Sunday, May 31, 2009

May 31 2009: Crawl in a hole


Corbis Bummer 1940
Executives of General Motors and some of the 75 members of the final assembly line crew, pictured during a ceremony marking the completion of the 25 millionth car turned out by the company


Ilargi: 10 more hours and it's done. No more GM. Might as well crawl in a hole and be silent for bit, think about what went wrong and what's coming next. It’ll never be the same, nor feel the same, and it's never coming back. Remember how Britain's industry once led the world and then one day no longer did? It's happened again, just this time in America. Just look at the predicted numbers of car sales that are circulating, and realize that that is what present day policies and bail-outs are based on. We'll be successful yet: we'll succeed in making this crisis much worse still, simply by denying its true extent and nature.






You just feel like crawling into a hole
Drive past Kirk-in-the-Hills and you could be forgiven thinking you were in rural Scotland. Set in 40 acres, with a perfect aqua lake behind it, the sprawling church – based on the long-ruined Melrose Abbey near the Scottish border – stands majestically in its grounds in affluent Bloomfield Hills, one of Detroit's finer suburbs. Inside one of the Kirk's wood-panelled rooms – just seven miles from the nearest General Motors' plant, at Pontiac – sit five men and three women who embody the city's woes."I worked for GM for 15 years," recounts Jeff Gress of Royal Oak, "and I got laid off in March."
 
The impact of his redundancy is clear for all at the evening's job support and motivational coaching group for all to see – at times he sits with his head in his hands. Gress worked as a plant leader in manufacturing before falling victim to the carmaker's embrace of "zero-based staffing" – a performance management tool which essentially harks back to the just-in-time techniques of the 1970s. But Gress is not alone in feeling down at heart. The car manufacturer has laid off – or announced plans to shed – 30,000 workers between the start of this year and the end of 2010. "I spoke to one of my friends still at GM, and they're still firing people. It'll be another 2,500 come June 1," he says, without directly mentioning the car manufacturer's impending bankruptcy.

For wife Julie, things are not easy. "We have our up days and our down days," she admits, remaining positive for the sake of her husband. Although she is looking for more work – a pay cut at her job as a part-time unemployment lawyer for the state of Michigan has exacerbated their situation – it would seem that she's as much at the group for her husband as for herself. "When someone loses a job, they lose their identity. It's not easy to get out there, and ooze self confidence, when you just feel like crawling into a hole," she says. Gress admits he's "bored to death" at home and is thinking about starting a part-time class just to ease that monotony until something more permanent comes along. But who knows when that will be.

His situation is little different from that of Steve Brune, an engineer from nearby West Bloomfield, who was made redundant in April from Autoliv, an automotive safety system specialist, after nine years. Brune worked most recently on systems for GM's Hummer, but as that brand was mothballed, so was he. In 2007, he won Autoliv's monthly gold star award on two separate occasions, but that counted for nothing when his section was closed down. "She thinks I should be out looking for jobs all the time, day and night," Brune tells Gress about his wife's feelings, hinting at the strain the situation has placed on his relationship. He is driven to find a job in part by what he witnessed in his family, seeing both his father and grandfather lose their livelihoods and the impact it had on their health.

During meeting he and Sam Okimoto, the support group's co-chairman who ironically took redundancy from GM in 1996 in order to change career, run through a mock interview. Brune is self-assured, turning negatives into positives, focusing on the successes he had at Autoliv and his obsession with car safety. A prime candidate, everyone present agrees, if only this was a real interview. Another member of the group is Sylvia Wilcox, who jokes darkly that she's had to come out of retirement "to join the ranks of the unemployed". She lost her pension after investments went awry and says that talking about the problems of unemployment and how to best find work in a dismal economy gives her hope when she is depressed.

Drive 15 minutes down the road, however, and it's quite a different picture. As forlorn jobseekers enter the Hilton Garden Inn in the non-descript town of Southfield, they're greeted by a few drab signs and the offer to enter a raffle to win a laptop. Inside the fair itself, although the greeters and exhibiting companies are friendly enough, there don't seem to be that many jobs on offer. Amid the plethora of direct sales opportunities – not least "Slumber Parties," erotically themed in-home parties for ladies over 18 – and the chance to join the army, the number of actual jobs appears insufficient to satisfy the couple of hundred people who visit over the course of the day.

For Terrence Price, from nearby Lavonia, it's not the first job fair from which he's walked away empty-handed. Having worked at Ford for 30 years, he took early retirement last year. Now, armed with a business administration degree, he wants a new challenge. "But in this economy, it's pretty tough. With two of the Big Three collapsing, a lot of companies are depressed." But look on the bright side, he jokes – back in 1978, the last time he was out of work, he had to stand for hours in line to register every other week for unemployment benefit. "Now you can just call them," he adds. Jermaine Franklin isn't amused. His friend's cousin referred him for a customer service job at Chrysler early last year, but he still hasn't heard anything, and knows he probably never will.

With his wife unable to work full-time since giving birth to their first child 18 months ago, he's taken part-time security work until he can get back into full-time employment, something he's been out of it for 12 months now. "It's been rough," he admits. Franklin, like so many of those present, wants to compare notes on other job fairs, to discover which were the most promising. Talk of one at the MGM Grand casino in downtown Detroit the previous week was that it was so busy it was pointless, while one man says he went to a technology fair that had 300 jobs available, and 2,700 people turned up.

It's a story that NaJuan Lockhart knows only too well. The retail sales manager for the Detroit Free Press – the city's biggest newspaper, itself going through tough times – explains that her husband Rush was so down at heart at being laid off from Chrysler after 16 years in computing that he no longer came to job fairs. "He's gotten to the point where he doesn't bother because he feels he's wasting the gas," Lockhart explains, "so I came on my way home from work instead." Two very different settings – a meeting room in a beautiful mock-13th century church and booths in a faceless corporate hotel. Two very different atmospheres – the hope of companionship and the despair of being one of hundreds, thousands, looking for work. But very similar stories, stories that are only set to increase in number as GM faces its latest judgment day.




Unemployment in U.S. Probably Surpassed 9% in May; Job Losses Threaten Spending
Unemployment in the U.S. probably surpassed 9 percent in May for the first time in more than 25 years, underscoring forecasts that the economy will be slow to pull out of the worst recession in half a century, economists said before a report this week. The jobless rate climbed to 9.2 percent, the highest level since September 1983, according to the median of 59 estimates in a Bloomberg News survey before the June 5 Labor Department report. Other data may show manufacturing and service industries shrank at a slower pace and consumer spending dropped. "The economy is decaying at a slower rate and that is the best you can say," said Steven Ricchiuto, chief economist at Mizuho Securities USA Inc. in New York. "I can’t tell you we are out of the woods yet."

Economists forecast the jobless rate will head to almost 10 percent by the end of the year, depriving Americans of the income needed to propel spending and stoke a vigorous recovery. Access to credit will likely also be limited as record defaults and foreclosures make banks reluctant to lend. The unemployment rate is predicted to rise from 8.9 percent in April. Payrolls probably fell by 521,000 this month after declining by 539,000 in April, the median of 60 estimates showed. Job losses peaked at 741,000 in January, the most since 1949. The economy has lost 5.7 million jobs since the recession began in December 2007, the most of any economic slump in the post-World War II era.

Restructuring at automakers including General Motors Corp. and Chrysler LLC may generate more job losses. AutoNation Inc., the largest U.S. new-vehicle retailer, has said it will close seven showrooms in line with bankrupt Chrysler’s termination of 789 dealerships. Economists project the Labor report will show manufacturers cut payrolls by 150,000 in May, after slashing them by 149,000 in April. Workforce reductions aren’t limited to the auto industry. American Express Co., the largest U.S. credit-card company by purchases, said on May 18 it will cut 4,000 positions as cardholders squeezed by rising unemployment fail to pay debts.

The chief executive officers of Caterpillar Inc. and Xerox Corp. said hiring at their companies probably won’t pick up until markets and the economy show more signs of stability. "We have had to continue reducing employment," Caterpillar CEO Jim Owens said today on NBC’s "Meet the Press" program. "We will probably not be able, in a position to, rehire until mid next year as we see these markets begin to recover." Xerox’s Anne Mulcahy said that "if you look at net head count it’s still coming down, because that’s what our intent is, until we’re sure that things are improving." She said "we’re hiring, but very modestly."

Consumer spending has taken a turn for the worse after improving in the first quarter. Purchases fell in April for a second month, and incomes declined for the sixth time in the last seven months, economists project a Commerce Department report tomorrow will show. Household purchases rose at a 1.5 percent annual rate from January to March, less than previously estimated, after plunging at a 4.3 percent annual rate in the last three months of 2008, revised figures from Commerce last week showed. Gross domestic product shrank at a 5.7 percent pace in the first quarter, less than the government previously estimated in April, the figures also showed. Following the 6.3 percent pace of decline in the last three months of 2008, the drop capped the worst six-month performance in five decades.

Also tomorrow, a report may show manufacturing shrank this month at a slower pace. The Institute for Supply Management’s factory index rose to 42 in May from 40.1 in April, according to the median estimate of 63 economists. Readings of the index of less than 50 signal a contraction. Underscoring the improvement at manufacturers, orders placed with factories probably rose 0.8 percent in April, the second gain this year, economists predicted ahead of a Commerce Department report June 3. An ISM report the same day may show service industries, which make up almost 90 percent of the economy, are also stabilizing. The Tempe, Arizona-based group’s gauge of non- manufacturing businesses probably increased to 45 in May from 43.7 the prior month, according to the Bloomberg survey.

Stocks have surged and Treasuries have dropped amid reports showing the worst of the downturn may have passed. The Standard & Poor’s 500 Index has gained 36 percent since March 9, when it hit the lowest level in more than 12 years, closing at 919.14 on May 29. Yields on the benchmark 10-year note climbed to 3.74 percent last week from 2.86 percent during that period. In other reports this week, the National Association of Realtors may report on June 2 that the number of Americans who signed contracts to buy previously owned homes rose in April for the third straight month as buyers took advantage of lower prices, according to the Bloomberg survey median.




GM Filing Expected 8 a.m. Monday; Koch to be Named Restructuring Chief
General Motors Corp. is expected to name turnaround executive Al Koch as its new chief restructuring officer to guide the auto maker's trip through Chapter 11 bankruptcy protection, according to people familiar with the matter. Mr. Koch, a managing director at the advisory firm AlixPartners LLP, will be named to the post when GM files its bankruptcy papers at 8 a.m. Monday at the U.S. Bankruptcy Court in New York's Southern District, these people said. He will be the highest-ranking outsider in GM's officer ranks and oversee about 60 Alix employees working for the auto maker.

A veteran turnaround specialist who worked on high-profile bankruptcies such as Kmart Corp., Mr. Koch will oversee a break-up of the company into a government-sponsored "New GM" and a remaining firm that will be left behind and liquidated. Mr. Koch will report to GM's Chief Executive Frederick "Fritz" Henderson but will also report directly to the company's board of directors. Assuming a New GM emerges from Chapter 11, Mr. Koch will then sit atop a new, separate management team winding down the "Old GM" that remains in bankruptcy court. In this role, he'll likely report directly to Old GM's board, which will be different from the New GM board.

As the steward of the Old GM, Mr. Koch will help negotiate contracts between the New GM and Old GM for certain services. He'll also lead efforts to spin-off or liquidate Old GM's assets, including the Saturn, Hummer, Saab and Pontiac brands, and as many as 20 factories. Since December, Mr. Koch has been in regular meetings with GM's top management. He helped develop the auto maker's viability plans requested by the Obama administration, negotiated with the company's shareholders and lenders and readied the Chapter 11 sale of GM's "good" assets to a New GM owned largely by the government. As Alix's main adviser to GM, he also prepared an analysis outlining likely recovery by creditors in the event the auto maker liquidated.

That analysis found "no recovery for unsecured creditors," said a person familiar with the finding. The U.S. Treasury recovery would have been "significantly impaired," said this person, estimating it at less than 50 cents on the dollar. Other top Alix managing directors on Mr. Koch's team will include Ted Stenger, who worked on Kmart and the collapse of auto-supplier Dana Automotive; Stefano Aversa, president of Alix's European operations and John Hoffecker, an auto industry specialist.

Sixty-seven year old Mr. Koch served as interim chief financial officer of Kmart when it became the largest retailer to seek Chapter 11 protection in 2002. Kmart emerged in 2003, earning Mr. Koch accolades. Kmart merged with Sears in 2005, creating Sears Holdings Corp. In addition, Mr. Koch served as chairman and chief executive of Champion Enterprises, where he led a turnaround for that manufactured-home builder that avoided bankruptcy.

Mr. Koch "seems like a solid guy with excellent industry experience. And he works for a top firm, so& he'll have good support," said Edward Altman, a New York University professor who focuses on bankruptcies. "Certainly Kmart was a great success in the several years subsequent to its filing, and was the darling of Wall Street in terms of when a company emerges and does well." But Mr. Altman cautioned that the economy plays a major role in the success of corporate restructurings emerging from Chapter 11, which could work against GM.




Industry Fears U.S. May Quit New Car Habit
For all the drastic cuts and financial overhauls that are meant to secure a future for General Motors and Chrysler, their prospects in coming years will be determined more by the answer to a simple question: Can American drivers live without that new-car smell? In recent years Americans appeared to be hooked on it and took advantage of home equity loans, easy credit and cheap short-term lease deals to send new-car sales to levels of more than 17 million a year.

Now the market has collapsed by 46 percent to below 10 million, as people are making do with the cars they have, leaving the industry to debate — and worry — about what the new normal will be once the recession ends. Some say the downturn is temporary and that sales will spring back in a few years. Others believe Americans will rethink whether they need so many cars, particularly new ones. The answer will be important to the Obama administration as it prepares to put G.M. into bankruptcy on Monday. After the company emerges from bankruptcy, the federal government will own about 70 percent of it, in return for $50 billion in taxpayer aid. G.M. has already received about $20 billion in federal help.

The Treasury Department’s advisers, who initially expected auto sales to pick up late next year, now foresee no jump in demand this year or in 2010. And even five years out, they expect annual sales to be about 15 million, still well below the peaks of this decade. Making predictions is tricky in this economy. The market has grown more bleak, and worst-case scenarios drafted only months ago are becoming reality. If sales do not recover, the Treasury will have to provide more financial support for G.M. and for Chrysler, which has received about $10 billion in federal aid, before they can stand on their own and the government can divest its shares.

People like Kate M. Emminger do not offer the carmakers much hope. Ms. Emminger sold her 2006 Toyota Corolla last April because she decided she could not afford her $250 monthly payment, even though she earns about $60,000 a year as a university events planner. "It just became too expensive to have a car," Ms. Emminger said. Now, she volunteers at City CarShare, a nonprofit organization in San Francisco, in order to earn free use of its vehicles, which normally rent to members for $5 an hour plus 40 cents a mile. Otherwise, she takes public transit. But plenty of people in Detroit argue that once the recession is over, buyers will rush back to dealer showrooms.

If sales do pick up, carmakers eventually could be more profitable than they have ever been because of all the costs they have shed, said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich. "After you rebound from this artificial low in demand, wow," Mr. Cole said of the potential for auto sales and profits. He estimates that pent-up demand for new cars is actually about 4 million vehicles higher than the current selling rate, which in April would translate to 9.3 million a year, according to Autodata Incorporated. Others, however, point to shifts suggesting that Americans’ desire — and need — for new cars may be cooling.

Baby boomers, the biggest group in the car market, are beginning to enter retirement, a stage of life when people typically buy fewer cars. Home values are down sharply, making consumers feel less wealthy, and also cutting off a handy source of money from home-equity loans for new cars. "We sold to people who purchased cars by refinancing their houses," said Wilbur Ross, the billionaire financier who has invested in steel mills and auto parts companies.



The housing and financial crisis has taken its toll on reliable customers like Frank Powell, a school administrator in the East Palo Alto school district in California. He moved out of the house he had lived in since 1983 and started renting a few months ago because of his debt burden, which includes auto loans. "I used to buy cars all the time and took out loans to pay them off," he said. "As soon as I paid part of one off I’d get another. I’d buy one for my kids, my wife, myself. I can’t do that anymore" He now has a Cadillac Escalade sport-utility vehicle, but he is thinking about downsizing and driving something much smaller — and for longer. "Something had to change," he added. "You just can’t keep going with that many cars."

Lifestyles have changed, too. As many people move back to cities from suburbs, they are swapping three-car garages for a single parking space. Public transit use is up. "Too many people are looking at alternatives," said Scott Griffith, chief executive of Zipcar, the national car-sharing company that has more than 300,000 members, up from about 200,000 a year ago. Mr. Griffith estimates that for every three members, a new car probably goes unsold. "They’re much smarter about spending money and looking for ways that don’t even involve cars any more," he added. Of course, car-sharing services like Zipcar are not available everywhere. They are concentrated in urban areas and college towns, where owning a car can be burdensome and expensive.

