The Boss taking liberties. "G'wan, I hain't married." The girl's steady.
Maggioni Canning Company. Port Royal, South Carolina.
Ilargi: You think there'll be any Americans protesting the gross largesse of the inauguration? Or will all agree that hope and change must of necessity come with a perverse price-tag? $50 million enough? How many blind, disabled and just plain destitute Californians could have been helped with that amount? While I think Schwarzenegger's threat to cut their state payments is just that, a threat, we can count down the days till it does become real somewhere in the land of the formerly free.
And if there’s anything left inside the huddled masses of the ghost of Tom Joad and the spirit that build the misnomered land of the brave, there'll be a lot of fighting men and women in the nation's streets. That won't be limited to Thailand or China, Russia, Greece, Latvia, Lithuania and Bulgaria. It's spreading fast and it comes closer everyday. Those who feel comfortable spending $50 millon on a party (for which Wall Street banks are the main sponsors) must feel they will be able to call in the police, the army and the National Guard to protect them. And feel good about it too. Well, we’ll see about that.
The main task for every government around the planet today is to make sure that its weakest citizens are protected from hunger, thirst and cold. But in order to take the initiatives needed, they would need to recognize that it might be impossible to restore the society they lost. And that is not happening anywhere. I have said it a thousand times now: failure to draw up such a contingency plan will cause societies and entire countries to implode. This is not a financial crisis, it's politics all the way. Is Obama prepared to call in the armed forces against his own voters arguing that if he won't be the change, they will? And who will succeed the Terminator as governor of Latvia in a few weeks time?
Here's Dan W. with his take:
Kristin Jensen Jan. 18 (Bloomberg) -- When Barack Obama gives his inaugural address on Jan. 20, he will evoke the inspiration of John F. Kennedy, the dreams of Martin Luther King Jr. and the challenges that faced Franklin Delano Roosevelt. The nation’s first black president is also expected to pay homage to a predecessor he often cites, Abraham Lincoln. Like Lincoln, Obama rose to prominence largely because of rhetorical skills. And like other American orators in history, Obama is now charged with offering reassurance to a shaken population. The address has to “restore the confidence of American consumers and investors in their own leadership and country,” said Kennedy’s speechwriter, Ted Sorensen, in an interview. “It’s got to restore the confidence of foreign investors and leaders in this country.”
I voted for Barack Obama. I am thrilled that the citizens of the USA courageously elected an African American man as our 44th President. I believe that Barack Obama is a fine man, a loving father, and a rigorous scholar. Regardless of these feelings, I will not watch the inauguration on Tuesday. Why? Because I believe that false hope is a dangerous thing. All of the emotions and excitement and deeply moving moments that will characterize the inauguration will stand in brutally stark contrast to the disastrous economic realties unfolding daily. Tears of joy and heartfelt cheers will quickly fade as the Obama team prepares to embark upon the ill-fated and patently insane economic policy of creating "bad banks" to buy up all of our banks toxic assets. Those who have travelled from all over the nation to take part in a weekend of celebration---to be a part of history---will return home to growing unemployment and sinking property values and spiraling deflation and growing desperation. And frankly, no amount of joy and optimism will overcome the economic tragedy to come.
Now, many will read this post and think that I'm just a party-pooper, a negative Ned. Let me clarify:
1. '...Restoring the confidence of American consumers...' so that they can go further into debt servitude is criminal. And that is precisely what Mr. Sorensen (above) is promoting. And the Obama-Rubin-Summers Triumverite's creation of "bad banks" to buy up all of the bad assets in the country is not just criminal, it is criminally insane. From my AMITY ISLAND post: These "bad banks" are going to have to spend literally TENS of trillions of dollars to accomplish the goal of buying up all of the toxic assets held by these banks, because for every billion in toilet paper reported by these institutions, there's another 50 billion hidden away from public view. How do I know this, you ask? Well, just take a look at Citi and BofA. How much have we spent to BEGIN the process of saving just two institutions??? Let's conservatively say 500 BILLION dollars. Now multiply that number by, we'll say, FIVE (a VERY conservative estimate): Five being the multiplier that accounts for ALL of BofA and Citi's debt. Now multiply THAT number by ONE HUNDRED (again, conservatively), a multiplier that represents the proportion of total debt held by Citi and BofA in relationship to the nation's other financials. The total: Roughly 25 TRILLION dollars. At what point do the "bad banks" (The Government!!) implode under the weight of this debt glacier??
2. Spending FIFTY MILLION DOLLARS on an inauguration celebration while hunger and homelessness grow by the hour is wrong. AND, for those who make the argument that $50 Million spent means $50 Million to carpenters and caterers and musicians and policemen, you have missed the point altogether. Not one cent of those $50 Million are going to produce anything that can become part of the REAL GNP. It's all just consumerist crapola. The lavishly decorated stage will be taken down on Wednesday, the tons of sugar-saturated food will be either devoured or thrown in the garbage, the policemen and other security personnel will take their overtime pay and sock it away because they are all in debt up to their badges, etc. On Wednesday there will be nothing to show for the events because nothing was, in fact produced by the event. (This, by the way, is a perfect example of the MYTH of GDP that has been proffered by our political and financial leaders for decades. Growth as a measure of debt or of non-circulating monies or of goods and services that have no ancillary or subsequent derivational value is NOT REAL GROWTH. It is the illusion of growth, an illusion perpetuated by the ruling classes for their benefit alone.)
3. Tens of thousands of middle class and working class participants in the weekend festivities---all of whom are just dying to be 'part of history'--- will return home not just thousands of dollars poorer, but thousands of dollars further in debt, having produced and/or purchased nothing of utility.
4. The audacity of false hope is that people will smilingly follow Obama down the river Styx as he institutes fatally flawed economic policies. All of the world's financial institutions are hiding trillions in worthless assets behind their vault doors. Hundreds of trillions of dollars 'worth' of garbage, just waiting to be exposed. Every bank is insolvent. Every state, every municipality, also broke. The age of credit is over. The "bad bank" purchase plan is simply more trillions down the drain.
5. While I know that it is tempting, please do not compare this moment to that during which MLK Jr. gave his defining I HAVE A DREAM speech. We stand at the cusp of the most dramatic global economic dislocation in history. The aforementioned moment in history did in fact have lasting and decidedly positive impact on the nation: MLK's speech was a critical and defining moment during a grand movement for political and social equality. Barack Obama's inauguration is not such a moment. It is a moment that marks a transition from one regime to another. Unfortunately, the Obama regime seems ready to promote economic policies that simply continue us on the road to perdition rather then rescuing us from us the the abyss.
In my opinion, Barack Obama should have cancelled the inauguration celebration, re-directed all of the money set aside for the events to food banks around the nation, and modeled for the nation the sobering realities that we face. Instead he has chosen a grand and glorious wedding rather than a quiet marriage in front of a Justice of the Peace. He has opted for the ten thousand dollar wedding ring rather than weaving blades of grass together into a wedding band. He has baked a cake for a million wedding invitees, a lovely frosting-encased edifice that has no nutritional value for the country. And once the grand wedding is over, all of the drunk celebrants will return home and wake up on Wednesday morning with hangovers and less money in the bank and will scratch their heads and wonder what happens next.
Truth be known, I believe that in time the festivities of the inauguration will serve to undermine Obama's authority during this the most trying moment in American History. People will recall the smiles and good feelings and they will wonder aloud, "what the hell were we thinking?". Had Barack Obama opted for a more understated and somber inauguration, people may have been jolted out of their somnabulent complacency. Unfortunately, while the rest of the nation battens down the hatches, it's party time in Washington!
Eastern Europe braced for a violent 'spring of discontent'
Eastern Europe is heading for a violent "spring of discontent", according to experts in the region who fear that the global economic downturn is generating a dangerous popular backlash on the streets Hit increasingly hard by the financial crisis, countries such as Bulgaria, Romania and the Baltic states face deep political destabilisation and social strife, as well as an increase in racial tension Last week protesters were tear-gassed as they threw rocks at police outside parliament in Vilnius, capital of Lithuania, in a protest against an austerity package including tax rises and benefit cuts. In Sofia, Bulgaria, 150 people were arrested and at least 30 injured in widespread violence. More than 100 were detained after street battles between security forces and demonstrators in the Latvian capital, Riga.
According to the most recent estimates, the economies of some eastern European countries, after posting double-digit growth for nearly a decade, will contract by up to 5% this year, with inflation peaking at more than 13%. Many fear Romania, which joined the European Union with Bulgaria in 2007, may be the next to suffer major breakdowns in public order. "In a few months there will be people in the streets, that much is certain," said Luca Niculescu, a media executive in Bucharest. "Every day we hear about another factory shutting or moving overseas. There is a new government that has not shown itself too effective. We have got used to very high growth rates. It's an explosive cocktail."
Major Romanian companies threatening massive job cuts include low-cost car-maker Dacia, where up to 4,000 posts could go if sales do not recover. A spokeswoman for Renault, which owns Dacia, said such deep cuts would only be considered in a "catastrophic scenario", but production in Romania has already been halted for two months after local demand plunged by more than half. Other major companies have already announced plans to relocate, with one Japanese wire factory heading for Morocco. Marius Oprea, security adviser to the last Romanian government, said the economic crisis would mean "serious problems for the middle class". He added: "There will be a fall in tax revenue which will lead to major problems for state budgets. The numbers of state employees will also be cut right back and their salaries will be worth less and less."
Another problem in Romania, as elsewhere in the region, is that many new middle-class house owners have taken out mortgages in euros. With local currencies collapsing, repayment is becoming harder. "We will try dialogue but if that does not work we will defend our members' interest however we can," said one Romanian trade unionist last week. "We want to be part of the solution, not the problem, but the situation is very serious." Dr Jonathan Eyal, a regional specialist at the Royal United Services Institute thinktank in London, said eastern European countries were ill-equipped to deal with the impact of the global downturn and risked "social meltdown".
"These are often fragile economies ... with brittle political structures, political parties that are not very well formed and weak institutions. They are ill-prepared for what has hit them," Eyal said. "Last year it was the core western European countries which were shaky; now it is the weaker periphery that are getting the full blast of the crisis." The reasons for last week's unrest are varied. Bulgarian students were protesting over the death of one of their number in an apparently random criminal attack, blaming the Socialist-led government for failing to ensure security. They were joined by farmers angry at low prices for their produce and problems with EU subsidies often diverted by corrupt administrators. Tensions have been exacerbated by the gas crisis, in which Bulgaria has suffered severe heating and power shortages since Moscow turned off the taps following a dispute with Ukraine.
"We are fed up with living in the poorest and most corrupt country," the Sofia protest organisers said in a statement. "This unique protest unites the people in their wish for change and their wish to live in a normal European country." In Latvia, years of strong economic growth have given way to recession, soaring inflation and rising unemployment. Trust in the state's authority and officials has fallen catastrophically, said President Valdis Zatlers last week, threatening to call snap elections. Most of those arrested in last week's disturbances in Riga have now been released. According to security police chief Janis Reiniks, the detained were "jobless, workers, students and school children" and included "one [person] connected to the Latvian Democratic Party and one skinhead".
Last year Latvia was forced to ask the International Monetary Fund for a £6.25bn bail-out package, fuelling a jingoistic backlash against a perceived "national humiliation". Some eastern European states appear to be resisting better, however. The Estonian government built up substantial currency reserves during years of rapid growth. "Everyone knows this year is going to be very tough. But in Riga and Vilnius they are exhausted and angry and have lost faith in their leaders; that is not the case here," said Raimo Poom, political editor of Tallinn-based newspaper Esti Paevaleht. One fear is a rise in attacks on ethnic minorities.
The Czech Republic, also hit badly by the crisis, saw its worst street violence for years recently when 700 members of the far-right Workers' Party clashed with 1,000 riot police in the town of Litvinov whenthey were prevented from marching into a mostly Roma area. "The populist, nationalist political climate [in eastern Europe] is very conducive to anti-minority sentiment," said Larry Olomoofe of the European Roma Rights Centre in Budapest. The recent history of the region aggravates the crisis, say experts. "You have people who were buoyed up through a very bad period after the collapse of the USSR, when their economies contracted by up to a third by a belief that joining the EU would bring them prosperity and stability," Eyal said. "It is that aspiration that has been disappointed and that is very destabilising."Europe's flashpoints
Population 7 million. Troubled by corruption and political instability. Dozens of people, including 14 police, injured during riots in Sofia last week.
Population 2.2 million. Centre-right government likely to call elections after riots over harsh conditions following IMF bail-out.
Population 3.5 million. Street clashes and 86 arrests after 7,000 people attended a Vilnius rally called by trade unions to protest at public sector pay cuts, reduced social security payments, an increase in VAT and an end to tax breaks on medicine and home heating.
Population 1.4 million. So far calm, and government has more reserves of cash and public confidence than elsewhere, but a 3.5% contraction in the economy in the third quarter of last year is likely to cause problems. Support for the prime minister, Andrus Ansip, and his government is falling quickly.
Panic Grows In California As Welfare Checks Set To Stop
Imagine living hand to mouth already, barely squeaking by. Come Feb 1 the State has warned you may not see another check for months. No Rent money, no money for food for medicine and even worse for some of the disabled, your Caregiver that comes by daily to feed, clean, shop, and generally make sure you are cared for, isn't coming anymore.California's fiscal future lurched yet another step toward oblivion on Friday as state Controller John Chiang announced he could no longer make payments for services to disabled and blind people who need the money to pay for rent and food. Chiang said payments would most likely have to be stopped by Feb. 1. "Delaying these payments will hurt real families," Chiang said.
I am disabled but my check comes from Social Security, but my Sig. Other, who is also disabled, gets her check from the State. It's not that much but helps with the bills like the cost of the electricity to run her oxygen machine that runs 24/7. She also has a daytime Caregiver paid for by the State because I cannot care for her like I used to. Her caregiver also rents a room from us which helps with the rent, but since he is going to be laid-off we are really going to be screwed.
I don't want to get too much into our personal business but to show just how damaging this will be just to my family alone I will have to use a few more details. I'm a chronic pain sufferer. I have what are known as Cluster Migraines which are just like your everyday migraine except they never go away.
They don't have a clue what causes them but we do know that stress makes them much worse. I also have a extremely bad back and neck, emphysema, and a few other problems. My SO has Diabetes, COPD, CHF, emphysema, Fibromyalgia, and is considered Terminal. She is bedridden most the time and uses a electric wheelchair when she can. She can neither cook, or bath herself any longer, and can barely dress herself most the time. You can see why her Caregiver is so important to us. He does the shopping, cooking, cleaning, laundry as well as taking her to the Doctor at least once every two weeks. He does much more but that should give you a sense of what my life will look like after Feb.1 and I'm not alone.
Even if State Controller John Chiang finds a way to make these payments Arnold is trying to make major cuts on the backs of the Disabled and Poor. Arnold is good republican after all.The Governor’s proposed cuts – including those proposed by the Governor and enacted by the Legislature in previous budget years, include major cuts proposed to Medi-Cal, regional centers, mental health services, CalWORKS (State’s "welfare to work" program that includes thousands of parents and children with special needs), In-Home Supportive Services (IHSS), SSI/SSP (Supplemental Security Income/State Supplemental Payment) grants to the lowest income persons with disabilities, the blind and seniors, the Cash Assistance Program for Immigrants (CAPI) that provides small state funded grants for legal immigrants with disabilities, the blind and low income seniors who do not qualify for SSI, cuts that impact public and accessible transportation and housing and cuts to public education that impact special education for over 650,000 children with special needs.
It's my hope that someone on the Obama Team will read this and see that the States like Ca. aren't let out of the coming Stimulus Money because it doesn't seem that the Republicans and some of the Democrats in Ca. aren't in any hurry to fix this coming disaster. I now know how those in New Orleans felt as they watched Katrina come and go and no one there to help. This will be a State of Emergency in my home and millions like mine. Somehow I don't think FEMA or the Red Cross will be handing out food and water anytime some. I wrote about this whole deal in a open thread earlier and I made a comment about how I feel. I should give you a hint at how many people feel.
Who can afford to sue ? The perfect victim, one too poor to have a atty. I have not found one article about blowback on the rebate cks we didn't get. Who will sue Arnie if they don't have a apt, phone or food ? The poor are treated as invisible, which for the most part we are. We are too afraid of losing what little income we get to rock the boat.
I don't have the answer here but I am hoping someone who does will read this, or that someone pass it on to someone who does. I haven't reached my limit yet, but it's coming fast. For someone who worked hard for over 30 yrs and paid all my share of taxes and dues this is a hard place to be and getting harder by the day. In some of the larger cities I believe we can expect growing violence if this isn't fixed and quick.
California controller to suspend tax refunds, welfare checks, student grants
The state will suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1, Controller John Chiang announced Friday. Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state's nearly $42-billion budget deficit. More than half of those payments are tax refunds. The controller said the suspended payments could be rolled into IOUs if California still lacks sufficient cash to pay its bills come March or April.
"It pains me to pull this trigger," Chiang said at a news conference in his office. "But it is an action that is critically necessary." The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the elderly, blind and disabled; and $13 million in grants for college students. Even if a budget agreement is reached by the end of this month, tax refunds and other payments could remain temporarily frozen. Chiang said a budget deal may not generate cash quickly enough to resume them immediately. Not all payments will stop Feb. 1.
Most school and healthcare programs will be paid, as required by state and federal law. The state will continue to pay more than $6.6 billion in such bills. And Los Angeles County officials said they would cover welfare payments to more than 500,000 local recipients -- for now. But California is projected to be $346 million short of the funds it needs to pay all its bills in February. By March, the state would be so far in the red that even continuing to suspend payments would not cover the shortfall. California would be insolvent, making the issuance of IOUs likely.
State officials have already designed an IOU template, Chiang said, and have been negotiating with banks over whether taxpayers could cash or deposit them if they are issued. The state could be forced to pay as much as 5% interest on delayed tax refunds if they are not paid by the end of May, Chiang said. The last time the state issued such IOUs -- the only time since the Great Depression -- was in 1992. The suspension of payments is the latest radical move by officials to help keep the state from running out of cash as Gov. Arnold Schwarzenegger and the Legislature battle over how to avoid insolvency.
