Walk 800 miles to attend Boy Scout Jamboree.
Two Venezuelan Boy Scouts, Rafael Angel Petit, left, and Juan Carmona, examining their boots after tramping 25 miles a day for two years in order to attend the Boy Scout Jamboree in Washington. They left Caracas Jan. 11, 1935, arriving in Washington today
Ilargi: Couple of things for today, I’ll try to keep it short because I can see in the stats that that Memorial thingy is eating away my attendance numbers, and when you look up things and all and write about them and that takes some time, you might as well do it for a larger crowd. So I’ll be back on top of these topics, but I’ll touch on them today, since they stand out so much and so clearly.
First, the Washington Post today ran an article that looks to be heavily influenced by the green shoots, in the way they were defined by Randall Forsyth in Barron’s:
"...why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect...."
The WaPo piece sort of puts the blame for the as-yet missing global economic recovery on Europe, whereas the US has done everything right, and aggressively so. It also groups Britain with continental Europe instead of the US, which is at best a questionable stance.
This whole idea that continental Europe is doing worse than the US and the UK, I’ve talked about it a lot, and I don’t want to again here, is a simple political media spin-driven image-building exercise aimed at making London and Washington look less bad, if not better. And I agree that available data, in between the hiding, massaging and outright lying, are often hard to read. But that is precisely the point. All the claims from Anglo media, as well as geniuses like Paul Krugman, Evans-Pritchard et al, who were shouting out about how the EU should follow those brilliant US policies, have so far proven to be inconclusive, if not indeed simply false. These people have nothing to show for their claims, except for the green shoots they smoke. I’ll get back to that in a sec. First, let’s return to an article I posted yesterday, Financial de-globalisation, savings drain, and the US dollar, and specifically, these two graphs:
Now, we all know that Europe is a hodge-podge of nations, with England and Ireland out there westward in more ways than one, with Spain suffering a bad English headache, and with Germany as the engine that drives it all. And yet, the WaPo dares claim that Europe will stifle growth and recovery around the globe, by which it means to imply the US. Look at the graphs. It's a politically driven bogus claim, intended to make Obama and his nation look less of a bunch of losers. A $800 billion deficit vs a $250 billion surplus. In one year.
That brings me to topic number 2. The green shoots, the recovery. There is no recovery, and any statement that says otherwise is false. I like Ed Harrison, but I read something he wrote today at nakedcapitalism that made my stomach turn and churn.
"And for the record, I have said I see a recovery happening probably in Q4 2009 or Q1 2010 [..]. The real question is how robust a recovery are we going to have [..]
Update: I would also add that it is far from clear that we will get a recovery at all.
Obviously, Ed wants it both ways and predictably gets stuck in his own words. Why write all those lofty recovery lines if it's not clear to you there's a recovery at all? Would some caution be in place perhaps?
Look, all sorts of numbers go up in spring, and not just temperatures. There's more work, always, so it's no surprise that 12000 less initial jobless claims were filed in the US in April than in March. It's a surprise the difference wasn't more substantial. What should be sounding loud red alarm bells, though, is that continuing claims kept on rising, setting a record for a 16th straight month. There may be shoots somewhere in there, but they sure ain't green.
Also, if you dump $4 trillion directly, and another $10 trillion indirectly. into an economy the size of America, it would be a sign of complete breakdown, mayhem and collapse if not at least some numbers were embellished somewhat. And those "donations" don't yet fully include what's waiting in store through the nation's guarantees of what goes on behind the curtains at AIG, Freddie and Fannie, the FDIC and, ultimately, the Fed. But those are data we won't find out about until it's literally too late.
All in all, it's safe to say that whatever passes for a recovery in the US, a theme that rests on the shaky foundations of largely hidden triilions in spent taxpayers money and numbers massaged enough to resurrect Lazarus, has nothing at all going for it. What will Americans buy cars with, and homes, in the next year? With money borrowed from their neighbors, that's what. That's your green shoots. There is no recovery in the US economy, we merely have a slight pause bought at the expense of many trillions of dollars. Which is a very steep price indeed for maintaining an illusion (and one western Europe is not at present paying). Also, US unemployment numbers are now worse than Europe, where being jobless is not such a punishment for many.
Ask yourself: what'll the US do when more bail-out money is needed? (which is a sure thing). How many trillions do you have left in your back pockets to keep the American Dream going a few more months? Dude, don't bogart that green shoots joint, pass it over.
Geithner's "Incredible" New Justification For Recycling Bailout Money
Treasury Secretary Timothy Geithner said on Thursday that he has "no plans to request additional funding" for the $700 billion Troubled Asset Relief Program. Of course, he wouldn't need to request additional funding, because, per his April declaration that the depleted TARP would benefit from $25 billion in repaid funds, the program can regenerate money like the T-1000 can regrow limbs. Nevermind the law that says the taxpayer is supposed to get his money back when bailed-out firms return funds, and that the previous administration promised this kind of recycling would never happen.
At a Senate hearing on Wednesday, Sen. Jim DeMint (R-S.C.) questioned Geithner about the recycling: "If over the next six months $50 billion comes back, will $50 billion go into the general fund of the United States?" Geithner responded that money returned to the TARP creates "additional head room" -- like the Lernaean Hydra.
"The way the TARP is designed -- and I didn't design this -- but the way it's designed is every dollar that comes back goes into the general fund but that does still create additional head room under the $700 billion authority for us to make capital investments," Geithner said. "So we have the ability to still use the $700 billion if we think there's a strong case for doing that, but the way the program works is a dollar comes in and goes to the general fund but still creates additional room for us to make a new..." "So your understanding of what we did is that the Treasury now has $700 billion that it can use permanently," DeMint said, "rotating in and out of the capital markets as you see fit?" "Well, I'm not quite sure permanent, but you're right," Geithner said.
What Geithner said represents an escalation over Treasury's previous justification. The law says revenue from the sale of troubled assets "shall be paid into the general fund of the Treasury for reduction of the public debt." A Treasury spokeswoman told the Huffington Post earlier this month that repaid principal from investments in preferred shares landed back under the TARP. But now "every dollar" that comes back goes into the TARP. "This is incredible," wrote economist Dean Baker, co-director of the Center for Economic and Policy Research, in an email to the Huffington Post. "I had thought that Geithner's argument for being able to recycle TARP money hinged on making a distinction between money that went to buy troubled assets, where the wording seems to explicitly rule out recycling, and money that was used to buy preferred shares.
There is no explicit wording on the latter because Congress had been told that the money it was approving would be used to buy troubled assets." Baker continued, "Instead of resting his case on this distinction, Geithner is apparently trying to say that the explicit wording, requiring repaid TARP money to be returned to the Treasury, has no meaning. In his testimony, he is claiming that Congress approved a $700 billion revolving fund, even though the wording is obviously intended to mean the opposite."
A Quick Recovery? Keep Dreaming
Boy, were people happy two weeks ago, when a 30%+ stock rocket ride from the bottom convinced everyone that we were headed for a spectacular economic recovery. Spirits have dampened somewhat since, with the market going limp day after day. But stocks are still hanging around fair value, and a sense of optimism remains. Well, regardless of what the market does over the coming weeks, don't embrace the happy talk that we're going to suddenly go right back to life as it was in 2007. The key problem in the economy, remember, is debt--specifically, way too much of it. See the chart from the SF Fed above, which compares debt, wealth, and income. The good news is that consumers have finally started deleveraging. But their wealth has plummeted a lot faster than their debt. And if history is any guide, the deleveraging process is going to take decades, not years.
Take a look at that chart of Japan's experience to the right, from the San Fran Fed. Look at where they are now compared to where we are now (the series aren't apples to apples, but the deleveraging process is similar). Note that Japan's economy is in the middle of its second decade of stagnation. And its stock market is trading at one-fifth of its pre-deleveraging peak. (The analogous performance for us would be DOW 3500 in 2026).
In future years, US consumers will have to save money to pay down all that debt. The savings rate will likely go back to its level in the good old days--8%-10% of GDP.
All the money consumers devote to debt reduction, meanwhile, will be money that they aren't spending. If our situation is similar to Japan's, the SF Fed estimates--if we go back to our pre-binge leverage ratios--this consumer deleveraging will shave 3/4 of a percentage point per year in consumption growth. (About half a point of GDP growth).
That doesn't sound like much? Many future economic forecasts, and many stock-market forecasts, are based on long-term growth of 3%+ per year. (The forecasts underlying Social Security and Medicare, for example.) Cut the growth of consumption by 75%, and you're also going to have businesses investing less. Add it all together, and you're probably shaving a point off GDP growth, so that the long-term growth rate might be 2%, not 3%. That makes a big difference for tax revenue (not to mention Social Security contributions).
San Francisco Fed Concerned About Consumer Deleveraging
One of the core macroeconomic themes that Zero Hedge has been expounding on since inception, which mirrors some of the major concerns of David Rosenberg, has been the evaporation of consumer wealth, income and equity as a function of both declining stock and real asset values and persistently high consumer debt. In an economic paper, the San Francisco Federal Reserve confirms that these concerns are not unfounded, and could be the very core of the processes that undermine the administration's attempts to restore economic growth.
While the administration is doing all it can through various media conduits to imprint the idea that inflation is all but a guaranteed reality at this point, so that consumers begin borrowing at an expansive pace yet again, consumer leveraging is exactly the process that has commenced unwinding, and the obvious impact on the personal saving rate which has been growing at a dramatic pace, has been visible throughout the economy. And as the consumer deleverages additionally, deflation is a certainty, as the combined impact of asset value decline and associated leverage flow through the economy, further depressed prices of goods and services. The four charts below from the Fed's release strike at the heart of the administration's faulty attempt to relever the US consumer.
Unfortunately for Bernanke and Geithner, the deleveraging process has commenced, and regardless of how many treasuries are issued, and how much additional debt the U.S. incurs, the demand side for credit is just not there, sticking banks with basements full of shrinkwrapped packages of hundred dollar bills, that will sit dusty and unused for years. The only immediate impact is that at some point in the not too distant future, the U.S. will need to print bonds to satisfy just the interest payments on these very bonds, which is an unsustainable state and only has one outcome.
In a very amusing section from the release, the San Fran Fed is discussing the financial behaviour of the consumer, when in fact the very same words are 100% applicable to the U.S. Treasury itself:More than 20 years ago, economist Hyman Minsky (1986) proposed a “financial instability hypothesis.” He argued that prosperous times can often induce borrowers to accumulate debt beyond their ability to repay out of current income, thus leading to financial crises and severe economic contractions.
Until recently, U.S. households were accumulating debt at a rapid pace, allowing consumption to grow faster than income. An environment of easy credit facilitated this process, fueled further by rising prices of stocks and housing, which provided collateral for even more borrowing.The value of that collateral has since dropped dramatically, leaving many households in a precarious financial position, particularly in light of economic uncertainty that threatens their jobs.
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates.
Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.