Donald Grimes, an economist at the University of Michigan, is forecasting the lowest sales for the driving-age population this year since 1970. From 1970 to 2001, there were 0.76 vehicles sold per driver in the United States. Now that figure has dropped to 0.4 vehicles per driver, and he does not see much of a rebound in coming years. The swift decline has spooked the industry. "I don’t think there has ever been a period in our history like this," Josephine Cooper, Toyota’s group vice president for government and industry affairs, said of her company, which lost $7.1 billion in the first three months of the year. "It is very, very sobering."

Now Toyota and other carmakers must wait to see if Americans will return to their old car-buying habits — people like Jay S. Allen, owner of a San Francisco consulting firm, and his wife, Jennifer Nicoloff, a product manager at Gap. Over the years, they have owned eight cars between them. But now they are carless, with no plans to buy. When he needs transportation, Mr. Allen either rides his scooter or borrows a car for a few hours from a local car-sharing service. "The biggest thing right now is fear," Mr. Allen said. "We don’t know which way the economy is going to go. We don’t want to buy anything that has long-term implications."




GM prepares for bankruptcy protection announcement
A statement from a group of large, institutional bondholders Sunday said 54 percent of the GM bondholders had agreed to exchange their unsecured bonds for a 10 percent stake in a newly restructured company, plus warrants to purchase a greater share later. Their acceptance is seen as critical in moving the company through bankruptcy quickly. GM and the Treasury Department, which has been guiding the Detroit automaker toward a rescue plan that will give taxpayers more than a 70 percent stake in the company, were quiet on the bondholders' decision.

The Treasury Department must find that there is sufficient acceptance for the deal to move forward. In a previous bond exchange offer, the Treasury demanded participation of 90 percent of bondholders, representing a debt exchange of $24 billion. The current 54 percent acceptance represents only $14.6 billion, but by lining up support in advance of a bankruptcy protection filing, GM is likely to find it easier to persuade a judge to apply terms of the sweetened offer to the rest of its unsecured debt. The company has not confirmed it will seek bankruptcy protection, but Chief Executive Officer Fritz Henderson has scheduled a news conference Monday morning in New York. President Barack Obama is also expected to give a speech addressing the Detroit automaker's fate.

The company made a huge stride toward restructuring Friday when the United Auto Workers union agreed to a cost-cutting deal, and early Saturday, Germany's finance minister said a plan was approved for Canadian auto parts maker Magna International Inc. to move ahead with a rescue of GM's Opel unit. GM is racing to meet the government's Monday deadline to qualify for more aid. It already has received about $20 billion in government loans and could get $30 billion more to make it through what is expected to be a 60-to-90-day reorganization in bankruptcy court. Treasury Secretary Timothy Geithner, who is visiting China, followed developments closely, taking a military aircraft with the latest in communications equipment that allowed him frequent contact with Steven Rattner, head of the administration's auto task force, and Obama economic aide Lawrence Summers.

The Treasury on Thursday offered bondholders 10 percent of a newly formed GM's stock, plus warrants to buy 15 percent more to erase the debt. Last week, GM withdrew an offer of 10 percent equity after only 15 percent of the thousands of bondholders signed up. Getting as many bondholders as possible to sign on to the offer in advance of a bankruptcy filing could help the automaker get through the court process more quickly, said Robert Gordon, head of the corporate restructuring and bankruptcy group at Clark Hill PLC in Detroit. "The more consensus you have, the more likely it is you'll be able to move through the bankruptcy process in an expeditious fashion with less resistance," Gordon said.

In a typical case under Chapter 11 of the Bankruptcy Code, the company files a plan of reorganization that must be voted on by creditors. In each class of creditors, the plan would have to be approved by holders of two-thirds of the claims and a majority of the number of individual creditors who vote. But the GM case is anything but ordinary, and it appears the company will sell some or all of its assets to a new entity that would become the new GM, rather than submit a plan to reorganize the old company.

Under a so-called Section 363 sale, the prospective buyer and seller present a fully negotiated asset purchase agreement for approval by the court. Creditors still can lodge objections, but GM could avoid the drawn-out fights between competing creditors, such as bondholders and workers, that often occur. Chrysler LLC, which filed for bankruptcy protection April 30, chose a similar path. A judge heard three days of testimony and arguments last week over the sale of most of Chrysler's assets to Italian carmaker Fiat Group SpA.

U.S. Judge Arthur Gonzalez is expected to approve the sale Monday, pushing Chrysler closer to its goal of a speedy exit from bankruptcy protection. But an appeal is likely from three Indiana state pension and construction funds, which invested in Chrysler debt and say the deal is not fair. That may force Chrysler to further postpone the deal's closing. GM's stock tumbled to the lowest price in the company's 100-year history on Friday, closing at just 75 cents after trading as low as 74 cents. In a Chapter 11 bankruptcy reorganization, the shares would become virtually worthless.




Questions about GM's future cloud car-shopping
Car shoppers have been kicking the tires a little more cautiously as salespeople try to ease their worries about service warranties, resale values, and even whether GM dealerships will still be around in another year. The general manager of Rose Chevrolet in this southwest Ohio city gathered his sales force this weekend ahead of announcements expected Monday that will shape the outlook for a company long intertwined with much of America's daily life. "Here's what we need to stress, guys," Ed Larkin said at the dealership along a busy highway. "Rose Chevrolet is going to be here; we're going to be here selling vehicles and here to service their vehicles. That isn't going to change."

But GM's troubles -- the company is considered likely to file Monday for bankruptcy court protection -- are a concern for those who own or are considering buying one of the company's vehicles in a recession that's eroded the financial security of many households. "This is a major purchase by consumers; they don't make it very often and they want more stability," said Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville, Mich. "Consumer loyalty has been shaken by a lot of factors." Leo Chavez, a Chicago-area realtor, said he's feeling GM's pain himself. He's been trying to get out of his Pontiac Grand Prix, a discontinued GM line, but said its trade-in value has fallen and dealers use that against him in bargaining.

"I'm very disappointed with GM, I really am," Chavez, 30, said Saturday at Chicago's Grossinger City Autoplex, where he wanted to trade for a used Toyota Camry. "I have more faith (in) Toyota." Just outside the nation's capital, jazz played in the showroom of an Alexandria, Va., dealership Saturday as veteran car salesman Earl Jones, 50, talked about a year that has been "like being on a rollercoaster." Foot traffic and sales have slowed at the dealership, he said, and customers have become bolder in demanding bargains on GM cars. "People come in and they ask us for the most ridiculous deals," Jones said, but added he's going to stay positive as he keeps selling cars. "They control what they've gotta control," he said of GM's leaders. "In here, I've got to control my destiny."

Linda Bentley, 61, scanned the car lot with a salesman for the 2009 Malibu she planned to buy. The retired federal employee typically buys American-made cars, but GM's situation nearly scared her off. A mechanic convinced her she should stick with GM. "He made it sound like it's an institution, it's not going anywhere," Bentley said. In Wisconsin, Debbie Praeger, a stay-at-home mom in Mequon, just bought another Toyota Camry to replace a '98 version that was so reliable she never considered buying from one of the U.S. automakers. "It's certainly not because I don't want to keep jobs at home. I do," said Praeger, 53. "But there are things people need to do to take care of themselves, especially if you don't have a lot of money."

Some GM dealers still fly giant U.S. flags and urge people to "buy American," but foreign automakers have also become part of the landscape with U.S. plants and community involvement. "I think that's mostly in the past now," Dennis Sullivan, a Miami University economics professor, said of buy-American appeals. "I tell my students that they can buy American cars made by Honda in Marysville, Ohio, and by Toyota in Georgetown, Ky." Sullivan, who owns a Pontiac Vibe from an Oxford dealership that's gone out of business, noted that even in the Reds' Great American Ball Park in Cincinnati, birthplace of the first professional franchise in the sport known as "the national pastime," the vehicle on display beyond the centerfield fence is a Toyota Tundra.

At a dealership in Santa Monica, Calif., an outdoor banner hung from two palm trees assuring that its business is "30 years long, still going strong." Steve Fischer, 56, a gold coin dealer from Los Angeles, was in the market for a new Corvette convertible. He was aware of GM's looming bankruptcy filing, but is confident the company will bounce back. "They're not going to disappear," he said. "GM is too big."

At Rose Chevrolet, Larkin is making plans to mark the dealership's 25th anniversary in June. There'll be a luncheon and recognition for longtime employees, and a celebration with customers. He's hoping to be able to offer big incentives to buy new Chevrolets; he expects the restructuring to improve long-term opportunity for the dealership. Jim Meador, of nearby Darrtown, is also staying optimistic about the company whose cars, trucks and vans he's been buying for three decades. "It is a part of America and has been for a long time," he said. "And hopefully, it will be for a long, long time to come."




For autoworkers, a new world
As men and women on the line make big sacrifices, a tough job that used to promise security and entry into the middle class becomes a lot less appealing. There was a time, not very long ago, when getting a job on the production line at a big automaker meant an instant ticket to the American dream, even for someone with little formal education. Not anymore. "The minute you signed the paper, you were instantly vaulted into the middle class," said Mike Smith, director of Wayne State University's Walter P. Reuther Library in Detroit, named for the founder of the United Auto Workers, the union that represents auto workers.

A shrinking paycheck. As the auto industry undergoes a sea change, the government has demanded that Chrysler and General Motors (GM, Fortune 500) bring their labor costs in line with foreign competitors operating non-union factories in the U.S. Today, an entry-level autoworker in a "non-core" position will make $14 an hour, compared to the $28-an-hour "base rate" others make, according to a summary of Chrysler's contract agreement. Workers' benefits have also taken a hit. "Workers coming in will have good benefits and a good wages but not necessarily what they were 20 or 30 years ago," said Smith.

Anemic health care. New UAW employees will pay a much larger portion of their health care expenses and once they retire, carmakers won't pay for it, according to information from the Center for Automotive Research. Fewer medical procedures and drugs will be covered and, under new agreements, Chrysler and GM retireees won't have dental and vision care covered.

Eroding unemployment benefits. As GM and Chrysler restructure, the UAW has agreed to give up salary protections that had cushioned laid off autoworkers. These protections had allowed factory workers to get their full pay, or close to it, even after they had been laid off. Workers could stay in the so-called "jobs bank," with pay, until they'd either returned to work or turned down job offers from the automaker. Under new deals with GM and Chrysler, factory workers will receive much less money when they're laid off. Senior workers will only be protected for up to one year, according to a summary of recent UAW contract changes.

Roots of the union. The UAW was started in the 1930's and, at first, was aimed at improving working conditions and curbing abuses on the factory floor, Smith said. Before an auto workers' union even existed, Ford Motor Co. (F, Fortune 500) unilaterally decided to begin paying its factory workers $5 a day starting in 1914, more than double the prevailing wage at the time, according to the book "Wheels for the World," by Douglas Brinkley. The reason Ford agreed to pay that high wage was that workers wouldn't stay on the lines very long otherwise. Every year, automakers had to hire and train many times the number of workers they actually needed to staff production lines, as workers quit or simply stopped coming to work. The work was mind-numbing at best, deadly at worst, especially at Ford which pioneered the use of assembly lines.

"In 1916, Highland Park might have a few deaths, a few hundred limbs lost," said Smith, talking about Ford Motor Co.'s first big, automated factory. Still, potential workers flocked to Detroit to work in Ford's plants looking for those big paychecks. Those who were accepted were subjected to strict background checks and agreed to have their homes routinely inspected by Ford staffers to be sure they were living decent, clean lives. Although Henry Ford bitterly resisted unionization when the time came, the $5 day offered a preview of what was to come. Ford wages eventually slipped back into line with the rest of the industry while workers demanded safer working conditions.

The UAW's heyday. As the economy improved and auto sales picked up following World War II, unions demanded a bigger share of the boom. "The kind of benefits we take for granted today, like health care and pensions, that stuff came up in the 1950's," said Smith. Automakers had another reason, besides union demands, to provide these benefits, said Nelson Lichtenstein, Center for the Study of Work, Labor, and Democracy at the University of California, Santa Barbara. "They wanted to generate loyalty and collaboration with the company," he said. Union leaders were actually pushing for government sponsored health care plans and better social security retirement benefits, he said, and saw corporate largesse as the less desirable alternative.

The downside of good benefits. As American automakers' market share shrank, those benefits became very costly. Ultimately, automakers ended up paying far more for retirees than for current workers.
GM, for instance, pays benefits to about 650,000 retirees and surviving family members while it has about 70,750 current employees, including both union and non-union workers. Since these carmakers have been producing cars in the United States much longer than their Japanese rivals, they also have an older workforce. Older workers generate higher health care costs, said Smith. It has been estimated that health care costs add about $1,500 to the cost of each car produced.

"The number of workers under the GM [union] contract today is 50,000 to 60,000 workers," he said. "That's way down from the 400,000 that it was in the 1970's." Today, Lichtenstein said, many Americans feel that autoworkers are only getting what they have coming to them: wages and benefits befitting those with blue-collar jobs. But in the past, autoworkers' good wages and benefits set the standard that Americans could rise above, with education and hard work, Lichtenstein said. As workers at automakers and suppliers are forced to accept less, it ultimately takes our standards down as a nation. "You want those parts workers to make more because that sets our de facto wage floor," he said. 




Geithner calls for closer economic ties with China
After years of acrimonious economic relations with China, the U.S. insists it wants to turn the page and develop closer ties with the world's third largest economy. U.S. Treasury Secretary Timothy Geithner, who arrived Sunday in Beijing for two days of talks with Chinese leaders, said he wanted to foster the same kind of working relationship with China that the United States has enjoyed for decades with European economic powers. On his first visit to China as treasury secretary, Geithner said the Obama administration was committed to forging a new relationship with China after trade disputes with the U.S. over the past decade.

Those fights have reflected record U.S. trade deficits with China. U.S. critics of China's economic policies say they have contributed to the loss of millions of American manufacturing jobs. But China is America's biggest creditor, holding $768 billion in Treasury securities. The U.S. also hopes China will play a positive role in resolving a tense dispute with North Korea over its nuclear weapons program. Ahead of his meetings, Geithner played down long-standing areas of disagreement such as China's undervalued currency.

"We would like to build with China the kind of relationship we built with the G-7 over the last several decades," Geithner told reporters traveling with him to Beijing. The Group of Seven includes the traditional economic powers — the U.S., Japan, Germany, Britain, France, Italy and Canada. Geithner said that the U.S. economy, mired in its longest recession since World War II, was beginning to stabilize. "We are seeing more durable stability in the economy and the financial system is in substantially better shape," Geithner said. But he said much more needed to be done in the U.S. and in other major economies to make a sustainable recovery possible.

Geithner could not escape the fallout from the recession even as he crossed the globe. He took a military aircraft with the latest in communications equipment that allowed him to be in frequent contact with Steven Rattner, head of the administration's auto task force, and Obama economic aide Lawrence Summers, who phoned with updates on the pivotal weekend negotiations with General Motors Corp. Geithner spent the trip in a private cabin at the back of the plane that was equipped with a desk and a bed. Most of the time he was either working the phones, huddled with aides or revising the speech he was to give Monday.

China, with 1.3 billion people, ranks as the third largest economy after the U.S. and Japan. Geithner said China's new status should be recognized with a bigger voice in such institutions as the International Monetary Fund. President Barack Obama and other leaders of the Group of 20 major industrial countries and emerging economic powers, which includes China, Brazil and India, pledged in April to work cooperatively on overhauling the IMF and other global institutions. The goal is to give them greater resources to deal with the current crisis and provide China and other emerging countries with more say in how the institutions are run.

"We are committed to reforming the international system and our interests are best served by giving China a stake in that process," Geithner told reporters. Geithner planned a speech Monday at Peking University assessing the global economy and U.S.-China relations. He spent two summers at the university as a college student learning Mandarin Chinese. At a briefing previewing the trip for Asian journalists, Geithner referenced those ties, saying he had taught Chinese while in college and had a "long personal interest" in the country. But he insisted that while he had worked very hard at his Chinese language studies, he was not proficient.

"I cannot actually speak Chinese with competence," he said. "I did study though for a long time, very hard. I practiced my characters very carefully." In addition to meeting with some of his former professors on Monday, Geithner was scheduled to visit an economist training program set up by his father when the elder Geithner was in charge of Ford Foundation programs in Asia. The Obama administration and China have come out with two massive economic stimulus plans while European countries have resisted Obama's calls to do more. They say they do not want to face the same deficit problems that the U.S. has.

China has turned its huge trade surpluses with the U.S. into the largest holdings of Treasury debt, but has raised concerns about America's commitment to deficit reform. Financial markets in recent weeks have sent long-term interest rates higher, a move that some attribute to worries about the U.S. budget deficits. The administration projects that the deficit for this year will hit $1.84 trillion, a record and four-times higher than the previous mark set last year. Geithner said that the administration had a credible program to reduce the deficits once the economy begins to recover. "No one is going to be more concerned about future deficits than we are," he told reporters.




