Easter morning outside church, Southside Chicago
Ilargi: Lately, Professor Michael Hudson has been making a serious name for himself as a fierce critic of the present day power cabals in our financial and political circles, two groups that differ far less than many still wish to maintain. With last week's The Financial War Against Iceland, Hudson ventures a few steps beyond "normal critical" financial writing. Here's how he describes his position:
"In the mid-1960s I was the balance-of-payments economist for the Chase Manhattan Bank and then for Arthur Anderson, and later for the United Nations Institute for Training and Research (UNITAR). I have taught international economics at the graduate level since 1969, and now head an international group on economic and financial history based at Harvard. In 1990 at Scudder Stevens and Clark, I organized the world’s first sovereign-debt fund. All these jobs involved analyzing the limited ability of debtor countries to pay – how much could be extracted from them through foreign-currency loans and how much public infrastructure was available to be sold off in a voluntary virtual foreclosure process by countries willing to submit to creditor-dictated rules.
I first wrote about monetary imperialism in the 1970s in my book Super Imperialism. It should have been entitled "Monetary Imperialism" because it detailed how replacing gold with paper dollar IOUs for trade and balance-of-payments deficits in 1971 allowed the United States to exploit the rest of the world without limit. Phasing out gold payments among central banks in favor of fiat paper money allowed the United States to run up massive debts equal to its cumulative payments deficit, far beyond its ability to pay. It currently owes over $4 trillion, while running a chronic trade deficit with enormous overseas military spending, financed entirely by other countries through their central banks. This is euphemized as the "international monetary system."
Allow me to correct myself: the article actually places Hudson square outside of, rather than just a few steps beyond, the realm of customary essays by professional career economists. In fact, it puts him almost painfully standing on the toes of Naomi Klein, whose 2008 “The Shock Doctrine: The Rise of Disaster Capitalism" provides a lucid overview of the global misery wrought at the hands of Milton Friedman's Chicago School, the US government, the World Bank and the IMF. What Hudson writes about Iceland is more than eerily similar to what Klein tells her readers about what happened in South America and Eastern Europe. The similarities are such that it feels somewhat discomforting to see Hudson not acknowledging Klein in his footnotes. Another Hudson quote:
"The United States, Britain and the International Monetary Fund (“the global investment community”) are couching their demands for draconian austerity policies in the language of capitalism. But what they actually are promoting is a financial system that threatens to end in debt peonage, not democratic capitalism. Across the globe, from the Baltics to Hungary in Europe, and indeed from Russia to China, riots and wildcat strikes recently have broken out to protest this post-capitalist financial dynamic. It already has destroyed the industrial capacity of debtor countries subjected to the cruel austerity programs imposed by the IMF as acting agent for the global financial class. This merely repeats what the British did in India. Industrial growth has been replaced with a financialized real estate bubble. The “final stage” of this dynamic is to foreclose and sell off the assets of debtors at giveaway prices. Talk about democracy from the financial elite is a public-relations cover story. Their “magic of compound interest” sales pitch threatens to destroy entire nations."
In The Shock Doctrine, Naomi Klein describes in vivid detail how the Chicagoans, through their vehicles, the World Bank, and the IMF, pushed through their warped so-called free-market policies in those countries that were the most vulnerable because of foreign debt. Hudson merely confirms that what happened under Pinochet in Chili, and Yeltsin in Russia, continues unabated to this day. Iceland is but a dress-rehearsal. Bigger prices to be had are the Baltics, Hungary and other Eastern European states, a wide variety of vulnerable Asian countries, and the for the moment biggest trophy, Turkey. Which, coincidentally, signed a huge loan deal with the IMF at the exact same moment that US president Obama was clamoring for Europe to accept Turkey as a full-blown member of the EU. No, no coincidences there. You bleed 'em dry, and then you buy them for cheap. Of course we all recognize the added military value of these countries.
Michael Hudson's rise to fame in internet circles coincides with the rather sudden emergence on the web of two other hoi-polloi economists, Jeffrey Sachs and Simon Johnson. Sachs has been doing all sorts of stuff in Africa lately, trying to look like a do-gooder, but his prominence in The Shock Doctrine won't be lost on whoever's read the book. Johnson recently got noticed for a site, Baseline Scenario, that looks kind of intelligent and all, but....
One thing that strikes me in what I've seen from him is his praise of his (former?) employer, the IMF, an organization that I personally see as far more criminal than even the Vatican Bank.
I may be wrong about the two of them, but their sudden prominence makes me as nervous as their past does. I don't have that feeling with Hudson, though I do think he has to fess up publicly to reading Klein. And The Automatic Earth.
America's 50 million uninsured haven't shown collective power
If the uninsured were a political lobbying group, they'd have more members than AARP. The National Mall couldn't hold them if they decided to march on Washington. But going without health insurance is still seen as a personal issue, a misfortune for many and a choice for some. People who lose coverage often struggle alone instead of turning their frustration into political action. Illegal immigrants rallied in Washington during past immigration debates, but the uninsured linger in the background as Congress struggles with a health care overhaul that seems to have the best odds in years of passing. That isolation could have profound repercussions.
Lawmakers already face tough choices to come up with the hundreds of billions it would cost to guarantee coverage for all. The lack of a vocal constituency won't help. Congress might decide to cover the uninsured slowly, in stages. The uninsured "do not provide political benefit for the aid you give them," said Robert Blendon, a professor of health policy and political analysis at the Harvard School of Public Health. "That's one of the dilemmas in getting all this money. If I'm in Congress, and I help out farmers, they'll help me out politically. But if I help out the uninsured, they are not likely to help members of Congress get re-elected." The number of uninsured has grown to an estimated 50 million people because of the recession. Even so, advocates in the halls of Congress are rarely the uninsured themselves.
The most visible are groups that represent people who have insurance, usually union members and older people. In the last election, only 10 percent of registered voters said they were uninsured. The grass-roots group Health Care for America Now plans to bring as many as 15,000 people to Washington this year to lobby Congress for guaranteed coverage. Campaign director Richard Kirsch expects most to have health insurance. "We would never want to organize the uninsured by themselves because Americans see the problem as affordability, and that is the key thing," he said. Besides, added Kirsch, the uninsured are too busy scrambling to make ends meet. Many are self-employed; others are holding two or three part-time jobs. "They may not have a lot of time to be activists," he said.
Vicki and Lyle White of Summerfield, Fla., know about such predicaments. They lost their health insurance because Lyle had to retire early after a heart attack left him unable to do his job as a custodian at Disney World. Vicki, 60, sells real estate. Her income has plunged due to the housing collapse. "We didn't realize that after he had the heart attack no one would want to insure him," said Vicki. The one bright spot is that Lyle, 64, has qualified for Medicare disability benefits and expects to be getting his card in July. But for now, the Whites have to pay out of pocket for Lyle's visits to the cardiologist and his medications. The bills came to about $5,000 last year. That put a strain on their limited budget because they are still making payments on their house and car.
"I never thought when we got to this age that we would be in such a mess," said Vicki, who has been married to Lyle for 43 years. "We didn't think we would have a heart attack and it would change our life forever." While her own health is "pretty good," Vicki said she suffers chronic sinus infections and hasn't had a checkup since 2007. "I have just learned to live with it," she said. The Whites' example shows how the lack of guaranteed health care access undermines middle-class families and puts them at risk, but that many of the uninsured eventually do find coverage. Lyle White has qualified for Medicare, even if the couple must still find a plan for Vicki. Research shows that nearly half of those who lose coverage find other health insurance in four months or less. That may be another reason the uninsured have not organized an advocacy group. At least until this recession, many have been able to fix the situation themselves.
"The uninsured are a moving target," said Cathy Schoen, a vice president of the Commonwealth Fund, a research group that studies the problems of health care costs and coverage. But even if gaps in coverage are only temporary, they can be dangerous. "Whenever you are uninsured, you are at risk," said Schoen. "People don't plan very well when they are going to get sick or injured." Indeed, the Institute of Medicine, which provides scientific advice to the government, has found that a lack of health insurance increases the chances of bad outcomes for people with a range of common ailments, from diabetes and high blood pressure to cancer and stroke. Uninsured patients don't get needed follow-up care, skip taking prescription medicines and put off seeking help when they develop new symptoms. Such evidence strengthens the case for getting everybody covered right away, Schoen said. But she acknowledges the politics may get tough. "It certainly has been a concern out of our history that unorganized voices aren't heard," she said.
Credit Default Swaps – Through The Looking Glass
by Satyajit Das
CDS contracts and credit derivatives are complex and powerful financial instruments that frequently have unforeseen consequences for market participants and the financial system. As former New York Federal Reserve President Gerald Corrigan told policy-makers and financiers on 16 May, 2007: "Anyone who thinks they understand this stuff is living in lala land." Financial innovation can offer economic benefits. A number of major benefits of CDS contracts are often cited by academic acolytes and fans, generally those promoting the product.
The first is that CDS contracts help complete markets, enhancing investment and borrowing opportunities, reducing transaction costs and allowing risk transfer. CDS contracts, where used for hedging, offers these advantages. Where not used for hedging it is not clear how this assists in capital formation and enhancing efficiency of markets. CDS contracts also, it is claimed, improve market liquidity. It is generally assumed that speculative interest assists in enhancing liquidity and lowers trading costs. Where the liquidity comes from leveraged investors, the additional systemic risk from the activity of these entities has to be balanced against potential benefits. The current financial crisis highlights these tradeoffs. CDS contracts also, it is claimed, improve the efficiency of credit pricing. It is not clear whether this is actually the case in practice.
Pricing of CDS contracts frequently does not accord with reasonable expected risk of default. The CDS prices, in practice, incorporate substantial liquidity premia, compensation for volatility of credit spreads and other factors. CDS pricing also frequently does not align with pricing of other traded credit instruments such as bonds or loans. For example, the existence of the "negative basis trade" is predicated on pricing inefficiency. In a negative basis transaction commonly undertaken by investors including insurance companies, the investor purchases a bond issued by the reference entity and hedges the credit risk by buying protection on the issuer using a CDS contract. The transaction is designed to lock in a positive margin between the earnings on the bond and CDS fees. Negative basis trades exploit market inefficiencies in the pricing of credit risk between bond and CDS markets.
In early 2009, the pricing of corporate bonds and CDS on the issuer diverged significantly. For example, the CDS fees for National Grid, a UK utility, were around 2.00% pa (200 basis points) compared to National Grid’s credit spread to government of around 3.30% (330 basis points). Similarly, Tesco, the UK retailer was exhibited CDS fees of around 1.40% (140 basis points) against a credit spread to government of around 2.50% (250 basis points). In effect, market pricing of credit risk as between the CDS market and the bond and loan market was significantly different. Another area of pricing discrepancy is the relative pricing of different firms. For example, in early 2009, bonds issued by borrowers rated "A" were trading at a higher credit spread than bonds of borrowers rated lower (say "B") in the bond market. At the same times, CDS fees for borrowers rated "A" were trading at a lower level than CDS fees of borrowers rated lower (say "B") in the credit derivatives market.
There are also notable discrepancies in the pricing of corporate credit risk relative to their sovereigns. In early 2009, Cadbury, the UK confectionery firm, was trading for 10 years substantially below the CDS fee of the UK government but Cadbury bonds were trading at a spread of around 2.00% (200 basis points) above UK government bonds. As people on one side of the Atlantic Ocean might remark: "Go figure!" CDS contracts also are supposed to enhance information efficiency, improving availability of market prices for credit risk allowing more informed decisions by market participants. As CDS contracts are traded in the private OTC derivative markets, there is limited dissemination of market prices. This limits price discovery and therefore any informational benefits.
In reality, pricing and trading information is only available readily to large active dealers in CDS contracts. This informational asymmetry may advantage these dealers. Knowledge about trading flows in CDS contracts may allow these dealers to earn economic profits. Benefits of CDS contracts must be balanced against any additional risks to the financial system from trading in these instruments. CDS contracts may create additional risks within the financial system. While CDS contracts did not cause the current financial crisis (excessive reliance of debt did), they may have exacerbated the problems and complicated the process of dealing with the issues.
The CDS market originally was predominantly a market for transferring and hedging credit risk. The contract itself has many attractive economic features and can serve useful purposes in hedging and transferring risk. Even this hedging application is dogged by some of the identified documentary issues that may reduce the effectiveness of CDS contracts as a hedge. Such problems may well be fundamental to the nature of the instrument and incapable of remedy, at least easily. In recent years, the ability to trade credit, create different types of credit risk to trade, the ability to short credit and also take highly leveraged credit bets has become increasingly important. To some extent the CDS market has detached from the underlying "real" credit market. If defaults rise then the high leverage, inherent complexity and potential loss of liquidity of CDS contracts and structures based on them may cause problems.
The International Swaps and Derivatives Association ("ISDA"), the derivatives industry group, have recently implemented initiatives to "hard wire" the auction based protocols into the standard CDS documentation. They have also initiated changes in market practices, such as fixed coupons for CDS contracts, designed to facilitate trading in these instruments. These actions increasingly focus on CDS contracts as an instrument for trading on default risk and credit spreads rather than one whose primary objective is the hedging of credit risk. The latter would emphasis less standardisation and a greater focus on matching the nature of underlying bond or loan being hedged.
The excesses of the CDS market are evident in the recent interest in contracts protecting against the default of a sovereign (known as sovereign CDS). For example, the CDS market for sovereign debt is increasingly pricing in increased funding costs for the US. The fee for hedging against losses on $10 million of Treasuries currently peaked at about 1.00% pa for 10 years (equivalent to $100,000 annually). This is an increase from 0.01% pa ($1,000) in 2007. The specter of banks, some of whom have needed capital injections and liquidity support from governments to ensure their own survival, offering to insure other market participants against the risk of default of sovereign government (sometimes their own) is surreal.
The unpalatable reality that very few, self interested industry participants are prepared to admit is that much of what passed for financial innovation was specifically designed to conceal risk, obfuscate investors and reduce transparency. The process was entirely deliberate. Efficiency and transparency are not consistent with the high profit margins that are much sought after on Wall Street. Financial products need to be opaque and priced inefficiently to produce excessive profits or economic rents. In October 2008, Alan Greenspan, the former Chairman of the Fed, acknowledged he was "partially" wrong to oppose regulation of CDS. "Credit default swaps, I think, have serious problems associated with them," he admitted to a Congressional hearing. This from the man who on 30 July 1998, stated that: "Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary."
On 6 March 2009 Bloomberg reported that Myron Scholes, the Nobel prize winning co-creator of the eponymous Black-Scholes-Merton option pricing model, observed that the derivative markets have stopped functioning and are creating problems in resolving the global financial crisis. Scholes was quoted as saying that: " [The] solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and … start over…" ISDA, the beleaguered derivatives industry group, predictably countered limply that: "… the notion that you would, as he said, blow up, the business in that way is just misguided."
Obama's New World Order
This article addresses Washington's financial coup d'etat in the context of discussing Michael Hudson's important, very lengthy and detailed April 5 Global Research.ca one titled: "The Financial War Against Iceland - Being defeated by debt is as deadly as outright military warfare." It reviews its key information in advance of Hudson's April 14 scheduled appearance on The Global Research News Hour to discuss. What's true for Iceland holds everywhere, including the developed world, the idea being to enrich finance capitalism through state-sponsored debt bondage and neo-feudal impoverishment. The global economic crisis was no accident. It was long ago hatched, and has been brewing for years, gestating, percolating, then bubbling into the 2000 tech crash, a mere prelude for today's greater one spreading everywhere like a cancer but hitting the developing world and most indebted nations hardest.
Hudson: "Iceland is under attack - not militarily but financially." Like many others, "It owes more than it can pay" and is bankrupt. It was planned that way, and the idea is to strip-mine the nation and its people of their resources, enterprises, assets, land, homes, jobs and futures through perpetual debt bondage. Bankers get enriched. Nations and people, however, are discarded like trash, with the IMF as enforcer, to be reinvigorated with an additional (G 20-pledged) $750 billion, quadrupling its resources to $1 trillion if fulfilled.
Wall Street and Western European bankers planned it and now ordered the government "to sell off the nation's public domain, its natural resources and public enterprises to pay (its) financial gambling debts." Also, raise permanent taxes at the worst possible time, then suck the maximum wealth from the country leaving behind an empty hulk and impoverished, desparate population. It's called dystopia Merriam-Webster defines as: "an imaginary place where people lead dehumanized and often fearful lives," the opposite of utopia under conditions of deprivation, poverty, disease, violence, oppression, and terror, much like in Orwell's Nineteen Eighty-Four.
Permanent debt bondage "is as deadly as outright military" defeat. Loss of livelihoods and assets leave people vulnerable to sickness, despair, and early deaths, much like what happened to post-Soviet Russia under Washington-imposed "shock therapy:"
- 80% of farmers went bankrupt;
- around 70,000 state factories closed;
- unemployment became epidemic;
- a permanent underclass was created;
- poverty rose from two million in 1989 to 74 million by the mid-1990s, and in half the cases it was desperate;
- alcoholism and drug abuse soared;
- so did HIV/AIDS 20-fold;
- suicides also and violent crime four-fold; and
- the population declined by 700,000 a year; by 2007 it was 10% lower than in 1989 because of sharply reduced life expectancies.
Iceland, the developing world, and the West take note. This cancer is heading everywhere, courtesy of banker-imposed diktats, mainly from America and the UK. They insist Iceland "impoverish its citizens by paying debts in ways (they'd) never follow" even though the government has no way to do it. No matter. "They are quite willing to take payment in the form of foreclosure on the nation's natural resources, land and housing, and a mortgage on the next few centuries of its future" - perpetual debt bondage no different than the spoils of war under permanent occupation. However, in this case, debtors are convinced to pay voluntarily "to put creditor interests above the economy's prosperity (and) national interest." Their indebtedness comes at a huge cost - "chronic currency depreciation (and) domestic price inflation for many decades to come."
Contrast this to how developed countries, like America, handle debt - by inflating (not deflating) their way out to pay it off with cheap (reduced purchasing power) money because inflation erodes its value. It's simple - by printing money and running budget deficits the way Washington did after Nixon closed the gold window in August 1971, ended the 1944 Bretton Woods Agreement, and no longer let dollars be backed by gold or converted into it in international markets. A new monetary system creates money like confetti, and lets us spend and live beyond our means, then have developing and indebted nations pay the price.
In recent years, dollar weakness and price inflation "wiped out much of the US international debt." The Iceland model turns "this inflationary solution inside out....in violation of traditional credit practice." Instead of currency inflation, Iceland "inflate(d) its way into debt, not out of it, (by) indexing (it) to the rate of inflation," thus guaranteeing "a unique windfall for banks at the expense of wage earners and industrial profits." The result: destruction of its traditional way of life. Iceland must "repudiate this debt bomb" to escape. It's indexed to inflation and "will never lose value." It's caught in a destructive whirlpool creating economic shrinkage, falling assets and wages in the face of perpetually burgeoning debt, the same global model needing to be exposed and renounced "now." Otherwise, economies will be hollowed out, "capital formation will plunge," people will be impoverished, and many won't survive.
His expertise comes from "having been an insider to imperial-style plundering....for forty years" - as an economist for Chase Manhattan Bank, Arthur Andersen, and the UN Institute for Training and Development (UNITAR). He's also taught economics since 1969, heads a Harvard-based economic and financial history group, is a Research Professor at the University of Missouri, and organized the first sovereign-debt fund in 1990 at Scudder, Stevens and Clark. "All these jobs (except his current professorship) involved analyzing the limited ability of debtor countries to pay - how much could be extracted from them through foreign-currency loans and how much public infrastructure (could) be sold off (through) voluntary virtual foreclosure (under) creditor-dictated rules."
He advises countries not to borrow in foreign currencies, instead "monetize their own credit for domestic spending and investment." Iceland broke "the cardinal rule of international finance: Never borrow in a foreign currency for credit" that can freely be created at home. "Governments can inflate their way out of domestic debt," not the foreign kind. Post-Soviet economies did it the wrong way, now suffer, and recent riots highlight their problems. "Instead of helping them industrialize and become more efficient," Western bankers loaded them with debt and exploited them - not for manufacturing and infrastructure development, as loans against existing real estate and infrastructure, to suck as much wealth out quickly.