The last paragraph is probably the most lucid explanation of the conundrum the Federal Reserve and the Treasury are in currently. And all that Bernanke and Geithner are attempting to do is not just make sure these very banks can survive another day with trillions of worthless loans on their books, but do all they can to relend them once again into private (consumer and hedge fund) hands.
This approach is flawed and as time passes and the consumer savings rate increases, the bifurcation between the Fed's plans and reality will only become more evident, with the cost being increasing deflation, while the U.S. accumulates higher and higher sovereign debt. The combined impact of both processes could end up having a devastating geopolitical impact on the United States.
Do Be Wary of Green Shoots
Hold your horses on calling a new bull market -- the bear has several years to go.
Blame the Brits. When Standard & Poor's suggested last week that the credit of the United Kingdom mightn't be exactly sterling because of its deficits and bailouts, it cast a worse light on America's standing. But an even worse blight has spread across the Atlantic. It's said we are two nations separated by a common language, though English is hardly the lingua franca it once was on these shores. Be that as it may, Yanks have adopted a turn of phrase originated on the other side of pond, the "green shoots" that keep popping up everywhere. It was originated by former British Chancellor of the Exchequer Norman Lamont, who was quoted as spotting green shoots in the British economy back in 1991, recalls Mark Turner, who heads the Pentagram Fund, a hedge fund that scored a 70% return in last year's collapse. Of course, Lamont would go on to oversee the ignominious withdrawal of the pound from the European Exchange Rate Mechanism the next year, which netted an infamous $1 billion windfall for George Soros.
So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I've read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving? Yet, in a world going to pot, nothing should be dismissed. Prior to the resounding rejection by California's voters of various patches for the state's budget deficit, Gov. Arnold Schwarzenegger seemed open to a legislative proposal to legalize marijuana and tax it. Now facing a $21 billion budget deficit, the "Governator" isn't in a position to just say No to anything.
As an alternative, the state's treasurer called on the federal government to guarantee California's borrowings in a way the Ford Administration declined to do back in the New York fiscal crisis of the 1970s. That, of course, led to the immortal New York Daily News headline, "Ford to City: Drop Dead." Having bailed out the banks and provided a lifeline to Chrysler and General Motors, how does Washington tell California, the eighth-largest economy in the world, to drop dead? That's the slippery slope that America's credit rating is on. Last year, many celebrated the 40th anniversary of the tumultuous events of 1968, a year that changed history, at least in the view of Baby Boomers who date it in terms of BE and AE (Before Elvis and After Elvis.)
Market historians have been pointing to 1938 as an antecedent for this year's action, as Mike Santoli has noted in his Streetwise column. So, too, has Louise Yamada, the doyenne of technical analysts, who now counsels clients via her LY Advisors after her long career at Smith Barney. Citigroup (C), in one of its many deft moves before it became a ward of the state, decided to axe Smith Barney's highly regarded technical-analysis group back in the middle of the decade. "It is almost uncanny the degree to which 2002-08 has tracked 1932-38," Yamada writes in her latest note to clients. She has posited in her so-called Alternate Hypothesis that the structural bear market would be less like its most recent predecessor, from 1966-82, and more like 1929-42.
So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise's chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.
From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II. Then came a series of bull and bear trades -- down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows. The positive aspect of this, writes Yamada, is that the arduous process permitted individual stock consolidations to develop over years ultimately provided the base for a bull market in 1942.
But, she emphasizes, that means investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far -- topped only by 1929-32 -- the structural bear has several years to go to complete the repair process. As for the current rebound, it is rather like a bungee jump, with an elastic snap-back after a terrifying plunge. And it has been a kind of worst-to-first move.
David Rosenberg, ensconced at Gluskin Sheff in Toronto after years of distinguished duty as Merrill Lynch's North American chief economist, observes that the best performers have been the lowest-quality stocks or those with biggest short interest. "In other words, this was a rally built largely on short-covering, pension-fund rebalancing and the emergence of hope wrapped up in 'green shoot' data points," he contends. That makes its sustainability in doubt. But the move has left many on the platform as the train pulled out of the station, including some of the biggest swingers in hedge funds, who are known in the market just by their first names.
What is likely to disappoint the bulls is the pace of recovery in corporate profits, according to the perspicacious Smithers & Co. of London. Earnings per share -- the sustenance of equity investors -- will be hampered by punk economic growth ahead and the need to repair corporate balance sheets. Investors had come to regard the record profit margins of recent years as the new norm. Last year's were above average, despite the general perception they were squeezed. Profits typically grow when the economy is expanding above trend, and vice versa. With U.S. growth likely to stabilize at only 1% into 2010, the outlook for earnings is apt to be, in a word, lousy.
Apart from the economic forces on profits, financial forces -- depreciation, leverage, interest costs and taxes -- are likely to push earnings per share down, Smithers observes. Deleveraging means share issuance rather than buybacks -- a reversal of the trend of recent years that worked to the benefit of corporate chieftains' bonuses. "The growth rate of earnings per share is thus likely to be worse than that indicated by profit margins alone," his report logically infers. The bottom line, as it were, is that when the economy recovers, the benefits to corporate earnings accruing to stockholders will be disappointing. That could make for a frustrating equity market until the healing is complete, a moment that, as Yamada's profile suggests, could be years away.
European Slump May Stall Global Rebound
The financial crisis in the United States may have tipped the world into a global recession, but the biggest obstacle to a full-scale recovery may now lie on the other side of the Atlantic -- in Europe. Yesterday, Britain reported that its economy suffered its steepest quarterly decline in 30 years and that car production fell 55 percent in April from a year earlier. On Thursday, Standard & Poor's took the extraordinary step of lowering Britain's credit outlook to negative, raising the specter of a cut in that nation's golden rating on government bonds. And some European nations, including Germany and Italy, are now in the midst of their sharpest downturns on record.
Nine months into the worst economic downturn since the Great Depression, the free fall in the United States appears to be giving way to a more measured decline, but economists are struggling to find a steady pulse in European and other industrialized nations, such as Japan, where the world's second-largest economy is also slowing the global recovery. These countries' recessions are shaping up to be both deeper and longer than the one in the United States, where the pace of job losses has eased and there are fresh signs of life in financial markets.
There are hints of stabilization in the Old World -- in Germany, for instance, investor sentiment is up amid indications that factory orders are stabilizing after months of sharp drops. But many economists now say Europe will trail the United States in pulling out of recession by at least three to six months. Critics charge that this is partly because Europe is still moving slowly to roll out government stimulus programs and right its own ailing financial system. Some countries, such as Ireland, are so cash-strapped that they've raised taxes in the middle of a deep recession, making things worse. In addition, European leaders have only recently signaled their willingness to conduct broad, systematic stress tests on their financial institutions, similar to the ones on major U.S. banks already concluded by the Treasury Department.
Indications are that they need such tests, and fast. While U.S. banks have already written down about half the estimated $1.1 trillion in troubled loans and toxic assets on their books, Europe's financial institutions have thus far written down less than 25 percent of their $1.4 trillion in bad debts related to the crisis, according to a report from the International Monetary Fund. Many major Western European banks are also heavily invested in hard-hit Eastern Europe, where the risk of a fresh wave of corporate and consumer defaults is considerable.
"Recovery here depends on recovery abroad," U.S. Treasury Secretary Timothy F. Geithner told a House Appropriations subcommittee Thursday. "Our financial reform effort in the United States must be matched by similarly strong efforts elsewhere in order to succeed." In the face of congressional criticism of Europe, however, he defended the actions taken by its governments thus far, saying they were "better than you think." Nevertheless, Europe's troubles are bad news for a global recovery. The 27-nation European Union accounts for almost a quarter of the world's economic activity, and its sluggish emergence from the crisis is likely to slow any rebound in world trade and foreign investment.
About one-fifth of all U.S. exports -- including big-ticket items like nuclear reactors and aircraft -- head to the E.U., with American companies including McDonald's and Google earning an increasing portion of their revenue there. The developing nations of Eastern Europe and Africa are also reliant on Western European investment, which has evaporated in recent months. Though private investors have begun plunking cash back into emerging markets in recent weeks, many developing nations are still predicting net outflows in overall foreign investment for 2009, for the first time in years. Some emerging giants such as China and India are continuing to grow, though the pace of their growth has slowed and experts doubt it will be enough to offset the slowdown in Europe.
"The net effect is that Europe will not be an engine in a global recovery, in fact, it will be quite the opposite," said Eswar Prasad, senior fellow at the Brookings Institution and professor of trade policy at Cornell University. "Europe is going to be a drag on the world economy for the next one to two years." Europe is grappling with complex problems. The global slump in demand for everything from cars to heavy equipment has particularly hurt its largest economy, Germany, where exports account for about 40 percent of the value of the national economy, compared with 13 percent in the United States. In the first three months of the year, the German economy shrank at a startling 14.4 percent annualized rate, compared with 6.1 percent in the U.S.
Other nations in Europe, including Spain and Britain, whose economy slowed at a nearly 8 percent annual rate in the first quarter, are also weathering American-style housing collapses. That means the E.U. -- a political and economic union of nations, some with vastly different economies -- is collectively suffering from both the economic problems of the United States and the problems of the export-dependent nations in Asia. Earlier this week, Japan reported that its economy contracted at a 15.2 percent annual pace in the first quarter, while in China, growth has slowed as exports have plummeted this year. Yet while Europe may be worse off statistically, most Europeans are not feeling the crisis to the same level as most Americans.
Millions of European workers have been spared the full impact because of strict labor laws that make it profoundly difficult for a company, in, say, France, to lay off employees in times good or bad. And those workers who lose their jobs in Europe often receive generous unemployment benefits, covering the lion's share of their lost salaries for many months. In the short run, that may aid in keeping consumer demand relatively robust. But the longer the crisis goes on, analysts say, the more likely it is that European companies will fall behind U.S. firms in overall competitiveness, potentially reversing the productivity gains made in a number of European countries in recent years.
Some critics have also faulted the European Central Bank -- which sets monetary policy in the 16-nation zone that uses the euro -- for being too slow to lower interest rates. That might have helped prevent the profound recessions now gripping countries like Spain and Ireland. But instead, the ECB has kept an emphasis on containing inflation in nations like France, where the downturn has not been so acute. "I think there has been a quicker response in the U.S.," said Howard Archer, chief European economist for IHS Global Insight. "The Federal Reserve has cut interest rates much more aggressively than the European Central Bank, and there is much debate about whether the fiscal stimulus in Europe has been enough."
US Jobless Rate Likely to Pass Europe’s
For many years, unemployment in the United States was lower than in Western Europe, a fact often cited by people who argued that the flexibility inherent in the American system — it is easier to both hire and fire workers than in many European countries — produced more jobs. That is no longer the case. Unemployment in the United States has risen to European averages, and seems likely to pass them when international data for April is calculated. “The current economic crisis,” wrote John Schmitt, Hye Jin Rho and Shawn Fremstad of the Center for Economic and Policy Research, a research organization in Washington, “has turned the case for the U.S. model almost entirely on its head.”