Geithner Wields Little Leverage In China Talks
Timothy Geithner's first trip to China as treasury secretary comes at a vulnerable time for the Obama administration. Mired in a brutal recession, the United States needs Beijing to buy more American goods, allow its currency rise and make other moves to narrow an enormous trade gap. The U.S. also needs China's help to confront any military threat from North Korea. Yet Washington's leverage has waned just as China's power over the U.S. has grown. China is now America's biggest creditor. As of March, it held $768 billion of Treasury securities _ about 10 percent of publicly traded debt.

The U.S. needs China's money to finance U.S. budget deficits, which are soaring as Washington tries to end the recession and bolster the banking system. The administration estimates the budget deficit will hit $1.84 trillion this year. That's four times last year's deficit. Geithner, who left Saturday for meetings Monday and Tuesday with Chinese leaders, carried an ambitious U.S. goal of persuading the Chinese government to adopt policies that would transform its nation of savers into spenders. Geithner spent the long flight to Beijing working on a speech he planned to give at Peking University that was expected to lay out the administration's recovery program and its current progress. He was also expected to talk about the administration's determination to deal with the government's soaring expenditures once the U.S. economy is recovering.

The current U.S. administration, just like the Clinton and Bush administrations, is convinced that the key to a prosperous global economy rests heavily with China. The U.S. wants Beijing to rely more on domestic spending and less on its exports to power its own economy _ and the world's. That shift would uncork enormous buying power and help rebalance world trade. It could hasten an end to the global recession and narrow America's huge trade gap because the Chinese would buy more American products. China would benefit, too. "Beijing really wants Washington to be successful in bringing the U.S. economy out of this recession as fast as it can because it is critical to Beijing's own economic growth," said Kenneth Lieberthal, a China expert at the Brookings Institution.

For the Chinese, there is growing nervousness about the explosion of U.S. borrowing. Like any bank worried about its loans, the Chinese have fretted over America's budget gap. In March, Premier Wen Jiabao said, "We've lent a huge amount of money to the U.S. Of course, we are concerned about the safety of our assets." Those comments, plus remarks by the head of China's central bank about whether the world needs a new top reserve currency to replace the U.S. dollar, jolted financial markets. The administration insists it isn't worried that the mound of debt it's creating will jeopardize America's sterling AAA bond rating. But treasury officials said Geithner still intends to reassure the Chinese.

Geithner plans to stress that the administration sees the $1 trillion-plus deficits for this and next year as temporary. The deficits are necessary to fund a stimulus plan to help lift America out of recession and invigorate a wobbly U.S. banking system, officials say. Once those needs are met, the administration says it will make deficit reduction a priority. Security tensions in Asia have flared since North Korea's recent nuclear weapons tests and missile firings. Because China is viewed as a critical player in any successful resolution of a North Korea standoff, Geithner is expected to address the topic with Chinese leaders. In addition to talks with President Hu Jintao and other leaders, Geithner plans a speech Monday at Peking University, where he studied Mandarin Chinese during two summers when he was in college.

Geithner will hold an event at a Ford Foundation program in Beijing to support the study of economics in the U.S. The program was started by his father when the elder Geithner was based in Asia as a foundation official. That the chief U.S. economic policymaker is going hat-in-hand to the Chinese to explain the soaring deficits shows how much has changed since President George W. Bush's treasury secretary, Henry Paulson, met with the Chinese in 2006.
Paulson managed to arm-twist China into agreeing to a new round of economic talks aimed at prodding Beijing to move faster to let its currency, the yuan, rise in value against the dollar. Doing so would make U.S. exports cheaper for the Chinese to buy. But this time, Geithner is expected to adopt a softer tone even though some U.S. lawmakers want tough penalties on China and other countries deemed to manipulate currencies to gain trade advantages.

American manufacturers see the undervalued yuan as the major culprit in the trade deficit with the Chinese, which last year hit $266 billion, the highest recorded with one country. The Chinese agreed in 2005 to begin letting their currency rise against the dollar, and it has risen about 20 percent. But those gains stopped last summer. China had begun to fear that a stronger yuan was reducing its export sales, already hurt by the global downturn. Though the crisis has given Geithner a weak hand, treasury officials said he will seek to push this bargain: The U.S. will work to reduce its budget deficits once the crisis ends, urge Americans to save more and shrink the trade deficits. To replace diminished U.S. spending, the Chinese will be asked to step up spending and stop saving so much.

The administration says this can be done if Beijing improves pensions and health insurance so Chinese households don't feel pressured to save so much. Geithner is expected to point out that U.S. consumers already are rebuilding their retirement savings. The Chinese have pledged to redirect their economy to boost domestic growth. But many private economists question how serious China is about it. Analysts said they expect Geithner and the Chinese to pledge to do all it takes to end the recession. Both sides know any hint of discord between the world's largest and third-largest economies probably will unsettled financial markets.

That's one reason analysts aren't expecting the new administration to press hard on the currency issue. As a candidate, President Barack Obama pledged to crack down on countries seen as cheating on global trade rules and hurting U.S. companies and workers. Last month, though, the administration chose not to cite China as a currency manipulator. That disappointed U.S. manufacturers and labor unions. But Frank Vargo, vice president for international affairs at the National Association of Manufacturers, said he understood the change in tone. "They talked a tougher line during the campaign, but the world changed," Vargo said. "It is a much more delicate time now."




Treasuries 'Only Game in Town' as China Boosts Holdings While Dollar Falls
For all the hand-wringing over the dollar’s slide, the expanding U.S. deficit and the nation’s AAA credit rating, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show. The Treasury said bidding from foreigners was above average at its $101 billion of note auctions last week.

U.S. government securities have tumbled 4.3 percent so far this year, the worst performance since Merrill Lynch & Co. began tracking returns in 1978, as so-called bond vigilantes drove up yields to punish President Barack Obama for quadrupling the budget shortfall to $1.85 trillion. The purchases by foreigners show that, at least for now, there’s little chance of buyers abandoning the U.S. or threatening the dollar’s status as the world’s reserve currency. "The U.S. Treasury market is the widest, deepest, most actively traded market in the world," said Jeffrey Caughron, an associate partner in Oklahoma City at The Baker Group Ltd., which advises community banks investing $20 billion of assets. "There’s really no other game in town."

Concerns about international investors have grown as the U.S. Dollar Index weakened 8.6 percent since February and Obama and Fed Chairman Ben S. Bernanke committed $12.8 trillion to thaw frozen credit markets and snap the longest U.S. economic slump since the 1930s. About 51 percent of the $6.36 trillion in marketable Treasuries are held outside the U.S., up from 35 percent in 2000, according to data compiled by the government.

Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at the Treasury’s debt auctions, estimates that the U.S. may borrow a record $3.25 trillion this fiscal year ending Sept. 30, almost four times the $892 billion in 2008. "There’s an awful lot of Treasury issuance going on," said Michael Moran, the chief economist at Daiwa Securities America Inc. in New York. "In the back of everyone’s mind there’s a realization that although the short-term fiscal situation is difficult, so too is the long-term situation. People are looking down the road, seeing budget deficits remaining wide and they are thinking the U.S. possibly can lose its AAA rating."

Treasury Secretary Timothy Geithner, in an interview with Bloomberg Television May 21, said the administration’s goal is to cut the budget deficit to 3 percent of gross domestic product or smaller. That would be down from a projected 12.9 percent this year. Geithner arrived in Beijing yesterday with a pledge to control borrowing as he sought to reassure China its holdings of U.S. government debt are safe. "No one is going to be more concerned about future deficits than we are," he told reporters on the way to two days of meetings in China’s capital. Chinese Premier Wen Jiabao said in March that the country was "worried" about its investment and wanted assurances the value of its holdings would be protected.

"I hope Geithner’s visit can soothe our nerves," said Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. "The Chinese public is worried about the safety of its foreign- exchange reserves," Yu said in an e-mail. Seventeen of 23 Chinese economists surveyed in connection with Geithner’s visit said Treasuries are a "great risk" for the economy, according to a Chinese state media report yesterday. Still, the majority argued against quickly cutting them, the Beijing-based Global Times reported.

China increased its holdings by 3.2 percent, the most since November, buying Treasuries with its reserves to control the level of the yuan. The currency, which was pegged at about 8 to the dollar until July 2005, has traded between 6.8 and 6.9 since last June. It closed May 29 at 6.8291 to the dollar. "To some extent they have to buy Treasuries because they want to support their currency peg," said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC. The firm is also a primary dealer.

Bond investors have driven up the yield on the benchmark 10-year Treasury note, which helps set rates on everything from mortgages to corporate bonds to as high as 3.75 percent last week from the record low of 2.035 percent in December. A rally at the end of the week pushed the yield on the 3.125 percent note due in May 2019 down to 3.46 percent. Rising rates can be attributed to the "bond vigilantes," according to Edward Yardeni, who came up with the phrase in 1983 when he was chief economist at Prudential to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds.

The term covers "really anybody who owns a bond that gets disillusioned and starts to worry about the value of their investment, if the government runs huge structural deficits and there are growing concerns that may lead to higher inflation," said Yardeni, who is now head of Yardeni Research Inc. in Great Neck, New York. The government is selling record amounts of bonds to repair the damage from the collapse of the subprime mortgage market in 2007. Credit markets froze last year, Lehman Brothers Holdings Inc. collapsed in September and the world’s largest financial institutions reported $1.47 trillion of writedowns and losses, Bloomberg data show.

Bernanke’s efforts to reduce the premium consumers pay for credit compared with government borrowing costs succeeded this year as the gap between 30-year fixed mortgage rates and 10-year Treasuries narrowed to 1.77 percentage points last month from 3.05 percentage points in December. The gains are in jeopardy as the vigilantes drive up interest for everyone. The average rate on a typical 30-year fixed mortgage rose as high as 5.27 percent last week from 4.85 percent in April, according to North Palm Beach, Florida-based Bankrate.com. Credit cards average 10.4 percentage points more than one-month London interbank offered rate, up from 7.19 percentage points in October.

Fed officials see several possible explanations for the rise in yields. One is the outlook for the economy is improving and investors are selling government debt used as a hedge against mortgage securities. Another is the supply of Treasuries for sale exceeds the Fed’s so-called quantitative easing program. After cutting its target interest rate for overnight loans between banks to almost zero, the central bank pledged to buy as much as $300 billion of Treasuries and $1.25 trillion of bonds backed by mortgages to cap borrowing costs.

Bernanke hasn’t formally asked policy makers to consider whether to increase Treasury purchases and may not do so before the Federal Open Market Committee’s next scheduled meeting June 23-24. Officials are confident they can mop up excess cash without gaining additional tools from Congress. Concern over rising budget deficits is also showing up in the currency market. The dollar index, which tracks the greenback against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped 4.9 percent in May, the biggest drop since December. The euro strengthened 7 percent and the pound appreciated 9.5 percent.

Declines accelerated after Standard & Poor’s lowered its outlook on the U.K.’s AAA credit rating on May 21 to "negative" from "stable," raising concern it may do the same to the U.S. because of a rising debt load. S&P said last week the change in the U.K.’s outlook "is not a secret message to Washington." The U.S. deficit is 7.8 percent of gross domestic product, compared with what Chancellor of the Exchequer Alistair Darling estimates will be 12.4 percent for the U.K. Moody’s Investors Service said May 27 the U.S. rating is stable "even with a significant deterioration" in the debt burden.

"Treasuries are still a buy and you can’t explain that from the macro economic perspective alone," said Mickael Benhaim, who manages about $32 billion as head of global bonds at Pictet & Cie Banquiers in Geneva. His fund began increasing its position in Treasuries last week. "I see U.S. Treasuries as attractive because we are still in the middle of quantitative easing and that will continue to cap yields." Demand for Treasuries was evident last week at the government’s sales of two-, five- and seven-year notes.

Indirect bidders, a group that includes foreign central banks, purchased 54.4 percent of the $40 billion in two-year notes sold May 26, the biggest percentage since November 2006, according to the Treasury. They bought 44.2 percent of the $35 billion five-year notes auctioned May 27, compared with an average of 32.4 percent at the previous 10 sales. The scooped up 33 percent of the $26 billion of seven-year notes offered on May 28, matching the average of the other three sales this year.

"The idea that we have lost sponsorship at the auctions seems farfetched," said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut at RBS Securities Inc., another primary dealer.
The rate on the 10-year note is still below the average of 6.49 percent over the past 25 years, and will likely stay below 4 percent through at least the third quarter of next year, according to the median estimate of 50 economists surveyed by Bloomberg. The Dollar Index is 13 percent above its record low level of 71.314 reached in July 2008. The greenback will appreciate against the euro and yen through the end of 2010, a separate survey showed.

The dollar is supported by investors betting the U.S. economy will strengthen as America recovers first from the global economic recession. Confidence among U.S. consumers jumped in May by the most in six years, according to the Conference Board’s sentiment index. Manufacturing in the Philadelphia region contracted in May at the slowest pace in eight months as shipments and employment improved, the Philadelphia Fed reported. Those who expect the recession to continue say the currency should benefit as the haven from turmoil in world markets. "Investors who are holding Treasuries are fully aware they are facing risks of yields rising and the dollar weakening but they have few other choices," Stephen Lewis, the chief economist at Monument Securities Ltd., a London-based brokerage.

At the end of 2008 the dollar accounted for 64 percent of all central bank reserves, up from 62.8 percent in June 2008, according to the International Monetary Fund in Washington. The U.S. has the "enormous privilege of controlling the world’s most important reserve currency," allowing it "to borrow almost without limit," Moritz Kraemer, S&P’s head of sovereign ratings for Europe, Middle East and Africa, told reporters at a media briefing in Johannesburg on May 27. There is no "serious contender" to threaten the dollar’s status as a global reserve currency, he said.




US bond sell-off putting pressure on other parts of the economy
by Mohamed El-Erian, Pimco CEO.

The US bond market is trying to tell us something and we should all be listening. Over the last few weeks, and especially last week, we have witnessed dramatic moves in a market that is central to many financial and economic activities around the world. On Wednesday alone, the yield on the 10-year bond surged by an unusual 19 basis points (to more than 3.7pc), bringing the one-month move to almost 100 basis points.

All this took place despite dramatic policy actions to keep interest rates low, not only by anchoring the overnight rate near 0pc but also through direct purchases of securities by the Federal Reserve. So, what is going on and why should investors and policymakers care? The answer is simple yet consequential: the bond market's gyrations are significant in terms of the causes and implications – the why and what now. On the why, four factors are currently in play:

First, the market is coming to grips with the US Treasury's bond issuance plan which involves a massive jump on account of the country's stimulus package, the funding of multiple emergency facilities, and compensating for the recession's impact on tax collections. The amounts involved are huge, whether you use absolute, relative or historical metrics. As an illustration, just look at the error term we attach to our 12-month issuance projection: +/- $500bn (£309bn) around a central forecast of $2 trillion. The error term is bigger than the largest 12-month issuance in history.

Second, the market is internalising the Treasury's desire to reverse a trend that has seen the average life of its outstanding debt fall to just 48 months. Such a low level has not been recorded since the beginning of the 1980s. It is not a good position to be in on the eve of an era of major debt issuance. If the low average debt maturity is not addressed, look for an increase in the government's vulnerability to re-financing risks.

Third, there is concern about a potential deterioration in inflationary expectations notwithstanding the fact that the country is still mired in recession. This has technical, political and economic dimensions. Markets have started to recognise that it will not be easy for any future government to drain the enormous amount of emergency liquidity that is being pumped into the system. History is full of examples where, facing various uncertainties and resistance, governments overstay their presence in the emergency mode. Technically, it is very difficult to determine with confidence whether the economy is ready for a withdrawal of emergency support.

As a result, once committed to the task of stabilisation, governments can end up doing too much rather than too little. Then there is the political angle. It is difficult to say "no more" to sectors that benefit from subsidised funds. Markets are also starting to realise that the speed limit for sustainable US economic growth is coming down as credit contracts, saving behaviour changes, and regulation increases. Put all this together and you come to a simple conclusion: inflationary pressures will take hold well before what would be expected based on recent historical experience based on "output gap" analyses.

Finally, S&P's announcement earlier this month that put the UK's AAA rating on negative outlook is a reminder that the sovereign risk of the US could eventually also be in play. And this is more than a US issue. It is an uncomfortable possibility for all those large holders of US debt around the world that had been attracted by the US dollar's role as the world's reserve currency, and by the depth and predictability of US financial markets The Treasury bond sell-off is now putting pressures on other markets in the economy.

We should worry most about housing where borrowing rates are rising notwithstanding the Federal Reserve purchase programme. Indeed, according to data released on Thursday, already 12pc of US households are facing difficulties meeting their mortgage payments. Housing is still central to the stabilisation and eventual recovery of the US and global economies. Any further decline in house prices will erode the collateral many Americans borrowed against, dampen their already-fragile consumption appetite, and increase the headwinds facing a banking system that is finally regaining its footing. The US can ill-afford a further sell-off in US bonds at this stage in the economy's rehabilitation process. Yet there is no easy way for policymakers to address this challenge.

