Re-tiring a locomotive driver wheel in the Atchison, Topeka, & Santa Fe railway shops at Shopton, near Fort Madison, Iowa
Ilargi: I spent a few hours on the road today, so I’ll leave you with a quiet and short Sunday reminiscence from Dan W. . The coming week may bring the demise of California and General Motors. Not bad for American symbolism, is it? If you're good boys and girls, we might just throw in Latvia and Romania as well. And maybe Ireland.
It's getting through to a growing number of thick skulls these days that most big banks are beyond saving. So why did we put in those trillions, again? What are the chances that we'll ever see them back? Is it a good idea to nationalize the banks, without having checked the contents of their vaults? Everyone from Roubini to Rosner to even Chris Whalen seems to think so these days. But look: it's already too late anyway. The system is dead, not just a few individual banks. So why risk god knows how many trillions more?
All the people calling for this are either working in the financial sector or in economics, or have campaigns paid for by the banks. Letting the system die with dignity is not in their favor. If nationalization arrives without proper valuation of assets, you'll know we're on the wrong track, Then again, you knew that already. We're in a tragic spectator sport of sorts.
Dan W.: The Shark: master of her domain, top of the food chain. And yet the shark is far from omnipotent. She has to keep moving forward lest she suffocate. I know from watching Mutual of Omaha’s Wild Kingdom when I was a wee lad. America has become the shark. We weren’t always the shark. But over the past three decades, give or take, we have become the shark. As a society, our survival, our existence, has become bound to growth, to moving forward, to never standing still. We stand still, we die. Growth at all costs.
The illusion of real growth at all costs. Double-or-nothing at the poker table, with nothing left in our pockets but trillions of dollars in IOU’s, all to keep "moving forward", to keep expanding, to maintain our 4% per annum GDP growth. And then, of course, arrives the ultimate insult. Our addiction to unchecked debt-sponsored "growth" (Not growth at all) has in fact left us nowhere left to grow. The shark has found the end of the ocean. We are dead in the water. We have created simply too much debt to service.
Virtually everyone’s balance sheets are upside down: every state, every city, every town, every business, every individual. The government continues to print and borrow and spend in an almost quixotic effort to save the day, but there is no way that we will ever be able to pay back our obligations. Simply the interest on our debt is too great to service. And the citizenry of a nation of debtors and poor will never, in the end, acquiesce to subsidizing the excesses of the gamblers and thieves who stole their futures. And if forced to do so, it all falls apart. And if not forced to do so, it all falls apart.
We are in the ‘buying time’ stage of decline. Next will surely come the creation of the “new war” economy, the cries of patriotic duty, Uncle Sam needs you again! The bond speculators will milk the market for every last dime. They too know that the gig is up. Everyone will soon begin to hunker down. Like cows before the rain, an entire nation will settle in to try and somehow ride out the storm. But there can be no shelter from this gathering storm. We birthed it, we perpetuated it, and it will surely lay us low.
Failure to save East Europe will lead to worldwide meltdown
The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point. If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen. The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.
Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble. "This is the largest run on a currency in history," said Mr Jen.
In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).
Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia. Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus. Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.
But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans. The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights.
Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament. "This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank. "There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU."
Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?
Ireland ‘could default on debt’
Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector. The cost of buying insurance against Irish government bonds rose to record highs on Friday, having almost tripled in a week. Debt-market investors now rank Ireland as the most troubled economy in Europe. Simon Johnson, the former chief economist of the International Monetary Fund, called for this weekend’s meeting of G7 finance ministers to put Ireland’s troubles at the top of the agenda.
Johnson said: “Don’t, please, tell me more about the basic principles of financial reform unless and until you have addressed the Irish problem. And don’t tell me the Irish have to sort this out for themselves. Eventually, the world always comes to help; check your notes on Iceland. “It’s much better and much cheaper to come in early and decisively. We need a plan of action for Ireland, and we need it now.” Pledges made by Ireland to support its banking sector amount to 220% of the country’s annual economic output. The total loans held in Irish banks are more than 11 times the size of the economy.
Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve. With Ireland set to borrow an additional €15 billion (£13.4 billion) this year, the national debt pile will hit €70 billion. The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every £100 of debt it would cost £3.50 to insure against default. A year ago it would have cost 10p to insure every £100 of Irish debt. One possible solution would see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank.
Nationalize the Banks! We're all Swedes Now
by Matthew Richardson and Nouriel Roubini
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it. As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.
The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages. Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.
But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole. Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.
But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are. Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end. Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:
First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.
Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.
Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer. The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.
Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers. The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.
Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here. Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth. Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.
Obama, like Bush, is Throwing Public Money into a Black Hole
“The [financial] crisis was not a failure of the free market system and the answer is not to try to reinvent that system. ...Government intervention is not a cure-all." President George W. Bush, Thursday November 13, 2008
"There is no cause to worry. The high tide of prosperity will continue." Andrew W. Mellon, Hoover's Secretary of the Treasury. September 1929
"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." President Herbert Hoover, May 1, 1930
Tuesday, February 10, may be the date when the U.S. economy officially entered into an economic depression. This was when President Obama's Treasury Secretary, Timothy Geithner, announced that the Obama administration was about to expand Bush's Secretary Paulson's $700-billion plan to rescue large U.S. banks from insolvency, euphemistically called the Troubled Assets Relief Program (TARP). The purpose now, as it was previously, is to use public capital, loans and guarantees to remove toxic financial assets from private banks' balance sheets and to transfer them to the Government and/or to willing private investors (hedge funds, private equity firms and other investors).
One must keep in mind that Mr. Paulson and Mr. Geithner were the principal architects of last October's original plan. This was then, and it is now, a plan designed primarily to use hundreds of billions of taxpayer dollars to prevent banks from declaring bankruptcy, while in fact doing little to accomplish its presumed primary objective of getting banks to resume normal lending. Such a cure has failed in the past and is likely to fail now. Saving insolvent banks is not the same as fixing them and making them viable.
Indeed, when Mr. Geithner announced on Tuesday, February 10, that he was expanding the Paulson plan to make it a $1.5 trillion bailout plan, financial markets saw it as simply rearranging the chairs on the deck of the Titanic, and they sold off. I believe the markets are right and the Obama-Geithner plan only makes the Bush-Paulsen plan worse. Both are misguided and do little to address the root cause of the financial crisis, which is a mountain of unsustainable bad debts that was allowed to expand recklessly over the last ten years, and which is now crumbling down, dragging the entire economy down with it.
With more public money thrown at the problem with little strings attached, large U.S. banks will only use the new cash to de-leverage themselves and pay off their debts, buyout smaller banks and find a way to reward their incompetent executives with large bonuses, but little will trickle down to the real economy. We are back to the discredited Reagan era's economic trickle-down theory, the rich helping themselves first and the poor getting the crumbs.
Let's look coldly at the situation. The ratio of total debt to the U.S. Gross Domestic Product (GDP) is now higher than it was in 1933, when it reached the lofty and unsustainable level of 299.8 percent. It took nearly twenty years to bring down the debt/GDP ratio to below 140 in 1952. In the second quarter of 2008, all debt records were broken when the total debt ratio in the U.S. registered at 356,7 percent of GDP. If the same process of unwinding of excessive debt level plays itself out this time, this could translate into a debt deflation process lasting possibly until 2027!
It all depends on the problem being recognized for what it is, that is to say a mountain of unsustainable and insolvable debts and bets that have to be cancelled and erased from the books. Transferring such bad debts from the banks and other entities to the government will not solve the problem. It will only displace the it from one place to another and potentially create new and even more serious problems, such as horrendous future tax increases or an onset of hyperinflation down the road.
There exists a state of denial in Washington D.C. regarding the excessive debt problem, essentially because the same people who are responsible for creating the mess are in power. It doesn't matter whether a Republican or a Democratic administration is in place, they remain in charge and they rely on the same failed economic policies. The Geithner plan is the son of the Paulson plan. Both are destined to fail because they are based on a flawed diagnosis.
To deflate the mountain of bad debts and unclog the credit system in an orderly fashion, and to prevent a deflationary spiral from taking hold, the Obama administration should take the advice of L. William Seidman, chairman of the S&L Resolution Trust Corp. (RTC), the agency created in the 1990s to manage hundreds of insolvent thrifts. At that time, the RTC seized the assets of troubled savings and loans and resold them to bargain-seeking investors. The Obama administration should bite the bullet and create a similar Banking Restructuring Trust to temporarily take over the large insolvent American banks, streamline their operations, liquidate their bad debts and bets, and reorganize them on a firmer financial basis. I myself proposed such a restructuring trust last September. This would be more efficient and less costly than throwing trillions of dollars down a black hole without even solving the structural problem at hand.
The creation of such a Trust to unify government intervention has also been proposed by former Federal Reserve Chairman Paul A. Volcker and by former Treasury Secretary Nicholas F. Brady. This would entail, of course, that many of the banks' illiquid assets in CDOs ("Collateralized Debt Obligations") and in CDS (“Credit Default Swaps”) and other shaky assets, would have to be written off or cancelled in a chapter 11-like process. Such a process would cleanse the banks from the excesses accumulated in previous years and prepare them to meet credit demand as the economy recovers. But, above all, it would mark an end to incremental, complicated and improvised 'ad hoc' government interventions to solve the banking crisis. I would bet that there would be a powerful rally of financial markets if such a take-charge and decisive approach were to be adopted.
The Geithner bank bailout plan must not be confused with the $800 billion-plus fiscal stimulus plan for the entire economy that Congress is about to adopt. The latter, contrary to the former, is designed to cushion the fall of real spending in the economy and is likely to have a net positive impact. Indeed, as households increase their savings rate and curtail their discretionary spending to compensate for the loss of housing and financial wealth, government spending has to take up the slack.
However, it should be realized that the multiplier effect on aggregate spending of each dollar of fresh public spending is not very high because national economies nowadays are globalized. Indeed, as domestic spending is being sustained, imports increase but exports may decline as world demand contracts. It is only if all governments adopt expansionary fiscal policies that all economic boats can be lifted. With European and Chinese economies weakening, this may take some time before world demand stops contracting. All this is to say that while the Geithner bank rescue plan is misguided and should be reengineered, Obama's fiscal stimulus package is most likely too timid and should be enlarged, considering the scope of the problem at hand. All in all, let us hope that a prolonged economic depression can be avoided
Chorus grows: Nationalize the banks
First of all, let's give the guy a break. The new U.S. Treasury secretary, Timothy Geithner, has been in office for all of - what? - two weeks? He is charged with fixing the most terrifying financial crisis in nearly 80 years. He is under intense pressure to do something big - and to do it fast. It is not his fault that the night before his big speech, President Barack Obama held a news conference in which he raised expectations absurdly, more or less proclaiming that his Treasury secretary had the problem solved. As Geithner unveiled the outlines of his "Financial Stability Plan" the next morning, it quickly became apparent that it is still very much a work in progress.
Nor is it his fault that his voice conveys uncertainty, even when he is trying to sound bold and determined, while his brow seems to be permanently stuck in the furrowed position. Watching him, you can't help think: If he's that worried, how scared should I be? (A little media training might help.) As for the fact that the stock market fell Tuesday after his speech, I can't think of a less reliable barometer of whether Geithner's set of ideas will work. The instantaneous judgment of the market is as meaningless as a thing can be. "A few hundred points up or down in the market today or next week isn't material to what's at stake here," said Daniel Arbess, who manages the Xerion hedge fund for Perella Weinberg Partners. "What is important is that the government get this right, because another false start risks triggering years of economic malaise."
Arbess added: "You've got a situation here that has been in the making for decades. Everybody knows it is complex. It's not going to be resolved in two weeks." Point well taken. Second of all, we need to face the reality that nobody can say with any certainty what will work and what won't. Nobody knows - not Geithner, not Lawrence Summers, not Paul Volcker, not anyone in or out of the administration. It is difficult even to evaluate what has already taken place. Was the original $350 billion in bailout money wasted because bad assets were left on the books to deteriorate further while the taxpayers' money was used to recapitalize the banks instead? Or did the recapitalization stave off disaster, keeping the system from collapsing and buying time? I've heard both arguments.
The truth is, solving a financial crisis amounts to a kind of sophisticated, high-stakes guessing game. Every proposed solution also has the potential to backfire. As the bank chieftains who testified before Congress said repeatedly Wednesday - when they weren't either groveling or listening stoically to congressional scoldings - reigniting the banking system has to start with re-establishing confidence.
But confidence has as much to do with psychology as with shoring up balance sheets or dealing with bad assets. What will attract private investors? What will cause banks to start trusting each other again? How can they be made to feel secure enough to begin lending again? Nobody knows for sure. To his credit, Geithner acknowledged as much in his speech. He's going to need to keep saying it. And yet, I still can't help thinking that Geithner is avoiding the most straightforward, obvious path out of the crisis. As I polled my Talking Business kitchen cabinet this week, gauging reaction to the Treasury secretary's plan, I kept hearing the same refrain.
"We've got to get on with it," said Christopher Whalen, the respected bank analyst who publishes the Institutional Risk Analyst newsletter. "We need to take over the banks," said Joshua Rosner, a managing director of the research firm Graham-Fisher. "When I talk to experts, after about two minutes they say, 'We should just nationalize,"' said Simon Johnson, a banking expert at the Sloan School of Business at the Massachusetts Institute of Technology. "That tells me that the consensus is moving in this direction, and we are all just afraid to say it." Nationalization. I just said it. The roof didn't cave in.
Although Geithner's plan has been criticized for lacking details, the Treasury Department has put out enough information that you can get a decent read on it. The U.S. government is going to send in an army of bank examiners to put the big banks through a "stress test," to figure out how crippled they will be under various economic scenarios. It plans to gin up what was originally planned as a $100 billion program to revive the securitization markets. Now it is going to be a $1 trillion program.
It is going to continue to shove billions of dollars in fresh capital into big banks that need it. At least $50 billion will be set aside for some kind of housing foreclosure mitigation program. And finally, it is going to create a "bad bank," funded with both private and government capital, that will begin to buy the toxic assets from the banks, and - this is the hope, anyway - create a liquid market that will allow them to be valued and traded. (There are also the usual vows of transparency, tough limits on executive compensation, and so on.)
Without question, this is the shock and awe approach to the banking crisis; the total amount the government is going to employ to get the banking system back on its feet is somewhere in the vicinity of - are you sitting down? - $2.5 trillion. The $1 trillion securitization program - the official name is the Term Asset-Backed Securities Loan Facility, or TALF - is especially important because at least half the lending that is done in America is securitized. Those markets are now dead; reviving them is critical to reviving lending.
The stress test, however, is the part of the plan that got me thinking about nationalization. Weeks ago, Daniel Alpert, a managing partner of Westwood Capital, and a charter member of my kitchen cabinet, sent me a proposal for solving the bank crisis that began with a stress test. Under his scenario, banks that failed the test - in other words, those that were insolvent once their bad assets had, as he phrased it, "more stringent marks" that better reflected their true value - would get all the capital they needed to meet minimum capital requirements. In return, the government would get 79.9 percent of the common equity.
His belief is that once it was clear that the government would not let these banks become insolvent - and the toxic assets were marked down to where they were finally attractive to buyers - investors would feel that it was finally safe again to put private capital into the banking system. When I spoke to Alpert this week, he seemed pretty sanguine about the Geithner plan, largely because of the stress test. He thought it meant that the Treasury secretary was paving the way for a government takeover of one or more of the big banks, like Citigroup or Bank of America, which will in all likelihood be insolvent as the economy continues to deteriorate and their toxic assets are marked closer to reality.
But I'm not so sure about that. One clue came in the release the Treasury Department put out to explain the plan. In describing the stress test, it said, "In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending." That doesn't exactly sound like a tough-minded approach that will lead to realistic marks. More important, Geithner simply doesn't seem able to get his head around the idea of nationalizing a big bank. As he told David Brooks, a New York Times columnist, recently, "It's very important that we don't look like there's any intent of taking over or managing banks. Governments are terrible managers of bad assets. There's no good history of governments doing that well."
But that's a canard. The government did a terrific job managing banks during the savings and loan crisis of the 1980s. It took over banks - "we called them bridge banks," recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle - replaced the top managers and the board, stripped out the bad assets, which the government then managed brilliantly, and sold the newly healthy banks to private buyers. It turned out not be all that hard to find actual bankers who could run these S&Ls for the federal government. Just recently, the FDIC took over IndyMac in California, which it ran for six months and then sold to an investment group. Although the FDIC had to absorb $9 billion in losses, that is hardly because the government managed the bank poorly. It is because the previous executives - the professional bankers! - had managed it so poorly.
Johnson, the MIT professor in my kitchen cabinet, used to work at the International Monetary Fund. Because of that experience, he is especially passionate about the importance of having the government take over insolvent banks. "This is exactly what the IMF tells an emerging-market country to do if it is facing a crisis - like Thailand in 1997, or Russia in 1998," he said. "It is not only simple and straightforward. It is also best practices."
Look, whatever solution winds up working, it is going to cost the taxpayers billions. That's a given. The S&L crisis - which was a piffle compared with what we face now - cost more than $100 billion by the time it was over. In return, shouldn't the taxpayer be the one to hold the majority ownership stake in the banks? And shouldn't the government have the right to decide that perhaps Ken Lewis should no longer be running Bank of America? And isn't the best way to protect the taxpayer - the mantra we heard all week long - to take control of what it is funding? It can be done right. It has been before.
Geithner deserves a chance to do it his way first. And we should pray that his plan works. It is far more pressing than the stimulus package. But we don't have a lot of time. Every month that passes without a healthy banking system means more jobs lost and an economy that slips deeper into recession. "Americans can always be counted on to do the right thing," said Winston Churchill, "after they have exhausted all other possibilities." As we run out of possibilities, nationalization is looking more and more like the right thing.
Let's Not Forget The Real Problem
Amid all the howling about "stimulating" the economy and "getting our banks lending again," it's worth reminding ourselves of the real problem, which no one in the government dares address. Robert Albertson, Sandler O'Neill strategist, in Barrons:
You have to look at this from the economic side, and then from the financial-sector side. On the economic side, all consumer debt is at 130% of income. Go back to 2000, and it was at 100%; 10 years earlier it was at 80% or 90%. It has to come down. So the first step is that we have to deleverage, probably by 10 to 20 percentage points, to repair the consumer's balance sheet. nAlso, the savings rate used to be 10% to 12% of income, but it went to zero, and it is back up to 3%. It probably has to go back to somewhere near 10%. So, let us just say we got a 25% correction in consumer income, which is about $10.5 trillion.
That is a $2.5 trillion headwind of income that has to go toward debt reduction and savings, as opposed to spending. But no government-stimulus program is going to offset that effectively. To me, it is a two- or three-year process...
How effectively has the government responded to this crisis?
I'm seeing very odd interpretations from the government, in particular about what we need. The government isn't thinking about deleveraging. The government is talking about jump-starting consumer credit. I hear the word jump-start all the time. It is such a bad word. Jump-start consumer credit for what? So we can be more indebted?
So what has to be done?
We need to reduce the debt. If you jumpstart credit, you are just going to prolong the problem and deepen it. What we need now is the patience to de-lever. We don't need the stimulus package. We need a savings package, but that couldn't be further from the goals at the moment. The mistake is that the government believes credit drives the economy, instead of the economy driving credit. They have got that backward, and this is a very dangerous time to be misfiring...
But assume that consumers repair their balance sheets. Doesn't that make it harder for gross domestic product to recover?
There is no choice; that is where we are. We should have had this decline in consumer spending in 2000, along with the corporate sector decline that should have been the recession that reset the economy. We have a cyclical economy; that is normal. We had an 18-year expansion, which had never happened before.
The Economists Who Missed the Housing Bubble Are Coming After Your Social Security
Word has it that President Obama intends to appoint a task force the week after next which will be charged with "reforming" Social Security. According to inside gossip, the task force will be led entirely by economists who were not able to see the $8 trillion housing bubble, the collapse of which is giving the country its sharpest downturn since the Great Depression. This effort is bizarre for several reasons. First, the economy is sinking rapidly. While President Obama's stimulus package is a good first step towards counteracting the decline, there is probably not a single economists in the country who believes that is adequate to the task. President Obama would be advised to focus his attention on getting the economy back in order instead of attacking the country's most important social program.
The second reason why this task force is strange is that Social Security doesn't need reforming. According to the Congressional Budget Office, it can pay all scheduled benefits for the next 40 years with no changes whatsoever. The third reason that this effort is pernicious is that this talk of reform is occurring with the baby boomers just as the cusp of retirement. Due to the reckless policies of the Rubin-Greenspan-Bush clique, this cohort has just seen their housing equity wiped out with the collapse of the housing bubble. Tens of millions of baby boomers who might have felt reasonably secure three years ago are now approaching retirement with little or no equity in their homes.
Similarly, if they had been fortunate enough to accumulate any substantial amount of savings in a 401(k) account, they just saw much of this wealth vanish with the plunge in the stock market. The median late baby boomer household (ages 45-54) has a net worth of just over $80,000 including the equity in their home. This means that if they took all of their savings, they would have less than half of their home (assuming a median price $175,000) paid off, and nothing else. The median household among older baby boomers would be doing a bit better. With a net worth of $143,000, this household could have most of their home paid off, but nothing else. And of course, half of the population has wealth less than the median, so they would be less well-prepared for retirement.
In short, the vast majority of baby boomers will be approaching retirement with little other than their Social Security and Medicare to support them. And now President Obama is apparently prepared to appoint a commission that will attack these only remaining pillars of support. It is especially infuriating that this task force is likely to headed up by economists who somehow could not see an $8 trillion housing bubble. The incompetence of such economists has inflicted enormous pain on billions of people around the world. However, unlike people who fail in other professions, economists who mess up on the job just get promoted so that they can do even more harm. My guess is that this task force will not be very popular except at the Washington Post and on Wall Street.