In March, the American unemployment rate stood at 8.5 percent, the same as the average rate for the first 15 members of the European Union — the countries that were part of the group before it began to expand into Eastern Europe. Because countries calculate unemployment rates differently, the rates used in the accompanying graph are the harmonized rates calculated by Eurostat, the European Union’s statistical agency. Harmonization does not change the American rate, but does affect some other rates. Eurostat publishes harmonized rates for the entire European Union and for three countries outside the union, the United States, Japan and Turkey.
In April, the rate in the United States rose to 8.9 percent. When the European figures are compiled, it seems likely that the American rate will be higher for the first time since Eurostat began compiling the numbers in 1993. For men, the unemployment rate in the United States surpassed that of the 15 original European Union countries in December. By March, it was 9.5 percent in the United States, compared with just 7.5 percent for women. The figures for men and women in the 15 European countries, however, are close together, at 8.4 percent and 8.5 percent.
The tables show how rates compared in various countries in March — or, in the case of some countries that are slower in compiling numbers, in the latest month available — and three years earlier, in March 2006, as the American housing boom neared a peak and economic growth was strong. Then, the United States had an unemployment rate of 4.7 percent, lower than all but three of the 15 European Union countries — Denmark, the Netherlands and Ireland — and equal to that of a fourth, Luxembourg. As the graphic shows, the March rate for the United States was higher than the rates of 11 of the 15. The exceptions were Portugal, which has the same rate, and Spain, Ireland and France. Eight of the 15 European countries have rates that are lower than three years ago.
How did that happen during a worldwide recession? First, it appears that the safety nets in many Western European economies made it easier for people to keep their jobs as the economy declined. In Germany, programs allow companies to get government help in paying workers, for example, keeping them employed. If the recession becomes severe enough and long enough, of course, it could turn out those programs do not so much avoid the pain as defer it. Another factor may be the lack of an economic boom in many European countries, which has left them less vulnerable to recession-related cutbacks.
There is, and always has been, a large variation in economic performance among Western European countries. Even though workers generally have the right to move between countries in the European Union, doing so presents language and cultural hurdles for many. In the United States, there has been more movement of workers from depressed areas to places where the employment outlook is brighter. But the housing crisis appears to be hampering such movement because some workers own homes that are worth far less than the amount they owe on their mortgages.
Among the 15 European Union countries, the national unemployment rates range from 2.8 percent in the Netherlands to 17.4 percent in Spain. That is a wider spread than the ones among American states, where the rates range from 4.2 percent in North Dakota to 12.6 percent in Michigan. Spain and Ireland, two of the highest unemployment countries in Western Europe, suffered housing booms and busts that were comparable to the cycle in the United States. Unemployment is also particularly high now in the Baltic states, Estonia, Latvia and Lithuania, which ran up large trade deficits during the good times and are suffering now that it is much harder for them to borrow money.
Here's Your Stimulus At Work
The Congressional Budget Office (CBO), which tends not to see the world through the same rose-colored glasses as politicians tasked with making the economy get better, is out with some new forecasts. We found this chart -- which shows the so-called GDP output gap (the difference between the GDP, and what it could be if unused capacity were being utilized -- to be quite amusing. not only does not show a fast comeback, but the impact of the stimulus looks almost pitifully small.
Obama Says States Need 'Creative' Debt Plans, Not Bailouts
President Barack Obama said a bailout of states such as California won’t be necessary and that his administration is in talks with state treasurers nationwide to find “creative” ways they can deal with frozen credit markets. Many states will end up having to make some “very difficult choices” as demands on services rise while tax revenue falls, Obama said in an interview with C-SPAN. The Democratic president said probably the biggest area in which states need help is in rolling over debt.
Obama said his administration is trying to find “creative ways that we can help them get through these difficult times.” “They are still being affected by some of the freezing in the credit markets,” Obama said in the interview, according to a transcript released by the cable-television network. Obama said “no,” when asked whether he will be forced to help financially strapped states such as California. California’s top finance officials told lawmakers yesterday that they must slash spending and shore up the budget by the end of next month to prevent the most-populous U.S. state from running out of cash as soon as July.
Bill Lockyer, the Democratic treasurer who handles the state’s bond sales, said short-term securities can’t be sold without a plan to eliminate a deficit that the Legislative Analyst’s Office says may total $24 billion in the next 13 months. Such borrowing allows the state to meet its obligations until the bulk of tax receipts are collected later in the year. Controller John Chiang, who pays the state’s bills, echoed that sentiment. “We are experiencing the greatest fiscal crisis since the Great Depression,” Chiang, a Democrat, said during a Sacramento legislative budget hearing.
FDIC Assesses Levy; Looks for More?
Regulators agreed to levy a special fee on the banking industry to bolster the fund that insures consumer deposits, and signaled they likely would ask for more before year end. The move to collect an estimated $5.6 billion from banks to reload the Federal Deposit Insurance Corp.'s deposit-insurance fund highlights the reality for regulators: the fallout from the financial crisis is far from over. FDIC Chairman Sheila Bair said Friday that it is "probable" that regulators will levy additional fees on lenders later this year as bank failures continue. FDIC staff on Friday disclosed that they now expect bank failures to result in losses of $70 billion over the next five years, $5 billion higher than they estimated in February. There already have been 34 bank failures this year, after 25 in all of 2008.
On Thursday, regulators seized Florida's BankUnited FSB in a failure estimated to cost the FDIC $4.9 billion. Banks across the country are grappling with bad real-estate bets they made during the housing bubble. Commercial real-estate portfolios and problems with residential-mortgage loans will weigh on banks that sought to expand, particularly in states such as Florida, California and Georgia that have been hardest hit by the downturn in the housing market. "There's enough softness in these loan portfolios that it's going to continue; it could be ugly," said Frank Bonaventure Jr., head of the financial practice at law firm Ober Kaler and a former Office of the Comptroller of the Currency official.
The FDIC's deposit-insurance fund had just $19 billion at the end of 2008, a historically low level. Ms. Bair acknowledged Friday that the special assessment, five cents for each $100 of total assets, with a deduction for certain capital holdings, is a "significant expense." But if regulators didn't get the money, the deposit-insurance fund could be emptied by the end of the year, she said. "To purposefully underprice deposit insurance would in essence be turning to taxpayers for another subsidy," Ms. Bair said at an FDIC board meeting.
Comptroller of the Currency John Dugan, who sits on the FDIC's board, was critical of the decision to use total assets to calculate the fee, a departure from the traditional use of a bank's deposits to measure premiums. Mr. Dugan, whose agency oversees national banks, said the fees are too high and unfairly shift the burden to large banks over smaller ones, especially since it is the smaller banks that are largely the ones failing. "Large banks have certainly had their own problems, but they did not force smaller banks to load up with commercial real estate funded by brokered deposits," Mr. Dugan said before the 4-1 vote. Ms. Bair said actions of the largest banks were a driving force behind the financial crisis. Larger institutions also have received a big share of U.S. aid, she said.
The First Honest Economic Forecast We've Ever Seen
The Congressional Budget Office has updated its forecasts for economic growth over the next couple of years. In so doing, they've issued what may be the first honest economic forecast we've ever seen.
What does the CBO think the economy will do over the next couple of years? The same thing almost everyone else thinks it will do: Grow modestly, starting soon. Unlike other forecasters, however, the CBO includes a chart revealing that it actually has no idea what the economy will do. Specifically, the chart shows what the economy will do if the CBO is as wrong in its current forecast as it has been in previous forecasts. What's more, it notes that the circumstances underlying the current economic projections suggest that the CBO may well be MORE wrong than they have been in the past. So let's hear it for the CBO!
California Cities Irked by Borrowing Plan
California Gov. Arnold Schwarzenegger, in his efforts to find funds to balance the state budget, has proposed borrowing $2 billion from municipal governments over the next fiscal year, a tactic that is rankling local officials up and down the state. Mr. Schwarzenegger is invoking a 2004 law that lets the state demand loans of 8% of property-tax revenue from cities, counties and special districts. Under the law, the state must repay the municipalities with interest within three years. Administrators of already cash-strapped cities and counties said the loans would force even deeper cuts in services. Fewer cops and fire engines would be on the streets, they said, and parks and libraries would be closed more often. And some local governments would be forced to lay off workers to keep their budgets out of the red, they said.
Mr. Schwarzenegger's proposal "suggests that financing state government and state-government services are more important than these basic community services," said Chris McKenzie, executive director of the League of California Cities. "I think it's something most of the public would disagree with." The governor said California's worsening fiscal woes forced his hand. California faces a $21 billion shortfall after voters on Tuesday rejected a series of measures to help keep the state solvent. Lawmakers dictate $92 billion of the state's $131 billion budget for the fiscal year beginning July 1. "I absolutely despise taking money from local government, but as I said, this is only under the worst-case scenario," Mr. Schwarzenegger said last week.
Mr. Schwarzenegger on Thursday announced he is seeking more cuts to avoid borrowing $5.5 billion from Wall Street, as he had previously proposed. On top of the $9 billion in spending reductions he had already called for, he is considering slashing an additional $750 million from prisons and $600 million from colleges and universities, an official in his finance department said. The state is also looking at cutting hundreds of millions of dollars from various social services, as well as eliminating Cal Grants, a college financial-aid program, the official said. The governor's proposal of borrowing from local governments must still be approved by the legislature. If it does so, municipalities are worried the state won't be able to repay the loans, given the state's fiscal plight. "They're hijacking our dollars," said Don Knabe, chairman of Los Angeles County Board of Supervisors. "They don't have money to pay us back. It's a joke."
Los Angeles County could lose the use of up to $500 million for the next fiscal year, Mr. Knabe said. That would add to the county's projected $300 million shortfall in its $23.5 billion budget, of which supervisors can control $3.5 billion. That could mean cuts to services like parks and libraries. The state could borrow about $25.6 million from Contra Costa County, said Contra Costa administrator David Twa. He says the county is in no shape to cut back more after slashing $156 million from its budget and laying off 600 workers. San Francisco would be forced to lend the state up to $90 million under the governor's proposal, said city Controller Ben Rosenfield. With the city already facing a $438 million budget gap, officials would likely borrow funds if the state takes their property-tax revenue, he said. "It costs us money to borrow," Mr. Rosenfield said. "It'll end up falling on future fiscal years."
Administrators in smaller counties also oppose the governor's idea. The budget deficit of Kern County, in the Central Valley, could increase by $26 million if the state goes through with its plan, said Allan Krauter, Kern's legislative analyst. "We're going to have more layoffs with this," he said. City and county officials are lobbying the state to reconsider the proposal. Mr. McKenzie said the League of California Cities is considering filing a suit against the state. Mike Reagan, a supervisor for Solano County in Northern California, said officials in numerous counties are strategizing on how to stop the state from borrowing the funds. Mr. Krauter of Kern County said local officials throughout the Golden State are sending a clear message to Sacramento: "State, you solve your problems. Let us solve ours."