As an illustration, consider the dilemma facing the Federal Reserve. Should the central bank step up its purchases of both Treasuries and mortgages in order to stabilise interest rates, but at the risk of adding to the distortions in these markets; or should it refrain from intervening further and risk a return of widespread economic and financial disruptions? I suspect that, when push comes to shove, policymakers will opt for greater purchases of mortgages and Treasuries – not because they really want to, but because the alternative is viewed as worse.

Believe it or not, there is a silver lining in all this. As they contemplate this difficult situation, they can draw some comfort from one thing: with the anchoring of the short-term policy rate near 0pc, the steepening of the yield curve is generating significant profits for banks. Remember, banking is fundamentally about mobilising cheap deposits (at the short end of the curve) and, supported by deposit insurance and central bank liquidity windows, lending at the longer-end of the yield curve. Come to think of it, the smartest trade for investors today is to find a bank that, unencumbered by legacy issues, is able to take advantage of an enormously attractive environment for old-style banking.




Congress's Afterthought, Wall Street's Trillion Dollars
On the day before Thanksgiving in 1991, the U.S. Senate voted to vastly expand the emergency powers of the Federal Reserve. Almost no one noticed. The critical language was contained in a single, somewhat inscrutable sentence, and the only public explanation was offered during a final debate that began with a reminder that senators had airplanes to catch. Yet, in removing a long-standing prohibition on loans that supported financial speculation, the provision effectively allowed the Fed for the first time to lend money to Wall Street during a crisis. That authority, which sat unused for more than 16 years, now provides the legal basis for the Fed's unprecedented efforts to rescue the financial system.

Since March 2008, the central bank's board of governors has invoked its emergency powers at least 19 times: to contain the wreckage of Bear Stearns and ease the fall of American International Group, to preserve Goldman Sachs and Morgan Stanley, to limit losses at Bank of America and Citigroup, to lend more than $1 trillion. The repeated use of the once-dusty law has surprised and alarmed a wide range of people, including economists and members of Congress. It has even raised worries among presidents of the regional banks that make up the Federal Reserve system. Many critics are concerned that an institution not accountable to voters is risking vast amounts of public money and choosing which companies get help. Others are concerned that the Fed's new role will interfere with its basic responsibility for regulating economic growth.

There is also a question about the roots of the crisis: Did investment banks take greater risks in the past two decades because they knew the Fed could rescue them? The 1991 legislation, authored by Sen. Christopher J. Dodd (D-Conn.), was requested by Goldman Sachs and other Wall Street firms in the wake of the 1987 market crisis, and it would save some of them a generation later. Fed Chairman Ben S. Bernanke and other leaders of the central bank have argued that the emergency authority has allowed it to rescue the financial system and that without it, the economy would be in far worse shape. And they argue that they are using the power as Congress intended.

"This provision was designed as a last resort to make sure credit flows when times are tough and credit isn't being extended," said Scott Alvarez, the Fed's general counsel. "That's exactly what it's being used for today." Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said that the actions taken by the Fed have been necessary and important but that those actions should have been taken by an agency accountable to voters. He said he was not aware of the Fed's emergency power until September, and he favored removing much of that authority from the Fed once the crisis has passed. "This is a democracy, and there is a problem with too much power going to an entity that is not subject to democratic powers," Frank said.

The Fed, by law and tradition, is insulated from political pressure. Members of its Board of Governors are appointed to 14-year terms, allowing them to take painful, unpopular actions to help the economy. That independence has become a valuable political tool for the Bush and Obama administrations, which have worked with the Fed to create vast rescue programs outside the reach of Congress. The most recent example is the Fed's agreement to spur up to $1 trillion in new lending by funding the purchase of securitized loans.

"By necessity, the Fed was the institution everybody looked to because they had the balance sheet and the legal authority to act," said Phillip L. Swagel, an assistant Treasury secretary in the George W. Bush administration who is to become a professor at Georgetown University's business school. But the government's reliance on the Fed has roused critics. "There's no accountability," said Walker F. Todd, a former economist at the Federal Reserve Bank of Cleveland whose writings raised some of the earliest questions about the 1991 law. "How much power do you want to concentrate in a few people who are not directly accountable to the political process?"

Those criticisms have been heightened by the Fed's refusal to disclose which firms have benefited from many of the emergency programs, such as the names of the companies that have used the Fed's "commercial paper funding facility" to issue short-term debt. Fed officials argue that disclosure could spark runs on those firms by alerting investors to the depth of their problems. Legislation pending before Congress would require the Fed to disclose more information. Other bills would impose additional oversight.

The mounting political pressure has alarmed some experts, who worry that the autonomy necessary to make monetary policy will be forever damaged. "What the Fed has done is almost irreparable," said Allan H. Meltzer, a Carnegie Mellon University economist who is a leading historian of the Fed. "It's going to be hard to get them to unlearn it. Now Congress will look to the Fed every time a constituent has a hard time getting a loan."

The Fed has always served as a lender of last resort for commercial banks. During the Depression, it was authorized by Congress to lend on an emergency basis to other companies that couldn't get money anywhere else. From 1932 to 1936, it made only 123 loans. A broader program launched in 1936 was more successful, and the Fed would make thousands of loans to businesses before Congress terminated the program in 1958. The original authority survived, but by then, a new generation of Fed officials had lost the will to lend.

Intermittently, other parts of the government would press the Fed to dust off its powers -- to save the Penn Central Railroad in 1970, to rescue New York City in 1975, to rescue property and casualty insurers in the 1980s -- but in each case, the Fed demurred out of concern for its independence. Ernest T. Patrikis, former general counsel at the Federal Reserve Bank of New York, recalled that in some cases the Fed went so far as to conduct legal research into its options, but never further than that. "We always knew about it, but we always knew it would only be used in extreme cases," said Patrikis, now a partner at the law firm White & Case.

The wind shifted in the late 1980s. During the stock market crash of October 1987, some commercial banks had refused to lend money to investment banks. A few years later, the collapse of Drexel Burnham Lambert, then the nation's fifth-largest investment bank, renewed concerns about the absence of a safety net beneath Wall Street. Rodgin Cohen, a partner at Sullivan & Cromwell, suggested to several of his clients the idea of modifying the 1932 law to allow lending to investment banks, according to people involved in the discussions. Cohen is a legendary figure on Wall Street, building a career as perhaps the preeminent legal adviser on banking mergers, in part through his command of the minutiae of federal regulations.

Dodd, at the time chairman of the securities subcommittee of the Senate Banking, Housing and Urban Affairs Committee, agreed to insert the language into a bill whose primary purpose was to reform the Federal Deposit Insurance Corp., which guarantees commercial bank deposits. Dodd declined to comment for this story, but at the time, he said the legislation gave the Fed "greater flexibility to respond in instances in which the overall financial system threatens to collapse." During a meeting to discuss the bill's final language, a representative of the Federal Reserve was asked to comment.

Donald L. Kohn, then the director of the Fed's Division of Monetary Affairs, said the agency had no objections, according to people in attendance that day. The Fed has extensive regulatory authority over commercial banks, to keep them from needing its safety net. But after Dodd's language passed into law, the Fed did not seek new regulatory authority over investment banks, nor did Congress move to provide new authority. Instead, over the next two decades, federal officials would emphasize that investment banks had an incentive to be cautious because they were operating without a safety net.

Sixteen years later, Kohn, now the Fed's vice chairman, appeared on March 4, 2008, before the Senate Banking Committee. Dodd, now the chairman, asked whether the Fed was considering using its emergency authority to help restore the flow of money through the capital markets. Kohn responded that he "would be very cautious" about lending Fed money to institutions other than banks or, as he put it, "opening that window more generally."

But by then, the Fed already was on the verge of invoking the emergency lending authority for the first time since the 1930s. Fed lawyers had started to dust off past research on the emergency-powers law during the fall of 2007, shortly after the earliest indications that the financial system was breaking down. Initially, the goal was to understand how the power might be used in a crisis, without any specific company or lending program in mind. By March, however, the Fed was focused on a particular program. Wall Street firms once again were struggling to borrow money. Lenders were charging much higher interest rates if borrowers pledged mortgage-backed securities rather than Treasurys.

On March 11, the Fed's Board of Governors invoked the emergency-powers law for the first time since the Great Depression, allowing firms to swap their securities for Treasurys, preserving their ability to raise money without requiring them to sell the securities at large losses. The Fed's biggest concern: Invoking a law that could be used only in a financial crisis might deepen the fear in the markets. The answer: The Fed, in its press release announcing the facility on March 11, didn't mention where the legal authority came from.

Three days later, on a bright Friday morning, the Fed governors and staff gathered again in a giant, formal conference room built during the Great Depression. They were bleary-eyed, having stayed up all night grappling with the deterioration of the investment bank Bear Stearns. The markets were soon to open. Moments later, the four governors present voted unanimously to support the sale of Bear Stearns to J.P. Morgan Chase, breaking the fall of an investment bank for the first time.




FDIC ups cease-and-desist orders in Georgia
Seven Georgia banks were issued the Federal Deposit Insurance Corp.’s strongest regulatory rebuke last month, according to an announcement Friday by the banking industry insurer.
The banks, concentrated primarily in metro Atlanta, entered into cease-and-desist orders with the FDIC, an agreement that stipulates how the bank must overhaul its business, or face failure. The seven orders are the most issued in a single month by the FDIC in Georgia since the start of the banking crisis last year, indicating the regulator is ramping up the long-awaited consolidation of the industry through increased oversight and outright bank seizures.

Each of the banks are state chartered, through the Georgia Department of Banking & Finance, which also entered into the agreements. The orders were issued throughout April, according to the FDIC’s release, and made public early Friday. Georgia’s 11 bank failures to date have predominantly been state-chartered institutions that were swamped by bad real estate lending bets when home sales soured, beginning in 2007. Four banks that received the orders were subsidiaries of Macon-based Security Bank Corp., one of the state’s five largest banks with $2.7 billion in total assets: Woodstock-based Security Bank of North Metro, Suwanee-based Security Bank of Gwinnett County, Macon-based Security Bank of Bibb County and Gray-based Security Bank of Jones County.

The parent company had previously announced five of its six subsidiaries are subject to the orders, noting its subsidiaries were described as undercapitalized by regulators, and would need to raise additional capital and overhaul the banks’ business models to comply with the agreements. The only Security Bank that is subject to a cease and desist not mentioned in the FDIC’s release is Security Bank of Houston County.

The three other banks subject to the agreements are small community banks, including: Jonesboro-based Community Capital Bank, Ellijay-based Appalachian Community Bank and Georgia Heritage Bank in Dallas. The provisions for each bank are generally similar, requiring an overhaul of management practices, raising additional capital and curbing “unsafe and unsound” business practices. The banks, for example, are barred from extending credit to any borrower that “would be detrimental to the best interests of the bank,” and must reduce the available credit for certain undisclosed borrowers.

Each of the banks, like many of their state counterparts, reported rising real estate loan problems throughout the first quarter of 2009. Georgia Heritage reported 23.9 percent of its $55 million loan portfolio is in some stage of delinquency or default, well above the state average of 7.4 percent. Community Capital Bank reported a problem loan ratio of 18.8 percent, and Appalachian Community reported a problem loan ratio of 13.9 percent.




FDIC orders changes at five California banks
The Federal Deposit Insurance Corp. said Friday that it and state regulators ordered five more small California banks to clean up their acts in April, part of a campaign of intensified scrutiny amid the bad economy. The cease-and-desist orders, requiring tighter lending policies, stronger management and in some cases new capital, illustrated the recession's outsized grip on California despite its highly diverse economy. The state accounted for 21% of the 24 such orders issued nationally last month. The affected banks were remarkably diverse, including commercial real estate lenders in Orange and Ventura counties, one of the Korean American banks crowding Los Angeles' mid-Wilshire district and a San Francisco "green" lending specialist.

Officials at three of the five banks said they were well along in addressing the concerns of the California Department of Financial Services and the FDIC, which regulates state-chartered banks that are not members of the Federal Reserve System. Ventura County's Affinity Bank, which also has branches in San Francisco, Los Angeles and Orange County, has been beset by problems with development and construction loans and emerging troubles with commercial mortgages. Managers of the privately held bank realized four years ago that they were concentrated too heavily in commercial real estate, said David Stepp, senior vice president of marketing.

Affinity, which currently has $1.2 billion in assets, took a stab at residential mortgage lending, decided that business was overheated and recently switched its diversification efforts to financing healthcare companies. "I just wish that the world hadn't collapsed as quickly as it has because then we'd be further along the path," Stepp said. To raise capital, Affinity is considering turning to private investors and selling assets, including an Irvine branch. Plaza Bank of Irvine, with $96 million in assets, was also on the list, with a demand from regulators that it strengthen management and raise $10 million in new capital.

Plaza, which has had problems with small-business loans, agreed in October to sell $15 million in stock to a group headed by Irvine investment banker Ed Carpenter. The restructuring included bringing in three new directors and two senior managers. The plan received final approval this month from regulators, said Plaza Chairman Robert J. Feldhake, and the new capital investment, now raised to $18 million, is expected to be made next week. "Once that is in the door, this bank will never have been as strong," Feldhake said. By contrast, New Resource Bank of San Francisco, which says its goal is "helping grow green and sustainable businesses through knowledgeable solutions," had a solid capital base.

However, the FDIC ordered the bank, with $166 million in assets, to improve management, overhaul its lending policies, especially regarding construction, shed badly performing loans and tighten procedures for lending to bank insiders. New Resource founder Peter Liu said the bank had named a new chief executive but faced challenges in working its way through problem construction loans made before the economy went south. Those include funding for energy-efficient condominiums aimed at entry-level homeowners in the East San Francisco Bay area. The targeted consumers are not currently buying, Liu said, and the builders are renting out the condos.

Officials at the other banks could not be reached. Regulators criticized Mirae Bank of Koreatown, which has $481 million in assets, for having too many poor loans and too little capital and reserves for losses. The bank was ordered to raise $30 million in new capital within 60 days and to reduce deposits brought in by brokers. Independence Bank of Newport Beach, with $387 million in assets, was ordered to retain top managers to upgrade a battered loan portfolio and to raise an unspecified amount of new capital within 120 days.




Class of '09: You're Screwed!
Last weekend, we journeyed to Boston to attend a college graduation. Thousands of callow scholars were on display. Each was handed his papers...and then marched out of the hockey stadium. To the tune of 'Pomp & Circumstance,' wearing a long, red robe, he entered the outside world solemnly...like a patsy joining a poker game. So far, not a single major university has asked us to make the commencement address. Nor a minor college. Not even a school of cosmetology or taxidermy. But here at the Daily Reckoning headquarters in London, protected by a broad ocean and a narrow reading of the First Amendment, we will give them - and UK graduates too - advice no one asked for.

"Plastics," was the advice given to college graduates in Mike Nichols' '67 film. But that was when there was still hope for America's manufacturing sector. Even then, it was too late. The percentage of GDP from the manufacturing sector fell for the next four decades, from over 20% in the last '60s to barely 12% last year. Better advice would have been 'derivatives.' They stank just as bad, but they were much more profitable. While only 8% of GDP, finance accounted for 40% of corporate profits in 2007. And derivatives grew from nothing to a face value of 16 times the GDP of the entire planet.

But your elders are always giving you bum advice. "You cannot decline the burdens of empire and still expect to share its honors," said Pericles to the class of 430BC. He lived during a time not unlike your parents' era in the USA - when Athens was on top of the world. But vanity got the better of him. He launched an attack on Sparta that backfired badly. He soon died of plague and Athens was not only ruined, but enslaved. Athens' 'golden age' turned to lead. Young Athenians should have shrugged off the burden rather than accept it. You should do the same.

When you were born 20-some years ago, the nation's total debt per person was less than $90,000 - adjusted to '09 dollars, of course. While that was a lot of money, it was nothing compared to what was coming. Now it's $186,717 per person - more than twice as much, in real terms. Fortunately, private debt is not inheritable. But it comes to you as a lien against property. Instead of paying off their mortgages and leaving you a house, free and clear, the baby boomer generation spent the 'equity' in their houses even faster than they got it. House prices rose. But mortgage debt rose faster. While your grandparents owned 80% of their houses, by 2007, the typical homeowner only really owned 4 rooms of an 8-room house.

And then, when house prices fell, so did his remaining equity...to the point where one out of six homeowners in America is now underwater. You could still eventually inherit a house, but you may have to scrape the barnacles off the front porch. But that's not even the half of it. While your parents had control of the US government they allowed themselves a little larceny. Add the unfunded retirement and healthcare benefits they voted for themselves to the official national debt, and together they are scheduled to cost your generation 4 times the total annual output of the US. This is over and above the private debt they accumulated.

