignorant about what Warren Buffett called the “financial weapons of mass destruction” that wrecked our economy. Fluent as we are in Al Qaeda and body scanners, when it comes to synthetic C.D.O.’s and credit-default swaps, not so much.
What we don’t know will hurt us, and quite possibly on a more devastating scale than any Qaeda attack. Americans must be told the full story of how Wall Street gamed and inflated the housing bubble, made out like bandits, and then left millions of households in ruin. Without that reckoning, there will be no public clamor for serious reform of a financial system that was as cunningly breached as airline security at the Amsterdam airport. And without reform, another massive attack on our economic security is guaranteed. Now that it can count on government bailouts, Wall Street has more incentive than ever to pump up its risks — secure that it can keep the bonanzas while we get stuck with the losses.
The window for change is rapidly closing. Health care, Afghanistan and the terrorism panic may have exhausted Washington’s already limited capacity for heavy lifting, especially in an election year. The White House’s chief economic hand, Lawrence Summers, has repeatedly announced that “everybody agrees that the recession is over” — which is technically true from an economist’s perspective and certainly true on Wall Street, where bailed-out banks are reporting record profits and bonuses. The contrary voices of Americans who have lost pay, jobs, homes and savings are either patronized or drowned out entirely by a political system where the banking lobby rules in both parties and the revolving door between finance and government never stops spinning.
It’s against this backdrop that this week’s long-awaited initial public hearings of the Financial Crisis Inquiry Commission are so critical. This is the bipartisan panel that Congress mandated last spring to investigate the still murky story of what happened in the meltdown. Phil Angelides, the former California treasurer who is the inquiry’s chairman, told me in interviews late last year that he has been busy deploying a tough investigative staff and will not allow the proceedings to devolve into a typical blue-ribbon Beltway exercise in toothless bloviation.
He wants to examine the financial sector’s “greed, stupidity, hubris and outright corruption” — from traders on the ground to the board room. “It’s important that we deliver new information,” he said. “We can’t just rehash what we’ve known to date.” He understands that if he fails to make news or to tell the story in a way that is comprehensible and compelling enough to arouse Americans to demand action, Wall Street and Washington will both keep moving on, unchallenged and unchastened.
Angelides gets it. But he has a tough act to follow: Ferdinand Pecora, the legendary prosecutor who served as chief counsel to the Senate committee that investigated the 1929 crash as F.D.R. took office. Pecora was a master of detail and drama. He riveted America even without the aid of television. His investigation led to indictments, jail sentences and, ultimately, key New Deal reforms — the creation of the Securities and Exchange Commission and the Glass-Steagall Act, designed to prevent the formation of banks too big to fail.
As it happened, a major Pecora target was the chief executive of National City Bank, the institution that would grow up to be Citigroup. Among other transgressions, National City had repackaged bad Latin American debt as new securities that it then sold to easily suckered investors during the frenzied 1920s boom. Once disaster struck, the bank’s executives helped themselves to millions of dollars in interest-free loans. Yet their own employees had to keep ponying up salary deductions for decimated National City stock purchased at a heady precrash price.
Trade bad Latin American debt for bad mortgage debt, and you have a partial portrait of Citigroup at the height of the housing bubble. The reckless Citi executives of our day may not have given themselves interest-free loans, but they often walked away with the short-term, illusionary profits while their employees were left with shredded jobs and 401(k)’s. Among those Citi executives was Robert Rubin, who, as the Clinton Treasury secretary, helped repeal the last vestiges of Glass-Steagall after years of Wall Street assault. Somewhere Pecora is turning in his grave
Rubin has never apologized, let alone been held accountable. But he’s hardly alone. Even after all the country has gone through, the titans who fueled the bubble are heedless. In last Sunday’s Times, Sandy Weill, the former chief executive who built Citigroup (and recruited Rubin to its ranks), gave a remarkable interview to Katrina Brooker blaming his own hand-picked successor, Charles Prince, for his bank’s implosion. Weill said he preferred to be remembered for his philanthropy. Good luck with that.
Among his causes is Carnegie Hall, where he is chairman of the board. To see how far American capitalism has fallen, contrast Weill with the giant who built Carnegie Hall. Not only is Andrew Carnegie remembered for far more epic and generous philanthropy than Weill’s — some 1,600 public libraries, just for starters — but also for creating a steel empire that actually helped build America’s industrial infrastructure in the late 19th century. At Citi, Weill built little more than a bloated gambling casino. As Paul Volcker, the regrettably powerless chairman of Obama’s Economic Recovery Advisory Board, said recently, there is not “one shred of neutral evidence” that any financial innovation of the past 20 years has led to economic growth. Citi, that “innovative” banking supermarket, destroyed far more wealth than Weill can or will ever give away.
Even now — despite its near-death experience, despite the departures of Weill, Prince and Rubin — Citi remains as imperious as it was before 9/15. Its current chairman, Richard Parsons, was one of three executives (along with Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley) who failed to show up at the mid-December White House meeting where President Obama implored bankers to increase lending. (The trio blamed fog for forcing them to participate by speakerphone, but the weather hadn’t grounded their peers or Amtrak.) Last week, ABC World News was also stiffed by Citi, which refused to answer questions about its latest round of outrageous credit card rate increases and instead e-mailed a statement blaming its customers for “not paying back their loans.” This from a bank that still owes taxpayers $25 billion of its $45 billion handout!
If Citi, among the most egregious of Wall Street reprobates, feels it can get away with business as usual, it’s because it fears no retribution. And it got more good news last week. Now that Chris Dodd is vacating the Senate, his chairmanship of the Banking Committee may fall next year to Tim Johnson of South Dakota, home to Citi’s credit card operation. Johnson was the only Senate Democrat to vote against Congress’s recent bill policing credit card abuses.
Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.
More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties. Last week, a Republican congressman, Darrell Issa of California, released e-mail showing that officials at the New York Fed, then led by Timothy Geithner, pressured A.I.G. to delay disclosing to the S.E.C. and the public the details on the billions of bailout dollars it was funneling to its trading partners. In this backdoor rescue, taxpayers unknowingly awarded banks like Goldman 100 cents on the dollar for their bets on mortgage-backed securities.
Why was our money used to make these high-flying gamblers whole while ordinary Americans received no such beneficence? Nothing less than complete transparency will connect the dots. Among the big-name witnesses that the Angelides commission has called for next week is Goldman’s Blankfein. Geithner, Henry Paulson and Ben Bernanke should be next.
If they all skate away yet again by deflecting blame or mouthing pro forma mea culpas, it will be a sign that this inquiry, like so many other promises of reform since 9/15, is likely to leave Wall Street’s status quo largely intact. That’s the ticking-bomb scenario that truly imperils us all.
http://www.nytimes.com/2010/01/10/opinion/10rich.html?ref=todayspaper
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Ed
14 yrs ago
‘Wake up, gentlemen’, world’s top bankers warned by former Fed chairman Volcker
One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.
Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.
On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”
As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).
“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”
Mr Volcker’s broadside punctured a slightly cosy atmosphere among bankers and regulators, assembled in a Sussex country house hotel to consider reform measures, at the Future of Finance Initiative, a conference organised by The Wall Street Journal.
Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank.
He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”.
Sir Deryck also questioned whether it was right that taxpayers should continue to underwrite many of those risks: “There’s something wrong about large proprietary risks being taken at the risk of taxpayers. The asymmetry will not hold. I’m not sure we’ve thought about that.”
Earlier Baroness Vadera, adviser to the G20 — and an adviser to Gordon Brown during the banking crisis — had warned the world’s most senior bankers that continental lenders had yet to acknowledge the scale of their losses and bad debts. She said: “It’s not the UK banks that have to come clean, but some of the continental banks still have issues.”
She added that, contrary to City assumptions, the supposedly hardline French and German governments were more relaxed about leverage and liquidity constraints than Britain and America.
The former UBS banker said that she continued to have nightmares about how close the British banking system came to collapse last year.
She also warned bankers that the G20 process was “like herding cats” and that one of the main problems with the group of the world’s wealthiest nations was that they did not want to give up national sovereignty and co-ordinate their behaviour.
Meanwhile, George Soros argued that CDS should be banned. The billionaire investor likened the widely traded securities to buying life assurance and then giving someone a licence to shoot the insured person.
“They really are a toxic market,” he said. “Credit default swaps give you a chance to bear-raid bonds. And bear raids certainly can work.”
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6949387.ece
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Ed
14 yrs ago
Volker has also called for reinstatement of Glass Steagall - but he has been ignored
http://www.nytimes.com/2009/10/21/business/21volcker.html?_r=1
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Ed
14 yrs ago
Not sure and I doubt by itself it would prevent another collapse...
But from what I understand this is what was put in place after the Great Depression to prevent another one... and we never had another Great Depression... then within a decade of repealing it we ended up on the precipice of GD2.... and sceptical me, the fact that the big banks dont seem to be very interested in rolling this law back in place makes me think that it's probably a good thing for the economy...
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Ed
14 yrs ago
Here's an interesting article I came across while researching for a discussion on THINK (join if you like http://hongkong.asiaxpat.com/forums/think!/threads/129111/the-irony-of-globalization/)
There appear to be other fundamental problems in the US economy that were concealed by the housing boom and that are compounding the problems of sustaining a recovery
A Lost Decade for Everyday Americans http://ndn.org/essay/lost-decade-everyday-americans
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Ed
14 yrs ago
I had a discussion with a friend who is an analyst with the Asian Development Bank over dinner last night...