General Motors maps out bankruptcy protection route
General Motors is preparing to file for bankruptcy protection as early as May 31, under a plan in which the US government would cancel most or all of its existing debt in the company and invest in a "new" GM that could emerge from bankruptcy in the autumn. GM would receive tens of billions of dollars in new government money, probably in a series of stages, to prop up its business at a time when car sales are threatening to be lower than the 10m annual rate at which GM says it can break even, said a person close to the matter. The government will cancel its existing debt in GM, the largest US carmaker, the person said, but it may keep a slice of debt in the "old" GM assets that are wound down in bankruptcy in order to retain leverage over the process.
GM would aim to win bankruptcy court approval by July 1 for a plan to separate its good brands and assets into a viable company. It would start marketing itself as a cleanly scrubbed company immediately in an effort to spur sales. It could take several more months, however, for the new GM to be technically freed from the bankruptcy process. GM's transfer of assets into the new company will occur on a rolling basis, sources said, as details are thrashed out. GM's advisers are still working on plans to wind down the assets that will remain under bankruptcy protection, and are trying to develop an accounting system that can handle the new and old companies separately. GM's bankruptcy preparations are occurring independently of Chrysler, which filed for creditor protection at the end of April. A key hearing to endorse Chrysler's exit plan, however, is set for next Wednesday, and one insider said the Obama administration would like to see the plan approved before a bankruptcy filing by GM.
GM is likely to file for bankruptcy protection even if 100 per cent of its bondholders agree to a costly debt swap proposed by the company and the government, sources close to the company said. An agreement looked unlikely yesterday, after a bondholder committee said that it would reject the offer amid claims by Republican lawmakers that bondholders' rights were being subverted. A bankruptcy filing would let GM cancel its dealer contracts rather than having to buy them out one by one. It would also allow the new company to protect itself from GM's present liabilities over civil lawsuits, asbestos claims and other environmental issues.
Chrysler Dealers Make Case Against Closings
The calls from Chrysler officials were coming nearly every day, sometimes several times a day, right through the final weeks before the company filed for bankruptcy. And the message, said Robert Archer, who runs three Chrysler dealerships in the Houston area, was simple: Take more cars. Another dealer who has been cut had planned to expand on a $3 million plot of land in Surprise, Ariz. While departing Chrysler, Dodge and Jeep dealers slashed prices, General Motors tapped Treasury for another $4 billion. “They tell me, ‘The only way that we can survive is if you order cars, and Fiat and the government see money coming in,’ ” Mr. Archer said.He acquiesced, he said, thinking he was doing his part to save the company. “I’m a team player and I don’t want them to go out of business, so I ordered a ton of cars.”
Then, a week ago, Chrysler told Mr. Archer, a dealer for three decades, that his three stores were among the 789 dealerships the company was eliminating as of June 9. Mr. Archer had 700 new vehicles and $1.7 million in new parts in stock when the letters arrived. Now, Mr. Archer is among 330 dealers, calling themselves the Committee of Chrysler Affected Dealers, who are contesting the company’s action. Next week and on June 3, the bankruptcy judge handling Chrysler’s case will consider their objections. Many of those fighting the hardest are dealers who recently spent huge amounts of money to stay in the company’s good graces, who sacrificed their own profits to help keep the company intact or who otherwise thought they had bent over backward to ensure that Chrysler could survive, only to learn that they were the ones who would not.
“I’m mad at myself for being duped all these years by them and going along with all of the things they wanted me to do,” said Homer Cutrubus, a Chrysler dealer in Utah since 1969. “If I treated my customers like Chrysler treated me, I wouldn’t have any business.” For years, Chrysler had been urging Mr. Cutrubus and other dealers to combine dealerships with just one or two of the company’s brands into “alpha” stores selling all three: Chrysler, Dodge and Jeep. It stepped up that pressure in February, he said, and in April he finally agreed to move his Dodge store in Layton, Utah, into a Chrysler-Jeep showroom half a mile away, even though he thought the change made little sense financially and had to be done at his own expense.
Included in the exhibits filed in bankruptcy court is an e-mail message from a Chrysler official in Denver to Mr. Cutrubus that said the company wanted to keep only one of the four area dealerships, preferably him. It concluded, “Are you our guy?” “I called them the next day and said, ‘Yeah, we’ve got a deal,’ ” Mr. Cutrubus said. Six weeks later, after he already had spent $100,000 making the move, he got the letter cutting all his franchises. Chrysler executives this week defended their decision to cut a quarter of its dealers and the process they used to determine which dealers should be eliminated. They said stores were evaluated on a number of factors, including sales, customer satisfaction, location and condition of the dealership.
If Chrysler does not streamline its operations and complete the proposed sale of its good assets to the Italian automaker Fiat, “the stark reality is all 3,181 dealers will face elimination,” Steven J. Landry, the company’s vice president of North American sales and marketing, said in a statement. “It was not an easy decision to ask the court to reject a portion of our dealer contracts, but the reality is Chrysler’s viability depends on a vibrant, profitable dealer network,” Mr. Landry said. “As presently configured, Chrysler’s dealer network does not meet that test.” Mr. Landry also argued that the company was “treating the rejected dealers fairly by assisting in the redistribution of remaining vehicle and parts inventory, paying incentive and warranty payments due.” But many dealers disagree.
Chrysler is not buying back any inventory, including the vehicles and parts that dealers say they never wanted and bought only under pressure. And the entire process, which gives them only until June 9 to liquidate everything, is far from fair, they contend. The company’s actions have bewildered William Coulter, a dealer in Phoenix. Several years ago, Mr. Coulter spent $2.7 million to buy out a competitor because Chrysler wanted him to sell all three of its brands. More recently, he paid $3.5 million for 12 acres of land in a more upscale, fast-growing suburb. Chrysler approved the relocation, but Mr. Coulter had to delay moving because the recession had cut deeply into sales. “All the local people were telling us we had nothing to worry about,” he said. “We were pretty confident, having invested all this money. And after making all these investments, I don’t have a choice.”
Chrysler said 89 percent of the dealers being cut sell more used vehicles than new ones and are, therefore, expected to keep selling and servicing used vehicles. It said 44 percent of the dealers being cut also sell a competing manufacturer’s vehicles at the same store, something it does not like. In Panama City, Fla., Buzz Leonard Chrysler Jeep used to also sell cars from Mazda and Mitsubishi. But the owner, Gerald Spitler, dropped the Mazda franchise a year ago and in February he paid $200,000 to give up Mitsubishi, even though it did decent sales, to show that he was fully committed to Chrysler. Right before Chrysler filed for bankruptcy, he said he tried to help the company by taking on 25 new vehicles, when he needed only 10.
“I was told several times that I was doing all the right things and that going forward I was going to be one of their guys,” Mr. Spitler said. “I thought I was right on track with them. I thought this was going to be fun.” On May 14, Mr. Spitler learned that his efforts were wasted, while the Dodge dealer across the street, which also sells Lincoln, Mercury and Hyundai, would survive. Mr. Spitler plans to keep Buzz Leonard open to sell used vehicles, but he had to lay off 20 of his 45 employees. Banks that he has worked with to finance sales have dropped him because he no longer has a new-car franchise. “It doesn’t make any sense,” he said. “You can’t expect us to unwind businesses we’ve had for years and years in weeks. They expect us to vanish.”
General Motors revamp comes under attack from US Congress
General Motors is preparing to file for bankruptcy protection as early as May 31 but a speedy restructuring of the troubled carmaker faces new headwinds from an increasingly sceptical US Congress.
Under the current plan, the US government would cancel most or all of its existing debt in the company and invest in a "new" GM that could emerge from bankruptcy in the autumn, said a person close to the matter.
GM would receive tens of billions of dollars in new government money, probably in a series of stages, to prop up its business at a time when car sales are threatening to be lower than the 10m annual rate at which GM says it can break even.
The person said that the government might keep a slice of debt in the "old" GM assets that are wound down in bankruptcy to retain leverage over the process. GM, the largest US carmaker, is likely to file for bankruptcy protection even if 100 per cent of bondholders agree to a debt swap proposed by the company and the government, said sources close to the company. An agreement looked unlikely yesterday after a bondholder committee said it would reject the offer. GM would aim to win bankruptcy court approval by July 1 for a plan to separate its good brands and assets into a viable company, which could then emerge from bankruptcy on a rolling basis after a few months.
Officials have been cheered by the speed of Chrysler's bankruptcy process, but hopes that GM can follow a rapid path through court are being dimmed by a building backlash from lawmakers. Some of them are claiming that creditors' rights are being given short shrift while others complain about job cuts and the closure of dealerships. A letter signed by 36 representatives was sent to US president Barack Obama yesterday, asking him to slow down the process to allow for more consultation. Dennis Kucinich, a Democratic representative, said taxpayers' money was "being used to close dozens of US car manufacturing plants and thousands of dealerships, having the effect of putting perhaps millions of Americans out of work".
He said that the Treasury's auto task force, led by the former investment banker Steve Rattner, represented "various Wall Street interests who have long looked at exporting jobs out of this country". Separately, the Senate commerce committee said it intended to ask carmakers' chief executives to testify about plans to close dealerships. As bankruptcy planning between the company and the task force continued, analysts noted that the large amount of credit insurance written on GM's debt made a filing seem inevitable. GM yesterday said it had borrowed another $4bn from the Treasury, taking its total federal funding to $19.4bn, and expected to need $7.6bn more after June 1.
Analysts: GM Bankruptcy May Not Be All That Bad
With General Motors' long-anticipated day of reckoning a little more than a week away, nearly all signs are pointing to the wounded auto giant limping its way into bankruptcy court, but experts say that might not be as bad as once expected. Car and truck buyers, they say, may not be as fearful of Chapter 11 as once thought, as evidenced by Chrysler's stronger-than-expected sales in the two weeks after it took the dreaded step into court. "I think in this case and in the eyes of the consumer, uncertainty is the enemy," said Jeff Schuster, executive director of automotive forecasting for J.D. Power and Associates. "Once they know what happened, it at least is better than uncertainty."
GM borrowed an additional $4 billion from the government Friday on top of $15.4 billion it previously received. It faces a June 1 government-imposed deadline to finish restructuring or be forced into bankruptcy court.
Restructuring demands from President Barack Obama's administration include cutting labor costs, reducing debt, shedding dealerships and brands, and closing excess factories. The company this week reached cost-cutting deals with Canadian and U.S. unions that still have to be ratified by members, but GM's unsecured bondholders have resisted an offer to take a 10 percent stake in the company to wipe out $27 billion in debt. They say that's too small a stake for the amount they are owed. But even if GM files for Chapter 11, Chrysler's performance since its April 30 bankruptcy filing has made analysts optimistic that GM sales won't "fall off a cliff" as the company's CEO predicted in February.