Not Ready for Prime Time
Tuesday was Treasury Secretary Timothy Geithner's coming out party. He was supposed to outline Obama's Financial Stability Plan to the Senate Banking Committee. Wall Street was looking for clarity, but it didn't get it. Instead, they got 25 minutes of political posturing and blather. The markets went into freefall. By the end of the day, the Dow was down 382 points. It was a complete fiasco. Geithner is a smart man. He knows what Wall Street wants. They want a plan and they want the details. They don't want more gibberish. He knew that he'd get hammered if he didn't produce a workable scheme for fixing the banks, but he went ahead anyway figuring he could dazzle his audience with his brilliance. It didn't work. The markets plummeted and the pundits wrote him off as "not ready for prime time". Now his credibility is shattered just three weeks into the new administration. Why did he do it?
Most people who've been following the financial crisis know what needs to be done. It's no secret. The insolvent banks have to be nationalized. They have to be taken over by the FDIC, the shareholders have to be wiped out, bondholders have to take a haircut, management has to be replaced and the bad assets have to be written down. There's no point in throwing public money down a rathole just to keep zombie banks on life support. Nobel prize winning economist Joseph Stiglitz sums it up like this: "The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt." ( Deutsche Welle)
Economist James Galbraith says the same thing in an interview on Democracy Now with Amy Goodman: "I think it’s fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent, and that the proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the steps that the FDIC normally takes when dealing with insolvent banks. And the sooner that you get to that and the sooner that you take these steps, which every administration, including the Bush administration, actually took in certain cases—replacing the management, making the risk capital take the first loss, reorganizing the institution, guaranteeing the deposits so that there isn’t a run, reopening the bank under new management so that it can begin to function again as it should have all along as a normal bank—the sooner you get to that, the more quickly you’ll work through the crisis.
The more you delay and the more you try to essentially prop up an institution whose books have already been poisoned, in effect, by this—the practices of the past few years, the longer it will take before the credit markets begin to function again. And as I said before, the functioning of the credit markets is absolutely essential to the success of the larger package, of the stimulus package and everything else, in beginning to revive the economy." Most of the economists say one thing while the bankers say the exact opposite. It's no surprise; they want to save their own skin. But bailing out the banks again is not in the public interest.
Most of the bad paper and non-performing loans appear to be concentrated in the very largest banks. By some estimates Citigroup, Bank of America, JP Morgan-Chase and Wells Fargo are holding two-thirds of all the toxic mortgage-backed paper. Therein lies the problem. These banking Goliaths have powerful constituencies and substantial political power. Keep in mind, the Obama campaign received over $10 million in contributions from Wall Street, the largest contributors by far. This suggests that Timothy Geithner is point-man for the banksters and his job is to fend off nationalization. Geithner admitted as much on Tuesday in an interview with Brian Williams when he said that he intended to "keep the system in private hands". If that's the case, then the taxpayer better get ready for a real shellacking, because it will take many trillions to keep these dinosaurs from extinction.
An interview in International Risk Analysis with Josh Rosner of Graham Fisher & Co sheds a little light on the backroom goings on during this charade: Rosner: "I am hearing very clearly from within the regulatory community that it is their primary concern that whatever they are planning is predicated on the notion that we must keep the large banks alive. But if we start off with saving the big banks as the point of departure, then there is no way we can marry that to an efficient or effective proposal. Lets define the solution based first on what is workable not by tying a hand behind our back with preconceptions."
Rosner explains the political dynamic which is driving the decision making: "I think this argument has less to with Lehman and more to do with the fact that the Fed of New York and the Board (of Governors) have always benefited from the failure of small institutions and the absorption of those assets by the big banks. There is no way that they can stomach seeing their regulatory power dissipated by those institutions now being broken up and sold. Perhaps we have to go back to the question of whether it makes sense for the Fed to be a regulator as well as a central bank."
The IRA (Institutional Risk Analysis): "Especially to investors outside of the New York district and even outside the Fed's immediate jurisdiction, to foreign investors. But whether anyone at the Fed or Treasury likes it or not, we are talking about the absorption by the US Treasury of at least half a trillion in losses for the top three banks in the next 12-18 months if an FDIC resolution is to be avoided.....This issue of resolving the larger banks has been a political issue going back to Paul Volcker's day. Democracy is inefficient."
The problem goes well beyond the failed banks. The issue can't be resolved because important clients of the banking lobby have a stranglehold on the Dept of Treasury and are sabotaging the rescue operation. In fact, it's looking more and more like Obama's election was part of a quid pro quo to ensure that Geithner, Summers and the other "big bank" loyalists would continue to control the levers of political power during the stormy years ahead, otherwise they would do what is necessary and and shut them down now.
Geithner knew exactly what he had to say on Tuesday, but hemmed and hawed and avoided the central issues like the plague. He provided no new details on how the government planned to remove the illiquid assets that are fouling the banks' balance sheets nor did he explain how he would determine the value of these assets. It is shocking to realize that the financial crisis started 19 months ago (when two Bear Stearns hedge funds defaulted) and still, no one has any idea of what these assets are really worth. Price discovery is basic to any functioning market but, in this case, fear has carried the day. Everyone involved is terrified that trillions of dollars of assets will turn out to be worthless.
Geithner employed the same obfuscating techniques as Alan Greenspan. He tried to affect the look of a man who was deeply concerned while rattling off well-rehearsed statements that revealed absolutely nothing about his real intentions. “I completely understand the desire for details and commitments," Geithner opined with heartfelt sincerity, "but we’re going to do this carefully so we don’t put ourselves in the position again....This is the beginning of the process of consultation." The there was this gem worthy of Maestro himself, "We are exploring a range of different structures" to deal with precisely that issue. Right.
Most of the critics believe that Geithner is in over his head, but that's probably not the case. More likely, he has a plan but wants to keep the public in the dark. After all, there's no graceful way to tell people that they are about to get shafted for another $2 trillion to keep the larder on Wall Street full of Dom Perignon and chocolate truffles. One thing Geithner will insist on is that the Treasury and the Fed remain the final arbiters of "who is solvent and who is not" as regards the big banks. That should be Sheila Bair's job. As the head of the FDIC, Bair is the regulator who should be in charge of checking capital reserves and closing underwater banks. But, apparently, Bair has been crowded out for political reasons. Geithner and his insider friends are calling the shots.
Geithner announced that Treasury would be putting together a new "public-private investment fund" to try to attract private capital to assist the government in purchasing some of the higher-rated assets the banks are trying to unload. The details are still sketchy, but it sounds a lot like Henry Paulson's Super SIV (structured investment vehicle) which provided a spot for the banks to dump their off-balance sheets garbage in one "government approved" SIV. Of course, the idea failed because, by then, investors were already skittish about buying complex, structured investments. Even so, Paulson's credibility took a real beating. He was seen as using his office to peddle dodgy bonds for his friends. Geithner won't make the same mistake. He'll take the high-road and entice the banks and hedge funds into buying the distressed MBS by providing government guarantees and subsidies similar to the perks in the Merrill Lynch-Lone Star transaction. In that deal, Merrill offloaded $31 billion in toxic CDOs for $.22 on the dollar and provided 75 percent of the financing. It was a sweetheart deal from the get-go and Geithner will undoubtedly duplicate it to get rid of the junk at no risk to the buyer. That will help fatten the bottom line of the teetering banking fraternity.
Geithner's financial rescue plan includes $500 billion to $1 trillion for the Fed's Term Asset-Backed Securities Loan Facility (TALF). This will provide additional funds for institutions that finance pools of car loans, student loans, credit card debt etc. The securitization of consumer debt, which broke down 19 months ago when the crisis began, has resulted in an unprecedented slump that's put the world economy in a tailspin. Securitization has been Wall Street's golden goose. It's a reliable way to maximize leverage on smaller and smaller slices of capital. As borrowing increases, asset prices rise, making the system more and more unstable. When the bubble finally bursts; the tremors ripple through the real economy sending asset values crashing, equities markets plunging, and unemployment skyrocketing.
In his speech Geithner admitted that, "In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses -- large and small.” 40 percent! Think about that. Nearly half the credit pumped into the economy comes from securitization.
In other words, the banks ARE lending; it's just that Wall Street's credit-generating mechanism is kaput. That's why the fall-off in auto sales, consumer spending and foreign trade has been so dramatic, unlike anything anyone has ever seen before. Wall Street's credit model is broken. Shouldn't there at least be public hearings before Geithner and Bernanke put Humpty together again and we resume the same tragic boom and bust cycle? There has to be another way. Credit production should never be in the hands of speculators. It's too dangerous. That's why the banks need to be strictly regulated, because the power to create credit is "more dangerous than standing armies".
According to the UK Telegraph: "The past five quarters have seen 40pc of the world's wealth destroyed and business leaders expect the global economic crisis can only get worse." Once again; 40 percent. The global economy is contracting to accommodate the new reality of less debt-fueled expansion. Wall Street (understandably) is looking for its next bubble, just like Geithner. But deflation follows its own inescapable logic, too. The excess leverage and unsustainable credit that was produced via complex debt instruments, derivatives contracts, and structured investments is being purged from the system causing a generalized shrinking throughout the economy. There's no need for an oversized financial system; business activity is slowing, investment and trade are dwindling, and consumers are hunkering down.
Even in the best of times it would be difficult for Geithner and Co to achieve their goal of saving the big banks. But given the state of the economy--the wobbly dollar, falling tax revenues, the enormous deficits, rising unemployment, the erosion of household balance sheets and the massive system-wide contraction--a multi trillion dollar bailout that leaves the banks in private hands is just not realistic. Geithner will not succeed. Every attempt to save the banks will be met with greater and greater public resistance and rage. The banks that are underwater need to be put out of their misery and nationalized.
Why is Obama Reluctant to Kill the Zombie Banks Threatening Our Economy?
The battle lines over how to deal with the banking crisis have been drawn. On the one side are those who know what needs to be done. On the other are those who know what needs to be done -- but won't admit it. Because it is against their self-interest. Unlike the conflict over the stimulus package, this is not an ideological fight. This is a battle between the status quo and the future, between the interests of the financial/lobbying establishment and the public interest. What needs to be done is hard but straightforward. As Martin Wolf of the Financial Times sums it up: "Admit reality, restructure banks and, above all, slay zombie institutions at once."
This tough love for bankers is being promoted by everyone from Nouriel Roubini, Paul Krugman, and Ann Pettifor to Niall Ferguson, the Wall Street Journal, and Milton Friedman's old partner, Anna Schwartz, the co-author of his seminal work, A Monetary History of the United States, 1867-1960. "They should not be recapitalizing firms that should be shut down," says Schwartz. "Firms that made wrong decisions should fail." The plan laid out -- or, more accurately, sketched out -- this week by Tim Geithner makes it very clear that he is on the wrong side of the issue, more worried about the banking industry than the American people. Like Hank Paulson before him, Geithner appears more concerned about saving particular banks than saving the banking system. No real shocker there. As Henry Blodget points out on HuffPost, it's hard to be surprised that Geithner is sticking with the Paulson plan "inasmuch as he was likely the one who created it."
The big problem is Geithner is acting as if the crisis we are facing is a crisis of liquidity when, in fact, it's a crisis of insolvency. As Ann Pettifor puts it on HuffPost: "Much of Wall Street is effectively insolvent. It's not that these banks lack cash or capital -- it's just that they're never going to meet all their financial liabilities -- i.e. repay their debts. Ever." Trying to prop these zombies up, as Geithner seems intent on doing, will lead to what Roubini calls "a royal rip-off of the taxpayer" and the risk of "turning a U-shaped recession into an L-shaped near-depression." President Obama has made it unambiguous that he understands what is at stake -- both for the country, and for himself politically. On Tuesday, he said that if his economic plan doesn't work, "a few years from now, you'll have a new president."
And we know that many within his administration -- including senior advisor David Axelrod - favor a strategy that may be harder on Wall Street but will more quickly revive the U.S. economy. So it's time to take off the kid gloves Geithner and Larry Summers are using to handle Wall Street and pull the plug on Geithner's deeply flawed plan. And let's not be distracted by the shiny objects of the financial crisis -- corporate jets, redecorated offices, CEO bonuses, etc. -- as happened to the members of the House Financial Services at yesterday's hearing. These are important issues, to be sure -- worthy of public outrage, Congressional grilling, and presidential action. But the central task at hand is cleaning up the toxic assets -- and the toxic thinking -- that have contaminated America's banking system. Being diverted from that is like obsessing over the cut on your finger while the Great White shark that has already bitten off your leg is about to finish you off.
Treasury Boss Taking Fire in Europe Over Stimulus
After the withering reception his bank rescue plan received in Washington, Treasury Secretary Timothy F. Geithner could be excused for seeing his first trip abroad as a well-timed respite. Mr. Geithner, whose last job was head of the Federal Reserve Bank of New York, has spent his career studying and carrying out international financial policy. So two days spent in Rome brainstorming with finance ministers from the Group of 7 nations about fixing the global economy played to his specialty.
But amid signs that Europe’s worsening slump has created fissures among G-7 leaders about how to deal with the crisis, Mr. Geithner found himself on the defensive in Rome this weekend, though not to the extent he was in Washington. In a statement, the G-7 ministers promised to cooperate on the global economic crisis and said they had taken steps to inject cash into banks and identify troubled assets. They said the effects of such measures would build over time.
“There are no quick fixes,” said Alistair Darling, Britain’s finance minister. He said participants were happy that the United States was committing a lot of federal money to cushion the economy, but more was expected. “We all understand that the U.S. needs to be an influence for good,” he added. The G-7 countries are Britain, Canada, France, Germany, Italy, Japan and the United States. Russian representatives also attended the meeting.
Last week Giulio Tremonti, Italy’s finance minister and Mr. Geithner’s host for the weekend, gave a tart review of the Obama administration’s stimulus in a local newspaper here. “If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private,” he wrote in the Corriere della Sera. Italy is one of the most indebted countries in Europe. Its debt surpasses its annual gross domestic product. The national debt of the United States, by contrast, was about 40 percent of G.D.P. at the end of 2008, but Moody’s expects that to rise to 60 percent by 2010 as a result of the recession and spending tied to the federal bailout and stimulus programs.
On Saturday, Mr. Tremonti also spoke disdainfully of the “Buy America” provision in the stimulus plan, which covers iron, steel and manufactured goods, as a political slogan. He and other ministers emphasized the importance of keeping the American economy free of protectionism. The president of the World Bank, Robert B. Zoellick, said he told ministers this weekend how crucial it was to keep the world economy open and to avoid the protectionist policy errors of the 1930s. “The Buy American provision is very dangerous,” he said.
As for Mr. Geithner’s ability to provide global leadership, Mr. Zoellick was hopeful but guarded. “He has to follow through,” he said, on to the bank rescue plan. “The demanding part will be in the delivery.” At a news conference Saturday, Mr. Geithner said the Obama administration was committed to free trade and efforts to jumpstart the world economy. He also addressed a barrage of questions about when more details about the administration’s bank rescue plan would be disclosed. “We are going to move quickly to lay out a broad design,” he said. “But we also want to make sure that they work.”
Mr. Geithner’s trip to Rome has been a whirlwind, leaving little time for sight seeing. He arrived in Rome on Friday morning and began with a lunch at the finance ministry with his host, Mr. Tremonti. In the afternoon, there were one-on-one meetings with his counterparts from Britain, Japan, Russia and Canada, followed by a working dinner at a villa in Rome. Mr. Geithner was the only minister to get the podium to himself in the main conference hall at the Excelsior Hotel. He seemed to find a comfort level that was lacking when he announced his bank plan last week at a news conference but took no questions. This time, he took a series of queries. When that was over, he waited several beats before exiting with a smile and a wave.
Who is Pulling Geithner's Strings?
Appearing behind a podium that proclaimed,Financial Stability and Recovery, Treasury Secretary Timothy Geithner on Tuesday carefully read from a teleprompter and provided what his flack said was a 'comprehensive' plan. It was not comprehensive in any way. It seemed so amateurish and shallow that the market dropped and commentators and senators were almost incredulous at the lack of detail. But what were they expecting? Geithner doesn't know the details because he hasn't been given them yet. Those who expected the details of the plan were operating under the false assumption that the Treasury Secretary, and by extension, the U.S. Government, is in practical control and charge of the U.S. economy.
Geithner's performance followed President Obama having advertised Geithner 's appearance in advance by saying,'He's going to be terrific. I'm going to make sure that Tim gets his moment in the sun. The sun? One analyst said Geithner looked like a deer caught in the headlights. It turns out the speech, which did mention the spending of trillions of dollars, was delivered in the Treasury Department's'Cash Room'. No kidding. Senator Orrin Hatch had voted to confirm Geithner, saying that heis not merely acceptable for the job he is highly qualified. That was largely because of his role as President of the New York Federal Reserve Bank in previous financial bailouts that have yet to succeed. Hatch understood this, but said that Geithner's recognition that mistakes had occurredmakes him more valuable, in my view, in the continuing effort to right our economic ship.
Why is he so valuable? It's not because he learns from his mistakes. As we have argued in previous columns, Geithner is valuable because he is a major player in the global financial community, a prominent figure in the Group of Thirty organization of central bankers and the Council on Foreign Relations. He is a former employee of Kissinger Associates and lived in China and speaks Chinese. His father, Peter Geithner, is a former top official of the Ford Foundation who knew Obama's mother when she was working onmicrofinance in Indonesia.
It would be a serious mistake to say that Geithner is incompetent. He knows exactly what he's doing. Essentially, his programmed performance was designed to send the message to the American people and the Congress that we can't be trusted with the details, even when they are available. It was pathetic to watch our elected senators at a subsequent hearing pleading for details. But it was also ateaching moment. This is out of our hands. This is theNew World Order and we had better get used to it.
The media couldn't help but notice that Geithner's performance fell flat. The Washington Post reported thatthe lack of detail in his plan dismayed lawmakers and investors, triggering a steep sell-off on Wall Street. The New York Times said, Initial reviews for the man and his plan were not good & and thatwithering punditry on the business-news cable channels made Geithner look even worse. You didn't have to be a pundit to be aghast at Geithner's performance. But wait a minute. Wasn't this the guy who was so smart that his tax cheating had to be overlooked in order to be confirmed? What is going on here? Is Geithner'splan, such as it is, designed to fail? Or does he not know what he's doing? Or could there be another explanation?
Geithner may not have all the answers because he has not gotten his marching orders. Those orders come from China, the global elite and the international bankers. After giving non-answers to Congress, Geithner is preparing to take off for a G-7 Meeting of Finance Ministers and Central Bank Governors in Rome, Italy. These foreign finance officials may determine the nature and fate of Geithner'sstability and recovery plan. These top finance officials include central bank governors, who play a role in what press reports described aseconomic coordination among the top industrialized nations.
One key global player is China.Geithner spoke late on Sunday evening with Chinese Vice Premier Wang Qishan, Reuters reported. Hence, Geithner was talking to a Chinese official even before he outlined hisplan to the American people and the Senate. This was the second such conversation in a week. In a statement, the Treasury Department said that Wang and Geithneragreed that strong cooperation on macroeconomic financial and regulatory matters was an essential part of the U.S. relationship with China and that it was important to sustain close dialogue, particularly at this time of global financial turmoil.
Wang Qishan was honored last year at a dinner sponsored by the United States Committee on United States-China Relations, on whose board Kissinger and Peter Geithner serve. Another speaker at the dinner was Bush Treasury Secretary Henry Paulson, Geithner's predecessor. Meanwhile, in her first trip abroad since taking office, Secretary of State Hillary Rodham Clinton will be traveling to Asia, including in China from February 20-22. The State Department explained that she will be discussingcommon approaches to the challenges facing the international community, includingthe financial markets turmoil. So both Geithner and Clinton will be attempting to persuade the Chinese to sign on. In this New World Order, China is in the driver's seat.
The conclusion has to be that Geithner doesn't know how his stability plan will work out in practice because he's not yet sure what China and other global players are going to do. Our fate lies in their hands, signaling desperate times for our nation. Obama speaks of a possible catastrophe but he isn't telling the American people the brutal truth at his carefully orchestrated town hall meetings. His prescription is more debt and spending the same policies that brought us to this precipice. He can only succeed, at least in the sense of getting foreign credit to pay for this spending spree, if the Communist Chinese and the rich Arabs agree. For the most part, the media won't tell the truth, either. They're too busy clamoring for front row seats at presidential press conferences.
Bank Recovery Stalls on Donations to Congress
As with the treatment of most crises, the one afflicting U.S. banks has an emergency-room phase and a long-term convalescence stage. In the short run, President Barack Obama’s administration is rushing to resuscitate the U.S. banking industry with cash infusions, guarantees, a fund to purchase banks’ illiquid assets and an initiative to foster new consumer and business loans. The strategy may or may not work. One thing is certain: The long-term goals of altering how banks are managed and redesigning the U.S. regulatory structure are doomed unless changes are made to laws on political-campaign contributions. Lawmakers must stop the flow of money greasing the incestuous links that the financial-services industry has with Congress and the executive branch. Finance companies -- commercial and investment banks, insurers, investment-management companies, private-equity firms and hedge funds -- have spent fortunes on lobbying efforts and campaign contributions, purchasing access, good will and clout.
The result has often been slack regulation and poor discipline to the detriment of the public, markets and, as has recently been shown, the institutions themselves. Look at how lawmakers barred the Commodity Futures Trading Commission from regulating derivatives. Individuals and political-action committees representing securities and investment firms contributed $146 million to federal political campaigns in 2007 and 2008, according to the Center for Responsive Politics, a Washington-based research group that tracks money flows in U.S. politics. Insurance companies were good for $44 million over the same period; commercial banks kicked in $35 million; hedge-fund related donations totaled $17 million. These numbers may not match Bernard Madoff’s alleged shenanigans, but the money isn’t chump change. It will get you 15 minutes over coffee with a senator, congressman or administration member, if not a five-course meal in a Washington restaurant.
