Boys waiting for the processional at an Episcopal church in South Side Chicago
Ilargi: Imagine a reporter writes a story about a priest telling everyone who wants to hear it that attendance in his church has gone up enormously. The story quickly gathers steam as other reporters quote it. It's a juicy story, because it makes just about everyone feel a little bit better in difficult times.
The predictable headline reads: "Church attendance soars" . Well chosen, since the reporter leaves open the option that it's not just one church, but a potentially larger drive. Just like in advertising campaigns for cars, detergent and presidents, picking the right words is imperative.
There is one detail of the story that escapes attention, though, amidst the happy feelings. It turns out that what the priest really told the reporter is that Sunday attendance was much higher than Saturday's. And that little tidbit of course makes it a non-story, because church attendance is always higher on Sunday.
The way the reporter writes about the priest is exactly how the National Association of Realtors’ latest data were reported today, across the US and international media. All the headlines save a precious few read like this one from the Wall Street Journal: ”US Home Sales Rise Second Straight Month In May". It seems like a normal headline. And it's true, too. But there's a problem with it, a big fat one. It's only partly true.
CalculatedRisk put it in this graph, to which Barry Ritholtz added his crude but effective trendlines. Together, they tell the whole story, not just the feel-good choice-bit approach even a renowned paper like the Wall Street Journal can't seem to stay away from.
Thing is, home sales in May are historically ALWAYS higher than in April. And there, of course, lies the link with the priest and his church attendance numbers, which are ALWAYS better on Sunday then on Saturday. In other words, the WSJ headline hides a non-story. But that doesn't matter. The same message, in varying words, went out through dozens of media outlets this morning. And people feel a bit better, because they think home sales went up. They did not. That is to say, they went up from April to May, but they always do that.
The real story, the one the headline conveniently hides, is that homes sales are down 3.6% from a year ago, and that prices in the same period fell 16.8%. And those are numbers from the NAR, an organization known for and set on bending both reality and the numbers that come with it until they will bend no more.
For people who work in advertising, the really important issues are picking the right words and capturing the right mood. The quality of the product being promoted is a secondary issue. This is a generally accepted phenomenon, even if most people are hardly aware of the effect advertisements have on them. People, after all, see themselves as rational beings, a fact that the most successful ad campaigns take shameless advantage of.
Journalists and politicians, on the other hand, are expected (and "believed") to be providing factual information, not to feed their public choice bits selected to make them feel a particular way, while leaving out other bits that might prevent inducing a certain mood among that public. In short, we think they should inform us in open and honest ways. And we think they do, mostly.
It's time, if you hadn't yet, to wake up to the reality that media and politicians are not in the business of objective reality. Like PR firms, they have clued in on your deeper sentiments, and have found that those are much easier to influence. No matter how desperate you may be, all it takes is to dangle a carrot with the promise of better times in front of you.
There's a lot of complaining and lamenting going on in the circles of traditional media, radio and TV stations, newspapers, magazines, about how the internet takes away their revenues and how that makes the world a much poorer and less informed place.
That one story on home sales today makes clear that those lamentations are completely out of place. They have brought it upon themselves, by stooping to the level of the lowest common denominator, and by having no scruples about lowering themselves to a brew of lies and non-stories with juicy headlines, all just to sell a few more copies and sell a few more ads, truth be damned.
This is how both American journalism, and its politics, are conducted these days. Which is a whole lot sadder than most of us care to admit.
Existing Homes Sales Fall 3.6%
News on the Housing front continues to marginally improve. This is not yet a positive number, but it is getting less worse. Existing-home sales fell 3.6% from May 2008. Sales in May 2009 rose 2.4% from April to 4.77 million. Note that these are apple and orange comparisons — revised to unrevised numbers. Once again, the prior monthly number was revised downwards (4.68 million down to 4.66 million). Some more data points:
- Total housing inventory at the end of May fell 3.5% to 3.80 million existing homes available for sale;
- Inventory is a 9.6-month supply at the current sales pace, down from a 10.1-month supply in April.
- First-time buyers accounted for 29% of transactions, down from 45% last month, but up from 20% a year ago;
- Prices fell 16.8% for the national median existing-home from a year earlier;
- Distressed properties declined to 33% of all sales in May from 45% in April;
- Single-family home sales rose 1.9% (seasonally adjusted annual rate of 4.25 )million in May, but are 3.0% below (4.38 million-unit level) May 2008;
- Median existing single-family home price was $172,900 in May, down 16.1% from a year ago.
One of the more bizarre aspects of the news release was Lawrence Yun’s call for appraisers "familiar" with local neighborhoods:"Lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected."
That is outrageous. Consider: The NAR remained notably silent during the appraisal corruption during the boom; Home sales based on loans to people who couldn’t afford them that drove prices higher were fair basis for appraisal comparables — but when these same homes are sold — inevitably through forclosure auctions, REOs or distressed sales — they should be ignored? Only up, not down?
Even worse, they seem to be calling for a return to "local" (i.e., friendlier) appraisals — like the good ole’ days. You remember the "friendlier" era of corrupt appraisals that were rife during the credit bubble? Am I reading this correctly? It looks like code for USE APPRAISERS (i.e., CORRUPTIBLE) WHOM YOU KNOW.
I thought I was inured to the idiocy of the NAR and the fetid stank of corruption that their press releases come with, but even I am astonished by the filth emanating from their offices today. Shame on you . . .
Seasonal Homes Sales Trend
An emailer asks: "Why do you diss the monthly numbers when they are improving?" Well, because they are not really improving, if you understand the seasonality associated with them. Let’s have a look at the monthly numbers relative to these seasonal trends.
They ALWAYS improve from January through the Summer, as this is the prime season (many families want to be settled in the new house before the new school year begins in September) with actual improvements The chart below makes it clear that the overall trend is seasonally driven:
Obama’s Home Bailout Bust
So far $18.3 billion to bailout mortgage servicers has been disbursed to 16 recipients. Heading the list is the ghost of Countrywide, Countrywide Home Loan, which received $5.2 billion. In second place is JP Morgan’s Chase Home Finance with $3.6 billion. In third place is Wells Fargo with $2.9 billion.
Isn’t it interesting that this program benefits the big four banks that are considered "too big to fail" a needed concept that our banking regulators want to get rid of. If you add in CitiMortgage and Bank of America the big four totals $13.6 billion or 74% of this bailout pie.
This program is the incentive payments for mortgage modifications according to Obama’s Making Home Affordable Program. When you consider that only 60,000 homeowners have been helped so far the 16 recipients have received an astounding payout of $305,000 per mortgage modification.
I received an email from someone trying to get his mortgage refinanced through Wells Fargo. He supplied all of information requested some 60 days ago. Last week he was told that Wells Fargo had three times as many foreclosures in May as they did in May a year ago, and that the bank does not have the staffing to look at his documents at this time. Wells is hiring outside consultants and they should be able to look at his case in another 60 days or so.
You Call This A Housing Rebound?
This morning, the NAR announced that monthly home sales ticked up in May. And it noted that increased affordability and the first-time buyer tax credit were beginning to work. We just thought we'd put the bounce in a little perspective.
The Housing Market Is A Way Bigger Deal Than The Stock Market
Here's another fun chart from that state of the housing market 2009 report. It shows -- using data from 2007 -- just how much more significant home equity is to household wealth than stock holdsins. Only for the top quartile are the two vaguely comporable. So it's great that the stock market has rebounded from their March lows (whoo-hoo!) but until the orange bar starts to grow again, households won't be feeling wealthy for a long, long time.
S&P Downgrades More US Prime Jumbo RMBS
Standard & Poor’s has reviewed 101 RMBS transactions backed by U.S. prime jumbo mortgage loan collateral issued in 2005, 2006, and 2007 and downgraded almost all of them: S&P downgraded 956 classes from 93 of these transactions and affirmed ratings on 246 classes from 40 transactions. The downgrades reflect our belief that credit enhancement for the affected classes will be insufficient to cover projected losses due to increased delinquencies and the current condition of the housing market.
S&P applied the assumptions discussed in Assumptions: Standard & Poor’s Revises U.S. Prime Jumbo RMBS Lifetime Loss Projections For Transactions Issued In 2005, 2006, And 2007, published June 16, 2009. In that report S&P raised its estimate of projected losses for U.S. RMBS transactions backed by prime jumbo collateral issued in 2005, 2006, and 2007. "This increase in our projections resulted from growth in the number of delinquent and defaulted loans beyond what we had previously projected based on our default curves for these vintages. Over the past six months, total delinquencies (as a percent of the current pool balances) for the 2005, 2006, and 2007 vintages have increased by approximately 53%, 71%, and 81%, respectively."
The effects of these changes to the projected losses on the collateral securing outstanding prime jumbo transactions are as follows:
- 2005 vintage losses increase to approximately 2.82% from 2.71%;
- 2006 vintage losses increase to approximately 5.08% from 3.65%; and
- 2007 vintage losses increase to approximately 6.97% from just under 4.5%.
Distressed commercial real estate totals $97.4 billion
National distressed commercial real estate totaled $97.4 billion in early June, including foreclosures, lender-owned properties and those headed in that direction, according to a new report from Delta Associates. Distressed commercial real estate volume has doubled every three months since December 2008 with retail properties representing the largest segment in June, at $29.7 billion.
Commercial mortgages had a 3.2 percent delinquency rate in the first quarter, up from 1.8 percent in the first quarter of 2008. Delta says mortgage maturities will also peak at more than $300 billion per year in 2012 and 2013. The Alexandria-based firm also reported that the 12-month trailing delinquent unpaid balance of commercial mortgage backed securities rose by $12.5 billion to $17.1 billion in February.
US Commercial Real Estate "Showing Signs of Capitulation"
Not much to cheer about in the latest Moody’s/REAL Commercial Property Price Indices:
- The National — All Property Type Aggregate Index measured an 8.6% decline in April 2009. The index now stands 29.5% below the peak measured in October 2007.
- Transaction volume continues to fall in both repeat-sales and the overall market.
April’s large price decline on the heels of a 5.5% monthly decline in January hints at an ongoing process of capitulation.
- The repeat sale transactions in the month of April for the first time showed more negative than positive annualized rates of return.
- Apartments are faring better than any other property type in the Eastern region, although all four types measured significant annual declines.
- The South was the worst performing region overall. All four property types saw annual value declines of more than 20%, with industrial measuring a decline of 28.8%.
- All four property types in Southern California underperformed the western market as a whole. Office was the worst performer with an annual value drop of 22.2%.
- The three major office markets measured significant annual declines. In the East, both New York and Washington DC outperformed the eastern office market, with annual declines of 12.9% and 21.1% respectively.
- The Florida apartment market, like the apartment market in the South on the whole, has experienced three straight years of falling prices. Florida apartment values are now down 31% from the peak.
Commercial Real Estate Fears
Think commercial real estate fears of fallouts and failures are overblown? Reis Inc. — an impartial provider of commercial real estate performance data — says vacancy rates at strip malls, neighborhood centers and regional malls are increasing at rates not seen in 30 years. "We've never really seen deterioration of this order in occupied space since 1980. We don't see much in expectations for improvement throughout the rest of this year and next year."
But that Reis forecast assumes positive job growth and an increase in consumer spending. So even Reis may be a bit off, as unemployment could continue to rise. Truth of the matter, the problem could get much worse. Between now and 2011, for instance, about $814 billion in commercial real estate loans will mature, and will need to be refinanced - an issue that could make commercial real estate the next shoe to drop in this decline.
The head analyst of commercial mortgages for Deutsche Bank believes commercial real estate won't recover until at least 2017. "The froth is still working itself out. We are currently in something which is comparable to what we saw in the 1990s and potentially worse." Worse, "U.S. commercial real estate could fall by more than 50 percent from the peak in 2007.
The number of new loans that are becoming delinquent each month are defaulting at rates between 5 percent and 8 percent per year, with the most loosely underwritten loans of 2007 defaults at 8 percent per year. We are not only not approaching stability, we are at a period of maximum deterioration."
US commercial property index in record drop-Moody's
U.S. commercial property prices plummeted 8.6 percent in April, a sign sellers are beginning to capitulate to a market deteriorating on lack of credit and the effects of recession, according to Moody's Investors Service. It was a record drop for Moody's REAL Commercial Property Indices, which show prices are now 29.5 percent below the peak of October 2007, said Connie Petruzziello, an analyst at Moody's. The index history extends back to December 2000.
