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Stoneleigh: The interface between finance and energy will prove to be the most important determinant of the way the Greater Depression we are rapidly moving toward will play out in practice. For those here who may be unaware of peak oil, the point is that global oil production appears to have reached a production peak that it will not be physically possible to exceed. Oil discoveries peaked decades ago and we have since been increasing production from large existing fields using ever more complicated and expensive technology, in order to supply increasing global demand from decreasing reserves.
The production peak does not mean that oil is imminently running out - in fact there is probably half of all the oil that ever existed still in the ground, but it is the expensive and relatively inaccessible half. We can no longer increase production and production will fall over time as we continue to use up reserves which are not being replaced by new discoveries. Although discoveries continue to be made, they are few and far between, and of much smaller size than the giant fields we have relied on for so long. As they are much more challenging to produce, they rely on high oil prices in order to remain commercially viable.
One might imagine that as an essential resource becomes scarcer, it's price would move in one direction only - up - and for a while it appeared that would be the case. However, our energy supply system is set in the context of our existing economic and financial structures. The extreme and increasing stress that these structures are under will interact with future energy scarcity with devastating effect, effectively placing a hard limit on any eventual recovery. Energy is the master resource without which no activity, economic or otherwise, is possible.
The effect of easy credit was to flood commodity exchanges with liquidity, as liquidity fleeing risky securitized assets searched for a safe haven. This pushed up the prices of all commodities beyond what could be justified, sending premature signals of scarcity that attracted even more speculative investment. In this way a bubble was formed, but bubbles always burst, and when they do, the speculative money disappears very quickly, taking price support with it. The price collapse we have seen since is partly a result of speculation in reverse, as speculators go short, and partly a result of falling demand, and that fall in demand has only just begun.
The consequence of that price plunge is a severe impact on the viability of continued fossil fuel exploration and development, and also a similarly significant impact on the viability of energy alternatives such as renewables and efficiency investments. Ilargi has long referred to this as the Law of Receding Horizons, meaning that each time alternatives appear to be reaching the threshold of viability, the combination of the price of conventional energy and the cost structure for the alternative is such that the threshold is never quite reached. Once again, energy prices are falling as costs for alternative have remained high, so that the hoped for developments will again be put on hold.
We are seeing the beginning of a global demand collapse, as the credit crunch takes an ever increasing toll on global economic activity and international trade. Already we are seeing the dire effects on shipping in the Baltic Dry index, thanks to the difficulty in obtaining letters of credit for shipments. Consumers in developed countries are tapped out and trying to repair their tattered balance sheets by cutting back, as are companies and banks. Consumption is therefore falling, which will hit exporting economies very hard indeed. They have spent vast sums, and used huge amounts of raw materials, to build what will now be shown to be an enormous excess of productive capacity. Their demand for raw materials will not recover any time soon, as there will be no demand for their products for a very long time.
For the time being, the on-going demand collapse, which has very much further to go, is causing the price of commodities, and particularly energy, to drop like a stone. This may well continue for a period of time, but the danger is that the demand collapse will lead to a supply collapse, and at that point prices will find a floor and begin to climb again. This price bottom could happen earlier in the coming Depression than would be the case for other goods and services.
Exactly when we might see the impact on supply is not clear, but I doubt if it will be all that long. Already there are many projects with high cost structures which are no longer viable. These are the projects that could have cushioned the down slope of Hubbert's curve (the decline from peak production of oil), but will not now come on line. Although they could in theory be developed at a later date, increasing capital constraints will make financing almost impossible, hence development will be unlikely for a very long time. We will therefore continue to make do with the fields already in production, but many of those are depleting very quickly - Ghawar in Saudi Arabia, Cantarell in Mexico, Burgan in Kuwait and many others.
For a while it will be enough to sustain the much lower level of economic activity that we are headed for, but not for all that much longer, especially since there will be many other 'above ground factors' to consider. For instance, production infrastructure requires expensive maintenance that will be increasingly difficult to perform, separatist movements in producing countries will seek to control resources for their own benefit, productive capacity being fought over will be damaged or destroyed, sabotage by the disaffected with nothing left to lose will increasingly become a factor, and piracy will make delivery much more challenging. Living off our fossil fuel legacy will therefore become progressively more difficult.
Many governments around the world, including those of all the major powers, are well aware of peak oil. In a very real sense in a modern world, oil IS power, as there is no comparable source of concentrated, transportable and flexible fuel. Securing access to it is therefore of the utmost strategic importance. Some governments, like the Anglo-Saxon economies, have so far appeared to place their trust in the global markets and their own perceived ability to outbid the competition. Others, notably China, have been quietly arranging long term bilateral supply contracts directly with producers, thereby taking production off the market.
China's strategy is likely to prove far superior in difficult times when international trade is drying up, the fungibility of oil comes under threat and no one can be sure of being able to outbid the competition. By the time others realize that trusting the market to provide is essentially a modern day cargo cult, they may have been completely out maneuvered. In my opinion, this will be the foundation of the coming shift in hegemonic power towards the Far East, but it will not be a peaceful transition. Resource wars are a given under these circumstances.
Crude Oil Caps Biggest Weekly Drop Since 1991 on Lower Demand
Crude oil fell for a sixth day, capping the biggest weekly drop since the Persian Gulf War in 1991, on concern demand will decline after a report showed U.S. employers cut jobs in November at the fastest pace since 1974. Oil is down 25 percent since Nov. 28 as the recession deepened in the U.S., Europe and Japan. Payrolls fell by 533,000 last month, the Labor Department said today. The International Energy Agency, U.S. Energy Department and OPEC lowered demand forecasts over the past month because of the contraction.
"It's all about the economy," said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. "There's not much that can be done right now to keep prices from falling off a cliff." Crude oil for January delivery fell $2.86, or 6.5 percent, to $40.81 a barrel at 2:51 p.m. on the New York Mercantile Exchange, the lowest settlement since Dec. 10, 2004. Prices have dropped 72 percent since reaching a record $147.27 on July 11.
"After the jobless number, any bulls that were left in the market will become extinct," said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. "There are no redeeming features in these numbers." U.S. payrolls were forecast to decline by 335,000, according to the median estimate in a Bloomberg News survey. November's drop exceeded all 73 forecasts by respondents.
"The numbers were horrible," said Michael Fitzpatrick, vice president for energy risk management at MF Global Ltd. in New York. "We were expecting something bad but nothing of this magnitude. This is bound to increase the negative sentiment that's been here since summer." The U.S. entered a recession in December 2007, the National Bureau of Economic Research, a non-profit panel of economists that dates American business cycles, said Dec. 1. U.S. equity markets declined yesterday as oil stocks dropped on forecasts of $25-a-barrel crude from analysts at Merrill Lynch & Co.
The U.S., European Union and Japan, which are in the first simultaneous recession since World War II, consumed 48 percent of the world's oil in 2007, according to BP Plc, which publishes its Annual Statistical Review of World Energy each June. The IEA cut its global oil-demand outlook for 2009 because of the world economic slowdown. The Paris-based agency reduced its forecast by 170,000 barrels a day from its November estimate to 86.37 million barrels a day, David Martin, an IEA analyst, said in a phone interview today as the agency issued an update to its July Medium-Term Oil Market report.
U.S. fuel demand during the four weeks ended Nov. 28 was down 6.2 percent from a year earlier, an Energy Department report showed Dec. 3. Brent crude oil for January settlement fell $2.54, or 6 percent, to $39.74 a barrel on London's ICE Futures Europe exchange, the lowest settlement since Dec. 29, 2004. Falling prices may lead the Organization of Petroleum Exporting Countries to reduce production.
Qatar's oil minister said on Dec. 3 that OPEC will "definitely" lower output at its next meeting in Algeria on Dec. 17. Abdullah bin Hamad al-Attiyah said he doesn't know by how much the group, which is responsible for more than 40 percent of global supply, will cut at the meeting. "OPEC is going to have to show much better compliance," said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. "They must feel somewhat dejected that the cut that was thrown at the market has had almost no impact. Although they aren't powerless, they can do very little to support prices until there is a semblance that demand is leveling."
OPEC oil ministers agreed on Oct. 24 in Vienna that the 11 members with quotas would lower supply by 1.5 million barrels a day starting in November. Production by the 11, excluding Iraq and Indonesia, declined 725,000 barrels to 28.24 million barrels a day last month, according to data compiled by Bloomberg News. "Analysts usually look to OPEC spare capacity and inventories as a guide to oil prices," said Adam Sieminski, Deutsche Bank's chief energy economist, in Washington. "Right now it's the dollar, stock markets and the economy that are the main drivers."
The U.S. dollar rose and the stock market declined as the economy slowed, driving commodities lower. Gasoline for January delivery declined 6.83 cents, or 7 percent, to 90.12 cents a gallon in New York, the lowest settlement since the contract for reformulated gasoline was introduced in October 2005. Pump prices have followed futures lower. Regular gasoline, averaged nationwide, dropped 1.6 cents to $1.773 a gallon, AAA, the largest U.S. motorist organization, said on its Web site today. It's the lowest since January 2005. The fuel has fallen 57 percent from the record $4.114 a gallon reached on July 17.
"Lower prices should help us get out of this mess," Sieminski said. "We should be thankful for lower prices for a limited amount of time, but these are not sustainable levels. Capital expenditures are staring to be cut."
Chesapeake Energy Cuts Spending, Plans to Build Cash
Chesapeake Energy Corp., the second- biggest independent U.S. natural-gas producer, cut its capital budget and said it plans to build “substantial” cash resources over the next two years because of a plunge in prices. Gas for January delivery fell 27.8 cents, or 4.6 percent, to $5.739 per million British thermal units at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. The fuel touched $5.712, the lowest since prices reached $5.249 per million Btu on Sept. 10, 2007. Chesapeake, based in Oklahoma City, dropped 52 cents, or 4.4 percent, to $11.32 in composite trading on the New York Stock Exchange. The stock declined as much as 17 percent before the company announced the budget cuts and cash plan in a statement today. The stock has plunged 71 percent this year.
“This is a step in the right direction, and it’s what people wanted to see,” Joseph Magner, a Denver-based analyst for Tristone Capital Inc., said today in a telephone interview. “The challenge now is, what are the details and what does it imply for production growth and cash flow?” Chesapeake said in September it was cutting capital spending by $3 billion through 2010. The company has been selling stakes in its best properties to help pay down debt and raise money for additional exploration.
“They’re going to have to cut $1.35 billion to $1.4 billion based on keeping a production growth rate of 16 percent,” Magner said regarding 2009. “They have an additional $1.25 billion to $1.75 billion planned for acquisitions and leaseholds and potential proceeds from asset sales. We wouldn’t be surprised to see another $3 billion or more in spending cuts.” Chesapeake sold an interest in its Marcellus Shale assets to StatoilHydro ASA for $1.25 billion in November. BP Plc, Europe’s second-biggest oil company, bought a stake in the Woodford Shale asset for $1.75 billion in July and an interest in the Fayetteville Shale for $1.9 billion in September.
Bets on Below-$20 January Oil Become Nymex Most Active Options
Bets that oil for January delivery will fall below $20 a barrel were the most active options contract in electronic trading today, a day after Merrill Lynch & Co. said oil may drop to less than $25. Oil may dip to a six-year low if the worldwide recession spreads and the Organization of Petroleum Exporting Countries fails to stem declines, Francisco Blanch, Merrill commodity strategist, said in a report yesterday.
“Under a number of circumstances including a recession in China and a failure from OPEC to cut enough output, we could see prices dipping all the way to $25 a barrel, which is the level at which we’ll destroy some non-OPEC supply,” Blanch said in an interview today. “We’re not forecasting that. We’re saying it might happen.” His 2009 forecast is for $50 a barrel.
January $20 puts rose 3 cents to 4 cents a barrel, or $40 a contract, according to electronic trading data as of 3:25 p.m. on the New York Mercantile Exchange. Volume was 743 contracts. Floor trading settled unchanged at 1 cent a barrel, or $10 a contract. Today’s pit volumes will be released Dec. 8. The contract didn’t trade yesterday, according to data today. Open interest was 291 contracts yesterday, the date for which the most recent figures are available. That’s unchanged from the day before.
Crude oil for January delivery lost $2.86, or 6.6 percent, to settle at $40.81 a barrel at 2:51 p.m. on the Nymex. Earlier, it touched $40.50, the lowest since December 2004, on concern demand will drop after a report showed U.S. employers cut jobs in November at the fastest pace since 1974. Futures posted their biggest weekly drop since the Persian Gulf War in 1991. Oil prices have tumbled 72 percent since reaching a record $147.27 on July 11.
Today’s second-most active options contract in electronic trading was January $50 calls, or bets the price will rise above that level. The contract fell 48 cents to 56 cents a barrel, or $560 a contract, in electronic trading. The contract fell 49 cents to 55 cents in floor trading. Electronic trading volume was 686 lots, up from 542 yesterday. Volume was 1,759 contracts yesterday when floor trades were added in. Open interest rose to 4,392 yesterday from 3,785 the day before.