Schwarzenegger, who hopes to speed up public-works projects to stimulate the economy, wants tax increases, spending cuts and legislation to relax some environmental rules and allow private companies to do some government construction. Democrats are seeking tax increases as well, but fewer spending cuts. Republican lawmakers would only pare spending and have been blocking any tax hikes. Meanwhile, Schwarzenegger has ordered that most state workers take two days off per month without pay -- equivalent to about a 10% pay cut. The governor also ordered most state offices -- including all DMV field offices -- to close on those two days. The order is being challenged in court by labor unions.
The state has also halted payments of bond money for more than 5,300 public-works projects. On Friday, the state Department of Finance temporarily exempted 276 of the projects from the freeze, reasoning that because they are nearly complete, it could cost the state more to shut them down than to finish them. The exemption, through Feb. 1, will allow the continuation of school construction by the Inglewood Unified School District and the construction of a new Court of Appeal facility in Santa Ana. Work on new rail tracks at L.A.'s Union Station and road projects involving Irwindale Avenue, Martin Luther King Boulevard and Imperial Highway in Los Angeles County will also be able to continue.
Some projects were exempted because the state is under court order to do the jobs. Others would threaten public safety if left uncompleted, according to Mike Genest, Schwarzenegger's finance director. "We're going to take the risk of allowing them to continue a little longer because we are very hopeful will have a budget by Feb. 1," Genest said. Contractors lined up at a meeting of state finance officials to warn of the consequences of stopping the bulk of the public-works money. They said shutting down projects already underway would ultimately cost the state significantly. According to Caltrans Director Will Kempton, the state would have to pay $350 million in legal costs, claims for contract breaches and expenses for securing sites that go dormant.
"The bulk of those dollars are lost . . . to the taxpayers," Kempton said. "You can't just walk away from a construction project. You have to make sure it is buttoned up." It is not just the state that would take a hit. Some school districts relying on state funds do not have the reserves in place to cover the payments they will owe builders if work stops. Counties are also feeling the pinch. They process the welfare payments scheduled to be halted by the controller's office Feb. 1. The state is freezing those payments, along with millions of dollars in salaries to county workers who run the programs.
Some county officials say they don't have reserves in place to cover the state until the budget crisis is resolved. "We simply don't have the cash," said Pat Leary, assistant administrator for Yolo County. "We are in critically bad times." About a third of all state welfare payments go to Los Angeles County, where officials said they can shift money around to keep the payments flowing in the short term. "The million-dollar question is how long this will last," said L.A. County Chief Executive William T Fujioka. "We cannot sustain a huge and very long hit."
Disabled, Blind People to Lose Disability Payments
California's fiscal future lurched yet another step toward oblivion on Friday as state Controller John Chiang announced he could no longer make payments for services to disabled and blind people who need the money to pay for rent and food. Chiang said payments would most likely have to be stopped by Feb. 1. "Delaying these payments will hurt real families," Chiang said. About one million people would be affected by the non-payments, Chiang said.
"People are going to be hungry at my house," said Shirley Magers, who receives a $900 monthly payment related to her disabilities. "(This is) not to mention the utilities. Personally I can't pay all the utilities right now." Education will be spared from the delayed payments, but California's money meltdown has been long in the making. "The last day the state had a positive cash balance was July 12, 2007 -- a year and a half ago," Chiang said.
Since that time, California has been using internal borrowing to pay the bills. Barring a quick deal at the capitol, taxpayers will likely receive IOUs instead of tax refunds this spring. Lawmakers have about two weeks to strike a deal with Gov. Arnold Schwarzenegger or the cash crisis will expand to even more people. Thousands of construction projects around the state are shutting down because state bond money has dried up.
"If it continues for a number of months into next year, it could be 200,000 jobs lost," said State Treasurer Bill Lockyer. The board that oversees those projects voted to free up funding on Friday while top legislative leaders joined Schwarzenegger for another round of budget talks. Schwarzenegger said he may host another meeting of top legislative leaders on Saturday.
Schwarzenegger gives lucrative board seats to ex-legislators and aides
As Gov. Arnold Schwarzenegger orders steep salary cuts for most of the state workforce, some Sacramento players are doing much better by him.The governor has added state legislators and former political aides to the state payroll, with six-figure salaries. Their positions: plum posts on the same state boards and commissions that the governor crusaded to abolish a few years ago, calling them a waste of taxpayer money. Two GOP lawmakers who recently left office and have limited expertise in thorny employment issues have received jobs at the state Unemployment Insurance Appeals Board. The panel met 12 times last year, and members are paid $128,109.
"It's a soft landing spot for ex-elected officials who can make a good living while showing up 12 times a year," said Joel Fox, an antitax advocate who worked on the governor's aborted plan to shut down the boards. "The positions should be eliminated." Seats on state boards have long been awarded to lawmakers loyal to governors and legislative leaders. But Schwarzenegger made the most recent appointments just days after ordering 238,000 state workers to be furloughed two days a month or take an equivalent pay cut of about 9%. He also requested that the state payroll be reduced an additional 10%, including layoffs if necessary.
"People were very disgusted and upset about it," said Sandie Luke, president of a Northern California council for the Service Employees International Union, Local 1000. The local represents 95,000 white-collar workers. She faulted the governor and his staff, saying: "It makes you wonder what their priorities are." Administration spokeswoman Rachel Cameron said lawmakers balked at abolishing the boards and folding their operations into other agencies, so the governor is left with no choice but to fill vacant seats. And she said the handling of unemployment appeals is more crucial than ever because of the sour economy.
"The governor still has an obligation to continue to appoint the best qualified people to carry out this function," she said. The two posts went to Bonnie Garcia of Cathedral City and George Plescia of La Jolla. Schwarzenegger's office announced the appointments on New Year's Eve. A few weeks earlier Schwarzenegger had appointed state Sen. Carole Migden (D-San Francisco) to a $132,000 seat on a board that meets once a month to oversee trash disposal in the state. Migden lost her reelection bid and had to leave the Legislature at the end of November.
The governor made the appointment even though he has twice recommended eliminating the trash board, most recently in his budget proposal for the next fiscal year, now pending before the Legislature. Still, his former scheduling director chairs the board, and two other former Democratic lawmakers were added to its payroll by legislative leaders late last year. Another panel, the state Personnel Board, includes onetime Schwarzenegger aides appointed earlier: Patricia Clarey, his former chief of staff, and Richard Costigan, former deputy chief of staff. The governor believes Garcia and Plescia are appropriate to their new positions, Cameron said. "They are both great public servants with a desire to continue serving the people of California in this new role," she said.
Garcia once served as vice chairwoman of the Assembly Committee on Jobs and Economic Development, and she noted she has a college degree in workforce development. Plescia, who did not return calls for comment, does not list in the resume he submitted to the governor's office any previous work involving unemployment insurance or employment issues. Migden was appointed to the waste board, Cameron said, on the recommendation of Senate leader Darrell Steinberg (D-Sacramento), "because she has held several elected positions throughout local and state government for nearly 20 years and her background will serve well in this new role." And Migden defended her own qualifications. "Throughout my career in public service, I've looked for ways to solve problems," she said.
In 2005, as part of his California Performance Review process, Schwarzenegger proposed eliminating 88 state boards and commissions, including those to which he has now appointed Garcia, Plescia and Migden. "No one paid by the state should make $100,000 a year for only meeting twice a month," he told legislators then. But in the face of widespread opposition from legislators and special interests, he dropped the idea. "I didn't want to stop all the other things I wanted to get done," he explained later.
Sen. Jeff Denham (R-Atwater) introduced legislation recently that would abolish the waste board, calling it "a blatant rip-off of taxpayer dollars to the tune of $2 million a year," a reference to the board's cost. "This type of wasteful spending can no longer be tolerated in the face of massive and ever-increasing budget deficits," Denham said. Democrats, too, are giving the California Performance Review Report a second look in a new Assembly committee created to find waste and ways to be more efficient.
Meanwhile, the $132,000 in annual salary that Migden will collect would be enough to cover 1,109 additional children in the state's Healthy Families program, which provides medical, dental and vision coverage to poor children and faces possible cutbacks because of the fiscal crisis. Her pay would also cover a cost-of-living increase for 523 families receiving state welfare grants. But Cameron noted that Migden and the other board appointees are subject to the same 10% salary cuts as mostother state employees. Plescia and Garcia's pay could eventually be cut to $115,298, while Migden's could drop to $118,000.
Nancy Swindell, president of the American Federation of State, County and Municipal Employees 2620, which represents pharmacists, dietitians, psychologists and social workers employed by the state, said that is small comfort to the average state employee When Schwarzenegger "gives an outlandish salary to Bonnie Garcia and then cuts the salary for a state worker making just above minimum wage, where is the impact?" Swindell said. "It sends the message that the governor supports the elite and has no sympathy or empathy for the working person."
Hundreds Protest Against Governor’s Spending Cut Proposals
Sending a shockwave to people with disabilities, the blind and seniors, State Controller John Chiang, the statewide elected official responsible for paying the State’s bills, announced Friday morning (January 16) that if a solution to the budget crisis is not passed by the Legislature and signed by the Governor by February 1st, he will be forced to begin delaying payments to several critical programs. Chiang’s announcement comes just 1 day after Governor Arnold Schwarzenegger delivered his grim “State of the State” address at the State Capitol on January 15th, while a large crowd of people with disabilities, mental health needs, seniors, and others protested against the Governor’s proposed spending cuts.
With no signs of an economic recovery in sight, Chiang said Friday that “it is critical that the Governor and the Legislature enact a sound budget solution that provides much-needed cash” by February 1, warning that “if not, the State will be $346 million in the red at the end of February, and $5.2 billion in the red in April.” The list of programs and services include those that have major impact to children and adults with disabilities – including those with developmental disabilities such as autism spectrum disorders, people with mental health needs, seniors, the blind, low income families and children. That list of programs and services impacted will expand significantly by March 1st if no solution to the budget crisis is passed and enacted.
The State Controller said making the list of those services and programs who will be paid – including In-Home Supportive Services workers and Medi-Cal institutional and non-institutional providers and public education – was based on whether such payments were required by the State Constitution, federal law or court rulings as having first claim to available State general fund cash. The Controller said that he will begin delaying, for 30 days, payments to all other programs that are funded out of the State’s depleted general funds.
Chiang said that those payments that could be delayed include thousands of payments to businesses for services and products they provide to the State; assistance for more than a million people with disabilities, the blind and low income seniors that goes to pay their rent, utilities, or put food on their tables; to State agencies that use the payments to fund critical public services, ranging from public safety to health and welfare. If the Governor and Legislature fail to provide real and adequate solutions by late February, the Controller said he will be forced to postpone those payments for another 30 days.
It is not clear yet when people with disabilities, the blind and low income seniors who receive SSI/SSP (Supplemental Security Income/State Supplemental Payment) grants and programs and services such as those funded by regional centers under the Department of Developmental Services for children and adults with developmental disabilities will actually be impacted if the State Controller is forced to begin delaying payments starting on February 1st. Meanwhile, as the budget crisis grows and the stalemate to solve it continues, hundreds of people with disabilities, mental health needs, seniors, low income families, community organizations and workers who provide supports and services protested at the State Capitol on January 14th (Wednesday) followed by a second protest on the sidewalk facing the Capitol at the same time of the Governor’s “State of the State” on January 15th (Thursday).
The January 14th protest was called the “State of the People” and included state employees, unions and education advocates as an answer to the Governor’s “State of the State” that was scheduled for the next day. The January 15th sidewalk demonstration (photo left of part of the large crowd, watched by Sacramento police in front of the State Capitol’s Assembly chamber on L Street) was held to protest the Governor’s “State of the State” and proposed spending cuts while he was actually delivering inside the State Capitol. Smaller protests were also held the same day and time at the Governor’s field offices in Los Angeles and San Diego.
Advocates have cited that the Governor’s proposed cuts – some which he proposed to take effect in the current State budget year that impact regional centers that fund community-based services for over 230,000 children and adults with developmental disabilities, including those with autism spectrum disorders, continue yearly spending reductions to services and programs impacting seniors, people with disabilities, people with mental health needs, people with MS, Alzhiemer’s and other disorders since the 2001-2002 State budget year. Many of those protesting yesterday and today are urging the Governor and the Legislature to look at other ways to bridge the huge budget deficit, including new revenues in increased taxes, and more matching funds from the federal government Advocates say even though the Governor is proposing new revenues, his proposed cuts are too much and impact too many critical programs.
To bridge a budget shortfall currently projected at over $41 billion by the end of the 2009-2010 State Budget year (June 30, 2010), the Governor is proposing over $14 billion in new revenues, including a temporary 1.5% increase in the State sales tax, and also over $17 billion in spending reductions, including what advocates say are “massive” reductions to critical programs that serve low income seniors, people with disabilities, mental health needs, low income children and others across the State. However the Governor and the Democratic and Republican legislative leaders are locked in a three way stalemate to resolve the budget deficit.
Legislative Republicans have called more deeper spending cuts – including cuts to control growth in state spending, and also other ways to raise revenues – but adamantly oppose any new taxes. Legislative Democrats have agreed to some deep spending cuts, though not as deep as what the Governor proposed. Legislative Democrats also proposed major new revenues that go further than what the Governor proposed, including raising some fees and some income taxes. It is that stalemate in solving the budget crisis that is making the State’s cash flow crisis so critical that certain programs and services will face delays in payments for at least 30 days beginning February 1st if no solution to the budget crisis is in place by then.
The Governor’s proposed cuts – including those proposed by the Governor and enacted by the Legislature in previous budget years, include major cuts proposed to Medi-Cal, regional centers, mental health services, CalWORKS (State’s “welfare to work” program that includes thousands of parents and children with special needs), In-Home Supportive Services (IHSS), SSI/SSP (Supplemental Security Income/State Supplemental Payment) grants to the lowest income persons with disabilities, the blind and seniors, the Cash Assistance Program for Immigrants (CAPI) that provides small state funded grants for legal immigrants with disabilities, the blind and low income seniors who do not qualify for SSI, cuts that impact public and accessible transportation and housing and cuts to public education that impact special education for over 650,000 children with special needs.
Southern California officials draw up wish lists for federal stimulus money
Los Angeles County supervisors urgently scrimmaged for federal stimulus money Tuesday, proposing $2.7 billion in projects they say would help jump-start the local economy. The push by the county to get a share of the more than $800-billion stimulus package that President-elect Barack Obama has asked Congress to approve came as concern mounts about potentially massive losses in state funding. County officials are particularly worried about an expected shortfall of hundreds of millions of dollars for social services at a time when such programs are strapped by the rising demands of the unemployed and underemployed.
Los Angeles County's wish list will be in competition with hundreds, if not thousands, of others being drawn up around the nation. In Orange County, officials have compiled $2.2 billion in projects, including $335 million for the expansion of John Wayne Airport. San Bernardino County officials said they have about $1.4 billion in highway projects in mind, but would not draft a list until they have eligibility requirements. Riverside County officials have said they will ask for at least $154 million, mostly for transportation projects. Los Angeles County officials are proposing projects that include more than $25 million to create renewable solar energy sources for county operations, $8 million to computerize some medical records at county health facilities and $186 million to pave roads.
County officials also hope to benefit "disproportionately" from billions of dollars in additional funding for food stamps, Medi-Cal and other entitlement programs that federal lawmakers hope will bring relief to the unemployed. The county's chief executive, William T. Fujioka, said it was crucial that the county be in a position to take advantage of a stimulus plan that he said "will be unprecedented at least in our lifetimes." But optimism was greatly tempered by the seemingly unrelenting sour news from the state Capitol. Based on an analysis of Gov. Arnold Schwarzenegger's latest proposed budget, county officials said this week that the county would lose about $350 million over the next 18 months.
Concern was heightened Tuesday about additional cuts when supervisors obtained a copy of legislation the governor submitted late last week that, if approved, would defer an additional $6.54 billion statewide beginning in February, with more than $1.7 billion of that coming out of funds for health and human services. Because some of the state cuts may be retroactive, county officials already are scrambling to plug holes in their $21-billion annual operating budget. "The elephant in the room that we're not talking about is the unstimulus package, which is the lack of a state budget," said Supervisor Zev Yaroslavsky, who expressed concern that the possibility of a federal stimulus package was being viewed by state lawmakers "as a way to absolve themselves of the tough decisions."
"The jeopardy we face because of a lack of a state budget is far greater than the benefit we get out of the stimulus," he said. Yaroslavsky cited the loss of 150 jobs when work was stopped on a performing arts center at Cal State Northridge as one example of the impact of the state's suspension of capital projects. Still, it was not immediately clear how many jobs might be created by projects for which the county is seeking federal funds. Obama has pledged to create 4 million jobs, and lawmakers appear eager to make good on that pledge amid growing skepticism over the effectiveness of President Bush's $350-billion bailout for financial firms last year.
Supervisor Gloria Molina, who pushed county officials to draft the list of eligible projects, said staffers would soon calculate the number of jobs that would be created by each item. But some on the list do not appear to meet Obama's focus on projects ready to go in order to jump-start the economy within two years. For example, $290 million is proposed for the refurbishment and retrofit needed to reopen inpatient services at Martin Luther King Jr.-Harbor Medical Center, even though the project requires nearly a year of architectural work before construction and the county has yet to find a willing operator.
Richard Little, director of the Keston Institute for Public Finance and Infrastructure Policy at USC, said the push to act quickly would inevitably fund some projects that might not survive more thorough deliberations. Little said that after the initial round of funding, he believed more thought and evaluation should come into play in determining worthy projects. "But first thing, you need to get the money flowing, get your contractors working," he said. "You need to prime the pump." To some extent, county lobbying will have a limited effect.
Congress has signaled that it will base funding on existing formulas for most expenditures, but a sizable minority of projects would be selected according to senior officials' discretion. For this reason, all five county supervisors said they would personally visit Washington lawmakers to press the case for pet projects. "It can feel like a free-for-all. The line you always get is things are moving rapidly but we don't know what the rules are going to be eventually," said Supervisor Don Knabe. He returned Monday from Washington, where he lobbied the Army Corps of Engineers for $6 million to dredge off the coast of Marina del Rey, a project on the stimulus wish list.