Some of this debt can be carried. Some will have to paid down. But as it stands, as much as $77 trillion of post-'09 earnings must be stolen from the future in order to pay for the liquor your parents drank...the bombs they dropped on god-forsaken foreigners...and the interest on their debts. So, forget about saving for a European vacation or a house of your own. Even if every penny of your savings - and every other American's savings - are put to the task you will still be paying for your parents' expenses all your life.

But wait, there's more! The burden is getting heavier. Federal budget projections show an additional $7 trillion in deficits over the next 10 years. Described as the cost of fighting recession, the present generation buries its own mistakes under cash that the next generation hasn't even earned yet. Today's bankers, businessmen and speculators are being bankrolled by you - tomorrow's bankers, businessmen and speculators. Today's homeowners get a helping hand...from whom? Tomorrow's homeowners - you. Today's employees get a boost too. Same story. Where do you think the money came from to pay Wall Street bonuses this year? How do you think GM stays in business...and Fannie Mae...and AIG... Who pays those salaries? Who pays to keep troops all over the world and keep old people supplied with new drugs? Who pays for hundreds of billions' worth of 'shovel ready' boondoggles? You will. At least, that's the plan.

The luck of one generation is the curse of the next. Like Pericles, your parents inherited a dollar; they leave you a peso. They took over the strongest, richest, most competitive nation in the world. And like Pericles they minded everyone's business but their own. Now, not only does the US owe money all over town, its government puts out trillions more in IOUs every year - each one with your name on it. You're not even out in the real world yet, and you're getting the bill for 50 cents of every dollar the feds spend - almost none of it earmarked for you. But that is the thing about the real world your teachers probably forgot to tell you about. It is more unreal and fantastical than anything you studied.

Here's what's real: You've been dealt a bad hand. From the bottom of the deck...your parents have slipped you some nasty cards. Our advice? Fold 'em. Get up from the table before they clean you out.




Why the wheels fell off Germany's economic model
Angela Merkel's desperate efforts to safeguard thousands of German jobs at the embattled carmaker Opel last week was a potent symbol of the sad truth laid bare by the credit crunch: what was meant to be the mighty strength of Europe's largest economy - its productive, high-quality, export-friendly manufacturing sector - has left it more, not less, vulnerable to the worldwide recession than the rapacious Anglo-Saxon countries.

It was never meant to be like this. A reunified Germany, at the heart of an expanding European Union and single currency, was supposed to offer a decent, stronger alternative to the "casino capitalism" that Germans have long thought of as represented by the US model that they love to hate. When the credit crunch first broke in the autumn of 2007, bringing banks such as Northern Rock down almost immediately, the Germans allowed themselves a quiet chuckle of schadenfreude along the lines of "we told you so".

But that was before the financial crisis swept through Germany's banking system, which turned out to have had its tentacles deep into the sub-prime mortgage market in the United States. And it was before the collapse in world trade that Germany had previously depended on to drive its economy. Britain's economy is in a mess, but it is not nearly as bad as Germany's. The UK economy shrank by 1.9% in the first quarter of this year, the worst performance since the early 1980s. But figures this month showed Germany, the largest economy in Europe, contracted by an incredible 3.8% in that three-month period, easily its worst post-war drop and one that has shocked Germans. The government expects the economy to shrink by 6% this year - worse even than Britain's expected decline of 4%.

"There is a worldwide financial and economic crisis and Germany has been very badly hit because of its long-standing policy of wanting to become the world's number one exporter," explains Berlin's deputy mayor and economy minister, Harald Wolf. "There has been a dramatic drop in export orders for industry and that will have appalling consequences for jobs. Our banking system is also full of toxic assets so it is far too soon to talk of any recovery."

Germany is a bigger manufacturer of goods than Britain. The sector makes up a quarter of its economy whereas in Britain or the US the figure is more like 15%. This is because German firms have worked hard to remain competitive in world markets in recent years and to make high-quality products that people want to buy. Exports accounted for 60% of German growth in recent years. The flipside is that it is has got slammed now that other countries don't want to buy from Germany any more. Exports are expected to drop by a fifth this year.

German unemployment, which fell dramatically in the couple of years prior to the recession, is on the rise again. It is currently about 3.5 million, or 8.2%, and experts fear it could rise back to the level of five million that it fell from in recent years. Unemployment in Britain, of course, started rising at the beginning of 2008 but, at 7.1%, it is still lower than in Germany. Many employees have been put on short-time working, with their pay being topped up by the government, but analysts warn that this is masking a rise in joblessness. "Under German labour law, firms cannot just sack workers and instead they simply send people home, on sharply reduced wages to twiddle their thumbs until they are re-hired," says Nick Parsons, of NAB Capital.

Jobs are rapidly being cut all across German industry, but particularly in the state of Baden-Württemberg, where carmakers such as Daimler-Benz are situated, and in Bavaria, which is home to BMW and Audi. It is not just the carmakers themselves that have suffered a massive drop in orders but also all the makers of parts that supply them. Germany's machine-tool makers have also suffered greatly due to the collapse in world trade. Germany has become the world's biggest exporter and sold a lot of machines to China, which the Chinese were using to manufacture goods to sell back to the west.

Many of these machine makers make up Germany's Mittelstand of small and medium-sized companies. They have not only suffered from a collapse in orders; they are heavily reliant on banks for finance, so have struggled to raise credit to tide them through the recession. Other businesses are in trouble too. Arcandor owns one of Germany's big department store groups, Karstadt, as well as the catalogue retailer Quelle and the Thomas Cook travel company. It, too, is struggling to raise credit and analysts fear it may go under. But critics say that, like Woolworths in Britain, the firm has long been badly managed and the recession has been the last straw. The authorities certainly seem unwilling to use any state funds to bail out the company, even though it employs 56,000 people.

Berlin's mayor, Klaus Wowereit, said last week: "We are now seeing that several large firms, which already had structural problems before the financial crisis, are trying to solve them with the help of the taxpayer." But Opel, General Motors' German subsidiary, is more likely to get some federal funding to help it to break away from its struggling US parent. The government was locked in talks with potential buyers last week, although critics argue that Germany's - and Europe's - car industry has long suffered from over-capacity, so throwing public money at Opel is a waste of time.

Meanwhile, German banks are struggling under an estimated £800bn of toxic waste relating to the sub-prime mortgage crisis. "In fact, the German banks contributed actively to manufacturing these problems. They made a lot of bad bets," says Dennis Snower, head of the respected Institute for the World Economy (IfW) in Kiel, northern Germany. Snower is very critical of the plans of the government of the chancellor, Angela Merkel, to encourage the banks to create their own "bad bank" in which to park their toxic assets. He thinks the plan is too complicated, lacks transparency and will not solve the problems: "It's a terrible proposal that will create off-balance sheet bad banks and not do anything."

Harald Wolf agrees. He says the government's reluctance to use any public money to combat the problem is a mistake: "This means the problem could drag on for 20 years and we could have zombie banks like the Japanese did." All of which means Germany could struggle to return to export-led growth if otherwise decent firms go under during the recession for want of credit to tide them through the slump and allow them to invest in new products.

Germany's long-running problem is that it lacks domestic demand to take the place of its lost export demand. Consumer spending has barely grown at all in real terms in the past decade, whereas exports rose 80% over the same period. The government's big increase in VAT last year hardly encouraged people to spend more. This explains why it, in common with other "surplus" countries such as Japan and China, has slumped so deeply and suddenly into recession. It relied on other countries, such as Britain and the US, to run trade deficits as the flipside of its huge trade surplus. If all countries were like Germany and sold more goods than they bought, the world economy could not function.

"We must end this export policy, this beggar-thy-neighbour policy. We must have a plan to boost domestic demand in case the levels of export demand we have seen do not return. Otherwise we could face a long period of stagnation in which the German economy becomes a desert," says Wolf. So what makes the Germans reluctant consumers? Richard Meng, spokesman for the Berlin state government, says it goes back to long-standing fears about losing their jobs that German people have had since the second world war: "The German reflex is to save. Germans tend to be pessimistic rather than optimistic, in contrast with the Americans who are hopeful and more confident."

He acknowledges, though, that the car scrappage scheme introduced this year by the federal government - and recently copied in Britain - has succeeded in boosting car sales, but he thinks this will only be temporary: "Germans love their cars, especially new ones, but what will happen in six months?" He adds that most Germans are still not yet affected by the recession, because job losses have not yet been widespread. But he expects unemployment to surge later this year. "The government is hoping to hang on until the election [in September], but after that there is going to be trouble. People are not yet afraid, but it will happen in a few months."

He also thinks that domestic demand could be boosted by increased spending on infrastructure - something that is part of the government's economic stimulus package introduced earlier this year. Amazing though it may sound to the average British person, Meng says much of Germany's infrastructure, such as road and railway bridges, is crumbling and needs replacing. A key difference with the economic booms in the US and Britain over the past decade, and one which may explain why consumer spending has been only modest, is that house prices in Germany did not boom at all. In fact they have not really risen for several decades.

The Germans like to think this is because they rent and do not speculate in property. While there may be some truth in that - only 40% own their own home, compared with 70% in the UK - the reality is more prosaic. The population has been static or falling because of a very low birthrate. This simply means there is very little upward pressure on demand for housing, be it rented or bought. Snower from the IfW also thinks that not spending money is deep-rooted in the German psyche. But he says this is not the only problem. Labour market reforms have been half-hearted at best and have not done as much as in countries such as Denmark, Sweden and Britain to encourage people to find work and support them to retrain to do so. As a result, the levels of "structural" unemployment have long been higher in Germany than in many other countries, which also feeds back into stagnant consumer spending.

"In Germany, if people lose their jobs they know they are in for a period of long unemployment," he says. "If you shift to a system where people get support once you find a job and re-skill, then people can be confident they will be able to remain employed and thus they will spend more money." So what for the future? In the short-term domestic demand is certainly not about to jump, with rising unemployment continuing to hit consumer confidence. So Germany, for now at least, must sit and wait for a recovery in export demand. Snower is not optimistic that the global economy will rebound quickly, given that the problems in the world's financial system are so deep-rooted. Germany's leading economic think-tanks recently jointly forecast that economic growth would only average 0.9% a year between now and 2013, down from the already-poor 1.5% annual average since 1995.

Meng also thinks that it will be two or three years before things really improve, but then he is confident Germany will be back to its old self as "export world champion". He says that domestic policies of the past 10 years, which have given a huge boost to clean technology, mean Germany is very well placed as the world increases its efforts to reduce carbon emissions. Indeed, long-term it looks as if Germany is further down the road to becoming a zero-carbon economy than any other. It would help, though, if the Germans would spend a bit more and do their bit by buying some stuff from the rest of us.




Opel Sale May Deepen Russian Ties to Germany, Trump East Europe's Concerns
German Chancellor Angela Merkel’s blessing of a Russian-backed bid for General Motors Corp.’s Opel unit augurs deeper ties between Moscow and Berlin that may trump concerns of ex-Soviet nations squeezed between the two capitals. Merkel’s government earlier today picked a partnership led by Magna International Inc., a Canadian auto-parts supplier, with Russia’s biggest bank, OAO Sberbank, and Russian carmaker OAO GAZ as the buyer for Opel, the European division of GM, which will file for bankruptcy next week.

"This will fuel suspicion in east Europe over Germany and Russia and why the biggest economy in Europe has tied up with strange Russian tycoons to please the Kremlin," said Fredrik Erixon, director of the Brussels-based European Centre for International Political Economy. "Germany is playing off the Poles and the Baltic states against Russia." Germany is Russia’s biggest trade partner, a relationship underpinned by rising German gas and oil imports. Annual German trade with Russia increased five-fold to 68.2 billion euros ($96.2 billion) last year since 2000. With 6,000 German companies operating in Russia, business leaders in Berlin view the global recession as a speed-bump, with manufacturers set to win contracts as Russia diversifies from energy and rebuilds transport and health care.

"Economic ties between Germany and Russia are very important," Merkel said at a joint news conference with Russian President Dmitry Medvedev in Berlin on March 31. "There’s a lot of potential here." Under Magna’s initial proposal, the Canadian company would get a 20 percent stake in GM’s Opel and Vauxhall divisions in Europe. Sberbank would own 35 percent, matching the remaining holding of Detroit-based GM. Magna Co-Chief Executive Officer Siegfried Wolf has described GAZ, based in Nizhny Novgorod, Russia, as its industrial partner.

Underscoring the political and commercial mix, Merkel spoke by phone to Russian Prime Minister Vladimir Putin on May 26 about "trade and economic cooperation." That followed a May 23 conversation dedicated to Opel, said her spokesman, Ulrich Wilhelm. Merkel’s predecessor, Gerhard Schroeder, was hired by Russian state gas export monopoly Gazprom OAO months after leaving office in 2005 to head the construction of the Nord Stream pipeline that will provide Russian gas to Germany. The Polish government fears that Nord Stream -- which will run from Russia directly to Germany under the Baltic Sea -- might allow Russia to cut gas supplies to east Europe while still supplying Germany and western Europe.

"Nothing’s ever purely economic with the Russians, there’s always political interest involved," Karol Karski, of Poland’s opposition Law & Justice party and a member of parliament’s foreign affairs committee, said in an interview. German relations with eastern Europe are still burdened by the memory of Nazi crimes from World War II, while Russia’s relations with the region are blighted by the post-1945 communist takeover by the Soviet Union. "These countries are allergic to many things coming from Russia or Germany," Jan Techau, a European and security expert at the Berlin-based German Council on Foreign Relations, said in an interview. "Balancing Germany’s ties with Russia and eastern Europe is one of the most difficult German foreign policy questions."

Techau said Opel is part of a bigger picture given that Russia views Germany as a key to its global economic policy. "Russia wants to move massively into Western markets," he said. "Opel would be a real catch because they’d get a big technological advantage for their auto industry and a foot into one of the world’s biggest economies." The move makes sense for Opel because Russia is set to become Europe’s largest car market, said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen in Germany. Russia is almost as crucial for German exports as China, and Merkel -- who grew up in communist East Germany -- has sometimes adopted policies linked to Russia that are opposed by eastern Europeans.

These range from Nord Stream to her rejection of fast-tracking former Soviet republics Ukraine and Georgia for NATO membership. For Germany, closer ties to Russia may also mark a bid to ensure a pivotal diplomatic role as the world’s center of gravity shifts away from Europe and President Barack Obama focuses on the Middle East and Asia, says Techau. "U.S.-Russian relations play out at a different level including security, the soft underbelly of Russia in Central Asia and North Korea," he said. "These are areas where Europe is a small player and it’s the Europeans who should be concerned that the new Obama policy will squeeze them out of their old mediator role between Moscow and Washington."




Whitehall worried about Deripaska link to Magna
Concerns are growing in Whitehall over links between Oleg Deripaska, the billionaire Russian oligarch, and the consortium set to rescue Opel and Vauxhall, the European arms of General Motors (GM). GAZ, Mr Deripaska's automotive group, owned the Birmingham van maker LDV when it nearly collapsed earlier this year, before selling it to the Malaysian vehicle importer Weststar. Mr Deripaska's businesses have been badly hit by the credit crunch, and he was one of the first Russian entrepreneurs bailed out by the Kremlin.

Despite these difficulties, GAZ has teamed up with the Canadian car parts firm Magna and Russian bank Sberbank in their proposed takeover of Opel and Vauxhall. GAZ would make Opel vehicles in Russia, while Magna has vowed to invest up to €700m (£610m) in Opel. On Friday, the consortium reached a tentative agreement with GM, which is likely to file for Chapter 11 bankruptcy in the US tomorrow. The British government was desperate for a deal to save 5,500 jobs at plants in Luton and Ellesmere Port.

A Whitehall source said that advisers expressed their concern to the Department for Business, headed by Lord Mandelson, over Mr Deripaska's involvement. The source said: "At least one has raised this issue with the Government. How can we deal with a man who has just gone and dumped LDV? He's had financial problems, so where has the money come from?" Richard Howitt, the east of England MEP who represents Luton, said: "We have to be sure that any deal has full transparency so that the bidder is not given carte blanche to asset strip. We must get guarantees on both production and jobs."

In the US, President Barack Obama will promise tomorrow that he has no intention of taking over responsibility for the day-to-day running of the US car industry. The government will emerge with more than 70 per cent of the shares in GM following Chapter 11. With the delicate negotiations over GM's future continuing into the weekend, the White House is concerned about how best to present the most significant interventions in industry by the federal government in more than a generation. Fritz Henderson, who was promoted to chief executive when GM's previous boss, Rick Wagoner, was sacked by Mr Obama in March, is hosting a press conference tomorrow in New York.

In Detroit on Friday, leaders of the United Auto Workers union announced their members' vote to accept significant cuts to healthcare and retirement benefits. White House officials have been insisting that day-to-day control of the company will rest with executives. "There obviously is a balancing act," White House spokesman Robert Gibbs said on Friday. "While not running an auto company on a day-to-day basis, obviously there will be concern about investments by the taxpayer as there should be and those are issues that as part of this restructuring will be worked on."