Bets that oil for June delivery will fall below $35 a barrel were the most active options contract on the exchange yesterday, according to floor-trading data released today. The June $35 put contract rose 57 cents to $2.16 a barrel, or $2,160 a contract. Volume was 10,164 lots, up from 3,300 on Dec. 4. Open interest more than tripled to 13,356 contracts yesterday from 4,006 the day before.
Bets that oil for delivery in December 2012 will fall below $60 and $75 a barrel were the second- and fourth-most active contracts on the exchange yesterday, according to today’s data. December 2012 $60 put options rose 59 cents to $7.03 a barrel, or $7,030 a contract, on volume of 7,800 shares. Open interest climbed to 8,250 lots from 450 the day before.
December 2012 $75 put options rose 86 cents to $14.03 a barrel, or $14,030 a contract, on volume of 3,900 lots. Open interest soared to 5,100 contracts yesterday from 1,651 the day before. December 2012 futures fell $2.82, or 3.7 percent, to settle at $73.60 a barrel today. Yesterday, they lost $1.05, or 1.4 percent, to $76.42 a barrel. The contract has fallen 9.8 percent since the U.S. Thanksgiving holiday last week, compared with a 14 percent decline in the most-active January 2009 contract.
January 2009 $40 put options, the third-most active contract yesterday, rose 60 cents to $1.49 a barrel, or $1,490 a contract on volume of 4,434 lots. Open interest was 10,186 lots yesterday, down from 10,880 the day before. One options contract equals 1,000 barrels of oil.
Ilargi: Obama’s first priority in infractructure programs should be in projects concerning health care, water treatment and sewage systems; the things that would keep life bearable. Alas, most money will undoubtedly go to highways, bridges and even broadband access, things that hold the promise of turning a profit. Despite GDP numbers that look awful into the next few years at least, indicating a fast shrinking economy, the belief system that is the growth economy is still the leading policy adviser, to the detriment of the American citizen. A nicely paved road that you have no car to drive on anymore, and nowhere to go to anyway after you've lost your job, while the neighbors’ excrement floats through your living room and you're breaking down the porch for wood to boil your drinking water with.
America needs to adapt to its new reality, and it has very little time to do so. Instead, all eyes and efforts are focused solely on regaining the old reality. Unfortunately, it will never return. And that makes the money and working hours spent to revive the past one a huge waste, which will drag down life in the street far deeper than if there would be less magical thinking and more understanding of how systems, including the economic one, work. Collective denial can be a highly destructive force.
Obama Plans Largest Building Program Since 1950s
President-elect Barack Obama said he’ll make the “single largest new investment” in roads, bridges and public buildings since the Eisenhower Administration to lift the sagging economy and create jobs. Obama, in his weekly radio speech today, said his plan to create or preserve 2.5 million jobs will also include making public buildings more energy efficient, repairing schools and modernizing health care with electronic medical records.
“We won’t just throw money at the problem,” he said. “We’ll measure progress by the reforms we make and the results we achieve -- by the jobs we create, by the energy we save, by whether America is more competitive in the world.” Obama spoke a day after a government report showed employers in the U.S. slashed 533,000 jobs last month, the biggest decline in 34 years. The losses are “another painful reminder of the serious economic challenge our country is facing,” Obama said.
The speech offered the first details of Obama’s job- creation program. He said the investment in infrastructure will be the largest since President Dwight D. Eisenhower created the interstate highway system a half-century ago. “When Congress reconvenes in January, I look forward to working with them to pass a plan immediately,” he said. Obama takes office as the 44th president on Jan. 20. With the economy heading toward the longest and deepest recession since World War II, pressure is rising for a spending program that will create new jobs. Congressional Democrats have said they will send Obama an economic stimulus package as soon as he takes office. New York Senator Charles Schumer late last month put the size of such a program at between $500 billion and $700 billion.
In addition to investing in infrastructure, requiring energy standards on public buildings and updating health-care practices, Obama said that he will start a “sweeping effort to modernize and upgrade school buildings” and will boost broadband access across America. To the states that will be the conduits for the funding, he had a simple message: “use it or lose it.” “If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money,” he said.
Obama’s plan to make public buildings more energy efficient should reduce the government’s energy bill, which he called the highest in the world. He plans to replace heating systems and install energy-efficient light bulbs. Obama also plans to upgrade Internet infrastructure, calling it “unacceptable that the United States ranks 15th in the world in broadband adoption.” Upgrading health care is the final component of the plan. By introducing new technology and electronic medical records, he said health-care workers could “prevent medical mistakes, and help save billions of dollars each year.”
Obama, in Chicago for the weekend, has no public events scheduled for today. Tomorrow, he will mark the anniversary of the 1941 attack on Pearl Harbor with a news conference in Chicago, according to a statement from his transition team. Obama will announce his choice to lead the Department of Veterans Affairs at the news conference, according to a Democratic aide who spoke on the condition of anonymity.
Obama Says Economy Will Worsen Before Recovery Begins
President-elect Barack Obama said the economic crisis will worsen before a recovery takes hold, and the government must act swiftly to stimulate job creation. “Things are going to get worse before they get better,” Obama said in an interview on NBC’s “Meet the Press” program broadcast today.
Obama, who takes office Jan. 20, said his advisers are still working to determine the size of the economic stimulus package needed to pull the country out of the longest recession since 1982. “But it is going to be substantial,” he said, without giving an estimate. While calling the federal budget deficit he will inherit “enormous,” Obama said economic recovery is more important, “and that means that we can’t worry, short term, about the budget deficit.”
Obama yesterday outlined an economic program focused on spending on public projects that he said would be the biggest such investment in the nation’s infrastructure since the Eisenhower administration. The economy has shown signs of worsening since the Nov. 4 election. The Labor Department reported Dec. 5 that employers cut 533,000 workers last month, bringing losses this year to 1.91 million. Sales at U.S. retailers probably fell in November for a fifth consecutive month, according to the median estimate of economists in a Bloomberg News survey.
Obama also said General Motors Corp., Ford Motor Co. and Chrysler LLC must take steps that will make them financially viable, including investing in more fuel-efficient cars, in order to get government aid. He also said compensation for company executives is out of line. Congress and the Bush administration are working out details of legislation to bail out the big three U.S. auto companies as they grapple with a drop in sales and the recession.
The chief executives of GM and Chrysler testified at hearings this week that they need a combined $14 billion to keep operating through March 31. “The last thing I want to see is the auto industry disappear,” Obama said. Still, he added that any loans or assistance must be tied to restructuring of the companies. On foreign policy, Obama said he expects his national security team -- including Hillary Clinton, whom he’s designated as secretary of state, and Robert Gates, who will remain defense chief -- to come up with a “comprehensive strategy” for dealing with the wars in Iraq and Afghanistan and the threat of terrorism.
Obama said he still wants to refocus military strategy on Afghanistan from Iraq. The U.S. should proceed with plans to draw down U.S. forces in Iraq as “quickly as we can to maintain stability in Iraq.” “We have to have more effective military action” in Afghanistan, he said. That includes adding more U.S. troops, greater coordination with the North Atlantic Treaty Organization and more vigorous diplomacy in the region, he said.
On Iran, Obama said the U.S. must “ratchet up tough but direct diplomacy” that will make clear “that their development of nuclear weapons would be unacceptable.” Obama also announced he will name former Army Chief of Staff Eric Shinseki to head the U.S. Department of Veterans Affairs. “General Shinseki is exactly the right person who is going to be able to make sure that we honor our troops when they come home,” Obama said during the interview, which was recorded yesterday.
Shortly before the 2003 U.S. invasion of Iraq, Shinseki told Congress it would take several hundred thousand troops to stabilize the country after a war. The assessment was rejected by the Bush administration. “He was right,” Obama said.
U.S. Lawmakers Move Toward Agreement on Aiding Auto Companies
U.S. lawmakers worked to hammer out details of legislation to bail out ailing auto companies that could be presented to Congress as early as tomorrow, after reaching an agreement in principle with the Bush administration. The legislation is taking shape after House Speaker Nancy Pelosi dropped her opposition to drawing on $25 billion in funds from the Energy Department intended to help automakers develop more fuel-efficient vehicles, according to a Democratic aide who declined to be identified.
The chief executives of General Motors Corp. and Chrysler LLC testified at hearings this week that they need a combined $14 billion to keep operating through March 31. To qualify for aid, automakers must be prepared to make “difficult decisions” to ensure their long-term viability, Dana Perino, the White House spokeswoman, said in a statement yesterday. The Bush administration has held “constructive discussions” with members of Congress, Perino said. “We hope to continue to make progress toward assistance for the automakers” provided public money can be safeguarded.
“Taxpayers should not be asked to finance assistance for automakers without a strong likelihood that they will be paid back,” Perino said. A draft proposal from the White House calls for the appointment of a “financial viability adviser” in the Department of Commerce to work out terms of assistance to auto companies. The adviser would be authorized to provide short-term loans to keep car makers afloat during talks.
Senate Minority Leader Mitch McConnell, a Kentucky Republican, said yesterday in a statement: “I look forward to reviewing the legislation being drafted to address the difficulties in our auto markets. As we consider this legislation, our first priority must be to protect the hard- earned money of the American taxpayer.” Democratic leaders in Congress and the Bush administration have been at odds for weeks over the source of money to help the industry.
Pelosi, a California Democrat, had demanded that the Bush administration tap a $700 billion bailout fund for the financial industry. President George W. Bush and congressional Republicans refused, saying the money must come from the $25 billion in Energy Department funds. The breakthrough came when Pelosi said the Energy Department funds could be used to keep the automakers operating, provided the money would be “replenished in a matter of weeks.”
The White House proposal calls for “strong taxpayer protections” for agreements on longer-term financing for auto companies. These include options for ownership stakes for the government, limits on compensation of senior executives and a suspension of dividends. Senator Bob Corker, a Republican from Tennessee and a member of the Senate Banking, Housing, and Urban Affairs Committee, yesterday said he was disappointed with the draft of the plan being worked on between House Democrats and the White House.
“Based on the outline we’ve seen so far, we are disappointed,” Corker said in a statement. Corker proposes including conditions for bondholders and for the auto unions and asks for wage parity with automakers like Nissan. Pelosi said she expects to bring legislation to the floor next week to provide “short-term and limited assistance” to the industry. She said there would be strict oversight on the use of the funds. The House plans to return to work Dec. 9 and the Senate reconvenes tomorrow.
Pelosi spoke directly with White House Chief of Staff Josh Bolten two days ago in an effort to resolve the issue, the Democratic aide said. The support of the White House is crucial since it removes the threat of a veto and will likely persuade many Senate Republicans to end their opposition. Some senators had argued that the companies should survive or fail on their own.
Senator Richard Shelby, an Alabama Republican, said aiding the companies would be like “throwing money down the drain,” because U.S. automakers have proven they can’t compete in the marketplace. Senate Majority Leader Harry Reid, a Nevada Democrat, said Congress must prevent the auto industry’s collapse or “risk adding millions more Americans to the unemployment line.”
The Labor Department reported that last month’s job cuts brought the losses so far this year to 1.91 million. The unemployment rate rose to 6.7 percent, the highest level since 1993. GM’s Chief Executive Rick Wagoner, Chrysler’s Robert Nardelli and Ford Motor Co. CEO Alan Mulally told lawmakers during two days of testimony this week that they wanted federal aid. Wagoner said GM needs $10 billion and Chrysler seeks $4 billion to keep from running out of cash by early next year.
The agreement in principle is “a good beginning,” said Representative John Dingell, a Michigan Democrat. House Financial Services Chairman Barney Frank said he aims for legislation to keep the companies operating until March and include “mechanisms” to restructure the companies and the kinds of cars they produce.
Auto bailout includes ‘car czar' to make sure conditions met
A government “car czar” would oversee any bailout of U.S. auto makers under proposed terms being negotiated by the White House and Congress for extending up to $17-billion (U.S.) in emergency loans that mainly aim to spare General Motors Corp. and Chrysler LLC from bankruptcy. Congressional and other sources familiar with the plan for oversight by an official within the executive branch said on Saturday that conditions were not final as Democratic leaders and the White House tried to cut a deal.
White House spokeswoman Dana Perino told reporters the assistance would only be considered for companies “willing to make the difficult decisions across the scope of their businesses to be viable and competitive” and in cases where strong taxpayer protections could be guaranteed. Reeling from a plunge in sales they blame largely on the credit crunch and recession, once-vaunted GM, Chrysler LLC and Ford Motor Co sought $34-billion from Congress this week to forestall possible collapse.
There is wide concern that insolvency at one of the big manufacturers would devastate the deeply interconnected industry, including suppliers and dealers. “That's our view,” GM Chief Executive Rick Wagoner told Congress on Friday at a hearing. Ms. Perino added that discussions between the White House and leaders of both parties had been “constructive.”