I asked him if he thought what China was doing had parallels with what the Bush administration did in 2002 i.e. pumped massive amounts of money into the economy to jump start a housing boom and pull America out of recession... creating false prosperity and leading to an enormous economic crash... recall Bush urging people to 'go shopping'... isn't that what China is doing - and making it possible by loaning trillions?
China seems to be doing the same thing...their exports have dropped off a cliff and without a recovery in the States will remain well off their peaks... and in the meantime they are plugging that huge whole in GDP by pumping trillions into the economy to create jobs and as in the States, false prosperity... I believe that if the stimulus and easy money are pulled back China will have serious problems and I point to the fact that even the mention of this causes stock markets to reel...
My friend is of the opinion that the growth in China is from legitimate consumer demand which implies China is decoupled from the States (and Europe) and can maintain prosperity and strong growth through internal demand...
I certainly hope he is correct... What do you think?
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Ed
14 yrs ago
I read the Ascent of Money recently ... a super book that details numerous crashes and how governments have dug their way out, on many occasions, by defaulting on their debts... of course wars were often fought because of this...
So... what would happen if America decided to simply say to China sorry but we aren't going to pay you back the two trillion or whatever it is they owe?
China needs the American export market, and they are not about to start a war with America...
So what are the repercussions?
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Ed
14 yrs ago
Was There Ever a Default on U.S. Treasury Debt?
http://spectator.org/archives/2009/01/21/was-there-ever-a-default-on-us
Will America default?
http://www.economist.com/blogs/freeexchange/2009/02/will_the_us_default
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Ed
14 yrs ago
Roubini says China can't bring recovery alone
HONG KONG (MarketWatch) - Noted economist Nouriel Roubini said Thursday that expectations China can buoy the global economy on its own will meet with disappointment, adding that a glut of worldwide industrial capacity threatens recovery from the financial crisis.
Roubini, who gained fame by predicting the current global recession, told a financial forum in Hong Kong that it would take "a decade if not a generation" before Chinese consumers are in a position to have a meaningful impact.
"China cannot be the only engine of global economic growth," though its frenzied pace of development is offering some support for regional economies and commodity markets, he said.
China faces a battle against the clock in its effort to transform its economy from an export-led model to one which relies more on domestic demand to drive growth.
"That's going to take a concerted policy change that will be radical and unlikely to occur fast enough," Roubini said.
As a percentage of gross domestic product, consumption in China represents about 36%, whereas U.S consumers typically account for about 70% of economic activity.
Getting China's vast population to spend more will require the introduction of social benefits, such as unemployment insurance and other safeguards against loss of income, that can help change attitudes about saving for a rainy day, Roubini said.
China shielded its economy from the slump in global trade in the past year by ramping up monetary stimulus in the form of government-funded infrastructure projects and state-directed bank lending.
Preliminary figures released Thursday showed China's economy returning to double-digit growth in the fourth quarter, with GDP up 10.7% in the period compared to the year-earlier quarter. See full story on latest Chinese economic data.
Mounting debt
Roubini also said he was concerned about the deteriorating fiscal position that successive years of massive deficit spending in China would entail, not to mention the consequences of a lending binge with few checks and balances.
Forcing state-controlled banks to extend loans to state-owned enterprises provided a short boost to employment and production, financed by household savings, a trend which works against the development of a consumer culture, Roubini said.
The spending binge also likely saddled the fixed-investment-addicted-economy with even more greater industrial capacity, he said.
"That strategy in China can work for a year or two, but it will lead to an even greater glut of capacity," Roubini said, adding that the consequences may eventually be a huge pile of non-performing loans.
More: http://www.marketwatch.com/story/roubini-says-china-cant-bring-recovery-alone-2010-01-21
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Ed
14 yrs ago
The Rising Cost of China's Stimulus
Beijing's out-of-control public spending is triggering an inflationary crisis.
China announced eye-popping fourth-quarter GDP growth of 10.7% yesterday, but the markets didn't celebrate much. That's because the cost of monetary stimulus is starting to surface in higher inflation. There's a lesson here not just for Beijing, but for governments the world over.
Since the global financial panic hit in November 2008, China has been pumping money into the mainland economy at a brisk pace. Last year outstanding bank loans grew by $9.6 trillion yuan ($1.4 trillion), or 29% of GDP. Money supply also exploded in 2009, with base money up by 32.4% and broad money up by 27.7%.
Inflation didn't immediately surface because Chinese companies and consumers hoarded the capital they received from public coffers, fearing the global economy wouldn't pick up quickly. But once it was clear exports were back on track, spending picked up, as did the velocity of money. Money has poured into stock and property markets. Yesterday, Beijing announced the consumer price index rose by 1.9% last month, up from 0.6% in November.
The good news is that Beijing's policy makers seem to be worried about this trend—although possibly too late, given that the consumer price index is a backward-looking measure. Ma Jiantong, commissioner of the National Bureau of Statistics, said yesterday the government needs to "prevent overly fast price increases." The central bank has increased bank reserve requirements and earlier this week ordered state-owned banks to rein in lending even further.
But it will take much more than tinkering around the edges to change the course of China's supertanker economy. For starters, China's central bank doesn't have the kind of monetary levers that market economies like the U.S. and Britain enjoy. When the lending boom started, companies tended to borrow all they could get, keeping money in their deposit accounts if they didn't need cash right away. So raising rates may not change their behavior.
It may also be hard to rein in local governments, many of which engaged in speculation with the cheap capital and now stand to lose money if the cash flow is cut off. Some provincial governments are talking about starting their own private-equity firms, for instance, and are talking to foreign investors.
Then there's the external inflationary stimulus of the yuan's peg to the U.S. dollar. As the Federal Reserve has kept interest rates at zero for more than year, the value of the dollar has fallen and along with it the yuan. This may have seemed good for China as a boost to its exports. But it also means importing inflation as part of the dollar bloc.
The world's central banks needed to act aggressively when the financial system had its heart attack in late 2008. But the temptation of easy money is always to keep it flowing longer than necessary. China's inflationary signals are exposing the dangers of too much monetary ease. To turn its recovery into a durable expansion, Beijing must now brake a speeding train without derailing it.
http://online.wsj.com/article/SB10001424052748703699204575016571622234374.html?mod=WSJASIA_hpp_sections_opinion
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Ed
14 yrs ago
Superb...
Taxing Wall Street Down to Size
WHILE supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too.
Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick — a levy of only 0.15 percent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.
Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated Treasury bonds and housing agency securities in less than a year. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.
Meanwhile, by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks’ cost of production — their interest expense on depositor funds — to the vanishing point.
The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. Soon, it is claimed, a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubble’s collapse. But will it?
In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income. And the banks, after reaping this ill-deserved windfall, are pleased to pronounce themselves solvent, ignoring the bad loans still on their books. This kind of Robin Hood redistribution in reverse is not sustainable. It requires permanently flooding world markets with cheap dollars — a recipe for the next bubble and financial crisis.
Moreover, rescuing the banks yet again, this time with a steeply sloped yield curve (that is, cheap short-term money and more expensive long-term rates), is not even a proper monetary policy action. It is a vast and capricious reallocation of national income, which would be hooted down in the halls of Congress, were it properly brought to a vote.
National economic policy has come to this absurd pass because for decades the Fed has juiced the banking system with excessive reserves. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. When Wall Street’s “heart attack” struck in September 2008, bank liabilities had reached 100 percent of gross domestic product — double the ratio of a few decades earlier.
This was a measurement of the perilous extent to which bad investments, financed by debt, had come to distort the warp and woof of the economy. Behind the worthless loans stands a vast assemblage of redundant housing units, shopping malls, office buildings, warehouses, tanning salons and fast food restaurants. These superfluous fixed assets had, over the past decade, given rise to a hothouse economy of jobs that have now vanished. Obviously, the legions of brokers, developers, appraisers, contractors, tradesmen and decorators who created the bad investments are long gone. But now the waitresses, yoga instructors, gardeners, repairmen, sales clerks, inventory managers, office workers and lift-truck drivers once thought needed to work at these places are disappearing into the unemployment statistics, as well.
The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient.
To argue, as some conservatives surely will, that a policy-directed shrinking of big banking is an inappropriate interference in the marketplace is to miss a crucial point: the big Wall Street banks are wards of the state, not private enterprises. During recent quarters, for instance, the preponderant share of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities.
But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.
To be sure, the most direct way to cure the banking system’s ills would be to return to a rational monetary policy based on sensible interest rates, an end to frantic monetization of federal debt and a stable exchange value for the dollar. But Ben Bernanke, the Fed chairman, and his posse are not likely to go there, believing as they do that central banking is about micromanaging aggregate demand — asset bubbles and a flagging dollar be damned. Still, there can be no doubt that taxing big bank liabilities will cause there to be less of them. And that’s a start.
http://www.nytimes.com/2010/01/20/opinion/20stockman.html
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Ed
14 yrs ago
Wake up call?
Sifting through news today and Page 23 IHT Market Round up... (sorry can't find the article online and funny how this stuff is always buried...)