Wave of UK commercial property failures predicted
A wave of failures in the commercial property market has been predicted by one of the UK's leading restructuring experts. Richard Fleming, UK head of restructuring at accountant KPMG, said that property failures to date are just the "tip of the iceberg". Mr Fleming said: "Our work on the JJB [Sports] CVA and the Lehman real estate portfolio in Asia has given us an insight into what we think is just the tip of the iceberg. We predict a wave of fallouts in the commercial property market as the true value of losses becomes apparent." He added that the restructuring that would be required in the commercial property market could be "the next big milestone in this recession".

"With the June quarter day fast approaching and with £43bn of debt repayments falling due this year, we could well see a very busy period of activity," he said. Yesterday Modus Ventures, a Manchester-based retail property company, appointed KPMG as administrator. Modus owns more than 40 subsidiary companies in the UK, many of which own retail property. Most of those subsidiaries have been ring-fenced and are not in administration, although the Trinity Walk shopping centre in Wakefield and the Grand Arcade Shopping Centre in Wigan went into administration earlier this year. Meanwhile, Europe's banks are ready to pull the plug on faltering UK commercial mortgages to limit losses.

More than £10bn of commercial mortgages have so far breached their terms, a recent study shows, and banks are running out of patience with problem borrowers. In 2009, £43bn of property loans mature, posing a much larger risk than commercial mortgage-backed securities (CMBS), which have largely been sold on, according to the De Montfort University study. Property experts believe that banks are becoming more organised in how they approach their commercial property exposures. Recent data from Begbies Traynor, the turnaround specialist, showed an 87pc year-on-year increase in the number of companies with critical financial problems.




Hedge funds worried Obama moves could backfire
U.S. government efforts to revive a sluggish economy have cheered markets since March, but some of the most successful investors around worry these moves may only make the bad times linger. Several hedge fund managers at an investment conference this week warned that a number of policy moves by the Obama administration, from its Chrysler intervention to Treasury's myriad bank bailouts, will only extend the recession. It would be better, they said, if the government let markets move unimpeded, causing pain now but clearing a path for sustainable recovery.

"The basic strategy appears to be to try to bring us back to 2006 by propping up asset prices and reflating the popped credit bubble, subsidizing bank creditors and shareholders, and delaying needed bank recapitalizations while hoping for an economic recovery," Greenlight Capital's David Einhorn said at the annual Ira Sohn Investment Research Conference. Wall Street has been pilloried during the past year for making big gains as markets crumbled, and blamed for driving companies into the ground and accused of standing in the way of the recovery. U.S. President Barack Obama last month chastised several hedge funds as "speculators" when they declined to support his Chrysler restructuring plan.

The scolding prompted these fund managers to surrender, but the episode made investors less certain about the security of their interests. "It is a very bad idea for governments to create arbitrary and unfair outcomes, or outcomes resulting from the passions and whims of the government rather than from the law, just because they have the power to do so," said Paul Singer of hedge fund Elliott Management. MidAmerican Energy Chairman David Sokol, who runs a utility that also owns the second-largest U.S. real estate brokerage, said short-term fixes could came back to haunt the U.S. economy.

"Government intervention could draw this out much further than is necessary and is useful, although for some areas it may feel somewhat good in the interim," said Sokol, a contender to succeed Warren Buffett as head of Berkshire Hathaway Inc. Several of the Ira Sohn speakers warned massive government spending today could lead to rampant inflation.

Peter Schiff of Euro Pacific Capital, who in 2006 publicly warned the subprime crisis would drag down financial markets, said Obama's policies will only re-inflate the credit bubble. "As any drug addict knows, if you stop using drugs you will go through withdrawal. Government is making the situation worse," said Schiff. "We don't need any more stimulus. We are suffering from the stimulus we have already been given." He joked years of misguided U.S. fiscal policy has created a Ponzi economy, where new Treasury bonds must be sold to repay existing investors just to keep Uncle Sam solvent. "I don't know why we have Bernie Madoff in jail," Schiff said. "We should appoint him secretary of the Treasury."

Einhorn observed the U.S. budget deficit has grown to 13 percent of GDP, not including the trillions of dollars of potential losses guaranteed under the government's bailout plans. Long-dated U.S. bonds, he said, are already anticipating higher rates inflation When it comes to bolstering banks, though, the Obama administration may be doing too little. Einhorn, who correctly predicted Lehman Brothers needed a lot more capital to cover real estate losses, this week said U.S. banks are undercapitalized even after raising $75 billion of equity following the so-called stress test.

The government should induce investors to swap debt for equity and push banks to recognize their losses on mortgages and other debts, he said. Yet these measures would generate losses and the government has not forced the issue. "The Obama administration disappointingly seems to be following the same path as the Bush administration," he said.




Arizona credit unions hard-hit in 1st quarter
Banks have been rattled by the financial-system earthquake, but credit unions are feeling aftershocks, too. Most of these populist, member-owned institutions steered clear of the exotic leveraged investments that got big banks into trouble. Yet most credit unions have been hit by bad mortgage, auto and other consumer loans - and by costs to help stabilize the industry. All that's especially true in Arizona, where members have been hit hard by the real-estate downturn, a weak job market and mounting bankruptcies.

Ninety-five percent of Arizona-based credit unions lost money in the first quarter, compared with 75 percent of Arizona-based banks. "They're feeling the pain their members are feeling," said Scott Earl, president and chief executive of the Arizona Credit Union League. Arizona's credit unions count nearly 1.6 million customers, with membership rising of late as people seek low-risk places to put their money, Earl said.
Should depositors worry? In most cases, no. The government recently enhanced its credit-union deposit protection, and some causes behind the big first-quarter losses may be temporary. Still, this is a period the industry would like to forget.

More than one-third of Arizona's credit unions lost at least $1 million during the quarter, a sizable setback for institutions that tend to be smaller than banks. The typical Arizona credit union serves about 6,800 people. The state's second-largest credit union, Arizona Federal, reported a $48 million loss in the quarter after a $116 million loss in 2008. That annual loss is one of the biggest ever for any credit union. "It comes back to whom we serve," said Ron Westad, president and chief executive of the 220,000-member credit union. "Our members are middle America, and they have been drastically impacted by the local economy."
Arizona Federal has responded by cutting staff, tightening its lending standards, closing some branches and reducing advertising.

It also has improved the quality of its loans and expects to post a profit in the second quarter, Westad said, yet it's still undercapitalized and likely will remain so through next year. "It's a long road for us," he said.
Desert Schools Federal Credit Union lost $12.8 million in the first quarter, reflecting stabilization costs, increased provisions for loan losses and more. Still, the state's largest credit union, with 360,000 members, has kept growing through the recession, boosting membership by 4 percent, deposits by 8 percent and loans by 10 percent last year, spokesman Jason Meyers said. "We actually had a good year, but provisions for loan losses impacted our bottom line," he said. "We hope to see less need for that in 2009."

The big first-quarter losses partly reflect regulators' seizure of two wholesale or corporate credit unions, actions that forced other credit unions to pay into an industry-stabilization fund. These added expenses pushed the industry into the red. Credit unions nationally lost $3.2 billion in the first quarter, with nearly the entire loss attributable to stabilization. However, a law passed by Congress last month allows credit unions to spread some of those costs over seven years, which likely will result in first-quarter financial results being restated in a more positive fashion, Earl said.

At any rate, these developments don't directly impact depositors. Credit-union deposits are guaranteed up to $250,000 per account by a federal insurance fund similar to that run by the FDIC for banks. The government in May extended that protection through 2013, as it did for FDIC bank accounts. Some of the added stabilization expenses pay for enhanced depositor protection, too. On the flip side, credit unions insist they're still making loans but with tighter standards. "Credit unions are still lending, but some are taking a more cautious approach," Earl said. Lending by the nation's more than 7,700 credit unions fell 0.1 percent during the first quarter. Nationally, four retail credit unions have failed in 2009. None was in Arizona. National credit-union membership rose 0.7 percent in 2008 to 89.2 million.

Unlike banks, credit unions don't pay income taxes and don't have to answer to shareholders. This arrangement allows them to pass savings along to members in lower fees and better interest rates. Credit unions long have touted themselves as a consumer-friendly alternative to banks. But amid all the red ink, they've lost some swagger. "The overall condition of credit unions, with rare exceptions, is that we're well-capitalized and still lending," Earl said. "My thought is that we've weathered the worst of it."




Lawmakers Bill Taxpayers For TVs, Cameras, Lexus
Florida Rep. Alcee Hastings spent $24,730 in taxpayer money last year to lease a 2008 luxury Lexus hybrid sedan. Ohio Rep. Michael Turner expensed a $1,435 digital camera. Eni Faleomavaega, the House delegate from American Samoa, bought two 46-inch Sony TVs. The expenditures were legal, properly accounted for and drawn from allowances the U.S. government grants to lawmakers. Equipment purchased with office expense accounts must be returned to the House or the federal General Services Administration when a lawmaker leaves office.

But as British politicians come under widening scorn for spending public money on everything from candy bars to moat-dredging, an examination of U.S. lawmakers' expense claims shows Washington's elected officials have also used public funds for eye-catching purchases. U.S. politicians, unlike their counterparts in Great Britain, can't bill taxpayers for personal living expenses. The U.S. Treasury gives them an allowance to cover "official and representational expenses," according to congressional rules, and the lawmakers enjoy a fair amount of discretion in how they use the funds.

The Senate and House release volumes of the reimbursement requests for these allowances, but do not make them available electronically. A Wall Street Journal review of thousands of pages of these records for 2008 expenses showed most lawmaker spending flowed to areas such as staff salaries, travel, office rent and supplies, and printing and mailing. But it also turned up spending on an array of products, from the car leases and electronics to a high-end laptop computer and $22 cellphone holder. Rep. Howard Berman expensed $84,000 worth of personalized calendars, printed by the U.S. Capitol Historical Society, for his constituents. A spokeswoman for Mr. Berman, a California Democrat, didn't return requests for comment.

The records show that some lawmakers spent heavily in the final months of the year to draw down allowances before the end of December -- a time when U.S. households were paring their budgets and lawmakers were criticizing Detroit auto executives for taking private aircraft to Washington to plead their case for taxpayer funding. Rep. Hastings, a Democrat, and Rep. Turner, a Republican, made their purchases in the third quarter. Rep. Faleomavaega, a Democrat, bought the TVs for $1,473 apiece in mid-November. Spokespeople for the three didn't return requests for comment.


House members get a government expense allowance of $1.3 million to $1.9 million a year. Senators get $2.9 million to $4.5 million. The disparity is based on several factors, with lawmakers whose home states are far from Washington, for example, typically receiving more to cover their higher travel expenses. If lawmakers don't seek reimbursement for all of their allowance money for the year, the remainder doesn't roll over to the next year, but stays with the Treasury. The review showed that the increased year-end spending went not only toward equipment but also to fund year-end "bonuses" to aides. The average House aide earned 17% more in the fourth quarter of the year, when the bonuses were paid, than in previous quarters, according to an earlier Journal analysis. Payments ranged from a few hundred dollars to $14,000.

The current system of governing lawmaker expenses was designed to bring the system greater transparency and public accountability. Scandals over congressional mismanagement -- including penalty-free overdrafts at the House bank and spending abuses at the Congressional post office -- led to new House rules in 1996 that consolidated lawmakers' various expense accounts into a single allowance.

Even so, the accounts aren't easy to view or parse. House lawmakers submit receipts and records to the chief administrative officer, who publishes a statement each quarter that runs more than 3,000 pages. Each member's expense ledger takes up about six pages and includes a short description of each expense, its amount and the date incurred. The Senate publishes two volumes every six months, with descriptions that are less detailed than those published by the House.

Members of the public can request specific receipts, but lawmakers aren't required to provide them. Officials said they are exploring the possibility of publishing the information electronically but have no immediate plans to do so. "This information is not widely available to the public," said Steve Ellis, vice president of the nonpartisan Taxpayers for Common Sense. "This is stuff that every constituent should be able to know." The House and Senate administrators can deny reimbursement if they deem an expense request to be inappropriate. Jeff Ventura, spokesman for House chief administrative officer Daniel Beard, said no formal records are kept on the number of claims deemed inappropriate, but that such instances are rare. The Senate operates similarly.

Staff salaries are the largest cost in most members' budgets, according to published details. Travel is another big cost center, with many lawmakers claiming funds for commercial air or train travel to and from their district, and for mileage on their cars or personal planes while they are there. Around 100 lawmakers lease cars using their official allowances. The majority lease American cars. Sport-utility vehicles, such as Ford Escapes and Chevy Tahoes, are among the most popular choices.

The fourth-quarter congressional expense records, bound in three thick beige-colored volumes, show that Rep. Rodney Alexander of Louisiana paid $20,000 for a 2009 lease on a Toyota Highlander, a hybrid SUV. Mr. Alexander said in an interview that the vehicle was for his state director's official business. The Highlander was appropriate, he said, given the size of his district and House rules setting fuel-efficiency standards for leased vehicles. "We have a large district, the largest in Louisiana," he said. "We didn't want to lease a bicycle for him to ride on."

Other expenses included five-figure printing bills. Rahm Emanuel, who resigned from his Illinois congressional seat in January to become President Barack Obama's chief of staff, recorded a $33,000 printing expense in the fourth quarter. An aide to Mr. Emanuel said it was for an official mailing sent to every household in his district. The records show several examples of spending on high-end electronics.

Rep. William Jefferson, a Louisiana Democrat, spent $2,793 on a Panasonic Toughbook laptop, which is marketed to the military, in September, about three months before he lost his re-election bid in a December runoff. A lawyer for Mr. Jefferson, who is facing an unrelated federal bribery trial, declined to comment.Some members detail small expenses. The office of Rep. Chaka Fattah, a Pennsylvania Democrat, described a $22 expenditure on a Liz Claiborne cellphone pouch. A spokeswoman for Mr. Fattah said it is standard for staff members to get a holder with their phone and that the pouch was "nothing fancy."

Other members itemized spending on everything from bottled water to pest control and office plants. The accounts of former Rep. Darlene Hooley, an Oregon Democrat, listed an $81 payment to the Plant Tender. Ms. Hooley, who retired at the end of the last Congress, said her office had "tried to be as transparent as possible and report every little thing." Her expenses "would look a whole lot better if other people had done the same thing," she added. Other expense explanations bore few details. The accounts for Rep. Tim Mahoney, a Florida Democrat, include an $11,000 payment on his House-issued credit card to cover airfare for him and an aide incurred in September, with the line "A/F Mahoney/Mitchell."

Mr. Mahoney, who lost his re-election bid, said in an interview that the line represented 13 trips over a two-month period. He is required to submit receipts for the card to the House, which decides how much information to publish. "As Congressman, I took every precaution to make sure that my office was fully in compliance with all ethics rules and financial reporting regulations," Mr. Mahoney added. Many lawmakers don't spend their full allocation. House Speaker Nancy Pelosi (D., Calif.) had about $57,000 remaining in her budget at the end of 2008. House Minority Leader John Boehner (R., Ohio) had $228,000.




The browning of America
by Willem Buiter

In politics, the urgent but not necessarily terribly important always trumps the important but not palpably urgent.  In the US today, getting out of the economic downturn is urgent, but not a matter of life and death.  Moving towards sustainable energy use and cutting back on man-made contributions to global warming is a matter of life and death, but not immediately so in the US.  When there is a conflict between a speedy exit from the recession and saving the environment, the environment therefore loses.

Since the crisis hit, it has been clear that the only pro-environment policies that have a chance, in the US and possibly elsewhere too, are those that involve increased public spending.  In this case environmental and Keynesian demand-boosting imperatives point in the same direction.  Examples are grants for home insulation, support for R&D and environmentally friendly infrastructure expenditure such as public transport improvements.  When environmental logic demands policy measures that increase costs to the private sector, however, the fact that such measures impose a financial burden on an already groaning private sector means that such measures will at best be watered down, at worst not implemented at all.

We have just seen two examples of this - the strange and deeply uninformed debate about a cap & trade scheme for CO2E emissions recently introduced in the House of Representatives, and the admission by the US Secretary of Energy, Dr. Steven Chu that bringing US fuel taxes (especially taxes on gasoline/petrol) is politically out of the question for the time being. Reducing the emission of greenhouse gases can be done in one of two ‘pure’ ways.  The same holds for reducing the consumption of energy, including energy consumed by burning gasoline to move cars around.  You either use quantity rationing, that is, physical rationing of the commodity whose use you wish to discourage or you make it more expensive through taxes or other charges. This is just the translation into domestic economy language of introducing binding quotas or tariffs in international trade language.