Senate Banking Committee Chairman Christopher Dodd of Connecticut and House Financial Services Chairman Barney Frank of Massachusetts took the lead in writing legislation for majority Democrats. One leadership aide said both sides favoured creation of a “car czar” role within the executive branch to oversee funds and ensure conditions were met. Congressional aides and other sources said negotiators and the White House were trading draft proposals, and planned to work through the weekend.
The details were to supplement a framework struck late on Friday on the amount of aid – up to $17-billion – and the source of funding, an Energy Department loan program approved in September to help auto makers make more fuel-efficient cars. The bridge loans are designed to carry industry into spring. The impetus for the bailout breakthrough was an unexpectedly sharp downturn in U.S. unemployment in November, which made lawmakers fear thousands of U.S. auto industry workers could soon be added to the jobless rolls. Employers slashed more than 533,000 jobs last month, the highest monthly decline in 34 years.
GM, Ford and Chrysler employ nearly 250,000 people and say millions of other jobs depend on their survival. The Detroit Three are weighed down by overcapacity, high health care and retirement expenses and high operating costs, as well as eroding market share due to competition from healthier foreign rivals like Toyota Motor Corp. Their slide accelerated in the second half of this year when record high gas prices undercut sales of bread-and-butter sport utility vehicles and pickup trucks.
Chrysler Chief Executive Bob Nardelli told a congressional committee on Friday the company needed $4-billion to survive through March. His counterpart at GM, Rick Wagoner, said his company needed $10-billion over the same time frame. Ford wants a $9-billion line of credit that would only be tapped if its finances deteriorate more than expected in 2009. Chrysler is also seeking more cash for operations into 2009 and GM wants a credit line as well.
Senior lawmakers hope next week to present a proposal for votes in both the House of Representatives and the Senate where there has been widespread skepticism about a bailout. The companies have said they would accept strict terms as conditions for aid. GM and Chrysler said they would go so far as to reconsider a merger if it meant getting federal funds. Congress is not expected to demand such a step this time.
Republican Sen. Bob Corker of Tennessee, a member of the Banking Committee who said this week that industry needed to shrink to be viable, said he was disappointed in what he has seen of the plan so far. He has recommended sharp wage reductions and other tough medicine as conditions. Nevertheless, aid for GM is expected to kick off a restructuring process that will resemble a bankruptcy proceeding but under the oversight of appointed officials rather than a federal judge.
Depending on terms, the $2.5-billion of GM's market value could be wiped out for shareholders. The auto maker is working to slash $30-billion in debt and could offer equity to existing creditors, including the United Auto Workers. The union, which has lost over a third of its membership this decade, has signalled that it will accept deep concessions now in a bid to save GM and Chrysler.
Other conditions favoured by many lawmakers included limiting executive compensation, imposing strict loan repayment terms, and protections for taxpayers that might include an equity stake in a restructured company. House Speaker Nancy Pelosi, a California Democrat, said on Friday the Energy Department funds must be replenished within weeks of withdrawal. The Big Three are also appealing for billions of dollars from the governments of Canada and Ontario, where they have substantial assembly operations, parts suppliers and sales.
Bleak prospect for Detroit Three despite bail-out
America's Big Three car makers will struggle to stay afloat until 2015 - even if they win a $34bn (around £23bn) government bail-out, a leading auto-industry think-tank said. David Cole, the head of the Center for Automotive Research, believes that a combination of recession and manufacturing problems will make a rapid turnaround impossible.
'I think we are looking at about 2012 until the market improves, and then another three years for the car makers to take advantage of it to return to profit and pay the government back,' he said. The grim prediction comes as it emerges that Congress could vote as soon as this week on a short-term rescue package for the car makers. The deal is expected to involve extending short-term loans, paid for using up to $25bn of funds earmarked for encouraging more fuel-efficient vehicles.
GM and Chrysler had demanded immediate loans to forestall failure, while Ford was asking for a $9bn credit line to be tapped if needed. GM wanted $12bn in loans, with $4bn straight away, and a $6bn credit line. Chrysler was asking for $7bn. But Cole said even with such a large handout the car makers were almost powerless to persuade consumers to buy new cars. More than 533,000 jobs were axed across America in November - the biggest monthly rise in unemployment since 1974. 'This is not the type of environment in which you see consumers rushing out to buy new cars,' Cole said.
Meanwhile, Chrysler is understood to have retained a law firm that specialises in bankruptcy proceedings to begin a liquidation process if Congress does not agree to lend the money it needs to surviv
Krugman: US auto industry will probably disappear
Nobel economics prize winner Paul Krugman said Sunday that the beleaguered U.S. auto industry will likely disappear. "It will do so because of the geographical forces that me and my colleagues have discussed," the Princeton University professor and New York Times columnist told reporters in Stockholm. "It is no longer sustained by the current economy."Krugman won the 10 million kronor (US$1.4 million) Nobel Memorial Prize in economics for his work on international trade patterns. Some of his research on economic geography seeks to explain why production resources are concentrated in certain locations.
Speaking to reporters three days ahead of the Nobel Prize ceremony, Krugman said plans by U.S. lawmakers to bail out the Big Three automakers were a short-term solution, resulting from a "lack of willingness to accept the failure of a large industry in the midst of an economic crisis." Facing massive job losses, the White House and congressional Democrats are negotiating a deal to provide about $15 billion in loans to prevent the weakened U.S. auto industry from collapsing.
Fears of a million layoffs a month in corporate America
As many as a million American jobs could be lost every month by next spring as businesses struggle to raise capital in financial markets consumed by fear, according to a new analysis. November was the worst month in the US labour market since the oil crisis of 1974, as more than 500,000 US workers were laid off, according to official figures released on Friday.
But Graham Turner, of consultancy GFC Economics, says the rising cost of corporate debt is now flashing a red warning signal that far worse is to come over the next few months and job losses are heading for levels last seen in the 1930s Great Depression. Corporate bond yields have rocketed since the credit crisis began as investors flee risky assets in search of safe havens such as US Treasuries. That effectively means many firms are being forced to pay eye-watering interest rates to borrow funds.
Turner says when the gap between the yield on high-risk company bonds and US Treasuries widens sharply, unemployment tends to shoot up - and current credit conditions are pointing to a doubling in the pace of layoffs, to more than a million workers a month, by spring. 'The correlation is holding up all too well,' he said. 'It's very disconcerting.' He added that the pace of layoffs already happening in the US 'is indicative of panic'. During the 1970s oil crisis the panic was relatively short-lived, he says. 'But the worry now is that this will just roll on and on.' On Friday alone, embattled car firm General Motors, fund manager Legg Mason, and motor parts supplier Gentex announced plans to shed staff.
November's jobs figures were so much worse than analysts had expected that the Dow Jones share index actually rallied by 259 points, more than 3 per cent, as investors bet that Washington would have to launch a major new rescue package for the economy even before President-elect Barack Obama takes over the White House in January. The scale of the layoffs in the US, which pushed unemployment to 6.7 per cent, could also point towards a further deterioration in conditions in the UK: David Blanchflower, an independent member of the Bank of England's Monetary Policy Committee and labour market specialist, warned recently: 'What happens in the US tends to be repeated six to nine months later in Britain'.
David Frost, director-general of the British Chambers of Commerce, believes Britain's companies are gearing up for large-scale layoffs. 'There will be a huge raft of redundancies. I am sensing that talking to firms. The worry is that next year the job losses will be just horrendous. All sectors are taking the hit. In the middle of the year it was construction and estate agencies. Now it is services, the automotive industry, retailers. Firms are waiting for Christmas and if they can't see any improvement they will cut their payrolls.' Woolworths administrators made 450 of its office staff redundant on Friday, but the future of the 25,000 staff who work in its stores remains uncertain.
Read only one number out of this report (the only one you should bother with monthly) - U-6. Bottom line - 12.2%, up 1.1% since last month and 4.1% in the last 12 months, or a rise of 50% (!) This is all unemployed plus all "marginally attached" workers (those working part-time who would like a full-time job, as a percentage.
This, the "non-adjusted" number, is the actual unemployment rate as reported before the BLS (government) started dicking with the numbers, and best matches unemployment as reported in, oh, the 1930s. No, this isn't a Depression print - yet. But it sure as hell is a serious recession print, and remember kids, unemployment is a lagging indicator, being 6-12 months behind the actual economic condition.
That is, if and when the economy improves you will see unemployment continue to get worse for up to a year. The level of deterioration in these numbers is devastating, and given the CEO survey of the last couple of days, in which virtually everyone is expecting to lay people off (never mind the announced layoffs that haven't hit the numbers yet!) means we're going to see major further spikes upward into the New Year.
Most employers try very hard NOT to lay people off going into the holidays for obvious PR reasons. This year they're doing it anyway, which tells you everything you need to know about how bad it really is. Everyone and their brother is out this morning saying "the government must spend our way out of this." The problem is that the government doesn't have any money; the Chinese have it exactly right when they told us (reportedly) to cut the crap and cut the debt.
Of course cutting the debt means forcing the defaults that should have happened out into the open and making them happen, which means more short-term pain.
But - like it or not - it is the only way out of this mess. We can either do it fast and bad or we can keep trying to hide the truth and the pain will be both longer and more severe.
Grim Job Report Not Showing Full Picture
As bad as the headline numbers in Friday’s employment report were, they still made the job market look better than it really is The unemployment rate reached its highest point since 1993, and overall employment fell by more than a half million jobs. Yet that was just the beginning. Thanks to the vagaries of the way that the government’s best-known jobs statistics are calculated, they have overlooked many workers who have been deeply affected by the current recession.
The number of people out of the labor force — meaning that they were neither working nor looking for work and that the government did not consider them unemployed — jumped by 637,000 last month, the Labor Department said. The number of part-time workers who said they wanted full-time work — all counted as fully employed — rose by an additional 621,000.
Take these people into account, and the job market may be in its worst condition since the early 1980s. It is still deteriorating rapidly, too. Already, the share of men older than 20 with jobs was at its lowest point last month since 1983, and very close to the low point of the last 60 years. The share of women with jobs is lower than it was eight years ago, which never happened in previous decades.
Liz Perkins, 24 and the mother of four young children in Colorado Springs, began looking for work in October after she learned that her husband, James, was about to lose his job at a bed-making factory. But the jobs she found either did not pay enough to cover child care or required her to work overnight. “I can’t do overnight work with four children,” she said. She has since stopped looking for work. The family has paid its bills by dipping into its savings and borrowing money from relatives. But Ms. Perkins said that unless her husband found a job in the next three months, she feared the family would become homeless.
Even Wall Street economists, whose analysis usually comes shaded in rose, seemed taken aback by the report. Goldman Sachs called the new numbers “horrendous.” Others said “dreadful” and “almost indescribably terrible.” In a note to clients, Morgan Stanley economists wrote, “Quite simply, there was nothing good in this report.” HSBC forecasters said they now expected the Federal Reserve to reduce its benchmark interest rate all the way to zero.
Such language may sound out of step with a jobless rate that, despite its recent rise, remains at 6.7 percent; the rate exceeded 10 percent in the early 1980s. But over the last few decades, the jobless rate has become a significantly less useful measure of the country’s economic health.
That is because far more people than in the past fall into the gray area of the labor market — not having a job and not looking for one, but interested in working. This group includes many former factory workers who have been unable to find new work that pays nearly as well and are unwilling to accept a job that pays much less. Some get by with help from disability payments, while others rely on their spouses’ paychecks.
For much of the last year, the ranks of these labor force dropouts were not changing rapidly, said Thomas Nardone, a Labor Department economist who oversees the collection of the unemployment data. People who had lost their jobs generally began looking for new work. But that changed in November.
Much as many stock market investors threw in the towel in early October, and consumers quickly followed suit by cutting their spending, job seekers seemed to turn darkly pessimistic about the American economy in November. Unless the numbers turn out to have been a one-month blip, large numbers of people seem to have decided that a job search is, for now, futile. “It’s not only that there’s nothing out there,” said Lorena Garcia, an organizer in Denver for 9to5, National Association of Working Women, a group that helps low-wage women and women who are looking for work. “But it also costs money to job hunt.”
Just how bad is the labor market? Coming up with a measure that is comparable across decades is not easy. The unemployment rate has been made less meaningful by the long-term rise in dropouts from the labor force. The simple percentage of people without jobs — including retirees, stay-at-home parents and discouraged would-be job seekers — can also be misleading, though. It has dropped in recent decades mainly because of the influx of women into the work force, not because the job market is fundamentally healthier than it used to be. The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. (The official rate includes only people who told a government surveyor that they had looked in the last four weeks.)