It produced "bubble economies built on debt-financed real estate and stock market inflation," illusory wealth "bubbles (that) always burst." The only sustainable financing of imports is through enough exports for a favorable balance of trade. De-industrialization destroys economies by shrinking them, the result of plunging property valuations, rental income, and exchange rates. Foreign currency mortgage costs exceed property values producing defaults and losses for lenders. It's hitting Sweden, Austria and leading creditor states like America and the UK. Real estate, stock market and employment are declining "in a straight line unprecedented even in the Great Depression." It's turned neoliberalism into a nightmare.
"Just as individuals can't live off a credit card forever, neither can nations. As any classical economist knows, societies that only manufacture debt are unsustainable." Eventually they collapse into bankruptcy just like a business or household. The old saying applies. Things that can't go on forever, won't. No matter. Predator banks want to prolong the game as long as possible, grab all the wealth they can, force debtor nations to sell state enterprises at distress prices, then get new business by lending to investors who buy them on the cheap. Will it work? Only if targeted countries go along. In the case of Iceland, its very future is at stake.
Sound v. Imprudent Banking
For centuries, banks created credit responsibly - loaning money for sound investments to debtors able to repay with interest. No one imagined a world like today's with massive defaults occurring globally. In America, one-third of home mortgages are in "Negative Equity;" that is, "the mortgage exceeds the (property's) market price pledged as collateral." US national debt tripled in one year, from $5 - $15 trillion, and according to some economists like John Williams, it's much higher under GAAP accounting - including unfunded liabilities around $65.5 trillion, an amount exceeding world GDP through FY 2008, meaning America is bankrupt. Williams also puts unemployment at 19.8% by reengineering it to include discouraged and involuntary part-time workers and excluding fictitious birth-death rate ratio inclusions.
Blunt Truths about the "Dismantling of Industrial Capitalism"
Instead of extending credit to construct and grow them, financial oligarchs turned indebted nations into "casinos (through) debt-leveraged gambles," redistributing wealth upward and creating "debt peonage for most citizens." Even in America, nearly half the population has no net worth, and the gulf between richest and the rest is unprecedented. "This is the unfair system that the world's top creditors would export to Iceland - if they can convince its voters (and leaders) to accept neoliberal debt pyramiding as a way to get rich." It's not working throughout post-Soviet states that see it as the road to hell, if public riots are a gauge.
"Better alternatives (are) the only defense" as it's impossible for "astronomically indebted economies to 'work their way out of debt.' " Trying will "collapse the currency's exchange rate," divert huge amounts of revenue and property to creditors, and produce "a new kind of post-capitalist (unjust, unsustainable) non-production/consumpton economy" too gruesome to imagine or tolerate. Iceland's financial crisis is the result of lawless predation, an "international (austerity demanding) Ponzi scheme" under rigged market rules imposing public and private "asset stripping" to pay debt. A simple scheme transfers wealth.
Economies and populations are trapped on a "debt treadmill from which there is no escape. (Lenders) pile on credit and let debts grow (through) the 'magic of compound interest,' knowing that loans cannot be repaid - except by asset sell-offs." They're strip-mined through unending debt service so the parasite keeps feeding on its food source. The idea is to get it all, leaving empty hulks behind, then on to the new victims. It's "euphemistically dubbed post-industrial wealth creation," the kind that's collapsing economies globally and destroying people. Obama is commander-in-chief of the process.
America as Lead Predator
It's a viciously ugly scheme that's "trapped other countries into a nightmarish system in which (they're practically forced) to recycle their excess balance-of-payment dollar inflows back to the US," mainly as loans to the Treasury. "When foreign central banks receive dollars for their exports (or asset sales)," their choices are limited. "Congress won't let them buy important domestic companies or resources," or get paid with US gold reserves. The alternative is buy Treasuries and mortgage-backed securities like Fannie and Freddie debt.
Icelanders and other nations must remember that America is the world's largest debtor, and as Adam Smith explained in The Wealth of Nations - "no nation ever repaid its debt," and he never envisioned one large as America's. We grow it by issuing paper for real assets and services. Until other countries demand more than confetti, this "Madoff-Ponzi scheme" will persist - for tiny states like Iceland (population 319,000 as of January 2009) until nothing is left to hand over. Today's road to riches isn't through capital investment. It's by "foreclos(ing) at pennies on the dollar and mak(ing) 'capital gains' by flipping property onto (central bank-inflated) world financial markets." In a word, socializing risks, privatizing profits, preying on the weak, and getting "a free lunch" at public expense.
It's a zero-sum game. One side's gain is another's loss, and when it matches America against Iceland, it's easy exerting pressure, but no certainty it'll prevail. As a sovereign state, Iceland can choose. More on that below. Throughout the process, "financialized wealth is extractive, not productive....because loans, stocks and bonds are claims on wealth," not the kind produced by making things.
This is Iceland's dilemma. "Homeowners are paying tribute, not in taxes to (an occupier), in interest to (debt pyramid, international creditor) sponsors of "over-financialization," aiming to strip-mine the country of everything, the way it's worked in many developing states. "Yet many Icelanders are heading into this future voluntarily" with little understanding of the trap, propelling them toward debt peonage destitution under the guise of an IMF rescuer - like a spider to a fly. It shouldn't happen and won't if countries refuse to be trapped and extricate themselves in time. Iceland is at a crossroads, still able to avoid what ruined Russia, other post-Soviet states, South Africa, and many other nations misjudging America and the IMF are saviors, not world class predators.
"Back to the Future" - A New Age of Neo-feudal Debt Bondage
Conventional banking works by extending credit in the form of interest-bearing loans and seizing collateral only in cases of default. Central banks were created to finance governments and commercial ones to "expand trade, related infrastructure, mining and shipping," and develop other forms of business and industry. More recently, "financial managers persuaded many countries to sell off public enterprises, like their water or energy supplies, mainly to pay debts or cut taxes" for the rich.
It's turned debtor nations into "tollbooth economies in which basic services become a vehicle to extract greater and greater portions of national income and wealth for the benefit of the few." It's the opposite of how classical economists define "free markets." Today, financial interests control them to extract labor and capital investment-produced surpluses - for themselves under the guise of "economic democracy." The result "pushed much of the Third World into poverty since the 1960s," and now the same cancer is heading everywhere.
Financial Warfare As Deadly As by Armies
Today's financial strategy is "multilateral (with) the IMF (and World Bank) act(ing) as enforcer(s) for global creditors to appropriate the income of real estate, national infrastructure and industry" by masquerading as a helping hand and seducing borrowers to believe it.
Here's how neo-feudal banking works. It doesn't create credit for manufacturing. Retained earnings and equity do it. It "create(s) credit primarily against (existing) collateral, and by so doing, "extract(s) money from the economy (and) undercuts industrial growth for "short-term speculative gains." This hegemony "took thousands of years to achieve," and it wasn't easy inducing nations into poverty through "debt pyramiding as good economic strategy." It's like prescribing gorging as a way to lose weight or a junk food diet to stay healthy.
Iceland made it worse by "protecting the claims of creditors against debtors," including most wage-earners. As post-bubble home prices plunged, creditors held their own and even "strengthen(ed) their hand by increasing their take," thus making a bad situation worse. Its people own a shrinking equity in their homes vis-a-vis bankers having the lion's share. Its law shifts homeowners to "Negative Equity," and it works by keeping people in the dark.
But it's much the same in the US to hide the root cause of today's crisis - Wall Street/Washington's engineered housing and debt bubble fraud amounting to financial piracy of the greatest magnitude. In America, Iceland, and elsewhere it's turned "ownership" societies into "loanship" debt trap ones. Until recently, it was unthinkable to let economies be crippled by interest payments. Now it's de rigueur through clever manipulation to convince people and nations to go along with their own demise.
For Iceland, its debt burden threatens its national identity and "loss of its future" the way Adam Smith explained - through bankruptcy when it's too great to repay. "Today, creditors and bondholders care about foreign economies only to the extent that they can charge (enough) interest (to) absorb their entire economic surplus." Getting it all is today's credo, and nothing too outlandish is irresponsible. Get in trouble. Socialism comes to the rescue, for bankers, not people or easy targets like Iceland.
Its "ethic is mutual aid and prosperity for all....a highly socialized attitude (yet how tragic that it's) lead the nation to (buy into) the snake oil (of) debt peonage." Economic growth never keeps pace with accruing debts that get recycled into greater ones, but end games are the same. "Debts that can't be paid, won't be," while bankers too big to fail get bailed out at the expense of public interests and sound economics. Yet Hudson explains: "Creditor mismanagement is the most important problem that any country should strive to avert."
Most important is to foster a free and open market of ideas, to extract the best and discard the others. But that's not how Western societies work, especially banker-run ones. A "free market" for them is "free" of ideas laying bare their snake oil. "Most societies throughout history provide(d) credit.... without oligarchy." Today it's the opposite. Predatory finance erased centuries of reform and did it at warp speed. As a result, our freedom is threatened and very close to being lost. What's needed is a return to "basics, and a call for transparent statistics," socially progressive ideas "of a just society free of economic privilege, free of prices in excess of socially necessary costs of production and of rentier income and wealth without effort," earned "in their sleep," not through their labor.
It means wealth should be based on "what one creates - not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money and other natural monopolies." Reform depends on purging this privilege. "The way to do it is to treat banking like transportation and broadcasting, as a public utility," not something privatized for "rentiers (to) tax society" for what rightfully belongs to everyone. In the hands of predators, progressive reforms are impossible as financial giants "preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry." Financialization:
- "raise(s) the cost of living (and) doing business;"
- frees bankers' "major customers - mortgage borrowers - from taxation to leave (maximum) surplus (for) interest;"
- collects public sector revenue "by capitalizing it into interest charges" and inflating housing, other real estate, and other business prices;
- "shift(s) taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies."
This is predation, the very opposite of "classical free market policy." Keynes concluded his General Theory by calling for "euthanasia of the rentier." His followers advocate banking as a public utility "to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles." None of that's in sight. Maybe someday after the inevitable demise of the current system that will eventually crumble under its own weight.
Lessons for Iceland and Other Nations
Iceland "is under financial attack from outside as well as within - by foreigners supported by a domestic banking class. To succeed (they need) to convince the population that all debt is productive, and that the economy benefits to the extent that its net worth rises (that is, make its asset values appear greater than its debt)." The fact is that prices don't fall, "and if they do, debts should (remain), even (at the expense of) negative equity." Icelanders are being manipulated to believe they have "no alternative but to pay debts that a few insiders (accumulated, ones) that accrue interest when (they're) unpaid." In fact, demanded debt amounts exceed what the country can pay, but the strategy is to conceal this as long as possible "to proceed with the foreclosure and voluntary pre-bankruptcy sell-off of national assets to pay" predators.
What's true for Iceland, holds everywhere Wall Street and the IMF target, and here's the scheme:
- shrink economies;
- shift wealth and property upwards to a financial oligarchy; and
- price "labor and industry out of world markets as a result of the heavy financial charges built into (the) pricing system."
Iceland is a "model test case for economic justice." Hopefully it will "confront reality sooner than later" and not get trapped into perpetual debt bondage by succumbing to global creditor pressure or seduction. What benefits them harms people, and everyone needs to know it. Bankers "aim (for) a return to 'normalcy,' defined as new exponential (debt volume) growth" producing more destructive bubbles like the last ones. Iceland must reject Wall Street's medicine or perish, and the same holds elsewhere, including in America. Bankers, not nations or people, should take the pain.
Hudson asks: "How can Iceland (or Hungary, Latvia, Ukraine, or many other nations) pay its debts without bankrupting itself, (in Iceland's case) abandoning its social democracy and polarizing its (people) between a tiny creditor oligarchy and" everyone else? They're threatened by "a new ruling class that will control (their) destiny for the next century" or beyond. It's their choice to reject it and stay free. Their "foreign currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright." The guiding principle should be to annul debts taken out under (destructive and extractive) terms benefitting creditors at the expense of their prey.
They aim to dominate societies - "above all....to maximize the power of debt over labor. The worse the economy does, the stronger" they get. It's a vicious cycle "recipe for economic suicide (from perpetual) debt peonage." Iceland can be a test case model against it. It comes down to whether it will back its people or, like America, surrender to financial predators. It's much the same globally, the result of the greatest ever economic crisis opportunity for plunder. The perpetrators love it. It's high time they got their comeuppance.
Imagine tiny Iceland taking the lead and fighting back against what another former high-level Wall Street and government insider warns - Catherine Austin Fitts, Assistant Secretary of Housing and Federal Housing Commissioner under GHW Bush and Dillon Read & Co. Managing Director and board member. In her latest quarterly review, she predicts that "Obama will do more to help bankers achieve centralized control and one world government than any (previous) US politician." In less than three months in office, he's shown bankers they can count on him - to the tune of trillions of dollars, further open-ended checkbook amounts on request, and global "diplomatic" pressure on targeted nations to surrender. It's for public rage, tiny Iceland, and other over-indebted nations to demand "no more." Hopefully enough of them have backbone to do it.
A 'Rebubble' Attempt
The rally is on! The Dow rose another 246 points yesterday. Enjoy it while it lasts...but keep those trailing stops tight. The "End of the Rally is Nigh," says Barron's. Our old friend, Marc Faber, says he expects a 10% drop in the stock market before the rally resumes. Maybe. This rally is going to end sometime. But it probably has a ways to go. There are still a lot of suckers who haven't been drawn in.
Another old friend, Rick Ackerman, thinks the problem with this rally is capitulation...or rather, the lack of it. There's been no capitulation, says he. And you can't have a real bottom without it. No capitulation, no bottom. The news from the economy is bad and getting worse. Credit card debt has just taken its biggest plunge in 32 years...maybe ever. Credit card balances fell 9.7% in February. And the number of open credit card accounts is going down too. What happens when people can't pay down their loans?
"Mortgage delinquencies soar in the US," says a Reuters article. Remember, delinquencies are the beginning of the process. Then come foreclosures and auctions - all eventually driving housing prices down further. And when property prices fall, so does the collateral behind the banks' and other financial institutions' assets. So, their troubles aren't over. The worst is still ahead of us, not behind us. But despite the bad economic outlook, investors think the worst is past for the stock market. Markets look ahead, they say, beyond the immediate economic forecast. True, but they have an adorable habit of seeing only what they want to see.
"In January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse," explains Rick Ackerman, "domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline." Investors didn't give up on stocks - despite the huge decline in stock market prices. What that means is that there's still a lot of selling to be done.
"This bear market will end," he continues, "like every other bear market in history, with a wholesale dumping of stocks at prices that will make current values seem exorbitant in comparison." That's why you use trailing stops. You want to be sure that when the selling begins your stocks get sold first - long before most investors finally capitulate. It's amazing how much credibility some people have. Seems almost infinite. No matter how bad their advice...or how little they understand...people still ask their opinions. Or, to put it another way...it's amazing what most people will believe. You'd think - after $50 trillion in losses - that people would be careful whom they listened to. Who would take Alan Greenspan's thoughts seriously, for example? Yet, the newspapers still report his remarks with a straight face.
And what about all the economists who claimed that since the "U.S. has the world's most flexible, dynamic economy" you couldn't go wrong buying U.S. stocks? And what about the market timers who urged investors to buy "bargains" when the Dow was only 10% below its peak? And how about the regulators - such as Tim Geithner - who completely missed the biggest Ponzi scheme of all time, taking place right under their noses? And the economists who thought derivative debt made the financial world safer by "distributing risk more widely?" And those, such as Hank Paulson, who thought the sub-prime crisis was "contained" at $100 billion in losses? (Current cost of the bailouts - $12.8 TRILLION!)
As our friend Nicholas Taleb says, it's as if these guys had wrecked a school bus - while they were driving drunk. But instead of putting them in jail - they're given a new school bus to drive! Kevin Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism warned of a the pending explosion of a 25-year "multibubble." The bubbles began in the 1980s, he says, when the financial sector accounted for 10 percent to 12 percent of the U.S. economy had grew to an "arguably crippling" 20 percent to 21 percent of GDP by the middle of this decade. Who's to blame? Henry Paulson, he says...and Ben Bernanke...and Alan Greenspan.
The Reuters report: "Phillips calls Paulson a Wall Street insider who was looking out for his own, and Bernanke an academic misguidedly trying to refight the 1930s Great Depression. Together they formed the wrong team at the wrong time whose ad hoc approach threw away hundreds of billions of dollars and more than doubled the Fed's balance sheet, he says. "What you're seeing Bernanke do is he's trying to create a bailout reflationary bubble, which he can't describe as a bubble, just as Greenspan couldn't describe the housing mortgage bubble as a bubble. What we're seeing by Bernanke is a covert attempt to rebubble," Phillips told Reuters.
Meanwhile, Nouriel Roubini - who's been mostly right about the crisis - says that [Jim] "Cramer is a buffoon." "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame...He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong." Roubini warned two years ago that the United States faced its worse recession in four decades. He points out that the current rally on Wall Street merely follows the pattern of other major downturns. "Once people get the reality check than it's going to get ugly again," he says.
Finally, as promised in yesterday's issue: What can we learn from Argentina? In the '30s, Argentina suffered along with the rest of the world. Until then, it was roughly as rich as Europe and rivaled America in some ways. "As rich as an Argentine," was an expression in England. Marrying one's daughter to an Argentine planter was the dream of many down-at-the- heels English aristocrat. But something went very wrong on the pampas. Instead of Franklin Roosevelt's New Deal, the Argentine's got a raw deal from Juan Peron. Both programs were frauds.
Both made things worse. But Peron's program stuck. Americans soon came to their senses and forgot Roosevelt. Between Franklin Roosevelt and Barack Obama were Eisenhower Republicans and Carter Democrats. But Peronist politicians have dominated the Argentine political landscape since the '40s. Every problem demands a government solution. And every Peronist solution makes things wors
Worried Customers Flock to Shuttered Bank for Answers
Saturday mornings are usually busy for New Frontier Bank in Greeley. But nothing like this Saturday. On the morning after the federal government stepped in to take over the bank, customers and employees arrived early and often. Employees were allowed in the bank, but customers were greeted outside by representatives of the Federal Depositors Insurance Corp. who were there to assure them that their money was safe. An office supply truck backed up to the entrance, unloading copying machines and other equipment supposedly to be used by the FDIC to copy records. Three off-duty Greeley police officers stood by inside the bank to provide security, should something difficult happen.
Throughout the morning -- as New Frontier employees participated in a lengthy meeting inside the bank -- David Barr, George Howard and Barbara Brunson from the FDIC talked individually to customers as they walked up to the doors or sat in a small traffic jam in front of the bank. "We just want to assure people that their money is safe," said Barr, who flew in from Washington for the bank takeover. "We're also very grateful to the employees of the bank today. They're working on overtime, but most of them will be here all day Saturday and some will be back Sunday. We can't do what we have to do without the help of the employees." At the same time, employees have been told not to speak to members of the media about the bank's closure.
People approached the door all morning long. Like Jerry and Jean Travis of Greeley, who've banked there for about four years. "We know what happened, but it's scary when you wake up Saturday morning and see your bank has closed," Jean said. "We were worried mostly about our savings," Jerry said. "But they (the FDIC representatives) told us everything was safe and we can transfer our savings to another bank. That's a good feeling, but -- you know -- it's still kind of scary." Bob Bernd, a well-known Greeley radio announcer and for the past few years an information specialist at the bank, was in and out of the bank Saturday, assuring customers their money is OK, and also saying goodbye to close friends. He's the familiar face most bank customers see when they visit New Frontier.
Larry Naggatz has banked with New Frontier since it opened, and he came by Saturday. "It's a beautiful bank," Naggatz said, "We hope our money is safe. He said he stopped to talk to the FDIC reps to make sure he can still write checks on his bank account." He was told writing checks would be fine for the next 30 days. After that, he'll need new checks from another bank. Another longtime customer, Carl Heimbuck, said he knew the bank would be closed Saturday, but he was there "because our CD came due today, and I wasn't sure what to do." FDIC rep George Howard assured Heimbuck that all would be worked out. "He told me they'd be sending out checks starting Monday, so I should be fine," Heimbuck said.
While the bank regular Saturday hours are 8 a.m.-1 p.m., a few customers continued to filter in through the afternoon. Howard and Brunson stayed out front, smiling and reassuring customers. Other banks in the area bulked up their staffing Saturday to handle loads of additional customers moving their money. "What's normal on Saturday, is we run one new account," said Bank of Choice president Darrell McAllister. "We had to pull in people from Fort Collins and had seven (employees) working today. The FDIC did come to our bank this morning and were politely encouraging us if possible to take any credit we could." Bill Kurtz, community bank president for Wells Fargo in Greeley, said business there has been increasing ever since the cease and desist order was issued to New Frontier in December.
"Just about any time there was article, we'd see an increase in accounts," Kurtz said. "When they announced they lost their investors, we had busier days that we'd seen" in a while. New Frontier will reopen Monday for 30 days, but with a new name: Deposit Insurance National Bank of Greeley. Most banks in the area will be ready. "Monday is going to be a busy, busy day," Kurtz said. "We're planning on opening early. I'm going to bring in staff from other areas, from Fort Collins and Boulder in order to make sure I have enough bankers to serve hopefully our new clients."
On How We Got Here
Every morning I wake up and look at Yahoo Finance and then open the front door and pick up the NY Times and the Wall Street Journal. And then sometimes I get mildly indignant at the news.The more I try to look at what’s happened the past two years, the more I realize that everyone has their own version of history. And, belatedly, I realize how difficult the writing of history must be, trying to figure out how society progressed from an earlier time to a later time, or from then to now. History is only a plausible story that everyone comes to accept as the more or less canonical version. I'm not a relativist, but with regard to cause and effect in human affairs, there is no provably "correct" explanation and there is no proof. Every path to the present has many possible trajectories that got there, maybe even parallel ones, as in the path integral formulation of quantum mechanics.
It seems to me that one plausible version of what happened recently is as follows: In the excitement and/or greed of the last twenty years, and following the repeated attempts to avert any market downturns, money was easy to borrow and a class of assets, call them class A (think of houses as an example, but I want to be more generic) became vastly overvalued by any reasonable standard. (Fair value is very hard to figure out because it obeys the Hole-In-The-Bucket Law1.) Derivatives on class A were therefore vastly overvalued too and, being derivatives, much more sensitive to changes in fair value (think subprime mortgages and their tranches). When people began to come to their senses, they realized these assets weren't worth what they'd paid for them. As a result, the firms that owned them or held too many of them on their books became insolvent.
There were other complex securities in the world, belonging to classes B, C, and D, etc., and as people became scared of complexity, they shied away from these securities too. These securities weren't overvalued in quite the same way. Whereas class A securities became "genuinely" worth much less, classes B, C and D became illiquid and so seemed to be worth much less too, but more for psychological reasons than for "physical" reasons. The companies that owned them got into difficulty too. As everyone fled the insolvent and illiquid securities they lost confidence in the economic future and stock prices fell, and people felt poorer and spent less and companies projected less future profits and fired people who then spent less money and so they drove other companies that depended on them to do badly and so on and so on.
The administration is trying to cure insolvency and illiquidity with stimulus, but stimulus is mostly a cure for illiquidity. They are using a medicine for living people to revive the dead2. The best thing would be to ring fence and restructure only the insolvencies and to stimulate the illiquidities. The desperate effort to treat insolvency with stimulus and the Chicken-Little warnings about the consequences of not doing so detracts from the confidence necessary to restore liquidity. Much of the sense of unfairness and indignation about the current bailout and bonuses comes from the fact that large insolvencies are being treated as illiquidities in the hope that time and volatility will save them, but small insolvencies don't get the same kindness. This is a kind of appeasement of large firms and people whose risk-taking should instead merit an honest declaration of insolvency, which is why I still think we need just one Churchill, not many Chamberlains.
Not true here.
- The Hole-In-The-Bucket Law: Fair value depends on future cash flows; future cash flows depend on the state of the future economy; the state of the future economy depends on how people use their money now; how people use their money now depends on their perception of their net worth; their net worth depends on fair value. See http://en.wikipedia.org wiki/There's_a_hole_in_the_bucket, Belafonte, H. & Odetta. See also Soros, G (1987) The Alchemy of Finance.)
- A little old Jewish lady at a funeral shouted: "Give that man some chicken soup." "Are you out of your mind? Can't you see he's dead?" someone said. "Chicken soup won't help." "Well it can't do any harm," said the little old lady.
Bank Stress-Tests Are A Sham
At the moment, the Fed has asked the banksters not to leak the results of the bank examiners stress-tests during the fictiously inflated bankster earnings season (April 9-April20). You see, as long as the banksters can announce fictiously inflated earnings, the higher the stock market may go short term, and the better their capital ratios will be when the Fed finally announces the stress-test results at end of April, ahead of the implementation of Geithner’s program to cleanse the banksters of their toxic assets.
According to the NYTimes:"the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say. That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again, either by private investors or, more likely, the federal government. After receiving many millions, and in some cases, many billions of taxpayer dollars, banks still need more capital, these officials say…
"Regulators say all 19 banks undergoing the exams will pass them. Indeed, they say this is a test that a bank simply will not fail: if the examiners determine that a bank needs "exceptional assistance," the government, that is, taxpayers, will provide it…
"Regulators recognize that for the tests to be credible, not all of the banks can be winners. And it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets."
"Clearly there is a desire to put a seal of good bookkeeping on these banks," said Lou Crandall, the chief economist at Wrightson ICAP. "Whether they will use this to select a couple of sacrificial lambs is unclear."
As far as the validity of these so called bank stress-tests goes, Yves Smith notes that "This is a garbage in, garbage out exercise. The banks used their own risk models to make the assessment, for instance, the very same risk models that caused this mess. And there was no examination of the underlying loan files." Understaffed bank examiners stress tests will have to rely on bankster models and the "significant judgements" of banksters. Remember from the Warren oversight Panel, the treasury believes this is a liquidity crisis, to be treated with more taxpayer-privided liquidity b/c assets are being mispriced in their significant judgment.
Bank examiners (from the treasury and Fed, suspect sources for examiners to come from, given what we know of their biases) will accept this garbage as "valid assumptions." This alleviates them from the responsibility of being forward looking at all. It isn’t required when loans held to maturity are expected to pay out 100 cents on the dollar. I am also alarmed that regulators say this is a test that a bank simply will not fail. Have they already determined the outcomes? I am further alarmed that the regulators recognize the need to GAME THE STRESS TESTS (sorry couldn’t resist thinking in all caps :-)) for the tests to be considered credible. Which they can easily do as you suggest by wiping out the some of the least offensive players.
It feels all so Yucky-Poo to me. Lurking Hu-Flung-PU seems to have a few more irons in the fire for branding? I would also like to add that we can also anticipate the new "resolution authority" bill that Geithner is asking for to broaden US Treasury’s power and authority, will be used in conjunction with these stress tests. And yes, it will be interesting indeed to see which bank managements get the ax, and which banks should be in receivership. If they round up all the unusual suspects and put them in front of the firing squad and leave the banksters intact, why you might just assume that the banksters delivered this injustice to the fairer banks. Oh, and guess what the banksters op margins will improve when there is less competition (just like WFC saw happen today according to their CFO).
Roundabout Bailout: Fed To Pump Foreign Currency Into U.S. Banks
The Fed is already printing trillions of U.S. dollars and pumping them into the global economy in an effort to stave off a financial collapse. Now it plans to start injecting foreign currency, too, according to minutes recently released from its March meeting. How the hell can the U.S. Fed do that? Glad you asked. The Federal Reserve engages in so-called swaps with foreign countries, which we first reported here. It uses these swaps to pump hundreds of billions of dollars into foreign central banks while taking foreign currency in exchange. The foreign central banks pass their new U.S. dollars to their foreign financial institutions, while the Fed has kept the foreign currency on its balance sheet and not injected it into the money supply.
Now, however, the Fed will be able to take the foreign currency it acquires in these swaps, and rather than hold it on its balance sheet, pass it on to U.S. banks, according to minutes from the Federal Open Market Committee's March meeting. These U.S. banks can then use that foreign currency to cover their foreign debts. The Fed governors said, according to the meeting notes, that the measure was only precautionary: "There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future." The expanded effort is part of a Fed project that has been injecting hundreds of billions of dollars into foreign central banks over the last several months. The committee notes say that the new program will "augment the existing network of central bank liquidity swap lines."
The Fed also announced in its minutes that it was approving "additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank." Extending additional swaps to these central banks raises the question of whether those banks are facing difficulties repaying previous swaps. The European and Japanese economies have been collapsing at a faster rate than the United States' has. "It is basically either an extension or increase of the existing lines, and raises suspicion that massive losses have been incurred in the previous round of supposedly 'temporary' swaps, as the return to dollar-supply-normalcy that these geniuses pretended to expect would have happened by now, did not," ventures economist James Galbraith.
Rep. Alan Grayson (D-Fla.), after reading the minutes, describes the Fed plan as "a massive transfer of wealth from the American people to who knows where," calling it a "round-about bailout." Beyond that, he notes, it's hard to know what to make of the Fed action because of the obscurity of the institution. "The Fed is out of control. If the president tried to do this, Republicans would be calling for his impeachment. But because it's done by the man behind the curtain they call the Chairman of the Federal Reserve, it's supposedly okay," he says, arguing that the founding fathers never intended one man to have so much unchecked power. The obscurity has led economists to wonder about the Fed's true motives. The expansion of Fed power comes amid increasing calls for transparency into the workings of the organization. If the Fed does send foreign currency to U.S. banks, it will be under no requirement to disclose which banks or how much.
On Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) called for the GAO to have more authority to investigate the Fed. Grayson says Frank has told him on numerous occasions that Congress needs a better idea of what it is that the Fed is doing. On Wednesday night, House Speaker Nancy Pelosi (D-Calif.) called on the Fed to post its financial transactions online during a conversation with the Daily Show's John Stewart. She plans to address "Fed authority" when Congress returns.
From the minutes:
The Committee also took up a proposal to augment the existing network of central bank liquidity swap lines by adding several temporary swap lines that could provide foreign currency liquidity to U.S. institutions, analogous to the arrangements that currently provide U.S. dollar liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future. The Committee unanimously approved the following resolution:
"The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and Swiss francs. The swap arrangements with each foreign central bank shall be subject to the following limits: an aggregate amount of up to £30 billion with the Bank of England; an aggregate amount of up to €80 billion with the ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate amount of up to SwF 40 billion with the Swiss National Bank. These arrangements shall terminate no later than October 30, 2009, unless extended by mutual agreement of the Committee and the respective foreign central banks. The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of swap transactions to assist such institutions in meeting short-term liquidity needs in their foreign operations. Requests for drawings on the central bank swap lines and distribution of the foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Foreign Currency Subcommittee."
Obama's Top Economic Adviser Is Greedy and Highly Compromised
Among the payoffs Larry Summers received: $45K from Merrill Lynch days before he joined Obama's team. And it gets worse."But Summers, a leading architect of the administration's economic policies and response to the global recession, appears to have collected the most income. Financial institutions including JP Morgan, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form." -- Washingtonpost.com
So I guess that $45,000 speaking fee from Merrill Lynch wasn't technically a bribe because Summers wasn't named to Obama's economic transition team until Nov. 24 — a full 12 days later. I'm sure Larry Summers had absolutely no inkling whatsoever that he was going to be one of the key advisers to the new administration on Nov. 12. It likewise makes perfect sense that Merrill Lynch, a company just months removed from having to be rescued from bankruptcy by an 11th-hour, pseudo-state-subsidized buyout by Bank of America, would decide to spend $45,000 on a speaking appearance by Summers because, well, they really valued his economic expertise and his proven ability to rally the troops with his stirring rhetoric.
It certainly had nothing to do with the fact that a) it was eight days after a Democrat was elected to the presidency; b) Summers had a long history of being one of the key policymakers in Democratic Party politics; and c) Merrill was absolutely not going to survive more than a few more months unless taxpayers forked over another 20 billion or so to cover the giant hole in Merrill's balance sheet that was, at that time, still being hidden from Bank of America and its shareholders. And how about that $135,000 appearance for Goldman Sachs in April, when Summers was already involved with Democratic Party politics again? That wasn't a surreptitious campaign contribution at all! But you have to give Goldman credit: it sure is thorough. It literally leaves no stone unturned.
One has to love the sequence of events here. Back in 2004, Goldman chief Hank Paulson goes to SEC chief William Donaldson and petitions to have lending restrictions relaxed for the top five investment banks. Donaldson rolls over, the restrictions are relaxed, and it's a disaster, as the top five banks immediately overleverage themselves — two of the five, Bear Stearns and Lehman, would actually collapse, at least partially as a result of being insanely overleveraged. In the midst of this disaster, Paulson is named Treasury secretary. He does nothing about the worsening financial crisis until it is far too late, then allows one of Goldman's biggest competitors, Lehman, to fail while at the same time intervening on a huge scale to save AIG, which just happens to owe Goldman a ton of money.
When AIG is bailed out, its government regulator is not in the room, but the new chief of Goldman, Lloyd Blankfein, is. In fact, Goldman Sachs ultimately receives about $13 billion of the money paid to AIG by the government in the bailout, reportedly getting paid 100 cents on the dollar for its AIG exposure, despite the fact that the bank claimed it wasn't going to suffer severe losses if AIG collapsed. Later, another former Goldman executive, Ed Liddy, is installed as head of AIG -- which just happens to get bailed out twice more, the last time to the tune of $30 billion. The last two bailouts of AIG take place after a former Goldman chief, Robert Rubin (who, incidentally, helped start this mess by ramming through a series of i-banker wet-dream deregulatory moves as Treasury secretary for Clinton in the 1990s), is named to the Obama transition team, joining Summers (who had already taken $135,000 from Goldman that year) and Timothy Geithner (a protege of another Goldman alum, John Thain, former president and chief operating officer and notorious scumbag).
When it comes time for new Treasury Secretary Geithner to name a chief of staff, he chooses Mark Patterson, who is less than a year removed from working as a lobbyist for … Goldman Sachs. Patterson's great contribution to society as a Goldman lobbyist was opposing a 2007 measure introduced in the Senate by presidential candidate Barack Obama to rein in executive compensation. I remember watching Obama the presidential candidate give a speech in Mason City, Iowa, in 2007. Obama had made a big show of not having registered lobbyists working for his campaign, and he promised that lobbyists "won't work in my White House." The line was a hit and became part of Obama's stump speech. I must have heard it two dozen times.
A little over a year later, he put a registered lobbyist of a bailed-out investment bank into a job whose primary responsibility is administering bailout money. It gets worse. According to a Glenn Greenwald piece I just read, even Gary Gensler is a former Goldman employee. That absolutely blows my mind. Genlser is Obama's choice to head the Commodities Futures Trading Commission, whose purview is the derivatives market. The CFTC was the battleground where ages ago Rubin, Summers, and then-Rubin aide Gensler teamed up to whack CFTC chief Brooksley Born, who had serious concerns about the burgeoning derivatives market, in particular the credit-default swap market. Rubin overturned Born's recommendations, and derivatives were freed from most regulation. That economic Alamo led almost directly to the AIG disaster.
Think about this for a moment. A former Goldman chief, Rubin, presses the CFTC to deregulate a type of derivative contract whose chief benefit to an investment bank like Goldman is that it allows it to lend more -- the CDS being most useful as a tool to move investment risk off a bank's balance sheet. Then another Goldman chief, Paulson, pushes for further relaxation of lending limits. Then Goldman jumps head first into the housing bubble, buying tens of billions in CDS protection to hedge its crazy investments. This massive explosion in lending by banks like Goldman, fueled in part by the use of derivatives like CDS and fueled still more by the 2004 change in rules, puts an enormous strain on the economy, leading to giant holes blown in its hull by the end of 2007 and on through 2008.
It follows that when Goldman's chief partner in those CDS deals, AIG, collapses as part of this wave of crashes, Paulson — now Treasury secretary — rushes to the rescue, pumping billions in taxpayer money into AIG that is quickly funneled to Goldman. Then a Goldman alum is put in charge of AIG, while another bunch of Goldman alums funnels still more bailout money to AIG, and yet another Goldman alum is put in charge of regulating the derivatives market that is the focus of most of the bailout efforts. In the midst of all of this, something amazing happens. Goldman Sachs, along with Bank of America, Morgan Stanley and a host of other "troubled" banks, reports a profit for its first quarter in 2009! How and why that happened is another fascinating story, for another time. For now, the only thing to remember is that all the ones who got us into this mess — Rubin, Summers, Goldman in general — are now being put in charge of the cleanup by a president who spent most of 18 months on the campaign trail pledging to end the influence of money in politics.
Add this to the obscene giveaway that is the toxic assets program Geithner has just devised (Goldman Sachs "expressed interest in participating in the plan as an investor," according to the Wall Street Journal), and you have an amazing situation. Between the Bush and Obama administrations, you have a bailout program that has now figured three ways to funnel money to Goldman Sachs: via AIG, via TARP and now via this trillion-dollar "public-private investment program," which basically lends huge amounts of money to investors and provides guarantees against heavy losses. It's free money, state-subsidized profiteering at its most naked. I hear all the time from people who complain that it's naive to wonder why we put Wall Street executives in charge of policing Wall Street -- that this is actually quite a sensible policy, because we need people with experience in that world making these decisions.
The reason people say this has nothing to do with reality and everything to do with the fact that the financial markets are intimidatingly complex. When Enron buys a seat at the table to conduct energy policy under the Bush administration, everyone knows what that is. When Reagan hires notorious union busters to run the National Labor Relations Board, everyone knows what that is. And when we hire investment bankers to run banking policy, and put investment bankers in charge of handing out bailout money to investment banks, we ought to know what that is. But for some reason we don't seem to see it the same way, not as clearly. In my mind this officially ends the Obama honeymoon. I can maybe see one or two of these creeps in key positions. But this many -- it's an undeniable pattern. He put William Lynn, a former Raytheon lobbyist, in the Pentagon as deputy defense secretary.
A lot of people squawked about Obama's early lean toward John Brennan as CIA director because of his role in establishing the "enhanced interrogation" policies, but to me more significant was the fact that Brennan was the former chairman of the Intelligence and National Security Alliance, which is sort of like the chamber of commerce of intelligence contractors. Most importantly, I'm sensing in these economic appointments a kind of drearily cynical parsing of the approval-ratings situation -- Obama knows he's still flying high with the "Yes We Can!" T-shirt crowd and knows that most people simply are not going to give a shit if he packs his Treasury Department with Goldman alums and lobbyists, despite the fact that he explicitly promised to do otherwise.
Awake and Sing!
"I am pronouncing the depression over!" declared CNBC’s irrepressible Jim Cramer on April 2. The next day the unemployment rate, already at the highest level in 25 years, jumped yet again, but Cramer wasn’t thinking about the 663,000 jobs that disappeared in March. He was thinking about the market. Mad money. Fast money. Big money. The Dow, after all, has rallied in the weeks since Timothy Geithner announced his bank bailout 2.0. Par-tay! On Wednesday, Cramer rang the opening bell at the New York Stock Exchange, in celebration of the 1,000th broadcast of his nightly stock-tip jamboree.
Given Cramer’s track record on those tips, there’s no reason to believe he’s right this time. But for the sake of argument, let’s say he is. (And let’s hope he is.) The question then arises: What, if anything, have we learned from this decade’s man-made economic disaster? It wasn’t just trillions of dollars of wealth that went poof in the bubble. Certain American values also crumbled and vanished. Making quick killings by reckless gambling in the markets — rather than by investing long-term in new products, innovations, technologies or services that might grow and benefit America and the world — became the holy grail in the upper echelons of finance.
This was not an exact replay of the preceding dot-com bubble. As a veteran of the tech gold rush recently observed to me, in Silicon Valley "the money comes later" and "the thing you make comes first, however whimsical, silly, microscopic, recondite it may be." On Wall Street over the past decade, the money usually came first, last and in between. There was no "thing" being made at all unless you count the slicing and dicing of debt into financial "products," the incomprehensible derivatives that helped bring down the economy, costing some five million Americans their jobs (so far) and countless more their 401(k)’s.
On the same Friday that the Labor Department reported the latest jobless numbers, the White House released (in the evening, after the network news) some other telling figures on the financial disclosure forms of its top officials. From those we learned more about how much the bubble’s culture permeated this administration. We discovered, for instance, that Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs. Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration. This dynamic duo’s innovative gift to their country was banks "too big to fail."
Some spoilsports raise the conflict-of-interest question about Summers: Can he be a fair broker of the bailout when he so recently received lavish compensation from some of its present and, no doubt, future players? This question can be answered only when every transaction in the new "public-private investment plan" to buy the banks’ toxic assets is made transparent. We need verification that this deal is not, as the economist Joseph Stiglitz has warned, a Rube Goldberg contraption contrived to facilitate "huge transfers of wealth to the financial markets" from taxpayers.
But perhaps I’ve become numb to the perennial and bipartisan revolving-door incestuousness of Washington and Wall Street. I was less shocked by the White House’s disclosure of Summers’s recent paydays than by a bit of reporting that appeared deep down in the Times follow-up article on that initial news. The reporter Louise Story wrote that Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard. That the highly paid leader of arguably America’s most esteemed educational institution (disclosure: I went there) would simultaneously freelance as a hedge-fund guy might stand as a symbol for the values of our time.
At the start of his stormy and short-lived presidency, Summers picked a fight with Cornel West for allegedly neglecting his professorial duties by taking on such extracurricular tasks as cutting a spoken-word CD. Yet Summers saw no conflict with moonlighting in the money racket while running the entire university. The students didn’t even get a CD for his efforts — and Harvard’s deflated endowment, now in a daunting liquidity crisis, didn’t exactly benefit either. Summers’s dual portfolio in Cambridge has already led to one potential intermingling of private business and public policy in his new White House post. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts. But again, Summers’s potential conflicts of interest seem less telling than the conflict of values that his Harvard double-résumé exemplifies.
In the bubble decade, making money as an end in itself boomed as a calling among students at elite universities like Harvard, siphoning off gifted undergraduates who might otherwise have been scientists, teachers, doctors, entrepreneurs, artists or inventors. The Harvard Crimson reported that in the class of 2007, 58 percent of the men and 43 percent of the women entering the work force took jobs in the finance and consulting industries. The figures were similar everywhere, from Duke to the University of Pennsylvania. Dan Rather, on his HDNet television program in December, reported that at Penn this was even true of "over half the students who graduated with engineering degrees — not a field commonly associated with Wall Street."
Clearly the last person to serve as an inspiring role model for alternative values would have been Summers. But in her first baccalaureate address last June, his successor as Harvard president, Drew Gilpin Faust, stepped into that moral vacuum, zeroing in on the huge number of students heading into finance, consulting and investment banking. "Find work you love," she implored the class of 2008. The "most remunerative" job choice "may not be the most meaningful and the most satisfying." This same note was hit a month earlier by the commencement speaker at Wesleyan University, Barack Obama. "The big house and the nice suits and all the other things that our money culture says you should buy," he said, amount to "a poverty of ambition." He wasn’t speaking idly. As America knows, Obama turned down the lucrative career path guaranteed to the first African-American president of The Harvard Law Review to pursue the missions of service and teaching instead. The potential rewards for our country, now that that early choice has led him into the White House, are enormous.
But it’s hardly a given that the entrenched money culture has evaporated along with the paper profits it generated. One skeptic is Howard Gardner, the Harvard education professor who has created seminars at several elite colleges to counsel students in the notion of pursuing meaningful, ethical and effective work — "Good Work," as he has titled it. He believes that many students may still be operating on the assumption that the world of finance will just pick up where it left off in a few years. "But we’re not going to be back there," Gardner told me last week, "and we shouldn’t be back there." He notes that while the New Deal was built from ideas developed in the Progressive Era and that the Reagan counterrevolution was the culmination of the conservative movement of the 1950s and ’60s, there is as yet "no counternarrative to replace ‘money is king.’
" The post-crash influx of graduates into Teach for America, while laudable, may be transitory unless there’s the political vision and leadership to make altruistic values stick after our crisis has passed. "It’s completely up in the air what’s going to happen," Gardner said. No one is better placed or more philosophically suited than Obama to construct the new counternarrative as we go forward in our new New Deal. But many masters of the old universe, including quite possibly his chief economic adviser, can’t recognize that the world has changed or should change. Even at the cratered Citigroup, a technical analyst was moved to write a report last month urging his peers to stop living in "denial" and recognize that we are witnessing the end of "25 to 30 years worth of excess." The "new normal" in lifestyle, wealth creation and profitability of companies, he wrote, "may be a shadow of the past."
There was a poignant quality to this Citi report, which cited as its mantra the R.E.M. song "It’s the End of the World as We Know It (and I Feel Fine)." Its tone somehow reminded me of the stirring speech written by the American playwright Clifford Odets in his classic drama of the Great Depression, "Awake and Sing!" (1935). "Boychick, wake up!" the grandfather Jacob tells his grandson, Ralph, as the battered Berger family disintegrates in the Bronx. "Be something! Make your life something good ... Go out and fight so life shouldn’t be printed on dollar bills." When Lawrence Summers was president of Harvard, he famously delighted students by signing his autograph on dollar bills that already bore his signature from his Treasury secretary days. How we leave that bankrupt culture behind and get to "something good" will be as much a factor in our recovery from this Depression as the fate of the unemployment rate and the Dow.
Restoring self government
The ongoing financial crisis has led to a worldwide recession/depression that threatens the well-being of billions of people. It's also very likely that this crisis will worsen with a large increase in the number of the unemployed, the uninsured, the homeless and the hungry over the next several years. The Bush and Obama administrations along with the private Federal Reserve share much of the blame for this looming bleak future. Unfortunately, although many economists and activists predicted this crisis, the influence of the FIRE (financial, insurance and real estate) sector overrode the concerns and warnings that were raised. The recent report, "Sold Out: How Wall Street and Washington Betrayed America" (www.wallstreetwatch.org/reports/sold_out.pdf), provides a detailed example of the influence of big money on our political system. The report shows that the FIRE sector alone invested over $5 billion in lobbying and in funding political campaigns between 1998 and 2008.
Alan Greenspan, former head of the Federal Reserve, also played a major role in setting the stage for the financial collapse. His cheap money policy made risky gambling extremely attractive to Wall Street. Making matters worse, he failed to require that these Wall Street institutions had sufficient reserves to pay off the bets if they lost. The failure of the regulatory and rating agencies to do their jobs greatly facilitated this financial disaster. Before the house of cards came tumbling down last year, many in the FIRE sector had already pocketed huge fortunes from salaries, bonuses and stock options at the expense of shareholders and the public. Adding insult to injury, due to the political and social connections between Wall Street and those making the decisions about the bank bailouts, the groups that caused the disaster will receive trillions of public dollars in bailouts.
Currently President Obama, Secretary of Wall Street Geithner and Federal Reserve head Bernanke are working to protect the big banks and Wall Street first and foremost. For example, Geithner's latest public-private investment plan will put hundreds of billions and possibly trillions of public money at risk without Congressional approval. The plan represents an effort to help big banks rid themselves of a portion of their toxic debt. However, to accomplish this goal, public money will be provided as an inducement to select investors who will wind up with a chance to make a huge profit while risking very little. The approach to the bank bailout taken by former Secretary of Treasury Paulson and followed by Geithner and Bernanke fails to confront the fact that many of these financial behemoths are bankrupt. Geithner and Bernanke are keeping these zombie institutions alive through this huge transfer of public wealth to the extremely rich. Continuing on this path is likely to cost additional trillions of taxpayer money and still won't save these institutions.
Instead, many leading economists, including Nobel Prize winners Joseph Stiglitz and Paul Krugman, have called for nationalizing these institutions now. Even Alan Greenspan has admitted that temporary nationalization may be needed. Once these institutions are nationalized and their financial status restored, then the government should break them into smaller institutions before selling them. The government must also aggressively enforce existing laws as well as enacting new regulations to prevent frauds from occurring. In addition, we need the public funding of campaigns to reduce the corruption of our political system.
The Federal Reserve has ventured ever further into the political realm, propping up failing companies, lending to industries other than banks and financing the federal budget through purchases of Treasury bonds. Now the politicians are threatening to respond in kind. By law, the Fed is independent. The president and Congress can do no more than name its seven governors, including the chairman. The governors share responsibility for monetary policy with presidents of the 12 reserve banks which are supervised by the board; these presidents are appointed by their banks’ boards and confirmed by the governors.
That Congress may not audit the Fed or approve its budget provides an added element of security. But that may now be at risk. "The role of the Fed has changed dramatically, so the usual defence of, well, we shouldn’t intrude in the integrity and independence of the Fed, I think, no longer applies," said Max Baucus, chairman of the Senate Finance Committee, on March 31st. Gene Dodaro, who heads the Government Accountability Office (GAO), Congress’s investigative arm, complained that his ability to monitor federal support for the financial system is hamstrung because the GAO cannot audit the Fed’s monetary-policy or lending operations.
Two days later, when the Senate voted for a federal-budget outline, it included a non-binding resolution giving the Senate authority to audit the Fed and requiring the central bank to disclose the name of anyone to whom it lends. A less draconian resolution requires the Fed to describe its collateral at regular intervals and calls for an "evaluation" of the Fed’s reserve banks. Congress has often targeted these banks, whose presidents are more likely to vote for higher interest rates than the governors. Even friends of the Fed question the usefulness of the 12 banks and their geographical distribution, which reflects the country’s political make-up in 1913.
When viewed in isolation, the resolutions do not amount to much, since they do not aim to intrude on monetary policy and are not binding. Carrying them out would require a change in the law which is unlikely for now. The Fed itself has begun a "top-to-bottom" review aimed at boosting its transparency, although it is highly unlikely to agree to name borrowers. A possible alternative to giving the GAO auditing authority would be giving more powers to the Fed’s own inspector-general. The latest actions are troubling nonetheless. The Fed’s interventions have been defensible given the scale of the crisis and lack of alternatives, but they have exposed it to public anger over bail-outs for bankers. Tim Geithner, the treasury secretary, owes his recent problems in part to having overseen the bail-out of American International Group, an insurer, in his previous job as head of the New York Fed.
The controversy also comes at a delicate moment for the Fed. Two governors’ seats are vacant and Ben Bernanke’s four-year term as chairman ends next January. The Fed also needs favours from Congress: it would like authority to issue debt securities to soak up the excess liquidity its rescue operations have created, or for the Treasury to have authority on its behalf. The Treasury is seeking to revamp financial rules and give the Fed more sway over the financial system. Hostile congressmen could seize on such initiatives to impose changes that the Fed doesn’t want. As if to pre-empt threats to its independence, the central bank and the Treasury released a joint statement last month affirming their shared responsibility for financial stability and the Fed’s sole responsibility for monetary policy. It was meant to be reassuring, but it mostly served to emphasise how much the Fed has become entangled in fiscal and financial policy.
The market's hurdle this week: Corporate earnings
Is Wall Street still in a bear market, or beginning a bull market? Either way, it's probably still due for a major pullback. And this week, the market's hurdle is a big one: A flood of quarterly results and outlooks from companies ranging from banks to toy sellers to computer chip makers. Stocks have been on a tear, gaining 23 percent over five straight weeks from 12-year lows. The Dow Jones industrial average finished last week at 8,083, a two-month high. But the market cannot go straight up forever, especially when the economy remains so uncertain.
Since 1900, whenever the stock market has risen more than 20 percent within two months, it has dropped an average of 7 percent in the ensuing month, according to JPMorgan equity analyst Thomas J. Lee. Historical averages do not always accurately predict the future, of course, but the statistic is a glaring reminder that Wall Street is still on shaky ground. "A bear market rally looks exactly like this - very, very quick. It sucks people in," said Robert Levitt, chief investment officer of Levitt Capital Management. Last week's Dow performance was decent - a 0.08 percent advance - thanks to a late-week rally on upbeat profit news from Wells Fargo & Co. But earlier in the week, investors got a taste of volatility, and there could be more to come. The Dow lost 2.8 percent over Monday and Tuesday as investors became worried about the bad news that earnings reports might bring.
The market did a sharp U-turn on Thursday and jumped higher after Wells Fargo announced that it expects a record $3 billion profit for the first quarter, an encouraging sign that the banking industry might not be as damaged as many had feared. But using Wells Fargo to take the temperature of the entire banking industry is a bit like using New York's real estate market as an indicator for the whole country's: It has simply been much stronger than others. Investors need more data points, and that is what they will get this week in the way of first-quarter results. Along with those results will come guidance from executives on how the rest of the year looks. "If you have a market that's already starting to build in a turn, what the guidance is going to do is either confirm it, or deny it," said Quincy Krosby, chief investment strategist for The Hartford.
More banks will be releasing quarterly results this week, notably Goldman Sachs Group Inc., Citigroup Inc. and JPMorgan Chase & Co. Other industries reporting earnings include technology (Intel Corp.), media (Gannett Co., Media General), non-discretionary consumer products (Johnson & Johnson), and discretionary goods (Mattel Inc., Harley-Davidson Inc.) Economic data will be coming in as well. The government reports this week on retail sales, inflation, industrial production and new home construction. Over the past month, economic readings on several fronts - new and existing home sales, manufacturing activity, retail sales and even jobless claims - have suggested the economy might not be in the freefall it was in late last year.
But even if the economy has bottomed, what happens then? Does it stay stagnant, or rebound? And if it does rebound, how quickly? Without corporate or economic growth, the stock market cannot grow, either. "The question will become, how much can we grow? We won't know the answer to that for some time," said Stuart Schweitzer, global markets strategist at J.P. Morgan Private Bank. The Dow may be up 23 percent from its March lows, but it remains down 693 points, or 7.9 percent, for the year. And the index would have to climb 6,081 points, or 75 percent, to return to its Oct. 9, 2007 record of 14,164.53.
Market rally could trip over the bottom line
It's the earnings, stupid. Optimism that the fortunes of financial companies like Citigroup were improving sparked a four-week rally beginning March 10 that drove the Standard & Poor's 500 index up 25 percent. But now investors will find out exactly how companies across all industries performed during the first three months of the year. Those quarterly results will determine whether the surge was the beginning of a bull market, or just a blip. After all, the market's last promising rally was derailed not by jobs data or an emergency federal bailout but by forecasts from companies that make everything from computer chips to tin cans to movies.
The S&P 500 jumped 182 points, or 24 percent, to 934 between Nov. 20 and Jan. 6. The next day, technology bellwether Intel Corp., aluminum producer Alcoa Inc. and media giant Time Warner Inc. all issu d grim earnings guidance. The S&P dropped 28 points, or 3 percent, that day and hasn't returned to its early January levels since. The current rally also began with a company announcement. This time, beleaguered and bailed out Citigroup Inc. said March 10 it was profitable for the first two months of the year. The S&P 500 gained 43 points, or 6 percent, that day to 719. The index closed Thursday at 857, and markets were closed on Good Friday.
The S&P could rise more, and even turn positive for 2009, if earnings reports for the first quarter show a strengthening economy. Alcoa, the first big company to report their results each quarter, announced a loss of $497 million on Tuesday evening. But investors were pleased about the aluminum company's efforts to cut expenses by $2 billion a year, and the shares are up 14 percent since. Wells Fargo & Co, meanwhile, said Thursday it expects record first-quarter earnings of $3 billion, about 50 percent more than the same period a year ago. The shares surged $4.72, or 32 percent, to $19.61 that day. "We've got this incredible possibility that the market has turned a corner -- that's it's not just a bear market rally or a head-fake," said Arthur Hogan, chief market analyst at Jefferies & Co. "Earnings are going to let us know whether the market has gotten ahead of itself, or is justified in its new valuation of stocks."
Investments Can Yield More on K Street, Study Indicates
One Tax Break Brought Companies 22,000% Rate of Return on Lobbying Costs
In a remarkable illustration of the power of lobbying in Washington, a study released last week found that a single tax break in 2004 earned companies $220 for every dollar they spent on the issue -- a 22,000 percent rate of return on their investment. The study by researchers at the University of Kansas underscores the central reason that lobbying has become a $3 billion-a-year industry in Washington: It pays. The $787 billion stimulus act and major spending proposals have ratcheted up the lobbying frenzy further this year, even as President Obama and public-interest groups press for sharper restrictions on the practice.
The paper by three Kansas professors examined the impact of a one-time tax break approved by Congress in 2004 that allowed multinational corporations to "repatriate" profits earned overseas, effectively reducing their tax rate on the money from 35 percent to 5.25 percent. More than 800 companies took advantage of the legislation, saving an estimated $100 billion in the process, according to the study. The largest recipients of tax breaks were concentrated in the pharmaceutical and technology fields, including Pfizer, Merck, Hewlett Packard, Johnson & Johnson and IBM. Pfizer alone repatriated $37 billion, representing 70 percent of its revenue in 2004, the study found. The now-beleaguered financial industry also benefited from the provision, including Citigroup, J.P. Morgan Chase, Morgan Stanley and Merrill Lynch, all of which have since received tens of billions of dollars in federal bailout money.
The researchers calculated an average rate of return of 22,000 percent for those companies that helped lobby for the tax break. Eli Lilly, for example, reported in disclosure documents that it spent $8.5 million in 2003 and 2004 to lobby for the provision -- and eventually gained tax savings of more than $2 billion. "There's always been speculation that lobbying is a lucrative area," said Stephen W. Mazza, a Kansas tax-law professor who is one of the authors of the study. "We've been able to come up with quantifiable returns and show that it really is the case." Mazza added that the results are "troubling" because they show how large companies can distort tax policy to benefit their bottom line. Obama has made lobbying a key target of his ethics policies, sharply limiting the access of lobbyists to the administration and forbidding the appointment of many former lobbyists in the government without special waivers. The moves have angered many lobbying groups but have had little apparent impact on the ongoing boom in K Street business.
"It's always hard to measure the financial benefits of lobbying, but generally everyone knows it does bring in a lot," said Craig Holman, government affairs lobbyist for Public Citizen. "That's why corporations are pouring more and more money into lobbying every year. Clearly, they understand it has a very good rate of return." The tax break in question was included as part of the American Jobs Creation Act of 2004, and was billed as a way to create jobs in the United States by requiring companies to use the money for specific purposes. But the Congressional Research Service and others have since found that many companies cut jobs in the wake of the tax break and that nearly all the money was used for stock buybacks or dividends. Supporters failed in a bid to include a similar tax break in this year's stimulus legislation, and a Senate subcommittee has launched an investigation into how companies used their tax savings under the 2004 program.
The provision was championed in part by the Homeland Investment Coalition, a group of companies and trade associations that was formed to push for the repatriation holiday. The Pharmaceutical Research and Manufacturers of America (PhRMA), one of the disbanded coalition's members, said in a statement Friday that "repatriation of profits provided a new source of investment for American companies." "PhRMA supported the legislation four years ago as part of a broad business coalition because of the additional economic benefits the bill would provide," senior vice president Ken Johnson said. "It meant jobs and skilled training for American workers, as well as a shot in the arm for local economies."
G7 Industrial Production Crashing
The production of real goods in the developed nations is plummeting. Even the mighty export driven economy of Japan appears to be heading lower as though it had fallen off a cliff. Countries must begin to encourage consumption in their own economies. To do this, they ought not to be stimulating the old credit/speculation machine called the neo-liberal financial system.Real economic growth is to be found in a broad employment and consumption, and an increase of the median wage.
This is the deep flaws in much of the third world economies, especially in Asia and Latin America. Economic health can be measured by the size and well being of the middle class in a relatively free society.The reason is simple. Individuals can only borrow so much before they are unable to service the debt. And the greedy few can only spend so much on consumption using the wealth which the tax and financial system has delivered to them from the many.
Gaming the system so that it overtaxes the income of the many for theincreasing benefit of a few has natural limitations, unless one can enforce a type of involuntary servitude. This model has its roots far back in history, in empires like Rome, Egypt, and Sparta. As the elite few accumulate real assets using their surplus, they will find that holding on to their wealth as the rest of society deteriorates in a downward spiral of privation can be a bit of a challenge.
Until the financial system is reformed and the economy is brought back into a balance, there will be no recovery, and the fabric of order will remain fragile. If things continue on as they are, despite all the stimulus and fine rhetoric, the madness will once again be unleashed on the earth, and the people will wonder from whence it came, as they do each time it rises from the same sources and ravages civilization: unbridled greed, malinvestment, and corruption.
Auto-Dealer Ranks Dwindled in First Quarter
In the first quarter of the year, 271 auto dealers in the U.S. went out of business, according to the National Automobile Dealers Association, as car buyers stayed away from showrooms and credit remained tight. At the end of the quarter, there were 19,738 auto dealers in the U.S., the dealer group said, down from 20,009 at the end of last year. It said it expects about 1,200 dealers, mostly sellers of domestic brands, to go out of business in 2009, roughly 20% more than last year. Many dealers closed as their lenders tightened terms and costs outstripped revenue, while some consolidated stores or closed up shop voluntarily. Light-vehicle sales in the first three months of the year were down 38%, with sales of domestic brands down 46%, compared with declines of 31% for Asian auto makers and 27% for European brands.
General Motors Corp. said 198 of its dealers closed in the first quarter, bringing its total to 6,177 at the end of March. In the viability plan it filed with the government Feb. 17, the company said it was looking to trim its dealer network by 25% over the next four years, compared with a reduction of 15% during the four previous years. The company aims to shrink its dealer network to 5,750 at the end of this year and to 4,100 in 2014. GM is in the process of selling and phasing out several of its brands, such as Hummer and Saturn. Several Saturn dealers have closed as a result, as first-quarter sales of the vehicles plunged 62% from a year earlier.
Chrysler LLC said it shaved dealer numbers by 82 over the first quarter to about 3,218 at the end of March. In the last quarter of 2008, Chrysler, majority-owned by Cerberus Capital Management LP, lost 74 dealers. In its viability plan in February, Chrysler estimated that 27% of its dealers were in financial trouble. Ford Motor Co. declined to provide the number of dealers the company had at the end of March. Last year, 269 dealers of all of Ford's brands closed, bringing the company's total at the end of December to 3,787. Some brands are expanding their dealer networks even in the current depressed environment. BMW AG's Mini, for instance, plans to open 13 outlets this year.
Tough Times for Town Fathers
Builder Tommy DeMilio and banker Stanley Kelley had planned to create a four-acre park for this city of 9,500 residents. It's a quarter finished and won't likely be completed. Mr. DeMilio's construction business has dried up. Mr. Kelley's bank failed in November. Maxie Price, a Chevrolet dealer whose lot is two miles away from the scuttled park project, is cutting his local donations by at least a third. His car sales are down to about 30 a month -- well below the hundred or so he moved during better times. Business leaders like Messrs. DeMilio, Kelley and Price have long been pillars of this once-thriving Georgia town. Each year, they contributed millions for parks, buildings, classroom books, even a gymnasium and a church. In the process, they acted as a safety net for everything from the local schools to the Chamber of Commerce.
Now, with the credit crisis causing the traditional support systems to crumble, life in Loganville is harder on just about everybody. "I've lost 80% of my net worth in this downturn and since I put it all back in my company, I'm not floating in cash," says Darrell McWaters, president of Meridian Homes USA Inc., a big homebuilder and another of the area's major donors. "We've had to cut out everything." The situation in Loganville, located about 35 miles from Atlanta, mirrors what's happening in many small communities across the country. Stalwarts of these often-patriarchal areas are falling, changing the civic landscape while leaving financial and social commitments behind. "Every small and medium-size town is going through this. Even in New York City there are certain people who help more than others and are involved in more civic giving and volunteer work than others," says Steven Dandaneau, sociology professor at the University of Tennessee and author of "A Town Abandoned: Flint, Michigan Confronts Deindustrialization." "The smaller the community, the bigger the effect," he says.
From Loganville to towns like Sanderson, Texas, and Loup City, Neb., local officials are grappling with the loss of revenue and civic participation from banks that have closed, as well as businesses ranging from car dealerships to local power companies that have either closed or are struggling. Loganville, incorporated in 1887, has little industry to attract workers to the area. In recent years, building became the dominant field as the population grew by more than 60%. When home sales slowed in 2007, construction largely halted, hurting everyone from bankers to electricians and plumbers, says Angela Yarman, director of the United Way of Walton County. "It goes on and on when building is at the top of the food chain of an economy," says Ms. Yarman, whose group supports 11 county agencies and organizations such as the Girl Scouts.
Betty McCullers says the change can best be seen through declining membership at the city's chamber of commerce. The Chamber, which sits across from a shuttered real-estate brokerage, has had the number of its dues-paying members fall to 180 from 300 businesses a year ago. Many have closed their doors and others have simply stopped paying dues because they don't have the money. The situation is so dire that Ms. McCullers, the chamber's 76-year-old president, has not taken a salary this year. The combination of lost businesses, declining revenue from taxes and local patronage "all happening at the same time has been devastating," she says. Thus far, the town has few visible markers of poverty or distress; there are no streets lined with vacant or boarded-up homes. But other, telltale signs of trouble abound.
Swaths of real-estate developments are in stand-still mode, their white plumbing pipes poking out of the barren earth like tombstones. More than than 100 pages of foreclosure notices fill The Walton Tribune and the Gwinnett Daily Post, the local newspapers named for the two counties that Loganville straddles. By January, unemployment in Walton hit the 10% mark. At one area elementary school, the proportion of free- and reduced- lunch students has risen to 43% over the past two years, up from 24%. As longtime patrons of their community, Mr. DeMilio, 48, and Mr. Kelley, 68, had ambitious plans for their park. They envisioned walking trails, an outdoor basketball court as well as playground and exercise equipment. Driving by the site in his SUV recently, Mr. DeMilio looked dejected. Only a few climbing and jungle-gym sets are in place. The recreation center isn't likely to be finished this year, if ever, "unless something turns around," Mr. DeMilio says."I feel like we failed the community."
Owner of the Wayne Thomas Group, Mr. DeMilio is a transplanted New Yorker who made a name here as a builder and developer. Today, his problems are twofold. Few new homes are being sold, which has killed most revenue from that end of his business. At the same time, he can't collect on agreements he has made to sell land to other builders because their credit has been frozen. "I can't go after them, they don't have the money," he says. At the height of the building boom, his company, which offered free lunch and gym memberships to employees, had 62 people on the payroll and about 450 subcontractors. He's now down to about 100 people. "I'm operating month to month now," he says.
Over the years, Stanley Kelley had become known for his education-related largesse. In 2007, when he still presided as owner of The Community Bank of Loganville, he wrote a $17,000 check to pay for teachers to work overtime at the high school in an attempt to curb dropout rates. After the child of a bank employee died from heart disease, Mr. Kelley's response was to buy defibrillators, costing $1,200 apiece, for 13 area schools. When the Loganville Elementary School principal started a reading program, Mr. Kelley -- who sat on the school's council -- bought books for all 600 students. Mr. Kelley's four-branch bank outfit also funded a $5,000 scholarship for a student to attend Georgia Tech, his father's alma mater.
A tall man with basset-hound eyes, Mr. Kelley, 68, is reluctant to take much credit for his charitable deeds. So others elaborate for him. When the Chamber needed money for postage and operating expenses, he paid them. When the Chamber needed computers, he bought those too. "I didn't worry," about budget shortfalls, says Chamber President Ms. McCullers. "He was there as a backstop." Mr. Kelley's father had co-founded Community Bank in 1946. Mr. Kelley became chairman of the board in 1997. He did not live like a wealthy man. His home was $200,000 when he bought it 12 years ago and he drives his late mother's 11-year-old car. "We were heavily concentrated in lending to developers and builders. We were riding the tidal wave of development coming out of Atlanta," he says. "I was just walking on the wave."
He says he didn't realize business was so poor until bank examiners showed up late last year. That was shortly after the bank's third-quarter report to regulators showed that nearly 40% of its loans, most of which were for home construction, were delinquent or uncollectible. The big hit came when two big developers he was financing sought bankruptcy protection. "It was the first time it occurred to me we might not be able to recover," Mr. Kelley says.
The government's Federal Deposit Insurance Corp. took over the bank, which had total assets of $681 million and deposits of $611million. The FDIC sold the bank, along with some of its assets and deposits, to Community Bank to Bank of Essex, Tappahannock, Va. Since then, Mr. Kelley's wife, who has never worked outside the home, has returned to school in hopes of earning a teaching certificate. At the car dealership that Mr. Price co-owns with his brother, the parking lot seems empty behind him as he sits with his back to the window. The Prices have been in the car business in Loganville since the 1950s. Vehicles are turned lengthwise along the highway so passersby can't tell that the lot behind them has little inventory. Recently, the car count was about 270. In good times there would have been three times that amount. "I'm trying to wrestle this thing," says Mr. Price, 49 years old, adding that a nearly 70% drop in average monthly new car sales is "a lot to wrestle."
In tough times past, his own safety net has been Corvettes, which sold regularly. "Usually the person who buys Corvettes and other high-end models, that person is okay, even in the last downturn," he says. "But not this time." Mr. Price estimates the dealership donated about $50,000 a year to various local causes in the past. That won't happen this year. He's anticipating cutting charitable donations by at least a third. Mr. Dandaneau, the sociology professor, says it's hard for communities who rely so heavily on a few well-off members to adjust to tough times. "The only way to avoid being impacted by the difficulties of those community leaders at a time like this is not to be dependent on them in the first place -- and that's not possible," he says. The Walton County Recreation Department, is one of the many local outfits in town trying to fill the void, having received contributions from each of Messrs. Price, Kelley and DeMilio. Director Jody Johnson, says the department is holding yard sales and selling barbecue dinners -- going back to old-style fundraising rather than look to struggling businesses and individuals.
Others are stepping up, too. Last fall, the local school district nearly canceled its annual banquet honoring the teacher and support staffer of the year. Robert Boss, commander of the American Legion post, allowed the banquet to be held there. Another local, Jerry West, a retired Delta mechanic and owner of Wild West Bar B Q, donated the food. On the desk of Mr. Boss is a six-inch stack of fresh requests for assistance. They cover everything from residents' unpaid electrical bills to pleas for help in securing rooms for the homeless at a local hotel. Mr. Boss, a 77 year old with a proud, weathered face, gives first dibs to families and the unemployed. "You do it because it's the right thing to do," he says.
As many residents are learning first-hand, even the smallest of gestures make a difference now. At Loganville High, Principal Nathan Franklin keeps donated snacks at the school's health clinic. Often his students eat lunch at 11:30 a.m. By 2:30 p.m. they are hungry and "they know they are not going home to anything" in terms of food, says the principal. "These are high-school kids and some of them don't have 40 cents for a bag of chips." There's less to do about other problems. One recent afternoon, Mr. Franklin stopped to talk to a student and learned that the boy was preparing to walk home from soccer practice. It is a five-mile trek. "His mother is working extra hours at her job" to make ends meet and can't pick him up, Mr. Franklin says. "She told him if he wants to play he will have to walk."
Some charities are busy changing their solicitation strategies -- casting a wider net. At local branch of the United Way, for instance, the new mantra is to "go wider rather than deeper," says Ms. Yarman, the director. "Now instead of going to one person, you go to three people and get smaller donations." Shepherd's Staff Ministries, one of the organizations United Way helps, has seen its individual and church donations inch up just enough to continue giving food boxes to impoverished residents. Essex, the new bank in town, also has picked up where Community Bank left off, contributing to various causes. Outside the small parking area is full as a steady flow of cars come in, pick up small boxes of food and leave. "We've seen more and more people who have lost their jobs coming in," said the executive director Joe Johnson. "At the same time it's amazing. We've seen so many people contribute. We might be able to swing this."
A Budget Weighed Down by Old Debt
Since taking office in 2006, Gov. Jon S. Corzine has repeatedly warned of the dangers of New Jersey’s "credit card culture," as one administration after another has borrowed to pay the bills. During the past 15 years, the state’s debt has increased fourfold, to $33 billion from $8.1 billion. In the fiscal year beginning July 1, with the governor and lawmakers trying to balance the budget at a time when tax revenues are dropping, the payment due on New Jersey’s debt — $2.9 billion — accounts for about a tenth of the governor’s proposed spending plan.
Even though Mr. Corzine’s proposed budget of $29.8 billion is smaller than the current fiscal year’s budget of $33 billion, the debt payment will increase by $300 million. As a result, New Jersey taxpayers will spend more next year to repay old loans than they will on initiatives like property tax rebates and aid to cities combined. "We’re in a dilemma, and it’s eating up our whole way of life," said Assemblyman Joseph R. Malone III of Burlington County, the ranking Republican on the Assembly Budget Committee. "It’s either you stop or you go into bankruptcy. I don’t know how you can continue like this."
Annual payments on outstanding loans have nearly doubled since 2003, State Treasury Department records show, even though New Jersey’s overall budget has grown by 26 percent in that time. R. David Rousseau, the state treasurer, said that many of New Jersey’s current fiscal problems are the result of previous administrations shortchanging the pension system, borrowing heavily and diverting resources from funds like the unemployment account even when the state economy was in good shape. "We got hit by an economic tsunami that engulfed us," Mr. Rousseau said. "Our problem in New Jersey is we used the things in good economic times, which limits your options even more when you’re in bad times."
The debt includes long-term loans for everything from highway and school construction to pension payments and the acquisition of open space. More than $4 billion of borrowed money was used to shore up state budgets between 2003 and 2005, meaning taxpayers will be making payments for another 26 years on loans that financed government services six years ago. In two appearances last week before legislative budget committees, Mr. Rousseau acknowledged that debt payments would mean sacrifices in other areas of the budget. "We can’t turn back the clock, but we can wonder aloud: How much easier would it be to retain critical services to vulnerable residents, education and public safety if we did not have that bill to pay in this budget?" Mr. Rousseau said in prepared remarks to lawmakers.
Mr. Corzine has long tried to warn lawmakers that constant borrowing would eventually cut into services. "Not only does this reliance place an ever-growing burden on state residents and businesses," the governor said in the preamble of his 2007 state budget proposal, "but debt payments essentially crowd out appropriations needed for education, health care, property tax relief and other key programs." Two years ago, the governor proposed steep highway toll increases to raise billions of dollars to be used toward paying down the state’s debt, but that plan collapsed in the face of widespread opposition. The potential for loan payments to "crowd out" other budget priorities, as Mr. Corzine put it, came into sharp focus this year, with a historic plunge in revenues from state income tax returns resulting in his trimming state spending by about 10 percent.
With debt service payments essentially unassailable, the governor turned elsewhere for savings. He has proposed cutting property tax rebates by $539 million. He declined to deposit $500 million into the state’s Unemployment Insurance Trust Fund — setting the stage for a $370 million business tax increase in July. And he is seeking $400 million in savings from public employee furloughs, wage freezes or layoffs. But many of Mr. Corzine’s cost-cutting strategies will add to future state budget expenses. For instance, he has proposed cutting payments to the state pension funds so sharply that an actuarial firm that reviewed the largest of the pension accounts questioned earlier this month whether the retirement system could survive.
"We do have concern about the fund being able to meet its long-term obligation," Scott F. Porter, an actuary with the firm, Milliman, told trustees of the New Jersey Teachers’ Pension and Annuity Fund when he presented his annual update on the financial condition of the fund. Similarly, the Unemployment Insurance Trust Fund, which covers the cost of weekly benefit checks to New Jersey’s growing ranks of the unemployed, has been overdrawn since March, and is on track to have a deficit of $1.6 billion by July 2010. Mr. Corzine’s proposed budget assumes the state will borrow another $2 billion for school construction and transportation improvements, adding millions to future years’ debt service costs. Assemblyman Malone agreed that the high debt payments leave state officials with few good options, but he suggested one: "You cannot give everything to everyone all at the same time, and it has to stop," he said. "You have to stop borrowing, no matter how worthy the cause is."
Ilargi: Evans-Pritchard won't let go of his pet project: blaming continental Europe for all woes on the planet he can either remember or imagine. Ireland would be sailing in calm waters if not for those pesky Krauts! If only it could lower its interest rate to zero, it would do as great as ...... the US and UK!!!
Ireland is ECB's sacrifical lamb to satisfy German inflation demands
Put bluntly, Ireland is being forced to roll back the welfare state and tighten fiscal policy in the midst of a savage economic contraction in order to uphold the deflation orthodoxies of Europe's monetary union. If Ireland still controlled the levers of economic policy, it would have slashed interest rates to near zero to prevent a property collapse from destroying the banking system. The Irish central bank would be a founder member of the "money printing" club, leading the way towards quantitative easing a l'outrance. Irish bond yields would not be soaring into the stratosphere. The central bank would be crushing the yields with a sledge-hammer, just as the Fed and the Bank of England are crushing yields on US Treasuries and gilts.
Dublin would be smiling quietly as the Irish exchange rate fell a third to reflect the reality of trade ties to Sterling and the dollar zone. It would not be tossing away its low-tax Celtic model to scrape together a few tax farthings – supposedly to stop the budget deficit exploding to 13pc of GDP this year, or 18pc says Barclays Capital. If the tax raises were designed to placate rating agencies, they made no difference. Fitch promptly booted Ireland from the AAA club anyway. Above all, Ireland would not be the lone member of the OECD club to compound its disaster by slashing child benefit and youth unemployment along with everything else in last week's "budget from Hell".
Depression buffs will note the parallel with Britain's infamous budget in September 1931, when Phillip Snowden cut the dole and child allowance to uphold the deflation orthodoxies of the Gold Standard – though in that case the flinty Pennine rather liked hair-shirts for their own sake. Though few had any inkling at the time, Snowden's austerity drive would soon push British society over the edge. It set off a mutiny – a Royal Navy mutiny at Invergordon over pay cuts, in turn triggering a run on sterling. The pound was forced off Gold within days. Irish deliverance from EMU will not be so easy. Brian Lenihan, Ireland's finance minister, said the economy would contract 8pc this year on top of the terrifying 7.1pc drop in the final quarter of last year.
But what caught my ear was his throw-away comment that prices would fall 4pc, which is to admit that Ireland is spiralling into the most extreme deflation in any country since the early 1930s. Or put another way, "real" interest rates are rocketing. This is torture for a debtors' economy. You can survive deflation; you can survive debt; but Irving Fisher taught us in his 1933 treatise "Debt Deflation causes of Great Depressions" that the two together will eat you alive. Don't blame the victim. Ireland has been betrayed twice in this saga. Once by New Labour, which led Dublin to believe that Britain would join EMU at the same time – covering Ireland's dangerously exposed flank of Sterling trade.
It was betrayed again by the European Central Bank, which opened the monetary floodgates early this decade to nurse Germany through a slump, holding rates at 2pc until late 2005, despite flagrant breach of the ECB's own M3 money targets. Fast-growing Ireland and the Club Med over-heaters were sacrificed to help Germany. They were left to cope with credit bubbles as best they could. Ireland struggled. Construction reached 21pc of GDP – a world record? – compared with 11pc in the US at the peak. Mr Lenihan hopes to shield banks from the calamitous consequences by creating a buffer agency. It will soak up €80bn to €90bn in toxic debt – or 50pc of GDP. He borrowed the plan from Sweden's bank rescues in the early 1990s, but overlooks the key point – it was not the bail-out that saved Sweden's financial system, the country recovered only by ditching its exchange peg and regaining its freedom of action.
Without that sort of liberation, Ireland's property slump will grind on for years and more multinationals will join Dell in decamping to cheaper plants in Poland. Ireland risks a deflationary slide into bankruptcy. Of course, it is not the job of the ECB to set policy for Dublin's needs. But it would at least help if Frankfurt began to set policy for Europe's needs. Has the ECB noticed the collapse of industrial output in Spain (-24pc), Germany (-23pc), Italy (-21pc), France (-14pc)? Simon Johnson, the IMF's former chief economist, said the ECB is pursuing a "ruinous policy" by disregarding the clear and present danger of deflation. "If they wait until deflation is 'fully in the data', it will be too late," he said.
Spain is already tipping into deflation. Unemployment has reached 3.5m or 15.5pc, and is rising very fast. Finance minister Pedro Solbes – ex-Mr Euro and lately the Torquemada of Madrid life – was toppled last week in a bitter dispute over spending plans. He said the kitty is empty. Quite. But is his fall a sign that Spain is no longer willing to follow the Frankfurt deflation script? France too is fraying. The over-valued euro – fruit of ECB doctrine – is hollowing-out core industry. This week ArcelorMittal mothballed its historic foundries in Lorraine in what looks like the final demise of French steel. Workers are taking matters into their own hands everywhere, holding managers hostage in what amounts to low-level terror tactics.
No doubt, Germany will recover. Its export machine is heavily geared to the global cycle. Southern Europe will not recover. The cost gap between North and South has grown too wide. Which is why the ECB's deflation policies must prove so destructive. If the ECB continues to serve as the instrument of German tastes, keeping German inflation near zero, then Club Med and Ireland must necessarily deflate into Hell with all their debts. Unless Germany accepts inflation of 4pc, 5pc or 6pc for a while, the only way the South can claw back lost competitiveness is through outright wage cuts, and that is not a macro-economic option for debtors. Is anybody facing up to this core reality in euroland? Ireland prides itself on a nimble workforce and flexible practices that make it different from Club Med. It can adjust faster to ups and downs, goes the story. For those of us who feel a duty to Ireland, let us hope this, at least, is true.