Since the start of 2003, Citigroup Inc. has been the largest contributor to the war chests of Christopher Dodd and Richard Shelby, respectively, the chairman and ranking Republican of the Senate Banking Committee. Hedge fund SAC Capital Partners ranked No. 3 among Dodd’s biggest donors, followed by American International Group Inc. and Royal Bank of Scotland Group Plc. Seventeen of the top 20 donors were banks, insurers, hedge funds or an industrial company with a large finance unit. Four of the five biggest contributors to the 2008 campaign of Barney Frank, chairman of the House Financial Services Committee, are finance companies, according to the Center for Responsive Politics. Ditto for Spencer Bachus, the committee’s ranking Republican. Employees and others associated with Goldman Sachs Group Inc. comprised the largest corporate-related donors to the Obama presidential campaign. JPMorgan Chase & Co. was the sixth-biggest and Citigroup was No. 7.
People associated with Merrill Lynch & Co., Citigroup, Morgan Stanley, Goldman Sachs and JPMorgan made up the top five donors to John McCain’s presidential bid. These contributions aren’t charity. The donors expect favors in return. So far, they have received them. In the late 1990s, Citigroup’s financial muscle helped persuade Congress to undo almost seven decades of regulation that separated investment and commercial banking and that kept banks and insurance companies out of each other’s businesses. Hedge funds and private-equity firms in 2007 successfully defeated proposals that would have resulted in their paying higher taxes. Since the beginning of 1989, Freddie Mac and Fannie Mae’s employees and political-action committees donated $19.5 million to candidates for federal office. This and lobbying “resulted in keeping the two companies afloat as more Americans defaulted on their mortgages,” the center said.
American government wasn’t supposed to work like this. The men who wrote the Constitution in 1787 envisioned a nation balanced by geographic tradeoffs: Each state was awarded two senators and, no matter how small, at least one representative. The founding fathers didn’t plan for a country where industries or even single companies might grow so wealthy that they could purchase compliant regulation and beneficial laws. The U.S. can’t revert to the agrarian economy it was in the 18th century. Nor should it. Also the issue of buying influence isn’t limited to finance. Still, that shouldn’t stop Americans from recapturing control of their financial destiny. One solution is to have only taxpayers fund campaigns for Congress and the White House, removing altogether the corrupting role of private capital. Failing that, prohibit senators and representatives from accepting contributions from interests linked to industries under the jurisdiction of the committees on which they sit.
A third option might be to have a small limit on the total amount of funding an industry can contribute to an individual political campaign. Just restricting the amount of money spent on elections won’t solve the problem of influence-peddling. But it would help to create a fairer system. The pervasive role of lobbyists also needs to be curtailed. What’s needed is much more transparency in their activities. For ethics restrictions to work, “there must be an open, publicly accessible reporting system where every executive-branch appointee records meetings with registered lobbyists during and after working hours, both inside and outside the office,” former U.S. attorney Whitney North Seymour Jr., wrote last month in a letter to the New York Times. Spot on. Even go a step further and have the same rules apply to senators, congressmen, their staffs and Congressional- committee staffs. The message is clear: The U.S. government isn’t for sale.
Obama to Shift Focus to Budget Deficit
With a $787 billion stimulus package in hand, President Barack Obama will pivot quickly to address a budget deficit that could now approach $2 trillion this year. He has scheduled a "fiscal-responsibility summit" on Feb. 23 and will unveil a budget blueprint three days later, crafted to put pressure on politicians to address the country's surging long-term debt crisis. Speaking Friday to business leaders at the White House, the president defended the surge of spending in the stimulus plan, but he made sure to add: "It's important for us to think in the midterm and long term. And over that midterm and long term, we're going to have to have fiscal discipline. We are not going to be able to perpetually finance the levels of debt that the federal government is currently carrying." Along those lines, White House budget director Peter R. Orszag has committed to instituting tougher budget-discipline rules -- once the economy turns around. Those include a mandate that any "nonemergency" spending increases be offset by equal spending cuts or tax increases.
Officials say the budget blueprint to be released this month will also attempt to make public the full extent of the dire fiscal situation, by not repeating some of the accounting used in crafting President George W. Bush's budgets. Recent budget blueprints excluded from deficit projections the long-term costs of wars in Iraq and Afghanistan. Those budgets also didn't include the cost of preventing the alternative minimum tax -- instituted in 1969 to ensure the rich didn't escape taxation -- from hitting the middle class. Officials are examining whether to include those costs. The budget will project out 10 years, not the five-year forecast instituted by Mr. Bush. And with the stimulus cost, the fiscal 2009 deficit in the document is likely to exceed the $1.2 trillion forecast by the Congressional Budget Office last month. Obama aides say they aren't looking for quick action, but a start to the conversation. "We're going to bring some things to the table, but we're going to listen to everybody else," said Christina Romer, chairman of the White House Council of Economic Advisers, in an interview Friday. "It's a giant issue, and it's not one we can solve unilaterally."
The president met with 44 fiscally conservative "Blue Dog" Democrats this week and gave a nod to legislation that would set up commissions to deal with long-term deficit strains. The commissions would then present plans to Congress for an up-or-down vote. "We feel like we've found a partner in the White House," said Rep. Charlie Melancon (D., La.), a Blue Dog co-chairman. For Mr. Obama, the national debt has become a pressing dilemma. If he transitions too quickly from priming the economy with money to pulling back for the sake of fiscal rectitude, the president risks choking off whatever economic recovery he might spark in the next year. Ms. Romer points to the seesaw nature of the New Deal, when President Franklin D. Roosevelt would spend big one year and then back away the next, never allowing the economy really to get traction. But if the administration waits too long to address the deficit, long-term interest rates may have to rise to attract buyers for all those Treasury bonds. That too could send the economy back into recession.
White House economic aides believe they have room to maneuver. Demand for Treasury bonds will remain strong for the next two to three years, a senior administration official said. But the White House also considers it imperative to signal how serious Mr. Obama is about a debt that could soar toward levels experienced by Japan, whose national debt equals the size of the country's economy. At just over 40% of gross domestic product, the U.S. debt is the country's highest in a decade. That is manageable, administration economists say, but needs to be stabilized. Projections for 2009 deficit range from Goldman Sachs's $1.43 trillion to $1.9 trillion from economic firm Strategas Research Partners. At 13.5% of GDP, a $1.9 trillion shortfall would more than double the peacetime record during Ronald Reagan's presidency, and approach the mark set in 1942 as the U.S. joined World War II.
Stimulating our way to catastrophe?
You could read this column. Or you could just go to James Howard Kunstler's blog at www.kunstler.com or read his nonfiction book, "The Long Emergency" and novel, "World Made by Hand." Talking to Kunstler is a little like leaning down to take a refreshing drink from a garden hose and realizing too late that it's actually a fire hydrant. That's meant as a compliment. The man has a lot to say. Scary, interesting things to say. Our current economic problems, Kunstler suggests, are a harbinger of a painful, all-encompassing, inevitable change in the way we live. Oil prices, currently down after last summer's wild spikes, are bound to trend higher as supplies diminish and allocation and distribution systems fall apart. "Now that the price of oil has come down temporarily, most people assume that the problem is over. They think it was just shuck and jive, and the Earth really does have a creamy nougat center of oil, that the only problem is the shenanigans of the companies that sell it," he says by phone from his home in Saratoga Springs, N.Y.
"We have been accustomed to a rate of change and economic expansion that is anomalous in history. It's all because of the contribution from fossil fuels, which has fueled this explosive expansion of population, technology and material wealth. ... This has unfortunately imbued us with a delusional sense of techno-grandiosity, techno triumphalism," he says. And to those who dismiss predictions of collapse and argue that human ingenuity and technology will pull our fat out of the fire, Kunstler says sorry, you're dreaming. "People who promote this view cannot make a distinction between energy and technology. ... They think if you run out of one, you just plug in the other," he says. But because the two are intimately entwined, "this is a fundamental error." Take that, Alvin Toffler. He's particularly irked by "elite environmentalists, the Aspen types" who bow in homage to Amory Lovins and "try to find some spiffy new way to run our cars. ... They want brownie points for buying Priuses, but they just don't get it."
Such thinking "only brainwashes people into thinking that we can continue to be car dependent," Kunstler argues. "The most perilous thing we could do is mount a campaign to sustain the unsustainable." Yet the Obama administration and Congress have put together a stimulus bill that chases the chimera of endless life in techno-gilded luxury. Former Vice President Dick Cheney famously (perhaps apocryphally) said "our way of life is not negotiable," and even Obama has said we're "not going to apologize for our way of life." But apologies, Kunstler says, are beside the point. He sees an imminent collapse of large scale agriculture because credit has dried up, though few see it coming: "The average man in Denver isn't thinking there will be no Cheerios next year because 13 percent of farmers can't get loans." The banking collapse, the freezing of credit, higher and higher oil prices, the cratering of big agriculture are just signs of the inevitable, he says, and spell ... uh oh.
"The point is that that way of life is no longer really viable. By this I mean a life of endless revolving debt and limitless material consumption," he says. "We are now facing not only strict limits to our energy supply, but strict limits on the planet's capacity to absorb the byproducts of our activities. ... We are facing the impoverishment of this society, very suddenly. ... The American people have basically mortgaged their future and the future is now here calling in the debt." Good times. Yet Kunstler swears he's not a "gloom and doomer." He doubts we'll get on the right track any time soon (and says the stimulus bill gets it all wrong) but says after a long and painful convulsion, we'll be forced out of our lavish, suburban way of life and into another that will, ultimately, be more meaningful. "We desperately need to return to moretraditional modes of living" and soon will have no choice, he says. "We'll have to return to towns, villages and cities that are properly scaled to the energy diet of the future."
And we'll be better off "driving less and walking more ... from making our own music instead of depending on canned entertainment, from eating real food instead of cheese doodles and Pepsi cola," he says. That's the harrowing, but ultimately hopeful, way of life he portrays in "World Made by Hand." "We might as well get started." Now "what we really need to do is stop wringing our hands over this reality and get to work re-scaling our systems of everyday life," he says. That includes rebuilding the railroad system, radically retooling agricultural policy and "reprogram our harbors and inland waterways for maritime trade. We're going to have to move things by other means than trucks." Of course, doomsayers (sorry, Jim!) from Paul Erhlich to generations of science-fiction writers have predicted such calamities before, on rather short timetables. So far, no cratering of "our way of life." But this time, Kunstler says, the "long emergency" has really begun as our oil-driven way of life seeps away into the sands of unsustainability. Pessimist he may be. But what unnerves me is reading his blogs and books, which display a canny propensity for predicting our current predicament. Like I say: Check it out.
Asia’s export economies in free fall
Staggering falls in exports across Asia have shocked economic analysts and ended all claims that the global slump may be nearing its bottom. The IMF's growth forecast for Asia this year is just 2.7 percent—less than a third of the 9 percent growth rate of 2007. The prediction is a full percentage point less than during the 1997-98 Asian financial crisis.
IMA Asia analyst Richard Martin commented in the Australian: "It's a bit like watching a train wreck in slow motion. North Asia is suffering the biggest collapse in demand since World War II." Westpac bank's Richard Franulovich said that the "speed of the decline embedded in the latest Asia data is on par with the collapse in the US during the 1930s Depression."
Japan, the world's second largest economy, is already in recession and still declining. Japanese exports fell 35 percent in December from a year earlier, as the global demand for its cars, electronics and capital goods dried up. Industrial production plunged a record 9.6 percent, month on month, in December.
Bank of Japan chief economist Kazuo Momma warned this week that the economy was facing an "unimaginable" contraction, as analysts estimated that there was an annualised rate of contraction of 10 percent in the last quarter of 2008, even worse than the US. The government warned that 125,000 irregular workers, mainly in manufacturing, will lose their jobs in the six months to March, but an industry estimate put the figure far higher at 400,000.
China, the so-called "workshop of the world," is being hit particularly hard. Exports declined for the third consecutive month in January, falling 17.5 percent from a year earlier, after a 2.8 percent decline in December. Imports plunged even further—43.1 percent, twice as much as December's 21.3 percent year-on-year drop, the General Administration of Customs said on Wednesday.
Because many of China's imports are inputs into the country's manufacturing exports, the sharp decline in imports indicates further falls in industrial activity. Imports of machinery and high-tech goods fell by roughly 40 percent, also spelling disaster for the countries that sell such components for Chinese factories to assemble. Shipments from Japan fell by 43.5 percent from a year earlier; those from South Korea were down 46.4 percent and from Taiwan, 58 percent.
Although many economists are predicting that China will still grow at 5-6 percent this year, these figures are no more reliable than the previous claims that China would continue to expand at a near-record pace. More than 20 million migrant workers have lost their jobs so far, with some analysts warning of 50 million more job losses if the economy deteriorates further.
India, the other economy previously touted as a possible bulwark against world depression, is suffering as well. Exports fell 24 percent in January. According to official data, one million Indian workers in the export sector have lost their jobs since September, when the global financial crisis erupted in the US. Textile, gem and jewellery workers have been worst affected. Another half a million workers are expected to lose their jobs by March.
Although better known for its IT outsourcing services, India has become a major Asian exporter in recent years. Its exports increased from 16.9 percent of India's GDP in 2002-03 to 24.8 percent in 2007-08. Export industries employ 150 million workers, the second largest sector after farming. India's economic growth for the fiscal year ending in March is officially projected to be 7.1 percent—down from 9.1 percent last year.
For the next fiscal year, economists believe the Indian growth rates will be near 6 percent at best. Citigroup estimated a growth rate of just 5.5 percent. Although India is less dependent on exports than most East Asian countries, its financial position is much weaker. New Delhi's public debt stands at 75 percent of its GDP, compared to just 18.5 percent in China, leaving less room for large stimulus packages.
South Korea's plight is equally stark. Exports, the main driving force of the economy, plunged 32.8 percent in January. Finance minister Yoon Jeung-hyun warned on Tuesday that the fourth largest economy in Asia would shrink by about 2 percent this year—a sharp revision from the previous official forecast of 3 percent growth. According to Yoon, this would mean the loss of 200,000 jobs in 2009. Even this figure is too optimistic compared to the IMF's forecast of 4 percent negative growth. Credit Suisse has projected as much as a 7 percent contraction.
Taiwan, the sixth largest Asian economy, saw its exports fall 44.1 percent in January from a year earlier—the biggest fall since records began in 1972. Imports plunged 56.5 percent in the same month. For an economy where exports account for 70 percent of GDP, the impact is devastating. Morgan Stanley has sharply revised down Taiwan's growth rate this year to minus 6 percent—down from the previous positive 0.5 percent. CLSA, a Hong Kong-based brokerage house, last week predicted an even greater contraction—11 percent.
The export-dependent economies of South East Asia are also suffering. The IMF's projection for Philippines is just 2.25 percent this year, down from 4.6 percent last year and 7.1 percent in 2007. The official predication for Singapore, the region's trade and financial hub, in 2009 is a contraction of 5 percent—the deepest recession since the city-state was founded in 1965. Malaysia's exports in December plunged 14.9 percent from a year earlier, with exports to the US falling by 30 percent. Analysts expected the Malaysian economy to grow by just 1-1.5 percent in 2009, far lower than the government's target of 3.5 percent. Indonesia's central bank predicts the country's economy will slow to 4-5 percent in 2009 compared to 6.2 percent for 2008.
High saving rates and relatively secure financial institutions have not prevented the Asian economies from suffering massive losses. After the financial crisis of 1997-98, Asian countries strove to increase their exports in order to build large foreign currency reserves as a shield against further such financial shocks. As a result, however, they have merely swapped dependence on global finance for reliance on global demand.
Credit Suisse analyst Cem Karacadag has estimated that net exports account for two-thirds of GDP in Hong Kong and Singapore, almost half in Malaysia and Thailand and one-third in Taiwan and South Korea. He calculated that, even without taking into account secondary impacts, every 10 percent fall in exports would cut 2 percentage points of growth in South Korea and Taiwan, and up to 7 percentage points in Hong Kong and Singapore.
Over the past decade, the export share of Chinese GDP doubled to 40 percent. With a vast supply of heavily-policed cheap labour, combined with infrastructure developed by the state, it became a final assembly point for transnational corporations. They supplied factories in China with components, raw materials and capital goods made elsewhere in Asia, transforming the region into a giant export machine. It appeared that China had replaced the US as the growth engine for many Asian countries.
In fact, as Jong Wha-Lee of the Asian Development Bank pointed out, the intra-regional trade disguised the fact that 60 percent of the final demand for Asian goods still came from advanced capitalist countries in North America, Europe and Japan. China's exports to the United States and European Union fell by 9.8 percent and 17.4 percent, respectively, in January. As the demand in the West has collapsed, the booming intra-trade, which involved mainly components, inputs and capital goods, has quickly evaporated.
The Korea Times complained last week: "China has been emerging as the biggest threat to the Korean economy" because the "high dependence on China has made the country particularly vulnerable to the emerging China risk". Korea's exports to China, much of them for re-export, fell 33 percent in December, and 46.4 percent in January, compared to a year earlier, due to the accelerating drop in global demand for "Chinese" goods.
Chinese officials have been loudly talking up the prospect of sparking a "rebound" by stimulating infrastructure spending and ordering state banks to increase lending. But analysts are sceptical that the state spending will boost private investment. The Morgan Stanley China economist Wang Qing told the Wall Street Journal: "Profits and profitability in 2009 will be very poor, and this is the key reason why I do not expect much private investment—especially in the manufacturing sector where China suffers from an overcapacity problem." He estimated that manufacturing investment would be zero this year, with a 12 percent drop in property investment.
The Financial Times on February 10 explained: "Most of all, China cannot escape the broader global economic environment. The government's fiscal stimulus was designed to keep the economy going until Western consumers recover. Yet the recent indications are that the global economy could be in for a more prolonged slump than first thought."
The same conclusion can be applied to all the stimulus packages across Asia. Most Asian countries are largely cheap labour platforms whose exports outweigh their relatively small domestic markets. Confronted by the global slump, each is trying to export more, which means taking market share at their neighbours' expense. This is causing rising trade tensions. India has started 17 investigations into Chinese imports since October, and imposed restrictions on Chinese steel, textiles and petrochemicals. In January, India banned Chinese toys imports for six months to protect its own toy industry.
Apart from pitting their "own" workers against other workers in neighbouring countries, the Asian elites have no understanding of, let along solution for, the economic crisis. Some have turned to the gods for answers. During the Chinese New Year a senior Hong Kong official selected a fortune stick on the city's behalf. It was the unluckiest, 27. "A fortune teller at Che Kung temple, shrouded in incense and consulting the heavens for inspiration, declared it meant Hong Kong could not isolate itself from global financial turmoil," the Financial Times reported.
Clinton to Find China’s Economic Troubles Curb Its Leadership
When Hillary Clinton arrives in East Asia next week on her first trip as secretary of state, she will discover there are limits to what the U.S. can expect of China, the region’s rising power. As China struggles to cope with its worst economic decline in more than a decade, it is unable to act as a leading partner in rescuing the international financial system or cutting greenhouse gases in the way President Barack Obama’s advisers have signaled they want, according to experts on the relationship.
“China’s much bigger than they were, but they’re not big enough yet to take the lead,” says Richard Cooper, a professor of international economics at Harvard University in Cambridge, Massachusetts, and chairman of the National Intelligence Council under President Bill Clinton. “We ought to stop asking the Chinese to do things and engage them in conversation.” With policies under review and top advisers not yet in place, the greatest value of Clinton’s seven-day trip to Japan, Indonesia, South Korea and China will be symbolic. Clinton will reassure allies who host U.S. forces of America’s security commitment at a time of threatening North Korean rhetoric, signal support for Indonesia -- the largest Muslim democracy -- and explore cooperation with Chinese leaders, advisers say.
A sign of how much times have changed is that Clinton, 61, included China in her first itinerary as Obama’s top diplomat, rather than the Middle East and Afghanistan, where she sent top envoys. Her husband, President Clinton, didn’t visit Beijing until his sixth year in office. A dozen years ago, when the Asian financial crisis rocked the continent from South Korea to Indonesia, China was a bit player. It wasn’t asked to bail out faltering economies, though it helped by not depreciating its currency and by giving limited aid to countries including Thailand.
This time, as the world is dragged into a recession driven by a credit crisis in the U.S., policy makers point to China’s new clout: an economy now bigger than Germany’s and the largest foreign holder of U.S. Treasury bills, with $682 billion. The two economies are interdependent as never before: China is the U.S.’s second-largest trading partner, buying $71.5 billion in U.S. exports last year as the U.S. took $337.8 billion in Chinese imports. One idea under discussion is to create a “G-2” partnership between the U.S. and China for economic, environmental and strategic dialogues overseen by Vice President Joe Biden and Chinese Premier Wen Jiabao, according to a senior administration official.
Following on the Bush administration’s policy, the Obama team wants China to allow its currency to appreciate or float freely and to avoid protectionism. Treasury Secretary Timothy Geithner said this week that the U.S. will look at the broad global picture in the coming months and judge “carefully” whether China is manipulating its currency. Geithner upset China by saying it is “manipulating” the yuan in a written answer last month to the Senate Finance Committee. Officials said Geithner merely repeated comments Obama made as a candidate and wasn’t stating official policy. Since China dropped its peg to the dollar in July 2005, the yuan has appreciated 21 percent against the dollar through the end of 2008, with the yuan holding about steady in the second half of last year.