This alternate measure rose to 12.5 percent in November. That is the highest level since the government began calculating the measure in 1994. Perhaps the best historical measure of the job market, however, is the one set by the market itself: pay. During the economic expansion that lasted from 2001 until December 2007, when the recession began, incomes for most households barely outpaced inflation. It was the weakest income growth in any expansion since World War II.
The one bit of good news in Friday’s jobs report, economists said, was that pay had not yet begun to fall sharply. Average weekly wages for rank-and-file workers, who make up about four-fifths of the work force, rose 2.8 percent over the last year, only slightly below inflation. But economists said those pay gains would begin to shrink next year, if not in the next few weeks, given the rapid drop in demand for workers. “Wage increases of this magnitude will be history very soon,” said Joshua Shapiro, an economist at MFR Incorporated, a research firm in New York.
Meltdown weakens NYC as global financial capital
For the hundreds of camera-toting tourists who visit Wall Street every day, the New York Stock Exchange presents an imposing sight. The building-sized American flag draped over the exchange's towering Corinthian columns. The sculptures on the facade that symbolize the prosperity of a capitalist nation. The stern-looking statue of George Washington across the street.
These icons of national pride mark Wall Street as both a site of business and a symbol of the risk-taking and financial success that have spurred American global dominance and helped shape this country's identity. But with the nation's top investment houses shuttered, sold or changing into staid commercial operations, doubts have emerged about whether the city that for generations has been known as the world's financial capital can retain that title -- or the daredevil swagger that has defined Wall Street for so long.
It is a transformation that some say was under way long before the meltdown of 2008. "It's going to be a long, slow process and take many years for us to really restore our leadership in the world," said Ron Chernow, who has written extensively on the history of Wall Street. "New York has been damaged, and some of it I think is permanent." First, Bear Stearns nearly collapsed and was bought by JPMorgan Chase in a deal backed by $29 billion in federal money. Then Lehman Brothers filed the biggest bankruptcy in U.S. history and the British bank Barclays PLC swept in to buy up key units of the firm. Goldman Sachs and Morgan Stanley opted to become commercial banks. And even Merrill Lynch & Co. Inc. -- long associated with Wall Street's iconic bull -- announced its sale to an out-of-town commercial bank, North Carolina-based Bank of America Corp. Citigroup has been crumbling day by day in the last week.
At the same time, places like London, Tokyo and Hong Kong have become global financial centers on a scale that some believe already rival New York. The New York Stock Exchange still far outweighs the London Stock Exchange -- with the value of shares traded at the NYSE in 2007 nearly triple the $10.33 trillion traded in London. However, the financial sway of cities such as London has been growing faster than New York's. From 1997 to 2007, the new capital raised yearly in New York dropped by nearly one-quarter -- while in London the figure almost quadrupled, according to the World Federation of Exchanges. Even the domestic market capitalization, or value of the market, has been growing faster in London than New York, the exchange federation says.
"In the short and medium term, the U.S. will still remain a very important financial center, and I think most likely the most important. But after the term of five years, I'm no more sure," said Lorenzo Gallai, economic statistician at the World Federation of Exchanges.
A loss of status in the world of finance could hurt the city on many levels. Money is stored here, higher-income jobs come here. This creates tax revenue and supports a higher quality of life, as businesses and cultural activities -- which themselves attract visitors -- spring up to support these workers, said Richard Sylla, a curator at the Museum of American Finance. He is also a professor of economics and financial history at the New York University Stern School of Business. Last year, 11 percent of the city's employees worked in the finance and insurance industries, but they made nearly 40 percent of the city's income.
The meltdown is expected to wipe out tens of thousands of those jobs. Even the top achievers in the financial field -- the people in pinstriped suits who live on adrenaline, bet big and reap even bigger rewards -- could be making less money. As the major investment banks change their focus following the crisis and evolve into commercial banks, they will be more constrained by government regulation, limiting both their risk-taking and potential profits. And the federal government's injection of hundreds of billions of dollars to bail out the banking industry also means that financial institutions will be forced to be more conservative in their investments, Chernow says. Taxpayers simply wouldn't stand for the kind of bold risk-taking that has defined Wall Street, he said. "When you think of Wall Street ... one has an image of these very freewheeling, razzle-dazzle, buccaneering kinds of firms," Chernow said. "That style of business is now history."
David Henderson knows all about this history. He works on the floor of the New York Stock Exchange and is a fifth-generation Wall Street worker whose great-great grandfather started the family tradition in the 1860s. Back then, London was the global financial capital. Although Wall Street traces its roots to the 1600s, it did not become the pre-eminent global financial center until after World War I.
Now Henderson wonders if he'll see that era end. "This wheeling and dealing atmosphere we've had going on for umpteen years, that's going to be more contained," he said. Others are not as ready to predict Wall Street's downfall, including Ted Weisberg, who has worked at the New York Stock Exchange for 40 years. "When you walk outside the New York Stock Exchange every day, there are thousands and thousands of tourists taking pictures of a building that they're not even allowed to get inside," Weisberg said. "They're not standing out in front of the London stock exchange ... they're not standing out in front of NASDAQ."
Some observers say New York has slowly been losing ground as the world capital for years. In 2006, Mayor Michael Bloomberg and Sen. Charles Schumer warned that New York risked being overtaken and they blamed what they said was a burdensome regulatory atmosphere. The New York City comptroller's chief economist, Frank Braconi, warned in October that the meltdown had "sped up the process of financial dispersion that was already under way," adding that "in coming years, New York will have to share the financial stage." It's not just other world capitals that could benefit.
"One thing New York did uniquely well was investment banking," Chernow said. "When they become commercial banks -- well, commercial banks can do very well in Charlotte, N.C.; Chicago, Ill.; or San Francisco, Calif. They don't need the New York ambience to flourish." However the crisis plays out, Wall Street still looms large to people around the world. Visiting Wall Street during a recent vacation, Dutch tourist Maryke Heyman said she wanted to see the NYSE because of all the turmoil in the market. "I don't know where it ends. Maybe it's not anymore the big place in the world," she said. Not long ago, she added, "It was happening here. This was No. 1."
Hong Kong job cuts so far are just the start
Just a year ago, conversations among executives and bankers in Hong Kong centred on the size of their bonuses after a booming 2007. Now, their biggest concerns are whether they will still have a job next year. As the global financial crisis spreads to Asia, Hong Kong is certainly not immune. Companies – from investment banks to fashion retailers – are already slashing jobs to cut costs, with many more reviewing their headcounts.
In the three months to the end of October, Hong Kong's jobless rate increased for the second consecutive month to 3.5 per cent, compared with 3.4 per cent in the July to September period. The figure is expected to continue to climb to about 4 per cent by end of this year, as the threats of redundancies become reality. Economists warned that unemployment could reach 5 per cent next year.
"This is just the beginning," says Irina Fan, senior economist at Hong Kong's Hang Seng Bank. "I think the situation is going to get worse in the coming months when the vacancy level starts to reflect the real impact of the turmoil," because there is usually a six- to nine-month time-lag between the economic situation and the job market. The government also said the labour statistics had yet "to reflect fully the impact of the global financial tsunami".
Still, Hong Kong has already witnessed a slew of job cuts and business closures since September, particularly in the retail, restaurant, manufacturing and financial sectors.
In the financial industry, where 150,000 jobs are estimated to have already been lost globally, large banks, including HSBC and Citigroup, have shed part of their international workforce, including hundreds of people in Hong Kong.
Retailers are not faring any better. In October, Krispy Kreme, the US doughnut chain, announced it was closing seven outlets in Hong Kong. This follows the closure of Tai Lin Radio Services, the city's third-largest electronics retail chain, and U-Right International, a clothing retailer. Meanwhile, other businesses have been put into provisional liquidation, leading to thousands of job losses, both in Hong Kong and across the border in southern China.
Export and trading companies, are the territory's biggest employers, and at the forefront of global economic problems. "Looking ahead, unemployment is expected to rise further in the near term, as the global financial turmoil and its contagion effects are felt," said the government. Hudson, the recruitment firm, finds in a survey that hiring expectations for this year's fourth quarter have fallen in all four markets polled: China, Hong Kong, Japan and Singapore.
Hong Kong has the lowest hiring expectations among the four and the steepest fall in expectations, from 42 per cent in the third quarter to 32 per cent this quarter – a five-year low. "Hong Kong's economy is driven by the banking and finance sectors, which are most affected by the financial turmoil. Hong Kong has been affected both actually and perceptually," says Mike Game, chief executive of Hudson Asia.
Headhunter Robert Walters, which publishes a job index tracking advertisement volumes for professional positions across main newspapers and online job boards every quarter, found that total job advertisements posted in Hong Kong in the third quarter was 8.5 per cent lower than the second quarter. While the decline is not unusual, as July and August are traditionally quieter periods when key decision-makers are on leave, it underlines the impact of the global crisis, as banks and financial institutions cut recruitment advertising spending to control costs.
Emma Charnock, regional director of Hays, the recruitment company, also says the number of jobs registered with the consultancy has fallen 20 per cent from six months ago, with the banking and finance industries suffering a 50 per cent drop. But she says there are still bright spots in the recruitment market, such as accountants with strong financial reporting and capital management experience, wealth management and private banking professionals, as well as Mandarin-speaking corporate and M&A lawyers.
"We are fairly optimistic. There are headcount freezes but some sectors are still hiring. We see no evidence that the market as a whole will stop hiring any time soon," says Ms Charnock. Falling demand for long-term staff, meanwhile, is creating a need for contract hiring. "There is a lot more emphasis on keeping headcounts as low as possible. Many companies now look for contract staff, be it hourly, daily or monthly," says Matthew Bennett, director at Robert Walters.
Contract hiring now accounts for 15 per cent of the company's monthly job placements, up from just 5 per cent last year. The firm is setting up a new division with two people to look after the growing business, which Mr Bennett says could increase to six to 10 next year. "There is always a need to fill vacant positions, but there are more concerns about taking long-term employees," says Mr Bennett. "The market needed this correction as it has injected a sense of realism. However, it is no means cataclysmic, growth will return."
Why Obama Must Go to China
As an investment banker and then as Chairman and Chief Executive of Goldman Sachs, Henry Paulson had extensive experience with the Middle Kingdom and developed strong relationships with top Chinese leaders.
As U.S. Treasury secretary over the last two and a half years he spent an enormous amount of his political capital trying to bring Washington and Beijing closer together, shuttling between the two cities twice a year, bringing together dozens of ministers from both countries, hammering away at such issues as currency relationships, trade openings, energy, climate change, aviation agreements, and food and product safety. Last week he co-chaired his last meeting of the U.S. China Strategic Economic Dialogue, which he established when he took office.
For all this effort, Paulson deserves credit on two scores: he kept a comprehensive and friendly exchange with Beijing going at a time when the Bush administration was distracted with Iraq, Iran and other issues in the Middle East; and he discouraged Congress from enacting retaliatory action against China's rising trade surplus with the United States. Yet progress with China was generally modest, and Paulson's efforts reveal that even a powerful and determined cabinet-level official, even one with such vast ties to Chinese officials, can do only so much.
In the years ahead, the United States must do better than that. Here's how to begin: Barack Obama's first overseas trip should be to China, and it should occur within a month after his inauguration on January 20. He should bring Secretary of State Hillary Clinton, Secretary of the Treasury Timothy Geithner, Secretary of Defense Robert Gates and his ambassador to Beijing. Such a trip would be a showstopper, breaking all precedents.
The majority of new U.S. presidents—including FDR, Eisenhower, Kennedy, Reagan and Clinton—have gone first to Canada, however briefly. George H. W. Bush went to Ottawa for six hours. (Carter went to Britain.) George W. Bush broke the mold by choosing Mexico, sending a message about change and the importance of Latin America to his administration. Obama could do the same for China.
In bringing his seniormost entourage, the president would be doing what no American president has ever done with any country: demonstrating that he will be personally overseeing the relationship with another nation. He would be showing that the deepening of friendships now trump American preoccupation with problem countries, in large part because we need close allies to solve the big challenges.
Obama said little about China during the presidential campaign, and so he need make no embarrassing policy U-turns. This is in clear contrast to Bill Clinton, who came into office having referred time and again to the "butchers of Beijing." It is also different from the hawkish stand of George W. Bush who before his first election refused to think of China as a potential partner and instead labeled it a "strategic competitor." Obama's clean slate would give him the latitude to build positive ties from the beginning.
Critics could say that an early trip would lack the necessary preparation of such diplomatic overtures. The National Security Council will not have done its extensive interagency studies, and the inevitable turf battles among State, Defense and Treasury will not have been resolved. But the trip would not be designed to negotiate or resolve specific issues. Instead, Obama would be setting the style and the tone of a new U.S. approach to China before the bureaucracy does it for him.
Naysayers might also complain that this is no time for the president to be traveling 13 time zones away when he should be at home tending to the economic meltdown or the crisis on the Indian subcontinent. But that misses the significance of China's overwhelming importance to U.S. domestic and international interests. With its $2 trillion of reserves and its central role in global trade and investment, China is critical to the resolution of the global economic and financial crisis that is enveloping the United States and the rest of the world, not to mention the subsequent recovery.