You can also combine the quota and charging approaches.  Quantity rationing of individual users is clearly a complex and administratively costly exercise, even though it has often been used in war time, when scarce commodities were rationed, with individual entitlements (vouchers) sometimes tradable, sometimes not tradable officially but traded informally or even illegally on a grey or black market.  Cap & trade is an example.  The policy authority sets an overall quota that is intended to be less than what would be consumed or produced without government intervention.  Call the size of the Quota  Q. Think of Q vouchers or permits, each of which entitles the owner to emit 1 unit of CO2E emissions.  All those wishing to emit some amount K ≤ Q of CO2E need to come up with an amount  K of permits.

If the quota is binding (if, should the permits be free, an amount of CO2E in excess of Q would be emitted), the question arises as to who will get the scarcity value (the rents) created by this new binding constraint.In the simplest case the authorities auction off all the permits in an efficient, competitive auction procedure.  That way the state gets all the rents. The only requirement for an allocation scheme to make sense is that it increases the marginal opportunity cost to the ultimate consumer (in the case of gasoline) or producer (in the case of greenhouse gases) - the entity that chooses the quantity actually consumed or produced.  Auctioning off individual units of the rationed commodity, subject to the constraint that the total amount of units sold not exceed the aggregate quota, Q, is one possibility.  This raises revenue for the government.

It is equally efficient from the point of view of limiting the emission of CO2E, for the government to give part or all of the quota away - to its friends, to the Daughters of the American Revolution, to all car-driving Americans, to the power generating industry, the owners of coal mines or aluminium smelters, to the poor and the oppressed or to anyone else.  As long as the allocation does not depend on current or future energy use or fuel consumption decisions, it will achieve the desired environmental effect efficiently, if there is an efficient secondary market for the permits.   Even if the permits are allocated free of charge to the worst polluters (coal-fired power plants, aluminium smelters, people barbecuing in their gardens), as long as the overall quota is binding, the vouchers will have a scarcity value or opportunity cost to the recipient - they could sell them on the secondary permit market.  Political considerations driving the allocations may be unfair, corrupt and outrageous, but not necessarily inefficient from an environmental perspective, as long as they do not distort the beneficiary’s marginal opportunity cost of fuel use or green house gas emissions.

Only if the emitter knows that they will get free vouchers to cover whatever emissions they would produce if vouchers were free, would there be an efficiency problem.But the overall q  uota should take care of that. If the requirement that total emissions be less than or equal to  Q represents a binding constraint, it is not possible to provide all would-be emitters with permits in the amount they would require to cover the emissions they would produce when permits are free.  So the key issues are (1) the size of the overall quota and (2) the enforcement of the rule what without a permit you cannot emit. U.S. Reps. Henry Waxman, D-Calif., and Edward Markey, D-Mass., recently introduced the American Clean Energy and Security (ACES) Act of 2009, which would create a cap-& trade programme requiring CO2E emissions to be reduced 17 percent below 2005 levels by 2020 and 83 percent below 2005 levels by 2050. In addition to creating a cap & trade system that sets the limit (Q) each year on total CO2E emissions , the proposes a carbon allowance for utilities and power-hungry companies.  That allowance is just the initial allocation of part of the overall quota or cap.

As long as the overall quota is adhered to, and as long as the secondary permits markets functions efficiently, the opportunity cost to the emitters of CO2E will come out about the same, regardless of the initial allocation of the allowances.  The consumer will ultimately bear the full cost at the margin where it should be felt if the policy is to have its desired environmental effect: when consuming energy whose generation, transmission and delivery produced CO2E emissions. It is my guess that the reality that ultimately the consumer of CO2E-intensive products will pay the price of restricting CO2E emissions, regardless of the initial assignment of the permits, will dawn on the body politic of the USA.  When this happens, the overall CO2E emissions ceilings will be relaxed from the levels proposed in the ACES ACT.

What this discussion shows is how much superior a straightforward uniform tax on CO2E emissions would be to a cap and trade scheme.  It avoids the non-transparent initial allocation of the permits, and it does not require an efficient secondary market for permits trading.  Efficient financial markets have not exactly been prominent since August 2007.  Trusting the efficient allocation of permits to the same people and institutions that brought us the Great Financial Crisis of 2007-2008 would not, in my view, be wise.  Taxing emissions makes exactly the same informational demands on the authorities as the cap & trade scheme - they must be able to monitor the actual volume of emissions.  Taxing emissions avoids the potential problems of speculative bubbles and market manipulation in the markets for permits.

America’s consumption and production is roughly twice as energy-intensive as that in the EU.  There is a simple reason for that: energy is more expensive to the end-user in the EU than in the USA. A litre of gasoline in the UK costs around £1.00, that is $1.60.  That would be $ 7.04 per US gallon (dry).  The latest quote I have for a US gallon of gas is $2.47. The UK price of a gallon of gas is therefore $4.57 higher than the US price. From an environmental perspective, the UK price is still too low, but let’s pass on that one for the moment. The brave thing to do would be for the US to put a $4.57 per gallon additional Federal tax on gas. 

Recognising that politicians are wimps, let’s phase this in, to soften the blow: 57 cents per gallon immediately, and a credible commitment to a $1.00 increase in the Federal gasoline tax for the next four years.   After that, both the US and the UK (and the rest of the environmentally well-intentioned nations, could add an additional $0.50 per gallon each year to the fuel tax, until the last gasoline-propelled vehicle has been driven off the roads.  Any undesirable aggregate demand fall-out from this cost-increasing proposal could be compensated by returning the revenue raised to the public through an income tax cut or an increase in transfer payments.

Even this wimpish proposal is way beyond the delivery capacity of the US political system.  Dr. Chu has discovered very soon what so many well-intentioned academics who entered politics before him found out eventually: the power of logic and facts is no match for that of lobbyists and well-heeled pressure groups. The only thing green about the Obama administration’s policy agenda are the greenbacks of the of the vested interests opposed to any meaningful environmental policy. Back to Berkeley for Professor Chu, after a decent interval, I would have thought - assuming there still is a university at Berkeley following the imminent bankruptcy of the once-proud state of California.


47 comments:

jal said...

Who cares what the cost will be.
The money will come from those who have it.
It certainly is not coming from the 60% of the population who are in debt.
Its got to come from those who have money. That would be your parents and your grandparents.
It will not come from your kids or grand children. They won't have any money.

So, go ahead!

You want an auto industry ... buy it.

You want a bunch of planes for the airforce ... buy it.

You want a banking system ... buy it.

You want to build a new Vegas pyramid ... buy it.

I don't care, I got no money. I never will. You will have to make the rich pay for it.
jal

Anonymous said...

@jal

"I don't care, I got no money. I never will. You will have to make the rich pay for it."

You think the rich got rich by taxing themselves? When the bosses hold the gun up to your wife's head, you'll find a few farthings in the stuffed newspaper in your shoe that you were saving for gruel.

Kimberly said...

Paul Krugman Headline: We've got too much debt.

It sounds like he's been reading TAE and Denninger.

Money Quotes:
"The increase in public debt was, however, dwarfed by the rise in private debt.......deregulation in effect gave the industry — whose deposits were federally insured — a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst......it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise......men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it."

So now Krugman thinks we're headed for Great Depression 2. A few weeks ago he predicted a recovery in the second half of 2009. I suspect he flips a coin prior to each column.

Krugman says we've got too much debt!

rapier said...

In my favorite novel, The Bamboo Bed by William Eastlake, a doomed US Army unit in Vietnam has a "mad minute".

They were stuck in the jungle after engaging what they thought was a rather small contingent of NVA but they were out manned badly and eventually surrendered the high ground. Under normal circumstance even without artillery they could expect to be wiped out by mortars but the canopy was too dense so mortars wouldn't work. All they could do was sit around and wait, till dusk.

It was then they decided to have their mad minute. For one glorious minute they fired everything they had. Figuring at least for that one minute more they would live.

Captain Clancy knew it was futile for he was an eternal warrior and he knew he had let the boys down by giving up the high ground. He knew the score.

Someday we might know if our captains knew the situation was hopeless. I suspect they don't. The mad minute they have launched, bailing out anything and everything with trillions upon trillions, thus lacks the wonderful desperate bravado of Captain Clancy's boys who accepted their tragedy and played their part in it eyes wide open. Our captains instead are just playing the fools, in a farce.

Anonymous said...

On the one hand, it's hard to fathom how anyone in the auto industry could be traumatized by the demise of the industry. Detroit has seen hard times before-- Harvey Keitel and Richard Pryor in the late 70's " Blue Collar" portrayal of a moribund Detroit-- and Ohio has been nothing if not a industrial wasteland reflection of what was sure to visit Michigan. On the other hand, it must be an incredibly hollow feeling as they look about their hometown and realize " these jobs are going son, and they ain't coming back."

As far as looking a dire situation straight in the eye, how about burying that insulting U3 unemployment propaganda. It has as much to do with reality as a spring training baseball game. And yet, the grinning MSM Yo-Yo's present it as the last and definitive word on unemployment. What a sham.

But back to Michigan and by extension the country. It's hard to prepare for a fall, and an Akido roll out of landing, when the only plan seems intent on pulling oneself back up on the same precarious ledge. Then again, the attempted long-range view in quest of a plan is continually blocked by the tall buildings and immediate demands of Wall Street.

"Going to leave this Brokedown Palace,
On my hands and my knees I will roll roll roll. "

Anonymous said...

@Kimberly

re Krugmanm. Funny I was tempted to write something earlier today about how we get so many things wrong for fear of not being right. We close our minds to opposition and refuse to listen. If Krugman has honestly changed his mind why reproach him when praise is due?

BTW even so, he does seem rather coy about it and never mentions the other D word:)

-tovar-

Anonymous said...

I read the Krugman piece and I fail to detect any reversal of opinion. He is simply laying the blame on Reagan and stating once again, that this current economic crisis is the worst since GD1.

More interesting is Krugman's lament for lack of 20% down payment on house purchases as a result of the Reagan deregulation revolution. A twenty percent down payment requirement is not happening in this economy and job market unless house prices go way, way down.

So is Krugman calling for a recalibrating of house prices?

Anonymous said...

Democracy and Built-in Obsolescence:

Alfred P. Sloan, the long-time president and chairman of General Motors, is credited with introducing built-in obsolescence as a tool to sustain the car industry. GM cars were built to fall apart mechanically and stylistically after a set period of time, thereby guaranteeing user turnover.

Does our democratic system of government also contain elements of built-in obsolescence?

Once citizens realize they can vote themselves an ever larger slice of the wealth pie, then the powers that be need to reach for the self-destruct button -- easy credit.

Anonymous said...

Krugman -- King of flip flop analysis:

April 1, 2009 - NYTimes Blog Entry:

"So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see."


April 2, 2009 - NYTimes Op/Ed:

"this crisis probably still has years to run."


May 3, 2009 - NYTimes OP/ED:
"There has been a lot of talk lately about green shoots and all that, and there are indeed indications that the economic plunge that began last fall may be leveling off. The National Bureau of Economic Research might even declare the recession over later this year."


May 25, 2009 - Reuters:

The world economy has avoided "utter catastrophe" and industrialized countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday. "I will not be surprised to see world trade stabilize, world industrial production stabilize and start to grow two months from now," Krugman told a seminar.

------------------------------------
So it turns out Krugman's analysis of our economic situation is really no different than Joe6Pack. If the stock market is down, things look bad. If the stock market is up, recovery around the corner. These economists don't have a fucking clue. They forecast as well as cab-drivers.

Anonymous said...

The information making the rounds about summers "investments",is enough to sicken ...We can hope his physical condition causes him to drop out of the game for health reasons Not likely,as these toads have the best of care,but one can hope.

There is a wave of destruction coming that got me wired tight.I have to ask myself,...how much longer..We can see the very unraveling of parts of our society now...the crisis in California,the destruction of GM...What will be next in this too shiny,hard,mechanical destruction of my country.
My brother was kind enough to Re-brain,and armor-plate my computer box after a massive virus attack.I was astounded at the degree of destruction wrought by some folks who wrote this garbage,and how difficult to remove it is.[I will spare you a description of what I would do to their fingers with a steel pipe.]
During the long episode [5 hrs]of attempts to save my files,we had some long talks about where the country is going ,and some decisions he has made.Providing his start up works,he is soon to become a expat,and intends to move to SE Asia for a "extended"stay.This is as he puts it"Due to the fact this is not the country I grew up in".
Whats terrible is I cant argue with him...Things are starting to get bad ,folks,and are going to get a hellava lot worse.We are at the beginning of some very,very, hard times.

He loves the area,and has a Thai wife.
"The neat thing about Thailand is that everyone knows the .gov is corrupt,and acts accordingly.As long as you have money your fine."With luck,he will make it..I hope.

Anon @ 1:36

Ok,for bonus points name the Greek Philosopher who say that democracy only lasted until the public found out they can vote themselves goods...

Krugman may be starting to see the writing on the wall....


I keep trying to see a way out of this,but the way it looks now is just like the last nasty nasty recession when I was a welder..And it keeps getting worse...what is going to happen when thousands and thousands more join "the dole"
Unemployment insurance is what is keeping the economy afloat now,and the majority fed.

Where/when does it end?

Or does it?

snuffy

Stoneleigh said...

Anon @1:54,

So it turns out Krugman's analysis of our economic situation is really no different than Joe6Pack. If the stock market is down, things look bad. If the stock market is up, recovery around the corner.

That is the essence of herding behaviour. A stock market is a very sensitive, virtually real-time measure of optimism versus pessimism (since people are able to act on their emotions very quickly.) Its valuation is the sum total of (mostly) uninformed opinion that chases momentum and jumps on and off passing bandwagons because that's what everyone else is doing. People pick up the prevailing emotion of the crowd and rationalize their opinions of where we are going in accordance with it. That series of Krugman quotes is a perfect example.

Economists like Krugman are burdened with the notion that markets behave like objective machines in response to external stimuli. This is simply not true. For instance, if you look at a chart over July to October 2001, could you pick out 9/11? A decline began in late summer and had been underway for weeks by that day. The attack happened near a bottom and a rally began shortly thereafter, following the terminal spike low that typically marks the end of such a move. If not for the short market suspension, there would be nothing in the market record to indicate the event.

el gallinazo said...

Stoneleigh,

I agree with most of what you say, but I really think you underestimate TPTB ability to maneuver the herd. Would this "green shoots" rally be as strong and long as it is proving to be without the corporate controlled MSM optimism propaganda machine or the PPT and Goldman Sachs painting the tape with taxpayer money? I see them as 1960's Clint Eastwoods, riding along side the stampede, firing off their six guns, and directing the dumb animals into the canyons or cliffs that they chose. It's just a matter of how much you weigh the two factors. I weigh deliberate manipulation more heavily than you.

Stoneleigh said...

To continue the thought from the last post, I would expect Krugman, Denninger and others to reflect pessimism during what is very likely to be just a pullback in the larger counter-trend rally, albeit perhaps a deep one. If the rally then resumes, as I expect it to, they would probably shift to a more optimistic position, before shifting back again once the rally is over. Some people shift positions quite quickly as they are very sensitive to changes in the way the wind is blowing, while others take longer. For instance, Doug Noland's latest piece, mentioned yesterday, is reflective of rally psychology not pullback psychology.

Markets have their own endogenous dynamics that have little or nothing to do with external events, at least so far as causation is concerned. In fact it is more correct to say that the market drives the news than that the news drives the market. Actually social mood drives both (google socionomics), but markets respond more quickly and so act as a leading indicator. The tone, and therefore the underlying message, of the news is set by perception of events, not by the objective reality of those events. During optimistic times, events are spun optimistically and then used to rationalize whatever the markets are doing. During pessimistic times, the reverse is true.

People pick up on the emotional tone of a newscast far more than they do the verbal descriptions of events, further driving the positive feedback loop of perception. Positive feedback loops are inherently destabilizing. They proceed until they break down, then a sharp move in the other direction occurs. Positive feedback spirals at all degrees of trend simultaneously form what looks like a random walk, but is actually highly patterned. This is the Elliottwave model. For more information on the specifics and quantitative analysis, check out Bob Prechter's site www.elliottwave.com.

I agree that opportunists will manipulate the herding impulse, but the herd is ultimately the more powerful force. Even quite skillful manipulators can sometimes be trampled. I expect this to happen when we see a real rush for the exits (ie a much larger market cascade than we have seen so far). I think this fall and next year will show just such a powerful move.

From that point I would expect attempts at manipulation to shift from markets to the political sphere. Jim Kunstler described this process well, pointing out that people will elect political extremists intent on vengeance, as these will be the people best able to capture and channel the mood of the herd. With that kind of force behind them they are likely to have a terrifying impact, just as Hitler did in his time.

el gallinazo said...

Bloomberg today

"Universa Investments LP, which has links to “Black Swan” author and New York University professor Nassim Nicholas Taleb, is starting a hedge fund to bet that efforts by governments and central banks to end the global recession will lead to hyperinflation, the Wall Street Journal reported, citing Taleb. The fund will invest in commodities and options on oil and gold stocks, the Journal said."

So now Marc Farber and Nassim Taleb have joined the hyperinflationistas. Does make you wonder as these guys are brighter than your average bull.