For Obama supporters, post-inauguration letdown is inevitable
On many issues, including gay marriage and the Mideast, his backers seem to have just assumed he didn't mean all those things he said on the campaign trail. Presidential inaugurations are in many ways the high-water marks of any presidency because they're so full of hope. All things seem possible. The rivalries and backbiting haven't set in yet, at least not publicly. Even the inevitable disappointments over Cabinet picks and White House staffing are tempered by the wide-eyed dreams of an ambitious agenda. Everyone -- or at least everyone who backed the guy -- has that "we can make this the best yearbook ever!" feeling.
Then comes the letdown. No, I don't mean Barack Obama will be a failed president. But even the most successful presidents bitterly disappoint some people, usually some of their biggest supporters. Indeed, they can only disappoint supporters because disappointment first requires confidence and hope. Those who voted against Obama can either have their low expectations fulfilled or be pleasantly surprised. Many conservatives, for example, had hoped that George W. Bush's "compassionate conservatism" was simply a marketing slogan. They were dismayed to discover he really meant it. In the 1980s, Republican factions were deeply divided in the "let Reagan be Reagan" debates. Everyone heard what they wanted to hear during the campaign and expected the man's presidency to jibe perfectly with their expectations.
Obama's ideological compass is far more difficult to discern than Reagan's or Bush's were. This is why his conservative detractors often called him a cipher. Obama's supporters rolled their eyes despite producing often-contradictory evidence to rebut the charge. This raises perhaps the most interesting question of the Obama presidency: "What wasn't Barack Obama lying about?" I don't mean this to be as harsh as it sounds. I'm not talking about what his conservative critics said he was lying about -- say, the true nature of his relationship with William Ayers. I'm talking about issues where his own supporters seem to have just assumed he had his fingers crossed.
Consider, for example, the controversy swirling around pastor Rick Warren, invited to deliver the invocation at the inaugural. The choice is controversial because Warren, while something of a moderate in the evangelical world, is a blackhearted villain among gay-rights activists for his support of Proposition 8 in California, which successfully proscribed same-sex marriage. The interesting thing is that throughout the campaign, Obama and Joe Biden took the exact same position as Warren on gay marriage. And yet, gays overwhelmingly supported Obama (and Democrats generally) but consider Warren a slap in the face of the first order. When you ask gay activists and liberal strategists about this sort of thing, their response might be: "It's OK because we know they're lying." They insist that when it's politically feasible, "Obama and the Democratic Party will be there for us."
That's one reason why the Warren appearance is so offensive to activists: It conjures the frightening possibility that Obama's election posturing wasn't posturing but rather (gasp!) his actual position. Over the interminably long campaign, Obama's positions "evolved" to suit his political needs. This is hardly extraordinary. Pretty much every successful presidential candidate embarks on a similar ideological migration. Indeed, Obama's campaign was in some ways remarkable for how little he tacked to the right in the general election. But it was also remarkable for how honest Obama could be about his dishonesty. When his past statements on NAFTA ("devastating" and "a big mistake") became inconvenient, he shrugged: "Sometimes during campaigns the rhetoric gets overheated and amplified." His own economic advisor, Austan Goolsbee, had already told Canadian officials not to worry about Obama's pledge to unilaterally "renegotiate" the North American Free Trade Agreement; it was all campaign boob-bait.
Some on the left are worried that Obama's previously staunch antiwar position was smoke and mirrors as well. Obama has retained Bush's secretary of Defense and has surrounded himself with supporters of the war, including his vice president and secretary of State. On Israel, the left had good reason to believe Obama was their guy. One of Obama's closest friends is Rashid Khalidi, an unofficial Palestinian spokesman and left-wing academic. Early in the campaign, many perceived Obama to be taking a pro-Palestinian line when he said that "nobody has suffered more than the Palestinian people." As the campaign wore on, he sounded increasingly pro-Israel, particularly during a hawkish speech to the American Israel Public Affairs Committee. In July, during a visit to the Hamas-besieged city of Sderot, Obama told reporters, "If somebody was sending rockets into my house, where my two daughters sleep at night, I'm going to do everything in my power to stop that." And, he added, "I would expect Israelis to do the same thing." In short, Obama placated Israel supporters without alienating critics of Israel.
But that's precisely the sort of thing you can pull off when you're simply running for president, particularly when your eloquence is only outmatched by the willingness of your supporters and the media to accept whatever you need to say to get elected. But when you're actually the "decider," splitting the differences becomes much more difficult. That's why we have that saying: "To govern is to choose." It will be in his choices that we will know the man.
Crunch cost Arabs $2.5 trillion in last four months
The global economic crisis has cost Arab countries $2,500bn (£1,690bn) in the last four months alone, according to Kuwait's foreign minister. Sheikh Mohammed al-Sabah told reporters in Kuwait City that oil-rich Gulf Arab states had postponed or cancelled 60% of development projects. He did not give details for his figures, which were released days before an Arab Economic Summit. Stock market falls and a low oil price have contributed to the losses.
The biggest loss was an estimated 40% drop in the value of Arab investments abroad, which had previously totalled around $2.5tn, AFP news agency reports. "The Arab world has lost $2.5 trillion in the past four months," Mr Sabah said after meeting fellow foreign and finance ministers. Kuwait City is due to open a two-day Arab Economic Summit on Monday, the first of its kind. Arab League Secretary General Amr Moussa earlier described the meeting of 22 heads of state as "the largest and most important" Arab event of 2009.
Monetary union has left half of Europe trapped in depression
Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch. Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.
A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill. Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped. As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker – a "prison of nations", to borrow from the Austro-Hungarian Empire.
This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts. "Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers, who called for the dissolution of parliament. In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday. These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts.
The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26pc of GDP. Riga property prices surpassed Berlin. The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months. Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.
This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project. Latvians have company. Dublin expects Ireland's economy to contract 4pc this year. The deficit will reach 12pc of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach. The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment.
To cap it all, Dell is decamping to Poland with 4pc of GDP. Irish wages crept too high during the heady years when Euroland interest rates of 2pc so beguiled the nation. Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end. Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible. Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste". Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.
They mean that capital flight from Club Med could set off an unstoppable process. Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days. Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931. Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.
Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling. Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions. In other words, the ECB is already providing a stealth bail-out for Europe's governments – though secrecy veils all. An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?
State Borrowing Gets Pricey
Markets have more to worry about than the health of the banking sector, they've got another big money holder to worry about: governments. In Europe, governments have already been borrowing billions more than usual from the debt markets to fund rescue attempts for troubled banks and economies, and some look more at risk than others.
Spreads on government debt from countries that were Europe's most famous economic success stories not long ago -- Greece, Spain and Ireland -- have reached record highs over German bunds in recent weeks on concerns about their public finances. They spiked again on Friday after Ireland nationalized one of its biggest lenders, Ango Irish Bank. This is a problem for these governments, especially if it turns out they underestimated how much the credit crisis would impact their economies and how much they'd need to borrow to finance their stimulus packages.
That is why many are racing to hold bond auctions now, before the rate of interest they are expected to pay back to bond holders gets eye-wateringly high as bond investors hold out for wider spreads. The higher it gets, the more taxpayers from countries like Greece and Ireland have to pay out. "Spreads will probably continue to widen because the news-flow is pretty negative as far as the real economy is concerned," said Jacques Cailloux, an economist from Royal Bank of Scotland. Some traders believe the Greek spread, which is currently yields 245 basis points more than the German bund, could widen to 300 or even 350 basis points by March. UBS analysts say government debt spreads are near their peaks and will narrow by the end of 2009.
Spyros Papanicolaou, head of Greece's Public Debt Management Agency, told Forbes that Greece was holding three quarters of all its bond auctions in the first half of this year, but still expects to borrow about 42.0 billion euros ($55.5 billion ) in 2009 to cover maturing debt and interest payments. Some 12.0 billion euros ($15.8 billion ) of that is for interest payments alone, and that number is flexible. "Eventually, the interest payments on debts will be higher than was thought, and you need to recoup those interest rate payments by higher taxes in the future," said Cailloux.
"There's not much we can do," said Papanicolaou when asked about his reaction to widening debt spreads, which are essentially a result of the bond market's perceived risk of Greece's ability to pay back its debt. "We just have to convince the market that they are wrong and they overreacted and the spreads are not justified. Let's hope they will change their mind." Some don't think investors should, though. Chris Pryce, Western Europe director at Fitch Ratings, says the current yield differential between Greek and German bonds reflect a better assessment of the risk.
"Previously euro zone investors did not property distinguish the risks in the euro zone. Greek government accounts are pretty appalling. They have the highest debt after Italy." Greece's debt-to-GDP ratio is forecast by Fitch to have hit 92.0% in 2008; Italy's hovers around 100.0%. Greece is launching another five year bond next week, and the government will be hoping that spreads won't go too much wider by then. Yet, with many investors holding out for tastier yields, it's doubtful that will be the case.
Bailout Is a No-Strings Windfall to Banks, if Not to Borrowers
At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money. “Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.” As the incoming Obama administration decides how to fix the economy, the troubles of the banking system have become particularly vexing.
Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates. Indeed, as mounting losses at major banks like Citigroup and Bank of America in the last week have underscored, regulators are still searching for ways to stabilize the banking system.
The Obama administration could be forced early on to come up with a systemic solution, getting bad loans off balance sheets as a way to encourage banks to begin lending, which most economists say is essential to get businesses and consumers spending again. Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions. Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America.
A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future. Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury. “With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”
The bankers’ comments, while representing only a random sampling of the more than 200 financial institutions that have received TARP money so far, underscore a growing gulf between public expectations for how the $700 billion should be used and the decisions being made by many of the institutions that have taken part. The program does not dictate what banks should do with the money. The loose requirements in the original plan have contributed to confusion over what the Treasury intended when it abruptly shelved its first proposal — to buy up bad mortgages — in favor of making direct investments in individual banks in return for preferred shares of stock.
The Treasury secretary, Henry M. Paulson Jr., said in October that banks should “deploy, not hoard” the money to build confidence and increase lending. He added: “We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure.” But a Congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law’s requirement that it develop a “plan that seeks to maximize assistance for homeowners.”
The report concluded that the Treasury’s top priority seemed to be to “stabilize financial markets” by simply giving healthy banks more money and letting them decide how best to use it. The report also said it was not clear how giving billions to banks “advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs, and families unable to pay their credit cards.” For the banks, fearful that the economic downturn could deepen and wary of risking additional losses, the question of what to do with the bailout money comes down to self-preservation.
Mark Fitzgibbon, research director at Sandler O’Neill & Partners, which sponsored the Palm Beach conference, said banks seemed to be allocating the bailout money for four general purposes: increased lending, absorbing losses, bolstering capital and “opportunistic acquisitions.” He said those approaches made sense from a business perspective, even though they might not conform to popular expectations that the money would be immediately lent to consumers. “For the banking industry, this isn’t a sprint, this is a marathon,” Mr. Fitzgibbon said. “I think over time there will be pressure to lend that capital out and get a return for their shareholders. But they’re not going to rush out and lend all that money tomorrow. If they did, they could lose it.”
For City National Bank in Los Angeles, the Treasury money “really doesn’t change our perspective about doing things,” said Christopher J. Carey, the bank’s chief financial officer, addressing the BancAnalysts Association of Boston Conference in November. He said that his bank would like to use it for lending and acquisitions but that the decision would depend on the economy. “Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think,” Mr. Carey said. “And if they don’t, we may end up just paying it back a little bit earlier.”
In addition to wanting more lending, members of Congress have said TARP should not be used to fuel mergers and acquisitions, although Treasury officials say the financial system would be strengthened if healthy banks absorbed weaker ones. To that extent, bailout money has been useful for improving capital ratios — the amount of money available to absorb losses — for banks that merge. On Friday, Bank of America said it would receive $20 billion more from the Treasury to help it digest losses it took on by acquiring Merrill Lynch, a process begun in September. At least seven banks that received TARP money have since bought other companies, including one that had been encouraged to do so by federal regulators. That one, PNC Financial Services, took $7.7 billion from the Treasury and promptly acquired the struggling National City Bank for $5.2 billion in stock and $384 million in cash.
Among the others, PlainsCapital Bank of Dallas announced in November, not long after the bailout program began, that it planned to merge with a healthy investment bank, First Southwest. PlainsCapital received $88 million from the Treasury on Dec. 19, and the all-stock merger was completed two weeks later. PlainsCapital’s chairman, Alan B. White, insisted in an interview that the two events were not connected. He said the bank had not yet decided what to do with its bailout money, which he called “opportunity capital.” Increased lending would be a priority, said Mr. White, who did not rule out using it for other acquisitions, adding that when regulators invited PlainsCapital to apply for federal dollars, there were no conditions attached. “They didn’t tell me I had to do anything particular with it,” he said.
None of the bankers who appeared before recent investor conferences offered specific details about their intentions, but recurring themes emerged in their presentations. Two of the most often cited priorities were hanging on to the money as insurance against a prolonged recession and using it for mergers. At the Sandler O’Neill East Coast Financial Services Conference in Florida, bankers mingled with investment analysts at an ocean-front luxury hotel, where the agenda featured evening cocktails by the pool and a golf outing at a nearby country club. During his presentation, John R. Buran, the chief executive of Flushing Financial in New York, said the government money was a way to up the “ante for acquisitions” of other companies.
“We can get $70 million in capital,” he said. “So, I would say the price of poker, so to speak, has gone up.” For Mr. Hope, the Whitney National Bank chairman, “the main motivation for TARP” was not more loans, but rather to safeguard against the “possibility things could get a lot worse.” He said Whitney would continue making loans “that we would have made with or without TARP.” “We see TARP as an insurance policy,” he said. “That when all this stuff is finally over, no matter how bad it gets, we’re going to be one of the remaining banks.”
No breakup at Citigroup
Make no mistake: Citigroup is not breaking itself up. It has merely drawn a blueprint for becoming a more manageable, responsible and potentially profitable financial institution. Much more must be done to satisfy investors and regulators that its decades-long string of failures has ended. The central flaw in the plan by the chief executive, Vikram Pandit, is a steely determination to keep Citigroup's wholesale bank welded to its far-flung consumer businesses. The company's arguments for doing so sound sensible. But so did its reasons for creating a financial supermarket - until they were proved wrong.
The good news is that Citi Holdings should allow the bank, over time, to dispose of a host of ancillary businesses and run down other unwanted assets without overly singeing shareholders. Over all, Citi Holdings will contain $850 billion in assets, including a $305 billion loan portfolio partly backstopped by the U.S. government. Taking these pieces from the core - which removes the final vestige of Sanford Weill's imprint by reviving the Citicorp name - is the right move. With a separate chief to conduct the sell-off, Pandit and his executives can refocus on the retail and wholesale banks.
The latter caused the bulk of Citigroup's $60 billion or more in write-downs and losses. But Pandit has already chastened it, all but banning proprietary trading to focus on being a middleman for clients. And he is capping the size of the unit's assets at $700 billion. That shrinks further, once commercial banking products that can be funded with deposits, like loans, are excluded, leaving a little less than $400 billion for the rest of the Wall Street operations - less than Goldman Sachs and Morgan Stanley have at their disposal.
For the moment, Citi executives say they have no plans to split the remaining rump in two, arguing there are synergies in tying them together. To get institutional business in many countries around world, they say, Citi must often have local retail deposits as funding. Perhaps. But it is impossible to judge whether that is the case, or whether the profitability of this business outweighs the risks of managing such a massive institution. What is certain is that Citigroup has a track record of promising synergies that never appear. There is no reason to believe it is different this time.
FDIC may let banks borrow cheaply for longer
The Federal Deposit Insurance Corp. said Friday it is considering expanding its guarantees for new bank debt, tweaking a popular program that aims to boost lending by letting financial institutions sell debt below market levels. In a press release announcing another $20 billion in aid to Bank of America, the FDIC said the board may soon propose rule changes to its Temporary Liquidity Guarantee Program that would allow banks to sell FDIC-guaranteed debt that matures in up to 10 years. Currently the agency only backs debt with maturities of three years or fewer. The program has been popular with investors and the financial sector, helping banks issue about $120 billion since late November at rates far below what they'd have to pay in the still-mostly-frozen corporate bond market.
Under the program, banks can sell their debt backed with the full faith and credit of the United States in exchange for a fee to FDIC. It was created to enable banks to lend more and at better rates to consumers and businesses. "It's not surprising that they are trying to come up with other ways to keep banks' funding costs down at reasonable levels," said Ira Jersey, an interest-rate strategist at Credit Suisse. Since this bank debt comes with a government guarantee but carries higher yields than the government's own debt, the new supply has already cut into demand for safe-haven U.S. Treasurys in maturities between three and 10 years, he said.
Right now, banks' 10-year bonds based solely on their own credit are trading at yields around 7%, Jersey said. By comparison, FDIC-backed three-year bonds sold over the last couple months are trading around 1.8%. On Friday, the news helped pressure Treasurys. Yields on 10-year notes, which move in the opposite direction of prices, increased 12 basis points, or 0.12%, to 2.33%. It was the biggest increase since Jan. 2. Five-year note yields rose 9 basis points to 1.47%. The FDIC specified that under the expanded program, the issuance would have to support new consumer lending. Reports show that consumer credit remains tight, leading some critics of the program to conclude many banks have held onto a lot of their FDIC-backed funding to shore up their balance sheets.
"Banks have been caught between needing to lend and needing capital," said Jason Brady, who helps oversee about $6 billion in fixed-income assets at Thornburg Investment Management. "You can't make a bank lend, but structuring it in a way that lending is guaranteed by the government addresses the problem in a very direct way. It's a good idea." The rule change is likely to also specify that the debt is "supported by collateral," the FDIC said. No other details were available, according to an FDIC spokesman. That would be a big switch from the plan to date, where the debt maturing in up to three years hasn't needed backing by specific collateral.