China's potential influence on Iran, North Korea, Pakistan, the United Nations and other international institutions make Beijing a key to the handling of virtually every major global political challenge we face. With its soaring industrialization and appetite for energy, there is no solution to the threat of climate change without China's central participation. At this delicate time in the history of capitalism, moreover, the path that China adopts—market orientation vs. heavy-handed state control—could well determine what system much of the emerging world will embrace. Obama campaigned on the promise of fundamental change. With one early trip to China, he could show he meant it.
U.S. Sees China Intent On Yuan Gaining Value
Treasury Secretary Henry M. Paulson Jr. said Friday that China remains committed to market reforms and to allowing its currency, the yuan, to appreciate in value even though it fell steeply this week.
The appreciation of the yuan has been one of the Bush administration's primary goals through the U.S.-China Strategic Economic Dialogue, an annual two-day economic summit that Paulson helped create in 2006. China has responded by allowing its currency to appreciate more than 20 percent since moving to more of a market-based exchange rate in July 2005. The currency's value is important to the United States partly as a market-opening tool, because a stronger yuan makes American goods cheaper in China, thus encouraging the Chinese to buy more of them.
"There will always be people in China that look at [Chinese exporters' current troubles] and blame it directly on the currency appreciation and seek to roll that back. But I think the Chinese understand how important currency reform is to balanced growth in China," Paulson told reporters at the end of the summit's latest round.
Exchange rates on the yuan recorded their largest drop in more than three years Monday. Assistant Finance Minister Zhu Guangyao sought to ease speculation that China planned to depreciate its currency further to prop up its export market. Zhu said Friday that market forces would continue to play a "primary role" in setting the yuan's value but that China would still aim to keep the yuan at a "reasonable" and "balanced" level.
Apart from currency discussion, the outcome from the meetings was wide-ranging, if modest: The countries announced they will offer $20 billion in financing for the export of their goods to emerging markets, a move billed as an important sign of cooperation toward helping the world's economies get through the current crisis.
Also, China will ease requirements on foreign banks to trade bonds on the Chinese interbank market, treating them now as they would treat local financial companies. The United States will support China and other "important emerging market economies" toward becoming members of the Financial Stability Forum, and U.S. and Chinese officials reached an agreement to help Chinese enterprises become more energy-efficient and more environmentally sound.
In an attempt to rebuild Chinese investor confidence in Wall Street, which has been especially marred by significant losses in that country's sovereign wealth fund investments, the United States "reaffirmed that it welcomes foreign investment, including in its financial sector," according to a statement released after the talks ended. The United States also committed to working toward fast-track processing of Chinese investment applications.
"The Chinese understand that the fact that there are flaws in the regulatory structure, that have become apparent as a result of this financial crisis, does not undercut the need for continuing opening up and reform," Paulson said. Chinese officials had admonished the United States on Thursday to get its financial house in order and "protect" Chinese investments there.
Throughout his two days in Beijing, Paulson continuously highlighted the success of American "engagement" with China through the talks, and he came across as at least as focused on justifying the value of the meetings as on answering questions about each day's specific accomplishments.
The future of the talks has been the subject of considerable speculation this week, since the incoming Obama administration has not announced whether or how it plans to continue the high-level dialogue. Representatives from both governments said they valued the forum but declined to discuss its future. "I believe that ideas that work generally don't die," Paulson told reporters.
Chinese President Hu Jintao met with Paulson on Friday afternoon and told him, "China and the United States should continue to step up their high-level dialogue mechanism for substantive cooperation and stronger bilateral relations," the official New China News Agency reported.
Paulson sought to play down American concerns about China's growing financial influence in the United States, particularly its position as the world's top holder of Treasury bills. "It's a fact that China is an investor in the U.S.," the Treasury secretary said. "But as I look around the world, I don't see any country with a stake so big that I consider it a threat."
China Blasts U.S. Economic Policy, Expresses Doubt in Financial System
China blasted U.S. economic policy yesterday (Thursday) at the Strategic Economic Dialogue, a two-day summit engineered to address long-term issues between the two countries. Chinese authorities have grown more fervent, and more explicit, with their criticism of the U.S. financial system over the past year, evidence of a shift in the balance of power between the nations.
"Over-consumption and a high reliance on credit is the cause of the U.S. financial crisis," said Zhou Xiaochuan, governor of the Chinese central bank. "As the largest and most important economy in the world, the U.S. should take the initiative to adjust its policies, raise its savings ratio appropriately and reduce its trade and fiscal deficits."
This kind of lecture was a deviation from past meetings, which were dominated by U.S. calls for China to better manage its fiscal policies. However, the global financial turmoil that has emanated from the collapsing U.S. housing market has left the United States without a pulpit on which to stand.
"One result of the crisis is that the U.S. no longer holds the high ground to lecture China on financial or macroeconomic policies," Eswar Prasad, a senior fellow at the Brookings Institution, told the Financial Times. "This may actually help turn their relationship into a more equal partnership with less posturing on both sides." Indeed, U.S. Treasury Secretary Henry Paulson, who in the past used summits like these to press Beijing to open its financial system and appreciate its currency, was noticeably more humble in representing the United States yesterday.
"International cooperation and coordination have been robust and we appreciate the responsible role China has played in the crisis," he said. Meanwhile, Wang Qishan, vice premier and leader of the Chinese delegation called on the United States to "take the necessary measures to stabilize the economy and financial markets as well as guarantee the safety of China’s assets and investments in the U.S."
Wang’s remarks followed those of Lou Jiwei, chairman of China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), who said Wednesday that his firm lacks the confidence to invest in the United States, particularly U.S. financial institutions.
"Right now we don’t have the courage to invest in financial institutions because we don’t know what problems we will put ourselves into," Lou said at a conference in Hong Kong. "My confidence should come from government policies. But if they are changing every week, how can you expect that to make me confident?"
CIC has lost about $6 billion of the $8 billion it invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. More importantly, however, China last month overtook Japan as the largest holder of U.S. government debt. And according to the Financial Times, officials have privately admitted that they are concerned about the value of the holdings.
Concerned with China’s overexposure to the United States, central bank governor Zhou said policymakers should no only address the country’s slowing economy, but "restructure the development model" and prepare "for a worst-case scenario," the FT reported. However, Chinese officials also say that any large-scale unwinding of U.S. holdings would be counterproductive, as the value of U.S. bonds and the dollar would subsequently plummet.
OC: Good luck with the following venture. It's hard to believe that suddenly there will be huge demand from the Chinese to buy property in the US. The Chinese, with the recent Great Leap Floorward, have undoubtedly lost fortunes in their own deflating property and stock market bubbles and have less means now to buy any more depreciating assets.
Chinese property hunters to raid US
Chinese bargain hunters are preparing to descend on American cities such as Los Angeles and San Francisco, where homeowners have suffered some of the steepest price falls in the US. SouFun, the biggest real estate website in China, is organising a trip next month to look at properties in California and possibly Nevada. Liu Jian, the company's chief operating officer, said about 300 people had expressed interest in the idea in the three days since it was advertised, though the company would take only a small group on the first trip.
"Given the problems in the Chinese market now, many people have been asking us about taking a look at overseas markets, especially the US," he said. The trip would focus on California, particularly San Francisco and Los Angeles, where big Chinese populations might make his clients more comfortable, but might also include Nevada.
Restrictions on taking money out of China would be an obstacle, he added, but some potential investors had an overseas connection such as a foreign passport that would make it easier. Property professionals say there is considerable interest among wealthy Chinese, who often hold a high proportion of assets in property, in investing abroad. "The US market absolutely terrifies me," said one Shanghai-based real estate executive. "However, there are plenty of people here who think this a great time for bottom-fishing."
There is opposition in China to SouFun's plan. "Unless these people need a house in the US to live in, this is senseless," said Yi Xianrong, a real estate expert at the Chinese Academy of Social Sciences. "A few years ago there was a lot of talk about investing in German real estate but most of the people who did so lost a lot of money."
SouFun, owned by Australia's Telstra, provides information on property markets in more than 100 cities and has more than 40m registered users.
Bank of England stands by with new shock therapy
Britain's economy is now in intensive care. Thousands of jobs have been lost in the past week alone, and firms across the economy are warning that business has evaporated. With much of the financial system already on life support, Mervyn King and Alistair Darling are preparing to resort to ever more dramatic and risky remedies.
In the past 12 months, the government and the Bank of England have repeatedly been forced to think the unthinkable.
Darling has reluctantly thrown moral hazard to the wind by nationalising battered banks, and announcing a £20bn package of tax cuts. At the same time, the Bank of England has driven interest rates down by 3.75 percentage points from their peak in summer of 2007, and poured cash into the system by swapping toxic mortgage-backed assets for more liquid government bonds. Yet the news from the patient has continued to get worse, and with interest rates now at just 2 per cent, Bank governor Mervyn King and his colleagues are getting closer to resorting to alternative methods.
King's staff, like number-crunchers in many other crisis-hit countries, are busily drawing up contingency plans for what to do when they have run out of rate-cutting medicine. Many analysts believe the Bank may soon decide to buy up billions of pounds worth of government bonds, to drive down long-term interest rates across the economy, and kick-start flat-lining demand. Central banks' great fear is that as the economy deteriorates, interest rates are cut close to zero, and inflation gets very low or negative, the economy slides into what is known as a 'liquidity trap': no one feels like spending, or making new investments, everyone hangs onto their cash, and the economy is driven ever further into decline.
That's where Japan got stuck during its 'lost decade' of the 1990s - in a topsy-turvy world in which prices were plunging, anxious consumers were wary about spending money, and recession and deflation went hand in hand. Japan finally managed to escape by resorting to what economists call 'quantitative easing', roughly equivalent in everyday language to letting rip with the printing presses, and spraying free money into the economy. Economist Larry Summers, who was recently announced as President-elect Obama's chief economic adviser, describes a liquidity trap as having 'a sort of Alice-Through-the-Looking-Glass quality'.
'Virtues like saving, or a central bank known to be strongly committed to price stability, become vices: to get out of the trap, a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and the central bank aren't as serious and austere as they seem.' Fear and uncertainty themselves can have a powerful impact on economies - and blunt the effect of policy action. Nick Bloom, an economist at Stanford University, has carried out research on 16 'uncertainty shocks', and found that they tend to paralyse decision-makers.
'When uncertainty went up, firms became incredibly cautious: they didn't react to either good or bad news,' he says. 'You can be cutting interest rates, and suddenly, your lever's not connected.' Within the Bank of England, there is a rising fear that with rates now at 2 per cent, the monetary policy committee is pulling down hard on the main lever it has at its disposal, but little is happening at the other end. Bloom says policy measures in periods of high uncertainty are also extremely risky - because once confidence flows back, there can be a sudden surge in demand as people look up and realise that borrowing looks appealingly cheap: and that can unleash inflation. 'It's as if you have a medicine that only works when the patient recovers,' he says.
The Bank's job is being made even harder by the fact that the ineffectiveness of monetary policy is being compounded by the parlous state of the banking system, which is preventing the benefits of rate cuts from being passed on. For homeowners on tracker mortgages, the latest rate cut was a welcome early Christmas present; but for many businesses, and hopeful first-time buyers, the level of rates is almost meaningless, as they struggle to get a loan at all.
Banks that have seen their balance sheets ravaged over the past 12 months understandably have little enthusiasm for making risky new loans; but King and his colleagues are alarmed about the potential impact of a credit shortage. As cash-flow problems mount among businesses, there is a risk of widespread insolvencies and mass layoffs. That could create a nasty feedback loop, as more borrowers default on loans, inflicting yet more damage on banks' balance sheets.
King is keenly hoping the weaker pound will help the economy to recover strongly once the global downturn is over, as world trade picks up; but if scores of firms have gone bust through lack of funds, there will be fewer exporters to take advantage of rising demand, and recovery could be slow and sickly. As Geoff Dicks, chief UK economist at RBS, puts it, 'what is right for one bank is wrong for the economy - which will make it wrong for all banks. So we need to short circuit the process and keep the finance flowing to the corporate sector... unorthodox policies may be required.'
That idea lies behind Darling and Gordon Brown's furious insistence that the bailed-out banks must pass on the cut in base rates to mortgage borrowers. So far, the Treasury has stuck to moral persuasion to tackle the banks' reluctance to lend, hauling in a shifting constellation of bank bosses for high pressure breakfasts, and using RBS, the bank in which the government now owns a majority stake, to set an example.
RBS has promised to freeze business overdraft rates and give cash-strapped homeowners six months' grace before moving to repossess their homes, and its rivals are being strongly urged to follow suit. But King is so concerned about the failure of banks to maintain the supply of credit, that he has raised the spectre of full-blown nationalisation. Even if every dose of monetary policy medicine is passed on to ordinary firms and families, once rates get close to nought, it may be time for a fresh approach - which is why King and his colleagues are beginning to weigh up quantitative easing.