Summary: China's tighter monetary policies, weak 4th quarter in Korea and possible US budget freeze highlight fears that the global recovery might be sputtering...not clear if the global economy is ready to cope with less stimulus spending... this is prompting investors to lock in profits or close positions...
From what I have read the Obama stimulus will have run its course by mid year... many say China's domestic consumption will replace the US consumer (and the moon is made of cheese)...
Hmmmm..... then what?
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Ed
14 yrs ago
And extend the housing tax credit...and keep building more infrastructure in China... and keep extending unemployment benefits... and keep giving banks money at 0%... and...
Sounds like 2002 - 2008... only different eh...
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Ed
14 yrs ago
Classic line from Jon Stewart...
Jamie Dimon: Somehow we just missed that home prices dont go up forever...
See the second segment on the Crisis for Stewarts response:
http://www.thedailyshow.com/full-episodes/tue-january-19-2010-colin-firth
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Ed
14 yrs ago
He makes some valid points...
Op-Ed Columnist
March of the Peacocks
Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.
One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending.
Wait, it gets worse. To justify the freeze, Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: “American families are tightening their belt, but they don’t see government tightening its belt.” Obama now: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.”
What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.
The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.
In the long run, however, even the U.S. government has to pay its way. And the long-run budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits.
How can this apparent conflict between short-run needs and long-run responsibilities be resolved? Intellectually, it’s not hard at all. We should combine actions that create jobs now with other actions that will reduce deficits later. And economic officials in the Obama administration understand that logic: for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later.
The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.
On jobs, it’s now clear that the Obama stimulus wasn’t nearly big enough. No need now to resolve the question of whether the administration should or could have sought a bigger package early last year. Either way, the point is that the boost from the stimulus will start to fade out in around six months, yet we’re still facing years of mass unemployment. The latest projections from the Congressional Budget Office say that the average unemployment rate next year will be only slightly lower than the current, disastrous, 10 percent.
Yet there is little sentiment in Congress for any major new job-creation efforts.
Meanwhile, health care reform faces a troubled outlook. Congressional Democrats may yet manage to pass a bill; they’ll be committing political suicide if they don’t. But there’s no question that Republicans were very successful at demonizing the plan. And, crucially, what they demonized most effectively were the cost-control efforts: modest, totally reasonable measures to ensure that Medicare dollars are spent wisely became evil “death panels.”
So if health reform fails, you can forget about any serious effort to rein in rising Medicare costs. And even if it succeeds, many politicians will have learned a hard lesson: you don’t get any credit for doing the fiscally responsible thing. It’s better, for the sake of your career, to just pretend that you’re fiscally responsible — that is, to be a deficit peacock.
So we’re paralyzed in the face of mass unemployment and out-of-control health care costs. Don’t blame Mr. Obama. There’s only so much one man can do, even if he sits in the White House. Blame our political culture instead, a culture that rewards hypocrisy and irresponsibility rather than serious efforts to solve America’s problems. And blame the filibuster, under which 41 senators can make the country ungovernable, if they choose — and they have so chosen.
I’m sorry to say this, but the state of the union — not the speech, but the thing itself — isn’t looking very good.
http://www.nytimes.com/2010/01/29/opinion/29krugman.html
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Ed
14 yrs ago
Good stuff on the financial crisis - the interview with Elizabeth Warren in the last third will probably bring your blood to the boiling point...
http://www.thedailyshow.com/full-episodes/tue-january-26-2010-elizabeth-warren
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Ed
14 yrs ago
This article pretty much (in my mind) puts and end to this hot air from bankers that says regulation stifles innovation etc etc etc... Here's a perfect example of what happens when you don't give the booze hound the keys to the liquor cabinet...
Good and Boring
In times of crisis, good news is no news. Iceland’s meltdown made headlines; the remarkable stability of Canada’s banks, not so much.
Yet as the world’s attention shifts from financial rescue to financial reform, the quiet success stories deserve at least as much attention as the spectacular failures. We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north. Right now, Canada is a very important role model.
Yes, I know, Canada is supposed to be dull. The New Republic famously pronounced “Worthwhile Canadian Initiative” (from a Times Op-Ed column in the ’80s) the world’s most boring headline. But I’ve always considered Canada fascinating, precisely because it’s similar to the United States in many but not all ways. The point is that when Canadian and U.S. experience diverge, it’s a very good bet that policy differences, rather than differences in culture or economic structure, are responsible for that divergence.
And anyway, when it comes to banking, boring is good.
First, some background. Over the past decade the United States and Canada faced the same global environment. Both were confronted with the same flood of cheap goods and cheap money from Asia. Economists in both countries cheerfully declared that the era of severe recessions was over.
But when things fell apart, the consequences were very different here and there. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?
It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.
Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.
On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren, the head of the Congressional panel overseeing the bank bailout, who place much of the blame for the crisis on failure to protect consumers from deceptive lending. Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending.
Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk. The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium.
More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money.
There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.
So what are the chances that the United States will learn from Canada’s success?
Actually, the financial reform bill that the House of Representatives passed in December would significantly Canadianize the U.S. system. It would create an independent Consumer Financial Protection Agency, it would establish limits on leverage, and it would limit securitization by requiring that lenders hold on to some of their loans.
But prospects for a comparable bill getting the 60 votes now needed to push anything through the Senate are doubtful. Republicans are clearly dead set against any significant financial reform — not a single Republican voted for the House bill — and some Democrats are ambivalent, too.
So there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.
http://www.nytimes.com/2010/02/01/opinion/01krugman.html
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Ed
14 yrs ago
Volcker also gets some space the NYT today on this subject http://dealbook.blogs.nytimes.com/2010/02/01/volcker-how-to-reform-our-financial-system/
I've got my own solution... it should have been used this time around but wasn't because it would have meant shareholders and management of the banks losing their minds...
You put a law in place that IF a bank ever needs govt bail out money to prevent collapse, the shareholders get wiped out. So if USA has to step in with money they get a very very sweet deal on equity (better than what Buffet got for his Goldman mini bail out because at the end of the day when the US govt steps in to back a company that carries far more weight than any individual).
The law requires that the govt exit selling their shares back to the public within a specified period of time.
I am sure that this is not the only solution to the problem but it certainly closes down the moral hazard angle that encourages bankers to take on huge risk knowing full well things could implode but that the govt has their back... (maybe Goldman Sacs might think twice about selling dodgy securities and at the same time buying insurance because they expect them to explode...)
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Ed
14 yrs ago
No help in sight, more homeowners walk away
I love this part...
That is an attitude Wall Street would like to encourage. David Rosenberg, the chief economist of the investment firm Gluskin Sheff, wrote recently that borrowers were not victims. They “signed contracts, and as adults should also be held accountable,” he wrote.
Of course, this is not necessarily how Wall Street itself behaves, as demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An investment group led by the real estate giant Tishman Speyer recently defaulted on $4.4 billion in debt that it had used to buy the two apartment developments in Manhattan, handing the properties back to the lenders.
Moreover, during the boom, it was the banks that helped drive prices to unrealistic levels by lowering credit standards and unleashing a wave of speculative housing demand.
http://www.msnbc.msn.com/id/35210866/ns/business-the_new_york_times/
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Ed
14 yrs ago
http://www.cnbc.com/id/15840232?video=1378106678
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Ed
14 yrs ago
Can someone help me with this....
Here's the headline:
US Stocks' Fall Cushioned By Relief Over Jobs Data
Yadda Yadda Yadda... then you come to this:
Still, the jobs data did not point unequivocally to a strengthening labor market.
Nonfarm payrolls fell by 20,000 compared with a revised 150,000 drop decline in December, with the December figure revised sharply downwards from an originally reported 85,000 drop. The Labor Department's annual benchmark revision to the survey showed that last year job losses were almost 600,000 more than previously reported.
The unemployment rate may have improved because more people gave up their job searches, said Phil Orlando, chief equity market strategist at Federated Investors. The number of discouraged workers grew to 1.1 million in January, up from 929,000 in December, according to the Labor Department. That makes the unemployment rate likely to pick back up later in the year, he said.
http://online.wsj.com/article/BT-CO-20100205-711248.html?mod=rss_Global_Stocks
This is supposed to pass for real journalism? The headline clearly is not supported by the article... in fact a completely opposite picture is painted by the facts....
Leading me to my - Word of the Day - PROPAGANDA.... my working definition is when the government asks media outlets not to publish or distort content that is not in the public interest... I would suggest that most people dont read past the headlines... so they see something like that AWJ header and go away thinking everything is good... but media cannot completely dishonest so what they do is let you work it out for yourself if you read the full articles... which of course few people will do...
Further on this... I would suggest that governments are fudging the employment numbers because time and time again after the fact we get much worse revised numbers... and the revised numbers are buried in obscure articles... surely that can't be a coincidence?
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Ed
14 yrs ago
Dark clouds gather over Europe.... and yet more bailouts on the way?
http://www.youtube.com/watch?v=JzpsgDdoE0Y&feature=player_embedded
Apparently readily facilitated by Wall Street....
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.
As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.
A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.
While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.
“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.
Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.
“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.
Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.
More http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=2&ref=todayspaper
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Ed
14 yrs ago
This is quite an interesting read...
"The American oligarchy spares no pains in promoting the belief that it does not exist, but the success of its disappearing act depends on equally strenuous efforts on the part of an American public anxious to believe in egalitarian fictions and unwilling to see what is hidden in plain sight." -- Michael Lind, To Have and to Have Not
We all have very strong differences of opinion on many issues. However, like our founding fathers before us, we must put aside our differences and unite to fight a common enemy.