The idea echoes comments Treasury Secretary Henry Paulson made back in July in favor of creating a covered bond market in the U.S., though primarily for mortgage debt. Covered bonds are secured debt instruments that provide loan interest and payments to an issuer, like a bank or depository institution. The bank is required to hold the assets on its books to compel it to only make good loans they'd be willing to back instead of sell off -- one of the root problems of the financial crisis, stemming from bad, subprime-mortgage loans.
Besides mortgages, banks may be able to secure covered bonds with newly issued securities backed by credit cards, student debt and car loans. A big unknown is over what period the banks would be allowed to issue these longer-term FDIC-backed bonds, and whether there would be a limit on how much they could issue. Under the current program, banks can issue FDIC-backed debt only until June, and may only issue up to 125% of the amount outstanding that matures by then.
Goldman Sachs, Citigroup and GE Capital, the financing arm of General Electric, have issued debt under the existing program.
"Extending the maturity is a good thing, but it's a bigger deal if they could extend the time in which banks could issue the debt," said Spencer Lee, who heads the fixed-income trading desk at SCM Advisors LLC, which manages about $5.8 billion. Being able to issue debt over a longer period would greatly help banks struggling to roll-over maturing debt after June, he said.
In Search of One Bold Stroke to Save the Banks
In the immortal words of Yogi Berra, it’s déjà vu all over again. Wasn’t it just four months ago that the government was racing to save the American International Group, forcing the sale of weak banks and writing huge checks to stabilize the teetering banking system? The worst was over — or so we were given to believe. It sure hasn’t worked out that way. In November, not long after it was handed $25 billion in new capital, Citigroup was back for more — another $20 billion in bailout money and a government backstop of more than $300 billion in potential losses. This week, alas, it’s Bank of America’s turn. It came crawling back because of the huge write-down of its shiny new toy, Merrill Lynch. It got another $20 billion and a backstop against losses of $118 billion in troubled assets. There are rumors that Wells Fargo might also need more capital.
When is it going to end? Because of declining asset values, the original bailout money has largely disappeared. “It’s like putting money in a pothole that keeps getting bigger,” said Daniel Alpert, the managing partner at Westwood Capital. And it’s not over yet. Goldman Sachs says the world banking system has absorbed about $1 trillion in losses — but there is likely to be another $1.1 trillion yet to go. The response has got to stop being so haphazard. Think about it: Citigroup is slimming down. Bank of America is bulking up. The government is essentially backing both approaches. It makes no sense. I started wondering if there is a better approach — something that doesn’t feel like plugging holes in a leaky dike. Perhaps this new idea being discussed in Washington of creating a government bank to buy up toxic assets might do the trick. It turns out I’m not the only one who’s been asking this question lately.
“I don’t want to have to do any more of these one-offs,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, in an interview on Friday. “Nobody does.” She was referring to the Bank of America deal, which had been completed just days before. But she could just as well have been talking about the Bush administration’s entire approach to the financial crisis. Think back to last September. After the A.I.G. rescue — which of course followed the Fannie Mae and Freddie Mac takeovers, the Merrill Lynch sale to Bank of America and the disastrous Lehman bankruptcy — Ben S. Bernanke, chairman of the Federal Reserve, and Treasury Secretary Henry M. Paulson Jr. concluded that they needed to find a systemic approach to fixing the huge problems in the banking system. They came up with the $700 billion bailout bill.
Do you remember the original idea for the TARP money? The government was going to use funds from the Troubled Asset Relief Program to buy up bad assets from banks and other institutions, thus taking them off the balance sheets and keeping them from dragging down the institutions. But by the time TARP became law, two things had become clear. The first was that nobody in Washington — or on Wall Street, for that matter — had a clear idea of how to value the toxic assets the government was proposing to buy. And second, the banking system had deteriorated so badly that most of that first $350 billion had to be shoveled into the banking system as recapitalizations. In addition, Ms. Bair and others forced the sale of insolvent institutions like Washington Mutual and Wachovia to healthier banks.
That initial recapitalization was necessary. Without that government-financed capital, many more banks would have been insolvent, or would have been hoarding capital, fearing future asset write-downs. But the underlying problem has never gone away. The toxic assets are still on the books. Banks still don’t really know what they are worth, so they continue to be written down in piecemeal fashion. And now, with the recession getting worse by the day, other assets, like commercial real estate and credit card loans, are going south as well. “It’s a rolling problem that gets worse as conditions worsen,” the banking consultant Bert Ely said. (A quick reminder for readers who wonder why the banks shouldn’t be allowed to go bankrupt, like any other company that made the kinds of mistakes banks made. The answer is that the banking system is the engine of the economy; if banks stop functioning, economic activity will grind to a halt. Indeed, at least some of the pain we are going through now is the result of the banking system’s not functioning properly.)
The key point here is that any systemic solution has to deal with the bad assets, once and for all. They need to be properly valued and they need to be isolated. “How do you know how big the hole is on the balance sheet of Citi until you have a decent valuation?” asks the Princeton economist Alan Blinder. That is the primary reason the banking system can’t attract private capital and has to rely on the government — no prospective investor has any idea how deep the hole is. That will only start to become clear when these assets are either written down to zero (unlikely) or start trading again. The second point is that the next round of recapitalization — and it now appears the next $350 billion of TARP money is going to be used primarily for that purpose — needs to encompass the entire banking system, and needs to be truly enormous. Simon Johnson, a professor at the Sloan School of Management at M.I.T., and a well-known blogger on banking issues, says he believes that it will take $1 trillion to really do the trick — money, presumably, the government will get back once the banking system is healthy again, and private capital comes in to replace the government’s capital.
“It’s not rocket science,” Mr. Johnson said. “When you do a recap, you need overkill. But then, you also have to take the bad assets off the books.” In the recent deals it cut with Citi and Bank of America, the government tried to “ring-fence” bad assets — that’s its phrase, not mine — by agreeing to absorb losses on securities that have been identified as toxic. But that is still a piecemeal, one-bank-at-a-time approach. Mr. Blinder, a former Fed governor, told me that he thought the government should be thinking about the entire problem differently: “It should go market to market instead of institution to institution.” He pointed to actions by the Federal Reserve as a possible model: it has revived the commercial paper market by creating a commercial paper funding facility — and has done the same with several other important debt markets. In effect, it is guaranteeing the smooth functioning of those markets. And that approach has worked.
As it turns out, Ms. Bair — who, thankfully, will remain the head of the F.D.I.C. in the new administration — has been thinking along the same lines. She, Mr. Bernanke and Treasury officials have begun talking about a new kind of bank, one that would be created and capitalized by the federal government, and whose sole purpose would be to buy up bad assets. Instead of ring-fencing bad assets one bank at a time, it would warehouse them in one place, much the same way the Resolution Trust Corporation did for real estate assets during the savings and loan crisis. Would the sale of these assets cause further write-downs? Of course. That is why you would need to throw more capital into the banks as part of a systemic solution. But at least you would finally know how deep the hole is. “You would have to mark the assets at the price they were selling for,” Ms. Bair told me. “I think that is an advantage.” At long last, there would be some certainty. Private capital won’t return to the banking system until that happens.
“The only rub in the ointment is back to the original problem: How do you determine the market price?” said Josh Rosner, a managing director of the research firm Graham Fisher. We avoided dealing with the issue in September; this time, we need to face it squarely. Senator Charles E. Schumer also worries about the total cost. “I’m hearing $1 trillion,” he told me. “That seems low.” But, he added, “if they can adequately answer that question, the idea has a lot of appeal, both on Capitol Hill and, I think, in the financial markets.” In past financial crises, it has often been the bold and brilliant stroke that has restored confidence and revived the financial system. During the German hyperinflation of the 1920s, the government actually created a new currency. During the Latin American crisis of the late 1980s, the United States government created so-called Brady bonds, which cleverly allowed banks to get their Latin American debt off their balance sheets by turning it into tradable instruments. And here we are again, in need of bold action and strategic thinking and the restoration of confidence. Inauguration Day can’t come a moment too soon.
Action needed now to avoid depression, warns ITEM economist
Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club said that quantitative easing is needed immediately. The Government and the Bank of England have got "days not weeks" to take action to revive the economy or face a prolonged depression, one of the UK's leading economists has warned. Peter Spencer, chief economic advisor to the Ernst & Young ITEM Club said that quantitative easing, whereby the Bank of England would print money to buy assets such as corporate bonds and consumer loans, was needed now.
"My concern is that people don't fully understand the dangers lurking out there. The Bank of England needs to move towards quantitative easing immediately – you don't have to wait until you get to zero per cent interest rates. If someone is choking to death you don't think twice about giving them an emergency tracheotomy. There may be dangers, yes, but the alternative is that they die," he said. "We are now in danger of seeing the economy choke: and once you get into a situation where people are hoarding as much cash as you can throw at them and interest rates are stuck at zero, you're in real, real trouble."
He made the comments before the publication of ITEM's latest economic forecast tomorrow, in which it predicts the economy will shrink by 2.7pc in 2009 – the most since the Second World War. Gross domestic product (GDP) will fall again in 2010 by 0.5pc, ITEM will argue, which is in sharp contrast to the Chancellors' own prediction that the UK economy will start to recover in the second half of 2009. The gloomy prediction comes before figures published on Friday provide the first official confirmation that the UK is in recession. The Office for National Statistics (ONS) is expected to reveal a sharp contraction in GDP in the final quarter of 2008, following a 0.6pc fall in the third. "Our forecasts are relatively optimistic. The recession is already baked in. The question is whether we go from here into a decade of deflation – if they make more mistakes that is pretty much on the cards – or some pretty horrific numbers this year and some positives later on. They have days – not weeks – to play with," said Professor Spencer.
He conceded, however, that Government action to date had "prevented the collapse of the monetary system as we know it". Separate figures from the ONS on Wednesday are expected to show that the deepening recession is taking its toll on the labour market, with unemployment up in November from 1.86m in October, and an acceleration in the number of people claiming jobless benefits in December. The number on unemployment benefits jumped by 75,700 to 1.07m in November. ITEM predicts that overall UK unemployment will reach 3.4m in 2011 and that house prices have a further 22pc to fall over the next 18 months. It will also say that it expects a near 16pc drop in business investment in 2009, with a further 6pc decline in 2010.
Professor Spencer said: "Precautionary behaviour has begun to spread with corporates planning for the worst. Investment intentions and recruitment plans have collapsed. Company treasurers are very worried about what lies around the corner in 2009 and prefer to be sitting on cash." Consumer spending will fall by 2.6pc in 2009, followed by 0.6pc in 2010, ITEM will say. The start of 2009 has seen no let-up in the gloom facing the UK economy. Since January 5 more than 40,000 jobs have fallen victim to the economic downturn with high-profile companies such as Barclays, Nissan, Marks & Spencer and Jaguar Land Rover announcing redundancies. A number of businesses have fallen into administration, such as china and crystal group Waterford Wedgwood, and a buyer could not be found for failed high-street retailer Woolworths, resulting in the loss of approximately 27,000 jobs.
UK taxpayers face years of debt in bank salvage deal
Taxpayers are poised to take on the "toxic" debts of High Street lenders in a new bank rescue deal which could cost taxpayers billions of pounds. Taxpayers are poised to take on the "toxic" debts of High Street lenders in a new bank rescue deal that could cost the Treasury billions of pounds. Under the "pay as you go" plan, details of which were still being hammered out on Saturday, the Government will create a new insurance scheme that would see liabilities of up to £200 billion potentially kept on the public books for years. Taxpayers would not face an immediate upfront cost but could be hit with payments in future if banks' assets fell below a certain level. The insurance scheme has won favour at the expense of alternative plans to create a "bad" bank under which the Government would have simply bought banks' existing toxic debts.
The latest rescue plan comes amid growing concern that lenders are about to unveil losses for 2008 that will shock the market. Royal Bank of Scotland (RBS) could reveal about £20 billion of losses which would be the biggest corporate loss ever in Britain. HBOS's bad debts, meanwhile, are thought to be so serious that the Government will press for the Lloyds Banking Group to come under state control. In a closely linked plan, the Government is preparing to "swap" certain types of shares in RBS, increasing its stake in the troubled lender from almost 60 per cent to 70 per cent. Ministers believe it is increasingly likely that they will now have to fully nationalise the Edinburgh-based bank. Under the same share-swap scheme the Government could increase its holding in the enlarged Lloyds bank from 43 per cent to over 50 per cent, giving it a controlling stake.
Lloyds is expected to fiercely resist the move. Details of Labour's latest bail-out plans, which could be announced as soon as Monday, came as Gordon Brown, the Prime Minister, stepped up his rhetoric over irresponsible lending. New balance sheet figures for some big lenders, including Barclays, RBS and HSBC, showed that 80 per cent of their loans were with overseas individuals and companies. In comments at Downing Street, Mr Brown said: "As far as British banks are concerned the greatest problem that we have is international. It is the exposure of British banks to international losses that is the biggest problem that we face." The Prime Minister is understood to have favoured the new "pay as you go" insurance deal over a single toxic bank because of the potential shock to taxpayers if they faced an immediate multi-billion pound hit so soon after last October's £37 billion bank rescue package. However, the impact of the two schemes is intended to be broadly similar.
The new rescue deal comes at a difficult time for ministers, amid sharply rising unemployment. A YouGov opinion poll today increases the Conservatives' lead over Labour to 13 points, providing further evidence that the improvement in Labour's ratings in response to the Prime Minister's handling of the financial crisis, is over. The survey puts the Conservatives on 45 per cent, up four points on last month, Labour down three on 32 per cent and the Liberal Democrats down one on 14 per cent. The poll is likely to put paid to speculation that Mr Brown would call a general election in the spring. Ministers hope their latest scheme will restore confidence in banks and increase lending levels. A source close to Alistair Darling, the Chancellor, said: "What Alistair has been totally focused on is removing the blockages from the system."
Were taxpayers to directly acquire the banks' worst assets, one of the major problems would have been valuing them. The insurance scheme puts less pressure on the Government and banks to strike a price for toxic assets. Lenders would keep their bad debts on their books but they would be underwritten by the taxpayer. Mr Darling was expected to call the chairmen of RBS, Lloyds Banking Group, HSBC and Barclays to a meeting, which would also be attended by senior figures from the Bank of England and Financial Services Authority. Officials are expected to give the banks a blueprint for their plan and hope that they come out with a strong statement of support for the measures on Monday morning, instilling confidence in the stock market. On Friday night shares in Barclays slumped by 25 per cent.
However, several issues were still the subject of intense debate between the banks and the Government on Saturday. Ministers were planning to offer to swap preference shares they took in several banks for ordinary equity, which would bolster banks’ capital. The Government will offer its insurance scheme for toxic debt to HSBC and Barclays, which so far have no state ownership because they did not take Government money in the October bail-out. Both banks were thought likely to take part in the new scheme. John Redwood, the chairman of the Conservatives’ economic competitiveness commission, said: “If the Government is going to do an insurance scheme, it must look after the taxpayer. It could still be extremely expensive and they are trying to prop up very large international banks that might have lost a lot of money overseas.”
The Business Secretary, Lord Mandelson, suggested that Britain would have to move away from financial services, where problems were going to take “time and ingenuity” to resolve. Speaking at a Fabian Society conference, Lord Mandelson said: “We will see our economy diversify away from an over dependency on financial services. We’ve got to identify in this country what specialist businesses we are going to invest in, where are we going to make our contribution to the global economy.” He said that there were “important questions” about bonuses. “Why have so many incentives for individuals in the financial services sector ended up destroying value rather than creating it? I don’t believe that we should worry too much about people getting rich so long as they can show that they are genuinely paid for their performance.”
Brown ready to risk billions on debt insurance
Gordon Brown is preparing an unprecedented multi-billion pound plan to insure British banks against future losses from so-called toxic assets, creating a safety net under the financial system which could unblock lending to homeowners and businesses. The scheme would force out any bombshells still hidden in the system, but risks exposing taxpayers to huge losses if the bad loans decline more sharply than expected. However, ministers hope it could restore confidence by setting a floor beneath which banks know they will not fall, and could be less of a gamble than proposals to create a "bad bank" into which lenders simply dump unwanted debt.
Ministers are also considering investing £10bn in the state-owned Northern Rock, turning it into a "good bank" lending freely to plug current gaps in mortgages and commercial lending. Since it was nationalised, Northern Rock has wound down its lending, but MPs want the government to exploit its holding. The prime minister yesterday hinted at the plans, which will require lengthy negotiations but could be sketched out as soon as tomorrow, when he demanded banks disclose the true scale of losses they are harbouring. He told the Financial Times that "where we have got clearly bad assets, I expect them to be dealt with".
Under the scheme, banks would reveal their toxic assets - mostly a legacy of the American sub-prime lending scandal, in which mortgages which could never be repaid were bundled up into complex debt instruments and sold around the world - to a new state-backed insurer. For a fee, the insurer would guarantee them against further losses below a certain level from their bad investments. Uncertainty about the impact of an estimated £200bn in toxic loans is blamed for banks' reluctance to lend, which is starving businesses of cash and increasing the risk of job losses. The news came as it emerged that millions of homeowners could be excluded from government plans for mortgage "holidays" to prevent repossessions among people made redundant in the recession. The Council of Mortgage Lenders has warned the offer may be restricted to low-risk borrowers with over 20-25% equity in their home unless the Treasury puts more public money behind the scheme.
That could exclude up to two million people forecast to be in negative equity by 2010, plus others hit by plummeting house prices - a far cry from last November's proposals to let struggling homeowners defer all but a nominal mortgage interest payment for two years, with the government underwriting payments. The priority now is tackling banks' toxic debts, after last week's rout in bank shares which wiped £27bn off the value of Barclays in one hour's trading. Brown, his close colleague Shriti Vadera, chancellor Alistair Darling, and business secretary Peter Mandelson spent the weekend in frantic negotiations. The government may seek a bigger stake in the Royal Bank of Scotland and Lloyds TSB-HBOS, as well as actively using Northern Rock. "They haven't dotted the i's and crossed the t's, but the idea of Northern Rock becoming the 'good bank' is a very strong possibility," said one industry insider.