In the monetary policy committee's statement announcing last week's one percentage point cut in interest rates, it warned that 'it was unlikely that a normal volume of lending would be restored without further measures'. Almost immediately, City analysts began feverishly speculating about what such 'further measures' might be. 'It's quite encouraging,' said Simon Ward of New Star. 'The Federal Reserve has taken some quite radical measures, so hopefully it will be something along those lines.'
The Federal Reserve is already buying all kinds of assets, including mortgage-backed bonds, in an effort to drive down borrowing costs right across the economy. Its chairman Ben Bernanke has suggested that it could also start buying government debt. Russell Jones, chief fixed income strategist at RBC Capital Markets, says where the US leads, the UK will tend to follow. 'We're in the same place: if you look at the problems of the economy as a whole, we're pretty much in the same situation as the US. The deleveraging process seems to be as acute here as there. 'Orthodox monetary policy is not working terribly well at the moment - quantitative easing is going to become a consistent theme, that's very clear. Central banks are asking: what else have we got up our sleeves?'
Fortunately, King already has a blueprint at his disposal. In the spring of 2003, in its Quarterly Bulletin, the Bank itself published an analysis of what other measures policymakers could take, once official interest rates hit zero. When the central bank is effectively handing out money for free, and the economy is still flat on the floor, it's time to get creative. Apart from concluding that zero rates are 'highly unlikely', in the UK, the Bank examined a series of options, including: buying illiquid assets, such as hard-to-sell bonds, to pump more cash into the economy; deliberately devaluing the pound (though with sterling sharply down this year already, that would look like overkill); and using central bank funds to pay for tax cuts.
Any of these ideas could be taken up by the MPC in the months ahead; but with the issuance of government debt due to explode over the next few years, as Darling pays for his fiscal stimulus package, buying government bonds, or gilts, as they are known, seems the most obvious solution. That would be a radical, risky measure, threatening inflation further down the line; but these are not normal times. As the US economy lurches deeper into recession, the UK's prospects look increasingly grim. King may soon decide it is time to resort to the monetary equivalent of shock treatment.
Curiouser and Curiouser
The jargon you will need to navigate through the counter-intuitive, Alice Through the Looking Glass world of very low interest rates ...
• Zirp - a Zero Interest Rate Policy, adopted by central banks desperate to stabilise their economies. US rates are already down to 1 per cent; here they are well on the way.
• Liquidity trap - the nasty vicious circle that can occur in a deep downturn, when interest rates get close to zero: most investments promise little return, and consumers and businesses have an incentive to hang on to cash; but this is the worst thing for the economy as a whole, driving it down further.
• Quantitative easing - the next step for policymakers, known in layman's terms as 'printing money': central banks buy assets, including government bonds, for example, to drive down the cost of borrowing and pour cash into the economy.
• Helicopter money - arch-monetarist Milton Friedman's example of a dramatic method of 'quantitative easing': dropping bundles of cash from the sky.
• Stag-deflation - not a violent cull of the deer population, but a painful combination of recession and falling prices across the economy.
• Industrial policy - state intervention to help struggling manufacturers has been woefully unfashionable since the 1970s, but Lord Mandelson is expected to use a speech next week to announce that the government will help to 'restructure' key sectors as recession bites.
Bernanke's bets get bigger to keep America moving
The Fed's policy of 'easing' is breaking new ground. With America's recession one year old - according to the official panel of experts at the National Bureau of Economic Research in Massachusetts, who decide these matters retrospectively - and conventional economic medicine so far producing little response from the patient, policymakers are turning to more desperate measures. As the Federal Reserve spends billions of dollars of public money on one rescue attempt after another, much of the US financial system is now effectively on life-support.
Washington has stepped in repeatedly in the past 12 months with injections of cash. Each time the financial markets have responded with enthusiasm; each time, exuberance has rapidly given way to despair. Now, Fed chairman Ben Bernanke has said he is considering buying up Treasury bills, the final step to what economists call 'quantitative easing'. 'Since the Fed chairman spoke, government bond markets have been on fire,' says Stephen Lewis of Monument Securities. Interest rates have already been cut to just 1 per cent, and once they hit zero the Fed will have to resort to unconventional measures. By buying up Treasuries from investors, it can channel cash out into the financial markets, in a bid to ensure that the funds keep flowing to firms and consumers beyond.
US policy has moved a long way in 12 months. Early in the year, much of the public funding came in direct support for the hardest-hit institutions. But as the months went by, policymakers reached for their chequebook with increasing frequency. Bernanke is an avid student of the Great Depression and the policy failures that helped turn the Great Crash of 1929 into a decade-long slump.
Wall Street wags nicknamed him 'Helicopter Ben' after a speech in 2002 revisiting Milton Friedman's proposal that once a central bank has slashed rates to zero, desperate measures may be necessary to pour cash into the economy - and dropping banknotes from a helicopter would be as good a method as any. Bernanke may not quite be dumping cash from the sky, but bit by bit the Fed has effectively nationalised one part of the financial system after another.
The bank had already been lending directly to Wall Street; but in early October, as US corporates began to complain that they were finding it increasingly costly to borrow, it announced that it would step in to buy 'commercial paper' - the loans many use to fund their day-to-day operations. In November, it made a much more radical announcement, saying it would use $600bn to buy mortgage-backed securities from the troubled state-backed loan guarantors Fannie Mae and Freddie Mac. This effectively superseded Paulson's Troubled Assets Recovery Program (Tarp), which was meant to buy up the near-worthless mortgage-backed securities many banks found themselves stuck with and hold them until the market returned to normal.
Quantitative easing is a gamble. Consumers and firms may be sceptical about spending in such a chilly economic climate. And even if it kickstarts demand, it will result in a vast and rising budget deficit, and could undermine overseas confidence in US assets. There is also a risk of unleashing inflation. That Bernanke is willing to take that risk powerfully underlines the dire state of America's economy.
Rate cuts fail to convince investors
Central banks delivered big rate cuts this week as policy makers sought to shore up a slumping global economy and ward off the threat of deflation. But lower borrowing costs did not prevent leading equity markets from recording big weekly losses, while government bond yields fell to fresh multi-decade lows on both sides of the Atlantic. Credit spreads widened to distressed levels, while oil and base metal prices slumped further. A week of poor global economic reports was crowned by the news on Friday that US job losses soared to 533,000 last month, the biggest monthly drop since 1974. That took losses to 1.2m over the past three months in the US alone and it bodes badly for the global economy, led by Europe, where conditions are worsening.
“The slowdown in the global economy has clearly been magnified by the acceleration of the financial shock in September and October,” said Chris Watling, chief executive at Longview Economics. “Global macroeconomic data have weakened markedly in recent months, while banks, in order to protect their capital bases, continue to pull back on the provision of credit.” The dire US jobs data are expected to accelerate the implementation of fiscal stimulus plans and lead to some form of bailout for the US domestic car makers. “Congress will do whatever it takes to stop job losses and they will pass a big stimulus package,” said John Ryding, chief economist at RDQ Economics.
Earlier in the week investors were unsettled by news that manufacturing activity in the eurozone, UK and Australia, Russia and China plumbed record low levels last month. India’s manufacturing industry contracted for the first time in 3½ years, while activity in the US shrank to its weakest rate since 1982. Against the backdrop of collapsing growth and the threat of deflation central banks in Australia, New Zealand, Sweden, the UK and Europe aggressively eased policy. Meanwhile, the US Federal Reserve opened the door to outright purchases of long term government bonds. Investors expect the cost of overnight lending will effectively fall to zero per cent in the coming months as unconventional monetary easing is pursued.
Global equities pared their double-digit gains from the last week of November. The FTSE Eurofirst 300 index posted a loss of 7.9 per cent, while in London the FTSE 100 dropped 5.6 per cent. Tokyo’s market fell 7 per cent for the week. But in New York, the S&P 500 staged a last-minute rebound on Friday, trimming its weekly loss to a decline of 2.25 per cent.
Among emerging markets, China was a rare gainer, rising 7.9 per cent, while India lost 1.4 per cent. Brazil fell 3.4 per cent, while Russia tumbled 8 per cent. The spread of emerging market bond yields over US Treasuries rose 37 basis points to 755bp for the week. Rate cuts and the growing fear of deflation boosted the appeal of government bonds and sent long dated yields in Europe and the UK to their lowest levels in more than 50 years. The yield on the 10-year Bund fell below 3 per cent after starting the week at 3.25 per cent. In the UK, 10-year Gilts dropped to 3.32 per cent from 3.77 per cent. The US 10-year Treasury fell to a 53-year low of 2.52 per cent after the jobs number yesterday, before it backed up to 2.70 per cent, down 26bps since Monday.
Rate cuts dictated big moves in currency trading. On Thursday sterling fell to a 6½-year low of $1.4477 against the dollar, set a record low against the euro and over the week lost nearly 7 per cent against the yen. Also sparking concern was the Chinese renminbi, which posted its biggest one-day fall against the dollar on record on Monday. That prompted speculation Beijing was sanctioning a weaker currency in order to support economic growth.
The Japanese yen remained the main beneficiary of risk aversion and falling bond yields in its main rivals. “I still see the yen as the default beneficiary of ongoing risk aversion, having less of the baggage associated with fears over monetisation currently encumbering long-term views on the dollar,” said Alan Ruskin, strategist at RBS Greenwich Capital.
In credit, Europe’s iTraxx Crossover index of companies with mainly sub-investment grade ratings broke above 1,100 basis points for the first time. The investment grade iTraxx Europe index hit a record 219p, while its US counterpart – the CDX North America index rose to a record of 289bp on Friday. The big story in commodities was the tumble in US oil prices to below $41 a barrel. Crude has now fallen more than $100 from its peak above $147 a barrel in July and is on track for its worst weekly decline since 1991. Worries about a deep global recession pressured crude and sent base metals to multi-year lows. Spot gold tumbled 7 per cent below $760 an ounce. Copper on Friday sank to $3,000.
World Bank warns Gaza banks may collapse
The World Bank and International Monetary Fund warned Saturday that Gaza's severe cash shortage may cause local banks to collapse. It was the most serious warning yet regarding the consequences of Israel's continued refusal to allow new money infusions into banks in the Palestinian territory.Israel has not allowed money to enter Gaza since October, barring Palestinian banks from transferring cash to their Gaza branches. It is part of a larger blockade imposed on Gaza in response to Palestinian rocket attacks from the territory controlled by the Islamic militant group Hamas.
"The liquidity crisis could lead to the collapse of the commercial banking system in Gaza," the World Bank said in a statement. The International Monetary Fund offered a similar prediction. The cash shortage means around 77,000 Palestinian civil servants will not be able to withdraw their salaries before a Muslim holiday early next week. The cash shortage also forced the United Nations in November to halt cash payments to thousands of Gaza's poorest residents. Gaza banks closed on Thursday — payday for civil servants — because of cash shortages. Bank officials have not said if they will open Monday, their next working day.
Monetary officials estimate Gaza banks hold less than a quarter of the cash needed to pay wages. The Israeli shekel is Gaza's main currency. Jihad al-Wazir, head of the Palestinian Monetary Authority in the West Bank, said Gaza's banks have around 47 million shekels (about $12 million) between them. They need 220 million shekels ($54 million) to pay salaries, he said. Al-Wazir said salaries may be paid in a mix of currencies to bypass the shekel shortage.
President Mahmoud Abbas, Israel's partner in peace talks, lost control of Gaza to Hamas in June 2007. Based in the West Bank, he still claims authority over Gaza and has continued to pay tens of thousands of civil servants there each month through the banking system.
The cash crunch appears to be hitting Abbas much harder than Hamas, because the militant group pays 20,000 of its own employees with cash it smuggles into Gaza from Egypt. Their employees received December salaries. Israel imposed the blockade on Gaza after Hamas took power last year, only allowing in humanitarian aid, fuel and some commercial goods. The blockade tightened in early November after an Israel incursion into Gaza set off Palestinian rocket fire at nearby Jewish communities.
Israel says despite the blockade, it wont allow a humanitarian crisis to develop. However, Israel's Defense Ministry, which signs off on goods entering Gaza, says cash supplies are not vital humanitarian aid. Ministry officials were not immediately available for comment Saturday. But they have repeatedly said the cash will start flowing when the rocket fire stops.
Pension Funds Take Another Pounding
If there's any doubt America faces its gravest financial crisis in decades, consider this sobering evidence: Pension plans for some of the 1,500 largest U.S. companies have lost about $280 billion so far this year.
In November alone, pension plans lost about $130 billion, marking the second consecutive month of record declines, according to a new report from Mercer, the financial consulting firm. The companies Mercer studied — those in the Standard & Poor's 1,500 index, which includes household names like 3M and Coca Cola — reported their pension plans ended 2007 with a $60 billion surplus. So the swiftness of this year's decline is astonishing. (Read "Is It OK to Pray for Your 401(k)?")