Concrete agreements are unlikely on a first trip. Without even her picks for economic undersecretary, Lael Brainard, or East Asia assistant secretary Kurt Campbell in place, Clinton should simply convey that “we’re not in the same boat, but we’re in the same storm, and we need to cooperate to get out of it,” says Cooper, a former undersecretary of state for economic affairs. Those calling for a greater contribution from China forget that its economy is less than a quarter the size of the U.S. economy and that one in three Chinese live on less than $2 a day. Many economists are dubious of the government’s claim of 6.8 percent growth in the last quarter of 2008, as exports, imports, electricity production and jobs all plummeted.
China’s capacity to influence the world economy is limited by the need to create jobs for more than 40 million people, including migrants, the urban unemployed and graduates entering the employment market, says David Michael Lampton, director of China studies at Johns Hopkins University’s School of Advanced International Studies in Washington, and a former president of the National Commission on U.S.-China Relations. During a visit to Britain on Feb. 2, Wen said while nations should cooperate in every way possible to get out of the downturn, “countries should first and foremost run their own affairs well and refrain from shifting troubles onto others.”
That’s been the consistent refrain, and the new administration would be unwise to “set the U.S.-Chinese relationship on a pedestal or raise expectations,” says Elizabeth Economy, director of Asian studies at the Council on Foreign Relations in New York. The notion that China could deploy its estimated $1.9 trillion in reserves for domestic stimulus or to rescue world markets is wrong, economists say. With a non-convertible currency, a $266 billion trade surplus with the U.S. last year and a limited and disappointing track record of overseas investments, China has no better option than to buy U.S. debt.
“The Chinese are in no position to help anyone,” says Derek Scissors, Asia economics fellow at the Heritage Foundation in Washington. The most they can be expected to do is to avoid protectionism and export promotion, keep their currency stable, and stimulate demand through expanded consumer lending, he says. When Pakistan, a close Chinese ally, was in crisis last fall, China didn’t take the lead in offering financial help, Scissors says. They don’t want to become “the world’s banker. It would be a nightmare: how much do you give, and to whom?”
On the environmental front, the U.S. wants China to adopt hard targets on greenhouse-gas reductions. Clinton is bringing her new climate-change envoy, Todd Stern, on the trip in a demonstration of Obama’s intent to engage China, the world’s largest source of carbon emissions, on the issue. Clinton says she is committed to the six-nation talks hosted by China and aimed at persuading North Korea to give up its nuclear weapons program. She will be accompanied on her trip by Obama’s senior Asia official at the National Security Council, Jeffrey Bader, and Christopher Hill, the top U.S. negotiator on North Korea since 2005.
In public remarks this week, Clinton cautioned North Korea’s regime against any action that would “threaten the stability and peace and security” of its neighbors -- a nod to worries in South Korea that the North may be planning a missile test. Douglas Paal, a former Asia director at the National Security Council, says Obama’s first conversation with Chinese President Hu Jintao touched on efforts to spur Chinese consumption, curb global warming and influence the governments in Sudan and Myanmar through its economic ties with both. The U.S. accuses Sudan’s government of involvement in genocide in its Darfur region, and says Myanmar’s military rulers must stop suppressing a democracy movement.
“The Chinese have been concerned about the Democrats’ traditional emphasis on trade protectionism and China’s human rights, and they more than welcome that those are not the leading issues,” says Paal, vice president for studies at the Carnegie Endowment for International Peace in Washington. Orville Schell, director of the Asia Society’s center on U.S.-China relations in New York, where Clinton will make a policy address today, says there’s a positive aspect to the economic crisis that has the U.S. looking for cooperation. “It has leveled the playing field,” he says. “For the first time in 150 years, we cannot but deal with China as a more equal partner.”
China's image improves as world economy slumps
As the world lurches ever deeper into economic distress, China's image is changing from that of currency manipulator to a source of badly needed consumer demand. At the Group of 7 conference here over the weekend, finance ministers extended a friendly hand to the country many have criticized. Veering sharply from his past testimony before the U.S. Congress, where he used harsh language in criticizing China's reluctance to let its currency, the yuan, appreciate, the new U.S. Treasury secretary, Timothy Geithner, was quick to commend China for its 4 trillion yuan, or $585 billion, stimulus package. "We very much welcome the steps China has taken to strengthen domestic demand and its commitment to further exchange rate reform," he said during a news conference Saturday.
This view was echoed by the Group of 7's communiqué, which added that the yuan was "expected to appreciate in effective terms."
The quick shift in the G-7's stance toward China underscores how sharply policy positions are changing as the world economy continues to struggle. It also is further proof of the diminishing stature of this once august group as it has become clear that large growing economies like China, India, Brazil and South Korea, which are part of the Group of 20 but not the G-7, will play defining roles in generating the purchasing power the global economy so desperately needs. The G-7 session was Geithner's first official trip abroad as Treasury secretary. After the withering reception that his bank rescue plan received in Washington, he could be excused for seeing the event as a well-timed respite.
Geithner, whose previous job was president of the Federal Reserve Bank of New York, has spent his academic and professional life studying and implementing international financial policy. So, two days spent in Rome brainstorming with finance ministers from the Group of 7 industrialized nations about fixing the global economy plays to his specialty. As one might expect in a gathering of diverse economies, there were differences of opinion. Amid signs that Europe's worsening economic slump has created fissures among G-7 leaders about how to deal with the crisis, Geithner fielded questions from his peers about provisions viewed as protectionist in the stimulus package of the administration of President Barack Obama, as well as the debt needed to pay for it and the lack of detail in his bank rescue plan.
When it came to concrete measures to address the world slump, there was little offered, although the final statement did point to increased steps to inject liquidity and strengthen bank balance sheets. "There are no quick fixes," said Alistair Darling, the British chancellor of the Exchequer. As for how Geithner was received, the Treasury secretary said that while participants were happy that the United States was stepping forward, more was expected. "We all understand that the U.S. needs to be an influence for good," he added. Geithner's trip to Rome - like much of his recent experience following his protracted confirmation process - was a whirlwind, crammed tight with meetings, dinners and, when he could squeeze it in, a trip to the gym. In theory, there has never been a Treasury secretary more qualified to be America's lead spokesman on international financial affairs. Geithner, unlike virtually all of his predecessors, has an orientation - personal, academic and professional - that is rooted outside his native country's borders.
At one dinner, Geithner, a veteran of untold previous international talking shops, gave an emotional speech outlining his respect for the consultative process.
"It was very heartfelt," said a Treasury official, who added that Geithner relied on notes he had taken minutes before speaking instead of his prepared presentation. "You could tell it was a homecoming." But when it came to underlining the importance of a coordinated approach to stimulating economies, Geithner was all business. And while most leaders agreed on the need to bolster government spending, the question of how to finance it remained a contentious one here as well as in the United States.
Last week Giulio Tremonti, the Italian finance minister and Geithner's host for the weekend, reviewed the U.S. administration's stimulus in a Milan newspaper. "If the problem is an excess of debt, the cure is not adding more debt, whether that debt is public or private," he wrote in the newspaper, Corriere della Sera, referring to this approach as the "American way." Italy is one of the most indebted countries in Europe, with a debt that surpasses its annual gross domestic product.
The national debt of the United States, by contrast, was about 40 percent of GDP at the end of 2008, but Moody's Investor Service said it expected that to rise to 60 percent by 2010 because of the recession and spending tied to the government's bailout and stimulus programs.
There was also much discussion about the "Buy America" provision in the stimulus plan, which covers iron, steel and manufactured goods. The president of the World Bank, Robert Zoellick, said he had emphasized in meetings with ministers how crucial it was to keep the world economy open, not closed and to not repeat the protectionist policy errors of the 1930s. "The 'Buy American' provision is very dangerous," he said. Geithner was careful to take on both issues at his closing news conference where he emphasized the administration's commitment to open markets, while taking up as well America's growing debt burden. "We need to show the world that we can bring our resources and expenditures back into balance," he said. "That is crucially important."
Hit with a barrage of questions regarding his bank plan, he effectively said - stay tuned. "We are going to move quickly to lay out a broad design," he said. "But we also want to makes sure that they work." And amid the camera flashes and aggressive questioning, the Treasury secretary seemed to have found a comfort level that was lacking during his earlier public appearance when he announced his bank plan but took no questions. His voice had a deeper quality and his smile was more self-assured. When there were no more questions, he waited several beats before exiting with a quick wave and headed for the plane waiting to take him and his team back to Washington.
Radical surgery is required to save this patient
Unless governments stop posturing for the sake of headlines, the full nationalisation of every bank is inevitable. If a minor flesh wound becomes infected and is allowed to fester, it can turn to gangrene and lead to crippling amputation or death. This is the situation of the world economy today.
What started as a minor flesh wound - the US sub-prime mortgage crisis of August 2007 - could easily have been cured if regulators, governments and central banks had taken decisive action a year ago, when it was already obvious that this was a problem that private financial markets could not resolve. But instead of taking action - guaranteeing and recapitalising banks, buying-up distressed mortgages and slashing interest rates to zero - governments all over the world essentially crossed their fingers and hoped for the best.
So the wound continued to fester and a year later became full-scale gangrene with the bankruptcy of Lehman Brothers on September 15. That fateful date is almost five months ago and the gangrene is still spreading, while the politicians who could cure it stand around and talk. This week the talk of a cure was supposed to turn to action. The Obama Administration was expected to announce a comprehensive package to stabilise the US banking system once and for all. The Bank of England was supposed to convince the public that it had finally got the measure of the recession and had the tools to prevent a total collapse in the economy. And Gordon Brown was meant to show tangible results from the hundreds of billions invested in British bank rescues, as the new managements of these dysfunctional organisations committed themselves publicly to start financing the economy instead of just lining their own pockets.
Tragically, however, none of these things has happened. The much vaunted “comprehensive plan” announced on Tuesday by the new US Treasury Secretary, Timothy Geithner, turned out to be nothing but a vague holding statement. The Bank of England's talk of “unconventional methods” lacked the sense of urgency implied by its own cataclysmic forecasts. And in Britain, government action on the banks focused on frivolous headlines about bonuses and personal apologies, while long-promised commitments to increase credit to businesses, homeowners and consumers kept receding, mirage-like, as they have throughout the past five months. Have we now reached the point where full-scale amputation is the only cure for the potentially fatal financial gangrene? Maybe the only way to avoid a truly catastrophic global depression and trade war is to nationalise every significant bank in America, Britain and the eurozone - since none could survive without government guarantees.
Many economists now take this view. The bitter disappointment over Mr Geithner's announcement, which sent share prices on Wall Street crashing back towards the lows they hit just before Barack Obama's election, now threatens to turn this desperation into a majority view. I am not yet quite ready to join this growing consensus. For me, dismantling global financial capitalism and replacing it with a neo-Marxist system of capital allocation by the State is too big a mental leap. But the way things are moving, even I will soon capitulate to the inevitability of universal bank nationalisation. The reason is simple. As the Governor of the Bank of England explained yesterday, neither zero interest rates nor tax cuts can revive economic activity if the credit system remains paralysed. Our politicians and bankers face a simple choice: either normal private banking services are restored quickly or governments take direct control.
I fervently hope that leading Western economies can still choose the former course. But we are losing a race against time. Mr Brown's five-point plan for stabilising the banking system made a lot of sense when it was announced in early January. But since then almost nothing has happened and credit has continued imploding. The situation in America is even more alarming. Mr Geithner's announcement this week was almost as ill prepared and sketchy as the letter from Henry Paulson, his predecessor, demanding a blank cheque for $700 billion from Congress. Mr Geithner's proposals suggested that he has no real idea what to do. If the US Government has run out of options, nationalising all leading banks is the only logical solution and the sooner the better. But before jumping to this conclusion it is worth asking why financial policy has been so ineffective. After all, the policies needed to save the private banking system are obvious: stronger deposit guarantees; government insurance for toxic assets and against catastrophic credit losses; partial forgiveness of mortgage loans; binding commitments on lending to non-financial borrowers.
Why, then, have these proved impossible to implement? Until this week I assumed the main reason was incompetence or ideological myopia. But this week's feeble performance by Mr Geithner, along with the frenzy over bankers' bonuses in Britain, suggests a different, and perhaps less intractable, problem.
Reports from Washington suggest that the fears about appearing “soft” on the banks was what prevented Mr Geithner making any serious announcements this week. Similar anxieties about “how it will look in the headlines” appear to be delaying the British Government's decisions on insurance for toxic assets, which have been months in gestation. If this is true, then British and US leaders could yet break out of this self-destructive populism by explaining two simple facts.
First, the public must be made to understand that “punishing” or “bailing out” banks is not the same as punishing or bailing out bankers. Voters hate bankers for lending money so stupidly, but they should remember whose money the bankers lent. If banks were allowed to collapse, then most of the losses would fall on the small depositors whose money the bankers were lending - or on taxpayers who would stump up the cash to guarantee those bank deposits. If the Government supports or subsidises a bank, it is subsidising depositors, not shareholders or bankers.
This leads to the second, more important, point. Whatever money the Government may lose in buying toxic loans or offering banks subsidised insurance pales into insignificance compared with the tax revenues lost to the Treasury if the economy falls into deep recession. Even if taxpayers were to “lose” tens of billions subsidising banking systems, this would be money well spent if it accelerated recovery even by a few months. For politicians and the media to endanger the entire structure of financial capitalism for the sake of a few populist headlines is the height of irresponsibility. Cut the bankers down to size by all means, but let's not amputate the banks.
Japan, IMF sign $100 billion loan deal to bolster international relief
Japan and the International Monetary Fund signed an agreement in Rome on Friday for a $100 billion loan to the Washington-based lender to help it assist cash-strapped countries amid the global financial crisis. Finance Minister Shoichi Nakagawa and IMF Managing Director Dominique Strauss-Kahn signed the terms of the accord just ahead of a two-day meeting of the Group of Seven financial leaders.
"This loan is not only important for the IMF . . . but it's mostly important for all countries having problems with the crisis and needing help," Strauss-Kahn said during the signing ceremony. "This loan of $100 billion is the biggest loan ever in the history of mankind," he said, adding that he hopes other countries will follow suit by contributing to the IMF. Nakagawa said, "I hope this can be put to good use very quickly." He said that given the global crisis, it is important that the IMF play a major role in dealing with it.
The loan, announced by Prime Minister Taro Aso in November, will help the IMF shore up its financial standing and help continue lending. The IMF has been trying to double its lending ability to about $500 billion to boost confidence so it can handle any future borrowers amid the deepening financial crisis, in addition to recent borrowers, such as Pakistan, Iceland and some Eastern European countries.
Europe turns to protectionism as industry plummets
Statistics released Thursday by the European Union's Eurostat agency reveal that production plummeted across Europe at the end of 2008. The figures announced were far worse than analysts had anticipated. Industrial production declined across Europe by 2.6 percent in December compared to the previous month. On a year-to-year basis, European production has slumped 12 percent.
For some time, leading European politicians have attempted to put a positive gloss on declining figures for European production, but the results released Thursday ushered in a new tone. European Union Industry Commissioner Günter Verheugen told the Financial Times Deutschland, "The extent and speed of the crisis is completely new." One day previously, an Ifo Institute for Economic Research survey revealed that business sentiment within the 16-country common-currency eurozone declined for the sixth consecutive quarter, plunging to its lowest point since the survey began 16 years ago. The European Central Bank (ECB) also issued a warning that the recession gripping Europe will not be short-lived. Rather, it will be a "long-lasting and clear downturn," the ECB said.
The response of the individual European nations to the growing crisis has been to embrace a raft of protectionist measures. Italian Premier Silvio Berlusconi recently warned appliance maker Indesit SpA not to transfer production and jobs to Poland, and in Britain, trade unions and politicians are demanding "British jobs for British workers." On Wednesday, the acting EU Council president, Czech Prime Minister Mirek Topolanek, appeared before the press in Brussels and warned of a "protectionist race" in Europe, while acknowledging that national economies in the European Union were being hit hard by the international crisis and losing ground with unanticipated speed.
Topolanek said, "Problems are emerging in the wake of the economic and financial crisis which the European Union considered to be relics of the past century and long since solved." After a meeting with EU Commission President José Manuel Barroso, Topolanek described the situation in Europe "as worse than it has ever been." The confidence of citizens in the economic and political system had been shaken, he said, and warned that the battening down of national markets endangered the European domestic market and the world economy.
The Süddeutsche Zeitung echoed the statements of the EU Council president, writing, "Any politician seeking to solve the economic crisis by protectionist measures only worsens the situation." Barroso also warned against states going it alone. European heads of state and government should put an end to any "nationalist navel gazing," he said. Otherwise, there was a danger of "intensifying the powerful downward trend." The European automotive industry is being especially hard hit by the lack of credit.
A European Union analysis stated: "Broad access to credit plays an important role in the automotive industry, with between 60 and 80 percent of private car sales in Europe carried out on a credit basis." In the steel industry, European Commission experts have reported a slump in orders of 43 to 57 percent. The European Union leadership expects a sharp rise in the number of unemployed in the coming months. According to EU Industry Commissioner Verheugen, in the past four months companies have shed 158,000 jobs and created just 25,000 new jobs. This is a reversal of the first three quarters of 2008, which saw a general trend toward increased employment.
Last Wednesday, the French automaker Peugeot announced it was shedding at least 11,000 jobs, and one day later, Renault announced its own plans to cut its workforce by 9,000. These job cuts have been agreed to by the French government and trade unions and are bound up with the announcement by French President Nicolas Sarkozy that he plans to subsidise domestic automakers with the sum of €6 billion.
Sarkozy declared that, in his opinion, it was irresponsible "to continue to manufacture French cars in the Czech Republic." He demanded a halt to the transfer of production to other countries. "If we give financial aid to the automotive industry," he said, "we do not want them to set up a factory in the Czech Republic again." He also urged the carmakers to support French industries involved in supplying parts and services to French auto companies. Czech Prime Minister Topolanek reacted sharply to this openly protectionist policy and called for a special European summit to block it and similar policies.
German Chancellor Angela Merkel (Christian Democratic Union—CDU) also criticised the French action. The defence of free trade and the European domestic market is of crucial importance, Merkel said. The German economy, which is heavily dependent on its export industries, would be especially vulnerable to any growth of protectionist measures in Europe. Sarkozy defended his decision and drew attention to the fact that the German chancellor had rejected a joint European stimulus programme just a few weeks before. Now, every government was forced to take its own measures to deal with the crisis, he said. He added that the latest German stimulus programme includes many measures aimed at subsidising German enterprises.
The conflict between Berlin and Paris runs deep. In his role as EU Council president last year, Sarkozy repeatedly raised the demand for an "economic administration" for the eurozone. He made it quite clear that he regarded himself as best suited to head such an administration. Supported by a majority of the 16 eurozone countries, Sarkozy is seeking to compel the German government to take more responsibility for financial policy. According to the Élysée Palace, Germany, as the continent's biggest national economy, must contribute much more to managing the crisis.
The German government wants precisely to prevent such a development. It regards itself better prepared for the crisis than other euro countries due to the labour market reforms introduced by the previous Social Democratic-Green government, which slashed welfare payments and opened the way for the creation of a huge low-wage sector in Germany. Backed by the country's business federations, the Merkel government is seeking to exploit the crisis to strengthen Germany's dominant role in Europe. Berlin is vehemently opposed to taking any responsibility for Europe's "weak states"—i.e., those countries that have thus far failed to implement drastic social and welfare cuts.
Behind the German chancellor's appeals for adherence to "free trade" and rejection of protectionism lie the egoistic interests of the German business elite, which profits most from the European domestic market. The varying economic performances of individual euro countries and the absence of a uniform financial and economic policy have led to increasing discrepancies ("spreads") between the government loans of the euro countries. In mid-January, Greece had to take out a new government loan at an interest rate well above the 3 percent levied on German government securities. Financial experts have said that the trend of rising spreads has "definitely not stopped" and warn that it could have explosive consequences for the fate of the euro as a common currency.
When the chairman of the euro group, Luxembourg Finance Minister and Prime Minister Jean-Claude Juncker, suggested introducing eurobonds to allow weaker member states access to credit on the basis of a pan-European solution, his proposal was immediately rejected by German Finance Minister Peer Steinbrück (Social Democratic Party—SPD). Instead, the German government is seeking to use its EU industry commissioner, Günter Verheugen, to force member states to implement budget cuts and strict austerity policies.
In view of increasing tensions, the EU presidency and the European Commission have announced plans for no fewer than three separate summits in the coming three months. On March 1, the heads of state and government will meet in Brussels to "coordinate national stimulus packages." The agenda is to include the struggle against protectionist tendencies, measures to revive the circulation of credit, the handling of "toxic" securities, and policies directed against the rise of unemployment.
Three weeks later, the regular spring summit of the EU takes place in Brussels, which is also likely to concentrate on the economic and financial crisis. In May, the Czech council president has invited member countries to Prague for an employment summit. Behind this summit frenzy are fears of a possible break-up of the European Union and an escalation of working class resistance to mass unemployment and growing poverty.
Factoring In The Cost of Getting Home
Ever wonder where all your money goes? According to some urban-planning researchers, almost half of it -- 46 percent -- goes to just two things: putting a roof overhead and getting around town. And that's before you even pay income taxes. Those two money sinks -- home and transportation -- play off each other, according to researchers at the Urban Land Institute, a nonprofit group associated with the development industry. For years, home buyers seeking more home for less money have moved to farther-out suburbs where land is cheaper. But they often don't fully account for higher transportation costs from hours behind the wheel, which will significantly cut into the real estate savings.