It has now become evident to a critical mass that the Republican and Democratic parties, along with all three branches of our government, have been bought off by a well-organized Economic Elite who are tactically destroying our way of life. The harsh truth is that 99 percent of the U.S. population no longer has political representation. The U.S. economy, government and tax system is now blatantly rigged against us.
Current statistical societal indicators clearly demonstrate that a strategic attack has been launched and an analysis of current governmental policies prove that conditions for 99 percent of Americans will continue to deteriorate. The Economic Elite have engineered a financial coup and have brought war to our doorstep...and make no mistake, they have launched a war to eliminate the U.S. middle class.
To those who feel I am using extreme rhetoric, I ask you to please take a few minutes of your time to hear me out and research the evidence put forth. The facts are there for the unprejudiced, rational and reasoned mind to absorb. It is the unfortunate reality of our current crisis.
Unless we all unite and organize on common ground, our very way of life and the ideals that our country was founded upon will continue to unravel.
Before exposing exactly who the Economic Elite are, and discussing common sense ways in which we can defeat them, let's take a look at how much damage they have already caused.
Buy the Book: The Economic Elite Vs. The People of the United States of America
Casualties of Economic Terrorism, Surveying the Damage
The devastating numbers across-the-board on the economic front are staggering. I'll go through some of them here, many we have already become all too familiar with. We hear some of these numbers all the time, so much so that it appears as if we have already begun "to normalize the unthinkable." You may be sick of hearing them, but behind each number is an enormous amount of individual suffering, American lives and families who are struggling worse than they ever have.
America is the richest nation in history, yet we now have the highest poverty rate in the industrialized world with an unprecedented amount of Americans living in dire straights and over 50 million citizens already living in poverty.
The government has come up with clever ways to downplay all of these numbers, but we have over 50 million people who need to use food stamps to eat, and a stunning 50 percent of U.S. children will use food stamps to eat at some point in their childhoods. Approximately 20,000 people are added to this total every day. In 2009, one out of five U.S. households didn't have enough money to buy food. In households with children, this number rose to 24 percent, as the hunger rate among U.S. citizens has now reached an all-time high.
We also currently have over 50 million U.S. citizens without health care. 1.4 million Americans filed for bankruptcy in 2009, a 32 percent increase from 2008. As bankruptcies continue to skyrocket, medical bankruptcies are responsible for over 60 percent of them, and over 75 percent of the medical bankruptcies filed are from people who have health care insurance. We have the most expensive health care system in the world, we are forced to pay twice as much as other countries and the overall care we get in return ranks 37th in the world.
In total, Americans have lost $5 trillion from their pensions and savings since the economic crisis began and $13 trillion in the value of their homes. During the first full year of the crisis, workers between the age of 55 - 60, who have worked for 20 - 29 years, have lost an average of 25 percent off their 401k. "Personal debt has risen from 65 percent of income in 1980 to 125 percent today." Over five million U.S. families have already lost their homes, in total 13 million U.S. families are expected to lose their home by 2014, with 25 percent of current mortgages underwater. Deutsche Bank has an even grimmer prediction: "The percentage of 'underwater' loans may rise to 48 percent, or 25 million homes." Every day 10,000 U.S. homes enter foreclosure. Statistics show that an increasing number of these people are not finding shelter elsewhere, there are now over 3 million homeless Americans, the fastest-growing segment of the homeless population is single parents with children.
One place more and more Americans are finding a home is in prison. With a prison population of 2.3 million people, we now have more people incarcerated than any other nation in the world -- the per capita statistics are 700 per 100,000 citizens. In comparison, China has 110 per 100,000, France has 80 per 100,000, Saudi Arabia has 45 per 100,000. The prison industry is thriving and expecting major growth over the next few years. A recent report from the Hartford Advocate titled "Incarceration Nation" revealed that "a new prison opens every week somewhere in America."
Mass Unemployment
The government unemployment rate is deceptive on several levels. It doesn't count people who are "involuntary part-time workers," meaning workers who are working part-time but want to find full-time work. It also doesn't count "discouraged workers," meaning long-term unemployed people who have lost hope and don't consistently look for work. As time goes by, more and more people stop consistently looking for work and are discounted from the unemployment figure. For instance, in January, 1.1 million workers were eliminated from the unemployment total because they were "officially" labeled discouraged workers. So instead of the number rising, we will hear deceptive reports about unemployment leveling off.
On top of this, the Bureau of Labor Statistics recently discovered that 824,000 job losses were never accounted for due to a "modeling error" in their data. Even in their initial January data there appears to be a huge understating, with the newest report saying the economy lost 20,000 jobs. TrimTabs employment analysis, which has consistently provided more accurate data, "estimated that the U.S. economy shed 104,000 jobs in January."
When you factor in all these uncounted workers -- "involuntary part-time" and "discouraged workers" -- the unemployment rate rises from 9.7 percent to over 20 percent. In total, we now have over 30 million U.S. citizens who are unemployed or underemployed. The rarely cited "employment-participation" rate, which reveals the percentage of the population that is currently in the workforce, has now fallen to 64 percent.
Even based on the "official" unemployment rate, just to get back to the unemployment level of 4.6 percent that we had in 2007, we need to create over 10 million new jobs, and most every serious economist will tell you that these jobs are not coming back. In fact, we are still consistently shedding jobs, on just one day, January 27, several companies announced new cuts of more than 60,000 jobs.
Due to the length of this crisis already, millions of Americans are reaching a point where the unemployment benefits they have been living on are coming to an end. More workers have already been out of work longer than at any point since statistics have been recorded, with over six million now unemployed for over six months. A record 20 million Americans qualified for unemployment insurance benefits last year, causing 27 states to run out of funds, with seven more also expected to go into the red within the next few months. In total, 40 state programs are expected to go broke.
Most economists believe the unemployment rate will remain high for the foreseeable future. What will happen when we have millions of laid-off workers without any unemployment benefits to save them?
Working More for Less
The millions struggling to find work are just part of the story. Due to the fact that we now have a record high six people for every one job opening, companies have been able to further increase the workload on their remaining employees. They have been able to increase the amount of hours Americans are working, reduce wages and drastically cut back on benefits. Even though Americans were already the most productive workers in the world before the economic crisis, in the third quarter of 2009, average worker productivity increased by an annualized rate of 9.5 percent, at the same time unit labor cost decreased by 5.2 percent. This has led to record profits for many companies. Of the 220 companies in the S&P 500 who have reported fourth-quarter results thus far, 78 percent of them had "better-than-expected profits" with earnings 17 percent above expectations, "the highest for any quarter since Thomson Reuters began tracking data."
According to the Bureau of Labor Statistics, the national median wage was only $32,390 per year in 2008, and median household income fell by 3.6 percent while the unemployment rate was 5.8 percent. With the unemployment rate now at 10 percent, median income has been falling at a 5 percent rate and is expected to continue its decline. Not surprisingly, Americans' job satisfaction level is now at an all-time low.
There are also a growing number of employed people who, despite having a job, are still living in poverty. There are at least 15 million workers who now fall into this rapidly growing category. $32,390 a year is not going to get you far in today's economy, and half of the country is making less than that. This is why many Americans are now forced to work two jobs to provide for their family to hopefully make ends meet.
A Crime Against Humanity
The mainstream news media will numb us to this horrifying reality by endlessly talking about the latest numbers, but they never piece them together to show you the whole devastating picture, and they rarely show you all the immense individual suffering behind them. This is how they "normalize the unthinkable" and make us become passive in the face of such a high causality count.
Behind each of these numbers, is a tremendous amount of misery; the physical toll is only outdone by the severe psychological toll. Anyone who has had to put off medical care, or who couldn't get medical care for one of their family members due to financial circumstances, can tell you about the psychological toll that is on top of the physical suffering. Anyone who has felt the stress of wondering how they were going to get their child's next meal or their own, or the stress of not knowing how they are going to pay the mortgage, rent, electricity or heat bill, let alone the car payment, gas, phone, cable or Internet bill.
There are now well over 150 million Americans who feel stress over these things on a consistent basis. Over 60 percent of Americans now live paycheck to paycheck.
These are all basic things every person should be able to easily afford in a technologically advanced society such as ours. The reason we struggle with these things is because the Economic Elite have robbed us all. This amount of suffering in the United States of America is literally a crime against humanity.
http://www.alternet.org/economy/145667/the_economic_elite_have_engineered_an_extraordinary_coup%2C_threatening_the_very_existence_of_the_middle_class
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Ed
14 yrs ago
Very good interview... I think Lou makes a number of good points particularly his assertion that the cause of this problem was to a large extent the removal of Glass Steagal... it prevented major financial collapses for 60+ years... yet nobody is willing to have that lid put back on... that's because lobbyists control Washington eh...
http://www.forbes.com/2010/02/05/dobbs-glass-steagall-entitlements-intelligent-investing-video.html
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Ed
14 yrs ago
Picked this up from WSJ this morning.... useful if you are of the opinion that the stimulus, TARP, and other bail outs have simply delayed the day of reckoning...
