Powerhouse Mechanic and Steam Pump One
Ilargi: First today, three things:
- We are truly humbled by your generosity. Thank you so much for your donations. Which doesn't mean you should stop, of course :>). We will make the best use possible of it. Plans are brewing. I would like to have a primer section, with a selection of what Stoneleigh and me have written over the past few years. Also, I think we need to expand towards a ‘what-to-do-now' collection of articles links, etc., likely in co-operation with others. In that regard, moving -partly- away from Blogger is an option, but that will bring along all kinds of additional costs. Since I am the only full-time voice here, and posting 7 days a week is a day-job and a half, please allow us some time to work it all out.
- Keeping the same lay-out all the time doesn't appeal to me too much. I’ll be changing things over the next while, item by item (time!), trying to clean up things, provide you with faster load-time etc.
- I'm also looking at the way we present articles, and that's a bit of a hard two-way one. I like to read till my head is close to numb, since that leaves me with an intuitive rather than a purely rational picture of events. Hey, it works for me... Still, it's not necessarily the best way to communicate issues towards you. Then again, as I’ve often said, I'm not here to make up your minds for you, but more to guide you in your own thinking process. And then there's the fair use argument, of course. I’m actively looking at this. Much of what we post is, in my opinion, not great reporting; just the few best pieces from the mainstream. Only by reading through it all does a real picture somewhat shine through. A lot of the best bits are always in the last few paragraphs, and I don't really want to cut those out. Plus, if I post short fragments, I will need to write much more, if only to provide the context of the snippets. Trust me, I do a lot of thinking about this. For now, I’m leaning towards shorter, because I have the feeling that I'm short-changing you on the accessibility of the Automatic Earth
That said, I think I need to get back to what I said yesterday about what I see for 2009. The main point to revisit has to do with potential stimulus packages, fiscal, checks sent around, corporate bail-outs, bank bail-outs and the next one to grow big: bail-outs for various public sectors. If our respective governments continue on their respective paths chosen so far, there can be no doubt that we'll see a delay in various downturns. Optimism reigns supreme in every January that follows an 'annus horribilus', and a new US president in 2.5 weeks can but stoke that fire. If Obama really wants to throw another $1 trillion at the wolves chasing the sled, yes, the wolves will be satisfied for a while longer. But don't forget last year's pattern: no matter how much bigger the rescue was than the one before, the response time always got shorter.
Apart from that, Obama looks set to make the same mistakes that every president and prime minister seems to make since John Maynard Keynes left kindergarten. Pay off debt with more debt, and pay back gambling debts with more gambling. It looks like a knee-jerk reaction by now, it's the only trick they know. Mike Shedlock has a good write-up on this today: How "Something For Nothing" Ideas Become Policy. Now I think it's a shame that he sinks into socialism bashing, not because I'm a socialist, but because he doesn't understand what it is. Socialists don't bail-out bankers with gambling debts. Still, Mike's analysis of Keynes through history, and certainly that of Japan's recent policies, are pretty spot on. One note on Japan: the country may have failed in many ways, but let's not forget they amassed a huge fortune in foreign reserves. Thing is, Japan had a global market for its ultra low interst rates, and its export products. Today, there's no such luck for anyone: this crisis is global in itself.
The real problem is not in government regulation, or socialism, or that sort of thing. The real problem lie in the idea that we can borrow from the future to sustain the comfort we have, or to pay off our debt, or even simply just to eat. Many native American people(s) had -and still have in many cases- principles along the line of "we must preserve the world for the next seven generations". You might call this a religious principle. Our current world has replaced this with another belief-system: that we can grow ourselves out of any problem that same growth-based belief system has gotten us into. That spending yet another trillion dollars has the potential to solve our problems.
We even manage to make ourselves say and believe that we do this to leave behind a better world for our children. By spending their money and resources! We are delusional, that's what we are. It has long since fascinated me that people, who will tell you from what they think is the bottom of their hearts that they love their children so much they would gladly give their lives to save them, volunteer to gobble up those same children's resources, even the entire world they will have to live in. We do it with the environment and with our energy sources. But today, we do it at a much faster pace still with our children's access to the means to provide the resources to raise their children. Our belief systems don't just not provide for seven generations, they don't even cover one generation.
How can I not wonder what America’s new president sees in store for his children? Here's what I see: If we don't, within our lifetimes, find a way to pay our debts that is just to all and punishing to those responsible, his children will not find the world he leaves them a comfortable space.
Credit and trust needed to end financial crisis
"Credit, the disposition of one man to trust another, is singularly varying," Walter Bagehot, the financial journalist, wrote 135 years ago. "In England, after a great calamity, everybody is suspicious of everybody; as soon as that calamity is forgotten, everybody again confides in everybody." He might have been describing modern Wall Street, where trust - and credit - are in short supply. The financial crisis began in the credit markets, and eventually it will end there. But as the financial industry leaves behind one of the most wrenching years in its history, bankers and policy makers are struggling to see the way out of this mess. Despite triage by Washington and trillions of dollars of taxpayers' money, credit is not flowing nearly as much as many had hoped. The problem, as Bagehot observed, is trust - or rather, the lack of it. Even after receiving millions, in some cases billions, of dollars from the government, banks are reluctant to lend money.
Crucial parts of the financial system have stopped functioning. The exuberance of the boom, which led bankers to make loans to people who could not repay them, has given way to a seemingly intractable fear of making any loans at all. How long this situation lasts will determine the immediate course of U.S. economic life. Will the recession, already a year old, drag on through 2009 - or even longer? Will the stock market revive soon or shrivel further? What of the beleaguered housing market? The answers to those questions will depend on the availability of credit in all its forms - home mortgages, personal and business loans and bonds sold by corporations, states and municipalities. For now, many banks are hoarding money rather than lending it. Their holdings of cash have nearly tripled to more than $1 trillion in the past three months, according to U.S. Federal Reserve data.
In the capital markets, bond investors who embraced risk in good times have abandoned all but the safest of investments. Many have rushed to buy ultra-safe U.S. Treasury securities, driving the yields on those investments to historic lows. Once the credit markets stabilize, bankers hope, investors will start buying other types of debt, unlocking the flow of credit. A big worry is the future of securitization, a crucial mechanism of modern banking that allows banks to bundle loans and bonds into securities for sale to investors. This crucial market is moribund, now that many of its creations have plunged in value. Some question when, or if, certain areas of securitization will revive. Securitization, which works like a shadow banking system, has radically changed banking and the credit markets in recent years. Three decades ago, banks supplied $3 out of every $4 worth of credit worldwide. Today, because of securitization, that share has dropped to about $1 in $3.
Unless financial firms can securitize debt - which, in turn, depends on investors' willingness to buy the bundled loans - credit will remain tight, even if banks resume lending. "What started in 2008, and is going on now, is the undoing of that shadow banking system," said Alex Roever, a short-term credit analyst at JPMorgan Securities. The Federal Reserve and Treasury Department are trying to fill the void, at least in part. Since late November, news that the U.S. government planned to acquire billions of dollars in mortgage securities issued by Fannie Mae and Freddie Mac, the two mortgage-finance giants, has driven down home loan rates. The national average 30-year fixed mortgage rate has fallen a full percentage point, nearly to 5 percent, setting off a huge refinancing boom.
The drop in mortgage rates, coupled with a steep decline in government bond yields, is prompting investors to reconsider riskier, albeit higher-yielding investment-grade corporate bonds. Since October, the difference between the yields on such bonds and comparable Treasury securities - a measure of the risk investors see in corporate debt - has fallen to about 4.4 percentage points, from 5.7 points. That's a good sign. "October was the peak, during which everybody shut down and stopped doing a lot of things," said Curtis Ishii, the senior investment officer for fixed income at the California Public Employees' Retirement System, a pension fund. "In December, things got a little better." Still, many bond investors and analysts remain cautious. Despite the government interventions, and indeed even because of them, many investors are reluctant to act until they are sure of Washington's next step.
"Investors will regain their confidence when they are sure they understand the rules of the road," said Jaret Seiberg, a financial policy analyst at the Stanford Group, a research and consulting firm in Washington. "In the past 18 months, those rules have been rewritten so many times that nobody is sure when the government will intervene and when it won't." Banks are struggling to navigate various crosscurrents from Washington and Wall Street. Regulators are urging banks to make loans, but they are also instructing them to reduce the amount of money they borrow. Credit card lenders are facing new rules that the industry claims will restrict credit just when consumers need it most. In such an environment, many investors refuse to part with their cash, and the government is stepping in to fill the gap. "The government is trying to use its full faith and credit as a substitute for investor confidence," Seiberg said.
A crucial test case may come in February, when policy makers try to lift consumer and small-business lending with the Term Asset-Backed Securities Loan Facility, or TALF. TALF is supposed to help lure investors back to the market for bonds backed by auto and student loans, credit card receivables and small-business debts. Alarmed by rising delinquencies, many investors are shunning these securities. That, in turn, has choked credit, since banks can no longer fashion the loans they make into securities. To allay investors' fears, the Federal Reserve, with the aid of the Treasury Department, will lend money against highly rated asset-backed securities. But the benefits may not trickle down to consumers for several months.
A confluence of forces is working to keep credit tight, even as the Federal Reserve has cut its benchmark lending rate almost to zero. Banks are able to buy loans at attractive prices in the resale, or secondary, market for loans, which means they have less incentive to make new ones. After one of the industry's worst years on record, many banks are bracing for still more losses in 2009. The collapse of Lehman Brothers in September is still reverberating through the markets: Many banks were forced to absorb assets that investors were no longer willing to buy. "The banks are somewhat fearful," said Hyun Song Shin, a Princeton economics professor. "The fundamentals look somewhat less promising, and the incentive to hoard capital will be stronger." The troubles in the economy, of course, only add to the anxiety.
Investors and bankers will be reluctant to extend credit until home prices stop falling and until more people are finding jobs than losing them. In a struggling economy, even a seemingly solid loan can turn bad quickly. Analysts say they see few signs that the recession will end quickly, even if the Obama administration enacts a huge fiscal stimulus plan that, according to some reports, could near $1 trillion. All of that spending will not revive the job market and lift housing values overnight. "I don't think it will be a V-shaped bottom," said Donald Galante, senior vice president for fixed income at MF Global. "It might be a double-dip or it might be a pan-shaped bottom." Or as Bagehot observed, confidence - and credit - will return when bankers start to forget the pain.
Steel Industry, in Slump, Looks to U.S. Stimulus, "Buy America"
The steel industry, having entered the recession in the best of health, is emerging as a leading indicator of what lies ahead. As steel production goes — and it is now in collapse — so will go the national economy. That maxim once applied to Detroit’s Big Three car companies, when they dominated American manufacturing. Now they are losing ground in good times and bad, and steel has replaced autos as the industry to watch for an early sign that a severe recession is beginning to lift. The industry itself is turning to government for orders that, until the September collapse, had come from manufacturers and builders. Its executives are waiting anxiously for details of President-elect Barack Obama's stimulus plan, and adding their voices to pleas for a huge public investment program — up to $1 trillion over two years — intended to lift demand for steel to build highways, bridges, electric power grids, schools, hospitals, water treatment plants and rapid transit.
'What we are asking,' said Daniel R. DiMicco, chairman and chief executive of the Nucor Corporation, a giant steel maker, 'is that our government deal with the worst economic slowdown in our lifetime through a recovery program that has in every provision a ‘buy America’ clause.' Economists in the Obama camp said the president-elect’s proposals to Congress will include significant infrastructure spending that draws on heavy industry. New spending should provide an immediate jolt to the steel business, which has already gone through the painful makeover now demanded of automakers. Steel mills were closed, companies were consolidated, hundreds of thousands lost their jobs and the survivors agreed to concessions. As a result, productivity shot up and so did profits, to record levels in the first nine months of this year. Even as the economy wobbled, steel held its own. But then the recession hit in force.
Steel goes into nearly everything made in America, from homes and office buildings to cars, appliances and light bulb sockets, and as construction and manufacturing wound down, so did the output of steel, plunging 50 percent since September. The steel industry’s collapse closely tracks the alarming late-autumn swoon in the national economy, as the housing bust and the credit crisis converted a mild downturn into 'a severe one that has much further to run,' says Nigel Gault, chief domestic economist at IHS Global Insight, offering a view increasingly shared by forecasters. Through August, steel production was actually up slightly for the year. The decline came slowly at first, and then with a rush in November and December. By late December, output was down to 1.02 million tons a week from 2.1 million tons on Aug. 30, the American Iron and Steel Institute reported. The price of a ton of steel is also down by half since late summer.
'We are making our steel at four mills instead of six,' said John Armstrong, a spokesman for the United States Steel Corporation, adding that two mills were recently idled and the four still operating are running at less than full capacity. 'The third quarter was one of the best in U.S. Steel’s history,' Mr. Armstrong added. 'And it has been a very precipitous drop from there.' The cutback has been particularly hard on workers at the big integrated mills like those at U.S. Steel and Arcelor Mittal USA, with their blast furnaces and coke ovens converting iron ore and other materials into steel. Operated at less than full capacity, these mills are less efficient than the equally large 'minimills,' like Nucor, whose electric arc furnaces can be operated efficiently at lower speeds. So the plant closings have been mostly at the integrated mills, whose 50,000 workers — roughly 40 percent of the nation’s steelworkers — are represented by the United Steelworkers. The union says that early this year it expects 20,000 workers to be on furlough. Ten thousand already have been.