Transportation costs begin to exceed the savings from lower housing prices when households move 15 to 17 miles away from job centers, according to a new report, "Beltway Burden: The Combined Cost of Housing and Transportation in the Greater Washington, D.C., Metropolitan Area," produced by the institute's Terwilliger Center for Workforce Housing. The center promotes higher-density development that mixes housing for people with different incomes close to jobs, shopping and public transit. Across the broad Washington area, stretching from the Blue Ridge to the Chesapeake, residents spend an average of nearly $23,000 each year on housing and $13,000 on transportation, accounting for about 46 percent of the $78,221 median household income, according to the report. Even worse: We waste an average of 60 hours a year stuck in traffic.
The report is linked with a Web-based calculator that allows people to enter their data to figure out the housing/transportation cost trade-offs for different addresses. The tool, available at http://www.uli.org/costcalculator, is tailored to the Washington region. According to the Urban Land Institute's calculations, Fredericksburg has the region's lowest combined housing/transportation cost at $25,404 per year. That's because many residents are not making the morning migration north to a job in or close to the District. "Fredericksburg is a compact, walkable community where jobs are plentiful relative to its population size, and residents have access to work, amenities and services locally," the report says.
However, Fredericksburg residents also have the lowest median income of the metro area, at $46,007, which means a high proportion of their income, 55 percent, goes to just housing and transportation. Residents of Loudoun County pay the highest combined price, $46,435 per year, but they also enjoy the highest median income, $101,289, according to the report. So the combined bill is 46 percent of their income. "The absolute worst offender here is Loudoun County," said Jeffrey Lubell, executive director at the Center for Housing Policy, a nonprofit research organization that helped prepare the report. "Incomes are so high, and residents can afford multiple cars."
Affluent households may be fine bearing those costs. But, Lubell said, households with moderate incomes in such auto-dependent communities can struggle with the combined housing/transportation expense. "These people are very, very vulnerable to fluctuating gas prices," he said, "and over time they're going to be in a bind." Where can you find more balance between high wages and relatively low combined spending? The report says it's in Arlington, where combined housing/transportation spending hits $33,938 per year, on average, and median income is $87,398. Housing and transportation consume 39 percent of income. It also cites Montgomery County, where costs are $38,478 and median income is $89,628. Housing and transportation account for 43 percent of income.
In the District, combined expenses are $27,553, accounting for 49 percent of the $56,823 median income. And in Prince George's County, combined expenses are $32,409, accounting for 48 percent of the $68,124 median income. District residents are tops for walking, biking and using public transit, according to the report. Only 41 percent drive to work, the lowest proportion in the area. The biggest fans of the internal combustion engine are in Warren County, Va., where almost 93 percent of residents drive to work. You can enter your household's information to get a cost comparison that more closely reflects your real budget. Make the model estimate your actual commute by entering home and work addresses. Adjust it for your family size and income, the number of people who hold jobs, the number of vehicles in the driveway, current gas prices and even your car's fuel efficiency.
You can tweak the model to see whether taking public transit would lower your transportation expense or actually add to the cost. And you can easily enter multiple addresses to see how housing and transportation costs break down for different places that you're considering as a new home. The calculator also shows how your income and expenditures compare with the average for the neighborhood, based on Census data updated in 2006. The Urban Land Institute does not require registration and doesn't hand out your e-mail address.
Committee on Doubt and Uncertainty
Anyone trying to understand why the credit mess keeps getting messier needs only to have sat through Wednesday's hearing of the House Financial Services Committee. The eight bank CEOs were mere props. The stars were the politicians, who managed to demand more loans for consumers while simultaneously giving lenders new cause to wonder if they'll ever be repaid. This gathering of the esteemed Committee on Doubt and Uncertainty occurred as markets desperately need less of both. Chairman Barney Frank's hearing was intended to flay the CEOs for not lending enough. It fell flat as political theater because banks have actually increased their lending in recent months. The people who aren't lending more are investors in nonbank financing such as asset-backed securities. In fact, the nonbank credit market is normally much bigger than bank lending. But new issues backed by auto loans, credit cards and the like have been rare this year, as markets wonder how the government's next move will change the value of such investments.
Buyers and sellers of existing securities are "sitting on the sidelines," according to Asset-Backed Alert, waiting for still another Washington recalibration of risk and reward. Most investors who lend in these markets are not recipients of financial bailout money, so Congress can't simply browbeat them into making another big bet on the American consumer. They've been burned badly. They need reassurance that our capital markets operate with a consistent set of rules. The Committee on Doubt and Uncertainty offered only the assurance that the rules will keep changing. Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.
Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits. The safest bet is a huge new rescue of those who borrowed too much, and Mr. Geithner has already promised another $50 billion of your tax dollars. Meanwhile, Mr. Frank made clear that Congress's obsession with promoting homeownership is alive and well. He explained that his foreclosure moratorium pending the Geithner plan is to avoid a circumstance akin to a soldier who is killed after a ceasefire agreement but before the news has reached the front. Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office.
Maxine Waters (D., Calif.), for her part, demanded to know why some banks don't modify loan terms until borrowers are 60-days delinquent. Heck, why stop at mortgages? Shouldn't lenders convert all of their money-making contracts into losers? If potential investors weren't frightened enough, Nydia Velazquez (D., N.Y.) then seized the microphone. She demanded to know if the assembled CEOs would back "cramdown" legislation, which rewrites the bankruptcy code to allow judges to reduce the amount people owe on their mortgages. So investors who might have jumped back into housing now must calculate the odds that this provision will pass the Senate, and if it does, how much bankruptcy judges will reduce their overall returns. Goldman Sachs CEO Lloyd Blankfein pointed out that a potential consequence of bankruptcy cramdowns is that "less capital flows into this market."
The only CEO who sided with Rep. Velazquez was Citigroup's Vikram Pandit, who also agreed with nearly everything the politicians had to say. This is what a CEO does when his bank becomes a de facto ward of the state, as Citi now is. Unfortunately, Mr. Pandit's support for cramdowns will only discourage nongovernment investors in housing markets. All in all, just another day's work for the Committee on Doubt and Uncertainty, which continues to believe that proposing more ways to punish lenders will somehow produce more lending.
Once upon a time, we had what were called 'clearing banks'...
Recently I received a letter from a lawyer friend who retired from the City some years ago. Entitled "Thoughts of an Old Man on the UK Banking System", it traced the history of what we used to call "joint stock banks". They originated in reaction to the plethora of small "partnership" banks, "which not uncommonly went bust, the customers/depositors losing their money - a familiar scene in many a Victorian novel, the cause being frequently the imaginative use (by the directors/partners) of the customers' deposits ..."
As my friend went on to observe: "What the customers actually needed and wanted were institutions where the customer simply handed over his money and actually got it back when he asked for it". So were born the joint stock banks, known to later generations as the clearing banks, who met the need by, in effect, guaranteeing "no imagination" and "no bright ideas", just "a safe haven for your money". When my friend worked in the City, and when I first came into financial journalism, clearing banks provided current account facilities; they did not make long-term loans, and certainly did not lend against mortgages, which were the preserve of the building societies and institutions such as life assurance companies. These latter could look at their own books, see they did not need the money back until their own policies matured in (say) 20 years' time, and thus could safely make loans maturing in 20 years' time. Those seeking capital appreciation could use the stockmarket.
I have summarised my friend's analysis, which he modestly calls "oversimplified - yet I cannot help wondering if it did not have some advantages", adding "of course there were risks, but they were identifiable and more or less measurable". The letter ends with "perhaps Virgil got it right when he (nearly) said: 'Beware investment banks bearing bright ideas'." Well, as I wrote a few weeks ago, in the immortal words of Joseph (Catch 22) Heller, "Something Happened". Something happened with a very long fuse - a fuse lit long ago - winding through the City of London's Big Bang of the mid-1980s; all that fashionable deregulation; the demutualisation of the building societies; and then the repeal, in 1999, of the US Glass-Steagall Act, which had separated the activities of what the public knew as "banks" and the more (eventually very much more) risk-taking institutions euphemistically known as "investment banks" or, for a long time in the UK, until the US financial invasion, "merchant banks".
Glass-Steagall had been passed in 1933 to avoid a repetition of the speculative, leveraged excesses of the 1920s. The scene shifts to recent years and the present day, when the banking crisis has become a daily soap opera in the wake of the sinking of the financial Titanic. As Martin Weale, director of the National Institute of Economic and Social Research, observed recently: "People who think they can walk on water should not be surprised when they fall in." Some analysts are making comparisons with the 1930s, while a new branch of commentary has been founded on the belief that one should not make comparisons with the 1930s. But one minister, Ed Balls, the secretary of state for children, families and schools, has even suggested that the crisis may be even worse, and more protracted, than the 1930s. One detects here a presentational decision by New Labour to shift from claiming that the UK is uniquely placed to weather the storm to a desire to "talk up" the crisis so vociferously that, if worst does not come to the worst, the government may gain some last vestiges of credit.
But is it a good idea to talk up the crisis when those "animal spirits" of businessmen are so low - to say nothing of the mood of the general public? I wonder. The terrible thing is that Balls may be right. We do not know. But the sheer speed of what has become a "synchronised downturn" in the once-lauded globalised world economy is truly frightening. Industrial production and exports have recently been recording a year-on-year decline in double-digit percentages, and the big fear of those organising the G20 meeting in London in April and the G8 world economic summit in Sardinia in July is the palpable growth of protectionist sentiment around the world. In his much publicised statement that the British economy was in "deep recession" last week, the governor of the Bank of England, Mervyn King, warned that "the length and depth of the recession will depend to a significant extent on developments in the rest of the world, where a severe economic downturn has taken hold."
Some bad things come to an end. As King said in January, "time is a great healer, even of banks". But it is disturbing that on both sides of the Atlantic the reaction to the banking crisis has been faltering and piecemeal on the part of governments, which seem too frightened to acknowledge that the best way out of this may be to write off the old system, set up new state banks, and allow a chastened private sector to develop when financial confidence has been restored - a sector that separates old-fashioned banking from outright risk-taking. As for bonuses, I give you the admission by John Mack, chief executive of Morgan Stanley: "We love what we do. If you gave me no bonus in the best of years, I'd still be here." But back to Joseph Heller: "Something did happen to me somewhere that robbed me of confidence and courage, and left me with a positive dread of everything unknown that might occur." For Heller's narrator, read the globalised financial system.
Pontiac, Michigan: Half of district’s 20 schools to be closed
The Pontiac School Board announced in late January that it would close nine of the twenty schools in the district, including half of the elementary schools, in the face of a projected $10 million deficit for the 2009-2010 school year. The proposed draconian cuts graphically illustrate the demise of Pontiac, a city made famous by the popular General Motors cars built there. This once teeming auto town has a long and proud history. Pontiac became a GM town exactly 100 years ago, when the company purchased Oakland Motor Car Company in 1909.
GM pioneered the Pontiac brand, borrowing the name of the town that honored the courageous Native American chieftain who united tribes between the Mississippi, Florida and Canada to fight the British in 1763. The city’s name was adopted for the “athletic, performance” division, Pontiac Motors, in 1946 and would also become the birthplace of GM’s sprawling Truck and Bus Division. Alongside the demise of the car that bears its name—the Pontiac has been relegated to a “niche” brand as of December 2008—the city has been devastated by the overall collapse of the auto industry.
The GM Truck and Bus plant was a three-plant facility that once employed tens of thousands of autoworkers producing trucks, motor homes and buses. It closed in 2005. Pontiac Assembly has a vastly reduced workforce of about 1,000 workers. Even before auto manufacturing came to the city, Pontiac had a proud tradition of cultural development. Its central location and well-kept homes and neighborhoods attracted working people and professionals. Woolen and gristmills made use of the Clinton River as a power source in the 19th century, and a railroad was built through the downtown area in 1844.
In 1849, Central High School became one of the first accredited high schools in the state. It is now one of the schools slated to shut down. These latest cuts are in addition to the six schools that have been closed in the last five years. In addition to Pontiac Central, the district plans to close Lincoln Middle School and Bethune School, an alternative high school for grades 10-12. Crofoot, Emerson, Franklin, LeBaron and Longfellow elementary schools will be shuttered along with the Dana P. Whitmer Human Resources Center.
School enrollment in Pontiac has dropped from 8,000 at the end of the 2007-2008 school years, to about 7,200 today. The school board voted to merge the two high schools into one, with the same process applied to the middle and elementary schools. The district is proposing to change from a neighborhood school system to an attendance center school system. For elementary students, this would mean one of the three schools would have Pre-K through 1st graders, another, second and third graders, and the other fourth and fifth graders. This would create conditions where elementary-aged children from one family could be attending three different schools, traveling longer distances to get there.
School officials made the cuts on the recommendation of an advisory panel consisting of teachers union members, parents and community leaders. No one in an official capacity has acknowledged intended layoffs in the coming year, although job cuts appear highly likely. One news report said the district would try to sell or repurpose the closed facilities. Pontiac Education Association President Irma Collins, head of the teachers union, supports the closures, telling the Detroit News, “The board should have voted to close one of the high schools at least three years ago.”
However, Collins acknowledged the danger of overcrowding in the elementary schools. “They’re closing too many elementary schools,” she said. “Students are not going to be leaving the district in large numbers and the classrooms are going to be overcrowded, even though the union contracts say we have a limit. We’re not going to be having the teachers taking on 40 students in a classroom.” A review of the city’s economic indices explains why the school system is declining. Michigan’s unemployment rate is 10.6 percent, the highest in the country. Pontiac is a ghost of its past with an official unemployment rate of 15.1 percent, one of the highest in the state.
According to the US Census, nearly a third of Pontiac’s residents—31.3 percent—live below the poverty line, one of the highest levels in the state. The poverty rate for children under 18 is a staggering 43 percent, the highest in Oakland County. Pontiac’s children are 10 times more likely to be impoverished than children south of the city’s border in neighboring Bloomfield Hills. Pontiac’s mayor, Clarence Phillips, told the media that of the 12,786 owner-occupied housing units in the city last year, over 1,000 foreclosures took place, with as many or more expected in 2009. The state of Michigan lost 200,000 manufacturing jobs between 2000 and 2007, the overwhelming majority in auto and related industries. The combined losses of jobs and tax revenues have devastated Pontiac, where median household income has now fallen to $31,000 per year, far below the national median of $44,334.
This figure is particularly stark when considering that autoworkers—with their families in the past forming the core of the Pontiac community—were previously the highest paid non-skilled workers in the US. All this has changed—beginning with the concessions granted by the United Auto Workers union in the 1980s, followed by a steady erosion of auto jobs and plant shutdowns. The population of Pontiac is presently 66,337. Unlike Detroit, it is a racially diverse city, with a population comprised of 39.09 percent white, 47.92 percent black, and 12.7 percent Hispanic. This diversity was clearly reflected at Pontiac’s Central High School when the WSWS visited recently.
Dr. Brian Yancy, head principal at Pontiac Central, spoke about the impact of the cuts on the school and its history. Yancy, a former Central student, has only been on the job for one-and-a-half years. “I’m one of those who will possibly face the loss of their jobs,” stated Yancy. When asked why the cuts were taking place, Yancy said the cuts were the result of the combined effect of diminished state funding due to declining enrollment and a decline in local property taxes because people have moved out of the area. “As we don’t sell cars, that funding begins to be depleted,” he said.
Yancy said the greatest amount of money comes from the state, based on head count. “So, as the economy declines and people move out of the area, by necessity they take their children with them. And so you get a collateral drop in enrollment because of that.” Yancy said the poverty level is very high in the school. “Our poverty levels are so high that we have a ‘school-wide’ lunch program. It is more efficient to say that everybody in the building is in poverty than to try to tease out the small percentages that are left.”
Despite the poverty, Yancy said he was proud of the school and felt the students had a positive attitude about their capabilities. “The sports program has a history that is unrivaled in the state,” stated Yancy, adding that no other school can claim to have had two Olympic gold medalists, one in track and field and the other in swimming. Yancy said the school has one of the finest marching and concert bands in the country and participated in the statewide contest in robotics. “Central is the oldest accredited school in the state,” he added. “It was established in 1849 and has the largest alumni association in the state. It is coming up to its 150th anniversary. This is what disheartens people in the community and the surrounding area about Pontiac Central.”
Despite his fondness for the school, Yancy said he agreed with the decision of the board to close the schools, believing the board had to respond responsibly to the loss in student enrollment. Many students and parents in the region, however, were opposed to the cuts and were concerned that more wasn’t being done to put more money into the school system. Like many distressed inner-city areas, Pontiac is plagued by gang activity. Devin Fears, a student at Central, told the WSWS that he was concerned that the school mergers would intensify this problem.
“People are worried,” Devin said. “If there were no gangs, it would be good. The sports teams in both schools are good. It’s just that there are too many gangs in both schools. People are starting to get hurt.” The WSWS spoke to a number of Pontiac residents, who expressed their concern and anger over the proposed school closings. “The schools are supported by the public,” commented Jason Burcham, who said he was concerned about the impact it will have on the entire city. He said a good school system is “one of the ways to bring quality to the district.”
“It’s like the chicken or the egg,” Jason added. “We need the investment in schools; otherwise we will have more abandoned houses. It’s a vicious cycle.” Gwen Reed did not agree with the cuts. “I don’t think it is a good idea. They have already closed a lot of schools. It’s hard on everyone to get kids to school as it is. It will be even harder with the cuts.” Nitzia Rodriquez also opposed the school closings. “It’s a shame, really,” said Nitzia. “It’s going to be chaotic. The government needs to step forward and help the districts. They should stop wasting it on other things like wars.”
GM, UAW talks break off and Chrysler talks stall
Talks between the United Auto Workers and General Motors Corp central to a turnaround plan for the struggling automaker have broken down over the issue of retiree healthcare costs, a person briefed on the talks said on Saturday. A parallel set of talks between Chrysler LLC and the UAW over similar concessions were continuing over the weekend but little progress had been made, a person briefed on those negotiations said. The breakdown of talks at GM and the stalled negotiations at Chrysler come with just three days remaining until both automakers must submit new restructuring plans to the U.S. government as a condition of the $17.4 billion in federal aid that has kept them both operating since the start of the year.
"It doesn't seem like the stakeholders are really prepared to give a whole lot," said independent auto industry analyst Erich Merkle. "It's a high-stakes game of poker right now." If GM cannot win agreement from the UAW and creditors to reduce its debt, analysts say the Obama administration will face a politically tough choice: either pump billions of dollars more into the struggling automaker or steer it toward bankruptcy as some critics of the bailout have urged. UAW negotiators walked away from talks being held near GM's Detroit headquarters on Friday night because of differences over how to pay the health care costs of retirees, the person familiar with the talks said.
Under Chief Executive Rick Wagoner, GM has resisted suggestions that it would be better able to restructure under a court-supervised bankruptcy. Wagoner and other executives have argued that consumers would shun GM cars and trucks if it were in bankruptcy, sending already weak sales into an irreversible tailspin. But in recent weeks, senior executives at the automaker have become more open to the prospect of a bankruptcy filing, a person involved in the talks said. GM declined to comment directly on the state of negotiations with the union. "We are committed to meeting the terms of the bridge loan and executing our restructuring plan," GM spokeswoman Renee Rashid-Merem said.
Chrysler said it was also committed to meeting the terms of the federal bailout, which requires both automakers to reduce labor costs and the amount owed to a UAW-affiliated fund. "We continue to engage all of our stakeholder groups as we work through this process," Chrysler said in a statement. UAW representatives were not immediately available. The UAW is owed some $20 billion by GM, money pledged to a healthcare trust for retirees. The union faces demands that it surrender its claim to half of that amount in exchange for stock in a recapitalized GM under the terms of the federal bailout for the automaker. GM and the UAW agreed to create the retiree health-care fund as part of a 2007 labor agreement the automaker hailed at the time as a way for it to shift a crippling liability from its balance sheet.
But the steep slide in U.S. auto sales in late 2008 overwhelmed GM's attempts to cut costs and raise cash on its own, leaving it unable to survive without federal loans and unable to fund its commitment to the union trust fund. For his part, UAW President Ron Gettelfinger has balked at saddling retired workers with additional risk by taking devalued GM stock instead of cash. GM's bondholders, who are being asked to write off some $18 billion in debt in exchange for GM stock, have also held out for better terms, people briefed on the talks have said. GM has received $9.4 billion from the U.S. government and has been pledged another $4 billion if it can show it can be viable at a time when U.S. auto sales are near 30-year lows.
The Wall Street Journal reported on Saturday that one scenario being considered by GM would put its viable assets, including international operations, into a single company. Other assets would be sold under the protection of a bankruptcy court, the newspaper said. A bankruptcy filing would allow GM to rework its contracts with creditors, the UAW, dealers and its suppliers. But it would also mean even steeper job losses. GM, Chrysler and Ford Motor Co have cut 250,000 jobs since the start of the decade and are looking to cut more. A bankruptcy by one of the U.S. automakers could also trigger a wave of failures among parts suppliers. That industry is seeking $18.5 billion in federal aid and has warned that 1 million jobs could be lost if the industry collapses.
Chrysler has been given $4 billion in emergency funding from the U.S. Treasury and is seeking another $3 billion. Chrysler has said it will present two restructuring plans. One will show its prospects as a stand-alone company now owned by private equity firm Cerberus Capital Management. A second scenario will show Chrysler's prospects under a tie-up with Italy's Fiat SpA. Fiat has agreed to take a 35 percent stake in Chrysler in exchange for access to its small-car technology and development efforts if the U.S. automaker can be made viable.
Sweeping California budget plan in big trouble; Dems still need one more GOP vote
A sweeping plan to pull California government back from the brink of insolvency was on the verge of defeat this morning— by a single vote.