China Central Bank Pledges Sufficient Liquidity
China’s central bank said it will ensure sufficient liquidity to sustain economic growth, damping speculation regulators may seek to restrain credit after new loans jumped sixfold to a record in March. The People’s Bank of China "will implement moderately loose monetary policy and maintain the continuity and stability of policy," the central bank said on its Web site today. It pledged "ample liquidity" to "ensure money supply and loan growth meet economic development needs." The statement indicates that reviving growth remains China’s priority amid concern that the credit boom will lead to bad debts and asset bubbles. The world’s third-largest economy, while showing better-than-expected performance in the first quarter, still faces "great difficulties," Premier Wen Jiabao told reporters in Thailand yesterday.
"It’s likely that the authorities will not change their stimulative policy at least for another month," said Stephen Green, head of China research at Standard Chartered Plc in Shanghai. "This means fast loan growth will continue. The longer this goes on, though, the bigger the risk of asset bubbles developing becomes." New loans rose to 1.89 trillion yuan ($277 billion) in March, the central bank said yesterday. M2, the broadest measure of money supply, grew 25.5 percent, the most since Bloomberg began compiling data in 1998 and more than the 21.5 percent median estimate in a survey of 12 economists. China’s industrial production climbed 8.3 percent from a year earlier in March and consumer demand grew "relatively rapidly" in the first quarter, adding to signs that the government’s 4 trillion yuan stimulus plan is taking effect, Wen was cited as saying by the official Xinhua News Agency.
The government has pushed banks to lend in support of the stimulus, implemented after the global recession led to a collapse in exports that dragged economic growth to the weakest pace in seven years. China’s lending boom contrasts with the struggle in the U.S. to rid banks of illiquid assets and efforts by central banks from Switzerland to Japan to unfreeze credit. China’s banks, which are mostly state-owned, have already met the bulk of the government’s target of at least 5 trillion yuan of new loans this year. Lending may top that level by as much as 3 trillion yuan, according to JPMorgan Chase & Co. "The biggest dangers to China’s economy and financial system come from within, not from outside," Jiang Zhenghua, former vice chairman of China’s parliamentary standing committee, said at a conference in Beijing yesterday. "The biggest of these hidden dangers is the degree of bad loans in China."
Commercial banks’ bad-loan ratio was 2.45 percent at the end of 2008, according to the regulator. The ratio was more than 20 percent in 2003, before the government completed a cleanup of the banking system that cost more $500 billion. The China Banking Regulatory Commission asked all banks to raise bad debt provisions to 150 percent of outstanding non- performing loans to be "prudent," Chairman Liu Mingkang said in Beijing last month. In today’s statement, the central bank pledged to prevent loans from going to high energy-consuming or polluting enterprises or to industries where there is overcapacity. It also reiterated support for loans to the agricultural sector, as well as to small- and medium-sized companies.
"The lending numbers are extraordinarily strong and there must be concerns about the impact on overall loan quality, the potential for new asset price bubbles, and whether these funds can all be allocated to investment projects in an efficient manner," said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong. "When you are throwing around so much money so quickly, some of it is bound to be wasted." The Shanghai Composite Index has climbed 34 percent this year, the second-best performer this year of 88 benchmark gauges tracked by Bloomberg, fueling concern that some of the increase in lending has been used for speculation.
"Some of the money has gone to the property market, some to the stock market," said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. "It is not what the central bank wants to see." Wen cited a month-on-month rebound in trade and gains in stocks and property transactions as evidence the stimulus is working, in an interview at the aborted Association of Southeast Asian Nations meeting, according to Xinhua. Signs of recovery also include a 26.5 percent jump in urban fixed-asset investment in the first two months. Vigilance is still needed as the global financial crisis is continuing to deepen and spread, Xinhua cited Wen as saying. China’s economic growth slowed to 6.8 percent in the fourth quarter. First-quarter data is due to be released April 16.
China foreign exchange reserves at $1.954 trillion
China's central bank said Saturday that its foreign exchange reserves rose 16 percent year-on-year to $1.9537 trillion by the end of March. China's reserves, already the world's largest, increased by $7.7 billion in the first quarter -- $146.2 billion less than the same period last year, the People's Bank of China said in a notice on its Web site. That rise was substantially less than the fourth quarter increase of almost $45 billion, according to China's official Xinhua News Agency, showing the impact of slowing exports due to the financial crisis.
In March, the reserves increased by $41.7 billion, it said, $6.7 billion more than the same period last year. Analysts believe China holds up to 70 percent of its foreign reserves in U.S. dollar-denominated assets, including Treasury securities. China's reserves have ballooned as the central bank buys up dollars generated from its huge trade and influx of foreign investment. While China's economy has slowed due to a plunge in trade and a slump in the domestic real estate industry, recent data show the drop eased in March. Beijing has taken steps to hold down the price of exports by cutting taxes on exporters and stopping the rise of China's tightly controlled currency, the yuan, against the U.S. dollar. Economists say both steps could strain relations with trading partners if China is seen to be competing unfairly.
Western leaders including British Prime Minister Gordon Brown are pressing for China to contribute to a global bailout fund from its reserves. Exports fell 17 percent in March from a year earlier, the fifth straight monthly decline but less severe than February's 25.7 plunge, the sharpest in a decade, the customs agency reported Friday. It said trade "showed clear signs of improvement." Imports fell by 25.7 percent, widening the Chinese trade surplus to $18.6 billion from February's $4.8 billion gap.
China Loans, Money Supply Jump to Records on Stimulus
China’s new lending surged more than sixfold from a year earlier to a record 1.89 trillion yuan ($277 billion) in March, adding to signs that growth in the world’s third-biggest economy is gathering pace. M2, the broadest measure of money supply, grew 25.5 percent, the central bank said on its Web site today. That’s the fastest since Bloomberg began compiling data in 1998 and more than the 21.5 percent median estimate in a survey of 12 economists. President Hu Jintao said April 1 that China’s 4 trillion yuan stimulus plan was taking effect, after urban fixed-asset investment surged 26.5 percent in the first two months. China’s lending boom contrasts with the struggle in the U.S. to rid banks of illiquid assets and efforts by central banks from Switzerland to Japan to unfreeze credit.
"China is unusual in that it has this incredible capacity to mobilize all its institutions -- central government, local governments and the entire banking system -- to boost government-influenced investments," said Vikram Nehru, the World Bank’s Washington-based chief Asia economist. China’s banks, which are mostly state-owned, have already met the bulk of the government’s target of at least 5 trillion yuan of new loans this year. Lending may top that level by as much as 3 trillion yuan, according to JPMorgan Chase & Co. The explosion in credit since the central bank dropped lending restrictions in November prompted the nation’s banking regulator to warn this month that lenders face a "severe" challenge in managing their risks.
"The central bank had to ensure it did enough to reflate the economy," said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong. "The question now is whether it has done more than is needed." A concentration of loans in infrastructure projects is a potential hazard for banks, China Banking Regulatory Commission Vice Chairman Jiang Dingzhi wrote in the April 1 edition of China Finance, a magazine affiliated with the central bank. Unusual growth in discounted bills, which are used for working capital and dilute banks’ lending profits, "deserves high attention," Jiang said. "The biggest dangers to China’s economy and financial system come from within, not from outside," Jiang Zhenghua, former vice chairman of China’s parliamentary standing committee, said at a financial conference in Beijing today. "The biggest of these hidden dangers is the degree of bad loans in China."
Not everyone agrees on the risks. China Merchants Bank Co., the nation’s fifth-largest by market value, said this week that providing money for infrastructure projects will improve the quality of its book by adding more medium- to long-term loans. Besides the risk of bad loans, the credit boom may inflate asset prices and increase the likelihood of inflation making a comeback. The benchmark Shanghai Composite Index of stocks has climbed about 34 percent this year. "Some of the money has gone to the property market, some to the stock market," said Lai at Daiwa Research. "It is not what the central bank wants to see." Excessive loan growth may "lead to inflationary pressure in the medium term, exacerbate credit risk and could potentially contribute to higher volatility in the economy," said Ma Jun, chief China economist at Deutsche Bank AG in Hong Kong.
Investment growth, a jump in vehicle sales and rising property transactions are among signs of a nascent recovery, according to the World Bank’s Nehru. Manufacturing expanded in March for the first time in six months, according to a government-backed index. Automobile sales rose to a record 1.08 million vehicles, the official Xinhua News Agency said. "With loan growth rates exceeding official targets, bank regulators may urge more restraint, to guard against excessive liquidity," Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong, wrote in a report today. China’s banking regulator is examining whether it needs to curb lending after new bank loans surged to a record in March, the Shanghai Securities News reported on April 8, citing unidentified people. Still, exports fell a record 25.7 percent in February, Chinese steel prices have dropped this year, and industries face "great difficulty," according to Ou Xinqian, a vice minister of Industry and Information Technology.
China’s trade surplus shrank 45 percent to $62.5 billion in the first quarter, from $114.3 billion in the previous quarter. The country’s foreign-exchange reserves grew by the least in eight years to $1.9537 trillion, the central bank said today. Economic growth cooled to 6.8 percent in the fourth quarter, the slowest pace in seven years. The first-quarter figure is due April 16. Macquarie Securities Ltd. on April 8 raised its forecast for China’s growth this year by 1 percentage point to as much as 8 percent. China International Capital Corp. last week raised its estimate to as much as 8 percent from a previous forecast of 7.3 percent.
British MPs look at possibility of breaking up the banks
MPs are to look at how Britain's banks could be carved up, The Times has learnt. As part of their inquiry into the banking crisis, MPs on the Treasury Select Committee plan to explore the feasibility of introducing legislation along the lines of the Glass-Steagall Act, which prohibited investment banks and retail lenders from operating within the same company. It was designed to prevent potential conflicts of interest. The Bank of England and the Federal Reserve of America are considering whether banks should be forced to hive off their investment banking businesses, as part of a wide debate among governments and regulators about how to reduce systemic risk among the banks.
While the committee, made up of 14 MPs from the Labour, Conservative and Liberal Democrat parties, was thought to be drawing its inquiry into the banking crisis to a close, it is understood that members now believe that they should spend more time discussing the shape of future financial regulation, and whether lenders should be made to separate their risky investment banking divisions from their retail businesses. While the committee focus will be on examining the Budget over the next month, it is believed that it will start calling experts, regulators and bankers in the run-up to the summer. News that the committee plans to examine the break-up issue comes only a day after George Osborne, the Shadow Chancellor, hinted that a Conservative government would break up Britain's nationalised banks and would consider whether to block other lenders from becoming too big.
It is thought that the committee — which has been drafting a report into its findings from the inquiry — will slice its findings into a number of smaller reports, the publication of which will be staggered over the next few months. The first part is expected to address whether the type and amount of support offered to the banks is appropriate and sufficient. The second is believed to deal with the perceived causes of the banking crisis and to suggest measures for changing executive pay. The third part of the report is expected to address the issue of regulation, the role of the Financial Services Authority, and whether banks need to shield their retail businesses from their investment banking arms.
Although politicians on both sides of the Atlantic have been pressing for banks to be forced into finding a means of ringfencing or splitting off their riskier investment banking businesses, in Britain the Prime Minister and the Chancellor want to beef up the regulation of banks rather than force the lenders into breaking up their businesses. Any move to compel the banks to separate their investment banking divisions could trigger a shockwave across the City and Wall Street.
British Telecom to slash another 10,000 jobs
BT is preparing to axe another 10,000 jobs. The huge redundancy programme will be announced next month alongside a horrendous set of year-end figures that will include provisions of about £1.5 billion. The results will mark one of the lowest points in BT’s history since it was privatised in 1984. The share price has crashed to 81p, valuing the telecoms company at £6.3 billion. It will also seriously damage the legacy of Ben Verwaayen, BT’s former chief executive, who left eight months ago and has since become chief executive at Alcatel-Lucent. The dividend is likely to be cut by up to 60%, while profits will be further dented by a big contribution to address a pension deficit that will exceed £8 billion. The redundancies, which result from an improvement in BT’s efficiency, are in addition to the 10,000 job cuts made last year and will be spread around BT’s 160,000 workforce.
There is no guarantee that this will mark the end of job losses. Some analysts believe next month’s figure could be higher than 12,000. BT’s chairman Sir Mike Rake and his chief executive Ian Livingston know they have one chance to clear up the group’s balance sheet and have no intention of underestimating the scale of provisions required. They intend to present a company that has a sustainable dividend policy, cash flow and profits that can be delivered at the same time as reducing a debt burden of £11 billion. The new business plan will be built around conservative assumptions and draw a line under further provisions at Global Services. Its remaining three divisions, retail, Openreach and wholesale, are performing at their best for five years.
A large portion of the provisions relate to contracts agreed during Verwaayen’s time at Global Services, which serves big, multinational customers. This division, which was meant to be the group’s growth engine, is a financial disaster. BT has already made a £336m provision against 15 of its 17 biggest contracts. But the remaining two are seen by insiders as toxic. The biggest is the National Health Service (NHS) and the other is thought to be Reuters. Final negotiations are still going on with both customers and, depending on the outcome of the talks, the scale of the provisions could vary by hundreds of millions of pounds.
BT has three big contracts under the NHS’s troubled £12 billion programme to upgrade its IT. Two have gone well. A broadband communications network is up and running, and the "spine", which holds national records, is regarded as a success. The problems have come on the third contract, to install new IT systems across London. Most of the write-offs are understood to relate to this programme, which has been hampered by a decision to change technology halfway through and by the conflicting demands of different NHS institutions.
Liquidate the Banks; Fire the Executives
On Tuesday, a congressional panel headed by ex-Harvard law professor Elizabeth Warren released a report on Treasury Secretary Timothy Geithner's handling of the Troubled Assets Relief Program (TARP). Warren was appointed to lead the five-member Congressional Oversight Panel (COP) in November by Senate majority leader Harry Reid. From the opening paragraph on, the Warren report makes clear that Congress is frustrated with Geithner's so-called "Financial Rescue Plan" and doesn't have the foggiest idea of what he is trying to do. Here are the first few lines of "Assessing Treasury's Strategy: Six Months of TARP":
"With this report, the Congressional Oversight Panel examines Treasury’s current strategy and evaluates the progress it has achieved thus far. This report returns the Panel’s inquiry to a central question raised in its first report: What is Treasury’s strategy?"
Six months and $1 trillion later, and Congress still cannot figure out what Geithner is up to. It's a wonder the Treasury Secretary hasn't been fired already.
From the report:"In addition to drawing on the $700 billion allocated to Treasury under the Emergency Economic Stabilization Act (EESA), economic stabilization efforts have depended heavily on the use of the Federal Reserve Board’s balance sheet. This approach has permitted Treasury to leverage TARP funds well beyond the funds appropriated by Congress. Thus, while Treasury has spent or committed $590.4 billion of TARP funds, according to Panel estimates, the Federal Reserve Board has expanded its balance sheet by more than $1.5 trillion in loans and purchases of government-sponsored enterprise (GSE) securities. The total value of all direct spending, loans and guarantees provided to date in conjunction with the federal government’s financial stability efforts (including those of the Federal Deposit Insurance Corporation (FDIC) as well as Treasury and the Federal Reserve Board) now exceeds $4 trillion."
So, while Congress approved a mere $700 billion in emergency funding for the TARP, Geithner and Bernanke deftly sidestepped the public opposition to more bailouts and shoveled another $3.3 trillion through the back door via loans and leverage for crappy mortgage paper that will never regain its value. Additionally, the Fed has made a deal with Treasury that when the financial crisis finally subsides, Treasury will assume the Fed's obligations vis a vis the "lending facilities", which means the taxpayer will then be responsible for unknown trillions in withering investments.
From the report:"To deal with a troubled financial system, three fundamentally different policy alternatives are possible: liquidation, receivership, or subsidization. To place these alternatives in context, the report evaluates historical and contemporary efforts to confront financial crises and their relative success. The Panel focused on six historical experiences: (1) the U.S. Depression of the 1930s; (2) the bank run on and subsequent government seizure of Continental Illinois in 1984; (3) the savings and loan crisis of the late 1980s and establishment of the Resolution Trust Corporation; (4) the recapitalization of the FDIC bank insurance fund in 1991; (5) Sweden’s financial crisis of the early 1990s; and (6) what has become known as Japan’s “Lost Decade” of the 1990s. The report also surveys the approaches currently employed by Iceland, Ireland, the United Kingdom, and other European countries."
This statement shows that the congressional committee understands that Geithner's lunatic plan has no historic precedent and no prospect of succeeding. Geithner's circuitous Public-Private Investment Program (PPIP)--which is designed to remove toxic assets from bank balance sheets--is an end-run around "tried-and-true" methods for fixing the banking system. In the most restrained and diplomatic language, Warren is telling Geithner that she knows that he's up to no good.
From the report:
"Liquidation avoids the uncertainty and open-ended commitment that accompany subsidization. It can restore market confidence in the surviving banks, and it can potentially accelerate recovery by offering decisive and clear statements about the government’s evaluation of financial conditions and institutions."
The committee agrees with the vast majority of reputable economists who think the banks should be taken over (liquidated) and the bad assets put up for auction. This is the committee's number one recommendation.
The committee also explores the pros and cons of conservatorship (which entails a reorganization in which bad assets are removed, failed managers are replaced, and parts of the business are spun off) and government subsidization, which involves capital infusions or the purchasing of troubled assets. Subsidization, however, carries the risk of distorting the market (by keeping assets artificially high) and creating a constant drain on government resources. Subsidization tends to create hobbled banks that continue to languish as wards of the state.
Liquidation, conservatorship and government subsidization; these are the three ways to fix the banking system. There is no fourth way. Geithner's plan is not a plan at all; it's mumbo-jumbo dignified with an acronym; PPIP. The Treasury Secretary is being as opaque as possible to stall for time while he diverts trillions in public revenue to his scamster friends at the big banks through capital injections and nutty-sounding money laundering programs like the PPIP.
From the report:
"Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability."
This is a crucial point; the toxic assets are not going to regain their value because their current market price--30 cents on the dollar for AAA mortgage-backed securities--accurately reflects the amount of risk they bear. The market is right and Geithner is wrong; it's that simple. Many of these securities are comprised of loans that were issued to people without sufficient income to make the payments. These "liar's loans" were bundled together with good loans into mortgage-backed securities. No one can say with any certainty what they are really worth. Naturally, there is a premium for uncertainty, which is why the assets are fetching a mere 30 cents on the dollar. This won't change no matter how much Geithner tries to prop up the market. The well has been already poisoned.
Also, according to this month’s Case-Schiller report, housing prices are falling at the fastest pace since their peak in 2006. That means that the market for mortgage-backed securities (MBS) will continue to plunge and the losses at the banks will continue to grow. The IMF recently increased its estimate of how much toxic mortgage-backed papaer the banks are holding to $4 trillion.
The banking system is underwater and needs to be resolved quickly before another Lehman-type crisis arises sending the economy into a protracted Depression. Geithner is clearly the wrong man for the job. His PPIP is nothing more than a stealth ripoff of public funds which uses confusing rules and guidelines to conceal the true objective, which is to shift toxic garbage onto the public's balance sheet while recapitalizing bankrupt financial institutions.
So, why is Geithner being kept on at Treasury when his plan has already been thoroughly discredited and his only goal is to bailout the banks through underhanded means? That question was best answered by the former chief economist of the IMF, Simon Johnson, in an article which appeared in The Atlantic Monthly:
"The crash has laid bare many unpleasant truths about the United States. One of the most alarming... is that the finance industry has effectively captured our government - a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation; recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression we're running out of time." (The Atlantic Monthly, May 2009, by Simon Johnson)
The banks have a stranglehold on the political process. Many of their foot soldiers now occupy the highest offices in government. It's up to people like Elizabeth Warren to draw attention to the silent coup that has taken place and do whatever needs to be done to purge the moneylenders from the seat of power and restore representative government. It's a tall order and time is running out.