How to invest for a global-debt-bomb explosion
Prepare for an apocalyptic anarchy ending Wall Street's toxic capitalism
Wake up investors. Are you prepared for the economic anarchy coming after a global-debt time bomb explodes? Are you thinking outside the box? Investing differently? Act now -- tomorrow will be too late.
Start by looking past the endless cable skirmishes between Rush, Glenn, Bill and Shawn versus Harry, Nancy, Ben and Barack. Look way past the insurgency bonding Sarah and her diehard Tea Party revolutionaries with Ron Paul's Neo-Reaganite ideologues, Fat-Cat Bankers and the Party of No, all planning a massive frontal assault on the 2010 elections, hell-bent on destroying the presidency. All that's the sideshow
The Big One is coming soon, bigger than the 2000 dot-com crash and the 2008 subprime credit meltdown combined. A huge market blowout. And as Bloomberg-BusinessWeek predicts: "The results won't be pretty for investors or elected officials."
After the global-debt bomb explodes don't expect a typical bear correction followed by a new bull. Wall Street's toxic pseudo-capitalism is imploding. Be prepared for a massive meltdown. Yes, already the third major bubble-bust of the 21st century, triggered once again by Wall Street's out-of-control Fat Cat Bankers. And it's dead ahead.
Can your family survive in the anarchy after the debt bomb explodes?
America's already descending into economic anarchy. We're all trapped in a historic economic supercycle, a turning point that must bleed through a no-man's land of lawless self-destructive anarchy before a neo-capitalistic world can re-emerge. Investors tell me they "feel" it at a deep level, "know" it's happening. They keep asking: "What's the best investment strategy to prepare now?"
This is no joke, folks. Are you prepared? Or preparing? Will your family survive in a post-apocalyptic world, when anarchy is rampant in America? Look at Washington, Wall Street and Corporate America today. You know it's already begun.
You are witnessing a fundamental breakdown of the American dream, a systemic breakdown of our democracy and our capitalism, a breakdown driven by the blind insatiable greed of Wall Street: Dysfunctional government, insane markets, economy on the brink. Multiply that many times over and see a world in total disarray. Ignore it now, tomorrow will be too late.
Not a war about ideology, but an economic game-changer
This is a war to control 299 million American taxpayers. A war waged by the "Happy Conspiracy" Jack Bogle profiled in his 2004 "Battle for the Soul of Capitalism," a war machine of Fat Cat Bankers, CEOs, 42,000 mercenary lobbyists and a Congress held hostage to unlimited campaign donations. Their conspiracy has been waging this war against Americans for decades, long before the Supreme Court exposed their dirty secret.
Yes, your enemy is that "Happy Conspiracy:" It has degraded into a pseudo-capitalism with no conscience, no sense of the public good, hell-bent on controlling America's mind, your money and the global markets for its own selfish ends. And eventually it will trigger the game-changing global-debt bomb, the third global meltdown of the century that finally ignites the Great Depression II, plunging us into an era of anarchy.
Investors keep asking: "If it is coming, how do I invest? Buy gold? Commodities? Hedge? Short trading? TIPS? Hoard cash? Buy and hold? Lazy Portfolios?" What if the Dow sinks below 5,000? Maybe the worst-case scenario recently predicted by Bob Prechter: A deeper plunge to the 1,000 range? Imagine a global depression, a bear market dragging on for decades: "How do I protect my family? Can I ever retire? What do I invest in? How can anyone prepare?"
How America's two classes are preparing for a descent into anarchy
As America descends into anarchy your family's survival and your ability to retire will depend on which of America's two economic classes you belong to out of our total of roughly 300 million citizens:
1.
"Average Joe & Jane" Americans: You're one of 299 million Main Street Americans. Average income is $50,000, only 10% of the average bonuses paid to Wall Street's Fat-Cat Bankers. Or you're already one of America's 20% underemployed ... maybe on food stamps ... maybe among the 47 million with no medical insurance ... your retirement assets are about $50,000, a year's survival. And you are "mad-as-hell" you're not working "inside" the "Happy Conspiracy."
2.
"Happy Conspiracy" Insiders: You're one of the lucky million or so elite Insiders in the "Happy Conspiracy." You may work for a Fat-Cat Bank that American taxpayers bailed out last year so you pocketed a 2009 bonus gift of somewhere between $600,000 and $10 million. Maybe you're a Corporate American CEO. Maybe you're on the Forbes 400 list. Or you're a U.S. Senator.
More... http://www.marketwatch.com/story/how-to-invest-for-the-debt-bomb-explosion-2010-02-09
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Ed
14 yrs ago
Is the Crisis in the US coming to a head?
Excerpt: “There isn’t a single sitting member of Congress — not one — that doesn’t know exactly where we’re headed,” Mr. Simpson said in a telephone interview Tuesday just before word of his role got out. “And to use the politics of fear and division and hate on each other — we are at a point right now where it doesn’t make a damn whether you’re a Democrat or a Republican if you’ve forgotten you’re an American.”
Full Article: http://www.nytimes.com/2010/02/17/business/economy/17gridlock.html?ref=todayspaper
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Ed
14 yrs ago
Started a related thread on this specific topic http://hongkong.asiaxpat.com/forums/think!/threads/132147/what-if-america-implodes?/
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Ed
14 yrs ago
I'd say this is an accurate assessment of where we stand:
Do you reckon at least in the short-term the worst of the correction is behind equity markets or would you still be wary?
No, I am very worried, there was a very interesting collection of either robo economists or long only fund managers with a bullish outlook. The major problem with a lot of rhetoric in the market today is that there is a lot of vested interest in the views that people are taking. It amazes me that we can talk about a cyclical recovery and consumption. As we know consumption drives the economy in the US and the US economy has driven the world, there is nothing cyclical about what is happening right now. The US consumer is bankrupt.
We are in a situation we are in because of overbearing burden of debt. The debt has not been worked through and the consumer has no access to capital. They don’t have any savings. The unemployment rate is double what it was when we had hyper consumption that drove the world and credit has dried up. Not only that there is no demand for credit.
So there is nothing cyclical about this recovery. This recovery was bought by stimulus packages around the world. Those are running their course they are about to end their run. There was not enough money to implement new stimulus packages of this level, so there is no recovery. Stock markets have priced in a V-shaped recovery, we are not going to get that recovery, so I am very worried about the level of stock markets and I would not be buying.
Full interview: http://www.moneycontrol.com/news/fii-view/debt-crisis-experts-see-more-skeletons-tumbling_441239.html
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Ed
14 yrs ago
Another comment:
What is your stance on the kind of tightening noises that you have heard from China over the last month or so because that had some kind of a denting impact on the commodities market?
A: China turned into a spectacular growth in 2009. But it was growth that was manufactured by the stimulus package where investment spending with a kind of 70% of the GDP increase last year and that was fueled by a record open ended burst of bank lending. China sensed some great signals that bank lending needs to slow otherwise there will be aversion deterioration to long quality and that investment can be expected to slow given the likely shortfall of bank lending as well. So Chinese economic growth is certainly going to be facing a significantly different headwind in 2010 than they did in 2009 with the important implications for China are Asia, Asian trading partners especially Eastern Asia.
http://www.moneycontrol.com/news/fii-view/be-cautious-eco-vulnerable-to-double-dip-morgan-stanley_440782-2.html
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Ed
14 yrs ago
Ponzi in Peking
China's economy is humming along in high gear, thanks to a fast-growing pile of dicey debt. Such booms tend to end badly.
As developed nations struggle to eke out a bit of growth and to get unemployment rates out of double digits, Chinese output gallops ahead at an 8% annual rate. This $4.7 trillion economy, it seems, is the world's dynamo and the prototype for the future.
Take a close look, however, and you may come away thinking China resembles nothing so much as Japan shortly before its stock and property markets melted down two decades ago. A speculative frenzy of borrowing and bidding-up is at work. If and when prices crash, there will be hell to pay.
Signs of the times: government bureaucracies funding themselves by foisting debt on state-owned business enterprises; local governments raising capital by selling land at sky-high prices to corporations they own; and the People's Bank of China lavishing liquidity on the entire system in a way that makes Federal Reserve Chairman Ben S. Bernanke look downright stingy.
"It's a Ponzi scheme whose head is the central bank, and it can print money," says Victor Shih, a China expert at Northwestern University outside Chicago.
The U.S. government's $7.6 trillion in debt at the end of September represented more than half of gross domestic product. The Chinese government's officially disclosed $840 billion in public debt represents less than 20% of GDP. But the People's Bank of China and China's treasury are also on the hook for potentially $1.5 trillion in off-balance-sheet debt owed by cities, provinces and entities they control. They're also implicitly obliged to backstop $1 trillion, both in loans that "policy banks" were directed to issue, even when they made no economic sense, and in nonperforming loans that the government removed from the books of state-owned commercial banks over the past decade.
Add it up and the national government is responsible for debt equal to over 70% of 2009 GDP. That doesn't count any loans generated this year that might go sour amid a 30% increase in debt balances nationwide. (The U.S. government, in addition to its direct debt equal to 50% of GDP, is responsible for cosigning mortgage borrowers' obligations equal to another18% of GDP.)
Like the U.S. housing industry a few years ago China's big developers are highly leveraged and dependent on low interest rates and rising prices. Municipal governments are knee-deep in this asset swamp. They use land sales as a means of funding themselves.