As bleary-eyed lawmakers debated the $41 billion package of tax hikes and spending cuts into the wee hours of the night, optimism that it would garner the two-thirds majorities it needed to pass began to fade. The votes were there in the Assembly in favor of the proposal to close the state's colossal deficit. But in the Senate, only two Republican senators appeared ready to buck party orthodoxy and vote to raise taxes. Three were needed. The plan's prospects severely dimmed this morning when Sen. Abel Maldonado, in an interview with the Mercury News, all but ruled out voting for the measure while pointedly criticizing Gov. Arnold Schwarzenegger as well as the Republican Senate leader. Maldonado, a moderate Republican whose district stretches from Los Gatos to Santa Maria, was seen as the last best hope for securing the final GOP vote needed to get the deficit plan over the two-thirds hump.
"I've always been a person who's been open-minded and tried to bring both sides together," Maldonado said. "But on this one, where they're asking for almost $15 billion in tax increases, it just goes against what I believe in my heart and my values." Maldonado added, "There's nothing they can give me that would make me vote for this budget." The senator went on to question the leadership of Schwarzenegger and Senate Republican leader Dave Cogdill of Fresno. Maldonado and Schwarzenegger have a tense relationship: In 2006, the senator publicly criticized the governor for not backing his unsuccessful campaign for state controller. "Where was he when I needed him?" Maldonado said of Schwarzenegger. Asked for his answer to the state's budget mess, Maldonado directed his criticism toward Cogdill, who helped negotiate the package of spending cuts and tax hikes.
"The solution is my leader stepping up to the plate," Maldonado said. "There's a difference between managing a caucus and leading a caucus." Maldonado's remarks were a serious blow to the deficit plan's hopes. When told of his comments, the Senate Democratic leader, Darrell Steinberg, appeared dejected.
"I have great respect for Abel," Steinberg said. "There's too much at stake to give up on anyone." For much of the night, the plan — and possibly California's fiscal health — appeared to be riding on the back of Sen. Dave Cox, R-Roseville, the man identified by many as the crucial third Republican vote. But when voting began on Saturday night, Cox voted against one of the package's key measures, and he showed no sign later of changing his mind. Steinberg was seen leading Cox into his office after midnight in an attempt to win the Republican over, and Schwarzenegger tried to cajole the senator, too.
But at 3:30 a.m., Cox told reporters he wasn't budging. "I've made a decision," he said. "The answer is no." After Cox made his decision, Steinberg huddled with Maldonado, but apparently to no avail. In one telling sign of the competing pressures, just before the Democatic leader approached him Maldonaldo was seen looking at the Web page of conservative talk radio personalities who vowed to put the "head on a stick" of any Republican who voted to raise taxes. Hours passed. As dawn arrived, Steinberg and Bass kept lawmakers locked inside the Capitol, hoping that sheer exhaustion might cause one more Republican to switch sides and call it a day. Some legislative aides retreated to their offices and changed into pajamas. The turn of events could hardly have been more stark from hours earlier, when Democratic leaders all but guaranteed victory. "I feel confident the Legislature and certainly the people of California are ready to put this crisis behind them," Steinberg told the Mercury News on Saturday afternoon. "It may take a few hours tonight, but we're going to get this done."
Assembly Speaker Karen Bass, D-Los Angeles, was even more upbeat. "I know I have the votes, and I know the Republican votes are there,'' she told reporters on the Assembly floor before the votes began. "I know we're going to finish this tonight.'' But once the voting began in the Senate, it became clear it would not be an easy night for the Democratic leadership. The $41 billion package — composed of 27 bills and constitutional amendments — was taken up late Saturday night and this morning in marathon sessions in the Assembly and Senate. Debates had been scheduled for Saturday morning but were pushed back to about 9 p.m. to give lawmakers more time to review the bills, which were written on the fly and first distributed to legislators Friday night. All but one component of the plan requires a two-thirds vote. That means for it to pass, every Democrat and at least three Republicans were needed in both the Assembly and Senate. Many political observers predicted the Senate would be much tougher terrain than the Assembly.
One conservative Democrat from Santa Ana in Orange County, Sen. Lou Correa, has long opposed higher taxes, and many Republican senators leading up to the vote indicated that they would vote no. But after budget negotiators in recent days agreed to insert a provision in one of the budget bills that would send tens of millions of dollars in additional property tax revenue to Orange County, Correa's vote was secured. And a Republican assemblyman who pledged his vote, Anthony Adams of Hesperia, was rewarded with a provision to help a redevelopment agency in his district. On a broader level, the plan includes $15.1 billion in spending cuts, $14.4 billion in tax increases and $11.4 billion in borrowing, plus a $1.3 billion reserve. Taxes would be raised on retail sales (one penny on the dollar), personal income (a 2.5 percent or 5 percent surtax on a person's state income tax bill), gasoline (12 cents a gallon), and vehicle registration (1.15 percent of a car's value, up from 0.65 percent currently). An income tax deduction for dependents would be cut from $300 to $100.
The tax increases would be tied to the fate of a ballot measure in June to limit state spending growth to roughly 4 percent to 6 percent annually. If the spending cap passes, the taxes would last for four years (except the sales tax, which would last three); if voters defeat the spending limit, the taxes would expire after two years.
The tax increases are paired with some deep spending cuts. The plan would cut public school funding by $8.6 billion, although much of that would be paid back in future years. Universities would face a 10 percent across-the-board cut; welfare programs and services for the disabled and elderly would also take a hit. The plan also contains a number of sweeteners to help win Republican support. Corporations with significant out-of-state sales would get a break on their state income taxes, a proposal that would cost the state treasury $690 million per year initially and $1.5 billion annually over time. Small businesses would receive a $3,000 tax credit for every new employee they hire.
Many of the plan's provisions had been defeated in the past when presented as stand-alone measures. But the budget package had to include major concessions for both sides to have any chance of passing, and both parties took advantage of the opportunity. Just before lawmakers began wrangling over the budget, the Schwarzenegger administration on Saturday reached a contract agreement with the largest state employee union, SEIU Local 1000, that will reduce the number of unpaid furlough days they were being forced to take from two to one a month — the equivalent of a 4.6 percent pay cut. The deal also eliminates two state holidays for state workers who are part of the union, which represents 95,000 employees, about half of state government's rank-and-file workers. They would receive two additional personal days off instead. The proposal saves the state money by reducing overtime pay to staff essential jobs during holidays. Schwarzenegger's staff is negotiating with most of the other state government unions, and it is likely that similar agreements will be reached.
Denver-area housing market long on short sales
A newly renovated home on a quiet, tree-lined street near City Park sold last November for $387,000 -- $125,280 less than the balance due on the mortgage. A McMansion in Evergreen was going to be sold for $1.5 million when construction started two years ago, but now the lender is mulling a $375,000 offer for the partially completed house. A 1,522-square-foot home in Aurora is on the market for $119,900, almost a third lower than what the owners paid for it in the spring of 2002. All are examples of short sales. A short sale is when a lender allows a homeowner to sell the home for less than the mortgage balance, avoiding a lengthy and costly foreclosure. The bank gains because it typically loses about half the amount with a short sale as with a foreclosure. And while the homeowner still loses the home and gets no money, as the owner would in a foreclosure, short sales are less damaging to credit records.
And investors and buyers of homes can get screaming deals, much like buying a foreclosed home from a bank. The downside is that short sales are lengthy, time-consuming and complicated transactions that frustrate home sellers, buyers and investors. In addition, the Colorado Division of Real Estate is investigating companies that do not fully disclose to all parties involved in the short sale transactions that involve "simultaneous sales." In these deals, the company will buy the home for less than the mortgage amount and immediately sell it to someone else for a profit. There's nothing wrong with that, as long the homeowner selling the property and the two banks - the original lender and the one providing the loan to the new buyer - are aware of what is going on, said Zachary Urban of the commission. A report last week by Zillow.com said that 11.4 percent of the homes sold in 2008 in the Denver area were short sales, compared with 10.9 percent nationwide. But not everyone is sold.
One broker called them a "colossal waste of time," and a prominent lender said the hype is overblown. Still, the concept appears to be gaining ground. "Five years ago, no one knew what a short sale was," said Ed Jalowsky, owner of Hottest Homes Realty. "Now, every home being sold in the Denver area for less than $300,000 is a short sale - or at least that is the way it seems," he said. A Denver Tech Center-based company, REALsponsible, believes it is taking the industry to a new level by offering one-stop shopping for all of the parties involved in a short sale: homeowners facing foreclosure, banks and buyers. The market for short sales is huge and is just starting to be tapped, said Jason Byrne, one of the company's three principals. "We think of ourselves as the 'thought leaders,' in wholesale short sales," he said. "I think foreclosures will grow to be as big as the Resolution Trust Corp. by a factor of at least 10."
The RTC, created by Congress in 1989, took control of troubled assets owned by failed savings and loans, selling about $500 billion in collapsed real estate and bad loans at huge discounts. Colorado was especially hard hit because the S&Ls had been big players here during the oil boom days of the mid-1980s. REALsponsible, which uses a line of credit from its investors to buy homes, renovates them and then sells or rents the houses, has completed about 90 short sales in the past year. It is looking to expand to areas with lots of foreclosures, such as California, Las Vegas, Phoenix and Florida. Short sales can provide great deals for buyers. Joe Manzanares of RE/MAX Leaders, who represents a buyer willing to pay $375,000 for the partially completed home in Evergreen, said if Countrywide Financial accepts the offer, it will be one of the "craziest" deals he has ever seen. Of course, the cash buyer he has lined up will have to pump at least a couple of hundred thousand dollars into the home to finish it.
But not everyone agrees that short sales are taking off or worth it. Jim Smith, owner of Golden Real Estate, had this to say about them this week in his online real estate column: "Having listed a short sale myself, I have experienced this colossal waste of time, and I'm no longer willing to list such homes." Smith said banks won't tell you the amount they will accept until you bring them a "live" contract, and the deals usually fall apart because it takes such a long time to get an answer from the lender. Lou Barnes, principal of Boulder West Financial, agrees. There are so few short sales being completed that they aren't worth the effort, Barnes said. "I was teaching a real estate class and I told my students that they would be better off doing their laundry than wasting their times on short sales," Barnes said. His skepticism is based on a national report by the Federal Housing Finance Agency, which was created last July to oversee Fannie Mae and Freddie Mac. The report showed only 1,721 short sales completed in the U.S. in September and 9,521 in the first three quarters of 2008. Jalowsky and others can't believe those numbers are correct. "It's probably 90 percent of my business," said Jalowsky, who completed about 60 of them in the past year.
SHORT SALE SNAPSHOT
* What it is: A short sale is when the seller's mortgage lender accepts a payoff less than the balance due on the loan.
* Who is eligible: Homeowners typically need to be behind on their mortgage payments, be able to provide a legitimate hardship and have little or no equity in their homes.
* Advantage to sellers: Typically, a seller, once back on his or her feet financially, can buy a home in another two years, instead of the five to seven years following a foreclosure. Also, a short sale is typically less damaging to a credit rating than a foreclosure.
* Advantage to lenders: Studies show that lenders lose far more money with a foreclosure than with a short sale.
* Disadvantages: Short sales take a lot of time. Many investors and home buyers walk away from a deal because the bank has dragged its feet on accepting a short sale offer. Many troubled homes have at least two loans on them, and it is difficult to get the second lien-holder to agree to the short sale. Also, as with a foreclosure, the homeowner still loses the house.
* How to find short sales: Metrolist now requires Realtors to list homes on the market that are short sales.
Is 'Octomom' America's Future?
A moment last Monday, just after noon, in Manhattan. It's slightly overcast, not cold, a good day for walking. I'm in the 90s on Fifth heading south, enjoying the broad avenue, the trees, the wide cobblestone walkway that rings Central Park. Suddenly I realize: Something's odd here. Something's strange. It's quiet. I can hear each car go by. The traffic's not an indistinct roar. The sidewalks aren't full, as they normally are. It's like a holiday, but it's not, it's the middle of a business day in February. I thought back to two weeks before when a friend and I zoomed down Park Avenue at evening rush hour in what should have been bumper-to-bumper traffic. This is New York five months into hard times. One senses it, for the first time: a shift in energy. Something new has taken hold, a new air of peace, perhaps, or tentativeness. The old hustle and bustle, the wild and daily assertion of dynamism, is calmed.
And now Washington becomes the financial capital of the country, of the world. Oh, what a status shift. Oh, what a fact. If you want to feel the bruise of what's happened, pick a neighborhood full of shops and go up and down the street. Here's Second Avenue in the 80s. A jewelry and consignment store on 84th has a new sign on the window: "We Buy Gold." Paul is at the counter, spraying the tarnish off a silver chain. How's business? "No buyin', no sellin', no nothin'. It's a joke. People scared. They're in shock." Nearby, an empty storefront, a bar that had been in business only 10 months. The sign on the window—you see it all over Manhattan now—says, "Retail Space Available." Next door, in a small beauty salon, the owner says "We're trying to survive." In September business plummeted. It's down "at least 30%," she says. July and August had been surprisingly good; her clients didn't go away on vacation. In the fall they were fired. "They lost the job, so they don't need to cut and color so much." In a liquor store just off 82nd, the owner, from India, says volume is still high but profits are down. "In business, if you have a product under $15, is good. People used to spend $70, $80 on a bottle of wine, all the bankers, the young kids. Nothing moving more than $15."
On 81st, the kosher restaurant has closed. On 79th, the Talbots is gone. "Left a few months ago," says the doorman next door. Turn down to Madison Avenue in the 80s. A high-end butcher who's been in the neighborhood more than 30 years is moving to the West Side because his rent has been raised more than he can afford. Why are landlords raising rents in a recession? It's not landlords, he says, you can reason with them, it's co-op boards that own a building. The people in the apartments upstairs are paying high maintenance, and they're worried about their jobs, their businesses, their bonuses. So they raise the rent on the shop downstairs to cut their maintenance. When the shopkeeper says he'll move and who'll take his place in this economy, the boards say, "It's Madison Avenue, we'll be able to rent it." He says, "They will for a while. But not if it gets worse." The windows of the Jil Sander shop on Madison off 79th are newly covered in paper. A sign says they plan to relocate. How's business in the small art gallery down the street? "It's soft," the owner says, discreetly.
At 84th and Madison, a ladies boutique has a new sale: "Buy 2 sale items (already marked down 50% off) 3rd item Free!" The Boltons on 86th and Madison, gone. The shoe store three doors down, gone. The children's boutique off 87th, gone. Not all the news is bad—there's a new department store coming in—but people don't close up shop when the immediate future is promising. And every day there's a new surprise. Wednesday it was the little French dress shop on 91st and Madison. The sale sign in the front window said 80% off. "Is she moving?" I asked a woman in line for the dressing room. "She's closing," she said. Politicians keep saying, "People have to begin to understand we're in bad shape," and "People should realize it's a crisis." I think they know, Sherlock. Do you? Our political leaders are like a doctor who rushes to the scene of a terrible crash, bends over a hemorrhaging woman and says, "This is serious, lady, you can't take it lightly." She looks up at him: "Help me, do something, I'm bleeding out!" The doctor, to the local TV cameras: "I hope she knows she's in trouble."
There's a sense that everyone's digging in. President Obama has dug in on this stimulus bill: Pass it or see catastrophe. Republicans are dug in: Pass it and see catastrophe. The digging in is a way of showing certitude, and they're showing certitude because they're lost. We hire politicians to know what to do about empty stores, job loss, and "Retail Space Available." But they don't, and more than ever we know they don't. And there's something else, not only in Manhattan but throughout the country. A major reason people are blue about the future is not the stores, not the Treasury secretary, not everyone digging in. It is those things, but it's more than that, and deeper. It's Sully and Suleman, the pilot and "Octomom," the two great stories that are twinned with the era. Sully, the airline captain who saved 155 lives by landing that plane just right—level wings, nose up, tail down, plant that baby, get everyone out, get them counted, and then, at night, wonder what you could have done better. You know the reaction of the people of our country to Chesley B. Sullenberger III: They shake their heads, and tears come to their eyes. He is cool, modest, competent, tough in the good way. He's the only one who doesn't applaud Sully. He was just doing his job.
This is why people are so moved: We're still making Sullys. We're still making those mythic Americans, those steely-eyed rocket men. Like Alan Shepard in the Mercury rocket: "Come on and light this candle." But Sully, 58, Air Force Academy '73, was shaped and formed by the old America, and educated in an ethos in which a certain style of manhood—of personhood—was held high. What we fear we're making more of these days is Nadya Suleman. The dizzy, selfish, self-dramatizing 33-year-old mother who had six small children and then a week ago eight more because, well, she always wanted a big family. "Suley" doubletalks with the best of them, she doubletalks with profound ease. She is like Blago without the charm. She had needs and took proactive steps to meet them, and those who don't approve are limited, which must be sad for them. She leaves anchorwomen slack-jawed: How do you rough up a woman who's still lactating? She seems aware of their predicament. Any great nation would worry at closed-up shops and a professional governing class that doesn't have a clue what to do. But a great nation that fears, deep down, that it may be becoming more Suley than Sully—that nation will enter a true depression.
Government must help oil industry ... or lose $1,000,000,000,000 in tax
The leading light of Scotland's oil and gas sector has issued his strongest warning yet that government intervention is needed to protect the long-term potential of the industry in the face of the worldwide recession. Sir Ian Wood, chairman of Wood Group, also predicted that failure to act now could undermine the UK economy's overall recovery when the upturn comes, and could cost the Treasury around $1 trillion (£700 billion) in lost tax revenue. Speaking to the Sunday Herald, the Aberdeen oil baron who turned his father's fishing company into a global energy giant, said he was "absolutely confident" about the long-term future of the North Sea industry.
But he believes that action in the short term would help the sector weather the problems created by the precipitous decline from last summer's oil price. He said: "I don't think we will see the price go back to $140 per barrel, but it will go back to $70, $80 or $90 from the current $45. We are looking at an uncertain window just now, but our price will recover quite significantly. "What the UK needs to do is work out how to tackle the short term challenges. What we don't want to see happen in the short term is a significant downturn which means the loss of people, resources and investment from the North Sea. The worst thing that can happen is that we lose skills and investment and struggle to pick up again on the other side of this."
Last week, the annual Oil & Gas UK (UKOOA) report predicted that as many as 50,000 jobs could be at risk in the North Sea industry due to a combination of low oil prices and freezing of capital investment. Malcolm Webb, the chief executive of UKOOA, called on the government for assistance and described the industry as being "at a crossroads". That view was echoed by Wood, who said that there were steps that both the government and the industry can take. "The government should be encouraging exploration," he said. "This sector has the highest level of taxation of any industry, in some cases the combination of taxes can be as high as 70%. "That is viable if the price is $145, but not at $45. There is a case for looking at those levels."
Wood also outlined how failure to do so could affect government coffers in the long run: "If you take a worst case scenario and you are only able to recover 15 billion barrels rather than a reasonable scenario of 25 billion barrels, that is a difference of 10 billion barrels at, perhaps $100 per barrel. That is $1 trillion lost to the economy." With the government increasing public borrowing to cope with the economic crisis, that revenue could, according to Wood, make a significant contribution to the UK's recovery. Recent speculation has centred on the possibility that some fields in the UK Continental Shelf could be snapped up by foreign investors, particularly from the Middle East or China, if smaller exploration companies go to the wall.
But Wood points to the fact that the North Sea has always attracted foreign investment. "I think that is a complete distraction," he said. "We have a whole lot of foreign companies working in the North Sea. One of them at the moment is TAQA, which is from Abu Dhabi. We are working with them. I don't see why we should look at that any differently from an American company or a Japanese company. "We want to attract people into the North Sea to carry out exploration and production and help us. I don't see why we would create some sort of emotive protectionism."
In the 1990s, Wood was one of the first in the industry to recognise the potential of exporting expertise gained and technology developed in the North Sea to foreign oil fields. He now sees further growth if the current economic crisis is handled properly. "I think Scotland has now moved on and I don't think now we are just looking for Scottish companies to become international. We are now looking to try to ensure that Scotland, long term, becomes the oil and gas base for the eastern hemisphere. "That is very important for the UK, and that is a reason why we don't want to lose momentum in the next few years. We should be looking at the Houston effect where a lot of the US industry is based in Houston. I would like Scotland to achieve that and I think that it is possible," he said.
£30 billion loss at RBS prompts savage job cuts
Royal Bank of Scotland boss Stephen Hester is to unveil a brutal cost-cutting exercise, alongside record losses of close to £30 billion, that are expected to lead to a further 10,000 to 20,000 job cuts. Hester has told his most senior lieutenants to draw up a new business plan, measured against five key financial metrics. The move will lead to hundreds of millions being stripped from the bank’s global cost base over the next three to five years. The project is also expected to see the bank exit a number of countries in emerging markets, and sell off dozens of businesses now deemed to be non-core.
RBS is considering selling off parts of ABN Amro that it acquired in 2007 as part of a three-way consortium with Spain’s Santander and Belgian bank Fortis.
It has already begun talks with the Dutch government, which may acquire certain operations in the Netherlands and parts of the group’s international operations.
RBS is expected to retain an international commercial-banking network as part of the review, but to scale back operations in countries such as Slovakia, Romania and Uzbekistan. Hester is finalising details of the plans ahead of the bank’s announcement of its results next week which are expected to reveal losses and impairments of £7 billion£8 billion and up to £20 billion in goodwill writedowns related to the ABN deal.
The bank has already axed 13,000 jobs internationally since last April, including 3,000 in its investment-banking business. Johnny Cameron, former head of the group’s global banking and markets business, will leave RBS at the end of this month without receiving a pay-off, according to sources close to the bank.
RBS announced 2,300 British job cuts last week, shortly after the bank’s former chief executive Sir Fred Goodwin was grilled by the Treasury committee. Hester and his advisers remain locked in talks with the Treasury over the government’s asset-protection scheme – the insurance deal designed to protect the bank from further losses.