Not since the 1980s has American steel production been as low as it is today. Those were the Rust Belt years when many steel companies were failing and imports of better quality, lower cost steel were rising. Foreign producers no longer have an advantage over the refurbished American companies. Indeed, imports, which represent about 30 percent of all steel sales in the United States, also are hurting as customers disappear. The industry, in response, is lobbying the Obama transition team for infrastructure projects that would require big amounts of steel. Mass transit systems are high on the list, and so is bridge repair. 'We are sharing with the president-elect’s transition team our thoughts in terms of the industry’s policy priorities,' said Nancy Gravatt, a spokeswoman for the American Iron and Steel Institute. The Obama team has not yet revealed details of the president-elect’s soon-to-be-announced recovery plan other than to indicate that most of the package will probably go into infrastructure spending rather than tax breaks.
'If the president-elect really follows through, he’ll fund a lot of mass transit projects,' said Wilbur L. Ross Jr., the Wall Street deal maker who put together the steel conglomerate known as Arcelor Mittal USA. 'All the big cities have these projects ready to go.' The sharp slide in steel production has several causes. Construction and auto production have fallen sharply; between them, they account for 57 percent of the steel bought each year in the United States, according to the Iron and Steel Institute. Appliances, machinery and other electrical equipment account for an additional 13 percent, and the fall-off in production of these goods has also reduced steel orders. Then there are the wholesalers, known in the steel industry as service centers. They buy in huge quantities from the mills, building up inventories and selling to customers like a construction company that needs I-beams to build a shopping center, or a manufacturer of auto parts in need of steel tubing.
Until recently, the inventories were bought on credit, and the service centers constantly replenished these stockpiles as steel was sold to end users. But now the service centers, unable to borrow money easily and reluctant to borrow anyway in these hard times, have stopped buying from the steel mills. They are selling off their inventories instead, raising cash in the process. It is a tactic that annoys Mr. DiMicco, the Nucor chief, no end. 'They don’t want to be without cash when they go into whatever the black hole is that is being created by the financial crisis,' he said, and faulted the nation’s lenders for collecting billions in government bailout money and then, in his view, refusing to lend it to the service centers on reasonable terms. 'Credit completely dried up,' Mr. DiMicco said, 'and it is still hard to get.'
Government aid could save U.S. newspapers, spark debate
Connecticut lawmaker Frank Nicastro sees saving the local newspaper as his duty. But others think he and his colleagues are setting a worrisome precedent for government involvement in the U.S. press. Nicastro represents Connecticut's 79th assembly district, which includes Bristol, a city of about 61,000 people outside Hartford, the state capital. Its paper, The Bristol Press, may fold within days, along with The Herald in nearby New Britain. That is because publisher Journal Register, in danger of being crushed under hundreds of millions of dollars of debt, says it cannot afford to keep them open anymore.
Nicastro and fellow legislators want the papers to survive, and petitioned the state government to do something about it. "The media is a vitally important part of America," he said, particularly local papers that cover news ignored by big papers and television and radio stations. To some experts, that sounds like a bailout, a word that resurfaced this year after the U.S. government agreed to give hundreds of billions of dollars to the automobile and financial sectors. Relying on government help raises ethical questions for the press, whose traditional role has been to operate free from government influence as it tries to hold politicians accountable to the people who elected them. Even some publishers desperate for help are wary of this route.
Providing government support can muddy that mission, said Paul Janensch, a journalism professor at Quinnipiac University in Connecticut, and a former reporter and editor. "You can't expect a watchdog to bite the hand that feeds it," he said. The state's Department of Economic and Community Development is offering tax breaks, training funds, financing opportunities and other incentives for publishers, but not cash. "We're not saying 'Come to Bristol, come to New Britain, we'll give you a million dollars,'" Nicastro said. The lifeline comes as U.S. newspaper publishers such as the New York Times, Tribune and McClatchy deal with falling advertising revenue, fleeing readers and tremendous debt.
Aggravating this extreme change is the world financial crisis. Publishers have slashed costs, often by firing thousands in a bid to remain healthy and to impress investors. Any aid to papers could gladden financial stakeholders, said Mike Simonton, an analyst at Fitch Ratings. "If governments are able to provide enough incentives to get some potential bidders off the sidelines, that could be a positive for newspaper valuations," he said. Many media experts predict that 2009 will be the year that newspapers of all sizes will falter and die, a threat long predicted but rarely taken seriously until the credit crunch blossomed into a full-fledged financial meltdown. Some papers no longer print daily, and some not at all.
Even as industries deemed too important to fail are seeking bailouts, most newspaper publishers have refused to give serious thought to the idea, though some industry insiders recounted joking about it with other newspaper executives. "The whole idea of the First Amendment and separating media and giving them freedom of control from the government is sacrosanct," said Digby Solomon, publisher of Tribune Co's Daily Press in Newport News, Virginia. Former Miami Herald Editor Tom Fiedler said that a democracy has an obligation to help preserve a free press. "I truly believe that no democracy can remain healthy without an equally healthy press," said Fiedler, now dean of Boston University's College of Communication. "Thus it is in democracy's interest to support the press in the same sense that the human being doesn't hesitate to take medicine when his or her health is threatened."
Connecticut does not see trying to find a buyer and offering tax breaks as exerting influence on the press, said Joan McDonald, the economic development commissioner. "It is what we do ... with companies whether it's in aerospace, biomedical devices, biotech or financial services," she said. "If a company is developing laser technology, we don't get into the business of what lasers are used for." Connecticut's actions are not the first time government has helped newspapers. The U.S. Postal Service has offered discounted postage rates. Several cities have papers running under Joint Operating Agreements, created following the congressional Newspaper Preservation Act of 1970 to keep competing urban dailies viable despite circulation declines.
But the press is not the same as other businesses, said veteran newspaper financial analyst John Morton. "You're doing something that has a bearing on political life," he said. Marc Levy, executive editor of the Herald and the Press, said he would not let gratitude get in the way of reporting on local political peccadilloes. "It's the brutal reality," he said. "You'd say, 'thank you very much for helping me with that, but now we have to ask you about this thing.'"
Will stimulus plans go global?
Barack Obama's economic stimulus plan is expected to reach historic proportions, but what the world could really use right now is something even bigger: similarly ambitious plans from the rest of the world. That's what many economists prescribe as the best path out of a slump that has turned global in scope. America is at the epicenter of the downturn, which helps explain why President-elect Obama and his team are readying a spending package that may be equal to about 2.5 percent of US gross domestic product in 2009, as well as a similar amount in 2010.
But other nations also face considerable risks of job loss and political turmoil. Their near-term need for stimulus also meshes with a longer-term imperative: From Asia to Germany, many nations would benefit from a shift toward stronger domestic consumption and less reliance on exports to the United States. "Ideally, they should be doing the heavy pulling," says Sherle Schwenninger, an economic policy expert at the New America Foundation in New York. "Because of the collapse of the US consumer, the US is not in a position to be the principal demand locomotive for the world, as it has been for these past 20 years." So far, however, planned stimulus efforts outside America generally amount to 1.5 percent of GDP or less, according to a tally done by the investment bank Morgan Stanley.
"There are really only two countries that are serious about fiscal stimulus. The US is one. China is the other," says Nariman Behravesh, chief economist at IHS Global Insight, a forecasting firm in Lexington, Mass. China's stimulus is similar, as a share of GDP, to what the Obama team appears ready to push for. Japan and most of Europe, Mr. Behravesh says, "need to double or triple the kind of numbers they're looking at." The stakes are high. In most nations, the economy depends partly on the health of their trade partners. Even in the US, with its large trade deficit, exports have represented an important contribution to GDP. One danger is that, if 2008 was about financial-market shock waves, this year will reveal the full social impact on jobs and consumer incomes.
A recent report by economist David Rosenberg at Merrill Lynch warns that geopolitical tensions and trade protectionism – as nations try to defend precious jobs – could be the dominant risks in 2009. He says countries including Brazil, Russia, and India have already moved to raise import tariffs or other barriers on some goods. Yet the year also brings opportunity. UN Secretary-General Ban Ki Moon has said that collective economic challenges, including global warming as well as recession, are prodding nations toward greater coordination. The question of stimulus is an immediate test. A recession in much of the world is already severe, and "the consequences if we don't respond in a vigorous way ... could be even more devastating," says Tu Packard, a global economist at Moody's Economy.com. The idea behind fiscal stimulus is to smooth out an economic downturn or aid recovery by ramping up government spending at a time when consumers are less able to spend and businesses are less willing to make investments.
Although governments borrow the money, the alternative – more job losses – might be an even harder hit because of erosion of the tax-revenue base.
"This is not the time, for example, to be worried about budget deficits," Ms. Packard says. Nor will stimulus by government "crowd out" other investments by competing with the private sector in credit markets. Those businesses have pulled back sharply on capital spending, she says. Not every nation can easily ramp up spending. But many that run trade surpluses have the financial means to do it. "Each country that has fiscal [capability] should contribute," argues a new report this week by economists at the International Monetary Fund in Washington. Such measures could follow some of the same steps under review by Obama: investments in education, energy, the environment, roads, and healthcare, as well as tax cuts. Ideally, spending projects will set the stage for long-run productivity as well as create jobs in the short term.
China is spending more on domestic infrastructure but is also trying to boost sagging exports. "They should actually be doing more [to bolster] the social safety net and less on stimulating the export sector," Packard says. "This really is an opportunity to put the world economy on sound and healthy footing." Leaders in China are aware of the need for a stronger consumer economy, but they've had difficulty making that transition after years of success built on exports and government investment. Similarly, Mr. Schwenninger says, the German government of Angela Merkel "doesn't seem to understand the seriousness of Germany's problems, in terms of free-riding off the rest of Europe for its demand."
The result, he says, is that Western Europe may not be able to provide much of a boost that helps the US or even its own neighbors, at a time when Eastern Europe has been hit especially hard by the tightening of global credit markets. America's trade balance with the world – using the broad measure called the current account – will fall by more than 50 percent this year to about $280 billion, Behravesh predicts. Rebalancing the global economy won't happen overnight. But if stimulus plans are expanded during the course of 2009 and are well designed, it could nudge the world further in that direction.
Obama, Pelosi to Discuss Scope of Economic Package
President-elect Barack Obama will meet with House Speaker Nancy Pelosi (D-Calif.) on Monday as Congress prepares to reconvene and debate a massive recovery plan for the nation's struggling economy, according to Democratic sources. The face-to-face meeting between two of the nation's top Democrats will be one of the president-elect's first acts after relocating his family to a hotel in Washington over the weekend. Sources said Obama and Pelosi will discuss the scope and timing of the economic recovery package, which Obama has said will be his first priority upon being sworn into office. Pelosi has said her goal is to have the legislation on the new president's desk and ready to be signed on Jan. 20. But that schedule appears increasingly likely to slip, as Republicans and conservative Democrats are raising concerns about the impact on the federal deficit of spending hundreds of billions on an array of projects with little vetting by Congress. Lawmakers now expect a spending package of between $675 billion and $775 billion.
And a top congressional aide said yesterday that Democratic leaders in the House are still waiting for a detailed proposal to be delivered by Obama's economic advisers before lawmakers can begin the process of turning it into legislation. Even so, congressional Democrats are anxious to get the process started so that a vote can take place in the House as early as the week of Jan. 12. Pelosi announced yesterday that the first hearing on the plan will take place Wednesday. In a letter to Democratic House members, she wrote that the hearing will focus on "the need to act with deliberate speed to safeguard as many as three million jobs by making needed investments in infrastructure, alternative energy, science and other emerging sectors and providing middle-class tax cuts to help make work pay."
Among those scheduled to testify at a series of hearings involving several committees are Mark Zandi of Moodys.com, Harvard University professor and former labor secretary Robert Reich, Harvard economist Martin Feldstein, MIT professor Maria T. Zuber and others. Even if the House votes before Obama's inauguration, passage in the Senate is likely to be more contentious and take longer than in the other chamber. With an ongoing recount in Minnesota's Senate race and the process for replacing Obama in the chamber still uncertain, Democrats can be assured of holding only 57 seats during January, three votes shy of a veto-proof majority. Obama aides said the president-elect and his team will help make an all-out push to convince Americans that the government must spend almost $1 trillion to create jobs, provide cash for spending and shore up the finances of the state governments. Obama aides and congressional sources have said the package under development is likely to contain three broad categories: infrastructure investment, tax breaks and direct aid to states.
Congressional aides said all the specifics of the infrastructure spending are unlikely to be spelled out in the legislation. Instead, the goal will be to provide formulas that allow states to choose projects that fit a series of broad principles laid out by the president-elect and Congress. The tax cuts being discussed are focused on reductions in payroll taxes, a top congressional aide said. Once adopted, workers would see more money in their paychecks every week, leading -- officials hope -- to increased consumer spending. The aid to states is likely to come in the form of payments that could help meet the growing costs of Medicaid spending. In a Washington Post-ABC News poll last month, 65 percent of those surveyed said they support new federal spending of as much as $700 billion on construction projects and other programs to try to stimulate the economy. In the same poll, 69 percent of those who supported the plan (47 percent of all adults) said they would still back the spending even if it increased the size of the federal deficit.
GM, Chrysler May Lead Sales Slide to Cap 16-Year Low
General Motors Corp. and Chrysler LLC, bailed out by $13.4 billion in federal loans last month, probably led a decline in December U.S. auto sales that capped the industry’s worst year since 1992. Sales dropped 48 percent from a year earlier at Chrysler, 41 percent at GM and 33 percent at Ford Motor Co., based on the average estimates of six analysts surveyed by Bloomberg. Toyota Motor Corp. may report a 40 percent slide and Honda Motor Co. may say its total was down 36 percent, Brian Johnson, a Barclays Capital analyst in New York, said in a Dec. 31 note to investors. Auto sales tumbled more than 25 percent each month since September as the credit crunch reduced access to loans and consumer confidence fell amid a weakening economy. With demand for large pickup trucks and sport-utility vehicles damped earlier this year by record fuel prices, analysts expect an annual total of slightly more than 13 million autos, the fewest in 16 years.