Chrysler's sales to individual buyers are down 40 percent so far this month when compared with May of last year, a little worse than the overall market, which is down around 35 percent, the company has said. Schuster said that's better than he expected, and he predicted that GM might fare even better if it goes into Chapter 11. "Maybe optimistic is a little too strong, but I think there could be potential for, once it's announced and once we understand how it's going to work, the potential for an uptick in the second half of the year," he said. Chrysler is keeping its retail sales up to a large degree by offering rebates and other incentives. The company led major automakers in April with an average of $4,383 per vehicle, up from $3,795 in the same month last year, according to the Edmunds.com automotive Web site. GM was second with $4,107.
With the government announcing that it would back GM and Chrysler warranties, people are taking advantage of deals to get cars on the cheap, said David Koehler, a clinical marketing professor at the University of Illinois at Chicago. "I think consumers right now know cars last for a long time," he said. "What they're looking at is the deals. I don't anticipate the doom and gloom that GM said, that this was going to kill them." GM's tentative labor deals have raised the pressure on bondholders to accept the debt exchange offer, which may keep the company out of bankruptcy. The offer expires on Tuesday, but GM said in a regulatory filing that it would decide Wednesday if it will be extended. Under GM's new capital structure, the government would forgive about $10 billion of its loans and get 50 percent of the company, and the United Auto Workers would own 39 percent for cutting in half the $20 billion GM owes to a union-run retiree health care trust.
Given that, bankruptcy experts say it's unlikely that GM can round up enough bondholders to get the debt-reduction to go through. The Treasury Department, which is overseeing GM's government-funded restructuring, has required 90 percent participation, but a committee of some of GM's largest bondholders have said they won't take the offer. "The other bondholders are getting such a poor deal, there's just no way I can see them bringing those bondholders on board by June 1," said Jon Groetzinger, a visiting law professor at Case Western Reserve University in Cleveland. Rep. Jeb Hensarling, R-Texas, and 22 House Republicans wrote Treasury Secretary Timothy Geithner on Friday to seek fairness for GM's debt holders.
"The proposal seems to favor the rights and claims of the UAW, a political ally of the current administration and a powerful lobbying force in Washington, over the rights and claims of the company's diverse group of bondholders," Hensarling and the lawmakers wrote. Also in doubt is GM's plan to cut its network of about 6,000 dealers by 40 percent before the end of 2010. GM sent notices last week to 1,100 dealers telling them their franchise agreements won't be renewed when they expire next year, and many dealers plan to fight in court. State franchise laws generally protect dealers, so it's unlikely GM could accomplish the cuts without help from a bankruptcy judge, experts have said. Fear of bankruptcy and the possibility that it could come as early as next week drove GM shares down 49 cents, or 26 percent, to $1.43 Friday, erasing much of the 32 percent gain from Thursday when the UAW agreement was announced.
As June 1 fast approaches, there's still an outside chance that GM could somehow pull it all together and complete restructuring out of bankruptcy court, said John Pottow, a University of Michigan professor who specializes in bankruptcy. Since the unions have given concessions and settled, there is pressure on GM's bondholders to do the same or risk becoming the entity that drove GM into bankruptcy, he said. "When they make those concessions, it becomes tougher for you not to make those concessions as well because everyone's doing it," Pottow said, adding that dissident Chrysler creditors gave up their fight as pressure mounted and other stakeholders fell in line. But with thousands of bondholders, it will difficult to get 90 percent of them to agree. "There's no sort of like central negotiating committee of bondholders and unsecured creditors," he said.
Opel Bids Prompt Concern Aid Sinking in 'Black Hole'
German Economy Minister Karl-Theodor zu Guttenberg said he remains unpersuaded by any of the three bids for General Motors Corp.’s Opel unit even after Fiat SpA sweetened its offer aimed at winning state aid. Guttenberg, who is leading efforts to find a “viable” bid for GM’s European operations, said today Fiat’s new offer was being reviewed to see “if they can stand up everything they say.” Questions also remain over bids by Canadian car-parts maker Magna International Inc. and RHJ International SA, a fund that has some former holdings of private-equity firm Ripplewood Holdings LLC, he said in an interview in Berlin.
“We still cannot be sure whether Magna, or Fiat, or Ripplewood will ensure that bridge loans won’t disappear into a black hole; that any further guarantees will be effective; and that they’re really offering something more than high-minded romantic ideas,” Guttenberg said. Fiat, which is in talks to form an alliance with Chrysler LLC in North America, raised its offer for Opel after Magna emerged yesterday as the leading bidder, according to state leaders including Roland Koch. Russelsheim-based Opel has said it needs 3.3 billion euros ($4.6 billion) in state aid to survive as GM struggles to avoid a June 1 bankruptcy.
A meeting hosted by Chancellor Angela Merkel yesterday agreed to focus on Aurora, Ontario-based Magna, Canada’s largest car-parts maker, for “concrete talks” because it offers the prospect of developing new markets and avoiding “dependence on Fiat-Chrysler technology,” Koch, the prime minister of Hesse state, where Opel is based, said today in an interview. He didn’t specify how Fiat’s new bid changed. “At the same time, we’re still reading our incoming mail,” Koch said. All bidders, including Magna, must make it clear how much they’re prepared to invest in Opel. “If an investor believes in his investment, they also have to put something on the table” and not just collect state loan guarantees, Koch said.
While German lawmakers from both main parties in Merkel’s coalition want to save Opel jobs before elections on Sept. 27, bidders must secure the backing of Europe’s biggest economy for their plans for Opel and the U.K.-based Vauxhall brand. Magna is also preparing to improve its offer, Welt am Sonntag newspaper reported in an advance copy of an article in tomorrow’s edition. Phone calls by Bloomberg News to the office of Magna Chief Financial Officer Vincent Galifi were not immediately returned. “Fiat has improved its offer because it needs Opel’s technology,” Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen, said in an interview. At the same time, new offers “will unfortunately delay the process to find a solution for Opel when time is getting short because GM’s insolvency is looming on the horizon.”
The bids from Magna and RHJ include cash, while Fiat’s offer requires 7 billion euros of financing to reorganize Opel, according to people familiar with the matter. Fiat’s bid has two parts: an offer for the Opel and U.K.-based Vauxhall units, and an alternative plan to also buy GM’s operations in Brazil and Argentina, one of the people said. Magna, which aims to join Russian partner OAO Sberbank in investing as much as 700 million euros in the deal, would be able to boost Opel’s presence in Russia, a market that is expected to grow to 5 million cars in 2015, Dudenhoeffer said. “Magna would also be able to preserve more jobs at Opel than Fiat, which already has overcapacity problems itself,” he added.
Ilargi: I don’t like doing things too close to non-finance related politics really, but I’ll make an exception for the self-implosions of Limbaugh and Beck, and say that we can always file this under comedy. It's scary to realize these two have listeners and influence (and multi-million dollar empires), albeit in entirely different universes. Then again, that's where so many Americans reside. Beck knows he's due on The View, he didn't forget or anything, but still chooses to make himself look good by telling blatant lies about the hosts a few days before.
Olbermann WTF Moment: Rush Limbaugh
Whoopi Goldberg Calls Glenn Beck A 'Lying Sack Of Dog Mess'
Glenn Beck went on "The View" today. It did NOT go well.
Nevertheless, it was DELIGHTFUL, by God. In the clip below, watch as Barbara Walters and Whoopi Goldberg pin Beck down for lying on the radio about an encounter they all had on the train to the White House Correspondents' Dinner. Beck is forced, at first, to walk back his "mischaracterization" of the encounter. But then, things go ZOMGY as Goldberg calls him a "LYING SACK OF DOG MESS," which is hilarious. Then Walters freaks out on him for claiming to be a reporter and yet not bothering to check his facts. And really, it just gets even more bonkers from there. Honestly, if you were to take a drink every time Beck comes off as totally disingenuous, you will require a new liver by the end of the segment. DO NOT DO THIS, OBVIOUSLY.
In the second segment, the discussion gets itself partially back on the rails, but only in that the show's hosts are no longer venting their aggravation with Beck telling falsehoods about their train encounter. Beck talks about how he hates everyone in Congress and how everyone should resign. But then Beck gets stumped by a question from Barbara: "What are your real convictions?"
His answer: "I believe in God. I believe in the founding of this country. I believe George Washington, James Madison, Thomas Jefferson were geniuses."
So there you have it. Glenn Beck really, really believes in God, the names of some Presidents, and that the United States was founded, somehow, at some point in the past.
UPDATE: Via Media Monitor Teri McCarthy, here's the second part, which goes okay until Walters starts asking Beck for his convictions:
ANOTHER UPDATE: Glenn is TERRIBLY upset at the terrible way the View ambushed him, like they were his Fox colleague, Bill O'Reilly or something!Glenn knew this wasn't going to be pretty -- but his interview with the ladies on The View was even worse than anticipated, mostly because they wasted an entire segment on accusations that Glenn 'lied' about who said hello to who first on his Amtrak train ride with Barbara and Whoopi to the Correspondents dinner in Washington DC. The saddest part is that not only did they waste an entire segment on a completely insignificant, petty, humorless and incidental point - Glenn had already clarified the point the day before! Tune in to Fox News tonight at 5pm for Glenn's first response to the 'liar liar pants on fire' ambush interview by the ladies on The View.
A LAST UPDATE: Glenn Beck called into his own show today to respond to the way he was treated on The View - something he could have done whilst actually on the show while it was happening but didn't, I guess. This is called "pulling a Jim Cramer."BECK: Judge, you listen to my radio show. I tell stories. I tell about experiences of my life and everything else, and I told the story about riding on the train with the two ladies of The View, and apparently I was a liar because I said that -- which is true, that she -- Barbara Walters said hello to me. Instead, it was I said hello to Barbara Walters. I walked up to her -- I guess that's what we need to spend our time on for 7 minutes.
As usual, Beck is being disingenuous by reducing the whole encounter to a dispute over who said hello to who first. In actuality, the "story" Beck told was about how: 1) Goldberg and Walters reserved seats on Amtrak, the subtext being that they were acting like some sort of celebrity divas, 2) implied that Walters was unpleasant in her conversation by affecting a mocking and exaggerated imitation of her voice, and 3) implied that it was Beck's great influence and magnetism that caused the View ladies to approach him and seek his attention, when in actuality, it was the reverse.
Beck took leave of his show thusly:BECK: What kind of person would go on national radio and say he introduced himself or they introduced themselves to him when, indeed, the truth, your honor, is that he introduced himself to them?
NAPOLITANO: Oh, boy. are you going to be back tomorrow, big guy?
BECK: I'm going to hang up the phone, take a little more Nyquil so I can rest medicine.
The answer to your first question is "a lying sack of dog mess." Enjoy getting bombed on Nyquil, though!
Expect "heck of a time" filling Liddy's shoes at AIG
Who would apply for a job that requires regular coach flights to Washington to be abused by Congress on international television, to run a company that in many ways symbolizes the financial crisis? And oh by the way, the person who formerly held this job earned $1 a year. American International Group, the once-proud insurance giant that now owes taxpayers $85 billion, is about to find out who, if anyone, wants to fill the shoes of Edward Liddy. The 63-year-old Liddy on Thursday announced plans to step down after a short, tumultuous reign as chairman and chief executive.