Banking sources say the complex structure of the deal means a final agreement may not be ready in time for the bank’s results. Disagreements over the costs of the scheme and the level of protection offered have bogged down the discussions. However, both the banks and the government are believed to be reluctant to see the creation of a “bad bank” to buy the assets. Such a move could create further capital problems for the banks.
Who would credit the word of banking's knights-erroneous?
When historians come to judge the least edifying patronage scandal of recent years, it will not be cash for honours, which anyone with half a brain realised has been happening since time immemorial. No, they will surely settle on financial collapse for honours, the enchanting outreach programme whereby bankers were given baubles, government jobs and taskforces to chair, on the basis that extremely rich men must be right (I paraphrase slightly). I am as shocked as the next person that extremely rich men have turned out to be wrong, and this week watched the Treasury select committee grill those four senior bankers: see-no-evil, hear-no-evil, speak-no-evil, and please-no-call-me-evil. Which did you think was the ghastliest? I thought ex-HBOS man Andy Hornby, because he was the youngest-looking one, while the others already resembled fully fossilised city gents. It's a bit like why Davros was the most disturbing Dr Who villain. You could still glimpse the humanity.
And indeed, even looking at the desk place-names in that committee room there was a poignant sense of promise cut off at the knees, when comparing plain old Andy's card with those of his co-defendants - "Lord Stevenson", "Sir Tom McKillop", "Sir Fred Goodwin". Poor Andy has yet to get his title, and one suspects it will not be the inevitability it once was in his line of work. But what a feeder club the City has been, with Labour having given 23 bankers honours since 1997. Four of them scored life peerages, and seven were knighted. Three were made government ministers, two appointed to senior posts within Downing Street, 10 have been placed on eminent councils, seven on agencies and quangos, while just the 37 have been drafted in to head up taskforces, or sit on commissions and advisory bodies.
How errant were these knights - and how erroneous. Indeed, as we survey the wreckage of the banking system, the worry is rather less that they were given titles than that they were given responsibility in so many areas of government policy. These were not sinecures. Goodwin headed up taskforces examining both the New Deal and credit unions. Yesterday I unearthed his 2006 appearance before the Treasury committee, which praised him for opening basic bank accounts. "There seems to be coming through quite a strong strand of public accountability and social conscience rather than profit," they fawned. Sir Fred's reply? "I think they work hand in hand ..." It would be funny if it weren't so bleeding tragic. Fred's social conscience appears to have been a demented expansionist dream that brought about the biggest losses in UK corporate history. It does rather make one wonder if his work on the New Deal and credit unions should be rehoused in a government file marked Do The Opposite Of This.
Then of course there was former HBOS chief Sir James Crosby, who had done so much to drive mortgage insanity that he was naturally charged with reviewing the ailing mortgage market. He also headed the ID cards taskforce. And let's not forget Sir Derek Wanless, assigned the even littler matter of mapping the future of the NHS. Among his conclusions were a recommendation to tax junk food (amazing how non-laissez faire these bankers are when it comes to people other than themselves), and lots of lectures about the public needing to "take responsibility" for themselves. We all have our limits, and I think being invited to consider the risks of a second portion of chips by a bloke who sat mutely on the Northern Rock audit and risk committee is probably mine.
Alas, there isn't the space to continue this roll call of banker-public intellectual hybrids. But we must just salute investment banker turned government adviser David Freud, who authored the white paper on welfare reform, and came up with the ur-justification for all bankers seeking to persuade people of their eminent suitability for these complex public roles. "I didn't know anything about welfare at all when I started," he breezed to reporters, "but that may have been an advantage ... In a funny way the solution was obvious." Unpicking the vast and meaningful influence this lot have had over every aspect of government policy in recent years would be a Piranesian nightmare. But you'd hope we've been shocked into caution, and that getting bankers to formulate social policy will one day seem as bizarre and unthinkably embarrassing a custom of bygone times as The Black and White Minstrel Show.
Then again, don't hold out too much hope. When Gordon Brown took over as PM, his now somewhat compromised reputation for caution was mocked by one Westminster wag who said: "When a bomb goes off, you can't call Derek Wanless to set up an 18-month review." Can't you? The banking system's implosion would seem to be a matter of similar emergency, and this week we learned that Brown has only gone and called a banker, Sir David Walker, to chair a review into the way bank boards operate. If and when Sir David comes to choose his seat, let us hope he opts for Lord Walker of Cloud Cuckoo Land.
Climbing off the property ladder 'was the wisest move we ever made'
Moving from owning a home to renting was once considered a backwards step, but many ex-homeowners who sold at the top of the market are now sitting pretty as they consider taking advantage of the property slump and buying again at bargain prices. As the property market continues to crumble with the average house price down 17% compared to this time last year, people who sold their homes before the credit crunch and opted not to buy again are now enjoying a mortgage-free, flexible lifestyle compared to those homeowners struggling with hefty mortgages and worrying about negative equity.
Jo Eccles, director of Sourcing Property, a property search company, says she has seen a substantial increase in the number of clients who sold their homes at the top of the market and who could afford to buy again, but have decided to live long-term in rental properties instead. "With the added uncertainty in the market and people worried about their jobs and whether or not they can pay the mortgage, renting is no longer considered a stepping stone for ex-homeowners," she says. "They are taking a long-term view and considering a rental property to be their home." Eccles says that 65% of her clients are looking for long-term rentals, whereas two years ago 85% of them only wanted a short-term let.
"People who are struggling to sell their property are now putting it on the rental market, so there is a lot more choice for tenants," she says. "Instead of moving into a standard buy-to-let property, tenants can move into a loved home and make it their own instead." Gemma Ward, an account manager in Dorset, sold her one-bedroom garden flat in Bournemouth last March for £162,500 after buying it for £130,000 three years ago. Ward and her husband, Peter, were about to complete on their next property purchase, a run-down house that needed renovation, but pulled out two days before the sale because they were worried about the market.
"It was the wisest move we ever made," she says. "I was so worried that we would end up in negative equity, and as soon as we pulled out of the purchase, I felt as if a weight had been lifted off my shoulders." The couple have been renting ever since, paying £900 a month for a two-bedroom garden apartment close to the beach. They are now looking for a larger family home - not to buy, but to rent long-term. Ward estimates that a mortgage on the same property would cost them around £1,250 a month: "The extra money lets us have a little more cash to do things which we would not otherwise be able to afford had we been tied into a mortgage, such as taking holidays."
Peter Orr, managing director of a mobile marketing company, sold his one-bedroom Georgian property in Edinburgh two years ago for £230,000 when he moved to London for work. He opted to rent as a quick solution to finding somewhere to live - but two years on, he's still renting, paying £1,650 a month for a two-bedroom roof-terrace apartment off the King's Road in London. "I'd always intended to buy when I moved to London, but it became clear at that time that prices were still way too high," he says. "For me, paying rent is not dead money, it's just another living expense. Besides, I doubt I'd find a place as nice as the one I'm currently in to buy."
Research from Abbey to be published tomorrow shows that for first-time buyers planning to put down a 15% deposit on a home, it is still cheaper to rent than to buy in every region of the country. The research concludes that in the East Midlands, for example, a typical first-time buyer property bought with a 15% deposit using an Abbey mortgage would cost £900 a year more than the average rent in that region. However, if the buyer put down a 25% deposit, based on these assumptions, it would be around £400 cheaper to buy. But in the wake of the Bank of England's decision to cut the base rate by a further 0.5%, some commentators are suggesting that ex-homeowners would be better off putting their deposits from house sales into property again, rather than leaving the money to earn minimal interest in savings accounts.
David Smith, senior partner at Dreweatt Neate estate agents, says: "People who have sold and are now renting are increasingly finding that the interest on the money in the bank is no longer covering their rent. As a result, they are slowly beginning to re-enter the market, knowing that prices are sharply lower than a year ago and that now could be an excellent opportunity in the medium to long term." Steven Smith, an electrical maintenance manager in Plymouth, has decided now is the time to buy. He sold his three-bed terrace in September 2007 for £141,000, after buying it in 1998 for £49,000. Since then, Smith has been renting a three-storey, new-build family home for £800 a month and he is about to buy a three-bedroom semi for his sons, aged 20 and 19, who will pay him every month to cover the mortgage. The sellers were originally asking for £160,000; Smith has just had his offer of £135,000 accepted.
"The money has just been sitting in the bank and I think now is the time to move it out of our savings, where it's only getting about 3% interest, and back into property," he says. James Wright, another renter, has started trying to get back on the ladder. He sold his London house in November 2007, started renting and shifted the money from the house sale into a savings account. "A year ago that deposit was earning about 5% but now it's earning next to nothing so I see this as a good time to buy," he says. Richard Mason, managing director of financial site Moneyextra.com, says ex-homeowners in a similar scenario to Wright are in a strong negotiating position. But he recommends waiting for at least another six months before buying as he predicts prices will drop further.
"Say you have £40,000 as a deposit from a previous house sale lined up and the price of the £200,000 house you want to buy drops 5% in the next six months," he says. "You'll have saved £10,000 - which makes up for the fact that you've lost out on six months of interest in a low-paying account." For some ex-homeowners like Orr, renting remains the more attractive option, regardless of where prices go. "For me, the excitement of property ownership has dissipated, if not disappeared," he says.
Romanian government agrees to drastic austerity package
Romania, like other Eastern European states, has been hit hard by the international economic crisis. While mass redundancies in industry are rapidly pushing up the unemployment rate, the government in Bucharest is shifting the burden of the crisis onto the backs of working people through a series of harsh austerity measures. Since the end of December, Romania has been governed by a grand coalition that includes both the Social Democratic Party (PSD), which came out of the ruling party of the former Stalinist bureaucracy, and the rightwing Democratic Liberal Party (PD-L), which is close to President Traian Basescu.
After the elections at the end of November, and despite their fierce differences, the country's political elite decided to form a grand coalition in order to have a broad parliamentary majority capable of pushing through substantial social attacks. Under Prime Minister Emil Boc, a government of right-wing reformists and ex-Stalinists has been in power for the first time since the beginning of the 1990s. In 1990, a similar coalition, the "National Salvation Front", was responsible for introducing free market economic policies, privatizing industry and plunging many into unemployment and misery. The austerity measures now being implemented by the Boc government are of a piece with the policies of that time.
One element of the current austerity programme is the slashing of public spending by around 20 percent. In future, pensioners, who are now often forced to find work in the public sector to supplement their low pensions, will be forced to choose between either working or drawing their pensions. The government has also rescinded last year's promises of wage increases. For example, after massive protests and strikes last year, the preceding government was forced to promise teachers a 50 percent wage hike. Remarking that "wages are out of control", Boc has now thrown aside these pledges. Teaching staff in Romania's public schools presently earn about €150 to €200 a month. A 5 percent ceiling for wage increases is to be imposed in 2009.
In a measure that will disproportionately affect those on low and middle incomes, consumption taxes are set to rise, for example on tobacco and alcohol, pumping money into the treasury. The attack on wages and incomes coincides with mass redundancies in Romanian industry. Auto manufacturers such as the Renault subsidiary Dacia and its suppliers are being particularly hard hit, but other sectors also face a wave of dismissals.
According to the Romanian press agency Rompres, the subsidiary of Austrian oil company OMV Petrom sacked 3,000 of its workers on February 1. The employers have not confirmed whether further jobs may be axed, but say the business is in a "reconstruction process." Before the Romanian company was privatized in 2004, some 50,100 were employed by Petrom. According to Rompres, the workforce presently numbers barely 33,000.
The population of Romania still has the lowest purchasing power in the European Union. Moreover, a substantial part of any nominal wage increase has been eaten away by the recent years of high inflation, which reached nearly 10 percent last summer. Romanian private household debt is enormous, rising in the last two years by around 60 percent. Often, Western European banks denominate these loans in euros, and with the depreciation of the Romanian leu many face a rapidly growing mountain of debt.
The sharp attacks being carried out by the political elite, the catastrophic social situation and the economic crisis have already led to popular confrontations with governments in other Eastern European states, including Latvia, Lithuania and Bulgaria. It appears that Romania is on a similar path. Nevertheless, the Romanian government is funnelling the savings that result from its austerity measures directly into the pockets of the corporations. At the end of last month, Boc announced a cash infusion for companies worth €250 million.
Boc and other high-ranking government representatives have also let it be known they are preparing further austerity measures, since the economic situation throughout Eastern Europe is rapidly worsening. Romania has been negotiating with the European Union Commission regarding an emergency credit, and discussions are also being held with representatives of the International Monetary Fund (IMF). Experts believe it is inevitable that Romania, alongside Hungary and Latvia, will also receive a cash injection. "We will need a credit of at least six or seven billion euros, probably from the IMF", said PSD chairman Mircea Geoana. Such credits usually come with draconian austerity measures attached.
Romania is highly indebted; the banking system depends almost exclusively on foreign money. Real estate prices have collapsed spectacularly; foreign investors have reduced or withdrawn their investments, meaning foreign capital is flowing out of Romania ever more rapidly. Meanwhile, the leu has lost a good quarter of its value in relation to the dollar, meaning foreign exchange credits that are denominated in dollars have increased in price by 25 percent. Romania has seen the creditworthiness of its long-term foreign debts lowered to "BB+", sinking by two ratings.
Analysts are questioning the ability of the Romanian state to avoid a "severe financial and economic crisis," reported the Mediafax press agency. A worse rating also makes it more difficult for the country to access loans at more favourable rates of interest. In 2008, the Romanian economy grew by approximately eight percent. But now the European Bank for Reconstruction and Development (EBRD) in London has downgraded its prognosis for Romanian growth this year from three to one percent, and experts consider a further lowering of this forecast highly probable. After just two months in office, the grand coalition is already gripped by fierce disputes.
Twelve days after his appointment, the social democratic interior minister, Liviu Dragnea, resigned. He was the second interior minister to leave the Boc cabinet. Dragnea had replaced Gabriel Oprea at the end of January after he also resigned. The PSD leadership had accused Oprea of being behind the appointment of a disputed candidate to head the secret service. The reasons for Dragnea's resignation also involved internal disputes over the appointment of state secretaries and other high-ranking officials in the interior ministry. Both cases have highlighted the intensification of the internal struggle within the former Stalinist ruling party for power and positions as the economic crisis deepens.
Indonesia sees container volumes down 20-30 pct in '09
Indonesia's trade minister said on Saturday export volumes for non-oil and gas are set to fall 20-30 percent this year from 2008 as global trade slows, dealing a blow to Southeast Asia's biggest economy in an election year. Earlier this month, Trade Minister Mari Pangestu said Indonesia's non-oil and gas export growth target had been revised to below 4.3 percent for 2009. On Saturday she told reporters the outlook was worse. "Based on container flow for January-February, exports volume this year may decline by between 20 to 30 percent. Non-oil and gas exports are expected to fall," Pangestu said. She added that exports of automotive products and electronics would be worst hit. Car exports through the Jakarta International Container Terminal, the country's largest shipping terminal, fell to 9,391 units in January, from 13,000 units in December 2008, Pangestu said, representing a decline of about 27 percent. Earlier this week, Pangestu said that growth in total exports would slow to just 1-2.5 percent this year, from about 20 percent in 2008. The government had previously forecast total exports would grow 5 percent in 2009.
The government has proposed a 71.3 trillion rupiah ($6.1 billion) fiscal stimulus package to counter the effects of a global economic slowdown, and expects economic growth to slow to between 4 and 5 percent, from an estimated 6.2 percent in 2008. While Indonesia's economy is less dependent on exports than some other Asian countries, millions of Indonesians are employed in export-related sectors and the prospect of big job losses is a concern for the government ahead of the April 9 general election and July 8 presidential election. Indonesian exports include palm oil, tin, coal, copper, and rubber, and prices for many of these commodities have slumped. Earlier this month, Indonesia reported that exports fell 20.6 percent to $8.69 billion in December from a year ago, the biggest drop in seven years. Economists expect the central bank, Bank Indonesia, to continue its monetary easing cycle this year to try to boost economic growth. Indonesia's central bank cut its key interest rate by 50 basis points to 8.25 percent in February, the third cut in three months, and indicated it may cut rates again to support growth. ($1=11,750 Rupiah)
Tajikistan risks 'social unrest'
The International Crisis Group warned of social unrest as income sent home by Tajiks working abroad begins to dry up. Such funds account for almost half of the country's income. Many Tajiks are losing their jobs as the global slump hits their host nations. Making matters worse, the group said, the government seems incapable of coping with the grave situation. "Far from being a bulwark against the spread of extremism and violence from Afghanistan, Tajikistan is looking increasingly like its southern neighbour - a weak state that is suffering from a failure of leadership," the ICG said in a special report published late on Thursday. International donors, including the US, the UK and EU currently provide substantial financial assistance to the government but much of this is believed to be lost through corruption. "President Emomali Rakhmon may be facing his greatest challenge since the civil war of 1992-97," the report said. "At the very least the government will be confronted with serious economic problems," it added, warning: "At worst the government runs the risk of social unrest."
Some 70% of the population is now said to live in abject poverty in the countryside, with hunger spreading to the cities, particularly Khujand, once one of the most prosperous parts of the country. The former Soviet Republic's energy infrastructure is suffering "near total breakdown for the second winter running", the group adds. According to the ICG, Tajikistan needs to import gas and electricity yet earlier this week, neighbouring Uzbekistan halved its natural gas supplies, citing Dushanbe's growing debt. In the past few years increasing numbers of young Tajiks have left the country to work as seasonal labourers, primarily in Russia and Kazakhstan. The money they sent home last year amounted to some $2 billion (£1.4m) almost half of the country's gross domestic product (GDP). The ICG said there were no alternatives to President Rakhmon and called on the West to review its aid programmes. It also urged the Tajik government to work out how to create jobs and avert famine.
New Farmers Chart Their Own Course
Thanks largely to the boom in renewable fuels, rural America – and particularly the Midwest – enjoyed somewhat of a “renaissance” over the past few years. But in 2008, the farm sector was hammered by highly volatile economic forces. Commodity prices soared to record levels last summer only to fall off a cliff in the fall. Though forecasters are cautiously optimistic about 2009, shifting government policy, declining profit margins, and increased development all threaten the next generation’s ability to begin farming. This week’s Census of Agriculture confirmed that U.S farms include a disproportionate share of older operators. And nowhere is the trend more obvious than in California where farmers age 65 and over outnumber those under the age of 25 by more than 50 to one.
But several programs are helping to facilitate intergenerational farm transitions. David Miller reports on efforts to link “those who aspire” with “those about to retire.” A life in agriculture is often a thankless job filled with hard work and long hours but many young people are drawn to the idea of charting their own course. It's the same for new farmers in the Midwest as it is for farmers on the coast. Despite the limited number of opportunities, the goal of making their own business decisions is the same. Rebecca King is planning to market the meat and cheese from her flock of sheep directly to northern California chefs. Rebecca King, Monkey Flower Ranch: "I knew for the past ten or fifteen years that I wanted to farm and it's just been kind of a gradual narrowing of focus and feeding different experiences into this." Daniel Zamora will sell strawberries directly to commercial wholesalers in the Salinas Valley. Daniel Zamora, Heritage Farms: "So I've been with this idea since I was in high school. so that's been about maybe 10 years but mostly since my parents been working in, in the fields I mean this just kind of a goal, a dream goal."
And George Macros found a way to mix teaching school and growing fruits and vegetables for local sale an hour north of San Francisco. George Macros, Earthworker Farm: "I started teaching and I was lowest in seniority so I got the classroom that nobody else wanted which had a huge greenhouse in it and basically started trying to green it up". In California, where land prices are high and available acres few and far between, one agency is helping new farmers like these achieve their dreams. It began nine years ago, when California FarmLink was opened and the staff began working on the dual goals of reducing urban sprawl and keeping agriculture alive in California. Steve Schwartz, California FarmLink: "...in general we meet a lot of land owners that their dream you know their goal is to keep the land in production. They might be a third generation farmer they feel like they'd be rolling over in their grave if they were the one to see it paved over."
Schwartz says the agricultural real estate market is so tight they get seven applications for every parcel of land listed with FarmLink. The organization offers one-on-one consulting as well as workshops on subjects like business planning and estate succession. New farmers also can apply for low interest loans as large as $50,000 through the California Coastal Rural Development Coalition. And FarmLink has a matching savings plan through its Individual Development Account program. If a farmer deposits $100 each month in a special account, Farmlink will match the funds 3-to-1. After two years of saving, $9600 is made available for infrastructure improvements. When Rebecca King was growing up in the suburbs of San Jose, California, the idea of marketing sheep meat and sheep milk cheeses was the farthest thing from her mind. Now in her second year, she is planning to sell the finished products from her flock of 140 animals directly to area gourmet chefs.
Rebecca King, Monkey Flower Ranch: "... it's kind of a growing market as far as having a niche' that I can make a living at. Doing, you now, organic produce in this area isn't a niche' anymore. It's a very competitive business so, um, sheep cheese is something that's really common in Europe. There's a lot of potential for it." After a year of renting land, King's parents acquired this property in July of 2008 through an estate sale listed with California FarmLink. The family that originally owned the land was no longer interested in working the 40 acres of ground near Watsonville, California but they wanted the farmstead to remain in agriculture. For now, King will rent the land from her parents. Rebecca King, Monkey Flower Ranch: "I know it will be in our family and you know one day I can buy it from them and it's not going to be something that I have to walk away from. So that's, that's huge."