Mercer analysts attribute the developments mainly to the collapse of the equity market, in which many U.S. pension plans are invested. But pension funds are being hit on the other side of their balance sheet as well, as declining yields on Treasury bonds swell the size of their pension fund liabilities.
The pension crisis will likely aggravate an already bleak financial outlook for many companies, and may stimulate a debate about retirement policy in this country. Already, President-elect Barack Obama has moved swiftly to address the worsening economic and financial crisis. Now, a key question is how, or if, President-elect Obama delivers on his campaign proposal to require companies that don't offer employee retirement plans to enroll workers in a direct-deposit IRA account, which may help many low- and middle-income people participate in retirement programs for the first time.
"You can't have companies going from a position of broad stability 12 months ago to having a hole of $280 billion in their pension plans," says Adrian Hartshorn, a lead analyst on the Mercer report. He added: "People are hurting because of the stock market, and there needs to be a national debate around how people save, in the long-term, for retirement."
In the last year, the funded status of the pension plans Mercer analyzed has fallen from an estimated 104% (a surplus) to 80% (a deficit). Now, companies are scrambling to determine how to make up the difference. There are two key ways to do that, with the easiest being a stock market recovery. But there's no telling when that will happen.
Ultimately, many companies will have to boost contributions to their pension plans to recover from this year's loss. How that occurs is partly governed by the Pension Protection Act. But experts say some companies will lobby for Congress to relax some aspects of the act, arguing that being forced to significantly increase contributions to pension plans may force them to file for bankruptcy. When President Bush signed the Pension Protection Act in 2006, companies won cost-savings concessions, such as the ability to use a higher interest rate in computing lump sump pension payouts. But the savings from those concessions have been swamped by stock market losses.
Barring relief from Washington, pension plan sponsors may revert to benefit cuts. Here's how that might work: A typical pension plan formula is based on an individual's ending salary, multiplied by a variable, such as .015, and then multiplied by the number of years of service. So an employee earning $150,000 a year, at age 60, with 30 years of service, would have the following formula: $150,000 x .015 x 30, which equals $67,500 annually in pension payments for the rest of her life. To reduce costs, a company can reduce that middle variable from, say, 0.15, to 0.1. That doesn't change what a 20-year employee has already earned in a defined benefit plan, but it would reduce the growth of his or her pension during the remaining years with that employer.
Some companies may eliminate, or freeze, pension plans altogether. On Wednesday, for instance, AK Steel, a leading automotive and appliance industry supplier based in West Chester, Ohio, announced it would freeze defined benefit pensions plans for salaried employees and replace with a defined contribution benefit plan that includes about 3% of a worker's annual salary. "Unfortunately, this extraordinary global economic downturn requires significant and rapid measures to reduce our costs in light of sharply lower order levels from our customers," James L. Wainscott, AK Steel's CEO, said in a statement.
It's worth noting that barely half of the companies that Mercer examined reported sponsoring a so-called defined pension plan: Simply put, it's becoming a relic, as companies scale back retirement options to shave one of the most expensive employee costs
Hamish Douglass and Alan Oster join Inside Business
ALAN KOHLER, PRESENTER: It's been a year of wealth destruction and chaos in which the pillars of capitalism have been rocked by the culmination of greed, excess and poor regulation. What exactly happened? And where's the global financial crisis heading from here? To get an assessment I spoke to Hamish Douglass of the global fund manager Magellan Financial Group, and the Chief Economist at the NAB, Alan Oster.
Hamish, perhaps I could just start with you. Clearly the global economy turned sharply in September, October. I mean it's getting worse now, but can you just take us through briefly what happened in September, October to cause that to happen?
HAMISH DOUGLASS, MAGELLAN FINANCIAL GROUP: Well you're right, Alan, there has been a very dramatic change in sentiment around the world. It really happened around 15th September with the collapse of Lehman Brothers, a large investment bank in the United States. And I don't think people have quite realised that what happened with the collapse of Lehman Brothers was a virtual meltdown of the world's banking system and why this happened wasn't really directly related to the risk that the regulators were concerned about and that was about the counterparty risk with the huge derivatives positions that these investment banks held. They believe that it would shock the system, that the system could survive if they...
KOHLER: So it was something else, was it?
DOUGLASS: It actually was something else Alan. What happened three days later, there was a very large money market fund in the United States, the Primary Reserve Fund, it's actually the largest money market fund, it's the oldest money market fund in the US. And believe it or not they held $800 million worth of Lehman Brothers senior debt and commercial paper. And on that Wednesday this made an announcement they held this paper and they were going to write down the net asset value of their money market fund below one dollar.
KOHLER: And that was because of Lehman Brothers?
DOUGLASS: That was because of Lehman Brothers. This was the unintended consequences of the collapse. What then happened, they made a secondary part of the announcement, they were going to freeze redemptions in that fund. Well this set off a whole set of dominos around the world.
KOHLER: And so that's what caused, that's what sparked the credit squeeze?
DOUGLASS: In late September early October because what happens is banks provide backup, they provide backup funding to all the commercial paper ring, they give credit lines to people who are issuing commercial paper and there are about $5 trillion of commercial paper backup credit facilities issued by banks around the world. These are normally have never been drawn on in any instance. What happened when this market completely froze, there was a distinct possibility over a matter of literally days and weeks, you could've found the world's banking system having to stump up $5 trillion US to fund the commercial paper back up lines around the world.
KOHLER: And how close to a meltdown was it?
DOUGLASS: I think we were very close to a meltdown because the world's banking system actually doesn't have $5 trillion US to be called on in a matter of weeks. So what happened is the smart investors, the wholesale investors started putting their deposits out of banks and putting them into government treasuries and bonds around the world. And we saw the Government treasury yields come in very dramatically. The insurance on bank debt around the world known as credit default swap started escalating, share prices started falling very rapidly in financials in particular were falling rapidly, and eventually it started to get into the mainstream press and retail investors and retail investors started taking their deposits out of bank. We were starting to see a collapse of the world's banking system. Well, this absolutely snapped with the politicians and the central banks around the world. They suddenly got a wakeup call like they had never seen before. And we even in Australia were in a position where the government was saying Australia was in an extremely strong financial position, within a matter of days and weeks completely changing the rhetoric.
KOHLER: Alan Oster, we are currently getting or recently getting data for the September quarter, in particular on the Australian economy. GDP growth, September quarter 0.1. Right? So close to recession.
But all this that took place was actually the end of the September quarter. We're now December, do you think as a result of what Hamish has just been talking about, do you think that the December quarter number for Australian GDP growth will be negative?
ALAN OSTER, CHIEF ECONOMIST, NAB: I think it probably will be. What we've seen right around the globe, Hamish has just explained what was happening in the markets, was we were seeing confidence in the business sector absolutely plummeting. And then you were seeing it actually having an impact on the real economy as well.
So yes, confidence was really bad but so was the real economy. And you look at our business survey for October, for example, and the confidence levels were worse than at the bottom of the 1990 recession which is ridiculous in terms of what was happening but it has real impacts. And then you look at forward orders and you have to go back to '92 to see that. So whatever happened what you know in the real economy, right around the globe not just in Australia was there was a sudden clunk. And so you had almost garden variety recessions going on in most of the major developed world and suddenly it looked a lot more serious. And so everybody's revising down their growth numbers for the next year and in the US we're now talking about minus one for next year which takes you back worse than 1990.
KOHLER: For the whole of next year?
OSTER: For the whole of next year. For Europe they're talking much the same, which would be the worst recession in Europe since World War Two. You look at non Japan Asia, which outside of China, which are always growing really strongly and are very closely related to trade flows, from four per cent growth next year we think they'll struggle to do more than say, one. So the global economy's going to do well to get more than 1.75 per cent.
KOHLER: We're talking a global recession right?
OSTER: We're talking a global recession.
KOHLER: One big difference between this downturn and virtually every other attempt to me is that the others were either caused by monetary policy and fiscal policy because the governments were either incompetent or they were trying to control the inflation. And this time around the governments of the world and the central banks are in a co-ordinated sense doing whatever they can to alleviate it.
Do you think that will actually work?
OSTER: It won't work in terms of the major economies around the world, so the US, those sort of economies, the Europe's, they're basically significantly already gone. In Australia I think what you can probably expect is further aggressive rate cuts, a lot more spending from the government and you're probably get out of it in a mild sort of slowdown in terms of next year.
KOHLER: Yes well I mean I'm just wondering about interest rates around the world, in fact....
OSTER: Yeah they're going quickly to the bottom.
KOHLER: Well I saw a comment the other day that said Europe, UK, US, and Japan interest rates are all going to zero, they might as well just do it now straight away.
OSTER: One of the problems I have with using interest rates in the current environment is I'm not sure it's going to work that much because people are, forget about the economics, people are scared and when you're scared what you do if you get some money and you have a lot of debt is you pay off the mortgage or stick it in the bank.
KOHLER: Well that's what people are saying.
OSTER: You don't get that.
KOHLER: That's what's being said about this government's fiscal stimulus which has now started to arrive in people's pockets.
OSTER: Yes to some extent. The only nice thing you can say is that it's targeted at the bottom end of the income distribution and the pensioners and so they're more likely to spend than a general tax cut. But at the end of the day what you need to do is the Government to actually spend within the economy, to employ people.
What you'd like them to do would basically as they're employing these people do something that essentially increases productivity in the medium term. So that would be good, but in the meantime, if you just throw money at people, I think most of it is not going to get spent in the current circumstances.
KOHLER: So much of Australia's prospects rely on commodities, China, the whole kind of terms of trade boom that we've had, Hamish.
How do you see the prospect for that?
DOUGLASS: You have to put the mining sector and China into perspective of how important it is for our economy. The mining sector, depending on which terms of trade you measure it off is any between 7.5 and 10 per cent of GDP. And people assume that China is actually the sole destination of our commodity exports. It's not the sole destination. It is a major part for the iron ore market and parts of the coal market but there is huge elements of the world as has just said, are all going into recession will have negative growth figures and that is a huge component of our mining exports.
So I think over the next 18 or 24 months, it is going to be a tough place for our commodity exporters, and I don't think we're at the bottom of that price cycle. We're certainly not at the bottom of the price cycle.
KOHLER: Just finally and briefly what's your thinking about the stock market from here?
DOUGLASS: On the stock market I think over the next six to 12 months we're going to see a lot of volatility, unfortunately. There will be some more financial failures, there will be some hedge funds who go under, there will be some insurance companies I think getting into difficulty around the world. I think a lot of major banks are still going to have to raise more capital and when they come to the market with more capital I think it's going to make the markets uncertain. I do not believe there is going to be a financial institution who are going to bring down the financial markets and we've seen the US just bail out Citigroup and if there was another very important bank that was central to the world's financial system or a domestic financial system they will get bailed out.
But if they get into trouble the markets will be volatile while they're waiting for the answer and also it's continuing to deteriorate. Until the markets have a view on the length and the depth of the downturn, I think it's going to be very volatile reacting to information.
OSTER: If you just know what has already happened and you say how much wealth has been destroyed, and how long does it take for people to react to that wealth destruction? Basically you can't expect to see any of these economies improve in a fundamental sense until at the best at the end of next year. So it's going to keep going down I think at least until the middle of the year. And in that sort of environment I think on the equity markets, we're basically got a dead cat bounce, so they're down 40 per cent over the last 12 months, maybe up five to eight per cent over the next 12 months. So that's still pretty lousy.
DOUGLASS: But Alan what I would say is when the market starts to get a clearer picture on the extent of and the length of this downturn it could react extremely quickly on the upside. So I think over the next six to 12 months expect a lot of volatility. When there's some information that and there's not going to a bell that rings here, but when the markets start to have a view that they understand the scenario we're in better, you could see quite a strong recovery in markets and before the economic data's really telling you.
Stoneleigh: Falling rents are a sign of deflation that we should see across the world soon enough, even in the hottest property markets. This makes selling and renting an even more attractive option for those currently live in properties bought on margin. Selling can get you out of debt while allowing you to extract your equity as liquidity just when liquidity will matter most. Falling rents, as well as other prices, will mean that liquidity will go much further than you would expect.
Rents tumble in inner Sydney
Rents on apartments across the lower North Shore and eastern suburbs are tumbling as the finance sector sheds jobs, existing renters reach breaking point and lower interest rates make buying a property more attractive. The median rent on a one-bedroom apartment in Kirribilli and Milsons Point fell 15.9 per cent in the three months to the end of September, official figures from NSW Housing show.
Double-digit quarterly rental price falls were also recorded for two-bedroom units in Lavender Bay, McMahons Point and North Sydney and, to the east, in Bondi Junction, Bronte and Waverley. Kirribilli and Milsons Point was the only Sydney postcode to record an annual decline in apartment rents over the year to September. "We believe this is due to the large number of expatriates who have been relocated back to their original countries, as well as a surge of corporate redundancies," said Keris Hodge, the director of the Cremorne-based rental agency, The Apartment Service.
An economist at Commonwealth Bank, Michael Workman, said job losses in Sydney's finance, property, legal and accounting industries had reduced demand for rental properties in the inner suburbs, while supply had remained constant. "Now that demand conditions are weak, renters are in a much stronger position to argue for no rent increases," he said.
The managing director of SQM Research, Louis Christopher, said landlords had stretched renters to breaking point, despite rising vacancy rates in inner Sydney. Renters were also taking a more cautious approach to budgeting. "In the middle and upper end of the rental market it is very discretionary, and in these uncertain economic times, if they can, they choose a $500-a-week rental property as opposed to an $800 to $1000 one."
As interest rates fell, and more young people took advantage of a temporary doubling in the first home buyers grant, the number of potential renters would fall, Mr Christopher said, tipping that rents would continue to drop in affluent areas of the inner city next year. But renters in outer suburban areas are feeling the pinch. The figures show double-digit rent rises on houses continued in the September quarter in Fairfield, Concord and Rhodes.
An agent at Deborah Richardson Real Estate, Stacey Rohan, said properties on the lower North Shore which used to be rented in one weekend, were now staying on the market for an average of three weeks, with landlords forced to drop rents by at least $20 a week to attract tenants. "It's probably a lot cheaper than it has been."
Deflation virus is moving the policy test beyond the 1930s extremes
Debt deflation is tightening its grip over the entire global system. Interest rates are creeping towards zero in Japan, America, and now across most of Europe. We are beyond the extremes of the 1930s. The frontiers of monetary policy are being pushed to limits that may now test viability of paper currencies and modern central banking. You cannot drop below zero. So what next if the credit markets refuse to thaw? Yes, Japan visited and survived this policy Hell during its lost decade, but that was a local affair in an otherwise booming global economy. It tells us nothing.
This time we are all going down together. There is no deus ex machina to lift us out. Certainly not China, which is the most vulnerable of all. As the risk grows, officials at the highest level of the British Government have begun to circulate a six-year-old speech by Ben Bernanke – at the time of its writing, a garrulous kid governor at the US Federal Reserve. Entitled Deflation: Making Sure It Doesn’t Happen Here, it is the manual of guerrilla tactics for defeating slumps by monetary means. “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost,” he said.
Critics had great fun with this when Bernanke later became Fed chief. But the speech is best seen as a thought experiment by a Princeton professor thinking aloud during the deflation mini-scare of 2002. His point was that central banks never run out of ammunition. They have an inexhaustible arsenal. The world’s fate now hangs on whether he was right (which is probable), or wrong (which is possible). As a scholar of the Great Depression, Bernanke does not think that sliding prices can safely be allowed to run their course. “Sustained deflation can be highly destructive to a modern economy,” he said.
Once the killer virus becomes lodged in the system, it leads to a self-reinforcing debt trap – the real burden of mortgages rises, year after year, house prices falling, year after year. The noose tightens until you choke. Subtly, it shifts wealth from workers to bondholders. It is reactionary poison. Ultimately, it leads to civic revolt. Democracies do not tolerate such social upheaval for long. They change the rules. Bernanke’s central claim is that the big guns of monetary policy were never properly deployed during the Depression, or during the early years of Japan’s bust, so no wonder the slumps dragged on.
The Fed can create money out of thin air and mop up assets on the open market, like a sovereign sugar daddy. “Sufficient injections of money will ultimately always reverse a deflation.” Bernanke said the Fed can “expand the menu of assets that it buys”. US Treasury bonds top the list, but it can equally purchase mortgage securities from US agencies such as Fannie, Freddie and Ginnie, or company bonds, or commercial paper. Any asset will do. The Fed can acquire houses, stocks, or a herd of Texas Longhorn cattle if it wants. It can even scatter $100 bills from helicopters. (Actually, Japan is about to do this with shopping coupons).
All the Fed needs is emergency powers under Article 13 (3) of its code. This “unusual and exigent circumstances” clause was indeed invoked – very quietly – in March to save the US investment bank Bear Stearns. There has been no looking back since. Last week the Fed began printing money to buy mortgage debt directly. The aim is to drive down the long-term interest rates used for most US home loans. The Bernanke speech is being put into practice, almost to the letter. No doubt, such reflation a l’outrance can “work”, but what is the exit strategy? The policy leaves behind a liquidity lake. The risk is that this will flood the system once the credit pipes are unblocked. The economy could flip abruptly from deflation to hyper-inflation.
Nobel Laureate Robert Mundell warned last week that America faces disaster unless the Bernanke policy is reversed immediately. This is a minority view, but one held by a disturbingly large number of theorists. History will judge. Most central bankers suffer from a déformation professionnelle. Those shaped by the 1970s are haunted by ghosts of libertine excess. Those like Bernanke who were shaped by the 1930s live with their Depression poltergeists. His original claim to fame was work on the “credit channel” causes of slumps. Bank failures can snowball out of control as the “financial accelerator” kicks in. The cardinal error of the 1930s was to let lending contract. This is why he went nuclear in January, ramming through the most dramatic rates cuts in Fed history. Events have borne him out.
A case can be made that Bernanke’s pre-emptive blitz has greatly reduced the likelihood of a catastrophe. It was no mean feat given that he had to face down a simmering revolt earlier this year from the Fed’s regional banks. The sooner the Bank of England tears up its rule books and prepares to follow the script in Bernanke’s manual, the more chance we too have of avoiding a crash landing. Monetary stimulus is a better option than fiscal sprees that leave us saddled with public debt – the path that nearly wrecked Japan.
Yes, I backed the Brown stimulus package – with a clothes-peg over my nose – but only as a one-off emergency. Public spending should be a last resort, as Keynes always argued. Of course, Bernanke should not be let off the hook too lightly. Let us not forget that he was deeply complicit in creating the disaster we now face. He was cheerleader of Alan Greenspan’s easy-money stupidities from 2003-2006. He egged on debt debauchery. It was he who provided the theoretical underpinnings of the Greenspan doctrine that one could safely ignore housing and stock bubbles because the Fed could simply “clean up afterwards”. Not so simply, it turns out. As Bernanke said in his 2002 speech: “the best way to get out of trouble is not to get into it in the first place”. Too late now.
A guide for the newly poor
If you're eating three meals today and have a roof over your head, you've probably never heard of the 211 service. It's like 411 or 911, except you use it when you're in such financial distress that you don't have enough money for food or perhaps even for a place to live. In this economic climate, those conditions can arise alarmingly quickly.
"We have households that six months ago made $70,000, $80,000," said Michael Flood, chief executive of the Los Angeles Regional Food Bank, "and then the bottom falls out." This is a consumer guide for the nouveaux poor, individuals and families who suddenly find themselves in financial peril. A good place to start is the 211 referral services, available in Los Angeles, Orange, Riverside, San Bernardino and Ventura counties. The L.A. version is available 24/7, including holidays.
"All day long we have people saying to us, 'I never thought this could happen to me,' " said 211 staffer Irene Aceves while taking calls on a recent afternoon at the L.A. operation's headquarters, a former bank in San Gabriel. Denial is common. Michelle Vu took a call from a woman in Hollywood who had lost her job, leading to the eventual loss of her home. For the last four nights the woman had slept in her car. "I told her about shelters where I could possibly find a place for her," Vu said. "She said she didn't want that because shelters are for people who are homeless." For someone who needs help, it's important to make the call promptly. Competition for services is getting fierce.
Maribel Marin, executive director of L.A. County 211, said the number of calls the service receives each month has jumped from about 30,000 last year to just over 50,000 now. With more people in need, food banks are coming up short, housing organizations have years-long waiting lists and the wait for medical services grows longer. Even the annual Christmas toy charities are hurting.
"More average people, not on the street, are calling to get Christmas presents for the kids and a Christmas meal," said Maggie Hutchinson, who has taken calls for 21 years at 211 L.A. County and its predecessor that used an 800 number. It's not all bad news at 211. There are victories. One recent evening, Miguel Serrano called numerous shelters until he found one that would provide a voucher -- rare for that late in the day -- for a woman and her two children to stay the night. As Serrano gave the woman the details, he quietly pumped his fist in victory. Serrano had stayed past his quitting time to complete the call. But as he packed up he was beaming. "A call like that can make your day," he said.
This is merely an introduction to navigating the system. "If you've been a low-income mother of five, you know all the agencies and the nonprofits where you can get help," said John Kim, director of the Healthy City project that is working on a consumer-friendly online guide to these resources. "But if you just lost your home and your job, you're new to this world. You are looking around, saying, 'Where do I turn?' "
One of the most direct, nonbureaucratic paths to getting help is at food pantries that provide the needy with free groceries. The Los Angeles Regional Food Bank supplies more than 400 of these pantries, and there are others that get supplies from other sources. Many of these operations are located at churches, synagogues and other faith-based facilities. If you have access to a computer -- and most libraries have terminals that you can use free -- you can find a pantry near you by going to the food bank's website and clicking on "Pantry Locator." Fill in a ZIP Code or city name to get a list of pantries in that area and their schedule of grocery distribution. The locater also can be used to identify agencies that serve meals to people in need. If you don't have access to a computer, call 211. The staff there has access to the list. Each of the pantries has its own rules. Some allow anyone to line up; others may have geographical restrictions or limit the number of times an individual can participate.
The need is rising sharply, and donations aren't keeping up. "Our pantry demand is up 41% over last year," Flood said, but the food bank has been able to increase its supply by only 33%. Pantries affected by the shortfall are cutting back on the amount of food they give each person, he said, or by reducing the number of people they serve. For longer-term help, people can apply to the county for food stamps, which can be used to purchase groceries at supermarkets and other stores that accept them. But there are a number of qualifications that must be met. For example, the maximum income allowed for a family of four in the program is $2,297 a month.
This is one of the toughest problems because of the scarcity of supply. For short-term emergencies, free shelters sometimes have room, but vouchers are often good for just one night. And many shelters are set up for individuals, not families. For longer-term subsidized housing, there are two main programs, generally known as Section 8 and public housing. Section 8, funded by the federal government, puts people in low-cost housing. In most cases, the client household is required to contribute 30% of its income toward the rent. The rest is picked up by the program. The public housing program puts clients in apartments owned by the Housing Authority of the City of Los Angeles, with rents subsidized on a sliding, income-based scale.
The two programs are similar in an important way: It can often take years for a qualified family or individual to actually get a place. The waiting list for Section 8 housing is currently closed, but the housing authority, which administers the program, plans to reopen it early in 2009. Section 8 Director Lourdes Castro-Ramirez says that in 2009 the program should be able to place 3,000 to 4,000 families. But that's just a fraction of the expected number of applicants. "We are estimating that about 300,000 will apply," Castro-Ramirez said.
The ones that stay on the list might get placed in five to 10 years, she said. It's not much better at the public housing program. "There are about 17,000 on the waiting list," said Sanford Riggs, director of housing services. "We have about a 3% vacancy rate per year." It generally takes two or three years to get into public housing. So where does a family with more immediate need go? "The speculation is that they will either move in with family or move into a unit with others that becomes overcrowded," Castro-Ramirez said. "Or they may end up on the streets."
The most generous safety net in healthcare is provided by the state Medi-Cal and federal Medicare programs. But if you don't qualify because of age or income and don't have medical insurance, you'll probably have to rely on the county-subsidized healthcare system. Although highly qualified and dedicated people work in that system, you'll be entering a world of delays and bureaucracy. If your health problem is an emergency requiring an ambulance, by law you're supposed to be taken to the nearest emergency room that can accept a patient. "The hospital has to do a medical screening examination, and they have to stabilize you," said Carol Meyer, interim chief network officer for the Los Angeles County Department of Health Services.
In many cases, Meyer said, you'll be treated and sent on your way. If it's a private hospital, you'll probably get a bill later that you can't afford to pay. But most hospitals have programs to reduce or cancel bills based on financial hardship. If you need more care and can be stabilized for transport, the private hospital has the right to send you to a public hospital, such as Los Angeles County-USC Medical Center.
Nonambulance visits to a public hospital emergency room can involve a long wait. "It can range from a couple of hours to 16, 17 or longer," Meyer said. Nonemergency primary care is available at county-run clinics. In Los Angeles County, there are six of them. But patients are also accepted at about 100 other clinics that have contracts with the county.
Getting an appointment can be a challenge, especially for specialty care that the insured might take for granted. Eye exams, for example, can take weeks, Meyer said. Preventive care, such as check-ups, can be difficult if not impossible to obtain, even though such care can catch minor conditions before they become serious and much more expensive to treat. "The evidence for that is well documented," Meyer said. "But the demand to treat patients who have specific conditions is so high that it uses most of our resources."