Many analysts have been predicting prices on office, retail and apartment buildings would accelerate their declines as the credit crunch limits financing for owners facing maturing debt. Lenders are often negotiating loan extensions and refinancings to ward off distressed sales, but borrowers are often unwilling or unable to meet terms, such as putting up more equity. What is more, investors are also shying away from the sector as soaring vacancy rates and falling rents reduce cash flow required to pay interest on debt.
The April data from Moody's included sales negotiated at the nadir of the credit crisis from the end of 2008 through early 2009. But credit availability is still thin in commercial real estate, Richard Parkus, an analyst at Deutsche Bank, told the Reuters Real Estate Summit in New York. "While loss aversion is no doubt still in play with many owners, more distressed sales appear to be occurring, resulting in more negative returns and causing larger drops in the index," Nick Levidy, a managing director at Moody's, said in a statement. Sales volume in April fell from March, and was the lowest since the inception of Moody's indices. Moody's reiterated it expects commercial real estate values to fall 35 percent to 40 percent, from peak to trough.
Worries over systemic risk in CMBS sector
Even as conditions in many parts of the credit markets have improved, a big question mark hangs over one large part of the market that is still dysfunctional: the market for securities backed by commercial mortgages. Behind the scenes, regulators are acutely aware that the commercial real estate market is one of the few potential remaining sources of systemic risk if the financing problems cannot be fixed. William Dudley, president of the Federal Reserve Bank of New York, highlighted this this month: "The revival of the commercial mortgage-backed security market is essential to stabilising the commercial real estate market.
"If the availability of funding for this market is not restored, the downturn in commercial real estate valuation and the losses for the holders of these assets will be greater. This will, in turn, likely further constrain credit availability. That’s the vicious cycle we want to lean against." The clock is ticking with some of the $3,400bn of loans made to property developers for anything from urban office tower blocks to shopping malls across the US due for payment. At the moment, it is near-impossible for developers to refinance these maturing commercial mortgages though the CMBS sector, which makes up 25 per cent of the real estate financing sector.
Even properties that are not in distress – the ones where the value of the property is still larger than the financing behind it – are in danger of defaulting if this problem is not fixed. The Federal Reserve is in charge of fixing this. It had planned to provide investors with funding to buy securities backed by commercial mortgages last week. In the event, the deals were not ready. They are supposed to kick off in July instead, and all eyes will be on whether the term asset-backed securities loan facility (Talf) – a $1,000bn credit facility aimed at easing the pain of a credit crunch – will deliver.
If the Fed cannot unblock the market for securities backed by commercial mortgages, there are concerns that another wave of losses could be unleashed on the fragile US banking system. Analysts at Goldman Sachs warned as early as February 2008 that losses on commercial real estate debt could be on a par with those from subprime mortgages but the pain would be felt over a longer timeline. Goldman currently estimates losses of $234bn from US commercial real estate loans raised between 1995 and 2008.
Rating agencies are also warning about the bleak outlook for European loans. "Some of the largest loans in European CMBS are scheduled to mature in the next two to four years and it remains questionable as to whether markets will have improved enough by then to allow for orderly refinance," says Euan Gatfield, senior director, Fitch Ratings. Although the CMBS sector faces a series of downgrades – bringing echoes of subprime mortgage-backed securities – there are important differences.
First of all, only a quarter of commercial mortgages are securitised – the proportion was much higher for subprime mortgages. Also, there was not the same amount of derivatives and securities linked to commercial mortgages.
The subprime mortgage collapse was so damaging because billions of dollars of securities were linked to their value through derivatives. The commercial mortgage issue is vital for US banks, which have much reduced capacity on their balance sheets, meaning they are not as able to roll over and refinance maturing loans. In addition, there are concerns about losses once properties that are not in a good state have to be refinanced.
In other words, there will be properties where the value is far less than the loan, and additional equity has to be found. "At least two-thirds of the loans maturing between 2009 and 2018 ($410bn) are unlikely to qualify for refinancing at maturity without significant equity infusions from borrowers," says Richard Parkus, analyst at Deutsche Bank. "Bank and life companies, which make up approximately 50 per cent and 10 per cent of the [$3,400bn commercial real estate] market, respectively, must also be considered," said Mr Parkus. "The same combination of deteriorating underwriting standards and excessive price inflation were operating in bank and life company lending [as in the CMBS market]."
The Fed’s initial plans are aimed at funding new securities backed by new mortgage loans. The complication is that the decision to lend commercial mortgages, unlike credit card or auto loan backed securities, is very closely linked to the interest rates available on existing CMBS. The collapse of the sector and the departure of numerous buyers of CMBS led to a huge increase in interest rates, and these remain high. The Fed is also planning to provide investors, such as hedge funds, loans through Talf to buy existing CMBS, but the plans are complicated by the fact that Standard & Poor’s has said it may downgrade many recent CMBS from triple A. The current Fed plans specify that it will finance only CMBS with triple A ratings.
Although many market participants expect the Fed could tweak these rules, the growing risks in the sector highlight the political balance of wanting to offer finance to property developers and others and protecting taxpayers from losses that those developers and others would otherwise potentially incur. Because the market for existing securities remains blighted, it complicates the creation of mortgages. In the real estate market it is believed that one or two deals are being readied for Talf financing. But because the exposure cannot be hedged so easily, the Talf may only work when an entire deal is financed through it.
Against this backdrop, it is clear why Mr Dudley stressed recently the CMBS market was the biggest test of the Talf programme. "The rollout of Talf to the CMBS market this summer will be important in determining the overall success of the programme," he said. It could also be important in determining whether those waiting for another shoe to drop – the commercial mortgage market – are right or not.
The Federal Reserve of Obama
How long will Ben Bernanke last as the Chairman of the Federal Reserve? Well, it depends on who you ask. Bernanke is scheduled to defend his record in front of the House of Representatives this week, Bloomberg reports. Lawmakers will certainly have questions about whether or not Bernanke forced Bank Of America CEO Ken Lewis to acquire Merrill Lynch during the height of the economic crisis last fall.
But Bernanke isn't the only opening on the Fed's five-person Board of Governors, a key body that determines oversight of banks and interest rates. In June of next year, vice chairman Donald L. Kohn's term will expire, while in August 2012 Elizabeth A. Duke's term is set to end. (Fed governors serve 14-year terms and cannot be reappointed). Considering that Obama has already appointed Daniel K. Tarullo to the Board while still president-elect, the President has a critical opportunity to name three of the five decision-makers of the country's economic policy.
Bernanke's term as Fed chairman expires on January 31, and the next few months will be crucial for his legacy. Lawmakers like Chris Dodd and Barney Frank, have already expressed concern over the Fed's super-sized under President's proposed overhaul of the financial system. (This may be why, at least in part, the Fed recently hired a former Enron lobbyist to improve its image on Capitol Hill). Though he has not indicated that he's looking to make a change, perhaps more so than any government agency, the Federal Reserve is crucial to the President's aims. In December, the Washington Post focused on the President's unusually strong influence on the makeup of the Fed:"...within 18 months of taking office, Obama will likely have appointed five of the seven Fed governors. The central bank is designed to be independent from politics, so a president's best chance of influencing how the Fed will regulate banks or respond to economic changes is through these appointments."
Who might take Bernanke's place next year? Both the Washington Post and Bloomberg indicate that the leading candidate is Lawrence Summers, former Treasury Secretary under President Clinton. The odds of Bernanke's reappointment, however, are less clear. Earlier this month, CNBC asked a few Fed watchers and they divided on how long Bernanke would last. CNBC suggested that Bernanke may fall victim to politics:"Bernanke is thought to be a Republican, which doesn't enhance his chances of getting the nod from a Democratic president. That idea may have been partly supported by the fact that Obama went months without even acknowledging the Fed boss by name, never mind commenting on his performance."
Intrade, the online trading market , suggests Bernanke chances may be fading. Intrade puts the chances of a Bernanke reappointment at 65 percent, down from 75 percent earlier this month.
Bernanke Set to Defend Record Amid Debate on New Term
Federal Reserve Chairman Ben S. Bernanke will defend his unprecedented actions to prevent a financial collapse as debate on whether he should be reappointed begins. Bernanke, whose term expires Jan. 31, faces lawmakers at a hearing this week on steps to aid Bank of America Corp.’s takeover of Merrill Lynch & Co. as Congress increasingly questions the Fed’s interventions. The session comes after a two-day meeting on monetary policy that began today.
President Barack Obama said today that while he wasn’t "going to make news" on a reappointment, the Fed chief has done a "fine job." Treasury Secretary Timothy Geithner, in reference to a possible candidacy for Obama economic official Lawrence Summers, told a lawmaker last week it wasn’t "appropriate" to pledge that top advisers weren’t in the running for the job. "The vultures are circling," said David M. Jones, a former Fed economist who is president of DMJ Advisors LLC in Denver. Bernanke is "going to be on the defensive," even after "turning confidence around" since the depths of the crisis, he predicted.
At stake is whether Bernanke, 55, pilots the Fed into an expanded financial-supervision role after overseeing the most aggressive use of the Fed’s powers since the Great Depression. Through doubling the central bank’s balance sheet to $2.1 trillion, Bernanke has helped thaw credit markets and put the economy on a path toward recovery. Odds favor the former Princeton University economist, a Republican: Reappointment may be less disruptive to investors, and no first-term president has replaced a sitting chairman in 30 years. Many on Wall Street and in Washington view it as likely Bernanke will be reappointed.
"There’s a very strong case for reappointment," said Douglas Lee, who runs Economics from Washington in Potomac, Maryland, and worked on Capitol Hill in the 1970s. "Removing a Fed chairman who is generally perceived to have done an outstanding job would be an enormous problem." Traders on online exchange Intrade today placed 60 percent odds on Bernanke’s renomination, down from 65 percent yesterday. Still, any Obama decision may be half a year away, and the economy and financial markets could shift again. The jobless rate is still rising, and economists anticipate it will reach a quarter-century high of 10 percent at year-end. The Fed is mandated by Congress to achieve maximum employment as well as stable prices.
Besides keeping Bernanke, Obama’s options include appointing Summers or Janet Yellen, both among the most prominent Democratic economists and veterans of the Clinton administration, Jones said. Bill Burton, a White House spokesman, declined to comment. Summers, 54, a former Treasury secretary who heads Obama’s National Economic Council, is considered the front-runner should the president want a change. San Francisco Fed President Yellen, 62, was previously a Fed governor and chairman of the Council of Economic Advisers and would be the first female Fed chief.
Summers wants the job, Senator Robert Bennett of Utah, the No. 2 Republican on the Banking Committee, said in an interview. Asked if he would support Summers for Fed chairman, Bennett said: "I am told that Larry would very much like me to. I would have no objection to Larry." Bernanke has "done a good job under very difficult conditions," Bennett also said. "Whether the president feels that way or not is another question." House Financial Services Committee Chairman Barney Frank said he’s "very pleased" with Bernanke. "Beyond that I wouldn’t say" anything about a renomination, the Massachusetts Democrat said in an interview.
Bernanke took office in February 2006 with an agenda to make the Fed more transparent in setting monetary policy and to depersonalize the institution from its chairman, conferring weight to the views of other top officials. In 2007, his term became engulfed by the biggest financial crisis since the 1930s. His record includes preventing the collapse of Bear Stearns Cos., extending emergency loans to investment banks, financing purchases of corporate debt, bailing out American International Group Inc. and shoring up consumer-credit markets.
Some signs have emerged that the crisis is waning. U.S. companies have sold at least $698 billion of debt this year, 24 percent more than the same period of 2008, Bloomberg data show. The Libor-OIS spread, which measures banks’ willingness to lend, has narrowed to 0.37 percentage point, from a record 3.64 points in October. The policy-setting Federal Open Market Committee gathers today in Washington to consider any change to its pledges to purchase as much as $300 billion of Treasuries and $1.45 trillion of housing debt and keep its benchmark interest rate near zero. The FOMC statement is expected about 2:15 p.m. tomorrow. The committee meeting began at 1 p.m. in Washington.