I think like Ulysses, I will have to tie myself to a mast in order to short the market at an appropriate moment.

Stoneleigh said...

El G,

A lot of commentators will be nailing their colours to the hyperinflation mast before this rally is over. It's part of the same psychology that drives the rally. Have people noticed that every time the market is up, commentators start talking about hyperinflation and every time it's down they talk about deflation?

I know this sounds awfully arrogant, but IMO people who understand what's going on don't flip flop on their fundamental analysis. I don't think very many people understand herding. The received wisdom that markets are efficient and taking a random walk (a contradiction in terms to start with) is very well established. Economists badly want their discipline to be objective and scientific, not grounded in messy emotions, ignorance and blind following behaviour. It is highly ironic that this understanding of markets actually leads to far greater predictability than the so-called scientific approach.

Anonymous said...

Stoneleigh,

Herding or no herding, the market still comes down to one fundamental fact--EARNINGS.

The past three months is clearly herding, but in the end it must be a profitable trade that is consistent with the indice total or you'll see the herd exit as fast as it entered.

As for Noland's take on reflation working? So far he's correct. But the very reflation is the fuel that the second leg of this deflation so needs. It's like the snake devouring itself. I don't think reflation last past fall, if that long.

Stoneleigh said...

Anon @9:27,

Herding or no herding, the market still comes down to one fundamental fact--EARNINGS.

Indeed. Reality bites in the end. Perception can differ from it for only so long.

The past three months is clearly herding, but in the end it must be a profitable trade that is consistent with the indice total or you'll see the herd exit as fast as it entered.

And that will also be herding behaviour, but to the downside this time. Herding to the downside can be a truly terrifying experience - a bit like yelling 'fire' in a crowded theatre.

As for Noland's take on reflation working? So far he's correct. But the very reflation is the fuel that the second leg of this deflation so needs. It's like the snake devouring itself. I don't think reflation last past fall, if that long.

So far yes. He wrote a piece about why the rally has legs about a month ago if memory serves, and I agreed with that (as I said, I am usually a fan of his work). His current piece seems to be suggesting a much larger move though, more akin to a lasting recovery, and that I strongly disagree with. Your analogy about the snake devouring itself is apt. The reflation is indeed setting the stage for the next leg of the decline. I also agree that the reflation is unlikely to last even as long as this fall. My best guess is for decline to resume this fall, with a fairly high probability of some kind of panic event. I think next year will be an almost unmitigated disaster.

jal said...

Stoneleigh said …
“I agree that opportunists will manipulate the herding impulse, but the herd is ultimately the more powerful force.”
--------
A clarification.
There are about 4,000 companies, on the TSX and 215 traders.

Investment Industry Regulatory Organization of Canada (IIROC)
Dealers (215)

Ontario Securities Commission
(There are 103 PAGES of registrants)
------------

The majority of people are not into the market.
The majority of people are bankrupt.
The majority of people couldn’t give a damn about the market.
What the majority of people think, feel and know about the state of the market/economy is irrelevant.
If you are not investing you are not part of the Elliot Wave; you are not part of the herd.

Robert Prechter's Elliott Wave, is a resource for analyzing the market and investing.
jal

Greenpa said...

El Gal- "So now Marc Farber and Nassim Taleb have joined the hyperinflationistas. Does make you wonder as these guys are brighter than your average bull."

Or- they're intending to a) add to the hyperinflation emotions; b) ride the hyperinflation bubble up a while (it's kind of predictable) and c) bail on the bubble before the top.

Very smart folk might do that, maybe perhaps.

One reflex of the herd, that can only be countered by long training, meditation, and chanting; is this: "Ralph disagrees with me! He has to be an idiot!"

:-)

The reflex you want to build up instead is: "Ralph disagrees with me. What is he up to?"

Part of my training (seriously) was years of fencing; NCAA competition, and then years of teaching it. Épée- because it's closest to real.

Fencing is "chess at 100 miles per hour); immensely mental; and the training is SPECIFICALLY counterintuitive. You train yourself to instantly react in the NON-instinctive fashion.

Most martial arts do that. Any other martial artists here? Would be interesting to see if there's a correlation between martial arts training and some ability to see outside the herd.

Greenpa said...

Stoneleigh- " a bit like yelling 'fire' in a crowded theatre."

yep. I've wondered if the existence of that metaphor is not one of the reasons why so few analysts are yelling "fire". We're taught, from very early on, that yelling fire in a crowded theater is an EVIL thing to do.

But the metaphor does not include the situation where there really IS a fire in the theater. In which case- yelling fire, ensuing panic and all, is the morally correct thing to do.

But our 3rd grade training does not include that possibility. So all the analysts who see the fire- carefully refrain from screaming- "DEPRESSION!! DEFLATION!!"

And those who do- are painted as horrible people who want to cause panic and chaos.

So. Here we sit, in the burning theater, with the manager and ushers all saying "There's no fire!! Don't panic! All that smoke is from something outside, pulled in by the ventilation system! Stay in your seats, and everything will be fine!"

But the theater IS on fire. :-)

Anonymous said...

Reality is realizing that perception is limited: the shadow side of the vase on the table is in light from the other side of the room. Acknowledging that reality, the so-called vacillations of a Krugman can be read in a different light. He just might be taking a walk around the room, so to speak, in order to inform his opinions with some omni-directional vantage points.

But I do agree, "Dogma' rarely rises from the chair of consistency.

el gallinazo said...

@jal

"The majority of people are not into the market.
The majority of people are bankrupt.
The majority of people couldn’t give a damn about the market.
What the majority of people think, feel and know about the state of the market/economy is irrelevant.
If you are not investing you are not part of the Elliot Wave; you are not part of the herd."

Jal, weren't you hanging on Stoneleigh's every word a couple of months ago hoping to dump your equities without a loss. Now that you think that you are equity free, your new mantra is BORING!

I am not sure how things work in Canada, but every Usano holding a 401 (k) or a private or public pension fund is deeply invested in equities as are all the university endowments. Your statement is just blatantly wrong.

John Hemingway said...

Ciao Stoneleigh!

You're right, things will soon shift to the political sphere, and that is where is gets truly scary. How long before we see Obama driven from Washington by the Palin-populists?
cheers,
John

Anonymous said...

Well I don't know, but just to drag Krugman into this again here is the last part of the last paragraph of the article:

... men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.

I would say that reads ... no peace for our time and I wonder if I would even make that much of a statement if I were an influential public person. It does little good to shout fire, in a crowded theatre, where a quiet word might.

That aside I would like to know what the next steps by Tim and crew will be. As I understand it there are more debt issues as large or larger than have passed so far. I doubt anyone here expected the way Bernanke et al have sidestepped or rather redirecting the effect on to the public purse. Can they put a gilt edge to the future problem? If I can mortgage a house for 20 or 30 years why not for a 100 or even 200. How far into the future can the problems of today be pushed? No economist me, but there should be a point where the numbers will not work. On an emotional or intuitive basis I think that point has been reached but I would like to know what the limit could be without emotion, without the 'herding factor'.

Greenpa said...

A 11:31 : "It does little good to shout fire, in a crowded theatre, where a quiet word might."

Sure. Fine.

But. There have been people quietly mentioning that we should move in an orderly fashion towards the exits for some time now. It is not working. The crowd is restless, but definitely staying seated.

At some point- it IS time to shout. Do you want to get the children and pregnant ladies in the middle of the theater out before the air becomes toxic and flaming beams are falling? I'd suggest yes.

The quiet word- IS NOT WORKING. Very soon now- it will need some shouting, to wake them up.

Anonymous said...

Wall Street is celebrating the end of GM - S&P up 2.5%. If the treasury loses its AAA rating, it will probably go up 10% :-D

Bigelow said...
This comment has been removed by the author.
jal said...

el gallinazo said...
your new mantra is BORING!
… Your statement is just blatantly wrong.
-------
Sorry to disappoint you.
I’m not a devout member.
I did my own analysis, right or wrong, I made a decision and left the investment herd. It is an engineered market and I have no business being part of it.
I learned from Stoneleigh and applied that wisdom.
Your situation may warrant doing something else.
Good luck in your decisions.
jal

Stoneleigh said...

JAL,

If you are not investing you are not part of the Elliot Wave; you are not part of the herd.The herd is much larger than the investing community. Pretty much anyone who consumes modern media and hasn't been hiding under a rock for years will be part of the groundswell of emotion, even if they can't act on that emotion in a financial way. They will still be part of the group that will demand the election of populist extremists in the not too distant future. Their risk aversion and revenge-seeking will still drive some very unpleasant consequences.

The stock market can be thought of as a useful short-hand for the balance between collective optimism and pessimism - sort of a thermometer of social mood. The broader the participation, the better it does this, partly because the level of ignorance increases, leaving more space for uninformed emotional responses. Participation has been very broad by historical standards for a long time, but universal participation is not required for the model to be useful.

As Greenpa says, it takes a long time to learn to interpret one's own natural responses counter-intuitively. Almost no one does this, so almost everyone picks up on emotional signals, takes them at face value and propagates them further. On the way down that means danger signal equals run first and ask questions later, like any group of deer that wants to live to run another day. It's part of being human, in fact part of being mammalian.

Bigelow said...

To add fuel to the fire discussion,
I am short the stock market and the position is underwater and has been seems like FOREVER. I also paid for Canadian energy trusts because I need the income and energy has long term value. If you were to back a paper money with something should be energy.

And the proper question is "is Nassim Taleb putting his money --and how much-- into the hyperinflation fund?"

What happens to us may be like what happened to the Dutch when the English became masters-of-the-universe without enough energy and more pollution.

jal said...

@ Stoneleigh

Thanks for expanding the explanation so that it includes activities that are outside of the investment community.
jal

Anonymous said...

Greenpa,I said ... I wonder if I would even make that much of a statement if I were an influential public person.

But I am not and doubt I would have that much courage if I were and I know I wouldn't have the courage to say what I really feel, but here in this quiet adult filled place I think I can speak quite freely and say that my real fear is that Bernanke an the rest will be able to do great damage by pushing things out in time. Would you mind talking to the question of that possibility, as I feel it more important than what brand the socks Krugman is wearing for the day are? Perhaps along the way we might talk about the morality of our current generations having used the planet foully and yet expect to push redress for those actions into the future. It really is such a cock-up , isn't it?!


-tovar-

BTW GM's bankruptcy will likely save us all by generating a great rise in GDP with all proliferation of talking heads and their views about it.

Stoneleigh said...

Greenpa and others,

People are spreading quiet words about the 'theatre being on fire', but, knowing that not everyone will get out through the very small door, those quiet words are directed at the few associates, not the many. Insiders are preparing to get out, knowing they will be leaving the masses to their fate.

IMO even many insiders will not get out this time. Too many will leave it to the last minute, assuming that they will be able to wring out the very last profits and still get out before the stampede blocks the exits. Greed will therefore be their undoing.

What we are trying to do is to inform anyone who will listen, with a particular focus on reaching out to those who are not insiders and would otherwise probably lose everything they have worked hard for all their lives. We can't reach everyone, but we are doing the best we can. Someone has to help the little guy.

Stoneleigh said...

John Hemingway,

How long before we see Obama driven from Washington by the Palin-populists?

This is exactly the kind of thing that gives me nightmares. I would quite frankly be surprised if Obama finishes his term, considering what he's about to preside over in the next 18 months, and be blamed for. Expectations have been deliberately pumped up, and that is a very dangerous strategy. When they are dashed, the backlash will be monumental.

Bigelow said...

Stoneleigh,

Are the stock and bond market mechanisms themselves at risk?
I don't mean a holiday of some sort, I mean bye bye, never a trade again?

CC said...

Stoneleigh, I love reading your commentary on this blog. I've been thinking what might the government's reaction be this time around when a market panic hits later this year. Last October, we had shorting bans, bank rescues, TARPs, etc.

But what will the U.S government do when confidence plummets?

I would think they would be unable to handle all of the bankruptcies, and layoffs with anything other than soothing words on how the crisis will be solved.

rumor said...

Ahhh, a day full of Stoneleigh's commentary is like a day with my brain plugged into the proverbial tree of the knowledge of good and evil.

Thanks for all the writings today, Stoneleigh. (And not to forget Ilargi, of course, for his unstoppable work efforts!)

Stoneleigh said...

Bigelow,

Are the stock and bond market mechanisms themselves at risk?
I don't mean a holiday of some sort, I mean bye bye, never a trade again?


I certainly think there will be a period when trading will not be possible, just as there was in 1929, when investors had to watch in a panic and could do nothing about it. There was no information about where the index stood and no one could trade.

In think some kind of trading is likely to resume, but participation will become narrower and narrower. IMO many things currently traded will not be in the future. I think derivatives will be banned for instance. Such forms of financial innovation only appear at the peak of a mania and are typically banned afterwards, thereby closing the barn door after the horse has bolted. Even in Holland in the 1630s - the Tulipmania - there were temporarily forms of financial innovation that we would recognize today. They didn't last long though.

CC,

I've been thinking what might the government's reaction be this time around when a market panic hits later this year. Last October, we had shorting bans, bank rescues, TARPs, etc.

I would expect shorting to be banned completely at some point. Short sellers are always demonized in a market meltdown. There may well be other rule changes that would impact adversely on people acting on correct knowledge and foresight. Don't expect the ground rules to stay the same and for the same kinds of opportunities to be open, especially to the little guy. In a free-for-all wealth grab, the little guy does not do well. This is another reason to make sure you get your wealth out before it's too late. Making some money in the meantime is much less important than not losing everything you have by hanging on too long.

Stoneleigh said...

We met two more of our readers in the last week - one in Montreal and one in Ottawa. It's always fun to meet people in person and find others to talk to in one's own neighbourhood (relatively speaking). Otherwise we end up feeling that we live on an isolated island.

Anonymous said...

No HEALTHY market would be up 250 points on the BK of THE American icon, GM. I don't think herd-six-pack is fooled one bit by this parabolic blowoff top.

el gallinazo said...

jal

I am not disappointed in your actions or statement. Part of my post was ambiguous, so I will make it clearer. I was just pointing out that when you were underwater in your equities, you hung on every prescient word Stoneleigh had to say, and now that you have unloaded them (without a loss) you find the whole topic boring and irrelevant. I guess that is also part of human nature :>D

Yes, it was amusing last September when Cox banned shorting for a month, but in retrospect the big boys were doing naked shorts, which truly are demonic, and nothing was done to them. It is, of course, all hypocrisy. When the shorts went into effect last September, I was holding SKF and SDS, both ProShares Ultrashorts. I panicked like everyone else, but after the fact I was surprised upon analysis to find that the ProShare short positions were not day to day volatile, but had a lot of staying power over the whole 30 days.

The lesson I learned was that when the SEC banned shorts, all the short ETF's ran for the door because everyone panicked. But after a week or so, the panic started to subside while the indices continued down, and the short ETF's firmed once again.

As Stoneleigh hints at, the trick will be to bail out of ultrashort ETF's before the whole market melts and put the profits into something safer, like pork belly futures or off-shore gambling.

Stoneleigh said...

I just came across a notice for a book I'm going to buy. It looks very interesting (in a morbidly fascinating way) for anyone who might like to see what a shanty-town future could look like following economic collapse. It's called Flammable: Environmental Suffering in an Argentine Shantytown (reference to Canadian Amazon site).

Stoneleigh said...

Anon @2:22,

I don't think herd-six-pack is fooled one bit by this parabolic blowoff top.

If they weren't fooled, they wouldn't be buying and pushing prices up that far. Of course some are speculating that there will always be a greater fool, but eventually there won't be. As always, some will have got in an got out early, while everyone else will become the empty bag holders. Everything based on ponzi dynamics works this way.

andrew said...

Doctors who provide life-saving care to women are assassinated in churches in a country on the doorstep of fascism. Black police officers are shot and killed in the streets by white police officers in a country on the doorstep of fascism. The state and the corporation are melded together in a country on the doorstep of fascism.

The US economy is now going to be run out of the banks, out of Goldman Sachs' offices. That's why the US treasury is being transferred there now. And the social order, if it can be maintained behind massive joblessness and the end of pensions and health care as we have known them, will be the responsibility of the military. It is here: fascism, the last refuge of capitalism from an economic system that actually works for humanity.

el gallinazo said...

Max Keiser and others point out that insiders are unloading huge blocks of their equities, technically legally, during this rally on a ten to one basis. Or to put it another way, top management of all companies are selling ten times as much of the stock in which they are corporate officers as they are buying, and they are selling it in giant blocks. So it's the guppies who are buying this crap. But for the indices to keep going up, the guppies have to be buying the off-loaded crap with great enthusiasm.

Ilargi said...

New post up

Stoneleigh said...

El G,

But for the indices to keep going up, the guppies have to be buying the off-loaded crap with great enthusiasm.

Exactly. In the later stages of an upward move, the herd is practically flinging its money at those who would fleece them. Insiders are indeed cashing out in droves at the public's expense, while the public tries to jump on to the passing bandwagon, always too late.