Downing Street sources confirmed the insurance plan was a leading option, but difficulties remain over calculating the value of toxic assets, and over how it interacts with international banking systems. Brown said that he was discussing an "international solution to the crisis" with other leaders: "We will do everything we can so that families can feel secure about their savings, so that mortgages can continue to be provided." Yesterday Mandelson, speaking at a Fabian Society conference, attacked what he called the "politics of resentment" against the rich. He acknowledged anger over City bonuses, but backed high salaries for high performers, adding: "I think it is very important that we don't get ourselves into thinking that tax, and tax on the highest paid in our society, is a litmus test of social justice."
Why the party's over in Ireland
For nearly 15 years, the world watched with a mixture of fascination and awe as Ireland transformed itself from one of Europe's poorest countries into one of its wealthiest, earning itself the nickname the Celtic Tiger. But the roar of yesteryear has turned to a whimper as the economy has been poleaxed by the global slump and a housing crash that has been worse than Britain's. Prices are down 30%, compared with around 16% in the UK. So bad have things become that the Republic's third largest lender, Anglo Irish Bank, was nationalised last Thursday amid a crisis of confidence that saw large-scale depositor withdrawals. A day earlier, in an atmosphere described as febrile by analysts, the Irish government was forced to deny that it was seeking emergency help from the International Monetary Fund.
The deepening crisis in Ireland is underlined by the jobless numbers: unemployment is forecast to hit 400,000, or 11% of Ireland's four-million population, by the end of 2009. Everywhere, the trappings of wealth and confidence are beginning to fade: Dublin airport used to be littered with private jets and luxury cars outside the terminal, but there are fewer nowadays as the country edges towards a new era of austerity. At the Curragh racecourse, costly expansion has been put on hold to conserve cash, while from Limerick in the south-west, to Louth in the north-east, businesses are shedding labour and, in some cases, going into liquidation. The rot has set in remarkably quickly: it is hard to believe that unemployment was just 4% at the end of 2007, or that GDP growth could plunge to minus 4% in 2009 against growth of 6% two years ago. "We are facing extreme short-term difficulties," says Rossa White, chief economist of Davy, the Irish stockbroker.
Last week, John Browett, chief executive of electrical goods retailing giant DSG, said that while the British recession was following past norms, the situation was "more serious" in Ireland. Experts say that the severity of the Irish downturn is partly explained by the uncomfortable truth that the boom in housing and financial services (similar to what happened in Britain) has masked a number of underlying "structural" problems. Fergal O'Brien, senior economist at the Irish Business and Employers Federation, says that wage inflation has been running out of control and today stands at 20% above the European norm. "Our wage costs have doubled in the last four or five years; that means we have lost our historic, competitive advantage and it will be a long, slow and painful process to restore it," says O'Brien.
For evidence of the consequences of wage inflation, look no further than Dell, the US computer company, which earlier this month announced that it was axing nearly half its 4,300-strong workforce and shifting its manufacturing operations from Ireland to Poland as part of a cost-cutting drive. The entire Irish production of laptops and desktop computers are being moved to Lodz, Poland's third largest city, where labour costs are two-thirds lower than in Ireland. Dell is not a two-bit player: it's Ireland's second-largest private sector employer, the country's biggest exporter and in recent years has contributed around 5% to GDP.
The sting in the tail was that in the past, Polish workers have flocked to Dell's Limerick factory for work and training. "Now they are taking our jobs," was a predictable response in some quarters, reflecting anxiety that a steep rise in domestic unemployment could lead to social tensions.
Ireland has been hit on another front: currency. The euro (which Ireland joined in 1999) has remained relatively strong against a plummeting British pound (25% of all Irish exports are to the UK) and a weakened dollar. The decline against sterling has had unforeseen consequences with Irish shoppers flocking to Northern Ireland in search of bargains. O'Brien estimates that "cross-border trade now accounts for between 2% and 3% of Irish consumer spending".
Newry Chamber of Commerce in Northern Ireland estimated that over Christmas at least 40% of its customers crossed the border to shop in its main retail centres - the Buttercrane and the Quays. The exodus prompted Ireland's finance minister, Brian Lenihan, to appeal to shoppers' "patriotism". But the call was largely ignored. Jane Smith from Kilbarrack, a north Dublin suburb, who recently returned from a shopping spree in the north, said: "I probably paid 20% less there than I would have done in Dublin. Cleaning products, babywipes, headache tablets are all cheaper." More importantly, Irish exporters cannot compete with their British counterparts, who have seen the pound devalued against the euro by 25% in the past year. O'Brien says that export trade is critical for the Irish economy as "80% of what we produce here is sold abroad".
The question that many people ask in the republic is whether the country can return to the halcyon days between 1994 and 2007 when GDP growth regularly touched an astonishing 10% a year. Alan McQuaid, chief economist at Bloxham stockbrokers says "almost certainly not" as Ireland in the 1980s had a lot of catching up to do. "But we have a young, English-speaking and highly educated workforce and as long as we tackle our problems, there is no reason to suppose that we couldn't record 2% or 3% GDP growth annually." Already Ireland is taking action to point the country in a direction that could herald a recovery in two or three years' time. Private companies are asking their employees to take a pay cut in view of harsh economic conditions. The upshot, if the medicine is more generally administered, will be to make Ireland more competitive, not only with western Europe, but with eastern and central Europe too.
One company that is applying the knife to pay is Independent News & Media, where the tycoon Tony O'Reilly has called on staff at his Irish operations to accept pay cuts of up to 10%, with employees on high salaries asked to make bigger sacrifices than those further down the pay scale. Elsewhere, the Irish construction industry is seeking to impose a 10% pay cut on more than 200,000 workers, telling unions that it's the only way to save jobs. Just as pressing is a need to cut pay in the public sector to plug a hole in government finances that analysts fear could hit £14bn in two years. As government and unions draw battle lines for the struggle ahead, the Irish prime minister, Brian Cowen, last week said that a trade unionist was right to warn that the IMF could impose cuts on the public sector unless it agrees to freeze or reduce pay to employees, which has ballooned over recent years. It was that assertion that sparked fears, unfounded it turned out, that Ireland was looking for an IMF lifeline.
For now, Cowen is confining himself to working with unions in a bid to lop £1bn from the budget this year by persuading staff to agree to pay reductions. But that will be a hard sell. Paul Sweeney, economic adviser to the Irish TUC, said: "There is no evidence whatsoever that cuts in wages lead to reductions in prices. In a small, open economy, inflation is largely determined externally. He added that the government should be held to account for stoking the boom by giving subsidies to property investors and cutting taxes. However, structural issues must be addressed, says White, and sooner rather than later. "The problem is that we have relatively low taxes but high expenditure, and that is unsustainable. Something has to give," he says.
Low taxes were one of the bulwarks of the Celtic Tiger economy, luring foreign multinationals to relocate to Ireland and fuelling the expansion in employment that saw many qualified Irish professionals and other skilled workers return home after moving overseas in search of work in the 1980s and early 1990s. Other factors were at play: it's generally agreed that membership of the EU was key to Ireland's ability to attract high-profile companies such as Intel, Google and Gateway. Many leading US companies use Ireland as a platform from which to operate in the European market. One analyst says: "The rapid growth in the US during the 1990s, together with a resurgence of EU trade, was undoubtedly a major contributor to Ireland's success."
For a long time, Ireland was a net recipient of EU aid, which helped to modernise the country's infrastructure and educational system, while the adoption of the euro provided much needed currency stability. Another critical reason behind the rise of the Celtic Tiger, say researchers, was the fall in the birth rate after the legalisation of contraceptives in 1979. That had an impact on the ratio of workers to those they financially support. The ratio fell dramatically in the 1980s and 1990s, so that by 2000 it had caught up with the European norm. That led to a seismic, demographic shift and a huge economic boost: from 1960 to 1990, the annual growth rate of income per capita in Ireland was about 3.5%; in the late 1990s, it jumped to 5.8%, well in excess of any other EU country.
But there is widespread gloom in Ireland today, summed up recently in an Irish Times article that said: "We have gone from Celtic Tiger to an era of financial fear with the suddenness of a Titanic-style shipwreck, thrown from comfort, even luxury, into a cold sea of uncertainty." The same, of course, could be said about most other countries in the world, in the wake of the near breakdown of the international banking system and the need for governments everywhere to pump in billions to support depositors and to avert a global depression. But as Tom Lynch, chairman of biotech company Amarin, says: "There was immense euphoria in Ireland up to 2007, perhaps unlike anywhere else. Now we all need to sober up a bit. We may not get back to the heady GDP growth rates we have had in the past, but that was when we were playing catch-up with the rest of Europe. There's no earthly reason, though, why the much maligned Celtic Tiger shouldn't get back on its feet."
Russians hoard cash as fear of crisis takes hold
Muscovites are hoarding thousands of dollars in safety deposit boxes, as fears intensify that Russia is teetering on the brink of a full-blown economic crisis, after the government devalued the rouble five times in six days. World oil prices have plunged from almost $150 (£102) a barrel to below $35, pushing the country to the brink of recession. "Russia is a volatile economy at the best of times: it's heavily dependent on commodity prices - on oil and gas," said Nigel Rendell, senior emerging markets analyst at RBC capital markets. As the public frets about a repeat of the 1998 financial crisis, when the government defaulted on its debts, sending shockwaves through the world financial system, banks are reporting a surge in use of safety deposit boxes in the capital.
"Russians have a massive distrust of high finance even at the best of times," said Neil Shearing, of consultancy Capital Economics. "At the first sign of trouble, they pull their money out and stick it under the bed." Even in 2004, the OECD estimated that up to $80bn, most of it probably in dollar notes, was circulating outside the official banking system. "The memories of 1998 loom large, and the rouble is taken as a bellwether of the health of the economy," Shearing said. "They're essentially trying devaluation by stealth, so that no one notices." The currency has shed 7% of its value in just five days, ending the week at 37.32 versus a euro-dollar basket. It has lost a fifth of its value since August, and Russian stock markets have lost 70% of their value since May. Moscow has blown over a quarter of its foreign currency reserves over the last five months in a desperate bid to ensure that depreciation is gradual. Dealers estimate the central bank spent $26bn on interventions this week alone.
Rendell, of RBC, added that a number of small Russian banks have made very risky bets on the country's property bubble, and may have to be bailed out by the government in the coming months. "Russia has over a thousand banks, which is probably about 950 too many," he said. Former Soviet leader Mikhail Gorbachev yesterday joined a chorus of influential Russians criticising the handling of the economic crisis. "Resources are directed not so much at protecting the interests of a majority of citizens as at saving the assets and property of a narrow circle of influential businessmen," said their letter, published in the Vedomosti newspaper. Oligarch Alexander Lebedev, who is buying the Evening Standard, was also a signatory. The crisis echoes the fate of credit crunched states across central Europe. Latvia and Bulgaria have seen street protests over the economy in the past week, while Turkey is in talks with the IMF.
The End of Banking as We Know It
The concept of the financial supermarket — the all-things-to-all-people, intergalactic, behemoth banking institution — bit the dust last week. The first death notice came on Tuesday, when Citigroup, Exhibit A for the failure of the soup-to-nuts business model, said it was dismantling. Just over a decade after the deal-maker Sanford I. Weill tried to meld insurance, investment banking, mortgage lending, credit cards and stock brokerage services, the dissolution began. Citigroup, it turned out, was too big to manage, too unwieldy to succeed and too gigantic to sell to one buyer. A few days later, Bank of America, another serial acquirer of troubled institutions —Merrill Lynch and Countrywide Financial most recently — fessed up that its deals now need taxpayer backing.
The United States government invested an additional $20 billion in Bank of America (after $25 billion last fall) and agreed to guarantee more than $100 billion of imperiled assets. Clearly, the entire financial industry is in the midst of a makeover. And while no one wants to call it nationalization, perhaps we can agree on this much: The money business as we have come to know it over the last two decades — with its lush salaries, big-swinging risk-takers and ultrathin capital cushions — is a goner. Got that? Toast. Toe-tagged. And that’s a good thing, because maybe we can go back to a banking model that is designed to do more than simply enrich the folks at the top of the enterprise while shareholders and taxpayers absorb all the hits.
Banking, because it oils the crucial wheels of commerce, has a special standing in our world. That will always be the case. But in exchange for that role, our country’s leading bankers might have approached their jobs with a sense of prudence and duty. Instead, a handful of arrogant greedmeisters blew up their institutions and took our economy off the cliff along the way. It’s too soon to say how much taxpayer money will be spent trying to rebuild banks hollowed out by bad lending practices. Paul J. Miller, an analyst at Friedman, Billings, Ramsey, thinks that the nation’s financial system needs an additional $1 trillion in common equity to restore confidence and to get lending — the lifeblood of a thriving and entrepreneurial free-market economy — moving again. That $1 trillion would come on top of funds disbursed through the Troubled Asset Relief Program, which has tapped $700 billion, and the president-elect’s stimulus plan, clocking in at $825 billion.
Larger capital requirements, beefed up to serve as a proper buffer when lenders misfire, will be one change facing banks when we emerge from this mess, Mr. Miller said. He thinks regulators will require banks to hold tangible common equity of 6 percent of assets. Now many institutions hold under 4 percent. Such a requirement will cut into earnings, of course. Toning down the risk-taking will also reduce the profitability — or the appearance of it — at these institutions. “This industry made a lot of money by taking a business line with 20 percent return on assets and levering it up 30 times,” Mr. Miller said. “But no more. Banks are going back to being the boring companies they should be, growing roughly in line with gross domestic product.” Clearly this means that the rip-roaring performance of financial services companies and their stocks isn’t likely to return anytime soon. Because these companies’ earnings fed both the economy and the stock market in recent years, a more muted performance has considerable implications for investors, consumers and the economy.
For example, since 1995, according to Standard & Poor’s, earnings of financial concerns have accounted for 22 percent of profits, on average, among the S.& P. 500 companies. That performance is almost double that of the next largest contributor — the energy industry. In 2003, earnings among financial companies peaked at 30 percent of total profits generated by the S.& P. 500; back in 1995, financial company earnings accounted for 18.4 percent of the total. Of course, many of these earnings were ephemeral and have since turned to losses. But while the companies were reporting the profits, their stocks roared. Between 2003 and the peak in 2007, the American Stock Exchange financial services index essentially doubled. At the peak, financial services companies dominated the S.& P. 500 index, accounting for 22 percent of its market value in 2007. With many of these stocks in free fall, that figure is now just 12.5 percent.
Will valuations on financial services stocks bounce back soon? Not in Mr. Miller’s view. “They are going to look more like the insurance industry, trading at book value or 1.5 times book,” he said. “That is, if you are really good.” For financial services workers, of course, the inevitable downsizing has already begun. But there will be more. “The industry was way too big; too many people were not producing anything,” Mr. Miller said. “Jobs will be lost and not replaced. And financial industry salaries won’t be anywhere close to where they have been.” The bright side is that all those displaced financial services professionals can now set their sights on doing something, well, truly useful. Still, this adjustment will be painful for all those who have to carve out new careers, as well as for New York and other places these companies call home.
Finally, what will a humbled financial services industry mean for consumers? Higher borrowing costs, Mr. Miller said. “The leverage that these companies were using allowed them to lower their rates,” he said. “Rates have to go higher for the banks to operate in a safe and sound manner and make money.” Credit is also likely to remain tight, in Mr. Miller’s opinion. A result is that consumer spending won’t recover to bubble levels. “It is going to be difficult to get credit, and that is something the system has to adapt to,” Mr. Miller said. “That is where the government is going to have to step in and replace that debt growth to make sure there is a smooth transition.” In other words, Barack Obama’s first stimulus plan is not likely to be his last. When a driving economic force takes a big dive, the ripples are far-reaching. Change is painful, there is no doubt. But American business can be awfully good at reinventing itself when it needs to. And does it ever need to now.
Loans threaten Minnesota community banks
For much of the past two years, Minnesota's community banks have seemed to escape the credit crisis engulfing the nation's largest banks. Until now. Dozens of Minnesota banks have entered the new year on shaky footing, hobbled with millions of dollars of commercial real estate loans going sour at an alarming pace. Several analysts predict that some community banks could fail in the state this year, as the slump that began in the housing market spreads to business loans backed by land and buildings.
"Any bank that has a sizable book of commercial real estate loans could have serious problems in 2009," predicted Jamie Peters, a bank analyst at Morningstar in Chicago. Across the state, banks are beginning to feel the impact of loans they made to borrowers during the real estate boom, when property values went nowhere but up. The delinquency rate on commercial mortgages and construction loans made by Minnesota banks jumped 84 percent from the third quarter of 2007 to the same period in 2008, according to Foresight Analytics, a real estate research firm in Oakland, Calif. As of the third quarter of last year, 5.7 percent of commercial real estate loans in Minnesota were more than 30 days past due, up from 3.1 percent a year ago, according to Foresight Analytics.
Officials with the Minnesota Department of Commerce, which regulates 429 state-chartered banks and credit unions in Minnesota, acknowledged the problem and said they are concerned. The department's watch list of banks it considers in "less than satisfactory" condition has nearly doubled over the past 18 months to 50, from 26 in June 2007. A handful of those banks are at risk of possible failure, say Commerce Department officials, though they declined to identify them.
State Tax Revenues Fall as Recession Bears Down
State tax revenues fell in the last quarter of 2008 as rising unemployment, falling business profits and a drop in consumer spending left many states with their largest deficits in a generation. Estimates for tax revenues, released Friday by the Nelson A. Rockefeller Institute of Government at the State University of New York system, cover the 36 states that have released fourth-quarter tax data. The states suffered declines in most sources of revenue. Personal-income taxes eked out a 0.1% gain, based largely on income earned before the recession deepened. Sales taxes were down 6.5% in the quarter compared with a year earlier as consumers cut back. Corporate income taxes fell 22.1%, reflecting falling profits.
"It's just astoundingly bad," said Don Boyd, senior fellow at the Rockefeller Institute. "I suspect [revenue] is going to be worse than many states were thinking." Budget problems have become the chief priority for governors and legislatures in many states. California Gov. Arnold Schwarzenegger discussed the state's $42 billion budget gap for much of his annual address to legislators Thursday, calling budget woes a "rock upon our chests." On Friday, the state moved closer to delaying tax refunds and other payments to preserve dwindling cash. More than $3 billion in payments, including tax refunds due to millions of individuals and businesses, would be delayed beginning Feb. 1 unless state leaders act on the budget soon. Also facing payment delays would be state vendors, local governments expecting aid for social programs and individuals expecting rent or food assistance.