“Consumers are scared,” said Erich Merkle, an auto analyst in Grand Rapids, Michigan, for consulting firm Crowe Horwath LLP. “People that are going to be laid off won’t be buying cars, and even those that are working are likely delaying purchases.” U.S. jobless rolls reached a 26-year high in the week ended Dec. 20, signaling a worsening labor market as the economy heads into the second year of recession. Automakers report December sales on Jan. 5, likely marking the first calendar year the U.S. carmakers’ combined market share was less than 50 percent, based on results through November. New cars and light trucks probably sold at a seasonally adjusted annualized rate of 10 million last month, a 39 percent drop from a year earlier, based on a Bloomberg survey of 22 analysts and economists. The November rate was 10.2 million, and annual sales for all of 2007 were 16.1 million.
December sales were probably the worst for the month in more than a decade, said Jesse Toprak, director of industry analysis for auto-research firm Edmunds.com in Santa Monica, California. “Everyone is trying to figure out if we’ve hit bottom yet,” he said. “We thought in October we had, then we thought in November we had, and now December will be worse.” The decline comes even as automakers keep offering consumer incentives. GM began a “Red Tag” sale 10 days early this year on Nov. 15. Ford on Nov. 19 began offering buyers the prices its employees pay, and Toyota introduced no-interest loans in October on more than half its models. “We started to see the point of diminishing returns for incentives,” Toprak said.
GM’s market share probably rose from November as lower gasoline prices helped boost sales of pickups and sport-utility vehicles, which generally bring in better margins for the automaker than small cars, Christopher Ceraso, a Credit Suisse analyst based in New York, said in a research note Dec. 31. Gasoline averaged $1.62 a gallon on Dec. 30, a 61 percent drop from the record $4.11 on July 15, according to motorist group AAA. December sales for Detroit-based GM, the largest U.S. automaker, were down from a year earlier, like those of all manufacturers, while “up considerably” from November, Mark LaNeve, the company’s North American sales chief, said on a Dec. 30 conference call. Increased demand for pickups also would help Dearborn, Michigan-based Ford, which gets about a quarter of its sales from F-Series trucks. The Ford pickups probably kept the annual title as the best-selling vehicles in the U.S., after leading GM’s Chevrolet Silverado trucks 473,933 to 431,725 through November.
In June, when gasoline prices were as high as $4 a gallon, the Toyota Corolla was the best-selling vehicle, followed by its Camry. The F-series ranked fifth that month. The Camry ranked third in sales through November, with 411,342 sold. Consumer concern that GM and Auburn Hills, Michigan-based Chrysler would fail to get government aid and be forced into bankruptcy may have contributed to the December sales decline, Patrick Archambault, a Goldman Sachs Group Inc. analyst based in New York, said in a Dec. 28 research note. President George W. Bush announced Dec. 19 that GM and Chrysler would get the emergency loans in exchange for substantially restructuring their businesses. GM had said it might run out of operating funds by the end of 2008, while Chrysler had said it might fall short by the end of March. The loans alone aren’t enough to boost sales in early 2009, said Archambault, who suspended his coverage of GM. “We continue to expect auto sales to remain at these extremely weak levels while housing weakness and dimmer employment prospects continue to keep confidence at multidecade lows,” he said in the note.
GM’s sales next year may rise by “several hundred thousand units” after the U.S. Treasury on Dec. 29 announced $6 billion in support for the automaker’s financing affiliate, GMAC LLC, said Ceraso, the Credit Suisse analyst. The cash will help GMAC expand lending to consumers with lower credit scores, he said. GM, Ford and Chrysler probably saw their market share fall below 50 percent for the first time in the U.S. due to overseas competitors. In 1992, the last time auto sales were below 13 million, the three companies controlled 79 percent of the market, according to trade publication Automotive News. This year, GM, Ford, and Chrysler held 48 percent of sales through November, a drop from 52 percent a year earlier, according to Woodcliff Lake, New Jersey-based Autodata Corp. The three largest Japanese automakers each gained U.S. market share through November, with Toyota City-based Toyota rising 0.6 point to 16.8 percent, Honda increasing 1.3 points to 10.9 percent, and Nissan Motor Co. up 0.6 of a point to 7.2 percent.
Paulson says crisis sown by imbalance
Global economic imbalances helped to foster the credit crisis by pushing down global interest rates and driving investors towards riskier assets, outgoing US Treasury Secretary Hank Paulson told the Financial Times. In a valedictory interview, Mr Paulson cast the crisis as partly the result of a collective failure to come to terms with the way the rise of emerging markets was reshaping the global financial system. These imbalances – arising from differences in the inclinations of different nations to save and invest – are reflected in large current account deficits and surpluses around the world.
The US Treasury Secretary said that in the years leading up to the crisis, super-abundant savings from fast-growing emerging nations such as China and oil exporters – at a time of low inflation and booming trade and capital flows – put downward pressure on yields and risk spreads everywhere. This, he said, laid the seeds of a global credit bubble that extended far beyond the US sub-prime mortgage market and has now burst with devastating consequences worldwide. 'Excesses… built up for a long time, [with] investors looking for yield, mis-pricing risk,' he said. 'It could take different forms.
For some of the European banks it was eastern Europe. Spain and the UK were much more like the US with housing being the biggest bubble. With Japan it may be banks continuing to invest in equities.' This argument – already advanced by a number of economists and largely endorsed by Federal Reserve chairman Ben Bernanke – suggests that the roots of the crisis do not simply lie in failures within the financial system. It also implies that avoiding crises in future will require global macroeconomic co-operation as well as better financial regulation and risk-management.
The party's over as US government seizes control of Citigroup expenses
The US government has seized control of Citigroup's staff Christmas party budget and set tight restrictions on the use of its corporate jet in exchange for its $45bn (£28bn) bail-out. The measures are among a raft of restrictions on expenses detailed in the small print of filing made by Citi on New Year's Eve with the US financial regulator, the Securities and Exchange Commission. The filing was made to formalise restrictions on executive pay and bonuses that Citi's chief executive, Vikram Pandit, was forced to adopt in exchange for the US government bail-out, which includes guarantees on $306bn of troubled assets on top of $45bn of loans.
In a memo to staff, Pandit said he and the chairman, Sir Win Bischoff, would forgo year-end bonuses for 2008 after the huge banking group lost three-quarters of its market value and was forced to go cap in hand to the treasury. The government was granted a stake in Citigroup in exchange for the unprecedented bail-out. "The harsh realities of 2008, primarily our earnings results, mean that our bonus pool is dramatically lower than last year," Pandit wrote. "The most senior leaders should be affected the most. That is why Win Bischoff and I will receive no bonus for 2008." Robert Rubin, treasury secretary under the former president Bill Clinton and now an adviser to the Citigroup board, also declined his bonus for 2008.
The deal with the treasury also imposed restrictions on "golden parachutes". Many departing Wall Street executives have been rebuked for receiving payoffs worth tens of millions of dollars when investors lost larger sums as the banks' performances dwindled. Pandit also claimed pay would be determined by individual and company performance, and that the bank could "claw back" any payment made to individuals that, according to the memo, "over time proves to be based on inaccurate financial or other information". But much of the SEC filing is left out of Pandit's memo, such as a lengthy section on Citigroup's new agreement on staff expenses, which must remain in place as long as the US government holds its tranche of preferred stock in the banking group.
Citigroup has written a new expenses policy governing the use of the company's private jet and budgets for "entertainment and holiday parties". The bank has also set new policies to govern expenses for travel and accommodation, office renovations, the use of contractors and the purchase or lease of real estate. If the bank wants to make any material changes to the policy, it must seek permission from the treasury. The filing also appears to list several get-out clauses that allow for executives to be paid bonuses under certain conditions and makes provisions for "golden parachutes" to some executives who leave the bank.
The filing states that 60% of the 2008 bonus pool will be paid to top executives "at the company's discretion" in a combination of "(x) deferred stock awards (all or a portion of which may be awarded in the form of stock options) or (y) deferred cash awards". The filing also states that the remaining 40% of bonuses for top executives "shall be granted subject to performance-based vesting".
Warren Buffett's Berkshire Hathaway suffers worst performance in 30 years with 32% loss
Billionaire investor Warren Buffett's Berkshire Hathaway slumped 32pc last year, the worst performance in more than three decades, as the U.S. recession forced down the value of the firm's equity holdings and derivative bets Most of the decline in shares happened in the last three months as Berkshire posted a fourth straight profit drop amid sagging insurance results. However, the company still beat the 38pc tumble of the Standard & Poor's 500 Index, the 14th year in 20 that Buffett outperformed the benchmark. Just six of 1,591 US stock mutual funds with at least $250m (£174m) in assets made money for investors last year, according to data compiled by Bloomberg.
"In 2008, there was nowhere to hide," said Guy Spier, chief investment officer at Aquamarine Capital Management, which holds shares in the Omaha, Nebraska-based company. "Berkshire can't escape the general fate of American businesses. What Buffett tries to do is ensure that Berkshire Hathaway does less badly than other companies." Mr Buffett, 78, poured money into stocks as prices fell and increased Berkshire's pace of deals as the contraction in credit markets hobbled buyout firms. He spent about $3.9bn on equities in the third quarter, making Berkshire the biggest shareholder in ConocoPhillips, the second-largest US refiner. Berkshire announced 12 acquisitions in 2008, compared with eight in 2007, and also agreed to buy $8 billion in preferred shares from Goldman Sachs Group Inc. and General Electric Co.
"Buffett has the opportunity to do what he does best, which is acquire new companies at prices that have him licking his lips," said Frank Betz, a partner at Warren, New Jersey-based Carret Zane Capital Management, which holds Berkshire shares. "I don't think Mr. Buffett is bummed out at all." Most of the top holdings in Berkshire's stock portfolio, valued at $76bn as of September 30, declined at least 15pc in the past three months of 2008. ConocoPhillips plunged 29pc in the fourth quarter. Coca-Cola Co., Berkshire's top holding, dropped 14pc, and No. 2 Wells Fargo & Co. plummeted 21pc. Declines in the value of derivatives also pressured Berkshire shares. Buyers of the contracts would be entitled to billions of dollars from Berkshire if four stock indexes drop below agreed-upon levels on dates beginning in 2019.
Mr Buffett said the liability on the contracts was $6.73bn at the end of the third quarter. Berkshire has collected $4.85bn on the contracts and can profit from investing the funds, the firm said. All four indexes, including the Standard & Poor's 500, would have to fall to zero for Berkshire to be liable for the entire $35.5bn that's at risk, Mr Buffett said in November. Acknowledging investor concern, Mr Buffett has said he' d provide more information on how he calculates losses on the contracts. Mr Buffett built Berkshire over four decades from a failing textile maker into a $150bn company by buying out-of-favor stocks and businesses whose management he deemed superior.
Definitive proof that the Bank of England saw the financial crisis coming
Looking back in our archives this Christmas I came across a rather important article which I had half forgotten about. It dates from 2006, when the credit crisis was a mere apple in the financial system's eye and the City was enjoying one of its biggest booms in history. The article, which can be found here, reveals that the Bank of England knew precisely what risk was posed by the dangerous build-up of debt which was brewing in the economy. More strikingly, its Financial Stability Report from 2006 was as far as I can tell the first major institutional missive explicitly warning about the dangerous funding gap building up in the British banking system.
As we wrote in our City Comment that day: "One statistic in particular shows precisely how exposed the City is to the bursting of the household debt bubble. At the beginning of 2001, our banks were not lending customers any more than the total amount of deposits they held. By the end of 2005, banks were lending customers £500bn in cash which simply wasn't in the vaults. Should customers default on their loans, these banks could be in trouble, having to resort to borrowing chunks of money at penal interbank rates." Not only did the Bank's report, which can be found here (page 28 is the one on the funding gap - p30 on the pdf version), lay out the City's increased reliance on wholesale funding - it also warned that this leaves banks extremely vulnerable in the event of a slowdown.
Now, the Bank was not the first to diagnose the seeds of the crisis: there were one or two hedge funds which were already trading on the likelihood of a UK banking breakdown caused by this reliance on securitisation. There were plenty of commentators warning on the excessive build-up of debt. But as far as I can tell this was about the earliest warning on the problems inherent to the UK mortgage market. The report completely debunks the notion that the financial crisis came as a surprise to the City, or indeed the Bank. The Government had been warned explicitly not by some crackpot economist but by its own employees in Threadneedle Street about precisely how the crisis could erupt. Not only this, but the report also revealed that its "war games" plotting out scenarios including a credit crunch revealed that a debt-fuelled crisis could cause a severe UK recession, a 25pc fall in house prices and a wiping out of a third of banks' tier one capital - around £40bn at the time. It is difficult to think how it could have made more noise about the possible risks the debt build-up entailed.
Of course, the eventual crisis has been far greater than even this worst-case scenario, but remember that this was a warning delivered more than a year before the securitisation markets broke down in August 2007. Had it been heeded in Government, Northern Rock - not to mention the rest of the banking system - could very possibly have been saved from complete collapse. The UK could have been let off with a mild rather than severe recession. House prices could have been brought back under control, rather than booming again for another breakneck year of growth. But this was not to be. As it was, 2006 was the year in which the credit bubble was blown well and truly out of proportion. Levels of money growth in the economy - until then under control - started to balloon, and the system started rolling along the road to destruction. The Bank could have done more to clamp down on this growth.
The Financial Services Authority, which as part of the tripartite authorities was sent copies of this report and was even involved in the "war games", should have done more to prevent Northern Rock and other lenders carrying out these policies and the Treasury, above all, ought to have wised up and taken the threat spelled out by the Bank seriously. Last but not least, a good deal of the blame has to lie with the Bank's Governor Mervyn King. Although one of the best monetary economists the country has to offer, he clearly failed to appreciate the scale of these risks. He was uniquely placed to take this warning from the obscure financial stability wing of the Bank, then sniffily regarded by many as something of a backwater, and actually do something with it.