As fast as China is growing and urbanizing, its cities are churning out more office towers and luxury malls than can be leased for years to come. Tianjin, a gritty metropolis not far from Beijing, will soon have more prime office space than will be filled in a quarter-century at the current absorption rate. Shunyi County, in the capital's suburbs, sold a residential plot last month for $400 per square foot, a new national record. The bidders were mostly state-owned companies and the winner none other than a developer owned by Shunyi County. Where the developer came up with the money for the purchase is unclear, but the county will nevertheless book $740 million as revenue from the sale.
China's mercantilist trade policy is another contributor to its asset bubble. By artificially depressing the value of its currency and making it difficult for locals to invest abroad, China has forced an artificially large amount of capital to chase after domestic investments, inflating property and stock prices. It's the same scenario China pursued in late 2007 before its stock market lost two-thirds of its value, but compared with today that era was characterized by monetary restraint.
"It's a pure debt game," says Andy Xie, an ex-Morgan Stanley ( MS - news - people ) economist who advises private investors and sees the current bubble as "much worse than previous ones."
In late November China's ruling politburo declared that the nation's monetary and fiscal promiscuity will continue in 2010. The markets, predictably, were overjoyed. Economists who see parallels to the Russian and Brazilian financial crises of a dozen years ago are less sanguine.
"The more debt that's on the balance sheets, whether you see it or not, the more vulnerable borrowing entities become to shocks," warns Michael Pettis, a finance professor at Peking University and an expert on China's economy and sovereign debt.
China naysayers have been wrong before. Gordon Chang, author of the 2001 book The Coming Collapse of China, has warned--wrongly, so far--that doom lies around the corner. Cushioning China's economy is its high growth rate, an estimated $260 billion (but declining) annual current account surplus and, at $2.3 trillion, the world's biggest foreign exchange reserve.
Bubbles, it bears noting, tend to surprise many observers with their longevity. (A FORBES cover story warned six years too early that the U.S. housing bubble threatened to tank the economy.) But when bubbles do eventually burst, it's usually with a bang.
In the first nine years of this decade China added an average of $1.50 in new credit to the economy to produce each incremental dollar of output. With so much money chasing domestic investments, that ratio has jumped to $7 of fresh credit for each additional dollar of GDP this year, estimates Pivot Capital Management, a Monaco hedge fund.
Assuming China's reckoning does arrive someday, it's impossible to say whether it might presage Japan-style deflation or Russian-style hyperinflation, both products of the 1990s, or American-style stagnation.
For now, private, semiprivate and state-owned enterprises are getting creative to keep the boom alive. Some cash-starved local governments were said to be asking companies to prepay 2010 corporate taxes to meet 2009 budgets. It's the kind of monkeyshines you might expect in New Jersey or California, not in supposedly cash-rich China.
Related-party transactions are another popular funding source. Hainan Expressway Co. in southern China is a government-owned outfit deep in hock. In the last year it has lent some $40 million to its founding shareholder, the Hainan Department of Transportation, and booked the loan due as an asset on its balance sheet. This classification provides the Hainan Expressway with additional collateral to borrow even more in new construction loans from state-owned financial institutions and increases the risk that it will eventually default, according to Northwestern's Shih.
Western and Hong Kong investors are in on the frenzy, too. Evergrande Real Estate Group, a Guangzhou developer, staved off a default on short-term debt in the fall by raising $800 million in a Hong Kong initial offering, which bestowed it with a $14 billion market cap. But who is it kidding? Sixty percent of its "profit" this year is expected to come from increasing the reported value of its properties, a ploy that is a common source of earnings for Chinese real estate developers.
As is typical in the later stages of property booms, many investors in China appear to have discarded rental yields as a measure of how much a building is worth in favor of greater-fool pricing. In downtown Beijing office towers sold this year for $400 per square foot, despite the fact that many were unleased and many more are under construction. The leading buyers: state-owned enterprises, including banks and insurers.
Asset-flipping can go on only so long. At some point you need paying tenants.
Warning Signs
Asset bubbles can go on surprisingly long but eventually do burst--often after a speculative frenzy like China's.
--Developers highly leveraged, dependent on easy credit.
--Government funding via debt and land sales to state-owned corporations, prepayment of corporate taxes.
--Total outstanding debt approaching Japan's precrash level.
--Property selling at record levels, despite growing glut.
http://www.forbes.com/global/2010/0118/companies-china-economy-schemes-ponzi-in-peking.html?boxes=Homepagemostemailed
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Ed
14 yrs ago
A Greek friend seems to think that the public servants will not accept pay cuts - tough for the other EU countries to bail them out if they refuse to take any pain...
Any thoughts on how this ends?
Three-way poker in Greek debt crisis
The man at the center of Greece's debt crisis is surviving on 4-5 hours sleep a night and could not get to his office last week because it was blockaded by striking employees.
Crisis in Credit
"We know we don't have a blank check," Finance Minister George Papaconstantinou told Reuters in an interview at a temporary refuge in a tax and customs administration building.
"We have public support as long as people feel everyone is bearing the burden equally."
Papaconstantinou is trying to make the most of a weak hand in a three-way poker game involving Greece, its European Union partners and the financial markets.
Greece needs to borrow or refinance 53 billion euros ($71.52 billion) this year, including 20 billion in April and May.
"We want to be able to borrow on the same terms as other countries in the euro zone," Prime Minister George Papandreou told a conference in London last Friday.
But investors anxious at the risk that Athens may be overwhelmed by its debts, projected to hit 120 percent of gross domestic product this year, are charging a steep premium to buy Greek bonds rather than benchmark German bunds.
The government needs to slash a huge budget deficit fast to assuage angry European partners and restore credibility in the bond markets, without squeezing voters so hard that it triggers a social revolt in a famously rebellious country.
Papaconstantinou is looking for clearer EU support to help escape a vicious circle of rising borrowing costs, harsher austerity measures, prolonged recession and diminished revenue.
Having owned up to a massive under reporting of its deficit and promised swift corrective action, Greece's negotiating leverage with its EU partners is mostly negative.
It can dramatize the risks for the entire euro zone if its debt woes get worse, it can point to the danger of social unrest if the EU forces too harsh austerity on Greeks, and it can threaten to go to the International Monetary Fund.
The government is doing a little of each while stressing its utter determination to meet steep deficit reduction targets.
"COLORADO DOESN'T GO TO THE IMF"
"The real threat, which they may eventually have to use, is not default, or leaving the euro zone, but going to the IMF," said Loukas Tsoukalis, a former top policy adviser to European Commission President Jose Manuel Barroso.
"That would look serious for the euro zone because we share a common currency. After all, Colorado doesn't go to the IMF," said Tsoukalis, president of Athens' Eliamep policy think-tank.
Euro zone heavyweights France and Germany have insisted that the Greek problem should be handled within the European family.
After EU leaders declared their support on February 11 for Athens' deficit-cutting program and vowed coordinated action, if needed, to safeguard stability in the euro zone, markets were looking for a clear signal of how Europe would help Greece.
It didn't come. Debt spreads, which fell on expectations of an EU rescue package, have crept up again as markets see the public backlash in Germany and question Berlin's willingness to make any financial commitment to Greece.
These doubts come just as Athens is hoping to go back to the market with its next 10-year bond issue.
After talks with EU colleagues last week, Papaconstantinou said in the interview: "We need to give the assurance to markets that we are actually working toward a potential instrument of "xyz" type, so that we'll never have to use it."
He did not rule out seeking IMF assistance but he said there were no negotiations with the global lender now.
Seen from Brussels and Berlin, it is too early to ease pressure on Athens by spreading out a European safety net that would be deeply unpopular with German, Dutch and Finnish voters.
EU ministers reckon Greece should take more drastic steps quickly to cut its public wage bill, raise value added tax and further increase fuel tax to achieve a promised deficit reduction this year of 4 percent of GDP.
The government is waiting until after a one-day general strike by the two main trade unions this week against its public sector wage freeze, tax hikes and welfare cuts before deciding on any further measures.
Papaconstantinou hopes that by April, Greece will have impressed markets with the initial execution of its fiscal adjustment, won further approval from Brussels and secured a clearer EU guarantee to back its borrowing.
"My only choice is to accelerate what we are doing here, be as public about it as we can, grit our teeth until things quieten down and pay the higher cost," the minister said.
http://www.reuters.com/article/idUSTRE61L16F20100222
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Ed
14 yrs ago
What did Orwell call it... Double Speak? I feel like I'm in 1984 when I read the biz news half the time... here's nonsense at its finest...
"We're showing signs of the housing market bottoming," says Michael Strauss, chief economist at Commonfund. "The bad news is we still have a long way to go."
http://www.businessweek.com/investor/content/feb2010/pi20100223_391703.htm
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Ed
14 yrs ago
Another astounding comment from a biz reporter... can't recall the publication... but the gist of it was that nobody should blame the bankers (primarily GS) who advised the Greek government how to hide massive debts so that they could remain within the restrictions set out by the EU....
Instead the government that asked for and adopted these structures should take the entire blame...
I disagree... yes the government should be blamed but so should the banks... how is this different than someone who robs a bank asking an expert in banking security for the weaknesses of the bank and getting a comprehensive plan that facilitates a successful robbery? I think its called being an accessory to the crime....
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Ed
14 yrs ago
Wonders never cease....
Banks Bet Greece Defaults on Debt They Helped Hide
http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=todayspaper
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.
“This is a country that is issuing paper into a weakening market,” said Ashish Shah, co-head of credit strategy at Barclays Capital, referring to Greece’s need for continual borrowing.
But while some European leaders have blamed financial speculators in general for worsening the crisis, the French finance minister, Christine Lagarde, last week singled out credit-default swaps. Ms. Lagarde said a few players dominated this arena, which she said needed tighter regulation.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
The Markit index is made up of the 15 most heavily traded credit-default swaps in Europe and covers other troubled economies like Portugal and Spain. And as worries about those countries’ debts moved markets around the world in February, trading in the index exploded.
In February, demand for such index contracts hit $109.3 billion, up from $52.9 billion in January. Markit collects a flat fee by licensing brokers to trade the index.
European banks including the Swiss giants Credit Suisse and UBS, France’s Société Générale and BNP Paribas and Deutsche Bank of Germany have been among the heaviest buyers of swaps insurance, according to traders and bankers who asked for anonymity because they were not authorized to comment publicly.
That is because those countries are the most exposed. French banks hold $75.4 billion worth of Greek debt, followed by Swiss institutions, at $64 billion, according to the Bank for International Settlements. German banks’ exposure stands at $43.2 billion.
Trading in credit-default swaps linked only to Greek debt has also surged, but is still smaller than the country’s actual debt load of $300 billion. The overall amount of insurance on Greek debt hit $85 billion in February, up from $38 billion a year ago, according to the Depository Trust and Clearing Corporation, which tracks swaps trading.
Markit says its index is a tool for traders, rather than a market driver.
In a statement, Markit said its index was started to satisfy market demand, and had improved the ability of traders to hedge their risks. The index and similar products, it added, actually make it easier for buyers and sellers to gauge prices for instruments that are traded among players over the counter, rather than on exchanges.
“These indices have helped bring transparency to the sovereign C.D.S. market,” Markit said. “Prior to their creation, there was no established benchmark index enabling investors to track the performance of segments of the sovereign C.D.S. market.”
Some money managers say trading in Greek swaps alone, not the broader index, is the problem.
“It’s like the tail wagging the dog,” said Markus Krygier, senior portfolio manager at Amundi Asset Management in London, which has $40 billion in global fixed-income assets. “There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds.”
If that sounds familiar, it should. Critics of these instruments contend swaps contributed to the fall of Lehman Brothers. But until recently, there was little demand for insurance on government debt. The possibility that a developed country could default on its obligations seemed remote.
As a result, many foreign banks that held Greek bonds or entered into other financial transactions with the government did not hedge against the risk of a default. Now, they are scrambling for insurance.
“Greece is not a small country,” said Mr. Raynes, at R&R in New York. “Credit-default swaps give the illusion of safety but actually increase systemic risk.”
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Ed
14 yrs ago
Another good article by Niall Ferguson author of the Ascent of Money:
America, the fragile empire
For centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms. From Polybius to Paul Kennedy, from ancient Rome to imperial Britain, we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted.
In the same way, the challenges that face the United States are often represented as slow-burning. It is the steady march of demographics -- which is driving up the ratio of retirees to workers -- not bad policy that condemns the public finances of the United States to sink deeper into the red. It is the inexorable growth of China's economy, not American stagnation, that will make the gross domestic product of the People's Republic larger than that of the United States by 2027.
As for climate change, the day of reckoning could be as much as a century away. These threats seem very remote compared with the time frame for the deployment of U.S. soldiers to Afghanistan, in which the unit of account is months, not years, much less decades.
But what if history is not cyclical and slow-moving but arrhythmic -- at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?
Great powers are complex systems, made up of a very large number of interacting components that are asymmetrically organized, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder. Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting. But there comes a moment when complex systems "go critical." A very small trigger can set off a "phase transition" from a benign equilibrium to a crisis -- a single grain of sand causes a whole pile to collapse.
Not long after such crises happen, historians arrive on the scene. They are the scholars who specialize in the study of "fat tail" events -- the low-frequency, high-impact historical moments, the ones that are by definition outside the norm and that therefore inhabit the "tails" of probability distributions -- such as wars, revolutions, financial crashes and imperial collapses. But historians often misunderstand complexity in decoding these events. They are trained to explain calamity in terms of long-term causes, often dating back decades. This is what Nassim Taleb rightly condemned in "The Black Swan" as "the narrative fallacy."
More http://articles.latimes.com/2010/feb/28/opinion/la-oe-ferguson28-2010feb28
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Ed
14 yrs ago
Anyone going to jail over this?
http://www.msnbc.msn.com/id/21134540/vp/35841681#35841681
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Ed
14 yrs ago
I assume all the debt ratio modeling we are seeing are based on past economic growth... what happens if the US, UK, France, Germany etc... remain mired in a Japan-style economy with a weak tax base for years to come...
Moody's Warns Nations on Debt: http://www.washingtonpost.com/wp-dyn/content/article/2010/03/15/AR2010031503465.html?hpid=topnews
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Ed
14 yrs ago
Wall Street Outsiders Who Made Fortunes from the Crisis
If you had to pick someone to write the autopsy report on the Wall Street financial collapse 18 months ago, you couldn't do any better than Michael Lewis, a preeminent non-fiction writer with a knack for turning complicated, mind numbing material into fascinating yarns. His new book, called "The Big Short: Inside the Doomsday Machine discusses how a handful of Wall Street outsiders realized the subprime mortgage business was a house of cards and found a way to bet against it. "
Watch Interview http://www.cbsnews.com/video/watch/?id=6298082n
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Ed
14 yrs ago
Useful...
Preparing for the Inevitable Bursting Bubble
Financial bubbles are a way of life now. They can upend your industry, send your portfolio into spasms and leave you with whiplash. And then, once you’ve recovered, the next one will hit.
Or so you might think, as a veteran of two gut-wrenching market declines and a housing bubble over the last decade.
There’s plenty of reason to expect more surprises, given the number of hedge funds moving large amounts of money quickly around the world and the big banks making their own trades.
Individuals, as always, may be tempted to make their own financial bets, too. Last time, they bought overpriced homes with too much borrowed money. Next time, who knows what the bubble will be? And that’s the problem, as it always is. How do you identify the next thing that will pop? Is it China? Or Greece? Or Treasury bonds? It is difficult to predict and make the right defensive (or offensive) moves at the correct moment to save or make money.
More: http://www.nytimes.com/2010/02/27/your-money/27money.html?src=me&ref=your-money
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Ed
14 yrs ago
What now....
Greek Bond Woes Spread
Concern over a potential liquidity shortage at Greece's private-sector banks fueled a sharp selloff in Greek debt and equity markets Thursday, suggesting that the European Union's efforts to defuse the crisis with a vague promise for an International Monetary Fund-backed rescue have all but failed.
Markets signaled fresh worries that Greek banks are having trouble meeting immediate funding needs, after the country's top four banks on Wednesday asked Athens for access to an emergency government liquidity facility. Greece's banks have been widely viewed as one of the few bright spots in the country's financial infrastructure.
"This is clearly a sign that the Greek authorities have reached the end of the line and need to make a phone call to the IMF," BNP Paribas analysts wrote in a note Thursday morning.
Greek bonds fell for the seventh straight session on Thursday and the Greece's benchmark stock index tumbled. The yield on Greece's 10-year bond, a reflection of both the country's borrowing costs and the risk investors associate with its debt, hit its highest level since the introduction of the euro.
More alarmingly, in a sign Greece may have difficulty finding money in the nearer term, investors drove the interest rate of the Greek two-year bond to 7.45% Thursday, 6.51 percentage points more than what Germany pays. That gap was 5.68 percentage points just a day earlier.
More http://online.wsj.com/article/SB10001424052702304830104575172010016417360.html?mod=WSJASIA_hpp_LEFTTopWhatNews
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Ed
14 yrs ago
20.01.2009
What happens if a euro area government were to default?
What if one of the member states of the eurozone were to default on its debt? On the occasion of the euro’s 10th birthday, this has become the most frequently asked question about the single currency zone.
The probability of a default is low but clearly rising. The decision by Standard & Poor’s, the ratings agency, to downgrade Greek sovereign debt and to put Spanish and Irish debt on watch seriously rattled investors last week, for good reason. If the financial crisis has taught us one thing, it is to take perceived tail-risks more seriously.
Before I answer the question, it is best to consider what would not happen. For a start, the eurozone would not fall apart. A government about to default would be mad to leave the eurozone. It would mean that, in addition to a debt crisis, the country would also face a currency and banking crisis. Bank customers would simply send their euros to a foreign bank to avoid a forced conversion into a new domestic currency.
So if a default were to happen, it would almost certainly happen within a eurozone that remained intact. If you put your mind to it, it is quite difficult, even in theory, to think of a circumstance in which the eurozone would blow apart. One theoretical possibility would be for the European Central Bank to generate massive inflation, prompting Germany to leave in disgust – not exactly the most likely scenario right now.
So we are stuck with the eurozone for better or for worse. If a default happens, the central banks and governments of the eurozone would be forced to co-ordinate their policies whether they liked it or not. Under its statutes, the euro system, which includes the ECB and the national central banks, is not allowed to monetise (that is, buy) new sovereign debt or to grant overdraft facilities. But the ECB is allowed to buy debt in the secondary markets, which is a way of monetising debt. All it would take is a decision by the ECB’s governing council.