Arizona's state treasurer said this month that the state could soon be out of money by February, which would force the state to borrow money to pay its bills. The recession is squeezing states from two sides: Falling tax revenues have left them with less money, while the rise in unemployment has increased demand for costly social-assistance programs. Unlike the federal government, most states are required to balance their budgets, forcing states to make tough choices such as furloughing employees, instituting pay freezes and cutting funding to normally untouchable programs like education and health-care funding. Some states have proposed sharing: On Tuesday, the governors of Minnesota and Wisconsin announced they are looking for ways to share everything from heavy equipment to software and road salt in hopes of easing both states' budget woes. Many states have essentially put off budget negotiations in anticipation of state aid in the stimulus package being urged by President-elect Barack Obama.
From earning six figures to hoping for $7 an hour
In her best year as a mortgage broker, Laura Glick says she made "six figures." This week she was one of more than 1,200 people attending a job fair and applying for one of 150 jobs paying between $7 and $12 an hour at a new Kohl's department store in a Denver, Colorado, suburb. She has been out of work for seven months and never thought it would take her this long to find a job. It's not the kind of job she thought she would be applying for, but she has a case of the jitters just the same. "Your heart starts to race, and you get nervous even though it is not some big job like you used to have," she said. "I'll take anything at this point." Glick is not alone. Many other people have lost their jobs in this tough economy.
A record number of jobless claims was set last month, when first-time claims hit a 26-year high of 589,000 claims in one week. Last week's claims also broke the half-million mark, 524,000, according to a new government report cited on CNNMoney.com. Glick, 29, has been living on about $1400 a month in unemployment benefits, barely enough to cover her rent and health insurance. To get by she has stopped eating out, given up cigarettes and has stopped taking her pets to the vet for regular checkups. "Its feels very degrading, some of the places I'm applying," Glick said. "It's really difficult, and its hard to stay positive, but that's the only way you're going to get something is staying positive. And I'm hoping everything happens for a reason and the doors that have been closed are going to be the ones that lead to open ones." Video Watch could you be an entrepreneur »
Job seekers have been pouring into a hotel ballroom all week for one of the prized jobs. They fill out paperwork and then are taken up to a hotel room in groups of ten or so. The beds have been removed from the room, and they sit in a circle while store managers holding clipboards ask questions. Most are told they will hear back within three weeks. But some get word right away. "Hey guess what. I got the job," exclaimed Rebecca Erickson, speaking to her mother on her cell phone. When the other applicants filed out the managers asked her to stay behind and offered her a job. She was so excited she forgot to ask how much the job pays. "It's only part-time, but I'll take it. There's always room for advancement, and with it being a new store opening you never know, a full-time position may open up," she said.
Erickson, a 31-year old single mother of three, has been unemployed for about two months and has been supporting her family on about $1400 a month in unemployment benefits and food stamps. "It's awesome; It's great; I love it," she said. "To know that I got a job and they have had over a thousand applications come in for this job, and to know that I am the one to get it is just awesome." A store opening such as this one is rare. With unemployment at 7.2 percent nationwide and retail sales down for six straight months, there are more going-out-of-business signs than grand-opening signs. Most of the applicants came alone, but a set of identical twins came here as a team.
"Where ever he goes, I go," said Jeri Hines, here with his brother Jerell. The 23-year-olds seem to always have a smile on their faces and insist on working together. They have spent the past year doing odd jobs such as raking leaves and shoveling snow while working on a comic book. "Its about a girl running around looking for treasure," Jerell said. As the Hines twins make their way up to the interview room, their strategy is simple. "Be really energetic and be sure they know everything they can about you," Jerell Hines said On the way out their smiles are still in place, they flash a thumbs up sign and in unison call out, "Keep your fingers crossed."
Outsourced Chores Come Back Home
A few months ago, as her family’s income fell, Laura French Spada, a real estate agent in Glen Rock, N.J., began dyeing her hair at home and washing the family cars herself. Her husband, Mark, started learning how to do electrical repairs. Susan Todoroff, a personal trainer in Ann Arbor, Mich., has begun brewing espressos at home and cutting her hair and cleaning her house herself. And Tamar A. Zaidenweber, a health care market researcher in Astoria, Queens, is spending more time walking her dog instead of taking it to day care each week. All of these consumers could praise themselves for their newfound frugality in the midst of an economic downturn. But every step they take toward self-reliance — each shrub they prune themselves, each cupcake they bake from scratch — hurts the people and small businesses that have long provided these services professionally.
These small, service-oriented businesses are run in storefronts on urban streets and in suburban strip malls, or sometimes just out of pickup trucks. Responsible for roughly 18 million jobs nationwide, according to 2006 Census Bureau data, these companies have long been seen as engines of America’s economic growth. Yet after years of explosive expansion, many beauty salons, dry cleaners, landscapers, dog walkers, nanny services and restaurants experienced slower sales growth or even decline in the final months of 2008. Their services are suddenly, and painfully, being perceived as nonessential. The question now for these businesses is whether demand will stabilize or, eventually, drop enough to force them to close. And the answer may depend on whether consumers’ new penchant for self-service is temporary or permanent.
After all, as incomes rose and gender roles changed over the last 50 years, families have become accustomed to outsourcing more and more of their household chores. No longer was it just the very rich who had “servants,” said Jan de Vries, an economic historian at the University of California, Berkeley. “Household members, particularly women, have been working more in the market,” said Mr. de Vries. “They have had less time and higher money income, and they have been spending a lot of that money income on services they once provided themselves.” Still, he said, even before the recession, some families had already cited moral reasons for reverting to domestic self-sufficiency, to those good old days when families grew their own food and burped their own babies.
“Families have been creating a discussion over the past decade about value-driven concerns that are now being reinforced by forces in the economy,” he said. As a result of this confluence of moral and financial incentives, “The way households function 20 years from now will probably be sort of surprising to us.” Indeed, after decades of spendthrift subcontracting, many consumers now say they view such specialist services as indulgences rather than necessities. “A lot of the way we’d been living was all an illusion, a fantasy,” said Ms. Spada, who has also been cooking more and bathing the family dog instead of going to the groomer. “We’ve been asking ourselves: Can we replicate some of those specialized services, which normally we would outsource, ourselves?” Even as Americans cut back on restaurant dining, pet care services, professional hair and nail services, house cleaners and landscapers, companies producing some of the do-it-yourself products are seeing higher sales.
According to Information Resources Inc., a market research firm in Chicago, sales of products used in home manicures, home cooking and home medical treatments, among others, have experienced healthy growth in the last year. Dollar sales of cold-allergy-sinus tablets, for example, increased 17.2 percent in 2008. Meanwhile, according to Sageworks, a company that tracks sales at privately held businesses, revenue at physicians’ offices fell by 0.06 percent. “They’re reducing doctor visits, and trying to treat themselves at home,” says Thom Blischok, president of global innovation and consulting at Information Resources. Big-box stores that sell these products have been capitalizing on the return to a self-service mentality.
Target, for example, recently began its “New Day” marketing campaign, which glorifies the family-friendly, do-it-yourself alternatives to activities households used to outsource. Against upbeat lyrics about how things are “getting better every single day,” the ads show dismal economic headlines, followed by scenes of a father buzzing the hair of his smiling sons (“the new barber shop”) and a child eagerly eyeing his mother’s cookie-filled oven (“the new bakery”). At the same time, the service providers have been hurting. “From the moment that the stock market collapsed and the TARP was being talked about, in September, it was like someone turned the switch off for nanny demand,” said Steve Lampert, the president of eNannySource.com, making a reference to the Troubled Asset Relief Program. Family subscriptions to eNannySource.com, a national nanny placement company based in West Hills, Calif., are down to 150,000, about a third of the site’s peak in 2007, he said.
James Erath, owner of Puppy Love & Kitty Kat in Manhattan, said, “Business is definitely down, about 25 or 50 percent down.” He has been offering steep discounts on grooming to attract customers who might bathe their pets at home. Similarly, Rhonda Coop-Piraino, a hair stylist in Dallas, said about 10 percent of her clients had started coloring their hair at home to save money. Many of these clients, she said, return to her salon for color correction when their home kits disappoint. “They do come in sometimes with some pretty orange hair,” she said. “I have a hard time charging the same amount I once charged for color correction, though. I have clients who have been with me for so many years, and it’s hard for me to charge them $200 in this economy.”
Like Ms. Coop-Piraino’s clients, some consumers say that doing things for themselves has not been as easy as they thought. After letting their maid go last October, Chris DeCarlo said he and his partner, Chris Toland, realized they had a lot to learn about keeping their Manhattan apartment tidy. Their biggest challenge has been laundry. “No mishaps yet,” said Mr. DeCarlo, a Web site designer, “but my partner is proud to report that somebody in our laundry room who was watching him struggle felt the need to intervene and show him the proper way to fold a fitted sheet.” And there are some services that consumers now have trouble duplicating themselves because of technological advances. When it comes to cars, for example, consumers might be able to refresh their memories about how to change a car’s oil — and some mechanics report a rise in such self-service. Faisal Akram, the owner of service stations in Irvington, Tarrytown and Cortlandt Manor, all in New York, said that for the first time in recent memory customers were bringing in waste oil from home.
But beyond oil changes, there is little most car owners can do themselves because automobiles have become so sophisticated. Aaron Clements, the owner of C & C Automotive and host of a car-repair radio show in Augusta, Ga., said that in recent months twice as many customers had been calling and asking for advice on how to service their cars themselves. But usually, once they learn what equipment, training and effort would be necessary for self-service, he said, they opt to take the car to a shop. “Two cars ago, I was able to rebuild the entire engine,” said Vicki Robin, the co-author of “Your Money or Your Life,” a book praising the financial virtues of self-service. “But back then a car was a car. Now a car is a computer with wheels.”
As their former nannies, stylists, landscapers, dry cleaners and maids languish, consumers report mixed feelings. They say they sometimes feel guilty about the ripple effects their penny-pinching is having on the livelihoods of others, but at the same time they feel unexpectedly empowered by their rediscovered self-reliance. Many say that even when their financial worries abate, they will probably remain self-service converts. “After doing it yourself, it’s like, ‘Why was I ever spending $200 to pay someone else to do it for me?’ ” said Ms. Zaidenweber, who recently dyed her hair for the first time from an $8 home coloring kit. “It was kind of fun, even if it didn’t turn out exactly as I expected, and even it took a couple tries to get it done right.”
Veggie Gardens and Other Ideas for the Obamas
After three months on the road getting signatures for their petition, Daniel Bowman Simon and Casey Gustowarow finally rolled into the nation's capital in early November. Their mission: To persuade President-elect Barack Obama to plant an organic farm at the White House. It's not such a loopy idea, say the young former Peace Corps volunteers, who drive a converted school bus with a rooftop garden. They believe there's plenty of room on the 18-acre White House grounds. "This is a real opportunity for the president to lead by example," Mr. Simon says. He points out that past administrations have had gardens and grown vegetables, including those of John Adams and Thomas Jefferson. And First Lady Eleanor Roosevelt, like millions of other Americans, had a Victory Garden during World War II.
Groups pushing all sorts of causes sense opportunity in the Obama White House. Advocates of everything from stray dogs to backyard clotheslines are hoping the new first family will give their causes the ultimate seal of approval: a personal endorsement and a home at 1600 Pennsylvania Ave. Folks with a pet cause were heartened last month when the president-elect said on NBC's "Meet the Press" that he would like to "open up the White House, and remind people that this is the people's house. There is an incredible bully pulpit." Roger Doiron, too, envisions a presidential vegetable garden. The founding director of Kitchen Gardeners International, an advocacy group in Scarborough, Maine, that is part of the eating-local movement, runs a campaign called Eat the View to promote a White House garden.
Mr. Doiron has gathered more than 10,000 signatures on a petition supporting the idea. His cause ranks first in votes among more than 5,000 ideas for President Obama that people have submitted to On Day One, a project of a group called Better World Fund that promotes good ties between the U.S. and the United Nations. Last month, the District of Columbia City Council sent Mr. Obama a letter regarding his vehicle registration. "We are writing to request you to use the District of Columbia 'Taxation Without Representation' license plates on the presidential limousine," the council's letter read. The council added the American Revolution slogan to district tags to promote its campaign for voting rights in Congress -- something Washington's 588,000 residents lack because the District of Columbia isn't a state. President Bill Clinton put the plates on his limo to show support. President George W. Bush took them off.
Stray-dog activists see a unique opportunity in pushing the Obamas to adopt a stray as the pet they have promised their daughters. A Nov. 19, letter to Mr. Obama from the president of the Humane Society of the United States presses the case: "You raised a concern about your daughter Malia's allergies," writes Wayne Pacelle. "Please allow us to reassure you," he writes, pointing out that 25% of dogs in animal shelters are purebreds, some of them said to cause fewer allergies, though no dog is completely hypoallergenic. "Our adoption specialists would be delighted to help 'interview' and select the right dog for your family."
The solar-panel lobby sees opportunity in the new White House occupants, too. At a recent conference on renewable energy, the president of the Solar Energy Industries Association said: "In addition to bringing a puppy to the White House, we hope that Obama would also put some small wind [device] up on the White House, some solar panels [and] a geothermal heat pump, and really show his daughters what we as individuals need to do to be energy patriots in this country." President Jimmy Carter installed solar panels during his presidency. His successor, Ronald Reagan, took them down. Ben Davis, a marketing entrepreneur in San Francisco, has gathered more than 800 signatures on a petition to encourage the Obamas to install a clothesline at the White House, for at least one day. "It would send a signal to the nation and world that reducing energy consumption is patriotic and that line-drying one's laundry is part of the acceptable social fabric of our nation." Alexander Lee, a leader of that movement and founder of a group called Project Laundry List, in Concord, N.H., points to a photo taken around 1910 that suggests there was once a clothesline at the White House.
The departing Bush administration says that in the past eight years, it has greened up the White House. "Mrs. Bush is extremely focused on energy savings," says her spokeswoman, Sally McDonough. As incandescent bulbs burn out, she says, the first lady has been insistent on replacing them with more efficient LED lights. She adds that a few herbs grow in the east garden, while tomatoes, cucumbers and peppers thrive on the roof in the summertime. With just days to go before the Inauguration, some of the advocates are losing steam. Messrs. Simon and Gustowarow have run out of gas money and are parking their bus for now. They are keeping hope alive by asking public elementary-school teachers to have their students write letters to the president-elect pushing for the vegetable garden.
An especially big booster is celebrity chef Alice Waters, owner of the Berkeley, Calif., restaurant Chez Panisse and an advocate of sustainable farming methods. Ms. Waters has long promoted the idea of a vegetable garden at the White House, starting with President Clinton, whose frequent trips to McDonald's at the time seemed to advocate fast food. The idea gained no traction with the Clintons, but with the Obamas, she sees cause for hope. Back in July, when Ms. Waters introduced Michelle Obama at a Chicago event, she slipped another pitch into her speech: "By now thousands of people have had the same idea, and they're already petitioning the next president to plant that White House Garden!"
After the election, Ms. Waters tried once more in a letter to President-elect and Mrs. Obama. "If you plant it, it will be a victory garden in the truest sense: a demonstration to the world that your presidency is dedicated to the good stewardship of the land." She's hopeful. She says Mrs. Obama sent her a handwritten note saying: "I love the idea of planting a victory garden at the White House. I'm surprised that it hasn't happened already." A spokeswoman for the Obama transition team said, "We are grateful for the outpouring of suggestions and ideas from Americans across the country." While noting that "none are as popular as which dog the Obamas should select," she said, "we can assure the thousands who have contacted us that we are keeping track of every thought, idea, essay and suggestion."
Hedge Funds, Unhinged
Last summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both, were so rich that they did something most wealthy couples don’t do until much later in life. Still in their 30s, they hired a Ph.D. student in economics to help dole out their money to charities. Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world, has seen the value of his funds plunge by roughly $10 billion — one of the biggest amounts lost in the hedge fund carnage last year.
He was down 55 percent while the average fund was down 18 percent. For Mr. Griffin, it is a failing as personal as they come. Sitting back in his chair, gazing uneasily at the skyline here, he points to a new patch of gray hair when asked about the toll of his losses. “Last year was a dramatic year for the world’s largest financial institutions,” he says. “We were not immune.” Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett — ever since he began trading from his Harvard dorm room 20 years ago and then moved to Chicago to start his hedge fund. In recent years, his firm handily took in more than $1 billion annually. But now, the whiz kid has lost so much money that it is unclear whether he can make it all back. That reality is playing out among thousands of troubled hedge funds drowning in losses.
Two out of three hedge funds lost money last year, and according to agreements with investors, their managers are supposed to recoup all losses before they start skimming fees from their profits again. That could take years. And it’s unclear whether these traders, so accustomed to flush times, will stick it out long enough to make investors whole again. Their decisions will reverberate beyond Greenwich, Conn., the New York suburb that is a haven for hedge fund honchos. Pension funds, endowments and charities — not just wealthy individuals — all invest in hedge funds. Assets held by hedge funds surged to nearly $2 trillion as of the start of last year, from $375 billion in 1998, according to estimates from Hedge Fund Research, a Chicago firm. Along the way, hedge funds — once so few in number that they represented a boutique industry populated by a rarefied group of specialists — sprang up like kudzu.
Today, there are around 10,000 hedge funds, compared with around 3,000 a decade ago and just a few hundred two decades ago. Little other than money unites hedge funds, which invest in areas as varied as bonds, aircraft and small-business loans. They even make bets on the weather. What they have in common are lucrative fees: managers typically charge 20 percent of profits and 2 percent of total funds under management — the latter of which they earn regardless of performance. The wealth and power of hedge funds, and those handsome fees, were predicated on what now sounds like a hollow promise: to make money year in and year out. But the years of easy money are over.