Among Bernanke’s most controversial steps have been allowing Lehman Brothers Holdings Inc. to fail and his discussions regarding Bank of America’s acquisition of Merrill Lynch. His role in that takeover will be examined in a House Oversight Committee hearing June 25, when lawmakers plan to question whether he applied inappropriate pressure to Bank of America to complete the purchase of Merrill Lynch after the company discovered mounting losses.
At a June 11 hearing with Bank of America Chief Executive Officer Kenneth Lewis, the committee released internal Fed e- mails, some from Bernanke, obtained by subpoena. One missive from the Fed chairman indicated he saw Lewis’s threat to scuttle the deal as a "bargaining chip." Republicans on the committee used the e-mails to argue the government overstepped its authority. Last week, the panel issued another subpoena for more Fed documents.
Bernanke has recent history on his side: Presidents Ronald Reagan, George H.W. Bush, Clinton and George W. Bush all reappointed Fed chairmen in their first terms. "He’s still got at least a decent chance," said Jones, putting the odds at about 60-40 in Bernanke’s favor. "His record has not been perfect, but it’s been pretty good," said Senator Sherrod Brown, an Ohio Democrat on the Banking Committee, which will vet the nomination. On whether to keep Bernanke, "I leave that to the president," he said.
Why all regulatory roads lead to the Fed
by Frederic Mishkin
The US Treasury has just taken the historic step of proposing a new regulatory regime in which the Federal Reserve would become a systemic regulator. The plan raises three questions. Do we need a systemic regulator? Should the Fed be the systemic regulator? Are there dangers from this proposal for the Fed and its core mission of conducting monetary policy to control inflation and promote maximum sustainable employment? The answer to all three is yes.
Do we need a systemic regulator? Before the current crisis, financial regulation in almost all countries was designed to ensure the soundness of individual institutions, principally commercial banks, against the risk of loss on their assets. This focus ignores critical interactions, when attempts by individual financial institutions to remain solvent in a crisis can undermine the stability of the system as a whole. As we have seen in this crisis, the failure of one institution can inflict severe losses that threaten the viability of many others. In addition, the focus on individual institutions can also cause regulators to overlook important changes in the financial system.
For example, although the markets for securitised assets and the shadow banking system of lightly regulated financial institutions grew dramatically in the years before the current crisis, the existing regulatory structures did not evolve with them. The need for a systemic regulator to oversee the health and stability of the overall financial system has never been greater. Its role should include gathering, analysing and reporting information about significant interactions and risks among financial institutions; deciding on which institutions expose the system to systemic risk; designing and implementing regulations such as higher and countercyclical capital requirements for systemically important institutions; and co-ordinating with other regulatory agencies and the fiscal authorities to manage systemic crises.
Should the Fed be the systemic regulator? There are four reasons why this makes sense. First, the central bank has daily trading relationships with market participants as part of its core function of implementing monetary policy and is well placed to monitor market events and to flag looming problems in the financial system. Second, its mandate to preserve macroeconomic stability is well matched to the role of ensuring the stability of the financial system. Third, successful systemic regulation requires a focus on the long term, so the respect and independence that central banks such as the Fed enjoy makes them natural candidates to be the systemic regulator. Fourth, a central bank is the only entity that can function as a lender of last resort, that is, it can use its balance sheet to provide emergency funding in times of crisis.
Are there dangers from the Treasury proposal to make the Fed the systemic regulator? There are three dangers from handing this new responsibility to the Fed. First, the clear focus on achieving output and price stability might become blurred once the central bank also takes account of financial stability objectives. Second, there is a danger of increased political pressure on the Fed that could subject it to attacks on its independence when it takes action to rein in risk-taking by systemically important institutions. Third, the Fed does not currently have sufficient resources to take on this new role. As I learnt when I was a governor of the Fed during the current crisis, its staff have been stretched to the limit.
Despite these dangers, given the importance of the financial stability goal and the fact that some institution must play the role of the systemic regulator, I strongly believe that the Fed should take on this new task. Some safeguards can mitigate the difficulties. For example, some central banks have used explicit, numerical long-run inflation objectives to keep the price stability goal firmly in view. As I have argued before on this page, the Fed should head in this direction. Congress also needs to support the Fed's independence and funding. An important lesson from the current crisis is that we desperately need a systemic regulator and the Fed is the only logical choice.
The writer is a professor of finance and economics at the Graduate School of Business, Columbia University, and a former member of the Board of Governors of the Federal Reserve. This article draws from a working paper of the Squam Lake Working Group on Financial Regulation
No repose on repos
In its latest attack on systemic risk, the Federal Reserve is considering displacing private banks from their role in clearing repurchase agreements. It should move from contemplation to action: the US repo market is ripe for reform. In repo agreements borrowers transfer securities to lenders with an agreement to repurchase them later, often the next day. They enable banks and shadow banks to fund long-term, high-yield investments with short-term low-cost loans – which they did enthusiastically during the credit bubble: by 2008 the top US investment banks funded half their balance sheets in a repo market exceeding $10,000bn.
Banks need a functioning repo market, as do central banks which use it to implement monetary policy. But the custodian banks that advance cash before trades are settled, such as JPMorgan and Bank of New York Mellon, cannot be left to manage the market alone. While maturity transformation – through repos or otherwise – is the basic function of banking, it resembles a sleight of hand. Banks take people’s money, promise to give it back on demand – and lock it up in less liquid investments.
This works marvellously while few enough lenders want their money back. It collapses when all want to hoard their cash at the same time. That is what happened to Lehman Brothers: the equivalent of a bank run in the repo market. The panic was made worse, the Fed thinks, by the custodians’ exposure to losses as Lehman’s lenders left it to its fate. Custodians also faced conflicts of interest as counterparties to the repo-funded banks in other markets.
To solve these problems, counterparty risk in the US repo market must be reduced. The euro repo market, which weathered the crisis better, has a central counterparty, and the European Central Bank’s has long accepted a wide range of repo collateral. The Fed has followed suit, recognising that, like deposits and money markets, repo markets need a public backstop of last resort. The Fed must now enforce central clearing with enough solvency to eliminate runs. But a public backstop must promote the public interest, not private profits. The custodian banks must submit to more public control of their business – or lose the business altogether.
Repo Overhaul May Include Federal Clearing Bank
A plan said to be in the works at the Federal Reserve to bring sweeping changes to the broad repurchase markets may involve the formation of a federal clearing bank to take the place of banks like Bank of New York Mellon and JPMorgan Chase. Repurchase markets — or repo markets — involve a borrower putting up collateral in return for short-term loans from large investment managers. The transactions literally occur overnight, meaning the lender repurchases the funds the next morning.
Problems arose, however, as borrowers put up increasing amounts of asset- and mortgage-backed securities as collateral. When the underlying value of the assets decline, valuating the security as collateral becomes something of a gamble. As a result, many depository clearing banks tend to withdraw from the repo market and the risk involved. A Fed clearing bank, on the other hand, would act as a facilitator between borrowers and lenders in these overnight loan transactions. It would also put taxpayer funds on the line instead of the traditional shareholder interest risked by banks.
Federal Reserve officials are slated to discus reforms to the system with its players next month with the goal of establishing a new repo system by October, unnamed sources told the Financial Times. One of HousingWire’s sources inside a major investment management firm says some voluntary overhaul efforts are already in the primary stages due to all the asset-backed securities offered as collateral. "The government is planning a revamp just because it has ended up with so much ABS paper as collateral," says the source. "It is probably surprised and a little overwhelmed by how much ABS its finally ended up saddled with, triple-A or not."
Any efforts to overhaul the system on a federal level, despite individual efforts to counter the buildup of ABS collateral, would signal a deeper reach of the administration into the financial sector. The Fed’s efforts to facilitate balance within assets and liabilities in the system would come as the administration’s latest attempt in a series of steps to increase its presence in the US banking and financial system.
Confidence in Stimulus Plan Ebbs, Poll Finds
Barely half of Americans are now confident that President Obama's $787 billion stimulus measure will boost the economy, and the rapid rise in optimism about the state of the nation that followed the 2008 election has abated, according to a new Washington Post-ABC News poll. Overall, 52 percent now say the stimulus package has succeeded or will succeed in restoring the economy, compared with 59 percent two months ago. The falloff in confidence has been sharpest in the hard-hit Midwest, where fewer than half now see the government spending as succeeding. In April, six in 10 Midwesterners said the federal program had worked or would do so.
The tempered public outlook has not significantly affected Obama's overall approval rating, which at 65 percent in the new survey outpaces the ratings of Presidents George W. Bush and Bill Clinton at similar points in their tenures. But new questions about the stimulus package's effectiveness underscore the stakes for the Obama administration in the months ahead as it pushes for big reforms in health care and energy at the same time it attempts to revive the nation's flagging economy.
Obama maintains leverage on these issues in part because of the continuing weakness of his opposition. The survey found the favorability ratings of congressional Republicans at their lowest point in more than a decade. Obama also has significant advantages over GOP lawmakers in terms of public trust on dealing with the economy, health care, the deficit and the threat of terrorism, despite broad-based Republican criticism of his early actions on these fronts. With unemployment projected to continue rising and fears that the big run-up in stock prices since February may have been a temporary trend, fixing the economy remains the most critical issue of Obama's presidency -- and retaining public confidence in his policies is an important element of his recovery strategy.
The shift in public assessments of the stimulus package has clear political ramifications: At the 100-day mark of Obama's presidency, 63 percent of people in states that were decided by fewer than 10 percentage points in November said the stimulus act had or would boost the economy. Today, in the telephone poll of 1,001 Americans conducted Thursday through Sunday, the number has plummeted to 50 percent in those closely contested states, with nearly as many now saying the stimulus program will not help the national economy.
The falloff since April cuts across partisan lines. Confidence in the package's effectiveness has dropped from 81 percent to 73 percent among Democrats and from 32 percent to 26 percent among Republicans. Among independents, it has dropped from 56 percent to 50 percent. What was once a clearly positive assessment of the program among independents (56 to 39 percent) is now an almost even split (50 to 47 percent).
Public confidence in the direction of the country remains well above pre-election lows, but in the new survey, that indicator stopped rising for the first time since the election. In April, the number of Americans saying things were moving in a positive direction hit 50 percent for the first time in more than six years, up from single digits before the November election. In the new survey, 47 percent said they believe the country is moving in the right direction and 50 percent said it is pretty seriously off on the wrong track.
Obama's approval rating is slightly lower than it was in April, and his disapproval figure has risen by five percentage points. In general, public approval of his handling of major issues is lower than his overall rating. Still, majorities of Americans said they approved of Obama's handling of the economy, health care and global warming. Two weak points on the domestic front remain: Obama still gets tepid marks on his handling of problems facing the big U.S. automakers, and as many people disapprove as approve of his handling of the federal budget deficit. On the deficit, intensity runs against the president, with 35 percent "strongly" disapproving, compared with 22 percent who say they are solidly behind his efforts.
More broadly, worries about the deficit remain widespread, with almost nine in 10 Americans saying they are "very" or "somewhat" concerned about its size. One factor that continues to work for Obama, however, is that most Americans still see him as a new type of Democrat, one "who will be careful with the public's money," rather than an old-style, "tax-and-spend Democrat." By this point in 1993, Clinton had lost the new-style label, which he had maintained over the first months of his presidency.
Obama has used the power and financial resources of the federal government repeatedly as he has dealt with the country's problems this year, to the consternation of his Republican critics. The poll found little change in underlying public attitudes toward government since the inauguration, with slightly more than half saying they prefer a smaller government with fewer services to a larger government with more services. Independents, however, now split 61 to 35 percent in favor of a smaller government; they were more narrowly divided on this question a year ago (52 to 44 percent), before the financial crisis hit.
As in previous polls, Obama's ratings on foreign policy are generally higher than on domestic issues. Six in 10 said they approve of his handling of international affairs, and 57 percent said they approve of his handling of the threat of terrorism. More said Obama's policies are making the United States safer than said they have weakened the country, but, as in April, a plurality said they have not made much of a difference. But on specific questions about the use of torture in terrorism investigations and the closing of the detention center at Guantanamo Bay, Cuba, there is still broad public pushback to his announced policies.
Fewer than half, 45 percent, said they approve of shutting down the military prison, and when asked whether they would accept those terrorism suspects in their home states, support dropped to 37 percent.