Since high school, Daniel Zamora wanted to have his own farm. He always hoped to employ his parents and take advantage of their experience working in California strawberry fields. Daniel Zamora, Heritage Farms: "So I always told myself that I will put myself through, through school and eventually, when I was ready, I will start a business where I could include them as part of the business." Zamora, an engineer by education, started attending classes and leasing a half acre at the Agriculture and Land-Based Training Association in Salinas, California. After hearing about California FarmLink, he knew he had found the path to increased production. Though he was rejected for a loan through California Coastal, he was able to secure a loan through USDA to pay rent on 26 acres. Because agricultural property in the area can cost up to $50,000 per acre Zamora will likely continue pay rent at $2,000 per acre for the near future.
Daniel Zamora, Heritage Farms: "It's exciting because we have, I have, been waiting a long time for this moment... I know we can do this successfully because I have total support from my family and they have the experience". The passion George Macros has for agriculture was ignited while teaching in Brooklyn, New York. Seeking a more laid back lifestyle he took a teaching job in California and began looking for places to grow vegetables. George Macros, Earthworker Farm: "Well, I guess that it kind of goes with my love of nature and also being, being outside and just I guess I've always loved plants and being outside." California FarmLink partnered him with the Chambers family. A little more than a year ago, Macros planted his first crop on one-and-a half acres of the Chambers' five acre Sebastapple Farm. Ann Chambers, Sebastapple Farm: "It feels heavenly actually. ...our object is, is to look for people so that we didn't work ourselves into the ground. We were both way overworked as we started slowing down. So, we had to do something smaller and we loved this place but realized it was too big for us."
Chambers, a Master Gardener and former truck farm owner, offers suggestions to her tenant but lets Macros make his own decisions. Macros began selling his produce through a Community Supported Agriculture business or CSA. Eventually, it became difficult to serve his customers and he put the CSA on hold. Today Macros emails his clients and they purchase the harvest in nearby Sebastapol, California. With no plans to quit his day job, he will continue teaching and farming. George Macros, Earthworker Farm: "I fantasize about having many acres and lots of workers ... and you know riding in the tractor and making phone calls all day but right now you know I'm enjoying the smaller scale growing operation."
Buy American: Protection From Yourself
Unbelievably, the abject stupidity of protectionism, in this case the so-called “Buy American” protectionism, is now resurfacing after all these decades of everything “going global” so that now the stupidity of protectionism is even more glaringly stupid since the globe has grown into a huge, incestuous, corrupt labyrinth interwoven with the tentacles of everything else grown foul and corrupt, all stitched together by zillions of contracts, deals, “arrangements”, schemes and scams, both private and public, all leveraged at huge multiples of a little speculative capital, and which is all now teetering on the edge of collapse after the global economy has lost untold tens of trillions of dollar’s worth of wealth in the last few months alone! Yikes!
Such profound stupidity is perfectly characterized by the cover of the Economist magazine this week, with the title “The Return of Economic Nationalism” overlaid on a picture of a decomposing arm and talon-like hand arising from the spooky, foggy graveyard where economic stupidities and monsters are buried, one day hopefully joined by the rotting corpse of the loathsome neo-Keynesian econometric theories adhered to by the laughable Federal Reserve and taught by the majority of the nation’s universities, which together comprise what George Ure at UrbanSurvival.com calls “the current crop of formulaic trance-masters and economystics”, which has now laid us to ruin with their stupidities, which is in itself a sad, sad commentary, indeed, on the real value of America’s universities and school system, infested as it is by millions of apparent halfwits, where not ONE of them was the least bit conversant about the last 4,500 years of economic history as pertains to a fiat currency, children’s elementary arithmetic disproving “investing for the long-term” as a viable theory, the Constitution, or even common sense, much less about the One True Economic Theory, which is the Austrian Business Cycle Theory which is free to everyone at Mises.org, so they can’t use “cost” as an excuse.
Which is not to even mention the repellent-yet-willing cooperation of the worthless “news media” which was given special protections in the Constitution so that they would be able to ferret out and expose such governmental stupidities and corruptions, like the corporate “whistleblower protection plan” we have at work that is currently protecting one Miss Sallie Mae Suggins, from the accounting department, for squealing on me for, ummm, certain “irregularities” surrounding a nifty check-kiting scheme between the honor-system coffee fund and the office’s petty cash balances.
But this is not about how we have been led down the path of destruction by the corrupt news media and the lapdog universities not doing their jobs, failing miserably, just as miserably as the Federal Reserve and the worthless trash in Congress have failed us, but about protectionism, which may be ostensibly about “saving jobs”, but it is actually about retaliation and massive tit-for-tat protectionist legislation, which makes everything that anyone buys cost more and more, making everything worse and worse, inflations spiraling until you are bankrupt and starving, which only underscores just how stupid Congress really is in considering protectionist legislation, and how it is imperative that you, your family and your friends and neighbors form into a mindless mob of maniacs to descend on Washington, D.C. in a foul mood, wreaking a terrible vengeance, while I stay here in the Mogambo Bunker Of Womb-Like Security (MBOWLS) and monitor the airwaves for news of your progress and for Bewitched reruns.
Even Jim McTague in Barron’s agrees with me without knowing it, as he reports that “The Buy American provision is intended to create jobs here, but it could cost taxpayers a heap of money. It generally mandates that supplies and equipment used in tax-financed infrastructure projects contain at least 50% American content, and that project managers (are also mandated-ed) buy goods and services from Americans as long as their bids are less than 25% higher than those from foreign rivals. In other words, taxpayers could pay a 25% surcharge.” Hahahaha!
Did he say, “Could”? Hahaha! That’s the whole point of the thing, dude! Better you should say, “The Mogambo is right! We’re freaking doomed, and if you are not buying gold, silver and oil, then you are Truly, Truly Screwed (TTS)! Whee! This investing stuff is easy!
Facing eviction, a man killed himself while a deputy stood at door
Wayne "Mike" Anderson knew what the knock at the door of his Stratmoor Valley home meant: He was being evicted. He wasn't ready to leave. Unemployed, awash in debt and hiding an October foreclosure from loved ones, the 55-year-old shot himself Wednesday morning as a sheriff's deputy stood outside. His live-in girlfriend was at work. She never knew they were being forced out, friends said. "He felt like he was in a corner, and that's what he had to do to free himself," said Bennie Walker, a family friend who said she thought of Anderson as an uncle. Friends believe Anderson, who they say used to work as a surgical nurse, began sliding into depression after losing his job about two years ago. Unable to find work in his field, Anderson turned to the same risky borrowing that helped plunge the country into a foreclosure crisis, borrowing against the modest split-level home at 1720 Ascot Road his parents bought in 1969 and left him in their will.
In May 2007, Anderson took out a $116,000 mortgage from Accredited Home Lenders Inc., one of the nation's largest subprime lenders. It carried a nearly 12 percent interest rate, described by El Paso County Public Trustee Tom Mowle as "shockingly high." The average that month was 6.26 percent, according to mortgage giant Freddie Mac. The loan appears to be what mortgage lenders call "Ninja" loans - given to borrowers with no assets, no job and no income. Such loans were common earlier this decade but are now outlawed in Colorado. "All the borrower had to do was provide a Social Security number and an address where they lived. We would get an appraisal and a credit report then close the loan," said Robert "Hutch" Hutchison, president of Adams Mortgage LLC and a member of the Colorado Mortgage Lenders Association advisory board. Anderson borrowed about 90 percent of the $129,396 value of the property, according to the El Paso County Assessor's Office. The loans were usually kept to 70 percent to 80 percent of the value of the property, Hutchison said.
"That way, the borrower had enough equity they would go out and get a second job if they needed to so they could make the payments and not lose their equity," he said. "Lenders eventually pushed the loan amounts to 90 percent of the value of the property, and that is where the game stopped working because people with that little equity would walk away from the loan and the property." About two months after Anderson got his loan, the nation's mortgage market began collapsing and lenders were no longer making such risky loans, he said. Accredited later sold the loan into a pool of mortgages set up by SG Mortgage Finance Corp., which then sold securities backed by the pool to investors. HSBC Bank is trustee for the pool. HSBC filed for foreclosure about a year after the loan was made, after Anderson defaulted on the payments. At the time, Anderson owed about $2,000 more than the home's market value. The British-owned bank, one of the world's largest financial institutions, was the only bidder at the El Paso County Public Trustee's Oct. 1 foreclosure auction with a $131,073.39 bid and got the deed to the property on Oct. 24.
Evictions after foreclosures typically take about two months, Mowle said. Anderson ended up staying in the home an extra two months because mortgage giant Fannie Mae put a two-month moratorium on foreclosures and evictions involving its loans, including Anderson's, that ended Jan. 31. Anderson's neighborhood, Stratmoor Valley, and the surrounding area are no strangers to foreclosures. Lenders sought foreclosure on 29 homes last year in Stratmoor Valley, including three others on Ascot Road, and 110 in the area surrounded by Nevada Avenue, U.S. 85-87, Las Vegas Street and the northern boundary of Fort Carson. The area has one of the highest concentrations of foreclosures in the county, Mowle said. Anderson told friends he was depressed, but never let on that he was struggling to keep his home. They believe he kept the news from his live-in girlfriend of many years, who told them she could have helped pay down the debt. Anderson's girlfriend declined to be interviewed.
As a boy, Anderson was a fixture at the home of Ethel Mae Adams on nearby Maxwell Street. Adams - whom he called Momma Mae - had moved into the neighborhood a few months after Anderson's parents in 1969. They were military families attached to Fort Carson. Before Anderson's mother died of cancer in 2004, she told Ethel Adams to watch over him. "We weren't related, but in some ways, we were closer than blood," said Walker, Adams' granddaughter, who was raised in the home. Anderson was more likely to offer help than ask for it, the Adamses said. He let people stay in his home if they were put out, and he could always be counted on for a ride across town. He liked sports, barbecuing and playing video games with his close childhood friend, Fred Adams Jr. "He didn't let anybody know what was happening," said Shani Ross, one of Adams' daughters.
The El Paso County Sheriff's Office, which under state law assists in evictions, serves two to 10 evictions a day, Lt. Lari Sevene said. The office posted warning of Anderson's eviction several days earlier and had no reason to fear trouble when they went to Anderson's house Wednesday morning, she said. The deputy knocked on his door just before 8 a.m. Wednesday, accompanied by a real estate agent working with the bank that foreclosed on his home. Anderson didn't open the door. Deputies heard him ask, "What?" and the deputy repeated himself. Anderson went upstairs into the living room, sat on the couch and shot himself with a pistol, Sevene said. Sheriff's SWAT officers found his body when they forced their way into the home. "We do evictions almost every day," Sevene said. "We usually post the writ a few days prior so that people know we're coming, and to give them the opportunity to get their things out. So I'm pretty sure he knew that they were coming."
It's too late for Planet Earth, says James Lovelock
You may feel, as job losses soar and parts of the world descend into turmoil, that you're apocalypsed-out for February. If so, you may not immediately leap at James Lovelock's forthcoming book, The Vanishing Face of Gaia. His warning that climate change is spinning us into a hot world, where billions will starve and whole ecosystems will collapse, is a horror few want to contemplate, leavened only by the faint consolation that those of us lucky enough to live in the British Isles, Siberia, Chile, Canada or New Zealand may survive. But his prophecies are plausible and they will also make you think, which are two good reasons to grit your teeth and read him.
It is human nature to prefer writers who confirm the accepted wisdom to those who speak inconvenient truths. Look at the journalists who warned two years ago that Iceland's banks were over-leveraged. Remember the late fund manager Tony Dye, who was ridiculed for predicting the dotcom bust and was fired by his employer, Phillips & Drew, only weeks before the stock market turned. The media has been similarly dismissive of scientists who fear that it is too late to avert serious climate change. We prefer those who warn that there are dangers, but that they are far off and containable. Four years ago, when Lovelock forecast widespread devastation, he was generally dismissed as a lovable “maverick”, a word that always makes me sit up because it is a favourite weapon of the Establishment to fend off difficult ideas.
Suddenly, in 2009, Lovelock's fears strike a chord. The Vanishing Face of Gaia has been hailed as “the most important book for decades” by Andrew Marr, a man not especially sympathetic to green issues or conspiracies. The book is powerful, not only because of the scary scale and speed of change that Lovelock foresees, making the first chapters as pacey as a Hollywood romp, but also because he is a serious, hands-on scientist. While working at Nasa in the 1960s he invented the electron capture detector, which enabled him to point the world to the dangers of the ozone hole and pesticides such as DDT. He has also built spy gadgets for MI6. Nor is he a conventional green. He loathes wind farms, is passionately pro-nuclear and is scathing about “saving the planet”. The planet will look after itself, he says. It's humans we need to save, and soon.
What Lovelock calls his “final warning” (he is 90) has new resonance because of the increasingly alarming data that is coming from the observation of everything from species numbers and deforestation to sea levels and Arctic ice. Satellite images and expeditions suggest that Arctic summer sea ice is disappearing much faster than was thought even two years ago. Then, the Intergovernmental Panel on Climate Change (IPCC) predicted that this ice would disappear towards the end of this century. Now, scientists at the US National Snow and Ice Data Centre, the US National Centre for Atmospheric Research, Cambridge University and elsewhere, are predicting that the summer sea ice may disappear in 20 years.
Why does this matter? Because ice reflects sunlight. A dark iceless sea will absorb it. If the Arctic does an “albedo flip” from light to dark, this could raise sea levels and melt parts of the Arctic permafrost that are keeping the lid on enormous quantities of greenhouse gases. As a result, Jim Hansen of Nasa has said that the IPCC models that expect gradual changes may be woefully misleading. Hansen points out that when temperatures increased to between 2 and 3 degrees above today's level 3.5 million years ago sea levels rose by 25m, not the 59cm being predicted by the IPCC. Like Lovelock, Hansen is dismissed in some quarters as an extremist. I had dinner with him last year in London. He came across as supremely rational.
Even a 5m rise in sea level would dramatically change life for millions of people. While only 2 per cent of the world's land is less than 10m above the mid-tide sea level, it is inhabited by 10 per cent of the world's population. A 5m rise would inundate large parts of cities, including London, New York, Sydney, Vancouver, Mumbai and Tokyo, and leave their surrounding areas vulnerable to storm surges. Shanghai has an average elevation of only 4m. Whole regions of Florida, Louisiana, the Netherlands and Bangladesh would also vanish. This is one reason why the Dutch have been at the forefront of developing renewable energy and floating houses - 60 per cent of them live at or below sea level - and the dykes and pumps they have built are increasingly vulnerable to flooding. The feared 25m rise is predicted to occur within our lifetimes. To put it another way, our grandchildren will be living in this submerged world.
As we begin 2009 there is a striking gap between the tone struck by politicians and business leaders, who are beginning to take climate change seriously, but with a “we can beat it” tone, and scientists who are getting markedly more gloomy. In the past year researchers at the University of East Anglia have suggested that the Gulf Stream will be altered by changes in Arctic temperatures. The Tyndall Centre for Climate Change Research has stated that world carbon emissions must peak by 2015 and disappear altogether by 2050. Dr Vicky Pope, at the Met Office Hadley Centre, has said that temperatures will rise by 5C by the end of the century if no action is taken. The mainstream view is that such an increase would be catastrophic.
You can question these figures. The Met Office isn't great at predicting the weather three days ahead: how can it know what will happen in 2100? There has been a steady rise in sea level for the past decade but little change - possibly even a drop - in global temperature. This must surely cast doubt on the warming-world thesis, a point made elegantly by Nigel Lawson in his book Appeal to Reason. Lovelock himself admits that there are still huge gaps in our knowledge. The Earth's system is so complex and interconnected that, he says, “we are like a 19th-century physician trying to give a sensible prognosis to a patient with diabetes”.
So why is he so sure that the hot world is on its way, within decades? “Compare the Earth with an iced drink,” he says. “The drink stays cold until the last of the ice melts ...a great deal of the heat of global heating has gone into warming that huge lump of water, the ocean, and into melting ice.” This could help to explain why temperatures have not yet risen. The danger is that they will rise rapidly once the ice disappears, causing the Earth to flip into a permanently hotter state. “There is a trustworthy indicator of the Earth's heat balance, and that is the sea level. Its rise is a general and reliable indicator that cuts through arguments as to whether some glaciers are melting and others advancing. The sea level rises for two reasons only: from ice on land that melts and from the expansion of the ocean as it warms. It is like the liquid in a thermometer: as the Earth warms the sea level rises.”
Even if concerns about sea-ice are overdone, Lovelock thinks that global warming is not the only problem. He is one of the few scientists prepared to address the deeply unfashionable issue of population. Even if we were not pumping so much greenhouse gas into the atmosphere by heating buildings and driving, he believes, the Earth cannot support seven billion people who are destroying natural habitats and species at a rate not seen since the death of the dinosaurs. This is not romantic: by razing forests and making the oceans barren we are reducing the planet's capacity to absorb carbon dioxide. We cannot solve the problem simply by abandoning fossil fuels, he believes. In fact, one theory, of global dimming, suggests that our pollution haze partially shields us from the Sun's heat. If European governments ever deliver on their grand promises to reduce emissions by 60 per cent, the atmosphere may get hotter. What a scary Catch-22.
The thought that maybe nothing can be done will be anathema to the many scientists and entrepreneurs who are being swept up in what I have previously called a new Green Rush, accelerated in the past two weeks by President Obama's declaration of war on global warming. But it is worth thinking through the worst-case scenario. Lovelock believes that many countries will be wiped out by drought but certain temperate ones will remain fertile, rather conveniently including Britain and New Zealand. These will be the “lifeboats” of the world. Their leaders will have to take difficult decisions about who to let on board, creating the hideous spectre of a fortress Britain, with land divided rigidly between high-density cities and intensive farming.
Lovelock's views about energy are equally controversial. Crusty greens who are attracted to the New Ageiness of “Gaia”, Lovelock's concept of the Earth as one living whole , will be spitting lentils at his ideas about energy. He believes that renewable energy is “an elaborate scam” made possible by enormous subsidies. He loathes the ugliness of wind farms and thinks that Europe's widespread use of wind “will be remembered as one of the great follies of the 21st century”. It is great to hear someone challenging the accepted wisdom about alternative energy. But he lacks the detailed knowledge that he has about the atmosphere. Tom Burke, of Imperial College (an opponent of nuclear power), says that Lovelock is “very knowledgeable about how Earth systems work, and he is right about the need to integrate science. But he does not apply the same intellectual rigour to his judgments about energy”.
Nevertheless, he is right when he rails that environmentalism has come too close to being a religion, “complete with dogma, icons and simple answers to all environmental problems”. This book makes you realise that nothing - GM food, nuclear power, family planning - should be taboo. The problem is that his descriptions of the Earth as Gaia, a living system, are so religious in tone. But Lovelock does offer some hope: for example, that climate change could be reversible through geo-engineering, by reflecting the Sun's heat back into space (for instance, with giant sunshades or artificial clouds) or by fertilising the oceans to grow more algae and remove more carbon dioxide from the atmosphere.
Meanwhile Lovelock is about to blast off into space, courtesy of Sir Richard Branson's “ultimate upgrade” on Virgin Intergalactic. He wants to see the Earth before she fades from the blue and green we know to the brown that he fears. We must hope that he is wrong. But if we face the possibility that he could be right, we have a better chance to avoid that future.
Climate warming gases rising faster than expected
Despite widespread concern over global warming, humans are adding carbon to the atmosphere even faster than in the 1990s, researchers warned Saturday. Carbon dioxide and other gases added to the air by industrial and other activities have been blamed for rising temperatures, increasing worries about possible major changes in weather and climate. Carbon emissions have been growing at 3.5 percent per year since 2000, up sharply from the 0.9 percent per year in the 1990s, Christopher Field of the Carnegie Institution for Science told the annual meeting of the American Association for the Advancement of Science. "It is now outside the entire envelope of possibilities" considered in the 2007 report of the International Panel on Climate Change, he said. The IPCC and former vice president Al Gore received the Nobel Prize for drawing attention to the dangers of climate change.
The largest factor in this increase is the widespread adoption of coal as an energy source, Field said, "and without aggressive attention societies will continue to focus on the energy sources that are cheapest, and that means coal." Past projections for declines in the emissions of greenhouse gases were too optimistic, he added. No part of the world had a decline in emissions from 2000 to 2008. Anny Cazenave of France's National Center for Space Studies told the meeting that improved satellite measurements show that sea levels are rising faster than had been expected. Rising oceans can pose a threat to low level areas such as South Florida, New York and other coastal areas as the ocean warms and expands and as water is added from melting ice sheets.
And the rise is uneven, with the fastest rising areas at about 1 centimeter — 0.39 inch — per year in parts of the North Atlantic, western Pacific and the Southern Ocean surrounding Antarctica, she said. Also, highly promoted efforts to curb carbon emissions through the use of biofuels may even backfire, other researchers said. Demand for biologically based fuels has led to the growing of more corn in the United States, but that means fields were switched from soybeans to corn, explained Michael Coe of the Woods Hole Research Center. But there was no decline in the demand for soy, he said, meaning other countries, such as Brazil, increased their soy crops to make up for the deficit. In turn, Brazil created more soy fields by destroying tropical forests, which tend to soak up carbon dioxide. Instead the forests were burned, releasing the gasses into the air. The increased emissions from Brazil swamp any declines recorded by the United States, he said.
Holly Gibbs of Stanford University said that if crops like sugar and oil palm are planted after tropical forests are burned, the extra carbon released may be balanced by lower emissions from biofuel in 40 to 120 years, but for crops such as corn and cassava it can take hundreds of years to break equal. "If we run our cars on biofuels produced in the tropics, chances will be good that we are effectively burning rainforests in our gas tanks," she said. However, there could be benefits from planting crops for biofuels on degraded land, such as fields that are not offering low productivity due to salinity, soil erosion or nutrient leaching. "In a sense that would be restoring land to a higher potential," she said. But there would be costs in fertilizer and improved farming practices. In some cases simply allowing the degraded land to return to forest might be the best answer, she said.