But instead he succumbed to the received wisdom sprouted in the City that securitisation - the sale of mortgage debt onto other investors - had reduced the risk in the banking system. This was, of course, completely wrong, as the Financial Stability Report in 2006 (and for that matter 2007) indicated, and yet he believed it enough to say, in the August Inflation Report press conference, only days before Northern Rock had to turn to the Bank for support: "our banking system is much more resilient than in the past precisely because many of these risks are no longer on their balance sheets, but have been sold off to people willing and probably more able to bear it.
Some have always had a preference for a banking system in which all the risk is concentrated there... [but] that's a very risky system...We don't have a system that is as fragile as that now. The growth of securitisation has reduced that fragility significantly." All of this might seem like ancient history now, two and a half years later. But it reveals some important lessons for policymakers. The first is that there was a more-than adequate early warning system in place here in the UK. The problem was that it was ignored. The Bank's financial stability experts were sending out a clarion call to the rest of the financial system, but as loud as it screamed, no-one - not the Treasury, not fellow regulators, not even the Bank's own Governor, paid it enough attention.
Credit crunch to intensify, Bank of England warns
The credit crunch is likely to intensify in the coming months, with banks planning to continue rationing the amount they lend out to customers, new figures have revealed. Britain's major lenders have tightened credit availability significantly in the past three months, and intend to make borrowed cash even harder to get hold of in the coming quarter, according to a survey from the Bank of England. The development comes in spite of the Government's insistence when it bailed out three of the UK's biggest lenders in October that they would raise mortgage availability back to 2007 levels. Economists have said the UK is trapped in a so-called negative feedback loop, with the economy slumping further as banks restrict mortgage and other loan availability in an effort to repair their balance sheets. This in turn causes further defaults, which causes more damage to their accounts, and worsening the vicious cycle.
The Bank's Credit Conditions Survey shows that lenders reduced the availability of secured credit such as mortgages to households in the three months to mid-December 2008, adding: "A further decline was expected over the next three months." The survey also revealed that banks are the demand for credit from both households and companies fell in the fourth quarter, while defaults and losses increased. Lenders are already withholding the full extent of the Bank of England's recent interest rate cuts - to the irritation of both customers and the Government - and the survey indicates that they are likely to continue doing so in the coming months. Nationwide announced that it will not pass on further rate cuts to customers with its tracker mortgages. In November the average cost of a two-year fixed-rate mortgage fell by less than half the 1.5pc interest-rate cut that month. Although the survey is likely to increase pressure on the Bank to cut rates further, it also reignites suspicion that the Government will have to intervene to resolve the mortgage market's current malaise.
Howard Archer, UK economists at IHS Global Insight said: "The credit conditions survey intensifies pressure on the Bank of England to slash interest rates further. "We expect the Bank's Monetary Policy Committee to reduce interest rates by at least a further 75 basis points from 2pc to 1.25pc next Thursday. "While an even bigger cut could well occur, we suspect that the MPC may well decide to moderate the pace at which it is cutting interest rates as they near zero and to allow the previous large cuts more time to feed through and have a significant effect. "Further out, we expect interest rates to fall to a low of 0.5pc in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero."
UK housing market braced for brutal 2009 as prices and mortgage lending plunge at record pace
The housing market looks set for a grim 2009 after figures today showed another sharp fall in house prices in December and a record low number of new mortgages lent. The average house price in Britain fell a bigger-than-expected 2.2% last month, the Halifax said today, leaving them more than 16% down from a year earlier. Continuing pressures on incomes and the negative impact of the credit crunch on the availability of mortgage finance are expected to push prices down further over the next few months, the country's largest mortgage lender said.
The latest Halifax numbers mean that the average price of £159,900 is a fifth lower than it was at the peak of the housing market bubble in the autumn of 2007. The Halifax said that the average house price had fallen 5.2% in the fourth quarter of the year - similar to the third quarter drop of 5.6% and the second quarter's 5.1% fall. But that still means prices are falling at an annual pace of over 20%. Martin Ellis, Halifax chief economist, said: "But a number of factors will help to support demand and should help to limit the downturn. Improving housing affordability and an easing in the pressure on the majority of households' finances should support market activity and prices.
He added that the house price to earnings ratio – a key affordability measure - is at its lowest for five-and-a-half years at 4.4 times, down from nearly six times in the middle of 2007 and not far above what it says is the long-term average of four times. The Halifax has declined to give a forecast for house prices for this year but many analysts think prices will fall by between 35% and 50% from the peak in 2007 to the trough in 2010 or 2011. Not only were house prices hugely overvalued, they say, but the drying up of mortgage finance has further hit buyers' ability to purchase a property.
Separately the Bank of England reported that new mortgage approvals for house purchases dropped to a record low of 27,000 in November, down from 31,000 in October and the lowest level since comparable records began in 1993. Approvals were down from 75,000 at the end of 2007 and 114,000 in mid-2007. The Bank also revealed that net mortgage lending was just £740m in November. While up from £477m in October, it was still one of the lowest levels on record and less than 10% of the £8bn of November 2007.
Liberal Democrat Treasury spokesman Vince Cable said: "It is understandable that when house prices are falling and are expected to continue to fall for some time that borrowers will hold back rather than risk finding themselves in negative equity. "Nonetheless it does appear that the inevitable big correction in the housing market is being exaggerated by the complete collapse of mortgage lending by the banks. The government is completely paralysed at this crucial moment." Shadow chancellor George Osborne added: "The new year shows that Gordon Brown's policies are not working and the recession is getting worse not better. That is because an economic recovery depends on confidence in the future, and people do not have that confidence while we have a Labour government in power bankrupting the country."
Analysts were also gloomy. "It may be 2009 but the ghosts of 2008 will continue to haunt us, and for some time yet. The November mortgage lending and December Halifax house price figures are just two grim reminders of the death, last year, of easy money, inflated house prices and consumer confidence, and there will be many more in the months ahead before things finally start to improve," said Andrew Montlake of mortgage broker Cobalt Capital. The Bank of England's monetary policy committee holds its latest monthly meeting next week and is widely expected to cut interest rates to an all-time low in a bid to prevent the whole economy slumping into a deep and painful recession. Rates are currently at a joint all-time-low of 2% and many economists think Threadneedle Street will cut them to as low as 1% next Thursday.
UK manufacturing activity shrinks for the eighth month in row
Britain's manufacturing sector has contracted for the eight month in a row, as new orders slumped and companies laid off workers at the fastest rate since the series began 17 years ago. The Chartered Institute of Purchasing and Supply/Markit index of manufacturing activity rose to 34.9 last month – just slightly above November's record low of 34.5 on a scale where figures under 50 indicate a contraction. "The second half of 2008 has been a nightmare for UK manufacturers, and December PMI data confirm that the sector will enter the New Year on its weakest footing since at least the early-90s recession," said Rob Dobson, an economist at Markit. "Production, new orders and employment are still dropping at, or near to, survey-record rates as the ongoing crises in the autos, construction, financial and retail markets are all draining demand."
Although the weakness of the pound has made manufacturers' goods cheaper to buy abroad, the global economic downturn has cut demand. In particular, the euro-zone, which is Britain's most important trading partner, is contracting for consecutive quarters for the first time in its 10-year history. However, the fall was better than the 33.6 forecast by economists, an indication that the rate of contraction could be slowing. Hetal Mehta, senior economic adviser to the Ernst & Young Item Club, said: "The decline in activity continues to feed through into employment prospects, with the fastest pace of manufacturing job cuts on record. "We expect this trend to continue over the coming months, with job losses across the economy set to push up unemployment." The Item Club believes manufacturing output declined by nearly 3pc in the fourth quarter of the year, with GDP likely to have fallen by more than 1pc. The drop in activity heightens expectations that the Bank of England will cut interest rates by at least half a percentage point next week.
Bank policy-makers have indicated they may cut the key rate further next week after trimming it to the lowest level since 1951. Howard Archer, chief UK & Europe Economist, at IHS Global Insight, said: "We expect the MPC to reduce interest rates by at least a further 75 basis points from 2.00pc to 1.25pc. While an even bigger cut could well occur, we suspect that the MPC may well prefer to moderate the pace at which it is cutting interest rates as they near zero and to allow the previous large cuts more time to feed through and take effect. "Further out, we expect interest rates to fall to a low of 0.50pc in the second quarter of 2009 and then stay there for the rest of the year. However, it is far from inconceivable that interest rates could come all the way down to zero." The CIPS/Markit manufacturing survey, which has been run since 1997, takes its measure from a sample of about 700 UK companies.
UK unemployment will soar above 3 million in 2009, say chambers of commerce
Unemployment will soar above 3 million as Britain's manufacturers, retailers and service industries feel the full effects of the downturn, according to the British Chambers of Commerce, which said economic output is set to fall this year by more than in the last recession of the 1990s. The jobless count will rise to 3.1 million, or 10% of the workforce, the business group predicted. It said the UK economy could shrink by as much as 2.9%, leaving the country to face the "distinct risk" of deflation this year. As a result, the government's depleted finances will remain in a parlous state for many years.
The BCC's gloomy forecast was matched by analysis from Experian that predicted that up to 1,400 retailers would be forced out of business over the coming year. The retail consultancy said there was no disguising that 2008 was "an annus horribilis" for the retail sector and there was little prospect of improvement in 2009. A last-minute dash to the shops at Christmas failed to lift footfall figures to last year's level, Experian said. Shopper numbers were 3.1% lower in December than they had been in the same month of 2007, despite heavy discounting that in many cases wiped out profit margins.
Experian said there had been a 21% year-on-year jump in the number of retail insolvencies, with high-profile casualties such as Woolworths, Adams and Zavvi all calling in the administrators. It predicted a further 440 retail businesses would fail in the first four months of 2009, with a total of 1,400 going under in the year as a whole. Economists lined up to support the view that 2009 would be one of the worst years for the economy and could trigger a longer-than-predicted slump in national output. Howard Archer, of Global Insight, said the economy would contract by 2.7% as the effects of the banking crisis gripped the real economy. "Consumer spending is being hammered by accelerating unemployment, muted income growth, high utility bills and food prices, very tight lending practices, heightened debt levels, a depressed housing market and substantially lower equity prices," he said. "Additionally, heightened concerns about the economic outlook are leading consumers to tighten their belts.
"The Bank of England's cutting of interest rates by a total of 300 basis points between October and December, and undoubtedly more reductions to come, will obviously help consumers, as will some of the measures contained in the government's £20bn stimulative fiscal package announced in November's pre-budget report. Nevertheless, consumers will face serious pressures for an extended period, and will be particularly hit by sharply ?rising unemployment in 2009. Consequently, we expect consumer spending to contract by around 2% in real terms in 2009." Archer predicted house prices would fall another 15%, while Capital Economics said it could be as much as 20% as the cost of the average home headed for a 50% fall from its peak in the summer of 2007.
The BCC said it believed there was a risk of deflation in the second half of this year, while government borrowing would increase to £130bn. David Frost, BCC director general, said: "I have worked through three recessions now and 2009 looks like it will be one of the toughest years I have ever seen for the UK. "Some of the strain can be avoided, but only if the government can address the two key problems of confidence and cash flow. We must avoid losing viable companies during this downturn." David Kern, chief economist at the BCC, added that the UK's prospects had worsened significantly since the group's last forecast at the end of 2008. The BCC was now predicting bigger declines in economic output, higher unemployment and larger government borrowing than envisaged in November.
Last year most City analysts were wrong on house price inflation, wrong on unemployment, wrong on interest rates and wrong on the severity and depth of the recession in 2008. To be fair, most of them were near the mark until the Lehman Brothers collapsed. As the governor of the Bank of England, Mervyn King, said, Lehmans changed everything. King, who was also wrong-footed by events, was predicting until the summer that the UK economy was robust and all we needed to worry about was inflation. In January last year the CBI believed the growth in national income for 2008 would be 2%. Today, GDP growth looks more like being 0.8%.
The Royal Institution of Chartered Surveyors suggested that 2008 would be a game of two halves for the property market. It said house prices will would end the year broadly unchanged as first-time buyers buoyed the market. Instead, we had the sharpest decline in house prices since the 1970s. Most economists opted for predicted that base rates at the end of the year of would be 4% to 4.5%. Roger Bootle, economic adviser to Deloitte & Touche, picked 4%, while David Brown at the soon-to-go-bust Bear Stearns, said: "UK rates should be at 4.5% by the end of 2008." Now they stand at 2% and with will fall further, to fall according to many experts.
Britain's biggest building society decides not to pass on rate cuts
Hundreds of thousands of home buyers who expect lower base rates to cut mortgage costs will have their hopes dashed by Britain's biggest building society. Nationwide has taken a top-level decision not reduce the cost of 200,000 home buyers' tracker mortgages any further, even if the Bank of England cuts base rates again next Thursday. Senior executives are braced for criticism but say they must hold rates to protect the position of savers, who outnumber borrowers by seven to one. A Nationwide spokesman said: "We have to balance the interests of our 1.4m borrowers with the interests of our 10m savers and so we will set a floor of 2pc on our trackers, whatever the Bank of England may say next week."
The decision will add to controversy about tracker mortgages, which are marketed as home loans which track or follow base rates. But Nationwide – like other lenders, such as Skipton and Yorkshire building societies – include a clause in their tracker contracts, reserving the right not to follow base rates below a fixed level or "floor" on these loans. When the Bank of England cut base rate to 2pc in December, Yorkshire enforced its floor at 3pc and spokesman David Holmes said: "In a low interest environment, our concern has to be with our savers – as that is where we get the money to lend. "To be honest, we feel that mortgage borrowers are getting a pretty good deal at 3pc.'' But last month Nationwide decided not to exercise the clause in its mortgage contract which would have enabled it to ignore base rates falling below 2.75pc.