The country remains sharply divided on torture, with nearly half saying there are cases in which torture should be considered. The president has condemned the practice. On Iran, some Republicans have criticized Obama's response to the recent anti-government demonstrations there, with critics saying he has not been vocal enough in promoting democracy and in siding with the protesters. In the new survey, 52 percent said they approved of how he has handled the situation.
There has been no noticeable change in assessments of his handling of relations with Iran since the last poll in April, before the controversy over the Iranian presidential election erupted. The state of the Republican Party remains grim. Just 22 percent of those surveyed identified themselves as Republicans, near April's decades-long low point. Thirty-six percent said they have a favorable impression of the GOP, and 56 percent said they have an unfavorable impression. (Fifty-three percent said they have a favorable view of the Democratic Party.)
Obama leads congressional Republicans by more than 20 points in public trust on dealing with health care, the deficit, terrorism and the economy. The margin on the economy has slipped since April, but it remains a hefty 55 percent to 31 percent. House Speaker Nancy Pelosi's ratings stand at 38 percent positive and 45 percent negative. The last time the Post-ABC poll asked about Pelosi (D-Calif.) was in April 2007. At that time, 53 percent said they approved of the way she was handling her job and 35 percent disapproved. The latest poll has a margin of sampling error of plus or minus three percentage points.
OECD warns on pensions crisis
Strains in pensions systems, in both private and public provision, threaten to turn the financial crisis over the past two years into a social crisis lasting decades, the Organisation for Economic Cooperation and Development warned on Tuesday. In its annual analysis of the health of the pensions systems around the world, the Paris-based international organisation, found that private pensions plans lost 23 per cent of their value last year while higher unemployment "leaves little room for more generous public pensions".
Angel Gurría, the OECD secretary general said: "Reforming pension systems now to make them both affordable and strong enough to provide protection against market swings will save governments a lot of financial and political pain in the future". The people, whose incomes in retirement have been hit hardest by the financial crisis are those heavily dependent on defined contribution pensions, where people save to build up a personal fund, are near retirement and are heavily invested in equities. This applies to many US citizens who have large pension pots, known as 401(k) retirement plans.
For these individuals and for the recently retired who have not bought an annuity with their accumulated pension wealth, the losses will be greatest, the OECD said, exacerbating the sense of a looming pensions crisis around the world. Those with defined benefit private pensions are not immune from potential losses because companies are increasingly restricting the benefits paid in many countries. By contrast, younger workers are not so hard hit because they have time to repair the damage to their pensions.
Their losses are also smaller compared with annual contributions than for those near retirement who have already built up a big pension pot. The losses in private pension schemes were highest - at over 25 per cent - in countries, such as Ireland, Australia and the US, where the greatest proportion was invested in equities. Losses in Germany, Mexico and the Czech Republic were correspondingly lower - at under 10 per cent - because private pensions were heavily invested in bonds in these countries.
Future incomes from public pensions are not immune from the financial crisis, the OECD warned because stretched public finances will prevent countries augmenting public provision and might lead to cuts. Canada, Germany and Sweden, for example already adjust public pensions in payment according to the public schemes’ finances. The OECD said this form of adjustment "needs a re-think" to prevent cuts in pensions exacerbating the recession. But it does not suggest simply reversing the proposed cuts, suggesting they are merely postponed until economies recover.
Some countries provide extremely low incomes for poor pensioners with a history of low income employment. The OECD singles out Germany, Japan and the US as countries where deficiencies in "old-age safety nets are a concern". For private pensions, the recommendation is that governments should ensure that most members of defined contribution pensions gradually reduce the proportion of equities and other risky investments in their portfolios as retirement approaches.
Europe and U.S. Accuse China of Trade Restrictions
The United States and European Union accused China of unfair trade practices on Tuesday, saying the Chinese government was restricting exports of raw materials to give manufacturers in that country a competitive advantage. Ron Kirk, the United States trade representative, said China had imposed quotas, export duties and other costs on raw materials used in the production of steel, chemicals and aluminum. In effect, he said, China was putting its thumb on the scale and giving Chinese manufacturers an unfair edge.
He said that restrictions on exports of bauxite, zinc, yellow phosphorus and other raw goods make it more expensive for manufacturers to produce finished goods and threatened thousands of jobs in industries already rocked by the global recession. "Trade has to be fair," Mr. Kirk said in a news conference in Washington. "If you’re going to do business with the United States, you’re going to have to play by the rules."
The United States and European Union filed complaints with the World Trade Organization, the first step in what could be a yearslong process of trying to resolve grievances against China. "The Chinese restrictions on raw material distort competition and increase global prices, making things even more difficult for our companies in this economic downturn," the European Union’s trade commissioner, Catherine Ashton, said in a statement.
In announcing the complaints, trade representatives from either side of the Atlantic said they had filed requests for formal consultations with China, and hoped to work out the disagreement before taking it further within the World Trade Organization. The formal complaint came after years of talks between China, the United States and European Union over Chinese trade practices went nowhere. Since China joined the World Trade Organization in 2001, it has filed four complaints against the United States, and has been the subject of seven other complaints by the United States and two by the European Union.
China is one of the United States’ largest trading partners and is the largest foreign holder of American debt. But trade between the two countries has tumbled since the financial crisis erupted. China’s export-heavy economy has stumbled amid a global downturn that has sapped demand for Chinese-made electronics, clothing and other consumer products. Earlier this month, the Chinese government reported that exports fell 26.4 percent in May from a year earlier. On Monday, in a possible effort to blunt the trade complaints, China announced that it would cut or eliminated export taxes on some metals, steel wire, fertilizer, soybeans and wheat.
Bar the gates, a mere nine months after the meltdown began, the risk takers are back in control on Wall Street. Have we learned anything from the near-collapse of the financial system, or are we worse off now than when we started? It's a fair question. The question is prompted by news last week that the very same cowboys who brought Lehman Brothers, and the rest of the world economy, to its knees last September have now been rewarded with the unthinkable--the chance to make billions on the very same toxic assets that blew up the firm in the first place.
Yes, you read correctly. Reports have it that Mark Walsh, the former global head of real estate at Lehman, will return with a team of his former Lehman colleagues to "manage" a big chunk of Lehman's crippled real estate portfolio. According to the Wall Street Journal: "They stand to profit if the portfolio of distressed assets--for which they once paid top dollar--recovers some of its value." Currently the toxic paper goes for less than 50 cents on the buck, so the upside is considerable.
So who is Mark Walsh? He's not a household name, but in many people's estimation he's as responsible for Lehman's demise as his old boss former CEO, Dick Fuld. Walsh, who helped pioneer the practice of slicing and dicing commercial mortgages and then getting Lehman to pocket some of the riskiest pieces itself, was once hailed as the most "brilliant real estate financier on Wall Street." At one point Walsh's portfolio generated about 20 percent of Lehman's profits. By last fall, his $43 billion dollar division ultimately helped bring down the 158-year-old bank.
Wacky bets on deals like Tishman Speyer's $22 billion dollar acquisition of 360 luxury apartment buildings at the height of the market, helped seal Lehman's fate. In addition, Federal prosecutors are investigating whether Walsh's real estate team helped hide the weakness of Lehman's balance sheet by over-valuing it's commercial real estate assets.
So what's the fallout for Walsh and his cronies? Well there is no fallout it seems. Instead, the folks who took these irresponsible and out sized risks are getting a second chance at the brass ring. Isn't this new era of responsibility really cool? The sheer madness of putting Walsh & Co. back in charge of the carnage it left behind nine months ago was the decision of the Lehman Estate, which chose the Walsh team over four others, presumably because they know where the bodies are buried. Heck, by that estimation, why not put Bernie Madoff in charge of the SEC!
The word on Wall Street has it that Walsh is an OK guy, and a smart cookie when it comes to real estate. But I'm getting pretty weary of hearing about all the financial geniuses who somehow happened to bring the global economy to the precipice when they weren't attending their Mensa meetings. Didn't any of these smarty pants see this coming? For my dollar, I wouldn't put Walsh in charge of negotiating my summer rental in the Hamptons.
Indeed, if one were to assemble a rogue's gallery of faces culpable in the financial meltdown it might look something like this: tan-man Angelo Mozillo representing unscrupulous mortgage lenders, Senator Chris Dodd standing in for corrupt politicians turning a blind-eye to the situation and Walsh representing the covetous, careless bankers that helped make the whole scheme possible. None of the three may have broken the law, but they did help break the part of the American dream. You'd think there would be a huge public outcry for some accountability.
But so it goes. Walsh and his merry band of real estate cowboys get a do-over, another chance to amass unbelievable wealth. But what about the rest of us? Do the thousands of retirees who lost millions when the Reserve money market fund imploded on the day of Lehman's demise get any of their nest egg back? Will investors who watched the Dow plunge 733 points that Black Monday get a second chance at recouping their losses? Of course not.
But with the Dow now comfortably flat for 2009, the bull market in outrage appears to have run its course. The banks that took us down the financial rat-hole are being recapitalized on the heels of government stress tests that glossed over their problems, and the executives that run them remain comfortably in power. Ironically, news of the resurrection of the Lehman real estate team came on the same day that President Obama gave broad and expanded authority to the Federal Reserve in regulating the financial markets for the foreseeable future.
There is a certain sad symmetry to all this. For it is the Fed's lax oversight during the Bush years (especially at the Geithner-led New York Fed) that bears responsibility for allowing the excesses to occur in the first place. The handwriting is on the wall on Wall Street. It isn't business as usual just yet, but the venom is fading. If we're not careful, a new bubble could be building. If that happens, the world won't get a second chance at averting another Great Depression.
OECD says 2010 unemployment to rise to nearly 10%
The jobless rate in the 30-nation OECD area will jump to 9.9 percent by the end of next year from 7.8 percent in April, the Organisation for Economic Cooperation and Development said on Tuesday. The rise will mean 57 million people out of work in the area, according to new forecasts that are part of a report which is due to be released on Wednesday. The unemployment rate in 2010 will average 9.8 percent, the OECD said. 'Unemployment will continue to weigh on national economies for a long time to come,' OECD Secretary General Angel Gurria said in a statement. The OECD called for policies to help the unemployed including training opportunities, targeted hiring and the provision of subsidies to help pay for work experience.
Hoping for Audacity
One of the great character strengths of Barack Obama, and one of his greatest strengths as a leader, is his ability to treat people with civility and respect and to try to inspire others to do the same. We saw that in his speech on race in Philadelphia, in his restraint throughout the campaign on personal attacks against John McCain, and again more recently in his speech to the Muslim world in Cairo.
But our strengths and our weaknesses tend to flow from the same wells. In a paradoxical sense, as daunting as the problems the President has inherited, his greatest stroke of luck as a candidate and now as President was that the prior administration had so thoroughly destroyed our economy, our strength and reputation around the world, and the security most voters had felt in their homes, their jobs, and their health care that they were ready for more than a reshuffling of the deck. They wanted a new set of cards, one that wasn't marked.
The American people were tired of a Republican Party that had nothing to offer but the rhetoric of their most influential leaders, Herbert Hoover and Joe McCarthy, whose ideology of unregulated corporate fraud masquerading as a free market and the politics of terror masquerading as patriotism were the twin pillars of Republican policies and politics during the Bush era. The American people were tired of theocrats telling them that Terri Shiavo was alive and well and living in the minds of Pat Robertson, Jerry Falwell, and physician-turned-mind-reader Bill Frist (who believed he could tell what "Terri" was thinking without reading her scans).
Americans were even willing to tolerate a President with a nuanced intellect (okay, one who could also hit three-pointers for the troops) after the destructive, impulsive, Manichean days of "you're-either-with us-or-against-us" and "nobody ever told me there were Sunnis and Shiites in I-rack" George W. Bush. But a pattern has emerged that is increasingly disquieting, not only because it is politically dangerous for a president who has inherited an economy that continues to shed hundreds of thousands of jobs per month, but more importantly, because it threatens to undermine not only the agenda Americans overwhelmingly endorsed in November but a moment in history that only comes around every half-century or so, when the country is ready for genuine, paradigm-busting progressive reform.
In the first serious mistake of the new administration, the President preached the virtues of bipartisanship and got nothing in return. Instead of putting Senators like Olympia Snowe and Susan Collins on notice that their constituents were watching them, he allowed two or three Senators who would have been picked off the next time the electorate had a shot at them if they voted against the President's original plan to serve as Trojan horses for the failed ideas of an impotent right-wing Republican minority that had suffered a resounding electoral defeat just months earlier.