Banks, pinioned by their own enormous mistakes and the economic slump, have cut back on hedge fund lending — essentially turning off a financial spigot that the funds relied upon to goose their returns. Economic uncertainty makes it harder to predict market movements. And investors, burned by big losses in 2008, are either questioning hedge fund fees or simply avoiding putting more money into the funds. The regulatory vise, meanwhile, is tightening around an industry that long enjoyed the freedom to trade and operate without the constraints imposed on more traditional firms. On Thursday, Mary L. Schapiro, Barack Obama’s nominee to head the Securities and Exchange Commission, said during a confirmation hearing that she plans to more tightly regulate hedge funds as part of an effort to “bring transparency and accountability to all corners of the marketplace.”
Lawmakers are already considering new taxes and regulations that would require hedge funds to disclose more information about their secretive trading strategies. Add it all up, and managing a hedge fund looks much less attractive than it used to. “The magnitude of this current crisis and its effect on their business was a real shock for hedge fund managers,” said William N. Goetzmann, a professor who studies hedge funds at the Yale School of Management. “It will be a long-lasting effect because it’s caused customers to question the basic model.” Mr. Griffin, fiercely competitive, says he is firmly in the camp of those trying to stay open. But he acknowledges that for several years, he will be working mostly for “psychic income.”
Not everyone is rooting for Citadel. Call up nearly any hedge fund manager, and you will hear the stories about Mr. Griffin, now 40, poaching workers, landing a trade on the cheap and stalking wounded peers for deals. Mr. Griffin declined to comment on such stories. His aggression has earned him admirers but has also created enemies. In the low-profile hedge fund industry, people shuddered at his brash claims that Citadel would become as powerful as investment banks like Morgan Stanley and Goldman Sachs. His firm has become the fortress that many would love to see broken. Mr. Griffin knows that, but he chalks it up to his success. “Over the last 10 years we have been innovative and bold,” he says.
But in July, his magic touch deserted him. After reviewing the trading books at Kensington and Wellington, the two largest funds that Citadel manages, he decided to trim some holdings while bolstering an asset class he had traded since his early days: convertible bonds. But the value of convertibles plummeted as banks, large issuers of such shares, went into a tailspin after the collapse of Lehman Brothers, the venerable investment bank. Citadel made another large bet that the gap between corporate bonds and insurance bought on those bonds, known as credit-default swaps, would narrow. In essence, Mr. Griffin was betting that the economy would strengthen and that the price of insurance on debt would cheapen.
Others in the industry backed away from that particular gambit. Paul Touradji, who runs a fund associated with the veteran trader Julian Robertson, said his own digging indicated that more people would need to sell their bond positions than the number that were likely to buy in. Still, Mr. Griffin stuck to his guns, even as his funds fell 16 percent in September. The loss put Citadel in the spotlight and generated speculation about its survival. One day, the rumor was that Federal Reserve officials were trolling his Chicago headquarters; the next, that his funds were selling off troubled assets, or that banks were pulling credit. (Federal Reserve officials did in fact check up on Citadel. But since last spring, such inquiries have become routine at all large financial institutions. The other rumors were unfounded.)
Mr. Griffin says Citadel came under attack because it was a large and easy target — not because it was about to collapse. By late October, Citadel was fighting for its life. At the end of the month, its funds were down an additional 20 percent and nearing 40 percent losses for the year. Mr. Griffin met with all of his employees and held a public conference call to reassure the world about Citadel’s financial footing. Mr. Griffin calls that period “surreal” but says he never went to bed worried that Lehman’s fate would become his own. The difference with Citadel, Mr. Griffin says, is financing. He says he has arranged for credit lines at dozens of banks with durations as long as a year, buying him time. “Any firm that is a lasting, permanent institution goes through rough times,” he says. “In three years, they’ll write the story about how we came back, much like Goldman Sachs came back after 1929.”
Citadel, in fact, is different from many hedge funds that specialize only in trading. Mr. Griffin reinvested profits over the years into new service-based businesses. The management company, which is controlled solely by Mr. Griffin, also owns a firm that provides administrative services to other hedge funds, as well as the Citadel Derivatives Group, a major player in the options and stock markets. And Citadel recently hired a former Merrill Lynch executive to build a capital markets business, a mainstay of investment banking. “Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives Group. “Our clients do not interact with the asset management side of the firm, and they’ve come to know us in an entirely different capacity.”
Mr. Griffin has full discretion over how much money he uses to subsidize his struggling funds. Last year, Citadel shouldered some of the funds’ operating costs, which are known to be among the largest in the industry. At the same time, though, Citadel blocked investors in its two troubled hedge funds from withdrawing money at the end of last year. The company has told investors that they might be allowed to withdraw money at the end of March. Mr. Griffin explains these decisions by saying that “it was the right thing to do,” because withdrawals by some investors might have disadvantaged other investors who remained in the funds. Citadel also canceled its holiday gathering because it was not “right,” he says, to celebrate last year.
But right and wrong in hedge fund land is a matter of debate. Industry veterans have been loudly criticizing fund managers who blocked investors from retrieving money. Leon Cooperman, for instance, who runs Omega Advisors, is suing another hedge fund, contending that it didn’t allow him to make withdrawals; he said his own fund would never block redemptions. “You’d have to lower me into the ground before I’d put up a gate,” Mr. Cooperman says. “Clients deserve to be able to withdraw their money.” Orin Kramer, another hedge fund manager, who also helps oversee the New Jersey pension fund, says that what bothers him most is that managers who are freezing their funds are still charging 2 percent management fees on money they have trapped. “It’s like telling someone at a hotel that they can’t check out and then charging them for the privilege of staying,” Mr. Kramer says.
In November, five of the country’s richest hedge fund managers filed solemnly into a Congressional hearing room to be grilled by lawmakers. They made up a Who’s Who of their industry. In addition to Mr. Griffin, the group included James Simons, of Renaissance Technologies; Philip A. Falcone, an activist investor who has bought a large stake in The New York Times; John Paulson, who earned billions of dollars betting against mortgages before the crisis; and George Soros, the Hungarian trader who rode to fame on prescient currency trades in the early 1990s. Unlike banks or brokerages, hedge funds do not have to reveal information on their financial condition to the government. That means the government has no way to know the value of funds’ assets, how much money they borrow, or even how many funds there are.
For years, the industry has argued that hedge funds should be allowed to operate under the radar because they serve sophisticated investors. But by November, it had become apparent that too many hedge funds, crammed into too many of the same trades, had been forced to sell — and that they did not operate in some distant universe. Like mutual funds, they can roil the markets. At the hearing, four of the managers surprised lawmakers and their peers by saying that more regulation of their business was needed. Mr. Griffin was the lone holdout. He argued for private market solutions, but as the hearing proceeded, he conceded that he would “not be averse” to greater disclosure to the government, provided that it was not made public. He says now that he is working on providing more transparency to his investors. Lawmakers proclaimed the day a victory.
“I believe there’s been a near-consensus that hedge funds can cause systemic risk,” said Representative Carolyn B. Maloney, a Democrat from New York and a member of the House Financial Services Committee. Even without government intervention, the days of working behind a curtain may be ending. Investors are already demanding more information about hedge funds’ operations. Eiichiro Kuwana, president of Cook Pine Capital, a firm in Greenwich, Conn., that helps wealthy people invest in hedge funds, says that investors once had so much money to invest that they became less circumspect — with many of them investing in hedge funds that refused to provide much information. No longer. “Why would I trust a fund with my money if they won’t trust me with information?” Mr. Kuwana says.
Hedge funds tend to close by choice; outright collapses are less common. Sometimes banks pull funds’ credit lines and managers are forced to shut down. But by and large, the end comes when a manager no longer sees a financial upside for himself or herself. Few funds have actually shut their doors. The number of funds peaked early last year at 10,233, according to Hedge Fund Research, and fell just 4 percent during the year. And they still manage $1.6 trillion. Of the funds that lost money last year, the average loss was 29 percent, according to estimates from HedgeFund.net, a research firm. It will take a few years of fairly robust gains — no easy feat in these markets — for funds to simply recoup those losses. Until then, managers would earn only their 2 percent fee, chump change to most hedge funds. Some managers are already paying talented employees out of their own pockets to persuade them to stay, but it’s apparent that surviving this turbulence isn’t in the cards for scores of funds.
Mr. Touradji of Touradji Capital was one of the few managers to make money last year, up 13 percent. He says that most firms that call themselves hedge funds never really deserved the title. “There’s any number of good violinists, but how many people are good enough to be considered to conduct the Philharmonic?” he says. “The whole concept of hedge funds was always and still is this very high bar, that you were never allowed to say it was a tough market. Come rain or shine, you were supposed to do well — even in tough markets.” But he predicts a slow death for the poseurs. Hedge fund managers, he says, may behave like restaurateurs who keep the doors open long after losses mount, largely because they don’t want to work in someone else’s kitchen. For his part, Mr. Griffin is not likely to be job-hunting any time soon.
While there is no way to calculate his net worth, it is thought to be at least hundreds of millions of dollars. In May, a monument to his riches will be unveiled at the Art Institute of Chicago. He and his wife donated $19 million for Griffin Court, part of a new modern wing that connects the museum to Millennium Park. And they are hoping they will have plenty of money for their Ph.D. graduate to give out by 2010. As for Mr. Griffin’s troubled hedge funds, their survival will pivot on successful trading — they are up 6 percent this year — and on his willingness to use Citadel’s other units as a safety net. Whatever happens, Mr. Griffin says he can handle the shakeout in the hedge fund industry. “It’s going to be fairly significant, “ he says, then pauses and grins. “It’s part of capitalism.”
Deflation? Stimulus? Deleveraging? Recession? A soft depression? A return to a bull market? With all that is going on, how does it all end up? When we get to where we are going, where will we be? In chess, the endgame refers to the stage of the game when there are few pieces left on the board. The line between middlegame and endgame is often not clear, and may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have different characteristics from the middlegame, and the players have correspondingly different strategic concerns. And in the current economic endgame, your strategy needs to consist of more than hope for a renewed bull market.
First, I have to address some more government data that can be misleading. We were told Thursday that initial unemployment claims were "only" 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff. Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That is not a typo. There were almost 1 million newly unemployed last week! That is up over 400,000 from the same week in 2008, while the seasonally adjusted number was up only 200,000. Last week the real number was 726,000, so this is a material rise of over 225,000, yet the seasonally adjusted number suggests a rise of only 57,000 from last week.
The continuing claims data leaped over 500,000 to (again, not a typo!) 5,832,746. The length of time people are staying unemployed is also rising rapidly. We are up almost 1.5 million new continuing claims in just the last five weeks. That is a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly, but it is what it is. When you are in periods where there are deep outliers to the data because of very real turning points in the economy (such as we are going through now), the seasonally adjusted numbers can mask the real underlying trends, both up and down.
Let me repeat a point I made last week, which is important and necessary for us to grasp if we are to understand where we are headed. We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before. But the captains of our fleet are Keynesians to their core (and they don't have any Vulcan advisors). They don't have any historical maps to guide us back to a functioning economy; they only have theory. The North Star they are guiding us by, for good or ill, is John Maynard Keynes, with a slight nod to Milton Friedman. It is not a question of whether or not there will be massive stimulus. The question is simply how much and for how long. And my wager, as outlined below, is that it will be far larger than anyone would want to admit today. Think of Scotty, aboard the Enterprise, when Captain Kirk demands more power, "But Captain, I'm giving her all she can take. She's ready to explode!" (But he always finds a little bit more.)
Let's set the scene for where we are today. The US likely just experienced a 4th quarter with GDP down over 4%. Some estimates suggest 5%. For all of 2009 we are likely going to be down at least 1-2%, which will make this the longest recession since the Great Depression. Unemployment is headed to at least 9%. Consumer spending will be off by at least 3% this year and again in 2010, as consumers start to find virtue in savings, which should rise in the US to 6% within a few years. Housing prices are going to drop another 10-15%, taking homes back to a level where they may be more affordable. Corporate earnings are going to be dismal for at least the first two quarters, with forward estimates being lowered again and again. Global trade is falling rapidly, and it is likely that we will see a global recession this year, which will result in further negative feedback on US, European, and Japanese exports.
On a more positive note, oil is below $40, which is more of a stimulus to consumers than anything anticipated by the incoming Obama administration (at least as far as consumers go). With short-term rates at zero, adjustable-rate mortgages are actually not the problem anticipated a year ago, and many homeowners are rushing to refinance their homes at lower rates. Large banks have indicated a willingness to actually cut the principle and interest on troubled mortgages, which might lower the number of defaults. Conversely, the number of defaults is high and rising -- throughout the developed world. It is likely to be 2011 before the housing market finds a real bottom and housing construction can begin to rise.
The credit markets are still in disarray. While there are some signs that the frozen markets are thawing, the Fed and the US Treasury are having to provide more bailout capital to large US banks. Citigroup is breaking up. Bank of America needs massive amounts of capital to digest Merrill. The hole that is AIG just keeps getting deeper. It is going to take several years for the credit markets to function at anything close to normal, as we simply vaporized a whole credit industry worldwide. To think it will take anything less is simply naive. And in the meantime, the various central banks of the world, along with their governments, are going to step in to fill the need for credit.
Obama has signaled that he needs the remaining $350 billion of Troubled Asset Relief Program money as soon as possible, although his delegated Treasury Secretary, who will run the program, may be in some trouble, as he failed to pay taxes on his income from his stint at the IMF. (This is not an "Oops, I forgot!" The IMF does not withhold income taxes from its employees. However, he was given a memo about the taxes he owed. And he did pay them for two years when he was audited and caught. He clearly knew the nature of the taxes due the two prior years, yet did not come clean on those years. Dumb move for someone on a fast-track career and who clearly has an impressive intellect. He has got to be kicking himself. Since the Treasury Secretary is in charge of the IRS, this is not good for Obama. Someone on his team should have vetted this more thoroughly. I do think Geithner is otherwise as qualified as anyone else on the short list, but this is a very large cloud hanging over him.)
The auto industry is reeling. Without a lot more government funds, it is unlikely that GM or Chrysler will survive without going through bankruptcy. The industry needs to shed about 20% of capacity. No amount of government funding will change that reality. Beyond autos, industry after industry is on the ropes. I could go on and on, but you get the picture that is facing the Obama administration and the entire rest of the developed world. So, how do we get out of this mess? As noted above, the captains of our collective ships are Keynesians. They are going to provide as much stimulus as needed.
Problem #1: Deflation
We got the Consumer Price Index numbers today, and they tell a tale of deflation. On an annualized basis, the CPI for the last three months was a negative -12.7%! Even core CPI, which is without food and energy, was a minus 0.3%. The CPI for 2008 was just 0.1% for the whole year. This was the smallest calendar-year increase since 1954, and it's down from 4.1% for 2007. (To see the whole release and data, you can go to www.bls.gov.) I outlined the problem of deflation last week in my 2009 Forecast so I will not go into detail, except to note that central bankers are going to fight tooth and nail any tendency for deflation to catch hold in the economic mind of the country. It is simply part of their DNA.
Obama wants an extra $825 billion in his stimulus package, in addition to the $350 billion in TARP monies. The Fed has started to buy mortgage assets, and that could be $500 billion or more. That is in addition to some $300 billion plus and growing in commercial paper, in addition to bank assets, etc.
Let me predict right here that this is merely the first installment. The problems described above are very large. It is one thing to make credit cheap and yet another to make consumers either want to borrow more, or be able to convince a lender that borrowers can repay their debts. On the one hand, the government is providing capital to banks and hoping they will lend it, and on the other hand the regulators are telling them to reduce lending and increase their capital. Their commercial mortgages on a mark-to-market basis are imploding. Consumer credit risk is high and rising. What's a bank to do?
Let's add it up. In the US, we have seen massive wealth destruction on personal balance sheets. At the end of the third quarter the losses totalled $5.6 trillion, between housing and stocks. They could be over $10 trillion at the end of the fourth quarter. (Source: Hoisington) The losses will almost certainly top $12 trillion by the middle of the year as housing continues to deteriorate. Pick any country in the developed world or much of the developing world, and it's the same picture: wealth destruction. We have seen at least a trillion dollars of capital on financial companies' balance sheets disappear; and given the recent spate of bailouts, it is likely to get worse. As I have been pounding the table about, a credit crisis and imploding balance sheets, a housing crisis, and a massive earnings shortfall that yields a relentless stock market drop are all independently deflationary. The combined forces are massively so. To think that a mere trillion or so dollars in stimulus will be enough to reflate the US and the world economies is simply not realistic.
Let me offer a simplistic definition of what I mean by reflation: it's when the velocity of money stops falling for at least two quarters and the economy emerges from outright recession. And much of the proposed stimulus is not really stimulus. Temporary tax cuts, as much as I like them, that are not targeted at getting small businesses recharged (which is where the real growth in jobs will come from) will likely be saved, much in the way that the last stimulus package did little real good for the economy, and simply put us another $177 billion in debt that our kids will have to pay. Helping keep people in their homes when they are already over their heads in debt is not really stimulus, however noble it sounds. Over 50% of mortgages that are reduced and rewritten are delinquent again within 6 months. That does not bode well for future efforts. Better to let the home go at some price to someone who can afford it. Tough love, but realistic.
Giving money to states to allow them to continue to spend beyond their budgets is not stimulus. And why should Texas pay for a profligate California? We have our own problems. The Robin Hood approach to stimulus programs is nonproductive and only encourages bad budgeting habits. What will work? Infrastructure development, although that takes time, and some real thought should be given as to which projects are undertaken, rather than allocating according to which Senator has the most seniority. Spending on defense equipment, which must all have US content (which will be distasteful to the left), is real stimulus. Upgrading technology in a number of areas qualifies, although past experience suggests governments are not good at spending new tech money wisely. Spending on green technologies? Creating a million new jobs in clean tech? Get real. How do we go from less than a 100,000 real clean-tech jobs to 1,000,000 in five years, let alone one? And three million new jobs? Really? From where? What government program could do this? In what universe? It makes for nice feel-good talk, but has no bearing on reality.
Don't get me wrong. In the midst of the late 1970s malaise, when the gloom was as thick as it is today, the correct answer to the question, "Where will all the new jobs come from?" was "I don't know, but they will." And it is still the correct answer. The US free market system is still the most dynamic economy in the world, and I truly believe that we will see new industries spring up, which will be a jobs dynamo. But that will take time. It is not a short-term solution, and by short-term I mean 1-2 years. My bet is that in the third quarter, when earnings reports come out and are terrible, unemployment is over 8% and pushing 9%, and there is no evidence of a recovery, that we will see more stimulus from both the Fed and Congress. Count on it.
The Fed and the Keynesian captains of our economic ship are "all in." If the current plans do not reflate the economy, they are not going to say, "Well, that is too bad. We did what we could. Now we just have to go ahead and let the US economy catch Japanese disease." Not a chance. They will up the ante.
And they will keep trying to "jump start" the economy until it works. Obama told us to expect trillion-dollar deficits for years to come. Give him this: he is being candid and honest. The Fed, and I think other central banks, are going to step in and be the buyers of last resort for a whole host of debts, both corporate and consumer. There are those who worry about creating inflation, because they actually do have to print money to buy these debts. While I would prefer a world where a central bank does not intervene in the markets, the time to fix the problem of excess leverage was a decade ago. Allowing banks to go to 30:1 leverage based on "value at risk" models and other financial wizardry that clearly neither the banks nor the regulators understood, was simply bad policy, and we are paying for it. As Woody Brock so wisely notes, 30:1 leverage is not three times more risky than 10:1 leverage, it is 25 times more risky. (Trust me, or at least Woody, on the math.) As an aside, many European banks were even more highly leveraged.
The End Game
The US (and indeed soon the whole world) is in a deep recession. The US is going to try and combat that recession with stimulus on a scale never before tried. It is a grand experiment. On the one hand is the theory that you can allocate stimulus and keep the velocity of money from falling. On the other hand is the theory that once the deleveraging process starts, there is not much you can do about it: it is going to work its way through the economy. We are about to find out which theory is correct. So, let's look at three possible outcomes, with the best outcome first. The basic optimistic assumption is that, while this recession is deep and the worst in the post-WWII era, it is still just a recession. Free-market economies eventually recover. Recessions do their work of reducing excess capacity, and the businesses which survive enjoy increased market share and potential for profits to rise. And corporations do indeed have on balance stronger than usual balance sheets going into this recession, except for most financial corporations. Another exception is businesses that were bought by private equity firms with large leverage. Many of those will have to be restructured. And those that have too much leverage or were too aggressive with expansion programs? They will go the way of all overleveraged flesh.
Besides, the optimistic scenario holds, the massive amount of stimulus being applied to the US economy is on a scale never seen. It will work, just as an easy monetary policy has always worked. (Except in the '70s, but we won't make that mistake again! We learned our lesson, yes we did! Volker can stay in retirement.) This scenario assumes that the psyche of US consumers has not actually been seared all that much, and that they will return to their spending habits as soon as they are able. It also assumes this is a normal business-cycle recession. There really is no endgame. It is business as usual. There has been no fundamental altering of the US dynamic. Banks will start lending again, businesses and consumers will start borrowing, and things get back to normal. Deflation is just some bugaboo that a weird coterie of economists and investment writers harp on to scare the children into behaving more rationally. It can't really happen here. And besides, the Fed can print enough money to make deflation go away. The real worry will be if they overshoot and inflation comes roaring back.
Problem # 2: Pushing on a String
The economy clearly let leverage run to an irrational level. You've seen the graphs. US debt to GDP is now over 300% and has risen precipitously in the last ten and especially the last five years. Leverage and debt fueled the growth of the economy, but debt growth hit a wall and now the deleveraging process is the painful result. This brings us to the worst-case scenario: that all the efforts of the Fed will go for naught and that we are in a liquidity trap. A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation. (Wikipedia)
And there is no question, at least in my mind, that the economy, if left to its own devices, would fall into a soft deflationary depression, which would take years to climb out of. The contention of those who believe that we are headed for such a state of affairs is that no matter what the Fed does, excesses on the part of consumers and unrestrained government deficit spending is going to create a Perfect Storm. First of deflation and then, because the Fed is going to try to re-inflate the economy by printing money, we will see a resurgence in inflation and a collapse or, at the very least, a serious drop in the value of the dollar. Further, to expect foreign governments to continue to buy depreciating dollars and allow the dollar to continue to be the world's reserve currency is not realistic. And of course, there are those who think we will eventually see hyperinflation as the Fed is forced to monetize the national deficits, with gold going to $3,000 (or higher!). And Obama, with his talk of trillion-dollar deficits for an extended period, certainly adds fuel to that fire. If, and it is a big but possible if, the Fed is indeed pushing on a string, then we are likely to see 15% unemployment, yet another lost decade for the stock market, and a real calamity in the pension, endowment, and insurance worlds, which are planning on 8% long-term portfolio returns to meet their obligations. And while I think it is a possibility we must be mindful of, it is not the most likely scenario.
The Muddle Through Middle
Now, we come to the third scenario and -- no surprise to long-time readers -- the one I think is most likely. I think that after we climb out of recession, we Muddle Through for an extended period of time. Follow my reasoning, and remember that I am often wrong but seldom in doubt! And please allow me some room to speculate. I can guarantee that I have some (or most) of the particulars wrong. But I think I have the general direction we are heading in.
We are in a serious recession. We have to allow time for both the housing market and the credit markets to heal. This will take at least two years. I think we have permanently seared the psyche of the American consumer. Consumer spending is likely to drop at least 6-7% over the next two years, and maybe more. The combination of all three bubbles (consumer spending, credit, and housing), which were made possible by increasing leverage and poor lending standards, is by definition deflationary. (I know, I keep repeating, but most readers do not really get the rather disturbing implications.)
The US government in general and the Fed in particular will react to the problem. Most of the government stimulus, other than that used to reliquefy the banking system, build useful infrastructure, and encourage small business to expand, will be wasted or have little short-term effect. The Fed (and central banks around the world), on the other hand, do have the potential to succeed with a "shock and awe" type of stimulus program. The problem is the Velocity of Money. (You can see this explained. There is just no way of knowing when the Fed programs will really create some traction. Anyone who shows you a model that says such and such an amount of stimulus is needed is from the government, trying to tell you that this time we really do know what we're doing. Any such models are based on assumptions about things we have no way of knowing. The Fed (and the US government) are going to continue to run deficits and print money until the economy begins to reflate. That is one thing I truly believe. Will it be a total of $2 trillion? Three? Four? More? I don't know. How large will the Fed balance sheet be in a few years? I don't know. And neither does anyone else. There are just too many damn variables.
But I do believe that at some point there will be some inflationary traction. And combined with an economy resetting itself at some new level of consumer spending, and with a basically resilient US free-market system, a recovery will begin. But here's the problem. Let's assume, and we can, that we find this new set point for the US economy. And that the economy begins to grow, but the Fed has injected a lot of liquidity. Now some of that liquidity is "self-liquidating." By that I mean, commercial paper is typically 90 days. The Fed simply has to begin to wind down its commercial paper investments, and it takes away some of the liquidity it created. Those mortgages they bought? Each month, as payments are made, a little liquidity is taken back from the economy. And if inflation is an issue, they can begin to withdraw that liquidity or raise rates. Of course, that will serve to slow the economy down, but better a slower Muddle Through Economy than a return to the high stagflation of the '70s.
That gets us to 2011-12. The economy is growing, albeit slower than anyone would like, but government deficits are still in the trillion-dollar range, as Obama and the Democratic Congress have increased the entitlement programs, locking in big deficits for a long time. High deficits put the dollar under pressure. The demand from voters is to get the deficit under control. However, the Social Security surpluses are beginning to dwindle. And just like in the early '80s, we have a Social Security crisis. Some combination of higher taxes, reduced benefits for wealthier Americans, later retirement ages, and a different methodology of indexing for inflation will be the order of the day. But Social Security is the relatively easy problem. Medicare benefits will be at nose-bleed levels and will swamp the ability of the government to fund it and other government programs. Democrats will never allow the programs to be cut back. And getting the 60-plus Republican senators needed for such cuts is just not likely to happen by 2012-2014.
The problem will be dealt with by cuts in some government programs, but mostly by tax hikes on the "rich" and increased contributions by participants. Since many of the rich are the very small business people who we need to create jobs, this is going to be very anti-growth, extending the Muddle Through Economy for yet another few years. And if taxes are raised too much in 2010 when the Bush tax cuts go away, then we could see a relapse back into a recession. Such an environment of higher taxes and slow growth is not good for corporate earnings. Earnings in the recent years have been at all-time high levels as a percentage of GDP. Earnings as such are mean reverting, and thus are unlikely to rise back to previous levels in terms of percentage of GDP. (Of course, in nominal terms they should rise.) This is going to put a constraint on stock market growth. Pension plans, endowments, insurance companies, and individual investors who are counting on 8% long-term compound returns from their stock portfolios are as likely to be disappointed in the next five years as they were in the last ten. The environment I am describing is one of compressing price to earnings ratios, much like the period from 1974 to 1982.
This environment is going to force the creation of new investment programs and products based on income generation. And that is one of the forces that will bring about a real recovery in the middle of the next decade. Investment capital will be made available to businesses that can generate low double-digit or high single-digit returns, as well as new technologies with the promise to deliver new paths to profits. The second major force will be the arrival of new waves of technological change. We will see a biotech revolution beyond our current comprehension. It has the real potential for solving a great deal of the Medicare entitlement program problems. For instance, it is likely we will have a real cure for Alzheimer's within five years. Since that is as much as 7% of US medical costs, that can create a real cost reduction. The same for heart disease, obesity, cancer, and a host of other medical conditions that will start to be dealt with by a new generation of therapies. That is going to create a new, very real bull market in biotech.
I expect to see a new generation of wireless broadband that powers whole new industries. And it will not just be green tech, but entirely new forms of energy generation that drive the cost of energy down and, combined with other new technologies, make electric cars practical. And along about the end of the decade, the nanotech world begins to really get into gear. And just as the tightly wound, low P/E ratios of the early '80s gave way to a spring-loaded major bull market as new technologies became the driver for a whole new set of public companies, we could (and should!) see a repeat of that performance. There is a new bull market in our future.
The problem is getting from where we are today to that next dawn. The definition of insanity is to keep repeating what you have done in the past and expect a different result. We are in a long-term secular bear market. P/E ratios are going to decline over time to low double digits. Hoping that stocks somehow rebound to new highs and that the economy is going to go back to what we saw in 1982-1999 or 2003-2006 is not a strategy. You need to be proactive and take charge of your portfolio, looking for absolute-return types of investments for the next 4-5 years. Simply using a traditional 60-40 split of stocks and bonds is not going to get you to retirement nirvana. It will lead to retirement hell.
8 years in 8 minutes
I don't want banks at all
I have a little secret. Please don't tell anyone. I am glad that the banks, for all the hundreds of billions of dollars we are giving them, are not lending. That is not because I want banks to improve the quality of their balance sheets. On the contrary, I don't want banks at all, at least not banks anything like what we've had. I don't want to "use all of our resources to preserve the strength of our banking institutions". Since we have already bought and paid for our nation's banking institutions, we are within our rights to, um, transition them to a different business model. Let's do that. But credit is the lifeblood of a capitalist economy, right? I keep hearing that line. It's a dumb line.
Credit, also known as debt, is one of several arrangements by which a party with the power to command resources but lacking aptitude or interest in managing a productive enterprise delegates wealth to another party who is capable of creating value but unable to command sufficient resources. You would be forgiven for not noticing, given how habitually we misuse credit, but supplying credit is really just a subspecies of the practice that used to be called "investing". There are a variety of other arrangements that serve the same economic function. Perhaps you have heard the terms like "common stock" and "cumulative preferred equity"? In fact, credit is to investing what heroin is to painkillers: Unusually appealing, in a certain way. Hard to kick once you're on it. Almost certain to, um, cause problems, eventually.
Our overall goal ought not be to kickstart the credit economy, but to kick the habit and move towards financing arrangements that are more equity-like than debt-like. That's going to be hard to do, because historically, we've subsidized the hell out of debt financing, especially bank credit, and alternatives are underdeveloped. But with the exception of war, no still-practiced human institution provokes catastrophe as regularly or as grandly as the misuse of debt. We ought to phase out banks as we've known them since before Bagehot's time, and move to a regime of what are lately referred to as "narrow banks" (banks that lend only to the government that issues the currency of their deposits). We should encourage the development fine-grained equity markets and local-market investment funds to replace bank financing. The rush to ramp up "consumer credit" is particularly dumb. Usually, financial investing involves funding wealth generating projects in exchange for a share of the anticipated wealth. Consumer credit funds current consumption in exchange for a share of, um, what exactly? In theory, there's a good answer: consumer credit funds current consumption in exchange for a share of anticipated future wealth that is believed to be endowed already.
Economists talk about consumption smoothing, how it may be optimal for a consumer whose income is volatile to borrow during periods of low income and repay (or save) during periods of high income in order to maintain a constant standard of living. That's very well in models where consumers know the true distribution of their future income, where the spread between borrowing and lending interest rates is not very large, and where consumer preferences are time-consistent. In practice, none of these conditions hold even approximately. As we are learning, the future is a very uncertain place. Consumers, like Wall Street quants, may inadequately extrapolate the distribution of their future income from recent observations. They have no access to the true distribution. The interest rates consumers pay for unsecured credit (think credit card rates) are often several times what they receive on money they save. In the world as it is, consumers ought to borrow only to counter severe downward shocks to income, pay off borrowings quickly, and build buffers of precautionary savings, since the cost of dissaving is much less then the cost of borrowing. (You lose 4% interest on your CD, rather than paying 12% interest on your credit card.)
Some consumers behave this way, but very many do not, suggesting that consumers are myopic, overvaluing consumption today in a manner that they themselves will come to regret in the future. If consumers are myopic, if self-today has different preferences than self-tomorrow, then whether taking on credit is a good idea is beyond the comfort zone of positive economics. Credit availability creates winners (self-today) and losers (self-tomorrow), while interest payments reduce the size of the overall pie available to the time series of selves. In the way that economists suggest "free trade" to be good — winners, losers, gains overall — myopic consumers imply that the absense of a credit constraint is bad. Thank goodness the banks aren't lending!
There are obvious wrinkles and objections — What about credit for cars, or home mortgages, or education? The analysis changes when the borrowing is exchanging one pre-existing long-term liability for another. (We are born short basic shelter, and, in much of America at least, short a cheap car as well.) Education can be viewed as an ordinary, wealth generating investment project that in theory could be equity rather than debt financed, but that might be too tricky in practice. It's not my intention to suggest that consumer credit is always bad, only to defend the commonplace notion that for many people and under many circumstances, even loans that will be never be defaulted can be positively harmful, and as a matter of policy we should not be exhorting banks to issue or consumers to accept credit.
But if we let consumer credit contract, and if investment demand is derived from consumption demand, doesn't that spell macroeconomic disaster? There is an alternative. It is called "transfers". What's good about credit from a simple Keynesian perspective isn't that loans get repaid tomorrow, but that they get spent today. If what consumers would do with funds would be better for the economy than what banks are doing with funds, we ought to stop the massive transfers of funds from buyers of government debt to banks, and transfer the funds directly to consumers. If you think that Americans consume too much, and that we need to grit our teeth and endure a "reduction in our standard of living", fine. I disagree, strongly, but at least you're consistent. Then the government shouldn't transfer to anyone, banks shouldn't be encouraged to lend, consumption, investment, and GDP should be allowed to fall until we find a new level. I think that's foolishly pessimistic, though.
Americans may need to change the mix of our consumption, but overall I think our standard of living is not only supportable, but improvable, and that our goal should be to get the rest of the world to live as well as we do, rather than to reconcile ourselves with some pseudomoral poverty. The world is full of human want, which we should strive to meet by working to increase our capacity to produce. Problems arise when want and purchasing power are misaligned. We can improve that by redistributing some of the purchasing power from those with lesser to those with greater use for current consumption. If that sounds Commie to you, note that is precisely the function that consumer credit traditionally serves, just without all the residual claims, a large fraction of which will prove to be illusory (at least in real terms). That is, transfers are just a more honest way of doing precisely what a credit expansion does, except without the trauma that comes from learning that much of the money lent to fund current consumption will never be repaid.
I'm trying to come up with a reasonable opposing view, a case for pushing consumer credit but opposing transfers. Perhaps you can help, because I just can't do it. One might argue on philosophical grounds against coercive transfers, but coercive transfers are a precondition of restarting bank lending, and we've already made transfers to banks on such a scale that banning them now would be like robbing a jewelry store, then piously arguing future looters should be shot. One might argue that bank lending is "smarter" than public transfers would be, that the patterns of consumption and investment that result from private sector credit allocation will lead to superior productive capacity and more sustainable patterns of consumption than direct transfers. Given the awful quality of aggregate investment this decade and the volatility now faced by consumers who were recently credit flush but who under any reasonable lending standard must now be credit constrained, it is hard to be enthusiastic about the special wisdom of bank-mediated credit allocation.
Of course, once we start redistributing purchasing power, there's the thorny question of who gets what. I have an answer to that, it is my new mantra. Transfer flat. Cut checks to every adult in the economy of interest, regardless of whether they pay taxes or have a job. Flat transfers are easy to understand and they pass the smell test for "fair". As an income source unrelated to work, flat transfers increase workers' bargaining power with employers by reducing the cost of refusing a raw deal. (Supplementary income is a better means of enhancing labor bargaining power than unionization, which serves the same purpose but may limit the flexibility and efficiency of production.) Finally, flat transfers align purchasing power in the economy with the problem that we want markets to solve — We want an economy that serves some people dramatically more than others, in order to preserve incentives to produce and excel. But we also want an economy that meets every person's basic needs, even those of people who are unable or unwilling to offer marketable goods or services. We won't let people starve, so why not fund a basic income, however miserly, rather than relying on an inefficient social services bureaucracy or taxing the virtuous by relying on charity? Tax Pigou and progressive. Transfer flat. Encourage equity. Contain the banks.