What about a direct fiscal bail-out by other member states? I suspect that the non-defaulting governments would be reluctant initially. Many of them had difficulty selling austerity-type policies to their domestic electorates and they might not achieve the parliamentary majorities needed for a bail-out. Some would no doubt argue that a bail-out would carry the risk of moral hazard.
But governments would soon discover that simply saying No was not going to work either. Back in the real world, governments would have to take into account the risk of contagion. For example, a sovereign default by a small country could wreak havoc on the markets for credit default swaps and might even destroy financial institutions in other eurozone countries.
A default could also trigger a panic rise in bond yields elsewhere, which could turn the threat of contagion into a self-fulfilling prophecy.
If confronted with this more realistic situation, governments would, I suspect, react similarly to the way they responded in the aftermath of the collapse of Lehman Brothers, the US investment bank. Complacency would be followed by anger and by grandstanding lectures on the virtues of fiscal discipline (I can see a speech coming by the German finance minister).
This would be followed by an emergency meeting one weekend in Brussels in which the European Union, perhaps together with the International Monetary Fund, would agree a package of credits to stabilise the defaulter.
The recipient would, in turn, have to accept an austerity programme, perhaps even the temporary loss of fiscal sovereignty, to ensure that the loan was repaid and to reduce moral hazard. In other words, the Europeans would bail out one of their own, but it would not be fun for anyone, especially not for the defaulter.
In the long run, a conditional bail-out combined with persistently positive bond spreads could even be a healthy development for the eurozone. Putting roughly the same value on Greek and German debt – which is what financial markets did for most of the last 10 years – never made sense.
If that situation had been allowed to persist, it would have produced serious difficulties for the eurozone further down the road. When the euro was launched in 1999, many commentators, including me, predicted that the markets would exert sufficient pressure on member states to run responsible fiscal policies. It took 10 years for that prediction to prove correct (which means, of course, that it was not such a great prediction).
A far more serious threat would be a cascading series of defaults that would eventually include one or more of the eurozone’s large countries. That would be a momentous challenge for the system but the policy response would be no different, only faster.
In extremis, you could conceive of a scenario under which the bail-out had to be so large that it would bring down the entire system. This could then provide the non-defaulters with an economic incentive to leave.
But dream on. If Germany, for example, had such an incentive to leave, it would almost certainly forgo that perceived economic benefit and stay for political reasons. If you assume the worst-case scenario of a default by five or six countries, a full fiscal union would be more probable than a break-up.
Most likely, we will see neither, but we may see conditional bail-outs.
http://www.eurointelligence.com/article.581+M5b61e32161d.0.html
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Ed
14 yrs ago
What Happens If Greece Really Defaults?
Earlier this week, Greek Prime Minister George Papandreou traveled to the United States to promote a message: We're in this together. The debt crisis that has threatened the Greek economy and the stability of the European Union's monetary policies "very much involves America's interests," Papandreou stated in a speech at the Brookings Institution in Washington.
The prime minister--who was born in St. Paul, Minn.--even connected the current crisis to the Great Depression as well as the Great Recession. "If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago," he said.
[Use our U.S. News Mutual Funds Score to find the best mutual fund for you.]
But the path from a Greek crisis to a U.S. crisis is not a direct one. The European Union is hoping it can contain Greece's debt crisis before the problems spread across the continent--threatening the stability of all countries that use the euro, or the euro zone--and then over the Atlantic.
The crisis began shortly after the election last fall of the new socialist government led by Papandreou. State officials revealed that Greece's budget deficit was at 14 percent of GDP--almost twice what the official Greek government statistics had reported. Two months later, Moody's downgraded Greece's debt to A2, raising the possibility of Greece defaulting on its debt.
If Greece defaults, "it risks exacerbating the economic downturns and could even reignite an acute financial crisis" through higher interest rates, Marc Chandler, global head of currency strategy at investment firm Brown Brothers Harriman, wrote in a report.
A Greek default would hit Americans hard in one major area: exports. According to the Economic Report of the President by the White House's Council of Economic Advisers, in order to "fill the gaps left in demand" by the recession, "net exports need to rise." President Obama announced in his State of the Union address a goal of doubling exports over the next five years. That goal might be hard to reach if Greece's debt crisis is not contained. "Under the scenario where things get much worse in Europe, the dollar would get strengthened relative to the euro, and that would create a policy headache for the Obama administration," says Steve Hanke, an economist at Johns Hopkins University. A stronger dollar would make U.S. exports more expensive. In addition, as interest rates in Europe soar and the euro falls in value in response to the credit crunch, Europeans would be unable to buy as many U.S. products.
The likelihood of that scenario depends partially on what the European Union decides to do about Greece. In reaction to this panic in Greece, much of the rest of Europe became frustrated over Greece's ability to hurt the rest of the continent economically but with little accountability owing to the fact that Greece is an independent state. Because Greece uses the euro, its fiscal problems can weaken the currency and lead to higher interest rates for all Europeans. A February poll found that a majority of Germans want Greece out of the euro zone.
Greek officials have received reassuring signs from Europe's leaders that the European Union will bail out the country in some way to assure creditors that it will not default on its debt. Jose Manuel Barroso, president of the European Commission, also announced this week that whatever mechanisms the EU uses to help Greece will be in line with the laws of the EU--assuaging fears that a bailout would violate the Maastricht Treaty, the agreement that created the euro.
[See A Fresh Look at Socially Responsible Funds]
But it is not guaranteed that bailing out Greece will save it and, by extension, the euro zone. Hanke worries that even with a bailout, wealthy Greeks and foreign investors will not stop withdrawing their money from Greek banks, from which they have already pulled out billions of euros. In order to get the rest of Europe's support for a bailout, Greece has had to promise to fill in its budget with more tax revenue. But paradoxically, those taxes might cause even more people to flee the Greek financial system, says Hanke. "In effect, with bank runs coupled with capital flights, you would get a collapse in credit in Greece," he says.
Such a collapse would have two major potential effects. First, a credit crunch would spread to other European countries that have vulnerable economies. For example, "if you had a lot of capital flight out of Greece, all of a sudden people in Spain say, 'We're going to be next,' " says Hanke.
Second, the credit crunch would increase the likelihood of Greece defaulting on its debt. In such a scenario, Greece could temporarily leave the euro zone and return to its former currency, the drachma, which would be heavily devalued against the euro.
There are still several signs that Greece can use the market to navigate out of the crisis without a default. Last week, Athens sold 10 billion euros of 10-year sovereign bonds to foreign investors. But an amount of 23 billion euros is needed to meet government obligations through May. And Greece has only begun to implement changes to its budget that will bring it out of a fiscal hole. Earlier this month, the government announced a plan of cuts to wages of government employees, tax hikes on tobacco and alcohol, and other measures expected to raise 4.8 billion euros. But these steps will reduce Greece's budget deficit by only 2 percent of GDP. It now stands at 12.7 percent of GDP, well above the European Union's target of 3 percent. Even the changes so far have not been easy politically. Several of the country's labor unions are striking in protest of the spending cuts and tax increases.
Perhaps, however, Greece can breathe its biggest sigh of relief over the fact that the international investors who recoiled in horror over the country's fiscal problems just a few months ago appear now to be softening their stance. Investors trade credit-default swaps on Greek sovereign debts, which are contracts that function as a kind of insurance on the chance the government will default. According to credit-default-swap prices from financial information company Markit, the annual cost to insure a five-year government bond for Greece hit a high of $425,000 on February 4. That was a 67 percent increase from the previous three months. But as of March 9, the cost had fallen to $289,000, down to the levels of December.
http://finance.yahoo.com/news/What-Happens-If-Greece-Really-usnews-3747443040.html?x=0
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Ed
14 yrs ago
Just finished this guys book - highly recommend it...
Many deep insights in the book including his theory that the subprime didnt cause the crash... rather high oil prices did...
Good interview http://www.youtube.com/watch?v=QhsMr49AKM8
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Ed
14 yrs ago
Interesting thoughts on what has been driving the stock market...
'Free money' is stocks' secret weapon
Stock-market bulls are hoping the sharp rebound in corporate profits will keep the rally alive, but continued low interest rates might be more important.
Good first-quarter results will certainly help, and profits will be jumping when numbers start rolling in this week. Earnings at S&P 500 companies are expected to rise 34% from their depressed level a year ago. Reports are due from JPMorgan Chase (JPM, Fortune 500), Google (GOOG, Fortune 500) and General Electric (GE, Fortune 500), among many others.
But the real secret weapon is the Federal Reserve's policy of holding interest rates near zero, which bulls contend will fuel a long-lived rally by forcing investors out of cash accounts gathering next to no interest.
"As long as we remain in this monetary twilight zone, stock prices should continue to rise, and corrections should be short and shallow," economist Ed Yardeni wrote in a note to clients this week. "The alternative to stocks is to earn zero in the money markets."
Though it has been 16 months since the Federal Reserve cut its Fed Funds rate to a range of zero to 0.25%, those who expect stocks to extend their gains say many people are only now warming to the idea of jumping back into the market.
"People eventually wake up to the fact that they're earning nothing," said Peter Cohan, who teaches business strategy at Babson College in suburban Boston. "It's sort of a case of getting over the hump."
More http://money.cnn.com/2010/04/13/news/free_money.fortune/index.htm
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