That minority promptly grew the debt with the same tax breaks they had already ballooned it with for eight years and eliminated from the President's plan over two hundred billion in spending that could have put Americans back to work rebuilding an infrastructure that had been crumbling under the ideological weight of Hoover Republicanism and McCarthyesque politics. Ever since Reagan resuscitated Hoover's economic legacy, Republicans have convinced Americans that they can have something for nothing and have scared Democrats at all levels of government into acquiescence by threatening to brand them as "tax and spend liberals" (which they have done anyway) if they told them that if you want a loaf of bread, somebody actually has to pay for it.
This was a teaching moment--and a crucial one at that. That moment has now been lost, and instead the polls are now showing Americans increasingly worried about the deficit. That, in turn, is frightening Congressional Democrats back into their defensive crouch, even as their normal predators are on the verge of extinction, with the Republican Party is at its lowest ebb in public opinion in recorded history. All Presidents make their early mistakes, and it looked like this administration had learned its lesson after the first one. But if the events of the last several weeks are any indication, that may not be the case.
Perhaps their political calculation is correct. Maybe the economy is in such bad shape that an extraordinary orator-in-chief will be able to convince a Democratic Congress still suffering from years of Post-Election Stress Disorder to enact a series of sweeping reforms that resemble the transformative measures of FDR rather than a series of half-measures forged by unnecessary compromises that leave us only half as vulnerable as before. But on issue after issue, the President is selling hope without audacity, leaving centrist Democrats from purple states and districts fearful of attacks from the right on everything from deficits to "socialized medicine." Why? Because of his steadfast refusal either to call out his opponents by name or to tell the story of how we got into any of the messes we're in.
In place of the earlier rhetoric of bipartisanship we now here the repeated rhetoric of "looking forward, not backward." But it's hard to fix a problem and prevent its recurrence if you refuse to investigate what happened. And it's hard to call for accountability and transparency when you refuse to hold anyone accountable for anything, whether incompetence or malfeasance. The American people would understand why we need regulation of every past and future financial product Wall Street speculators can invent if someone would just tell them the story--and repeat it until they know it by heart--of how those bankers, speculators, and those whose job was to regulate them risked our life savings, homes, and jobs through get-rich-quick schemes, compensation plans that rewarded irresponsible risk-taking with our money, and fraud.
The American people would understand why we need to offer at least one health insurance plan not controlled by the insurance companies if someone would just tell them the story of how it came to be that our premiums have doubled as millions more Americans have lost their coverage. The American people would understand why the government needs to invest, with or without private partners, in alternative sources of energy that you don't have to burn, if someone would just tell them the story of how Big Oil has been telling us they're for "all of the above" (a mix of fuels) when "all of the above" for them really means regular, premium, and super unleaded.
The President is offering the public a series of stories that are all missing half the plot and half the characters--namely, the part of the plot that says how we got where we are (e.g., 50 million without health insurance, half a million losing their jobs every month, 1 in 8 homes foreclosed or in danger of foreclosure, 70% of our energy coming from regimes hostile to us and gas prices on the rise again even as demand has fallen)--and the characters responsible for those gaps in the stories. He is trying to sell health care reform without calling out the drug and insurance industries, whose profits have soared at our expense. He is trying to sell financial reform without pointing his finger squarely at the banks and speculators who bankrupted us.
He is trying to sell energy reform without blaming the oil companies who racked up record profits as Americans racked up record debts paying for their gas. And he is trying to sell all of these essential reforms without mentioning that there's been a party--not just nameless "naysayers"--that has been fighting every one of these reforms for decades. When the President does feel compelled on occasion to mention the people who not only put their interests above the public interest but are now funding the lobbyists and attack ads aimed at derailing his agenda, he speaks in passive voice about how "mistakes were made," or refers to unnamed "naysayers." The President's hero is Abraham Lincoln, but it is the Lincoln who penned the Gettysburg Address, not the Lincoln who ordered Union troops to fire.
Roosevelt never made the mistake of letting Americans forget for one moment that the Great Depression was Hoover's depression. And as Paul Begala noted this week on Bill Maher, Ronald Reagan, who inherited an economy in trouble and an American public that felt humiliated over our government's inability to recover our hostages from Iran, never failed to blame Jimmy Carter for every mistake he ever made as President--and then some. We remember Reagan's brilliant ad as "Morning in America," when in fact, the first line of that ad was, "It's morning again in American" (emphasis added). The ad was, indeed, inspirational in tone, but it was also relentlessly critical by contrast with the "dark night" of Carter/Mondale.
Neither Roosevelt nor Reagan ever made it personal, and nor need Obama. FDR did not, for example, attack Hoover's intellect, nor should he have. Hoover was no fool. Hoover's problem was his inflexibility and his ideology, which did not allow him to solve the grave problems his ideology had inspired--the same ideology that brought us to the precipice again 70 years later. Now some might say that critics doubted Obama before, and that he got elected by a wide margin using precisely the same strategy he is using now.
But that is revisionist history. His advisors did not want him to give that speech on race in Philadelphia--they would have preferred to act as if no one noticed his color, a pretence they maintained publicly all the way through the election and afterwards--and it was only when he broke with the politics of avoidance that he turned the corner on the bubbling issue of race and won the Democratic nomination. And while the "generic Democrat" was leading all over the country by double digits, John McCain had overtaken Obama in the polls and was holding a marginal lead in mid September, just weeks before an election that should have been long over.
It was not until then-candidate Obama finally decided to mention his adversary and tell the story of why four more years of Republican rule would be devastating to the country that the wind returned to his sails and he never looked back. Consider the following paragraphs from a post I wrote here in mid September of last year:It was Tuesday afternoon last week, and I was heading back from San Diego to the East Coast when I caught a piece of a speech on the economy by Barack Obama. I almost missed my flight because I couldn't walk away from it. My immediate response: This was a game-changer, and we ought to see a five-point shift in the polls if he keeps this up for the rest of the week.
I was wrong. The shift was bigger. He leapt from 2 points behind John McCain to 6 points ahead at one point by the end of the week. His newfound voice in fact yielded dividends. The question is whether he and his campaign will draw the right conclusions about why he earned those dividends or whether they do what they have done so many times before: drop their gloves and start getting beaten up again after having their opponent down on the canvas.
Mark Sept 16, 2008 as the date Obama may have turned the election around. What he did in that speech in Colorado was something he had only done once before, in his convention address: not just to inspire voters about himself and his vision for the future, but to make the case against John McCain. The truth, he stated with the razor sharpness of a good prosecutor making his closing statement, is that what McCain was saying in response to the extraordinary financial crisis that was unfolding "fits with the same economic philosophy that he's had for 26 years...
It's the philosophy that says even common-sense regulations are unnecessary and unwise. It's a philosophy that lets Washington lobbyists shred consumer protections and distort our economy so it works for the special interests instead of working people...We've had this philosophy for eight years. We know the results. You feel it in your own lives. Jobs have disappeared, and peoples' life savings have been put at risk. Millions of families face foreclosure, and millions more have seen their home values plummet. The cost of everything from gas to groceries to health care has gone up, while the dream of a college education for our kids and a secure and dignified retirement for our seniors is slipping away. These are the struggles that Americans are facing. This is the pain that has now trickled up."
That is the story President Obama needs to tell again and again until it sticks in the minds of voters the same way Ronald Reagan made "government is the problem, not the solution" stick in the minds of voters for 30 years.
The President could get lucky. Without mentioning that the crises we face are not accidents of nature but are in fact man-made--the result of a failed ideology, a tortured morality of unregulated greed, and acts of bad faith perpetrated by bad actors--the economy could pick up, unemployment could reverse itself by this time next year, the deficits could start to decline, and comprehensive health care and energy reform could pass.
In that case, he will build his majorities in Congress in 2010 and will likely become the transformative leader most of us voted for. He is a man not only of tremendous vision but of brilliant rhetorical skill, and he has clearly found his voice as President. If his team is appropriately frustrated that commentators are not giving him enough credit for the impact of his speech in Cairo on subsequent electoral events in the Arab world, they have every right to be, because it was an extraordinary speech that clearly reached the Arab street, and no one else could have given it. But it would be as risky to depend on luck--or on one emotion, hope--as it would be to leave a large loophole in his plans for regulation of the financial industry. Hope and inspiration are very powerful tools, but so are anger and moral indignation, and the American people have every right to feel both.
No one should have been allowed to play with our financial futures the way the banking industry did. No one should have been allowed to amass fortunes in the oil industry or in oil speculation as everyday Americans were loading themselves down with credit card debt to pay four dollars a gallon for gas. No one should have lost a job or a home because someone wanted to turn a quick buck and didn't give a damn what the impact might be on millions of families, shareholders, or pensioners. No industry should have been incentivized to increase its profits every time it denied insurance to someone with a "pre-existing condition" or stamped "denied" on a legitimate medical claim.
Those are stories the American people need to hear. Those are stories conservative Democrats need to hear echoed from their constituents if they are going to do what's right by them. As the President is fond of quoting Martin Luther King, the arc of history is long, but it bends toward justice. Mr. President, now is the time to make it bend. Dr. King didn't seek conflict, but he never avoided it. It's time to follow his example.
The Boundaries of Unemployment
Fred Wright and Tyrone Gatson live about 55 miles apart and worked as technicians for poultry producer Pilgrim's Pride Corp. until they were laid off last month. But Mr. Wright, who lives and worked in Arkansas, is eligible for nearly twice as much in unemployment benefits as Mr. Gatson, who lives in Louisiana and worked at a different Pilgrim's Pride plant in that state, just over the border from Mr. Wright. Under Arkansas's more generous system, Mr. Wright can get $431 in weekly benefits, compared to Mr. Gatson's $284. He is also eligible to receive benefits for three more months than Mr. Gatson.
The differences highlight the inequities of the U.S. unemployment-insurance system, a complex patchwork of government programs guided by Washington but administered principally by the states. Economists say jobless benefits soften the blow of recessions by offering laid-off workers money for necessities like food and housing while they seek new jobs. The programs also prop up consumer spending, reducing the spread of layoffs in hard-hit areas. As the recession drags on, more Americans are relying on unemployment checks -- 6.7 million in the week ended June 6 -- than at any time since the Department of Labor began collecting the data in 1967.
Unemployment benefits are financed by state and federal taxes on employers; in general, employers pay higher taxes as more of their former workers tap benefits. States set most of the rules based on their own fiscal and policy choices, creating a maze of regulations to determine who qualifies for jobless benefits, how much money they get, and for how long. Some students of the system say the inconsistencies weaken the safety net and allow many women, low-wage earners and part-timers to slip through. "Too many states are very stingy about paying out adequate unemployment benefits," says Maurice Emsellem, policy co-director at the National Employment Law Project, a research and employee-advocacy group. "Sometimes there's no rhyme or reason to it."
For instance, laid-off workers in Mississippi typically receive no more than $230 a week, while those in Massachusetts with 13 or more dependents can get up to $942 a week. (A total of 14 states increase benefits to claimants with dependents.) Connecticut calculates benefits for construction workers using a different, more generous formula than for other workers. North Dakotans can work part-time and earn as much as 60% of their weekly benefits without sacrificing a dime. But every dollar a New Yorker earns while drawing an unemployment check is subtracted from his or her benefits.
The maximum duration is based on state unemployment rates and state law. Unemployed workers in 17 states and the District of Columbia are eligible for up to 79 weeks of benefits, more than a year and a half. But those in six states can get no more than 46 weeks. Laid-off workers in Mississippi and Alabama are eligible for 59 weeks, and could get another 20 weeks, but their laws use a more-restrictive unemployment-rate formula. Spokesmen for the state agencies that oversee the programs say the formulas can be changed only by state lawmakers. Thirty-three states cover people who leave work for certain compelling family reasons, and 15 offer extra benefits to those who enroll in job training. Another federal program offers up to two years of benefits to manufacturing and farm workers who lose jobs to foreign competition.