Protests And Pitchforks: as New Bank Bailouts Seem Likely, There Is More To Speak Out Against
There's a phrase that's worked its way into the Japanese language: "Lehman Shokku"-translated as Lehman Shock. It refers to what happened to 460,000 people after Hank Paulson and Tim Geithner let the global Lehman Investment Bank collapse. A former Lehman executive told me over Matzoh at a Passover seder that she believes the decision reflected a competitive conflict and ego battle between the former Goldman Sachs chief turned Treasury Secretary and the bullheaded CEO of Lehman. The clash of two power-crats in New York triggered a hard rain across the world.
Bloomberg reports on a forty year old former bank employee, Miki, who "now sleeps in cardboard boxes under the elevated Hanshin expressway in Umeda, Osaka's central business district...as the global recession triggered by the implosion of Wall Street banks batters Japan. ... Miki's loss of housing shows how Japan's 2.95 million unemployed people threaten to fuel a rise in homelessness." Bloomberg is doing more than reporting bad news; it is also suing the Federal Reserve Bank for information that the privately run "public institution" wants to hide. Bloomberg wants the FED to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
As the sun creeps through and the weather warms, there's an expectation that the new season will wipe out the winter's bad karma and lead to a desperately needed economic recovery. Obama Advisor Larry Summers, like an evangelist from the Elmer Granty era, sees the signs in small upticks of business activity. Now, according to the News n Economic blog comes an analyst, Roger Shealy, who has examined the footnotes and available data concluding "The Fed is holding a larger share of risky assets as collateral for its riskless currency and Treasuries lent on the open market."
Translation: We are living on Quicksand. The Fed also admits that its consumer credit plan is faltering. Reports TIME: "The second round of the Federal Reserve's attempt to restart the nonbank consumer-lending market, the so-called TALF program, went even worse than the faltering first round did last month. The poor performance is causing some Fed officials to doubt the entire premise of the effort to restart nonbank credit markets."
On top of that, as the Treasury Department runs so-called "stress tests on the soundness of the banks," the Fed wants the banks to stay silent on the results. Again, Fed watcher Bloomberg is on the case: "The U.S. Federal Reserve has told Goldman Sachs Group Inc., Citigroup Inc. and other banks to keep mum on the results of "stress tests" that will gauge their ability to weather the recession, people familiar with the matter said." On this Easter weekend of "He Has Risen," a lot seems to be still falling. For the most cogent explanation of what's going on, visit the Baseline Scenario website run by former IMF exec and MIT Professor Simon Johnson:"Just as global financial liberalization created the potential for capital to move violently across countries and greatly facilitated speculative attacks on currencies, so financial deregulation within the United States has made it possible for capital markets to attack - or, in less colorful terms, go short or place massive negative bets on - the credit of big banks and, in the latest developments, the ability of the government to bailout/rescue banks.
"The latest credit default spreads data for the largest banks show a speculative run underway. As the system stabilizes, it becomes more plausible that a single big bank will fail or be rescued in a way that involves large losses for creditors. This would like trigger further speculative attacks on other banks, much as the shorting of countries' obligations spread from Thailand to Indonesia/Malaysia and then to Korea in fall 1997."
In other words, them chickens will soon be coming home to roost. The banks seem confident that having learned the disastrous lessons on Lehman Shokku, the government will keep bailing them out. Quiet as it's kept, insolvency in many banks suggests another wave of bailouts is coming. The banks seem confident that they have "captured" the government and can depend on taxpayer monies to pay off their crimes and mistakes. At the same time, they are worried about something else: US. JP Morgan Chase overlord Jamie Dimon fears that the public anger will torpedo the schemes the banks are running, saying, '"If you let them vilify us too much, the economic recovery will be greatly delayed." Comments Jenkins:
"The 'center vs. the pitchforks' idea fundamentally misconstrues the current debate. This is not about angry left or right against the center. It's about centrist technocrat (close to current big finance) vs. centrist technocrat (suspicious of big finance; economists, lawyers, nonfinancial business, and - most interestingly - current/former finance, other than the biggest of the big, particularly people with experience in emerging markets.)"
If anything, this seems the time to get the pitchforks going, to intensify the pressure, to make noise and press for change. Paul Krugman tells us that the policy world and the bankers want to rebuild a corrupt system, writing:
"Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress. Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won't be a one-time event; it will be the shape of things to come."
Goldman Cuts Outlook for Russia, Ukraine, Kazakhstan
Goldman Sachs Group Inc. cut its forecasts for the economies of Russia, Kazakhstan and Ukraine as the global outlook continues to deteriorate. The three countries are "all suffering severe hangovers from the burst global credit bubble and the crash in commodity prices," Rory MacFarquhar, Goldman’s Moscow economist, said in a report today. Russia’s economy will shrink 5.5 percent in 2009, compared with a previous estimate for a 3.5 percent contraction, while gross domestic product in Kazakhstan will decline 3 percent, compared with a previous forecast for zero growth, the report said. Ukraine will see a 15 percent contraction, compared with an earlier estimate of a 2 percent fall, reflecting "the very hard landing that is already underway," the report said.
Companies and banks across the region have struggled to repay their foreign loans as the price of oil, gas and metals, the countries’ key export earners, has tumbled, the report said. Kazakhstan, which holds 3.2 percent of the world’s oil reserves according to BP Plc, devalued the tenge 21 percent against the dollar on Feb. 4 after oil prices dropped 67 percent in six months. Neighboring Russia, the world’s largest energy supplier, depreciated its currency by 36 percent in the period. Recent economic data on Ukraine has been "far worse" than expected, the report said. A $16.4 billion loan from the International Monetary Fund may not be enough to stem accelerating capital flight and stop the country from falling into a "profound crisis," according to MacFarquhar.
The hryvnia may slide 20 percent by the end of the first half of the year as Ukrainian banks and companies buy dollars to repay about $10 billion in foreign debt by the end of June, according to Moscow-based investment bank Renaissance Capital. The IMF returned to Kiev on April 8 to resume talks over the second installment of its $16.4 billion loan to Ukraine, after suspending the $1.9 billion payment because the parliament approved a budget deficit equal to 5 percent of GDP. Offers of $3.75 billion in additional funding from the World Bank and the European Union would "help," the report said. "But we think the country needs additional financing on the order of $10 billion, an amount that would be likely to come only from G-8 sovereigns."
The Decade of Darkness
It's been 21 months since two Bear Stearns hedge funds defaulted, setting off a series of events which have led to the gravest economic crisis since the Great Depression. No one expected the financial earthquake to shake this hard or ripple this fast. The failure at Bear triggered a shock in the secondary market where mortgage loans are repackaged into securities and sold to investors. That market is now completely paralyzed cutting off 40 percent of funding for consumer and business loans and thrusting the broader economy into a deep recession. Banks and financial institutions have been forced to curtail their off-balance sheet operations and build their reserves which have ballooned from $45 billion to nearly $700 billion in the last 6 months alone. Like millions of homeowners who have seen their home equity vanish and their retirement savings slashed in half, the banks are hunkering down, hoping they can outlast the deflationary hurricane ahead.
Deteriorating economic conditions have taken their toll on consumer confidence and forced businesses to lay off employees that won't be needed during the slowdown. The system is hollow as an empty tomb with overcapacity. Demand is falling faster than any time since the 1930s. Inventories will have to be trimmed and budgets cut to muddle through the down-times. Foreign trade has slowed to a crawl, auto sales are down by 40 per cent or more, and unemployment is rising at a rate of 650,000 per month. Policymakers have pushed through a $800 billion stimulus plan, but it won't be nearly enough to stop the steady rise in unemployment or take up the slack in an economy where industrial output has been cut in half, new home construction has dropped to record lows, and manufacturing has fallen off the cliff. Economists warn that when governments don't step in and provide stimulus to increase aggregate demand, consumers cut back sharply on spending and push the economy deeper into depression.
Treasury Secretary Geithner and Fed chief Bernanke have lent or committed $13 trillion trying to keep the financial system functioning, but they've only managed to plug a few holes and avoid a system-wide collapse. The financial system is hobbled and unable to provide sufficient credit to generate growth. Every sector has suffered cutbacks, layoffs and slimmer profits. The problems go beyond toxic assets or complex derivatives. The system is plagued with stagnation, overcapacity and redundancy. The UCLA-based historian professor Robert Brenner sums it up like this in an interview in the Asia Pacific Journal:"The current crisis is more serious than the worst previous recession of the postwar period, between 1979 and 1982, and could conceivably come to rival the Great Depression, though there is no way of really knowing. Economic forecasters have underestimated how bad it is because they have over-estimated the strength of the real economy and failed to take into account the extent of its dependence upon a buildup of debt that relied on asset price bubbles. In the U.S., during the recent business cycle of the years 2001-2007, GDP growth was by far the slowest of the postwar epoch. There was no increase in private sector employment. The increase in plants and equipment was about a third of the previous, a postwar low. Real wages were basically flat. There was no increase in median family income for the first time since World War II. Economic growth was driven entirely by personal consumption and residential investment, made possible by easy credit and rising house prices. Economic performance was weak, even despite the enormous stimulus from the housing bubble and the Bush administration’s huge federal deficits. Housing by itself accounted for almost one-third of the growth of GDP and close to half of the increase in employment in the years 2001-2005. It was, therefore, to be expected that when the housing bubble burst, consumption and residential investment would fall, and the economy would plunge. " ("Overproduction not Financial Collapse is the Heart of the Crisis", Robert P. Brenner speaks with Jeong Seong-jin, Asia Pacific Journal)
The economy is now in a downward spiral. Tightening in the credit markets has made it harder for consumers to borrow or businesses to expand. Overextended financial institutions are forced to shed assets at fire sale prices to meet margin calls from the banks. Asset deflation is ongoing with no end in sight. Price declines in housing have reached 30 percent already and are now accelerating on the downside. This is the nightmare scenario that Bernanke hoped to avoid; a savage contraction in real estate that drags the rest of economy into a black hole. The economist Nouriel Roubini and market analyst Meredith Whitney predict that housing prices will drop another 20 per cent before they hit bottom. Nearly half of all homeowners will be underwater and owe more on their mortgages than the current value of their homes. That will increase the foreclosures and push scores of banks into default. According to Merrill Lynch's economist David Rosenberg:"It would take over three years to achieve price stability (in housing) The problem is that prices do not begin to stabilize until we break below eight months’ supply – and they tend to deflate 3 per cent per quarter until that happens. So as impressive as it is that the builders have taken single-family starts below underlying sales, their efforts are just not sufficient to prevent real estate prices from falling further. In fact, even if the builders were to declare a moratorium immediately, that is, taking starts to zero, demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market."
The main economic indicators all point to a long period of retrenchment ahead. The slowdown in global trade has hit Germany, Japan, and most of Asia particularly hard. The export-driven model of growth has suffered a major setback and won't rebound for some time to come. With the heroic US consumers unable to continue their debt-fueled spending efforts, surplus countries will have to develop domestic markets for growth, but it won't be easy. Chinese workers save 50 per cent of what they earn and German workers already have a comfortable life without increasing personal consumption. Higher wages and lower interest rates can help stimulate demand, but cultural influences make it difficult to change spending habits. Meanwhile, the economy will continue to languish operating well below its optimum capacity.
Capital flows have also suddenly reversed causing turmoil in the currency markets. January's TIC data indicates that net capital outflows for the US were negative $148 billion in January. Capital is now fleeing the country. Financial protectionism has triggered the repatriation of foreign investment causing a sharp drop in the purchase of US sovereign debt. This is from Brad Setser, an economist with the Council on Foreign Relations:"The obvious implication of the recent downturn in total reserve holdings — and the $180 billion fall in the fourth quarter of 2008 wasn’t driven by currency moves — is that the pace of growth in the world’s dollar reserves has slowed dramatically... The obvious implication: most of the 2009 US fiscal deficit will need to be financed domestically. The Fed’s custodial data indicates central banks are still buying Treasuries, though at a somewhat slower pace than in late 2008. But their demand hasn’t kept up with issuance. (Foreign Central banks aren't going to finance much of the 2009 US fiscal deficit; Their reserves aren't growing anymore", Brad Setser, Council on Foreign Relations)
The United States does not have the reserves to finance it own deficits which will soar to $1.9 trillion by the end of 2009. The Fed will have to increase its purchases of US Treasuries and monetize the debt. Foreign holders of Treasuries and dollar-backed assets ($5 trillion overseas) will be watching carefully as Bernanke revs up the printing presses to fight the recession and meet government obligations. China, Russia, Venezuela and Iran have already called for a change in the world's reserve currency. It won't happen overnight, but the momentum is steadily growing.
The S&P 500 has soared 23 per cent in the last four weeks, but the current bear market rally is misleading. The prospects for a quick recovery are remote at best. The fundamentals are all weak. Corporate profits are down, GDP is negative 6 per cent, housing is in a shambles, and the banking system broken. The Fed has increased the money supply by 22 percent, but economic activity is at a standstill. The velocity at which money is being spent is the slowest since 1987. Nothing is moving. The banks are hoarding, credit has dried up, and consumers are saving for the first time in 2 decades. The banks' credit-conduit cannot function properly until bad assets are removed from their balance sheets. But the magnitude of the losses make it impossible for the government to purchase them outright without bankrupting the country. According to the Times Online, the IMF has increased its estimates of how much toxic mortgage-backed paper the banks are holding:"Toxic debts racked up by banks and insurers could spiral to $4 trillion, new forecasts from the International Monetary Fund (IMF) are set to suggest. The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia. Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system."
Since banks lend at a ratio of 10 to 1; the amount of credit cut off to the broader economy will ensure that sluggish growth well into the future. If there is a recovery, it will be weak. The Obama administration will have to increase its capital injections even though they will add to mushrooming deficits. So far, financial institutions have only written down $1 trillion or 25 percent of their losses. This means the banking system is insolvent. Eventually, Obama will have to resolve the bad banks and auction off troubled assets, even though political support is rapidly eroding. According to political analyst F. William Engdahl, most of the garbage assets are concentrated in the nation's five biggest banks:"Today five US banks according to data in the just-released Federal Office of Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activity, hold 96 per cent of all US bank derivatives positions in terms of nominal values, and an eye-popping 81 per cent of the total net credit risk exposure in event of default. The five are, in declining order of importance: JPMorgan Chase which holds a staggering $88 trillion in derivatives (€66 trillion!). Morgan Chase is followed by Bank of America with $38 trillion in derivatives, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs with a ‘mere’ $30 trillion in derivatives. Number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain’s HSBC Bank USA has $3.7 trillion. ("Geithner’s ‘Dirty Little Secret’: The Entire Global Financial System is at Risk", F. William Engdahl, Global Research)
These five banking Goliaths are at the center of political power in America today. Their White House emissary, Timothy Geithner, has concocted a rescue plan--the Public-Private Investment Program--which will provide 94 per cent funding from the FDIC for the purchase bad assets. The program is designed to keep asset prices artificially high while transferring the bulk of the losses to the taxpayer. The plan has been widely criticized and has even raised a few eyebrows even among usually-supportive members of the establishment like the Financial Times:"US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system. The plans proved controversial, with critics charging that the government’s public-private partnership - which provide generous loans to investors - are intended to help banks sell, rather than acquire, troubled securities and loans. Banks have three options if they want to buy toxic assets: apply to become one of four or five fund managers that will purchase troubled securities; bid for packages of bad loans; or buy into funds set up by others. The government plan does not allow banks to buy their own assets, but there is no ban on the purchase of securities and loans sold by others." (The Financial Times)
It's a multi-billion dollar shell game with myriad opportunities for fraud. In theory, the banks could create their own off-balance sheet operations (SIVs or SPEs) and use them to purchase their own bad assets taking advantage of the government's 94 percent low interest non recourse loans. It's a swindle and another windfall for Wall Street. Geithner's plan does not fix the problems with the banks, it only delays the final outcome. The next leg-down in the recession will push many of the undercapitalized banks into receivership. Geithner's PPIP won't change that. As housing prices fall and foreclosures rise, the capital position of many of the banks will become untenable leading to a rash of bank failures. An article in Monday's Wall Street Journal puts adds some historical perspective to today's financial crisis:"The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2 per cent of household wealth; by 1929, it was 27.2 per cent of household wealth.... The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge." (From Bubble to Depression? Steven Gjerstad and Vernon L. Smith, Wall Street Journal)
Two leading economic historians, Barry Eichengreen and Kevin H. Rourke, have written an article "A Tale of Two Depressions" which has been widely circulated on the Internet. It illustrates (with graphs) how the global economy is plummeting faster now than during the 1930s. Stockbrokers aren’t selling apples yet, but the velocity of present downturn is worse than the Great Depression. Manufacturing, industrial production, foreign trade, capital flows, consumer confidence, housing, and even stocks are falling faster today than after the crash of 1929. So far, Bernanke's monetary bandaids have prevented the wholesale collapse of the financial system, but that could change. The economy continues its downhill slide and it looks like there's nothing to stop it from falling further still.
Thousands of US homes built with toxic Chinese drywall
At the height of the U.S. housing boom, when building materials were in short supply, American construction companies used millions of pounds of Chinese-made drywall because it was abundant and cheap. Now that decision is haunting hundreds of homeowners and apartment dwellers who are concerned that the wallboard gives off fumes that can corrode copper pipes, blacken jewelry and silverware, and possibly sicken people. Shipping records reviewed by The Associated Press indicate that imports of potentially tainted Chinese building materials exceeded 500 million pounds during a four-year period of soaring home prices. The drywall may have been used in more than 100,000 homes, according to some estimates, including houses rebuilt after Hurricane Katrina.
"This is a traumatic problem of extraordinary proportions," said U.S. Rep. Robert Wexler, a Florida Democrat who introduced a bill in the House calling for a temporary ban on the Chinese-made imports until more is known about their chemical makeup. Similar legislation has been proposed in the Senate. The drywall apparently causes a chemical reaction that gives off a rotten-egg stench, which grows worse with heat and humidity. Researchers do not know yet what causes the reaction, but possible culprits include fumigants sprayed on the drywall and material inside it. The Chinese drywall is also made with a coal byproduct called fly ash that is less refined than the form used by U.S. drywall makers.
Dozens of homeowners in the Southeast have sued builders, suppliers and manufacturers, claiming the very walls around them are emitting smelly sulfur compounds that are poisoning their families and rendering their homes uninhabitable. "It's like your hopes and dreams are just gone," said Mary Ann Schultheis, who has suffered burning eyes, sinus headaches, and a general heaviness in her chest since moving into her brand-new, 4,000-square foot house in this tidy South Florida suburb a few years ago. She has few options. Her builder is in bankruptcy, the government is not helping and her lender will not give her a break. "I'm just going to cry," she said. "We don't know what we're going to do."
Builders have filed their own lawsuits against suppliers and manufacturers, claiming they unknowingly used the bad building materials. The Consumer Product Safety Commission is investigating, as are health departments in Virginia, Louisiana, North Carolina, Florida and Washington state. Companies that produced some of the wallboard said they are looking into the complaints, but downplayed the possibility of health risks. "What we're trying to do is get to the bottom of what is precisely going on," said Ken Haldin, a spokesman for Knauf Plasterboard Tianjin, a Chinese company named in many of the lawsuits. The Chinese ministries of commerce, construction and industry and the Administration of Quality Supervision Inspection and Quarantine did not respond to repeated requests for comment. Chinese news reports have said AQSIQ, which enforces product quality standards, was investigating the complaints but people in the agency's press office said they could not confirm that.
Meanwhile, governors in Louisiana and Florida are asking for federal assistance, and experts say the problem is only now beginning to surface. "Based on the amount of material that came in, it's possible that just in one year, 100,000 residences could be involved," said Michael Foreman, who owns a construction consulting firm. The company has performed tests on some 200 homes in the Sarasota area and has been tracking shipments of the drywall. Federal authorities say they are investigating just how much of the wallboard was imported. Shipping records analyzed by the AP show that more than 540 million pounds of plasterboard -- which includes both drywall and ceiling tile panels -- was imported from China between 2004 and 2008, although it's unclear whether all of that material was problematic or only certain batches.
Most of it came into the country in 2006, following a series of Gulf Coast hurricanes and a domestic shortage brought on by the national housing boom. The Chinese board was also cheaper. One homeowner told AP he saved $1,000 by building his house with it instead of a domestic product. In 2006, enough wallboard was imported from China to build some 34,000 homes of roughly 2,000 square feet each, according to AP's analysis of the shipping records and estimates supplied by the nationwide drywall supplier United States Gypsum. Experts and advocates say many homes may have been built with a mixture of Chinese and domestic drywall, potentially raising the number of affected homes much higher.