As a result, some of its tracker mortgages, which charge 0.76 of a percentage point below base, currently cost borrowers just 1.24pc. Now Nationwide has decided enough is enough. A spokesman said: "Following December's base rate cut, we have had to reduce returns to savers by an average of 0.87 of a percentage point, with effect from January 1. But, if we were to cut mortgage costs further, we would have to reduce our savings rates even more aggressively." However, Lloyds TSB and its mortgage subsidiary Cheltenham & Gloucester have set no floor on their tracker loans – nor has HSBC, although that bank reserves the right to do so. Pressure from the Government to force banks and building societies to pass on rate cuts may hasten regulatory intervention to ensure borrowers benefit.
Last month, the Financial Services Authority (FSA) said some tracker floors would prove unenforceable if borrowers were not warned about them sufficiently clearly when loans were arranged. Jon Pain, FSA retail markets managing director, told the Council of Mortgage Lenders' annual conference: "While tracker interest floors can be a legitimate term of a mortgage, this can only be if it is clear and unambiguous to the consumer and is consistently and prominently spelt out in the initial offer document. "If it is not, you run the real risk of both breaching our disclosure requirements and having an unfair contract term you can't enforce.'' But Melanie Bien, a director of mortgage broker Savills Private Finance, said lenders needed discretion to cope with very low interest rates: "Otherwise, you could have the ridiculous situation where a borrower is on a tracker at say one percentage point below base and, if base falls below 1pc, the lender would be paying the borrower for the mortgage."
UK lenders resist pressure to pass on rate cuts
Demands by the government for lenders to boost lending to small business and householders were ignored in the final three months of last year when the supply of credit contracted more than expected. A Bank of England survey of banks and building societies published today also shows that lenders expect to keep cutting the loans available to companies and individuals in the coming three months, and are braced for a rise in the numbers of customers failing to make loan repayments on time.
The worsening credit conditions led economists to predict that the Bank's monetary policy committee would be more likely to cut interest rates – already at their lowest levels for 58 years – next week. Howard Archer, chief UK and European economist at IHS Global Insight, said: "The credit conditions' survey intensifies pressure on the Bank of England to slash interest rates further." He predicted a cut of at least 75 basis points to 1.25% next Thursday following the MPC meeting. The government has used £37bn to buy stakes in Royal Bank of Scotland and the soon-to-be-merged Lloyds TSB and HBOS and is heaping pressure on them and other lenders to pass on rate cuts. However, Nationwide is refusing to pass on any further cuts to customers of its tracker mortgages and is setting a floor of 2%.
The Bank of England conducted its survey between 24 November and 15 December and found that lenders had been surprised by a stable demand for mortgages and remortgages. Lenders had expected demand to fall, as it did for unsecured loans. Lenders reported that they reduced the availability of mortgages to householders because of expectations of further falls in house prices and concerns about the economic outlook.
Euro-zone manufacturing contracts at record pace
Manufacturing activity contracted for the seventh month running in December for the countries using the euro, falling at its sharpest rate for at least 11 years, a closely-watched survey found Friday. The figures reinforced expectations that the European Central Bank will cut interest rates again this month. The monthly purchasing managers' index was revised down to 33.9 in December from the initial estimate of 34.5, down from 35.6 the previous month. A reading below 50 indicates contraction, and the bigger the difference from 50 the greater the contraction. December's reading was the lowest in the survey's 11-year history.
The PMI provided further evidence that the euro-zone economy, already in recession, closed out 2008 in shaky condition. The equivalent services index, due on Tuesday, is expected to paint a similar downbeat picture and fuel speculation that the European Central Bank will cut its benchmark interest rate from the current 2.5 percent at its next meeting on January 15. The European Central Bank has been criticized in many quarters for not cutting interest rates as aggressively as its counterparts, the U.S. Federal Reserve and the Bank of England.
Euro's Birthday Gift: Angst
Two unlikely countries have the European spotlight as the euro celebrates its 10th birthday. Slovakia becomes the 16th country to adopt the single currency. The Czech Republic takes the European Union's revolving six-month presidency for the first time. Slovakia, 15 years after Czechoslovakia split in two, appears a case study for euro benefits. Its politicians were quick to embrace the rules for entry into the currency bloc, compared with the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland, which still aren't in the euro zone.
Slovakia has so far been spared the pain felt by the likes of Hungary and Latvia. The monetary and fiscal discipline required for euro entry has proved reassuring for investors. But there are two sides to every coin. The euro has gained wide public acceptance since 1999 but, because of falling unemployment, booming trade, and tame inflation, investors are nervous. Yield differentials between 10-year German bonds and those of Italy and Greece remain wide at 1.4 and 2.2 percentage points, respectively. In fact, Slovakian government debt is viewed as about as secure as that issued by Italy, a founding member of the euro. That is a sign of worries that a long recession will put huge stress on the euro zone's members -- not helped by doubts over the Czechs' ability to rise to the task of the EU presidency in such tough circumstances.
True, the economic problems Europe faces might have been worse without the single currency. But the euro zone's outlook is still far from rosy. And individual countries could struggle with the one-size-fits-all monetary policy and rigid exchange rate. The increase in French unemployment in November was the highest in decades. Germany and Italy can expect a similar impact on their labor markets from looming industrial slumps. The temptation to scapegoat the euro may prove hard to resist for some populist European politicians. Having completed its first 10 years, the young, growing but imperfect currency area will start its second decade with plenty of challenges.
Ignoring the Oracles
It’s hard to tell what’s more striking about Raghuram Rajan’s 2005 presentation at the Kansas City Fed’s Jackson Hole symposium — the way many of the dangers he laid out came to pass, or the way he was attacked, and then discounted. Mr. Rajan came to the conference, dedicated to soon-to-retire Fed Chairman Alan Greenspan, with strong bona fides as a pro market advocate. He and University Chicago colleague Luigi Zingales wrote a 2003 book, 'Saving Capitalism from the Capitalists,' that argued at length that free-market capitalism is the best way to organize an economy, and that free financial markets – through their ability to direct funds to where the economy needs them most – are crucial to the system’s success. But when he suggested at Jackson Hole that markets could get it badly wrong sometimes, and that central banks should consider responding to that, he was lambasted as nostalgic for the old days of highly regulated banking.
Fed Governor Donald Kohn – who for years has played the role of providing intellectual ballast to the central bank’s decisions and now serves as its Vice Chairman – said that for central bankers to enact policy’s aimed at stemming risk-taking would 'be at odds with the tradition of policy excellence of the person whose era we are examining at this conference.' Former Treasury Secretary Lawrence Summers said the premise of Mr. Rajan’s paper was 'misguided.' 'This is a common feature of people when they come across dissent – they want to put you in a box and label you and dismiss you,' says Mr. Zingales. 'He is definitely not anti-market. That’s the most mistaken characterization of Raghu.'
The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them. Another reason that many policymakers may have missed the risks is that macroeconomists didn’t have a good understanding of the changes that were occurring within financial markets and the banking system. There has long been a marked distinction between economists who study finance and economists who study the broader economy, with limited communication between the groups. As a young Harvard University economist, Mr. Summers argued this was a dangerous shortcoming in a now famous screed, where he unfavorably compared finance specialists to 'ketchup economists' who are too narrowly focused on their field of study, while also complaining about general economists tendency to continually rediscover conclusions that the finance specialists had come to long ago.
Finally, many academic economists privately worried that a housing bubble was building, and that it’s bursting would cause severe problems, but didn’t publicize their concerns. An exception is New York University’s Nouriel Roubini, who in 2006 said that the U.S. was almost certainly heading into a recession. Mr. Roubini is often characterized as a grand stander, but Mr. Rajan says that he deserves credit for acting on his convictions. 'Most academics are really reluctant to take part in the public dialog, because the public dialog requires you to have an opinion about things you can’t really be sure about,' says Mr. Rajan. 'They fear talking about things where everything is not neatly nailed in a model. They stay away and let the charlatans occupy the high ground.'
Mutual funds suffer $320 billion outflow
Investors pulled a net $320bn from mutual funds in 2008, a record in both dollar terms and as a percentage of assets, in one of the biggest flights to safety the industry has seen. The move out of what were previously regarded as safe and stable investments followed a record year of investor inflows in 2007. However, it appears that outflows stabilised and even reversed in the final weeks of the year. Investors put a net $23bn into equity funds during December and withdrew only $3.5bn from bond funds, less than in earlier months. Equity funds had outflows of $233.5bn in the year to December 29, with bond funds seeing outflows of $58.2bn and balanced funds – which include both securities – having outflows of $28bn, according to Emerging Portfolio Funds Research, which tracks fund flows in most of the world. The data include both retail and institutional investors. The total outflow of $320bn does not include money market funds. Almost every money manager has seen a drop in long-term assets this year as a result of net outflows and a decline in performance.
Much of the cash withdrawn went into money market funds, which saw inflows of $422bn during the year, lifting their total assets to a record $3,720bn. Bank deposits also saw increases during the year. More than 4 per cent of equity fund assets were withdrawn during the year, a record since EPFR began keeping records in 1995. This is greater than the percentage of assets investors pulled from hedge funds during the year, although hedge fund outflows have been partly halted by managers’ suspending or limiting redemptions. This is not an option available to mutual fund managers, who market their funds as offering daily liquidity. The main, if not the only, growth for money managers this year has been in money market funds, but these have generated several problems of their own. Earlier in the year many ran into trouble because of exposure to subprime securities. One fund, the Reserve, 'broke the buck', with the value of assets falling below the level investors paid in. More recently, as interest rates fell to near zero, the funds have been able to eke out only tiny yields which offer little return to investors and provide no profit to the firms running them.
Sovereign Wealth Funds Take a Big Hit
Just a few months ago political leaders worldwide were fretting mightily over the growing power of sovereign wealth funds, those vast pools of government-controlled cash in oil-rich countries and other big exporters. The fear was that they would gobble up trophy assets and start to demand a say in running businesses. But as the past year's market turmoil has hit the funds hard, those worries are fading. While the funds are cagey about what they own -- and what they've lost -- it's certain that they have suffered. One that does report numbers, Norway's $300 billion Government Pension Fund-Global, was down 7.7% in the September quarter. It was the worst performance in the 18-year history of the fund, which invests Norway's oil revenues. And that drop doesn't include more recent market woes. All told, the sovereign funds have lost 18% to 25% this year, estimates Stephen Jen, an economist at Morgan Stanley in London. That means losses of as much as $700 billion, bringing the funds' total value down to some $2.4 trillion. "You don't lose a quarter of your assets without consequences," Jen says.
Those consequences will probably include closer scrutiny by the funds' boards. Coupled with other troubles, such as steep drops in their domestic stock markets and potential bailouts of local companies, at least some of the funds have come under pressure to spend at home rather than abroad. Kuwait's government, for instance, has asked its fund to pump money into the local bourse, which has fallen sharply. With the global credit squeeze, "the average Kuwaiti or Abu Dhabian can't get a mortgage or a car loan," says one Mideast banker. "They wonder why (the funds) are bailing out the Citigroups of this world." Losses have been particularly steep in Abu Dhabi. The Abu Dhabi Investment Authority [ADIA] is believed to be the world's largest sovereign fund, valued as high as $900 billion, though no outsiders know for sure. While ADIA won't disclose its holdings, officials at the fund have said they aim to put 55% to 71% of their portfolio in stocks and 12% to 28% in such alternatives as real estate, hedge funds, and private equity. Brad Setser, an economist at the Council on Foreign Relations in New York, suspects the fund has lost a third of its value. The decline, though, may have been cushioned by some $50 billion in new oil revenues last year.
Other Gulf funds have been hit almost as hard. The Kuwait Investment Authority lost roughly 30% of its $250 billion stash, while getting $50 billion in new oil money, Setser reckons. Potential losses at the $60 billion fund controlled by the Qatar Investment Authority (QIA) are harder to figure because it reveals little about its activities. It is probably the most aggressive of the bunch, though, and in recent months it has pumped roughly $5 billion into Britain's Barclays Bank even after other funds had taken a beating on investments in the likes of Citigroup and Merrill Lynch. Though the QIA's shares in Barclays have some downside protection, the bank's stock is off 20% since the deal. The big winners may be the Saudis. They have long been derided for propping up the U.S. budget deficit in exchange for low returns, but now they look smart. Though just $6 billion has been earmarked for a sovereign fund, the central bank holds some $440 billion in reserves. It appears to have largely avoided risky investments for the safety of U.S. Treasury bonds.
Many of the funds sought influence in financial circles by purchasing stakes in stock exchanges. Those have turned out to be bad bets. The QIA owns 15% of the London Stock Exchange, and Dubai's fund has 20%. LSE shares have dropped nearly two-thirds since the funds bought in 15 months ago. At the same time, Dubai paid $3.1 billion for 20% of Nasdaq OMX Group, which has since fallen 35%. It's too early to say whether the funds will significantly change the way they do business. Some are eyeing distressed assets in the West and elsewhere. And their investment horizon is typically measured in decades, not years, so they have plenty of time to smooth out current losses. Nonetheless, they may need to sell off stock holdings, if only because oil prices and equities tend to follow the same path, rising in good times and tumbling when the world economy shudders. "They need to have (more) assets," Setser says, "that hold value when oil falls."