People in the same state, and even neighbors, can be treated differently, because benefits are awarded by the state where they worked, not where they live. Consider Johnny Hill, another former Pilgrim's Pride technician laid off in May. Mr. Hill lives in Louisiana, like Mr. Gatson, but he worked with Mr. Wright at the Pilgrim's Pride plant in El Dorado, Ark., about 20 miles from his home. Mr. Hill, who made around $1,000 weekly at Pilgrim's Pride, gets Arkansas's bigger benefits -- $431 a week for up to 72 weeks. The 53-year-old technician, who worked at the El Dorado plant for 36 years, hopes to find a job near his home. "If there are no jobs out there, I guess I'll go ahead and retire," he says.
Mr. Gatson, who worked in Farmerville, La., earned more than Mr. Hill when both were working, but he gets smaller unemployment checks. The 35-year-old father of three, whose wife lost her job about two years ago, says he hopes he can "stay above water" on $284 a week. He is looking for a job but says "there's none out there." Mr. Gatson hopes to be hired by Foster Farms, which acquired the Farmerville plant last month, after Pilgrim's Pride entered bankruptcy-court protection in December. Foster Farms plans to rehire many of its former workers.
As for Mr. Wright, he says he is supplementing his unemployment benefits with savings accumulated while frequently working overtime during 15 years at the El Dorado plant. His family is cutting back on extras like dining out. He is hoping to find a job nearby to avoid moving before his daughter graduates from high school in two years. The savings "can't last forever," he says. Louisiana, like many other states, tries to keep unemployment taxes low to attract businesses, and jobs, to the state. But the lower taxes pay for smaller benefits. The regime was reinforced in the 1980s, when Louisiana's unemployment insurance trust fund went bankrupt and the state borrowed money from the federal government to replenish it, says Curt Eysink, a spokesman for the Louisiana Workforce Commission. The state then enacted a law that links tax rates and benefit payments to the size of the trust fund.
In July, Arkansas will raise its maximum weekly payment to $441. The maximum payment is set at two-thirds the state's average weekly wage and rises nearly every year. The maximum weekly benefit payment isn't tied to the size of the state's trust fund. In January, Louisiana increased the maximum weekly payment to $284 from $258 to account for projected growth in its trust fund. That helped Robert Fenceroy, who lost his job as a machine operator in January when International Paper Co. closed its Bastrop, La., mill. (The federal economic-stimulus law, enacted in February, then raised weekly payments for all eligible workers by $25.)
But Louisiana's increase didn't benefit people who filed for benefits before January, such as Mr. Fenceroy's friend and former co-worker, Kenneth Jones. He initially filed for unemployment when he was laid off for three weeks in November, before the plant closed. The November claim determines his eligibility for benefits. Moreover, state officials have since reclaimed one week of Mr. Jones's November benefits on a technicality. He filed for bankruptcy last week. Mr. Jones, an ordained Baptist minister who lives less than 20 miles south of the Arkansas border, says "it's unfair that we don't get as much as the other state." He adds, "It's just hard to understand."
Mr. Fenceroy agrees. "Why should it be any different in Louisiana?" he says. Jobless benefits "ought to be universal. If you're unemployed, you're unemployed." The federal government and some employee-advocacy groups are pushing states to modernize and harmonize their unemployment-insurance programs. The economic-stimulus law includes $7 billion for states to make it easier for women, low-wage earners and part-time workers to qualify for jobless benefits.
So far, 34 states are receiving funding. Louisiana Gov. Bobby Jindal turned down the $98 million incentive available to his state. The changes, he argued, would increase taxes on employers by allowing more former employees to qualify for benefits, at a time when many businesses are struggling, says Mr. Eysink of the Louisiana Workforce Commission. Louisiana's benefits could be cut back for workers who apply next year, if its trust fund is depleted, says David Fitzgerald, the state's chief of benefits. "With increased benefits going out and the unemployment rate continuing to rise," a drop is likely, he says.
UK debt chief Stheeman dismisses prospect of 'buyers strike'
Britain has no risk whatsoever of facing a "buyers' strike" where investors abandon its debt, the head of the Debt Management Office (DMO) has insisted on Tuesday. Robert Stheeman dismissed fears that markets would simply baulk at the record amount of debt set to be issued in the coming years. Speaking at the Global Borrowers and Investor's Forum, organised by Euromoney, Mr Stheeman said: "This notion of a buyers' strike is something very peculiar to the UK because some people have memories of the 1970s. "This flies in the face of the facts. Government borrowing markets are the most liquid and efficient markets that you will find anywhere.
If markets have trouble absorbing issuance then prices will fall and yields will rise. What we won't see is a buyers' strike." Mr Stheeman also said that the DMO remains "colourblind" to the fact that the Bank of England is buying £125bn or more of gilts through its quantitative easing programme, saying it would carry on issuing debt as normal, and pointing out that the DMO has already issued a quarter of the debt it planned to this year. He said that although ratings agency Standard and Poor's last month put UK debt on a "negative outlook", he had yet to discern any negative effects. "We haven't seen any effect from it," he said.
"When the news came out it was an hour and a half before our biggest auction ever. As it happened we had more bids in that auction than we had ever had before." He added that it remained a challenge trying to sell the £220bn of debt the government is trying to raise this year. He said: "I wouldn't want to give the sense that we are completely ignorant of the fact that this is an extremely large financing requirement that we face. "But markets have performed very well. We had an uncovered auction in March but since then the covers we received have risen".
Eurozone recovery loses momentum
An economic recovery in the eurozone is only inching forward, according to a closely-watched survey that has highlighted the fragility of recent turnaround in growth prospects. June’s purchasing managers’ indices for the 16-country region rose to a nine-month high, indicating that the worst recession to hit continental Europe since the second world war was continuing to lose its ferocity. But the rate of improvement was less than expected, dragged down by a weaker performance in the service sector, and the indices still pointed to a substantial contraction in second quarter economic activity.
The weaker-than-expected results will damp hopes that the eurozone could return to growth this year, even if the worst of the recession is clearly over, but were consistent with the view of many forecasters, including at the European Commission and European Central Bank that the economy will start expanding again in 2010. The eurozone economy was badly hit by the collapse in global confidence that followed the failure of Lehman Brothers investment bank last September. Gross domestic product contracted by 1.8 per cent in the final three months of 2008 and by a further 2.5 per cent in the first quarter of this year – significantly faster than in the US or UK.
Chris Williamson, chief economist at Markit, which produces the purchasing managers’ indices, said June’s readings pointed to a contraction of about 0.5 per cent or 0.6 per cent in eurozone GDP in the second quarter. The rate of easing had "lost considerable momentum towards the end of the quarter," he said, especially in the service sector, where demand appeared to have been hit by rising unemployment. Dominic Bryant at BNP Paribas ruled out a robust recovery "anytime soon", and said he expected the economy to be "more or less flat for the next four quarters". That lacklustre performance compared with the US and UK would reflect, he said, "the less aggressive action of policy makers in the eurozone in the areas of monetary policy, fiscal policy and banking sector support."
However, the purchasing managers’ indices still suggested further improvements were likely in coming months. They showed the ratio of new orders to inventories in manufacturing, which in the past has acted as a guide to future production trends, rose sharply this month to a 19 month high. Expectations about activity in the service sector, meanwhile, hit a 23-month peak. The composite purchasing managers’ index, covering manufacturing and services, rose from 44.0 in May to 44.4 in June. A figure below 50 indicates a contraction in activity. The manufacturing sector index rose strongly, from 40.7 in May to 42.4 but the service sector index dropped from 44.8 in May to 44.5.
Peugeot-Citroen Expects Big 2009 Loss
PSA Peugeot-Citroen warned Tuesday that it expects to post a large loss for 2009, and announced plans to issue up to €575 million of convertible bonds. Europe's second-largest car maker after Germany's Volkswagen AG forecast a loss of between €1 billion ($1.39 billion) and €2 billion for the year. Peugeot-Citroen had previously indicated it would record a loss for 2009, but hadn't said how big that loss would be. Analysts polled by FactSet expect a loss of €1.37 billion for 2009. The company reported a loss of €343 million for 2008.
Like other auto makers, Peugeot-Citroen is battling with sagging demand for its cars while trying to conserve cash by reducing stocks and slashing costs. Peugeot-Citroen is also undergoing a significant overhaul following the removal of chief executive Christian Streiff in March. He was succeeded by Philippe Varin, formerly head of the Corus steel group, who last week undertook a major management reshuffle that gave responsibility for the Citroen and Peugeot brands to Jean-Mark Gales. "The new chief executive seems to be cleaning out the cupboard," said Mike Tyndall of Nomura Securities.
Market analysts had anticipated that Peugeot-Citroen would issue convertible bonds to strengthen its balance sheet, but the size of the offering is smaller than many had expected. Peugeot-Citroen said that "given recent improvements in capital markets, the group is also considering an issue of new notes or bonds, depending on market conditions." The company has received a €3 billion loan by the French state, and €400 million from the European Investment Bank.
Fonciere, Financiere et de Participation, or FFP, a Peugeot family investment vehicle, will subscribe to 10% of the available amount of convertible bonds, Peugeot-Citroen said. FFP owns 22.1% of Peugeot-Citroen's capital and 32.8% of its voting rights, implying a "marginal" dilution, a spokesman said. FFP, together with other Peugeot family interests, controls 30.3% of Peugeot-Citroen's capital and 45.1% of its voting rights. Its chairman, Thierry Peugeot, said earlier this month that the family is prepared to see some dilution of its shareholding but will retain control.
Peugeot-Citroen Tuesday also increased its projection for demand for automobiles in Western Europe. The company now expects a decline of 12% in this key market for sales and profits, compared to the 20% drop it had indicated in recent months. The French auto maker said there has been a sharp swing in consumer preference for smaller, fuel-efficient cars that offer thinner margins, and promotional activity in this market segment has become more aggressive.
Car sales in France and several other European countries have been underpinned by government initiatives offering financial incentives to owners of old cars to scrap them and buy new, environmentally friendly models. The plan in France is due to expire at the end of this year, although car makers are in talks with the government on how to avoid a possible collapse in sales that could result if the aid is withdrawn abruptly. Peugeot-Citroen warned Tuesday that if the scrappage scheme isn't prolonged it will have to cut back production in the last quarter of this year.
Credit worthy borrowers trapped in negative equity
One in 10 credit-worthy homeowners are already trapped in negative equity, according to a report by the credit-ratings agency Fitch. The borrowers with an "excellent" credit record are saddled with mortgages which are bigger than the value of their homes, the Financial Times said, citing the report. The area worst affected by negative equity is Northampton, where 17pc of borrowers have been hit. Other parts of the country have been relatively unscathed, Fitch said. In Glasgow, only 4pc of homeowners owe more than the value of their homes.
Northern Rock and Bradford & Bingley, both bailed out by the Government, are among the banks with the highest number of customers in negative equity, the newspaper said. Alliance & Leicester, owned by Santander, and Birmingham Midshires, part of HBOS, are also high up the list. If house prices do fall by between 30pc and 35pc from peak to trough, then the proportion of homeowners in negative equity could rise to 23pc, Fitch predicted. The report is based on loan information from 2.7m borrowers, using values from the Nationwide house price index, which has fallen 20pc from the peak.
Most UK businesses freeze pay as recession bites
Six in every 10 UK companies plan to freeze pay or negotiate cuts, according to a new employment survey by the Confederation of British Industry (CBI) and recruitment group Harvey Nash. The same proportion of businesses have frozen recruitment across all or part of their operations, the comprehensive poll published today indicates. John Cridland, deputy director-general of the CBI, said the research revealed that the recession had dramatically altered the workplace landscape. More than 700 companies, employing about 3m people, took part in the survey.
It had been a "particularly bruising recession, but one of its most positive and striking aspects has been the commitment of many businesses and their staff to work together to try to trim costs and save jobs," Mr Cridland said. Among other key findings, in cases where jobs could not be saved, the cost of individual redundancy payments averaged £12,100. More than half the businesses surveyed expect recruitment levels to take more than a year to return to 2007 levels, and about half of those said it would take more than two years.
Almost 40pc have put a freeze on graduate recruitment and a further 10pc said they were recruiting fewer graduates, compared to just 5pc recruiting more. Albert Ellis, chief executive of Harvey Nash, warned that the UK economy was in danger of losing its competitive edge if British companies failed to take a more "proactive approach to training, accommodating and retaining talent".