"They're going to have a heck of a time getting somebody," said Alan Johnson, managing director of New York-based compensation consultant Johnson Associates. "It's one thing to be looking out from the parapets of the castle and have them shooting at you, but it's another thing to be shot in the back." Consultants and experts said someone with political savvy, even an outright politician, might be best-suited for the job, given that the U.S. government owns nearly 80 percent of the giant insurer, and that billions in public funds are on the line. The government named Liddy CEO of AIG in September, just after it rescued the crippled insurer. It has since made some $180 billion available to keep it afloat and, with Liddy heading for the door, now needs a replacement for a job that now pays a $1 salary.
But Liddy's short tenure as CEO is marked by the public scolding he received at the hands of lawmakers over bonuses paid to AIG's financial product unit, whose bad bets on mortgage-backed securities brought the giant firm to its knees last year. That scolding may have satisfied the need for a scapegoat, but it also thins the ranks of job candidates. "Congress acted grossly unprofessional, vindictive, and there are ramifications," said Johnson. "The next guy doesn't have to take this job, we're not going to get as good a person, and the American people will probably lose additional billions of dollars because of it."
Liddy, a former Allstate executive who was retired but took the AIG job largely in the name of public service, said Thursday he expects his successor to be paid a much higher salary than he accepted. But Americans, prompted in part by their president, attacked Wall Street compensation as galling and excessive as the country tumbled last year into a severe recession blamed heavily on banks and others in the previously high-flying financial sector. "They narrow the pool substantially and increase the chances of making a bad pick if they get too chintzy" with compensation, said Bert Ely, political policy consultant at Ely & Co in Alexandria, Va.
"Given how poorly the government has conducted itself over the last six to eight months, it cannot make a convincing argument that the person they pick will not be a political punching bag," he said. The administration has no power over Congress, which is free to question the state-controlled company as it pleases. Liddy said on Thursday he had no regrets but acknowledged it was not easy being the target of public fury. John Challenger, CEO of global outplacement firm Challenger, Gray & Christmas, in Chicago, said the company should allow insurance experts to work out of the public glare and underneath the CEO, who could focus on government and public relations. "That requires a politician," Challenger said. "But the odds are that no matter what you do, you're going to face public ignominy."
AIG, which now owes taxpayers more than $85 billion, could take several years to restructure, sell off assets, and repay its obligations. Liddy, who replaced Robert Willumstad, suggested the next CEO would come from inside the firm. But Gustavo Dolfino, president of New York-based headhunter WhiteRock Group, said the candidate should at least know how to steer a distressed vessel. "The right person is likely going to come from a portfolio company owned by a large private equity firm that put them there to turn it around and make it more profitable," Dolfino said. Liddy said on Thursday those leading the search for his successor will be announced next week, and that the process would not take more than a few months.
Odds against quick recovery lengthen as consumer spending shows sharp decline
The slump in the economy in the first three months of the year was fuelled by the sharpest plunge in consumer spending for three decades, as Britons reacted fearfully to soaring unemployment and a worsening squeeze on their incomes. Official national accounts figures yesterday confirmed initial estimates that the economy plummeted in the first quarter (Q1) at a headlong pace of 1.9 per cent. The steepest quarterly drop in GDP since 1979 confounded City hopes for an upward revision to the data. The first detailed breakdowns of the sources of the economy's woes further stoked concern that the recovery could prove both slow and elusive, despite continued hopes that Q1 will mark a low point in the recession. The broad-based nature of the downturn, with few parts of the economy escaping the recession's toll, inflamed worries that any revival will prove hard won and tough to sustain.
A key concern was the strength of consumer demand, by far the biggest engine for growth in the UK economy. Consumer spending tumbled by 1.2 per cent in Q1 — its biggest decline since 1980 — accounting for half the overall contraction in the economy during the quarter. The steep drop in consumption came as households reacted to anxiety over the bleak economic prospects, and an intensifying squeeze on their earnings. Employee compensation, a broad measure of pay in the national accounts, suffered a record fall of 1.1percent in Q1, as incomes were battered by lay-offs, cuts in hours, collapsing bonus payments in many industries and an increasingly widespread spate of pay freezes and, in a rising number of cases, pay cuts.
While yesterday's figures confirmed other recent indications that sales in the high street have held up relatively well despite these grim trends, the data showed that consumers responded by sharply reining in spending in other areas. The wholesale and retail sectors shrank by a modest 0.2 per cent in Q1, compared with the brutal 2.4 per cent contraction they endured in the final three months of last year. But hotels and restaurants bore the brunt of the consumers' retreat, with output in the two industries dropping by a hefty 5.1 per cent. One area of strength came in the betting and gaming industry, where output rose sharply as Britons tried to cheer themselves up in harsh times with a gamble.
The economy's continuing frailty was emphasised by slumps in business investment and exports, too. Investment spending across the economy sank by 3.8 per cent in Q1, after a 1.3 per cent fall in the previous quarter.
Exports plummeted by 6.1 per cent in Q1, casting doubt over the boost to Britain's competitiveness from the sharp fall in the value of the pound. Jonathan Loynes, of Capital Economics, said: “While the UK economy may have passed the absolute low point of this recession, any recovery is likely to be built on pretty fragile foundations.” Colin Ellis, of Daiwa Securities, agreed.
He said: “With unemployment set to continue its upward trend and the prospect of a marked fiscal tightening looming large on the horizon after the next election, it is likely to be a long time indeed before the UK returns to a period of robust and steady expansion.” Hopes that the economy will stage some short-term rebound from a rebuilding of stocks in future quarters were boosted, however, by confirmation that businesses cut stocks at a record pace in Q1. Companies pushed through a record rundown in stocks worth £3.7 billion, after cuts worth £3.6 billion in the previous quarter.
The Treasury won a powerful ally yesterday over its dismissal of the threat that Britain could face a downgrade of its crucial credit rating as the Government’s debt spirals. After Standard & Poor’s, the ratings agency, changed its outlook on the UK’s prized triple A debt rating to “negative” from “stable”, the head of the Organisation for Economic Cooperation and Development said that a downgrade would make little sense. “A rating cut of the United Kingdom would be inexplicable,” José Ángel Gurría, the OECD’s Secretary-General, told a news conference in Madrid. Mr Gurría’s remarks came as he also boosted hopes that the worst of the global recession may have passed. “The rate of the slowdown in easing; we’re no longer in freefall,” he said. Asked if world output would begin to stage a resurgence by the end of the year, the OECD chief added: “I would say yes – the issue of recovery does not mean that we start to have very clear positive figures but that first the world economy stops contracting.”
Gordon Brown to Bank of England: lighten up
The Bank of England’s gloomy outlook for the economy has stoked tensions between Gordon Brown and Mervyn King, the Bank’s governor, with senior government officials complaining that the central bank is handing ammunition to the Tories. There is growing irritation in Downing Street and the Treasury towards Mr King. The prime minister and Alistair Darling, chancellor, have been left fuming by the governor’s interventions, most notably after his downbeat assessment this month of the economic outlook, a viewpoint pounced on by the Conservatives. Although Mr King’s forecasts were broadly similar to those set out by Mr Darling in last month’s Budget, the governor’s gloom-laden press conference at the launch of the central bank’s latest quarterly inflation report was watched with dismay in government circles.
“If you’d watched Mervyn on the news you’d have thought the world was a terrible place,” said one official in the Brown administration. Another talked of barely disguised dislike between the prime minister and governor when they met. Official data on Friday confirmed the severity of the downturn. Household spending fell at its fastest for almost 30 years in the first quarter, while the biggest drop in wages and benefits for more than half a century pointed to further economic weakness ahead. The data came a day after Standard & Poor’s warned that Britain might lose triple A credit rating for its debt. Mr Brown has been advised by US president Barack Obama’s campaign team – now working for Labour – that he must fight the next election with an optimistic outlook, contrasting with Tory leader David Cameron’s rhetoric on the need for “an age of austerity”. Neither Mr Brown nor Mr Darling suspects party political motives but they believe the governor’s willingness to speak out and what they see as his occasional naivety are playing into Tory hands.
The Bank of England insists it is just trying to tell a straight story. One official said there was no intention of talking the economy down, but acknowledged that tension with the government could arise. Last year Mr Darling was outraged to discover that Mr King had briefed David Cameron, Tory leader, on highly sensitive plans to recapitalise Britain’s banks, allowing the opposition leader to claim the idea as his own. The Conservatives insist it was Mr Cameron’s own work. The Bank says it is not in the business of giving the opposition party leaked information. But the Bank’s viewpoint – which sometimes represents an alternative economic stance to the government – is increasingly being reflected by George Osborne, shadow chancellor.
Professor Robert Shiller warns Britain may suffer a double recession
One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession. Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution. He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?” The apparent upturn could soon go into reverse, he told The Times, marking a repeat of economic patterns in the 1930s and the 1980s. Such a double-dip slowdown has been nicknamed by economists a “W-shaped” recession, where recovery is so fragile, the country could be plunged into another slowdown as soon as it emerged from the last.
Since March the stock market has rebounded by 27 per cent, raising hopes that the recession may not be as severe and protracted as many economists had feared. Some have interpreted the recent rally as a sign that the banking system - which imploded after Lehman Brothers, the US investment bank, went bust in September - has stabilised and that confidence is returning. Last week Alistair Darling, the Chancellor, brushed aside doubts that his Budget forecasts had been overoptimistic and predicted that the recession would be over by Christmas. Many economists in the City believe that Britain will stagnate until the end of 2010 and that unemployment will continue to rise well after that. Speaking to The Times this week, Professor Shiller said: “I was last here [in London] in the fall and there is definitely a sense of optimism now. The Fed [US central bank] and the Bank of England seem to have things under control. Everything seems to be getting better.”
However, he warned that “there is a real possiblity of another recession. We may well see more bad news. It is a real failure of the imagination to think otherwise.” He said that there were a number of issues that threatened any long-term recovery for the British economy - rising unemployment, mortgage defaults, and another wave of new company failures that “could surprise us yet”. Professor Shiller also said that the banks were still harbouring large portfolios of troubled assets. “We all want to lick this problem — there's been a burst of confidence over the last few months, but really it's not based on any news. A lot of people think this recession is coming to an end. But I'm not so sure. A resurgence in confidence may not translate into new jobs. We are still in uncertain times.”
He added: “In 1931 in the US, President Hoover unveiled his recovery plan - there was a huge stock market rally — the market improved but it didn't hold because bad news kept coming in. Increased confidence can be a self-fulfilling prophecy but it doesn't always hold.” Professor Shiller said, however, that he believed another likely scenario to be one where Britain would face a continuous decline with house prices falling for a number of years, drawing comparisons with the decade of misery in Japan in the 1990s. The economist became well known when he predicted the timing of the end of the dot-com boom in March 2000, and was one of the first to warn that the US housing market was perilously overvalued and that its collapse would cause devastating reverberations across the world's biggest economy.