Credit insurers feel strain of costs
Credit insurers are facing further pressure after a sharp increase in their costs in the January 1 renewal period, a key date for worldwide reinsurance. According to Willis, the world’s third-largest insurance broker, the price of one of the main types of reinsurance bought by European credit insurers rose by an average of 40 per cent. 'If reinsurance costs go up, it makes [credit insurers’] life more difficult,' said James Vickers, chairman of the international division of Willis Re, Willis’ reinsurance unit. Willis will also say in a report that many reinsurers are cutting back on the cover offered to credit insurers, with some smaller operators pulling out of the market. Consequently, reinsurance will remain 'very scarce' and conditions 'very tough for buyers'. This could create further problems for European supply lines, with the potential for credit insurers to cut cover – against the risk of the purchasers going bust – that they offer to suppliers.
The leading operators in the niche credit insurance market are Atradius, Euler Hermes and Coface. Credit insurers typically protect themselves by sharing a fixed proportion of the risk and reward on every policy with a reinsurer. In return, the credit insurer receives a commission. Mr Vickers estimated that commissions fell by between 5 per cent and 15 per cent on renewal. Credit insurers also buy reinsurance to protect themselves against losses on the proportion of the policy they keep – and the cost of cover has risen by about 40 per cent on average, he said. Munich Re, which provides reinsurance to credit insurers, also said it expected prices in this class of business to have risen but it was too early to give any figures. Willis will also say today that the cost of reinsurance is rising in other areas of the market where capital is in short supply, with increases set to continue through 2009. Mr Vickers said insurers with portfolios across the US exposed to hurricanes and earthquakes saw reinsurance costs increase by 15 per cent, on average. For regional insurers, prices were up to 5 per cent higher.
As well as about $25bn of hurricane losses, reinsurance capacity has been eroded by the financial turmoil while a number of hedge funds and capital market investors have withdrawn from the US catastrophe reinsurance market. Many insurers want to buy more cover but reinsurers want to write fewer risky policies, as it would be difficult to repair their balance sheets after losses. Meanwhile, closed debt markets and volatile equity markets make it difficult to start new reinsurers. Insurers seeking significant protection against windstorm losses across several northern European countries also saw price increases of 7.5 per cent to 10 per cent, said Mr Vickers. The cost of the reinsurance that reinsurers themselves buy rose by 10 per cent for companies free from claims, and by up to 25 per cent for those with losses, Willis estimated, with this market hit by the withdrawal of hedge fund capacity. Reinsurance is also scarce for insurers of offshore infrastructure in the US Gulf of Mexico after the hurricanes and prices are expected to rise. But many reinsurers are holding off until insurance contracts have been finalised.
Insurance companies woes mounted in 2008, face more storms ahead
Storms weren't the only thing that battered insurance companies in 2008, and the new year could be just as tough. Perhaps the biggest event to shake the industry in 2008 was the sudden collapse of American International Group Inc., once the largest insurance company in the U.S. before it gave in September under the weight of bad bets it made insuring mortgage-backed securities. New York-based AIG has received to date a $150 billion rescue package from the federal government, and the company is seeking to shed some assets to raise more funds. A bankruptcy of AIG likely would have wreaked havoc in international markets. "Obviously it was a pretty notable year with AIG being in the headlines," said Keefe, Bruyette & Woods analyst Cliff Gallant. "With that said, you compare the insurance industry to the banking industry ... there haven't been insolvencies." Still, there have been signs of distress. The Dow Jones U.S. Insurance index was down about 50 percent. The broader market has also declined.
Among the biggest companies hit include AIG, which fell 97 percent, Bermuda-based insurer and reinsurer XL Capital Ltd., down 93 percent, and Richmond, Va.-based life and mortgage insurance provider Genworth Financial Inc., which dropped 89 percent. "We are expecting 2009 to be a difficult year," Gallant said. "We are hoping that by the second half we start to pull through things, but I think we still have a lot of challenges ahead of us." Insurers, like other financial firms, have taken losses on investments in debt such as collateralized debt obligations and mortgage-backed securities. CDOs are securities backed by pools of mortgages or other assets. They have plummeted in value since the credit crisis erupted more than a year ago as investors fled all but the safest forms of debt. During 2008, insurers' stocks, including Genworth, MetLife Inc. and Hartford Financial Services Group Inc., have been hit hard by concerns over the sector's mortgage exposure and the need for companies to raise capital. MetLife was down 43 percent for 2008, while Hartford lost 81 percent.
Several, like bond insurer Ambac Financial Group Inc., whose stock fell 95 percent for the year, have taken steps to reduce their CDO exposure. Others, like AIG, have also lost money on credit-default swaps, which are essentially insurance contracts or bets on the possible default of CDOs or mortgage-backed securities. Sellers of the swaps must repay customers if the underlying value of the assets decline. Insurers also have been under pressure to maintain solid capital positions as the markets all but stopped lending money to avoid damaging downgrades by ratings agencies. Keeping high ratings is key for insurers because lower ratings can mean higher costs, and in some cases, even a loss of business. "In a year like 2008, it's hard to pick many winners," said Robert Hartwig, an economist and president of the Insurance Information Institute, a New York-based industry group. Hartwig added that if anyone is a winner, it's the policy holder. "Your claim is being paid. Your policy is being renewed," said Hartwig, who expects pricing will remain relatively flat.
Property and casualty insurers had more than $25 billion of dollars in catastrophe losses tied to Hurricanes Gustav and Ike and other natural disasters in 2008. Deutsche Bank analyst Darin Arita said in a client note that he expects life-insurance stocks to fluctuate with the credit and equity markets in the near term, which will add increased pressure to earnings. In recent months, some companies have taken action to bolster capital. Hartford Financial of Connecticut raised $2.5 billion of capital in October and contributed all of it into its life-insurance operations. That same month, New York-based MetLife raised $2.3 billion in a stock offering. Recently, Newark, N.J.-based Prudential Financial Inc. contributed a stake from its retail-brokerage joint venture with Charlotte, N.C.-based Wachovia Corp. into its primary insurance subsidiary, increasing its life-insurance capital by $2 billion. "We would not rule out the life insurers raising additional capital, especially if their stock prices move higher," Arita wrote.
New Year's resolution: Fill out college financial aid form
The new year is here, and an ambitious list of resolutions is staring you in the face. But if you're a high school senior hoping to go to college this fall, one resolution should skyrocket to the top of the list: filling out financial aid forms. The commonly used FAFSA — or Free Application for Federal Student Aid — form for 2009-10 was posted on the federal Department of Education Web site as soon as the new year began. The 10-page federal form is considered key to the vast majority of financial aid dollars available. The FAFSA is widely used by public and private colleges and determines a critical figure: the EFC or "expected family contribution" — how much of a college bill a family is actually expected to pay.
Local high school guidance counselors and financial advisers urge families of all income levels to fill out the FAFSA as early as possible in January, even though they won't yet know which colleges have accepted their child. The downturn in the economy has whacked not only family budgets but also state funding and college endowments, meaning that more students are competing for a smaller pool of scholarships and financial aid. "The sooner you get your application completed and into the pipeline, the better," said Debbie Cochrane of The Institute for College Access and Success in Berkeley. If you're interested The form is at www.fafsa.ed.gov.
The end of the world? No, just madness
How historians eventually label 2008 will depend on how much worse it all gets in 2009. But they will surely have an easier job than newspaper headline writers, who have already used their entire stock of abysses, maelstroms, meltdowns and apocalypses to describe the events of the past few months, only to face a new year in which it may well happen again. Except this time round, it will really get serious. Or will it? If there is a profession that stands lower these days than headline writers, hedge fund managers or buy-to-let property developers, it is that of the economic forecaster and market pundit. A rotting bouquet must surely go, in this category, to the equity analysts at Lehman Brothers in London who predicted that the FTSE-100 share index would end 2008 at 7,300: they can't actually collect their prize, of course, because Lehman went bust in September, starting the whole cycle of abysses and maelstroms to which we shall return in a moment. As for the FTSE, despite a late rally it limped home to complete its worst year on record, almost 3,000 points below Lehman's prediction. Was it possible to be more wrong?
Yes it was, as a matter of fact. When crude oil hit a record barrel price of $147 in early July, many learned folk took the view that this reflected the imminent exhaustion of global carbon fuel supplies. Brace yourselves for $200 oil, said the boffins at Goldman Sachs; make that $250, warned the man in charge of most of Russia's oil and gas; you can be sure we'll never see it dip below $100 again, said several distinguished British columnists. Those of us who took a contrary view, that the price bubble was driven by speculators and would soon burst ?were shouted down. But as it happened, we were right: on New Year's Eve, despite all Opec's efforts to boost the price by cutting production, a barrel of Brent crude could be had for less than $37 – one quarter of the peak price. So 2008 was a year in which it was all too possible for experts to misread the signals? and for non-experts to over-egg the gloom. It was a year in which the certainties of three decades of free-market prosperity were shaken to their core. More than that, it was a year in which rational analysis became distorted by fear – fear of two enormous but unquantifiable connected threats.
The first of those threats was a complete breakdown of the global financial system. It very nearly happened, or at least we convinced ourselves that it nearly happened, shortly after Lehman went down. "Do you realise," one of my neighbours whispered in late October, "that if Hank Paulson [of the US Treasury] had not bailed out AIG [the insurance giant which provided cover for much of the paper issued by Lehman and other troubled banks], all the ATM machines in the world would have been switched off the next day?" I heard the same rumour soon afterwards from a distant, unconnected source, and when I played it back to people in the financial world they nodded sagely, as though it were obviously true. None of us really knows, ?but if banks had suddenly refused to issue cash, it really would have been the maelstrom: there would have been instant global chaos, looting, violence, political upheaval. On a more local scale, if Royal Bank of Scotland or HBOS had been forced to declare themselves insolvent in October, we would have seen a version of the chaos on our own high streets ?– not genteel and orderly like the Northern Rock queues of September 2007, but quickly turning to rampant disorder.
At that point, however, came the boldest move by any British politician since Margaret Thatcher launched the Falklands task force. Gordon Brown stepped in with his £37 billion part-nationalisation, and the rest of the world followed his example. A consensus swiftly took hold that retail banks could not be allowed to fail: the economic ripples would be too extensive and the political risks too high. Waves of emergency mergers and capital-raisings followed, bringing about the near-destruction of the value of bank shareholdings for many millions of small investors; but the ATMs are still working and our account balances still seem, touch wood, to be there. So that first monstrous threat has for the time being receded and whatever other failings and fiscal mismanagements we will undoubtedly hold against Gordon Brown at the polls in due course, he will never miss an opportunity to remind us of his decisive intervention. But he will reap no political dividend from the outcome of the second threat: a deep, prolonged global recession, perhaps even a repeat of the Great Depression. Here, again, it is useful to put 2008 in perspective by recalling some of the things that did not happen, including mass unemployment and widespread bankruptcies.
Certainly there was a bloodbath in the financial sector, but only after years of bloated bonuses; and even in Lehman's case, many employers who were seen tearfully carrying their possessions out in cardboard boxes one day were re-employed by Nomura or Barclays the next. Meanwhile, everyone swapped stories about how full they still found their local department stores, restaurants and Ryanair flights. Technically we may have been in recession for several months, but for most of us it only felt that way when we listened to another bulletin of doom from Robert Peston of the BBC. Only in the last few weeks of the year did we sense the true severity of the downturn as it advanced at a pace through the real economy. First to go were moribund retailers such as Woolworth and MFI; and many others with stronger sales propositions but weak balance sheets looked set to follow. If there is one forecast we can safely make, it is that job losses will be savage through the rest of the winter and repossessions and business failures will soar. In terms of real economic experience, as opposed to foreboding as to what might be about to happen, or what might have happened differently but for the bailouts ? I'm sorry to say that the year gone by may have been a picnic in the park by comparison with 2009.
So rather than describing 2008 as the year of financial Armageddon, I would prefer to call it the year of madness. It began with a phase in which traders, hedge-fund players and their ilk seemed to have gone quite mad, attacking bank shares and currencies and driving oil and food commodity prices to absurd highs – causing hardship in many poorer countries as they did so – in pursuit of a last flourish of profit before their world fell apart. The investment banking world had already taken leave of its senses, wheeling and dealing vast volumes of subprime debt and its derivatives in a frenzied game of pass-the-toxic-parcel. Governments were deluded by the dazzle of the bankers; consumers were deluded by the mirage of easy money; investors were ready to be gulled by alchemists like Mr Madoff. Collectively, did we but know it, we were of unsound mind, unfit to manage our own financial affairs. And when the system could no longer hold, the madness mutated into William Blake-style visions of the last judgment. The foundations of the age of affluence – ?the only age most of us know – perfectly symbolised by the ATM that pumps cash into our hands at the touch of a button, were about to crumble.
Circumstances changed so fast that no prediction counted for anything. Conditions were unprecedented, which meant that economic theories had little to offer: most perversely, it was declared that the last-ditch remedy for a crisis caused by over-borrowing and over-consumption was for governments to borrow more and make money cheaper, so that consumers would spend more. We start the new year in confusion and trepidation: the global financial system has not turned to dust as we feared, but its pillars and principles have cracked; and the dark vision of global recession is about to become a reality. Given all that has happened, it would be easy to label the year just passed as one to forget; but those who forget the past are destined to relive it. When boom times eventually come round again, ten or 20 years hence, we should remember the madness of 2008.
Asia’s Economic Slump Deepens as Manufacturing, Exports Shrink
Singapore said its economy may shrink more than previously forecast in 2009, foreshadowing a deepening slump throughout the region as exports and manufacturing contracted further in China, South Korea and Australia. China’s manufacturing declined for a fifth month in December, South Korea’s exports fell by more than 15 percent for a second month, and Australian manufacturing shrank, reports today showed. Singapore’s economy may contract as much as 2 percent this year, worse than a November prediction, the government said today.
'Asia is facing a growth shock with indicators suggesting the contraction will be as sharp as during the depth of the Asian financial crisis,' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. 'There will be more fiscal pump-priming and monetary-policy loosening forthcoming over the next three to four months.' Public spending packages and interest-rate cuts by governments and central banks around the world have failed to reverse a worldwide economic slump and the worst credit crunch in seven decades. Asia’s export-driven economies are slowing as demand for their products diminishes amid recessions in the U.S., Japan and Europe. Overseas shipments by India are also falling, and Vietnam this week said its 2008 economic expansion was the weakest in nine years. Among Southeast Asia’s three biggest economies, Thailand says it’s at risk of falling into a recession this quarter, while Indonesia and Malaysia expect growth this year to be the slowest since 2001.
The World Bank last month predicted international trade will shrink in 2009 for the first time in more than 25 years. Exports account for about 32 percent of Asia’s gross domestic product, according to the World Bank. Japan, Hong Kong, Singapore and New Zealand are already in recession. Singapore’s recession this year may be the worst in its 43- year history, Citigroup Inc. economist Kit Wei Zheng wrote in a note today. 'It’s going to be a tough time across Asia,' said Alvin Liew, an economist at Standard Chartered Plc in Singapore. 'We don’t see any bright spots in the Singapore economy, especially in the first half.' Singapore’s Chartered Semiconductor Manufacturing Ltd. and Taiwan Semiconductor Manufacturing Co., two of the world’s three largest custom-chipmakers, last month lowered their earnings projections amid delayed orders and a slump in demand.
In South Korea, President Lee Myung Bak today pledged to help bring down interest rates amid concern the economy may enter its first recession since 1998 by June as exports slow and consumer spending weakens. Overseas shipments fell 17.4 percent in December, after a 19 percent decline the month before. 'We won’t waste a minute or a second in examining economic conditions every day and coming up with measures,' Lee said. 'Most of all, we have to ensure money flow in the markets.' The worst global financial crisis since the Great Depression in the 1930s will deteriorate further, New York University Professor Nouriel Roubini wrote in a commentary published on Bloomberg News yesterday. 'The entire global economy will contract in a severe and protracted U-shaped global recession that started a year ago,' Roubini said. 'A hard landing for emerging-market economies may also be at hand.' In China, where manufacturers in industries from metals to toys are reducing production or closing down, Roubini predicted growth will slow to 5 percent or less this year, and said India will face a 'sharp slowdown.'
Still, HSBC’s Neumann forecasts a rebound in Asian growth in the second half of 2009 as government spending boosts domestic consumption.
China in November unveiled a 4 trillion-yuan ($586 billion) economic stimulus plan, while South Korea revealed a 14 trillion-won ($11 billion) package of extra spending and corporate tax breaks, adding to almost $20 billion in income-tax reductions announced in September. Malaysia’s government on Nov. 4 unveiled public projects valued at 7 billion ringgit ($2 billion) to spur growth. 'Governments across the region have promised a very significant fiscal stimulus,' Neumann said. 'We believe that Asia will be able to generate enough domestic demand to lead a recovery in growth.'
China factories cut output at record pace
Chinese factories slashed output and workers at a record pace in December and manufacturing activity overall fell for a fifth month as the global financial crisis hit export demand, a survey by brokerage CLSA showed on Friday. The figures, which CLSA said showed a sector close to recession, spell further gloom ahead for the Chinese economy and highlight the urgency with which the government is trying to cushion the country from the effects of the global crisis. "Chinese manufacturing activity was very weak in December. Output contracted at a record pace, employment fell for the fifth month and work in hand declined," Eric Fishwick, head of economic research at CLSA, said in a statement.
"With five back-to-back PMIs signaling contraction, the manufacturing sector, which accounts for 43 percent of the Chinese economy, is close to technical recession," he said. CLSA's Purchasing Managers' Index (PMI) rose to 41.2, up from the record low of 40.9 in November, indicating that while manufacturing was still shrinking, the pace had slowed from November's record. The output sub-index fell to 38.6, signaling the sharpest contraction in production since the survey was launched in April 2004. PMIs for Russia, the Netherlands and India also posted record lows for output. Readings above 50 indicate improving conditions for manufacturers, while those below 50 indicate a deterioration in business conditions.
The weak reading reflects other data suggesting further gloom for the Chinese economy, and particularly manufacturers, who have been hit unexpectedly hard as a result of the global financial crisis. Official statistics showed that factory output grew just 5.4 percent in the year to November, the slowest pace on record, as overseas demand shrank and firms used up existing stocks of goods to cut costs. Exports fell from a year earlier that month, the first such drop in many years. Looking to head off any marked increase in unemployment, authorities have taken a series of steps to counter the slowdown, including launching a 4 trillion yuan ($586 billion) stimulus package in November and repeatedly cutting interest rates. While the government is aiming to maintain growth at 8 percent in 2009 -- down from the 9.9 percent annual pace in the first nine months of 2008 -- many economists say growth could be well below that in the first half of this year. The PMI suggested tough times ahead for manufacturers, which could demand a stronger policy response from Beijing.
New orders continued to shrink in December, at the second-fastest pace on record and marking the fifth straight month of contraction. New export orders also declined at the second-sharpest pace in the history of the survey. Firms' backlogs of work fell at the sharpest pace on record, and they accordingly cut their work forces by the biggest margin ever, boding ill for the government's efforts to preserve as many jobs as possible to help maintain social stability. Output and input prices continued to fall sharply in December, though at a slower pace in November. The CLSA PMI, compiled by research firm Markit Economics, is designed to give a timely snapshot of business conditions in the manufacturing sector. The government's official December PMI is due to be released on January 4. It hit a record low of 38.8 in November.
Singapore economy shrinks 12.5% in 4th quarter
Singapore's economy contracted for a third consecutive quarter as a global slump hurt demand for the city-state's exports, prompting the government to lower its 2009 growth forecast and foreshadowing a deeper downturn for the region. Gross domestic product shrank a seasonally adjusted 12.5 percent in the October-December quarter from the previous quarter, the Trade and Industry Ministry said in a statement Friday. The economy contracted 2.6 percent in the fourth quarter from the same period a year earlier, the ministry said. "If we are correct, 2009 will mark the most severe recession in Singapore's history," said Citigroup Inc. analyst Kit Wei Zheng, who expects the economy to contract 2.8 percent this year.
The ministry lowered its GDP growth forecast for 2009, saying the economy could contract as much as 2 percent or in the best case scenario grow just 1 percent. The government previously forecast economic activity in a range between a 1 percent contraction and a 2 percent expansion. Singapore is one of the first economies in Asia to release growth figures for the fourth quarter, providing an early sign of how badly the export-dependent region was hit by the global downturn in the closing months of 2008. The contraction in the fourth quarter from a year earlier was led by a 9.0 percent fall in manufacturing while the services sector, which includes transport and storage, grew 1.1 percent. The ministry said it based its fourth quarter GDP estimate mostly on October and November data and will release a more comprehensive report in February.
The ministry reiterated the economy grew 1.5 percent last year after expanding 7.7 percent in 2007. "Manufacturing will be weighed down by falling demand in the developed economies, while financial services will see a sharp slowdown reflecting weak financial markets and credit growth," the ministry said. "The slowdown in these sectors will spread to the domestically-oriented segments of the economy, such as property, retail, and business services." The government's Urban Redevelopment Authority said Friday its private residential property price index fell 5.7 percent in the fourth quarter from the previous quarter after dropping 2.4 percent in the third quarter.
IMF agrees to $2.5 billion loan for Belarus
Belarus has secured an emergency loan of $2.5bn (£1.74bn) from the International Monetary Fund. It becomes the sixth country after Iceland, Hungary, Ukraine, Latvia, and Pakistan to need a rescue since the crisis began The ex-Soviet state - still run by strongman Alexander Lukashenko - has suffered a run on its foreign reserves as the economic downturn engulfs Eastern Europe. The country's key exports are potash fertilizer and oil products, both hit hard by the commodity crash. The IMF's chief, Dominique Strauss-Kahn, said the tough terms of the bail-out include "strict public-sector wage restraint" and cuts in state spending. Russia has pledged a further $2bn.
He added: "The fund-supported program will help Belarus achieve an orderly adjustment to the external shocks that it is facing and offer protection against its most pressing vulnerabilities. "Adverse terms of trade movement, falling demand from trading partners and difficulties in accessing trade and other external finance have led to a decline in Belarus' international reserves." The IMF has already lent $40bn and warned others will need rescuing before the crisis is over. It may require more money if Turkey or Argentina need help.
Austria Takes Control of Bank Medici on Madoff Risk
The Austrian financial regulator assumed control of Bank Medici AG after the Vienna-based private bank said it had $2.1 billion invested in funds managed by Bernard Madoff. Chief Executive Officer Peter Scheithauer resigned. The Financial Markets Authority is assigning state supervisor Gerhard Altenberger to the bank to 'safeguard the interests of creditors and the company’s assets,' the regulator said in a statement today. The watchdog has the power under Austrian law to make such an appointment for up to 18 months 'to avert any threat to the financial interests of the clients of an investment firm.'
Bank Medici said on Dec. 16 that its Herald USA Segregated Portfolio One and Herald (Lux) US Absolute Return funds invested all of their money with Madoff. The bank also took over managing a third fund, the Dublin-based Thema Fund, at the end of 2006, according to a regulatory filing. Medici still manages Thema, two people with direct knowledge of the matter said. They declined to be identified as they’re not authorized to give the information. The Thema Fund had $1.1 billion of assets as of Nov. 28, according to data compiled by Bloomberg. It suspended redemptions on Dec. 14 after Madoff’s assets were frozen by court order. Madoff was arrested on Dec. 11 and charged with running what he told his sons was a Ponzi scheme. Clients face losses that Madoff said were as high as $50 billion, according to the U.S. Securities and Exchange Commission.
Bank Medici, which had net income of 541,000 euros ($753,000) in 2007, is 75 percent owned by Chairman Sonja Kohn, 60, who founded the bank in 1994. Milan-based UniCredit SpA holds the rest. The company had $4 billion of assets under management as of Sept. 29. Bank Medici said in a statement earlier today that it wasn’t necessary for the Austrian regulator to appoint a supervisor because its clients’ assets 'aren’t in danger.' The bank is 'sound' and will comply with any action taken by the FMA, it added. Altenberger will have the power to reject any business t
Peace and calm for 2009, but not economic recovery, say Chinese soothsayers
The world can look forward to peace and harmony in 2009, but Chinese soothsayers warned that the road to economic recovery will be long. The Year of the Rat, marked by an unprecedented, global financial crisis, will give way to a much more stable Year of the Ox, Chinese astrologists and feng shui masters predicted. "The soil represents a garden or a green field, a feng shui symbol for harmony, relaxation, and recovery," Raymond Lo, Hong Kong feng shui expert, told AFP. Chinese fortune-tellers study the changing balance of the five spiritual elements they believe form the core of the universe -- gold, wood, water, fire, and soil. A person's element can be calculated by using the exact time and date of his birth.
Each of the elements is further divided into the yin and the yang strands, the two complementary qualities representing respectively the passive and active side of nature. Coincidentally, Lo said, quite a few world leaders in 2009 were associated with "yin soil", including US President-elect Barack Obama and French president Nicolas Sarkozy. "People belonging to the yin soil tend to be more charming and charitable. They love peace rather than war. They are usually the ones who contribute to science and humanity," he said. Examples include Leonardo da Vinci, Charles Darwin, Abraham Lincoln, and Sigmund Freud, he said.
However, the feng shui master said he did not expect Obama or other state leaders to be able to turn around the global economic situation in 2009 because the element of fire -- which stands for the force that motivates financial activities -- is missing for most of next year. "It is a year for Obama to lay the foundation for his administration, rather than achieve anything. "The financial markets will go up a little in the first couple of months but this will be short-lived. Investors are bound to be disappointed in the end," he said. The prediction is similar to the forecasts of many financial analysts. Sarkozy's administration will be more stable than it was in 2008, because the strength of water will weaken in 2009, said Lo. "There was a lot of water in 2008, which is not good for a yin soil leader because it will flood the soil," he said.
The Chinese calendar moves in 60-year cycles, meaning the world will experience similar events in the new year to those that took place 60 years ago. In 1949, the People's Republic of China was established by communist leader Mao Zedong. Lo said that 2009's year of the Ox could similarly see a new world order being forged. Professions or events that can be associated with wood will fare well next year because the element thrives on soil, Lo said. He predicted that former US Vice President Al Gore, who has since turned himself into an environmental activist, will make big progress in his efforts to combat global warming. Next year will also be good for professions that are related to wood, paper, and energy, including fashion, news media, entertainment, oil and air travel, said Lo.
Mak Ling-ling, a celebrity astrologist and feng shui master, said the financial markets would be very quiet next year and economic problems would be particularly acute in the west. "Businesses will be even worse than now. Social order will be disturbed, with the number of fraud cases will rise," she said, but added that the situation would improve after next year. While many of the wealthiest and the most powerful businessmen in Hong Kong will continue to suffer in the present financial climate, Mak said some low-profile individuals would be able to seize the chance to profit from the crisis with their courage and original ideas. She warned the Hong Kong government against relying too heavily on Beijing, saying China will have its own problems to solve next year. "I think it will be unwise for Hong Kong to keep hoping that it can forever rely on mainland Chinese tourists to boost the domestic economy," she said.
As Recession Deepens, So Does Milk Surplus
The long economic boom, fueled by easy credit that allowed people to spend money they did not have, led to a huge oversupply of cars, houses and shopping malls, as recent months have made clear. Now, add one more item to the list: an oversupply of cows. And it turns out that shutting down the milk supply is not as easy as closing an automobile assembly line.
As a breakneck expansion in the global dairy industry turns to bust, Roger Van Groningen must deal with the consequences. In a warehouse that his company runs here, 8 to 20 trucks pull up every day to unload milk powder. Bags of the stuff — surplus that nobody will buy, at least not at a price the dairy industry regards as acceptable — are unloaded and stacked into towering rows that nearly fill the warehouse. Mr. Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the United States. To date, the government has agreed to buy about $91 million worth of milk powder. 'The thing is, they are going to produce it because they have to milk the cows,' Mr. Van Groningen said. 'It’s like a river. It keeps coming.' In addition, dairy farmers are all too aware that, unlike industrial machinery, cows cannot be turned off and stored until economic conditions improve; they must be fed and cared for, at continuing expense.
The bags of milk powder represent a startling reversal of fortune for the dairy industry, which flourished in recent years in part because of a growing appetite for milk, cheese, ice cream and pizza in places like Mexico, Egypt and Indonesia. Many of those countries were benefiting from a global economic boom led by free-spending consumers in the United States. As American dairy farmers increased their shipments of powdered milk, cheese and other dairy ingredients to foreign markets, their incomes rose. And the demand surge helped drive up the price of milk for American families. The national average for whole milk peaked at $3.89 a gallon in July, up from an average of $3.20 a gallon in 2006. But now, demand for dairy products is stalling amid a global economic slowdown and credit crisis, even as supplies have increased. The result is a glut of milk — and its assorted byproducts, like milk powder, butter and whey proteins — that has led to a precipitous drop in prices.
The price of powdered skim milk, used in infant formula, dairy products and processed foods, has fallen to roughly 80 cents a pound today from about $2.20 in mid-2007. Other dairy products have declined as well. Whole milk at grocers has not declined as rapidly as wholesale powdered milk, but it has dropped to $3.67 a gallon, down nearly 6 percent from the peak. While consumers are undoubtedly pleased by the lower prices, dairy farmers are struggling. 'Everything was going great,' said Joaquin Contente, a farmer in Hanford, Calif. 'The product was moving. Then this financial crisis came along and shoot, the whole thing came to a halt.' Logic might suggest that dairy farmers would simply sell some of their cows to a hamburger plant to cut the milk supply and raise prices. Indeed, the dairy industry has a cooperative effort under way to cull the herd.
But farmers are reluctant to do that if they expect a demand recovery, since rebuilding a herd can take years. The culling program is relatively small, and at least so far, most farmers are holding onto their cows. 'People don’t want to panic,' said Brian W. Gould, an agricultural economist at the University of Wisconsin, adding that farmers were receiving $20 for 100 pounds of raw milk just a few months ago. The price is expected to drop to about $14 for 100 pounds of raw milk in coming months. 'It is unclear as to whether this will be a short-term or long-term market correction. It all depends on how long it takes the U.S. economy to recover,' he said. Other agricultural sectors are also struggling with a slowdown in demand from foreign buyers because of the global recession and an increase in the value of the dollar, which has made American exports more expensive abroad. The Agriculture Department is expecting steep declines in exports of corn, wheat, soybeans and pork.
But while the government has price-support programs for about two dozen agricultural products, so far milk powder is the only commodity that has sunk low enough to start the flow of government dollars. Some expect that taxpayers will soon be buying blocks of cheese, too, given the plunging price. Government price supports provide a price floor for agricultural products as a way of keeping farmers afloat during hard times and ensuring an adequate food supply. The Agriculture Department has committed to buying 111.6 million pounds of milk powder at 80 cents a pound, for roughly $91 million, which includes some handling fees. Before October, the last time the government bought milk powder was in June 2006, and it was eventually used in government nutrition programs, given away as animal feed or sold on the open market, said Steve Gill, director of commodity operations for the department. He said the agency has not decided what to do with the cache of milk powder in California.
Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production. 'They don’t want to downsize or respond to the market signal. They want to keep producing,' said Kenneth Cook, president of the Environmental Working Group, a Washington research organization that has long been critical of the government’s farm policy. 'Once you get in a jam like this, it becomes our collective problem.' The government purchases come after what the department calls a 'euphoric period of record prices and booming exports' for the American dairy industry. Since 2003, dairy exports have increased from $1 billion a year to about $4 billion this year, with exports of powdered milk increasing sixfold during that period. Milk powder is an attractive product to export because it does not require refrigeration, has a long shelf life and can be used to make numerous beverages and foods.
Much of the increase was caused by increased demand in developing countries, where a growing middle class replaced starch in their diets with protein sources like meat and dairy products. Some Asian countries had little history of eating dairy products but were introduced to milk and mild cheeses by government nutrition programs or by restaurant chains like McDonald’s and Pizza Hut. In China, for instance, per-person dairy consumption nearly doubled in just five years, to 63 pounds in 2007 from 33 pounds in 2002 (though it remains far below the per-capita consumption in the United States of about 580 pounds), according to the U.S. Dairy Export Council. The growth translates into the need for nearly 40 billion pounds more milk each year, roughly equal to California’s annual milk production. In addition to the increased demand, exports from the American dairy industry benefited from a relatively weak dollar and tight global supplies. For instance, droughts reduced milk production in New Zealand and Australia, two major dairy exporters, allowing American suppliers to fill the gaps.
American dairy shipments soared to places like Algeria, Bangladesh, Indonesia and the Philippines. The biggest market, however, was Mexico, where imports from America increased to $853 million in 2007 from $258 million in 2003, according to the Agriculture Department.
But now, global demand has stagnated amid high prices and economic uncertainty just as the dollar has strengthened and milk production in New Zealand and, to a lesser extent, Australia, has bounced back. The continuing scandal involving melamine contamination of dairy products in China is expected to further diminish demand. 'In some of these countries where dairy hasn’t been a big part of their diet, this is where we are seeing people pull back,' said Deborah Perkins, managing director of the food and agribusiness research group at Rabobank International. Several dairy exporters say they remain bullish on their long-term prospects, given the barely tapped markets in the developing world. Until then, dairy farmers say, they are braced for a period of low milk prices even as feed and other costs remain relatively high.
Arthur Machado, who milks cows on the outskirts of Fresno, said he sold more than half his herd in 2006, the last time prices collapsed. Now, with prices plummeting again, he said he is trying to sell the remainder of his herd to another dairy farmer. 'The business isn’t what it was in the ’70s, when I started,' he said. 'There are not enough peaks to offset the valleys anymore.' Once the herd is sold, Mr. Machado said, he plans to focus on less volatile commodities, like almonds and grapes. But it is not so easy to get out of the dairy business. Just as with automobiles and homes, there is simply too much inventory on the dairy cow market. 'Right now, there are no buyers,' he said. 'When it’s on the upswing, we’ll sell. Until then, we’ll struggle through.'
The Most Distrusted Institution In America
For my last column of the year, let me offer three provocative political predictions that I see as mortal--and in some cases moral--locks for 2009.
Prediction No. 1: Wall Street is about to become the new Catholic Church--the most distrusted and vilified institution in America. It's hard to top priestly pedophilia (and bishops covering up for them) for sheer despicability, but Bernie Madoff and his fellow hucksters are giving the men of clod a close run for their--and our--money.
Prediction No. 2: This wave of well-deserved populist bloodlust will become the most potent political force in America. In fact, I sense that the recent takedown of the auto industry rescue bill was just an opening act, and that the anti-Wall Street anger will be felt in multiple and even more muscular ways next year.
Prediction No. 3: The first political party to see that second prediction coming, and to adjust its leverage accordingly, will have a distinct and likely decisive upper hand in the next two-year cycle. Forget about the office-park dads and the security moms--the voter du jour in the 2010 mid-terms will be the bailout buster. Now, you may ask, what's so provocative about these prognostications? Wall Street was already on its way to dirty word status a couple months ago as the facts behind the market meltdown emerged--and that was before the bailout backlash and the Madoff scandal. Today the outrage and mistrust is palpable across the political spectrum and targeted across the banking industry.
To wit, when Americans were asked the week before Christmas if they thought the Madoff ripoff was an isolated case or common behavior among financial advisers and institutions, 74 percent told CNN they thought it was the norm. That is truly staggering: three-quarters of Americans believe that Wall Street is rife not just with ethically challenged behavior but with outright criminal fraud. Who can blame them, especially after reading articles like the front-page dissection of Washington Mutual's mortgage chicanery in Sunday's New York Times. The poster child for WaMu's brazenness was a mortgage processing supervisor named John Parsons, whose creative notion of due diligence was to take a photograph of a mariachi singer claiming a six-figure income in front of his home in his mariachi outfit.
But that's not the worst of it. According to the Times, it turns out Parsons was snorting meth daily--and openly. "'In our world, it was tolerated,' said Sherri Zaback, who worked for Mr. Parsons and recalls seeing drug paraphernalia on his desk. 'Everybody said, 'He gets the job done.''" Yes, Parsons and WaMu did a heckuva job on us all right. The reason this is such a dynamic "you ain't seen nothing yet" situation, though, is that the American people have not, in fact, seen anything yet in terms of the depth of the law-breaking that led to the market meltdown. Indeed, most Americans have no idea how many criminal investigations are being quietly conducted right now--and how many blood-boiling indictments are going to detonate publicly in 2009.
This to me is literally the great untold story of the whole financial crisis--and arguably the biggest mystery. Why is it that so little reporting has been done by the national news media about these investigations outside of the sensational Madoff case? (Which, it bears noting, would still be a secret if the scammer had not turned himself in.) Why don't we know which banks and which reckless, wreckage-inducing executives are being pursued for engineering massive frauds on investors and the larger public? The only explanation I can come up with for this reporting vacuum--an explanation that is even more perplexing and vexing than the press's failures--is that our top political leaders have been shockingly silent on the subject.
The national news media, which is sadly as toothless a watchdog as Bush's Securities and Exchange Commission, typically reacts to the agendas and priorities of the Washington leaders they cover. No cues from the big politicians means no news from the big networks and papers. One would think, given that 74% of the country now thinks Wall Street is filled with crooks, that the left and right would by now be engaging in a bidding war to bash the banks and demanding prosecutions right and left. Indeed, if ever there was a time for podium-pounding and finger-pointing, this would be it.
But to my knowledge, President George Bush, President-elect Barack Obama, Treasury Secretary Hank Paulson and the bipartisan leaders of Congress have not taken one formal action or held one dedicated press conference to communicate to the American people that the rapacious con men who jeopardized the stability of our economy and decimated the wealth of millions of middle-class Americans will be getting the jail time they have earned. Where is the bulldozing Eliot Spitzer when we really need him? To some extent, this lack of focus on the lack of accountability is understandable in light of the exigencies of the moment. The White House and Congress' first responsibility has to be preventing the economy from totally disintegrating, limiting the fallout from the fall meltdown and getting us back in the business of creating jobs and wealth. Moreover, it makes sense, at least on paper, for Obama to avoid grandstanding right now--it's not his style, and he is trying to position himself as a new kind of problem-solving leader.
But what Obama and the rest of Washington don't seem to realize is that the public's escalating outrage is a central part of the problem. This truly is a case of no justice, no peace--or to be more precise, no accountability, no stability. By that I mean that the new president and Congress are going to have more and more trouble building public support for their recovery plans--which will inevitably call for the nose-holding delivery of more federal dollars to the banks that got us into this mess--if they do not simultaneously assure taxpayers that the perps are going to pay for their crimes instead of profiting from them.
But there is an even greater long-term danger here, particularly for the Democrats, who will soon control both ends of Pennsylvania Avenue. Without Bush to kick around, they will soon own not just the economy and whatever stimulus bill is passed but also the management of the bailouts. Once the criminal investigations and indictments pop next year, what kind of exposure will the TARP-covered Obama administration have? Will they be seen as soft on Wall Street crime? That depends in large part on how the Republicans re-position themselves for the post-Madoff era, which I think will be the most fascinating political subplot to watch in 2009.
The Democrats like to think of themselves as the party of the little guy. But their recent reticence on the sub-prime crime wave, along with their aggressive push for the bad bailout deals, has given the down-and-out GOP a huge opening to begin reclaiming the middle class that Bush drove away in droves. One of the best barometers of that will be how the Republicans take on New York Sen. Chuck Schumer, who is up for re-election in two years and is widely seen as one of Wall Street's most aggressive advocates. By all traditional measures, Schumer should win big again, hands-down. He is one of the shrewdest pols in Washington; he effectively courted middle-class voters outside of his New York City base and his favorability ratings have remained consistently high over the past four years.
But Schumer's extensive record of doing the bidding of his banking constituents--which was once seen as a major asset, particularly in raising piles of cash as the head of the Democratic Senate Campaign Committee--has the potential to be a life-threatening liability in this climate. With a small team of crafty opposition researchers, a small businessman from outside Buffalo or Rochester could run a devastating ad campaign painting Schumer as Bernie Madoff and company's chief protector and enabler. I suspect that Schumer is too smart to let that happen, and that you can bank on him to engage in some Spitzer-esque fist-shaking early next year to inoculate himself before the trials start. Call it a blame default swap.
The same, I think, is true of Obama. He actually tipped his hand to some extent in one of his last pre-holiday press conferences, when he vowed to force the kind of "adult supervision" of markets Americans are demanding and to release a detailed regulatory overhaul plan as one of his first initiatives.
That leads me to Prediction No. 4: Obama’s regulatory plan, in addition to beefing up prospective enforcement and fraud deterrence, will call for a substantial increase in Bush's badly underfunded budget for investigating and prosecuting crimes already committed (a point that Obama will not be shy in highlighting). And if the new president is really smart, he will find a creative legal tool to seize the ill-gotten bonuses that legions of Wall Streeters are reaping from their ill-gotten gains. That's one Christmas present the country would gladly accept a little late.