French central bank chief warns on spending
The French government must control spending to reduce the public deficit as soon as the economy starts growing again, Christian Noyer, governor of the Bank of France said on Tuesday. His warning came a day after Nicolas Sarkozy scaled back commitments to shore up the country’s deteriorating public finances, putting the French president on a collision course with the European Central Bank, on whose board Mr Noyer sits. The ECB has urged fiscal restraint but in a speech in Monday, Mr Sarkozy rejected "austerity policies" and called for a change in the way deficits were addressed.
Mr Noyer pointed out that France had the biggest public debt of the main industrial countries, at 53 per cent of national income. This compares with the UK’s 48 per cent, Germany’s 44 per cent and the US’s 37 per cent. "As soon as growth has returned, we need to be quite rigorous on the level of spending, because we have a level of spending that is very strong, to make sure that spending increases at a slower pace than receipts, so that the deficit is rapidly re-absorbed," Mr Noyer said, presenting the French central bank’s annual report. "It is very important to prepare this policy for tomorrow."
Analysts said that Mr Sarkozy’s recent comments suggested he would not give such a high priority to straightening out public finances once growth returned to an economy expected to contract by 3 per cent this year. Nevertheless, Mr Noyer thew his weight behind the government’s current measures to stimulate growth, saying it was a paradox of the crisis that: "in the short-term they require measures that run counter to those desirable in the long-term. ....We need to spend more today but reduce deficits tomorrow."
He acknowledged that the government had a :"difficult juggling act" in supporting the economy while carrying out structural reforms aimed at raising the country’s long-term growth potential. There were signs the economy would stabilise by the end of the year with growth returning at the beginning of 2010. The deficit could be brought down through more cuts in jobs in the public sector and reform of the public health system. "It’s very important to think about it now even if we’re not going to start shrinking the deficit because one doesn’t do that in the middle of the crisis or recession," he said.
Ilargi: Maybe this time next year he’ll be selling them to the soup kitchens.
Cats and Dogs Targeted for Termination in California
With his state mired in billions of dollars in red ink, Gov. Arnold Schwarzenegger is eager to save every penny he can, even if it means killing a few thousand cats and dogs. The Hayden Bill, enacted 11 years ago, requires that California shelters provide care to animals for at least six days before euthanizing them. According to a report by the Legislative Analyst’s Office, the state could save $23 million by slashing that mandate in half.
The cost of recovery for each animal adopted is typically paid for via fees, but the LAO claims that keeping these animals alive a few extra days does nothing for their long-term.
"This increased supply of adoptable animals can give households greater choice in selecting a pet to adopt. It does not necessarily mean, however, that more households adopt pets," reads the report. Animal lovers like San Francisco Animal Care and Control director Rebecca Katz are predictably outraged. "The quick and dirty answer is, locally, we don't intend to change our practices on how long we hold a stray animal," the aptly named Katz told SF Weekly. "I don't know that will always be the case, but that is our intention."
Don't think for a minute that Schwarzenegger feels good about the prospect signing so many death warrants. "I feel terrible about it," he told the San Diego Union-Tribune.
Pensioners kidnap financial adviser who lost them £2 million and batter him with Zimmer frames
Pensioners battered a financial adviser with Zimmer frames before kidnapping and torturing him for losing £2million of their savings. James Amburn, 56, was ambushed outside his home in Speyer, western Germany, bound with masking tape and bundled into a car boot. ‘It took them quite a while because they ran out of breath,’ said Mr Amburn, who was driven to the Bavarian lakeside home of one of the gang. Another couple, retired doctors, joined the kidnappers in the cellar where Mr Amburn was chained and tortured for four days last week.
‘The fear of death was indescribable,’ he said. Mr Amburn was rescued when he sent a fax to release funds from a Swiss bank and scribbled a message on it for the receiver to call police.' Mr Arnburn, 56, described how two of his kidnappers, identified only as Roland K, 74, and Willy D, 60, hit him with a Zimmer frame outside his home in Speyer, west Germany before binding him with duct tape. He was bundled into the boot of a silver Audi saloon and driven 300 miles to the home of Roland K on the shores of Lake Chiemsee in Bavaria. As the financial advisor, who runs investment firm Digitalglobalnet, was bundled into the cellar another couple, retired doctors Gerhard and Iris F, aged 63 and 66, arrived to assist his kidnappers.
Mr Amburn said: 'I had known these people for 25 years. I had no reason to be afraid. But as I went into my home I was jumped from the rear and struck. 'They bound me with masking tape until I looked like a mummy. It took them quite a while because they ran out of breath. When they loaded me into the car I thought I was a dead man. 'I was bleeding from my eyes, nose and my mouth. But the nightmare had only just started.' During his confinement in an unheated cellar, Mr Amburn claims he was burned with cigarettes, beaten, had two of his ribs broken when he was hit with a chair leg and chained up 'like an animal.' He says he was fed only two bowls of watery soup during his four days in the dungeon.
'I was led into the cellar,' recalled Mr Amburn, 'And I saw a folding bed and a WC reserved for me. They immediately went on about their money. 'I told them what I had told them before, that due to market conditions, unfortunately it was gone. 'I was struck. Again and again they threatened to kill me. The fear of death was indescribable. I never thought I would make it out alive. 'I tried to buy time, to ease the situation, but I didn’t know if night was day or day night. 'I told them that if I sold certain securities in Switzerland they could get their money and for this I had to send a fax to a bank in that country so funds could be transferred.'
They agreed and he sent a fax. But unbeknown to them, he had scribbled a message on the bottom of the paper for whoever received it to call the police. 'It was disguised as a policy which is spelled police in German,' he said. 'I wrote call police and they didn’t notice it but someone at the bank was bright enough to pick up on it.' Allowed out of the cellar on Friday for cigarette break in the garden while the kidnappers waited on their loot, Mr Amburn attempted to escape over the wall. In the pouring rain he ran down the street pursued by his captors in the Audi A8 they had used to transport him to the house.
Several people saw him but Roland K shouted: 'He’s a burglar!' He was then dragged back to the cellar where he sustained several broken ribs as a 'punishment' for trying to escape. Shortly afterwards, the Swiss bank telephoned police in Germany and an armed team of special SEK commandos was scrambled and the house was stormed in the early hours of Saturday morning. Forty armed officers rescued Mr Amburn who was naked except for his underwear. A physician had to be on hand to help his captors into police vans because of their various infirmities. They now face up to 15 years in jail each for illegal hostage taking, torture and grievous bodily harm.
Chief public prosecutor Volker Ziegler said: 'They were angry because they invested money in properties in Florida and he lost it all. 'This was black money - they hadn’t declared it to the revenue authorities in Germany.' Mr Amburn, who needed hospital treatment for his injuries before being allowed home, added: 'They threatened me with the Russian mafia too. I am not sure I feel all that safe even though they are behind bars.'
A Perfect Storm Could Shed Light On Secretive Energy Markets
When Olav Refvik wanted to boost the price of heating oil to make a lucrative energy deal even more lucrative, the Morgan Stanley trader locked up several storage tanks the bank owned near New York Harbor to squeeze supply. Far from being illegal, the maneuver -- which earned him millions and the moniker "King of New York Harbor" -- is business as usual in the "regulated" commodities market. The rough-and-tumble Chicago-based commodities market is an unusual beast on Wall Street, where practices that would be frowned upon at the flashier New York stock exchange, are considered quite acceptable.
While less glamorous than its East Coast cousin, the commodities markets are critical to most Americans. That's because its traders are integral in establishing the price we pay for oil at the pump each day. When Morgan Stanley, Citigroup and Royal Dutch Shell squirreled away 80 million barrels of crude oil -- nearly enough to supply the entire world for a day -- in supertankers off the Gulf of Mexico last January, they too profited as the price at the pump rose.
But now, as a comprehensive climate bill wends its way through the House of Representatives, some of these aggressive commodities practices have come under scrutiny. New legislation proposed by Rep. Waxman (D-Calif.) and Rep. Markey (D-Mass.) would create a system of carbon allowance permits that the government would sell to companies that want to circumvent new emissions requirements. These permits would end up spurring as much as $2 trillion in new carbon-based "derivatives." In this case, these new derivatives, so-called because they derive their value from something else, would be traded on the commodities markets, and without proper regulation, critics worry their prices could be manipulated much in the way that traders influence the price of oil.
With the combination of the upcoming climate bill that that could create a major new commodity derivatives market, in addition to a new focus from the Obama administration on derivatives, experts are hoping that regulation will be strengthened. Experts and legislators say these two forces have created a perfect storm, and that the opportunity is ripe to take a broader look at the overall commodities market rather than be limited to reforming only derivatives.
President Obama last week called for the overhaul Wall Street, and as part of his proposal, he zeroed in on regulating over-the-counter (OTC) derivatives, or those instruments that are bought and sold via verbal contracts. Because they are not traded on an exchange, OTC derivatives leave no paper trail and lack transparency. At this time, it seems probable that the pollution derivatives would be traded over the counter. "On the road to reform we shouldn't be leaving any loopholes," Warren Gunnels, a senior policy advisor to Sen. Bernie Sanders (I-Vt.), told the Huffington Post. "It's important that we not just look at OTC derivatives, but also see how this whole commodities market can be more transparent."
Sanders is one of a five legislators who has proposed legislation in recent weeks that would change the freewheeling Chicago market by strengthening regulations and, in some cases, bolstering the oversight powers of the Commodities Futures Trading Commission (CFTC). Sanders is hoping to compel the CFTC to invoke its emergency powers to stop traders from participating in excessive oil speculation. Other legislation related to reforming the commodities markets includes an amendment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.
One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.
"There is much in the energy market that would be considered insider trading on Wall Street, but is completely acceptable in the commodities market," said Tyson Slocum, the director of the energy program at Public Citizen. Goldman Sachs, Slocum says, should be considered "an energy company" and has been increasingly buying up pipeline and storage facilities. "Then say they are only using the acquisitions to hedge positions on their infrastructure. What they are really doing is getting an insider peek into information that gives them a significant edge," Slocum said. When asked to comment on how they use this proprietary information, Goldman Sachs declined to comment and Morgan Stanley didn't return calls.
Central to the practices in Chicago is that the CFTC has historically been a weak regulator. Congress stripped the CFTC of much of its power in the 1990s and 2000 as a result of lobbying from Enron and a sympathetic administration. Its powers have yet to be reinstated, which means there is little in the way of limits on how many commodity contracts traders can buy and sell, and there are only minimal capital requirements. This means that, much like with the housing bust, banks can borrow continuously to fund their speculation without having to hold much capital, or so-called 'skin in the game.' The same is true with hedge funds, which do not have to register with the CFTC.
This is worrisome, according to the experts, because if the big traders over-leverage themselves as a result of the lax capital requirements, they will be unable to pay out their contracts should the value of commodities suddenly drop. That could lead to a market collapse much like the one that has taken place with real estate. Another issue is the electronic trading platforms. While many commodity derivatives are traded over the counter, with no oversight, commodities of all kinds are also traded on two other types of platforms: There is the traditional NYMEX, which is the most heavily regulated of the commodities markets and operates like the stock exchange, and another, only lightly regulated electronic market, the most popular of which is IntercontinentalExchange, or ICE.
London-based ICE, which counts among its founding members Goldman Sachs, BP and Shell, was under no regulatory oversight until last year, when the Republican-led CFTC entered into a voluntary agreement. Under the terms, ICE was to send the agency data on its trades, and the CFTC also gained the right to regulate individual commodity contracts if it could prove it could be related to anti-competitive behavior. The agreement with ICE hasn't had much of an effect, however. That's because ICE's computer software isn't compatible with the CFTC's system, and what data the regulator can read is often "months old and useless," said Slocum, citing conversations with frustrated CFTC enforcement officials.
A CFTC spokesman told the Huffington Post that it receives data daily from ICE and that they are able to glean useful information from the reports. The spokesman, David Gary, added that the agency had asked the Obama administration for technological upgrades to its computer systems as part of a proposal for additional funding. "The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX is difficult," Slocum testified earlier this year at a hearing of the House Committee on Agriculture. He cited a case in which the Department of Justice took four years to investigate allegations of a single day's worth of price fixing. "If it takes the DOJ four years to investigate a single day's worth of market manipulation, clearly energy traders intent on price-gouging the public don't have much to fear," Slocum said.