Professor Shiller has been in London this week promoting his book Animal Spirits. How Human Psychology Drives the Economy and Why it Matters for Global Capitalism, in which he argues that our own psychology and emotions, such as envy and resentment, drive house prices, debt levels and share values. His co-author is George Akerlof, who won the Nobel Prize for economics in 2001. In the book, they argue: “What had the people been thinking? Why did they not notice until real events — the collapse of banks, the loss of jobs, mortgage foreclosures — were already upon us. The public, the Government and most economists had been reassured by an economic theory that said that we were safe. It was all OK. “But that theory was deficient. It had ignored the importance of ideas in the conduct of the economy. It had also ignored the fact that people could be unaware of having boarded a rollercoaster.”
Robert Shiller predicted that the internet bubble would burst in March 2000. Weeks before the boom ended, when the Dow Jones industrial average was about 11,000 points, he published Irrational Exuberance. He argued that market valuations were unsustainable, likening the phenomenon to a Ponzi scheme on steroids. As the bubble burst, Wall Street stocks dropped 20 per cent in 16 months. The phrase “irrational exuberance” to describe the fevered stock market was adopted by Alan Greenspan, the former Chairman of the Federal Reserve. Professor Shiller was also among the first to warn about the US housing boom, telling investors that high property prices could not last. He said that the impact of the housing crisis could be so great that it might bring down a key financial institution. Within weeks, Lehman Brothers had gone bust, while mortgage giants Fannie Mae and Freddie Mac and the world’s largest insurer AIG had to be bailed out with billions of dollars of taxpayers’ money.
Recession Turns Malls Into Ghost Towns
Malls, those ubiquitous shopping meccas that sprang up in the 1950s, are dwindling in number, with many struggling properties reduced to largely vacant shells. On the low-income east side of Charlotte, N.C., the 1.1-million-square-foot Eastland Mall recently lost a slew of key tenants, including a Dillard's and, next month, a Sears. Sales per square foot at the venue fell to $210 in 2008 from $288 in 2001. The Metcalf South Shopping Center in Overland Park, Kan., is languishing after plans to redevelop it into an open-air shopping district fizzled. The stretch of shops that connects the two largest tenants -- a Sears and a Macy's -- stands mostly vacant, patrolled by security guards.
With their maze of walkways and fast-food courts, malls have long been an iconic, if sometimes unsightly, presence in the American retail landscape. A few were made famous by their sheer size, others for the range of shopping and social diversions they provided. But the long recession is helping to empty out the promenades. Some analysts estimate that the number of so-called "dead malls" -- centers debilitated by anemic sales and high vacancy rates -- will swell to more than 100 by the end of this year. In the 12 months ended March 31, U.S. malls collectively posted a 6.5% decline in tenants' same-store sales, according to Green Street Advisors Inc., a real-estate research firm. The recent slump was led by an average 7.3% sales drop at Simon Property Group Inc., the operator with the largest number of mall locations.
The industry's woes are worsening. Thinning customer traffic, and subsequent hits to tenants' sales and profits, prompted Standard & Poor's Corp. last month to lower the credit ratings of the department-store sector. That knocked Macy's Inc. and J.C. Penney Co. into junk territory and pushed others deeper into junk. Sears Holdings Corp., a cornerstone tenant at many malls, is expected to close 23 stores this month and next. General Growth Properties, which owns more than 200 U.S. malls, filed for bankruptcy protection April 16, due mainly to its failure to refinance billions of dollars of debt coming due. While the real-estate investment trust has said the filing will have no impact on its mall business, analysts say a prolonged bankruptcy proceeding could make retailers nervous about sticking around once their leases expire.
The severity of the recession is turning some malls that were once viewed as viable into potential casualties. "Any mall that's sitting on life support is probably going to get its plug pulled" as the economy stalls, says Michael Glimcher, chairman and CEO of Glimcher Realty Trust, which owns 23 U.S. properties, including Eastland Mall in Charlotte. One industry rule of thumb holds that any large, enclosed mall generating sales per square foot of $250 or less -- the U.S. average is $381 -- is in danger of failure. By that measure, Eastland is one of 84 dead malls in a 1,032-mall database compiled by Green Street. (The database focuses heavily on malls owned by publicly traded landlords and doesn't account for several dozen failing malls in private hands.) If retail sales continue to decline at current rates, the dead-mall roster could exceed 100 properties by the end of this year, according to Green Street. That's up from an estimated 40 failing malls in 2006, before the recession began.
"This time around, because of the dramatic changes in consumer spending practices, we're very likely to see more malls in the death spiral than we've ever seen before," says Green Street analyst Jim Sullivan. Failing malls didn't get into trouble overnight, and most began their descent long before the tough climate. Typically, a mall begins to suffer due to job losses and other pressures in the surrounding neighborhood or because a newer mall opens nearby. The loss of key tenants -- such as the wave of department-store closures over the past three years -- hastens the demise. Also sapping malls' vibrancy: the increased preference among consumers for big-box stores, such as Wal-Mart Stores Inc. and Target Corp., which rarely operate in malls.
Developers, in fact, have been moving away from the enclosed-mall format in favor of big-box centers anchored by free-standing giants such as Wal-Mart or open-air shopping centers with tiny parks and outdoor cafes sprinkled among fashion stores. Only one enclosed mall has opened in the U.S. since 2006: The Mall at Turtle Creek in Jonesboro, Ark. These pressures, coupled with landlords' difficulties refinancing debts in the bone-dry capital markets, signal tough years ahead for retail-property owners -- even after consumer spending begins to rebound. "The shopping-center bankruptcies and the REIT bankruptcies are the ticking time bomb that people aren't talking about," says Burt P. Flickinger III, managing director of Strategic Resource Group, a research firm.
Four months ago, executives at J.C. Penney headquarters in Plano, Texas, called a "triage" meeting to discuss a recent study of the financial condition and health of the 550 malls housing Penney stores. The study's conclusion: 15 of its stores are located in malls at risk of failure. "We started to see things heading south," says Penney CEO Myron "Mike" Ullman III. It was important, he notes, to "get ahead of this" mall problem by reviewing Penney's new store strategy to determine whether it might relocate existing mall stores. Over the past 18 months, Penney's weekly sales have been trending better at stand-alone stores that aren't attached to traditional malls.
Hundreds of other anchor stores -- generally two- and three-story department stores that drive mall momentum -- are pulling out of properties. Several anchor chains, including Gottschalks Inc., Goody's Family Clothing Inc. and Boscov's Department Store LLC, filed for bankruptcy protection in recent months. Goody's ended up liquidating its 282 stores, as Gottschalks is now doing with its 58. Boscov's closed 10 locations. As mall-based chains face the prospect of a much smaller market, more closures are likely. So far for 2009, monthly sales declines at upscale retailers such as Saks Inc., Nordstrom Inc. and Neiman Marcus Group have registered mostly in the double digits, compared with results a year ago.
Saks CEO Stephen Sadove is talking with mall owners about closing a few of the retailer's 53 Saks Fifth Avenue stores. "You have to ask yourself: Do you believe the prospects for a given store or mall are going to be positive? Can you make money over the long term?" he says. For towns and cities that are home to dying malls, the fallout can be devastating. Malls hire hundreds of workers and are significant contributors to the local tax base. In suburbs and small towns, malls often are the only major public spaces and the safest venues for teenagers to shop, hang out and seek part-time work.
Commonly, "the mall will be a meeting place, or, in some cases, like a city center," says Carl Steidtmann, chief economist at Deloitte LLP. The deterioration of a mall can spawn broader problems, he notes. "It can become a crime magnet." The gradual fade-out of marginal malls has prompted a thriving Web culture dedicated to sharing information about dead or dying properties. Sites such as Flickr.com, Deadmalls.com and Labelscar.com are drawing traffic from mall employees, shoppers and other mall mourners who swap stories, photos and predictions about the status of centers on their way out."So sad!" wrote Edith Schilla, 45 years old, of Independence, Ohio, in an April 3 posting on Labelscar.com following her visit to a Sears liquidation sale at the Randall Park Mall in North Randall, Ohio. "I was able to peek into the mall and was so overtaken by the vast emptiness," she wrote, recalling it as previously "so busy."
After the Sears closes next month, Randall Park will be left with only a few remaining tenants, including an Ohio Technical College automotive school. It currently has the most popular page on Labelscar.com, which so far this year has a 25% increase in postings on its "dead malls" category. Mall owner Whichard Real Estate LLC is trying to sell the property, which likely needs to be torn down and rebuilt into something else, says Whichard asset manager Kenneth Whichard. Local officials, meanwhile, want to fill the mall with education and industrial tenants.
During past economic cycles, dead malls were frequently redeveloped into mixed-use space that includes apartments, offices or parks. Repurposing mall space today will be more difficult. Lenders and investors are moving away from commercial real estate as property values decline and delinquencies rise on debt used to acquire or develop properties. Retail real estate has been hit especially hard, as declining retail sales and store closures hammer mall landlords. In Charlotte, Eastland's deterioration into a dead mall matches the fate of many others across the U.S. Faison Enterprises Inc. opened Eastland in 1975 as the city's second regional mall.
Shoppers crowded four-deep around its skating rink to see local dignitaries kneel gingerly on the ice as a Presbyterian minister blessed the structure with prayers. In the early years, shoppers flocked to the mall's Miller & Rhoads and Ivey's department stores, among others. "It was just a great place to go and be seen," said Mary Kate Cline, a 51-year-old who frequented the mall in its early years but can't recall the last time she entered it. Eastland's reign lasted roughly two decades. Its market began to erode when the area around Eastland fostered low-income housing.
Meanwhile, the Charlotte area's more affluent residents and new arrivals gravitated to suburbs on the city's north and south ends. Developers built and renovated malls in those suburbs, drawing shoppers away from Eastland. In recent years, discount stores such as Wal-Mart and midtier Kohl's Corp. sprung up near Eastland, siphoning off more of its shoppers. A string of major store exits at Eastland began with Penney's departure in 2002. Belk Inc. closed in 2007, along with several national specialty stores. The closures gained momentum amid the recession last year, when stores including New York & Co., Genesco Inc.'s Journeys, Finish Line Inc. and Dillard's Inc. pulled out, leaving behind empty, gated storefronts.
A handful of retail holdouts -- stores for Footlocker Inc., Burlington Coat Factory Inc. and several local merchants, many paying reduced rents -- are reluctant to leave, even as sales dwindle. "I've made my business here," Luz Pavas said, while manning her kiosk of health and beauty aids. "I don't want to move to another mall. I want Eastland Mall to be like it was eight years ago." Boarded-up stores near the mall languish as reminders of departed retailers, including Mega Food Market, Uptons department store and Harris Teeter Inc. Neighbors and community leaders want Eastland razed and replaced with developments such as upscale housing to attract a new demographic.
But the mall's current owner, Glimcher Realty Trust, the Columbus, Ohio-based owner of 23 malls, is keen to sell Eastland rather than spend the hefty sums needed to redevelop it. A better investment, says the company, "would be to put money into assets that were doing well," according to Glimcher spokeswoman Lisa Indest. Charlotte city officials have lined up resources to help reinvent the mall, including $20 million in public financing. They acknowledge that finding a developer willing to underwrite the additional $180 million needed to turn Eastland into a mix of housing, shops and parks will be tough. "No one's kidding themselves that this is an easy real-estate deal," says Charlotte City Councilman John Lassiter. "It wasn't easy when the market was good. Now it's much harder."
Ilargi: More about that Fake Nobel I’ve been talking about. From Yves Gingras (Université du Quebec à Montéal), post-autistic economics [sic!] review, issue no. 17, December 4, 2002. What Gingras -curiously- doesn't touch upon is the background push from the Chicago School boys, particularly Milton Friedman, for recognition as scientists. And by no means was this only a theoretical prestige matter. The boys were actively invading Asia and South America with their disaster doctrine theories and military machine, and America's largest corporations, as well as its government, stood to gain massive returns. Obviously, the more the theories could be "legitimized" by pretending they were based in science, the easier it would be to implement them without international protests. I doubt we will ever know for sure why the Sveriges Riskbank created the award, but it seems clear the institution itself had little to gain from it, unlike America's corporate cabal.
Beautiful Mind, Ugly Deception:
The Bank of Sweden Prize in Economics Science
Much has been said about the Oscar-winning movie A Beautiful Mind and its hero, the mathematician John Nash. Just as spring is the time for Oscars, a new crop of Nobel prizes has accompanied the fall of autumn leaves every October since 1901. As Daniel Kahneman and Vernon L. Smith share an award this year, it's a good time to pose a question raised by a neglected aspect of the movie: what prize exactly did Nash really win?
The answer is not as obvious as it seems. When A Beautiful Mind hit our screens, one correspondent to an entertainment weekly pointed out that the `Nobel Prize in Mathematics' he had read about did not actually exist. Many will recall the brief scene in the movie when the young Nash – suffering from lack of recognition of his true genius – remarks to his MIT colleagues that he has been robbed of the `Fields Medal'. What is that? Ask any mathematician, and he will tell you: `this is the equivalent of the Nobel prize for mathematicians'. Established in 1936, it is given once every four years to no more than four exceptional mathematicians under 40 years of age.
The incident confirms that John Nash, in coveting this most prestigious prize in the mathematics community, was at that point still rooted in reality. In contrast, though the story of a man from Stockholm waiting for Nash after his class to share the good news that he had won a prize is confirmed, it is doubtful that the prize itself was real. Or so I will claim.
The currency is prestige Which `Nobel prize' was the man from Stockholm talking about? Most journalists (and every economist) will of course answer, the `Nobel Prize in Economics' – even though it is never specified in the movie. Against this taken-for-granted `fact', I am arguing here that this prize does not exist: and moreover, that this so-called `Nobel prize' is an extraordinary case study in the successful transformation of economic capital into symbolic capital, a transformation which greatly inflates the symbolic power of the discipline of Economics in the public mind.
The confusion can be traced back to 1968 when the governor of the Central Bank of Sweden decided to mark the tercentenary of that institution by creating a new award. It could have been named after a well-known ancestral economist, such as Adam Smith, or more simply, though unimaginatively, `The Bank of Sweden Prize in Economics'. After all, every discipline has its own `prestigious' prize. Their number grows every year. However, the problem is that all these prizes, though well known within the microcosms of their discipline, have little public appeal. Only the Nobel prizes have a real public impact. But they are limited to five fields: physics, chemistry, physiology and medicine, literature and, finally, peace.
Moreover, the enormous symbolic capital of the very name `Nobel prize' has been accumulated over the years by a careful selection of prizewinners. Like every new prize, by definition unknown, the Nobel faced the problem of what we can call (invoking Pierre Bourdieu's apt concept) the `primitive accumulation of symbolic capital'. This obstacle was overcome by giving the prize early on to already renowned scientists who would bring the prize real credibility. The idea was that, over the years, this symbolic capital would surely accrue to such an extent that it could in turn bring recognition to the chosen winners.
The organisers, conscious of this conundrum and wishing to endow the discipline of economics with as much public credibility as possible, decided to call the prize: `The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Curiously then, it was the memory of Nobel, not that of an economist, that was being recalled. This mystery can be explained if we unpack the process crystallised in that bizarre and awkward name.
First, despite the scepticism of some scientists towards the `scientificity' of economics, the Bank managed to convince the Royal Swedish Academy of Sciences and the Nobel Foundation to administer their prize. Secondly, identical procedures for the selection and nomination of the prize were chosen to those of the real Nobel prizes. Of course, the prize money would come from the Bank of Sweden, not the Nobel Foundation, but all the rest would be done exactly as if it was in fact a Nobel prize, up to and including the ceremony of 10 December.
Thus, the inclusion of the term `in Honor of Alfred Nobel' in the title created the necessary bridge to the Nobel prize, and by exactly mimicking the process, the Bank created all the conditions enabling the association and even the identification of its prize with those established by Alfred Nobel at the turn of the century. Note that, for obvious reasons, it is much simpler to say `Nobel Prize in Economics' than `Bank of Sweden Prize in Economic Sciences in Honor of Alfred Nobel'! No surprise that, since 1969, all journalists and economists have commonly referred to the Bank of Sweden Prize as `The Nobel Prize in Economics'. The strategy was a complete success.
The social alchemy of belief Now that we understand why a bizarre name was chosen, transforming a peculiar social alchemy into a `Nobel prize', let us look at the `flow of capital' the whole process involved. The Bank started with economic capital and `invested' it in the Nobel Foundation to transform it into symbolic capital as fast as possible. Even a very large amount of cash is not sufficient in itself to assure the prestige of a prize. The key point was to effect a complete transfer of the already accumulated symbolic capital of the Nobel prizes to the new Economic Prize instituted by the Bank. Any other strategy would have been more risky given the difficulty, uncertainty and time lag attending any primitive accumulation of symbolic capital.
In other words, this history makes visible the well-managed transformation of economic into symbolic capital, thus confirming Bourdieu's theory of the convertibility of the basic kinds of capital (economic, social, cultural and symbolic). Of course, many will say: `We all know it is the Bank of Sweden Prize, but it is much simpler to say "Nobel Prize".' In point of fact, the Nobel website is careful to make the distinction, thus habitually announcing the `2002 Nobel Prizes and the Prize in Economic Sciences in Memory of Alfred Nobel'. But this argument is either naive or disingenuous. For the success of the strategy of creating a `Nobel by association' has obvious social consequences.
As anyone knows, the attribution of a Nobel prize gives instant world fame to the winners, who become oracles commenting on anything journalists can fathom: war, peace, philosophy, environment, irrespective of their particular fields of expertise. Interestingly, there is a strong correlation between the dates of attribution of a Nobel prize and the subsequent publication of memoirs or opinionated books by Nobel Laureates. This is a socio-logical consequence of the fact that the legitimacy bestowed by the Nobel prize is rapidly put to use in the public space to voice ideas that the winner would not have dared to submit were he or she a `simple scientist'.
Whereas the `spontaneous' philosophy or sociology of scientists can be considered relatively harmless, the situation is quite different in economics. By its annual offer of a public image of `hard science' through its association with the Nobel prizes, the Bank of Sweden Prize in Economic Sciences gives the discipline and its laureates the `scientific' aura it lacked to put forward authoritative but often simplistic theories about the economy (or, worse, the whole society) conceived as a big `market' where everything can be submitted to the so-called `law of demand' – be it a house, a wedding, or even an idea.
What is even more fascinating is that the social alchemy which transmuted the Bank of Sweden prize into a Nobel prize, affected not only the general public (via its media coverage of course) but the members of the discipline and even the winners themselves, who are convinced they have won a real `Nobel Prize in Economics'. Thus, James Buchanan (1986 prize) offers the readers his "Notes on Nobelity". Before him, Paul Samuelson (1970 winner) wrote about his `Nobel coronation' – not his `Bank of Sweden Coronation' – and filled his talk with references to Einstein (4 times) Bohr (2 times) and eight other winners of the (real) physics Nobel prize (not to mention, of course, Newton) plus a few other names names as if he were part of this familly. Curiously there is not a single economist named in this talk. A simple counterfactual gedanken experiment (as physicists like to call these thought experiments) makes it easy to understand that such a talk would have been impossible had the prize been called "The Adam Smith Prize of Economics" and accompanied with a Million dollar check.
As for the discipline – in a move typical of the pushy newcomer – it markets with ostentation its (false) membership in the Nobel club by publishing books, such as Lives of the Laureates: Seven Nobel Economists (1986 and carefully updated to `Ten' in 1990), which promote the discipline by associating it with the Nobel prize, a practice not observed in the scientific fields covered in the will of Alfred Nobel.
It would seem that engineers, frustrated not to have a Nobel of their own, have also approached the Nobel Foundation to create one, only to be told that, in order not to dilute the prestige of the Nobel prize, there should not be any more. Though the effect of scarcity applies to the value of economic as well as symbolic capital, the credibility of the Foundation may already be affected by association with the Bank of Sweden and the economists. Having played an important role in lobbying the Swedish Academy of Sciences to accept the Bank's offer and after having himself received the prize, Swedish economist Gunnar Myrdal changed his mind and became a fierce advocate of the abolition of the prize. More recently, a few days before the Nobel ceremony of the 2001 prizes, descendants of Alfred Nobel criticized the used of the term "Nobel prize" applied to economics. Peter Nobel, a great-grandnephew of Nobel told journalists that his familly is "asking for a clear distinction between the original Nobel prizes and this (prize)". True to economic "laws" (or maybe ironic…) he noted that the actual use of the name "is like an intrusion in the trademark"! (See Chronicle of Higher Education, December 7 2001).
Though this suggestion may be considered extreme by many (not me), it is clear that there are now many people coming to the conclusion that the institutions involved made a mistake in associating themselves with this symbolic coup d'Etat in the `Republic of Science' – a move aimed at enforcing the dominant status of economics as a `hard' science not only among the disciplines of the social sciences, but first and foremost in the mind of the public and its elected representatives.
In his classic book How to Do Things with Words, philosopher John Austin, explained that words not only describe the world but create it through their performative aspect. Those of us who want to resist the symbolic violence inherent in the usurpation of the "Nobel Prizes" by economists and do something against this annual propaganda can begin by calling the prize by its real name: The Bank of Sweden Prize in Economic Science". They can also correct systematically those who still persist in talking about the "Nobel prize in Economics". Where the mere repetition of words has contributed to the "reality" of that prize in the public mind, it is not impossible that a systematic counter-attack could deconstruct this chimera propagated by media and idolized by economists.
Ilargi: If you have 30 minutes, and a high-speed connection, this is pretty much can't afford to miss. Or you can order the whole film.
I.O.U.S.A.: The 30-minute version