So far, the problem appears to be concentrated in the Southeast, which blossomed with new construction during the housing boom and where the damp climate appears to cause the gypsum in the building material to degrade more quickly. In Florida alone, more than 35,000 homes may contain the product, experts said. In Louisiana, the state health department has received complaints from at least 350 people in just a few weeks. Many of the affected homeowners rebuilt after Hurricane Katrina only to face the prospect of tearing down their houses and rebuilding again. In another cruel twist, some of the very communities that have been hit hardest by the collapse of the housing market and skyrocketing foreclosure rates are now at the epicenter of the drywall problem. Foreman warns of a "sleeping beast" in the thousands of bank-owned condos and houses across the country, with no one in them to complain.
Outside the South, it's harder to pinpoint the number of affected homes. And in drier climates such as California and Nevada, it may be years before homeowners begin to see -- and smell -- what may be lurking inside their walls. The drywall furor is the latest in a series of scares over potentially toxic imports from China. In 2007, Chinese authorities ratcheted up inspections and tightened restrictions on exports after manufacturers were found to have exported tainted cough syrup, toxic pet food and toys decorated with lead paint. Scientists hope to understand the problem by studying the chemicals in the board. Drywall consists of wide, flat boards used to cover walls. It is often made from gypsum, a common mineral that can be mined or manufactured from the byproducts of coal-fired power plants.
Plaintiffs in the lawsuits, as well as U.S. wallboard manufacturers, say the tainted drywall was made with fly ash, a residue of coal combustion more commonly used in concrete mixtures. Fly ash can be gathered before it ever reaches the smokestack, where technology is used to remove sulfur dioxide from the emissions. The process of "scrubbing" the smokestack emissions creates calcium sulfate, or gypsum, which can then used to make wallboard, experts say. Haldin, the Knaupf Tianjin spokesman, says some domestic drywall is also made from the less-refined fly ash. But Michael Gardner, executive director of the U.S. Gypsum Association, said American manufacturers gather the gypsum from the smokestacks after the scrubbing, which produces a cleaner product.
The Consumer Product Safety Commission has dispatched teams of toxicologists, electrical engineers and other experts to Florida to study the phenomenon. The commission is also working with the Environmental Protection Agency and the Centers for Disease Control and Prevention to determine whether there is a health hazard. A Florida Department of Health analysis found the Chinese drywall emits "volatile sulfur compounds," and contains traces of strontium sulfide, which can produce the rotten-egg odor and reacts with air to corrode metals and wires. But the agency says on its Web site that it "has not identified data suggesting an imminent or chronic health hazard at this time." "We're continuing to test," said Susan Smith, a spokeswoman for the department, which has logged 230 complaints from homeowners.
Dr. Patricia Williams, a University of New Orleans toxicologist hired by a Louisiana law firm that represents plaintiffs in some of the cases, said she has identified highly toxic compounds in the drywall, including hydrogen sulfide, sulfuric acid, sulfur dioxide and carbon disulfide. Prolonged exposure to the compounds, especially high levels of carbon disulfide, can cause breathing problems, chest pains and even death; and can affect the nervous system, according to the CDC. "It is absolutely shocking what is happening," Williams said. Dr. Phillip Goad, a toxicologist hired by Knaupf Plasterboard Tianjin, sampled drywall from 25 homes, some that contained the company's wallboard and some that did not. "The studies we have performed to date have identified very low levels of naturally occurring compounds," Goad said. "The levels we have detected do not present a public health concern. The chemicals are naturally occurring. They're produced in ocean water, in salt marsh air, in estuaries."
But those who are living with it are convinced that something is making them sick, including dozens of homeowners in a single subdivision in Parkland, about 50 miles north of Miami. They are now faced with a daunting choice: Tear down and rebuild, or move out and be stuck with a mortgage and a home they cannot sell. "We are particularly concerned about the safety and well-being of our children," said Holly Krulik, who lives down the street from Mary Ann Schultheis. She and her husband, Doug, are suffering sinus problems and respiratory ailments, and their young daughter has repeated nose bleeds. "If a shiny copper coil can turn absolutely black within a matter of months, it certainly can't be good for human beings," Krulik said.
Neighbor John Willis is moving out, even though he can hardly afford to walk away from a house he's owned for just three years. He cries as he speaks of his 3-year-old son's respiratory infection, which eventually required surgery. "They basically took out a substance that looked like rubber cement out of my 3-year-old son's sinuses," he said. "My wife and I are now faced with the choice between our children's health and our financial health. My children are always going to win on that." The subdivision's builder, WCI Communities, is in Chapter 11 bankruptcy restructuring and can do little more than log complaints, said spokeswoman Connie Boyd. The federal government does not regulate the chemical ingredients of imported drywall. Plasterboard Tianjin said it has been making drywall for 10 years in accordance with U.S. and international standards. Another Chinese company facing lawsuits, Taishan Gypsum Ltd., also insists that it meets all U.S. standards.
Determining what is causing the problems could take months. Researchers will try to recreate in a lab the conditions that caused the sulfur compounds normally found in drywall to give off noxious gases. Meanwhile, people like Lisa Sich, 43, are left with more questions than answers. Sich has not felt well since moving into the Henderson, Nev., apartment she rents less than a year ago, and her silverware quickly tarnished. "I can hear myself wheezing," said Sich, who is having environmental experts test the apartment, built in 2007. "My eyes are constantly itchy, extreme fatigue." And while Sich is not even certain she's got the bad wallboard, she has not felt like herself in months. She's missed five weeks of work just since Thanksgiving. "I'm just tired all the time," she said. "It doesn't make sense."
John Gray: 'We're not facing our problems. We've got Prozac politics'
It's universally recognised that some people benefit hugely from recessions. But no one really expects those beneficiaries to be philosophers. John Gray, thus far, has had a fabulous recession, not least because he was one of the few people who forcefully predicted it, notably in his 1998 book False Dawn: The Delusions of Global Capitalism. This week, with perfect serendipity, Penguin has published Gray's Anatomy, a collection of his political writings over the past 30 years. Gathered together, Gray's essays, articles and reviews offer a very handy historical and philosophical guide to how we all got here, in a hefty, readable slab of glorious prescience.
Gray, who is now 60, withdrew from his sparkling academic career not much more than a year ago, in order to write full-time, and he still gets a bit of a kick from his new-found freedom. He grandly insisted on booking a room in "the Wylie building" for our interview. This, I think, hints a little at pleasure in being represented by Andrew "the Jackal" Wylie, the pre-eminent transatlantic agent of his generation, and a lot at habituation to having well-appointed institutional rooms at his disposal. Gray moved to Bath, with his wife Mieko, a dealer in Japanese antiquities, around the time when he surrendered his most recent post, as Professor of European Thought at the LSE. So the plush Bloomsbury office now serves as a London base.
One might forgive Gray, as he sits in Georgian splendour sporting a rust-coloured corduroy suit, for being a little bit bumptious, and slightly prone to self-regarding cries of: "I told you so." But such egotistical grandstanding would be a betrayal of everything Gray has ever believed in, if he could be accused of ever having "believed in" anything. Gray eschews all "isms", except realism, and he admits, with some shame and an awareness of the dreadful irony of life, that "a surviving element of utopianism in me" presently leads him to hope against hope that realism – and the establishment of a reasonable modus vivendi – might possibly be the coming thing. Long mistaken for a pessimist, Gray instead has a talent for calling an ideological spade an ideological spade. His intellectual speciality, or his "recurrent habit of enquiry", as he puts it himself, "is to try to identify features of the present moment, which are taken to be unshakeable by conventional opinion and established interpretation, but are not, in order to try to find out the interstices or weaknesses or fragilities". It's a technique that has served him very well.
However, Gray always does his best to respect the politicians who wield the ideological spades, preferring those who are "willing to get their hands dirty" and involving himself in the think-tanks that nourish them. This guiding principle dictated that he was an early supporter of first "the Thatcher project" and then "the New Labour project", even though many people would argue that one or both of these contributed vastly to our current predicament. Again, it's all about realism. It would be wrong to say that Gray has "faith" in politics. But he does think that politics are a much better way of sorting things out than the messier alternatives – war and revolution. He also reserves a degree of disdain for protest politics, not because it never succeeds in getting its point across – Gray fully accepted the evidence of global warming early on, for example – but because he is suspicious of movements that people join in order to find psychological satisfaction and "give meaning to their lives". It is the "meaning-conferring function of political projects" that he identifies as the aspect of them that allows people to get carried away with dangerous fervour.
In the introduction to Gray's Anatomy, the author declares with some irritation that he has lost count of the number of people who have asked him why he stopped "believing in Thatcherism". He has the good grace to chortle amiably when I facetiously insist on making that my first question to him. Anyway, it's still a good question, as he concedes himself, because its answer encapsulates pretty much every aspect of Gray's formative thinking. Certainly Gray recognised in Thatcher, from the moment she became leader of the opposition in 1975, a politician who was willing to get her hands dirty. But more importantly for him, she was a militant anti-communist, as was he. He dates his interest in Russia from early in his teens, when he began reading Dostoevsky, and credits the hardening of his anti-Soviet, anti-ideological stance to "the enormous influence" of Norman Cohn's 1957 book The Pursuit of the Millennium.
"Cohn argued that all of the great political movements of the 20th century, including Nazism, were at least partly pathological versions of western religious traditions, in particular apocalypticism. If you talk to most centre-left people, these happy meliorists, these so-called inch-by-inch meliorists, they will say: 'That may be true of the 20th century and of the extremes of politics but not of us.' But I always believed that utopian or millenarian or, let's just say, irrational politics, could break out in democracies as well." His 2007 book, Black Mass: Apocalyptic Religion and the Death of Utopia, explains how the war in Iraq was one such nightmarish manifestation. Crucially, Gray considers that one of the signals of incipient pathology is the advent of hubris. Hubris, he points out, entered the Thatcher project when communism collapsed. It was then that it came widely to be dubbed as "Thatcherism" and then that Gray judged it to have disconnected from reality. He recalls seeing Thatcher on television saying, "We are a grandmother," and thinking: "That's it, then..."
"One of my recurring tests of political reality and of political fantasy is when hubris penetrates not just leaders but an entire organisation," he explains. "Then it's over. That happened with Thatcher, and it happened with Bush. The key phrase with him was the famous: 'Are you part of the reality community?' " Significantly, Gray's anti-communism differed in one important aspect from Thatcher's – and almost everybody else's. "Far from being pessimistic," says Gray, "I was considered wildly optimistic at that time because I thought communism – a tremendously repressive system of government – would simply collapse. Nearly everyone, including the Foreign Office and Sovietologists, always portrayed it as completely unshakeable. I didn't think that was true. It didn't have much internal legitimacy – ever." So, while Gray fully endorsed Thatcher's "militant position in the Cold War", he wasn't utterly surprised when the Berlin Wall suddenly went, like a tower block that had been demolished in a controlled explosion. Except that this was an explosion that few saw the need to control.
"I was horrified by the uncomprehending and stupid western post-collapse policy towards Russia ... What were western policy-makers thinking in the Nineties, when Russia went through a demographic crisis? People were dying in numbers unique in modern peace-time. A third of the population went underwater, pensions and life savings went out of the window. What were they thinking would result from that? That was an absolute catastrophe. George Bush Senior, not long after the Wall came down, said: 'This is a great moment for freedom, but no occasion for triumph. It will be very, very difficult.' But nobody wanted to hear that. "It went against the prevailing mood of triumphalism, when Thatcherism turned into a global project. It went against the opportunities for financial gain that presented themselves in the former Soviet Union. It went against the hubris of the time. What was needed was a very light touch, a non-ideological approach, very pragmatic, very flexible, very skilful. Instead what we got was: 'This is what you've got to do. Adopt this wonderful model that we've got.' "
The swaggering hubris of the time gained widespread intellectual legitimacy with the publication of Francis Fukuyama's essay The End of History, in 1989. Gray was back then contemptuous of what he saw as yet another expression of apocalyptic thinking, and an example of "the domination of the American mind by the liberal ideology that has fostered blind spots in American perception of the real world that have been immensely disabling for policy". While Fukuyama's theory is now dismissed as an aberration, Gray rightly maintains that its influence was pervasive and baleful. Anyway, it is now all too obvious that neither global liberal democracy nor global free markets were unstoppable. Gray is quite certain, on the contrary, that they are over, in their present form. He predicts, during the piecemeal process of coming up with a different model, "a relatively long period of sheer survival".
"We are presently in the first phase, not of recession, depression, deflation, inflation – all these sterile debates. We're in the first phase of the collapse of this type of globalisation, or this phase of globalisation, which will have some features in common with the Thirties but will be different in lots of ways." Gray admires John Maynard Keynes, and admires the post-war settlement. Why shouldn't he? From a working-class background in South Shields, he was nudged into grammar school and from there to Exeter College, Oxford, where he studied PPE because its reading list "coincided with the things I was reading anyway". He describes himself as a Butler boy, a child of the post-war settlement. But he doesn't think that approach will work now. All it provides, he says, "is a staff to lean on" while we work out how to "stop fighting the last battle instead of the one we are in".
"A crucial difference is that America isn't the industrial powerhouse of the world any more, so reflating America, even if it was possible, wouldn't get us out of the mess. The Obama administration is essentially rudderless. Gordon Brown did stop the banking system from outright collapse, but that was crisis management, and we're now at a later stage. Mechanical Keynesianism won't work, or at least won't work well in a context in which capital movements and economies are open. "A semi-open global free-market was created, especially for capital. It has its own features, its own logic, its own dynamism. I don't think anyone fully understood how it worked or how big it was growing. So then it becomes very difficult to control, because there's no entity that embraces this economy. Each separate state or entity presents problems without even comprehending what is happening. They all react in different ways as they resolve different issues. The elite oscillates between immediate crisis management, and just dithering, or not knowing what to do, or quarrelling about who is to blame.
"In this early phase of collapse, Brownian rationalist re-regulation at an international level is utterly remote from what is in fact happening, which includes an entrenchment of illegal parts of the economy that are rather globalised. The elements of de-globalisation are: less trade, repatriation of capital, nation state more important. If you're going to bail out a bank there will be pressure – so far not very effective – for the benefits of that to be felt locally. "So all these classical features of collapse are present. Which has happened before. This is a normal historical collapse. There was a major collapse in globalisation after the First World War. I'm not saying we are going to have what we had then, because there were a number of malign features then that we don't have now. We don't have fascism or communism we don't have imperialism or colonialism ..."
But we do have ecological peril. "Yes. Industrialisation is still occurring. China still wants and needs 8 per cent growth a year. That requires large energy inputs and so oil prices will go back probably to $80 or more in the next few years. When that happens, will it be against a background of governments having taken various measures to ensure that they develop alternatives to oil? I doubt it. Because most environmental and ecological projects are being reined back because now the immediate imperative everywhere – in the case of China for regime survival even, or in democratic countries just as part of winning the next election – is to try to get the show back on the road. But the reason it collapsed is that it is not sustainable.
"There are no goodies and baddies in this. It's not just the Russians, the Chinese. It's also Canada, Denmark, Norway. All saying: 'We want our share.' That's the future. If we had the realism to see that as an ongoing trend, it could be mitigated, the sharp edges could be taken off. We could expect conflicts we might be able to manage better. "But the actual response, I think, and this is partly to do with the way democracy works and the way the mass-media works, is to avoid confronting these admittedly intractable problems, because there is actually underlying despair. It's Prozac politics. If you say actually, possibly, we're past the tipping point for preventing a two-degree change. That's despair: 'I can't get out of bed. I'll get drunk. I just can't take it.' So it's a very fragile mental resilience we've got here. "But in the Netherlands, they're giving some land back to the sea, they're giving some land that was farmed back to nature, they're building on stilts, they're creating wildlife passageways – they're responding. Intelligently. To my mind that's inspiring. Just take the emerging consensus of scientists and respond.
"Realism is a necessary condition of serious politics and serious policy-making. And realism isn't popular. Because what many people are looking for in politics – including green politics at the moment, is a meaning for their lives. If you say to people: 'We can't move to a world in which we don't have either nuclear or fossil fuels. That's impossible,' they will say, 'That's not impossible, not if we all want it.' But many countries don't want it. Russia's not going to do it. Venezuela's not going to do it. Iran's not going to do it. Their wealth and power depend upon fossil fuel. 'Well, we can do it,' they'll say. "And when you push it, it comes down to a kind of symbolic expressive function whereby even if the effect of certain policies – like moving towards wind power – is to be forced back to coal, then it doesn't matter, because the purpose of the policy is not actually to effect a real-world change but to keep the spirits up. "The search for a narrative which confers meaning on people's lives and shows them to be part of a larger, meaningful picture, is to my mind a legitimate and deep-seated human need." For that reason Gray scorns Richard Dawkins, and the whole idea that if people turned away from religious belief, the world would be "better".
"The search for meaning is dangerous when it spills over into politics. It's not only dangerous when it produces the communists, the Jacobins and the Nazis, but also in the context of democratic or liberal meliorism, because it creates a preference for policies which satisfy this need for meaning rather than have an actual effect." Gray sees the present collapse as an inevitable consequence of the human condition, and particularly the human belief that somehow industrialisation is progressive, and can become wholly benign, for everybody. "Humans don't always adapt well to industrialisation, but pretty much all humans want the benefits of industrialisation. They want clean water, they want long lives, they want warm rooms, and, let's be frank, they also want a high-stimulus environment. I can't imagine what life is like in an immobile village in the medieval period. But it would be a very low-stimulus environment, in which people are stuck. There's no room for romantic nostalgia here.
"Yet all forms of industrialism are on one hand attractive to humans and on the other intolerable to them. Partly, that's their revolutionary character. It is in the nature of industrialisation that markets rise up and disappear because new technologies rise up and disappear. So whole industries vanish, with some of the ways of life that are associated with them. People have to move or change their skills, or find other things to do. It's not a transition to a stable state. It's permanent change. "It's not really about capitalism. Industrial civilisation itself is inherently dynamic and revolutionary. I think Marx got that right. That's partly what human beings like about it. That's what's attractive. What's unattractive is that it is very difficult to reconcile its actual operation with the human needs for security and stability. People do want security and stability. But they also want possibility and thrills. They do want happiness, but they also want excitement, which is quite different. And these are ubiquitous human conflicts."
Gray remains a fan of the 19th-century philosopher John Stuart Mill: "Not his utilitarianism, not his belief in progress, not his Victorianism – but his eclecticism. He took things from different systems of thought. The truth about human civilisation is very unlikely to lie in some single form. Which he understood." Yet specialisation is another change that has been ever-increasingly wrought by industrialisation. Very few people on the planet now can really claim to be intellectual generalists yet still have a grasp of "the detail". Gray suggests that there are one or two people who manage to achieve a useful overview. He is complimentary about Nassim Taleb, the writer and hedge-fund manager who also anticipated the crash. But he is, like many others, a bit cross with the "experts" of Wall Street and Canary Wharf, who didn't read Keynes or Galbraith – or even Ayn Rand – until they got their redundancy bonuses.
"The type of economic thinking that went on up to and including Keynes – which was not that long ago – doesn't happen any more. Political economy. Adam Smith. Lectures on jurisprudence. Theory of Morals. And so on. David Ricardo. Marx came out of that tradition. "Economics wasn't seen as a separate discipline concerned with mathematics and the ability to model it. It was seen as a historical discipline connected with history, connected with morality, connected with the analysis of the nature of the human mind. And that went on right up to Keynes, who was a sophisticated kind of guy, founder of the Arts Council and so on, but who also wrote a treatise on probability, read all the philosophers of his day, was an investor, liked to go to Deauville and have a flutter.
"The post-war settlement did last a long time and was a benign settlement, predominantly ... But the way economics has developed ... it has cut loose from history, even from the history of economics, let alone the history of economies ... the loss of the past, of the sense of history is a very profound development." It's slightly weird talking to Gray, because I find I agree with absolutely every word he says. I'm not sure whether we are just on the same wavelength, or whether, over the years, he's had such a profound influence on my world-view that I'm just a little John Gray thought-clone. However, since that's one question that Gray is quite unable to answer, I fear that I cannot answer it either.