While numbers are hard to come by, Morgan Stanley said in its November 2008 SEC filing, that it held $18.7 billion in commodity futures, options and swaps. In its annual report, the company said that commodity revenues had jumped 62 percent. The bank also reported to the SEC that it had committed $452 million solely to lease petroleum storage facilities in 2009. As for Goldman, 17 percent of if its $22 billion in revenue in 2008 came from fixed income, currency and commodities, which includes all of its energy trading business. Meanwhile, Citigroup's trading division, Phibro, reported the total value of its commodity derivatives increased to $214.5 billion in 2008, a 384 percent increase from 2004. Bank of America held $58.6 billion in these derivatives as of September 2008.
Overall, energy experts said they would be watching to see how the legislation proceeds. "In my opinion, we haven't served the problem of excessive speculation, and whether these reforms will at that is questionable," said Mark Cooper, the research director of the Consumer Federation of America. "We would like to see all of the loopholes closed since it really is the ordinary American consumer who is paying the price in the form of higher prices."
Touring Empire's Ruins
From Detroit to the Amazon
The empire ends with a pull out. Not, as many supposed a few years ago, from Iraq. There, as well as in Afghanistan, we are mulishly staying the course, come what may, trapped in the biggest of all the "too-big-to-fail" boondoggles. But from Detroit.
Of course, the real evacuation of the Motor City began decades ago, when Ford, General Motors, and Chrysler started to move more and more of their operations out of the downtown area to harder to unionize rural areas and suburbs, and, finally, overseas. Even as the economy boomed in the 1950s and 1960s, 50 Detroit residents were already packing up and leaving their city every day. By the time the Berlin Wall fell in 1989, Detroit could count tens of thousands of empty lots and over 15,000 abandoned homes. Stunning Beaux Arts and modernist buildings were left deserted to return to nature, their floors and roofs covered by switchgrass. They now serve as little more than ornate bird houses.
In mythological terms, however, Detroit remains the ancestral birthplace of storied American capitalism. And looking back in the years to come, the sudden disintegration of the Big Three this year will surely be seen as a blow to American power comparable to the end of the Raj, Britain's loss of India, that jewel in the imperial crown, in 1948. Forget the possession of a colony or the bomb, in the second half of the twentieth century, the real marker of a world power was the ability to make a precision V-8.
There have been dissections aplenty of what went wrong with the U.S. auto industry, as well as fond reminiscences about Detroit's salad days, about outsized tailfins and double-barrel carburetors. Last year, the iconic Clint Eastwood even put the iconic white auto worker to rest in his movie Gran Torino. Few of these postmortems have conveyed, however, just how crucial Detroit was to U.S. foreign policy -- not just as the anchor of America's high-tech, high-profit export economy, but as a confirmation of our sense of ourselves as the world's premier power (although in linking Detroit's demise to the blowback from President Nixon's illegal war in Laos, Eastwood at least came closer than most).
Detroit not only supplied a continual stream of symbols of America's cultural power, but offered the organizational know-how necessary to run a vast industrial enterprise like a car company -- or an empire. Pundits love to quote GM President "Engine" Charlie Wilson, who once famously said that he thought what was good for America "was good for General Motors, and vice versa." It's rarely noted, however, that Wilson made his remark at his Senate confirmation hearings to be Dwight D. Eisenhower's Secretary of Defense. At the Pentagon, Wilson would impose GM's corporate bureaucratic model on the armed forces, modernizing them to fight the Cold War.
After GM, it was Ford's turn to take the reins, with John F. Kennedy tapping its CEO Robert McNamara and his "whiz kids" to ready American troops for a "long twilight struggle, year in and year out." McNamara used Ford's integrated "systems management" approach to wage "mechanized, dehumanizing slaughter," as historian Gabriel Kolko once put it, from the skies over Vietnam, Laos, and Cambodia.
Perhaps, then, we should think of the ruins of Detroit as our Roman Forum. Just as Rome's triumphal arches still remind us of its bygone imperial victories in Mesopotamia, Persia, and elsewhere, so Motown's dilapidated buildings today invoke America's fast slipping supremacy.
Among the most imposing is Henry Ford's Highland Park factory, shuttered since the late 1950s. Dubbed the Crystal Palace for its floor to ceiling glass walls, it was here that Ford perfected assembly-line production, building up to 9,000 Model Ts a day -- a million by 1915 -- catapulting the United States light-years ahead of industrial Europe.
It was also here that Ford first paid his workers five dollars a day, creating one of the fastest growing and most prosperous working-class neighborhoods in all of America, filled with fine arts-and-crafts style homes. Today, Highland Park looks like a war zone, its streets covered with shattered glass and lined with burnt-out houses. More than 30% of its population lives in poverty, and you don't want to know the unemployment numbers (more than 20%) or the median yearly income (less than $20,000).
There is one reminder that it wasn't always so. A small historical-register plaque outside the Ford factory reads: "Mass production soon moved from here to all phases of American industry and set the pattern of abundance for 20th Century living."
America in the Amazon
To truly grasp how far America has fallen from the heights of its industrial grandeur -- and to understand how that grandeur led to stupendous acts of folly -- you should tour another set of ruins far from the Midwest rustbelt; they lie, in fact, deep (and nearly forgotten) in, of all places, the Brazilian Amazon rainforest. There, overrun by tropical vines, sits Henry Ford's testament to the belief that the American Way of Life could easily be exported, even to one of the wildest places on the planet.
Ford owned forests in Michigan as well as mines in Kentucky and West Virginia, which gave him control over every natural resource needed to make a car -- save rubber. So in 1927, he obtained an Amazonian land grant the size of a small American state. Ford could have simply set up a purchasing office there, and bought rubber from local producers, leaving them to live their lives as they saw fit. That's what other rubber exporters did.
Ford, however, had more grandiose ideas. He felt compelled to cultivate not only "rubber but the rubber gatherers as well." So he set out to overlay Americana on Amazonia. He had his managers build Cape Cod-style shingled houses for the Brazilian work force he hired. He urged them to tend flower and vegetable gardens and eat whole wheat bread, unpolished rice, canned Michigan peaches, and oatmeal. He dubbed his jungle town, with suitable pride, Fordlandia.
It was the 1920s, of course, and so his managers enforced alcohol Prohibition, or at least tried to, though it wasn't a Brazilian law, as it was in the United States at the time. On weekends, the company organized square dances and recitations of the poetry of Henry Longfellow. The hospital Ford had built in the town offered free health care for workers and visitors alike. It was designed by Albert Kahn, the renowned architect who built a number of Detroit's most famous buildings, including the Crystal Palace. Fordlandia had a central square, sidewalks, indoor plumbing, manicured lawns, a movie theater, shoe stores, ice cream and perfume shops, swimming pools, tennis courts, a golf course, and, of course, Model Ts rolling down its paved streets.
The clash between Henry Ford -- the man who reduced industrial production to its simplest motions in order to produce a series of infinitely identical products, the first indistinguishable from the millionth -- and the Amazon, the world's most complex and diverse ecosystem, was Chaplinesque in its absurdity, producing a parade of mishaps straight out of a Hollywood movie. Think Modern Times meets Fitzcarraldo. Brazilian workers rebelled against Ford's Puritanism and nature rebelled against his industrial regimentation. Run by incompetent managers who knew little about rubber planting much less social engineering, Fordlandia in its early years was plagued by vice, knife fights, and riots. The place seemed less Our Town than Deadwood, as brothels and bars sprawled around its edges.
Ford did eventually manage to get control over his namesake fiefdom, but because he insisted that his managers plant rubber trees in tight rows -- back in his Detroit factories, Ford famously crowded machines close together to reduce movement -- he actually created the conditions for the explosive growth of the bugs and blight that feed off rubber, and these eventually laid waste to the plantation. Over the course of nearly two decades, Ford sank millions upon millions of dollars into trying to make his jungle utopia work the American way, yet not one drop of Fordlandia latex ever made its way into a Ford car.
The eeriest thing of all is this: Today, the ruins of Fordlandia look a lot like those in Highland Park, as well as in other rustbelt towns where neighborhoods that once hummed with life centered on a factory are now returned to weed. There is, in fact, an uncanny resemblance between Fordlandia's rusting water tower, broken-glassed sawmill, and empty power plant and the husks of the same structures in Iron Mountain, a depressed industrial city on Michigan's Upper Peninsula that also used to be a Ford town.
In the Amazon, Albert Kahn's hospital has collapsed, the jungle has reclaimed the golf course and tennis courts, and bats have taken up residence in houses where American managers once lived, covering their plaster walls with a glaze of guano. No commemorative plaque marks its place in history, but Fordlandia, no less than the wreck of Detroit, is a monument to the titans of American capital -- none more titanic than Ford -- who believed that the United States offered a universal, and universally acknowledged, model for the rest of humanity.
Errand into the Wilderness
It would be easy to read the story of Fordlandia as a parable of arrogance. With a surety of purpose and incuriosity about the world that seem all too familiar, Ford deliberately rejected expert advice and set out to turn the Amazon into the Midwest of his imagination. The more the project failed on its own terms -- that is, to grow rubber -- the more Ford company officials defended it as a civilizational mission; think of it as a kind of distant preview of the ever expanding set of justifications for why the U.S. invaded Iraq six years ago. Yet Fordlandia cuts deeper into the marrow of the American experience than that.
Over 50 years ago, the Harvard historian Perry Miller gave a famous lecture which he titled "Errand into the Wilderness." In it, he tried to explain why English Puritans lit out for the New World to begin with, as opposed to, say, going to Holland. They went, Miller suggested, not just to escape the corruptions of the Church of England but to complete the Protestant reformation of Christendom that had stalled in Europe.
The Puritans did not flee to the New World, Miller said, but rather sought to give the faithful back in England a "working model" of a purer community. Put another way, central from the beginning to American expansion was "deep disquietude," a feeling that "something had gone wrong" at home. With the Massachusetts Bay Colony just a few decades old, a dissatisfied Cotton Mather began to learn Spanish, thinking that a better "New Jerusalem" could be raised in Mexico.
The founding of Fordlandia was driven by a similar restlessness, a chafing sense, even in the good times, the best of times, that "something had gone wrong" in America. When Ford embarked on his Amazon adventure, he had already spent the greater part of two decades, and a large part of his enormous fortune, trying to reform American society. His frustrations and discontents with domestic politics and culture were legion. War, unions, Wall Street, energy monopolies, Jews, modern dance, cow's milk, both Theodore and Franklin Roosevelt, cigarettes, and alcohol were among his many targets and complaints. Yet churning beneath all these imagined annoyances was the fact that the force of industrial capitalism he had helped unleash was undermining the world he hoped to restore.
Ford preached with a pastor's confidence his one true idea: ever increasing productivity combined with ever increasing pay would both relieve human drudgery and create prosperous working-class communities, with corporate profits dependent on the continual expansion of consumer demand. "High wages," as Ford put it, to create "large markets." By the late 1920s, Fordism -- as this idea came to be called -- was synonymous with Americanism, envied the world over for having apparently humanized industrial capitalism.
But Fordism contained within itself the seeds of its own undoing: the breaking down of the assembly process into smaller and smaller tasks, combined with rapid advances in transportation and communication, made it easier for manufacturers to break out of the dependent relationship established by Ford between high wages and large markets. Goods could be made in one place and sold somewhere else, removing the incentive employers had to pay workers enough to buy the products they made.
In Rome, the ruins came after the empire fell. In the United States, the destruction of Detroit happened even as the country was rising to new heights as a superpower.
Ford sensed this unraveling early on and responded to it, trying at least to slow it in ever more eccentric ways. He established throughout Michigan a series of decentralized "village-industries" designed to balance farm and factory work and rescue small-town America. Yet his pastoral communes were no match for the raw power of the changes he had played such a large part in engendering. So he turned to the Amazon to raise his City on a Hill, or in this case a city in a tropical river valley, pulling together all the many strains of his utopianism in one last, desperate bid for success.
Nearly a century ago, the journalist Walter Lippmann remarked that Henry Ford's drive to make the world anew represented a common strain of "primitive Americanism," reinforced by a confidence born of unparalleled achievement. He then followed with a question meant to be sarcastic but which was, in fact, all too prophetic: "Why shouldn't success in Detroit assure success in front of Baghdad?" We know the ruination that befell Detroit. Whither Baghdad? Whither America?
Ilargi: I thought this screenshot is a lovely coincidence. Ads are different for every viewer, of course, nothing that we can control, and this is what I got yesterday: