Mildred Williams, one of several women freight handlers employed at the Atchison, Topeka, and Santa Fe depot, Kansas City, Missouri
Ilargi: Yay!! The stimulus plan is working! And it only took half a year and change! Spending, Incomes, Savings, everything goes up. Spending up 0.3%!! Wonder what the margin of error is. And the margin of plastic. Incomes up. Want to know why?
Social Security payments that come straight out of the stimulus. And tax cuts, hence a larger federal deficit. Do we need a reminder where the stimulus money comes from? That's right, from you. The 1.4% rise in American incomes springs from one source, and one only: YOU! How do you know? Easy: "Wages and salaries dropped 0.1 percent in May".
What's left in the positive department is savings. Only, that's not positive at all. Not right now. The american people ain't getting it: you’re bankrupting the government, you fools!! The highest savings rate in 15 years means Americans are not spending. And yes, you're right, that puts the reported 0.3% rise in spending in an eery light, since, combined with the savings rate, it would mean that there's quite a bit more money in people's pockets.
And that, given foreclosure and unemployment rates, is clearly not the case. Perhaps lots of people bought the few remaining Detroit-made vehicles at or below cost?! In the end a central bank can issue all it wants, but it can't force people to spend a penny.
All in all, take these numbers with a ton of salt, and get the hell out of their way. Make sure your families are not dependent on anything that carries risk, at least not if they can help it. Stand clear and stand pat and don’t believe a word they say.
PS:I see there's a "nice" interaction happening between Gary North and Mike 'Mish' Shedlock. First off, North's writings ooze the fact that he is really jealous of Shedlock's success as a blogger/writer. That makes for some awkward reading, and it really drags down the level. North's opening paragraph made me almost hit delete right off the bat.
He sort of suggests that because Martin Weiss’ father, J. Irving Weiss, talked about deflation back in 1967, when it didn't happen, everyone else since, including Shedlock, and the both of us here at The Automatic Earth, is per definition wrong when they talk about the topic 42 years later. Or maybe always?!
That is such a huge straw man, why keep reading? I did, though. It also seems that because I say deflation is coming, I must first and immediately answer ten -if you ask me, pretty senseless- questions drawn up by Mr. North, or else I’m not worthy of licking his boots. That reminds me of the scene in Chaplin's The Great Dictator, where Hinkel, in his office, makes sure he's seated at a much higher level than his guests.
I'm sorry I don't have the time right now to properly react, and neither does Stoneleigh. Since we sort of have a stake in this, if only because we couldn't have said anything comprehensible on anything grown-up back in 1967, and that by no means gives anyone the right to imply we've been wrong since then, or we’re wrong now because of it, we’ll try to get to it later. Who knows where the conversation is by then?! Meanwhile, here’s the four installments to date for you to enjoy:
- North: Pushing on a String
- Mish: The Big Inflationist Scare
- North: Mish Shedlock on Gold, Inflation, and Deflation
- North: Ten Questions for Those Forecasters Who Predict Inevitable, Systemic Price Deflation
U.S. Consumer Spending, Incomes, Savings Jump on Obama's Stimulus Efforts
Consumer spending rose for the first time in three months in May as incomes jumped by the most in a year, a sign that government efforts to revive the economy may be starting to pay off. The 0.3 percent gain in purchases followed no change in April, the Commerce Department said today in Washington. Incomes surged 1.4 percent, reflecting tax cuts and Social Security payments from the Obama administration’s stimulus and driving up the savings rate to a 15-year high.
Government efforts to restore the flow of credit and prop up incomes are making it possible for consumers to spend even as unemployment climbs to levels last seen in the early 1980s. The loss of wealth caused by the worst housing slump in seven decades will prompt households to keep rebuilding savings, indicating an economic recovery will be slow to develop. “Consumer spending has largely stabilized,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. Stimulus-related measures “have contributed to increasing spending power. It sets the stage for more growth in consumption, and should help jumpstart the economy. Ultimately, we need the labor market to kick in as well,” he said.
Treasuries advanced after the report, which also showed that inflation slowed last month. Yields on benchmark 10-year notes slipped to 3.50 percent at 9:05 a.m. in New York, from 3.54 percent late yesterday. Futures on the Standard & Poor’s 500 Stock Index were down 0.5 percent at 912.30. Economists had forecast spending would rise 0.3 percent, after an originally reported 0.1 percent drop in April, according to the median of 76 estimates in a Bloomberg News survey. Projections ranged from no change to a 0.6 percent increase.
Wages and salaries dropped 0.1 percent in May, showing the effects of mounting job losses. Today’s report also showed inflation moderated. The price gauge tied to spending patterns rose 0.1 percent from May 2008, the smallest gain since records began in 1959. The Federal Reserve’s preferred gauge of prices, which excludes food and fuel, rose 0.1 percent from a month earlier and was up 1.8 percent from a year earlier. Adjusted for inflation, spending climbed 0.2 percent, following a 0.1 percent drop the prior month.
Because the increase in spending was smaller than the gain in incomes, the savings rate surged to 6.9 percent, the highest level since December 1993. The rate may drop back in coming months as the effects of the stimulus wane. Disposable income, or the money left over after taxes, increased 1.6 percent, after climbing 1.3 percent the previous month. Adjusted for inflation, disposable income also rose 1.6 percent.
Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, gained 0.9 percent last month after falling 1.3 percent in April. U.S. auto sales rose to a 9.9 million-unit rate in May from 9.3 million the prior month. Industry estimates for June show the rate may exceed 10 million for the first time this year. Consumer purchases of non-durable goods increased 0.4 percent after dropping 0.4 percent, today’s report showed. Spending on services, the largest category, was unchanged in May.
Consumer spending, which accounts for about 70 percent of the economy, rose in the first quarter at a 1.4 percent rate after falling in the last half of 2008 by the most since 1980, according to revised figures from Commerce yesterday. The economy shrank at a 5.5 percent annual rate from January to March, the revisions also showed. Purchases may drop at a 0.6 percent annual rate this quarter before growing again in the second half of the year, according to economists surveyed by Bloomberg this month.
Job losses are one reason for the projected decline. The unemployment rate, which reached a 25-year high of 9.4 percent last month, probably rose to 9.6 percent in June, economists predicted ahead of the government’s monthly jobs report due next week. The rate may climb to 10 percent by year-end, according to the survey. Still companies like Hertz Global Holdings Inc. are among those seeing an improvement. The second-largest U.S. rental-car company yesterday forecast it will return to profit in the second quarter, after declines in business and consumer travel triggered two consecutive quarters of losses.
“Our car rental demand in the U.S. and Europe has stabilized,” Chairman and Chief Executive Officer Mark Frissora said in a statement. Summer peak reservations are “better-than- anticipated.” Other retailers report Americans aren’t splurging. Kroger Co., the U.S. grocery chain that also operates Ralphs and Food 4 Less stores, said lower-priced store brands drew customers, helping lift first-quarter profit by 13 percent. “Shoppers remain cautious in this economy, and we do not anticipate that changing anytime soon,” Chief Executive Officer David Dillon said on a conference call with analysts this week.
A Recession in Dog Years
The United States is experiencing what Japan did in the 1990s, but seven times faster.
Combine Japanese cultural tendencies toward formality, politesse, and indirection with the usual central banker's love of opacity and econo-jargon, and you'd expect that a meeting with the deputy governor of the Bank of Japan would be a one-way trip into a cloud of vagueness. But in a meeting Monday, Kiyohiko Nishimura, Yale-trained economist, former Tokyo University professor, and deputy governor of the Bank of Japan, gave one of the most lucid and useful explications of the credit crisis and its aftermath that I've heard—and I've heard a lot of them. And even more surprisingly, it was pretty optimistic.
A Japanese central banker is well-situated to comment on the current global crisis, given Japan's own sad history of dealing with the overhang of a credit/real estate bubble—or, more accurately, of not dealing with it. The government and private-sector's uncertain policies condemned Japan to a traumatic lost decade of slow growth. Nishimura shared a talk he's been giving—including at a Federal Reserve Bank of Chicago conference in May—about the comparative post-bust experience of Japan in the 1990s and the United States today. It's titled: "The Past Does Not Repeat Itself, but It Rhymes." The rhyming can clearly be seen in a chart showing what he dubbed a "remarkable resemblance in developments between the U.S. crisis and Japan's 'lost decade.' "
Nishimura dates the onset of the Japan crisis to the fourth quarter of 1990, when commercial land prices began to fall, and tracks the policy responses (rate cuts in 1991, stimulus in August 1992 and following years, expanding bank insurance in 1995, bank failures in 1997, injections of public funds into banks in 1998, zero-interest rate policies in February 1999). The Japanese economy began to grow again in 1999 but slipped back into recession in 2001. The final turning point for Japan came in October 2002, when Japan's authorities urged banks to deal more aggressively with problem loans. "The Japanese economy was, in general, out of the woods around 2005," Nishimura concludes. (Of course, it's deep in recession now, with the rest of the global economy.)
If the first chunk of this story sounds familiar, you're right. On an adjacent chart, he shows how the U.S. crisis, which he dates to the decline in mortgage-backed securities prices in February 2007, has followed a remarkably similar course. But that doesn't mean the United States is in for 15 lean years. The resemblance lies more in the sequence of events than in their duration, the rhyming rather than the repeating. In fact, the United States is acting in what might be considered dog years. In the early stages, he said, "one month in the U.S. looked approximately equal to three months in Japan in the early stage." But since September 2008, he said, it's more like "one month in the U.S. is equal to six or seven months in Japan."
Why the accelerated pace? It has to do in part with changing global circumstances. Nishimura argues that both crises started because problems in the property and credit markets contributed to an adverse feedback loop between financial distress and economic activity. But information, events, and distress move much more quickly around the globe today than they did in the 1990s. With just-in-time production systems, and with 21st-century communications technology, bad news travels much more quickly—and farther. In the 1990s, much important exchange of international market information was still done by fax. In addition, traders can now act more quickly on real-time bad news. In the early 1990s, analysts had to wait several months for data. And since the level of financial integration was much less intense in the early 1990s, Japan didn't export its financial problems.
The upshot: In the current crisis, "the velocity of market dysfunction has been much faster and its contagion much more widespread than in Japan's case." And so the damage has been more devastating. Of course, the duration of the crisis also has something to do with the mentality and action of the first responders. A lesson from both crises, he argues, is that once an adverse feedback loop is established, it's difficult and very expensive to break it and restore confidence. It took a very long time for good news to reach critical mass in Japan in the 1990s, in part due to the slowness of the policy response.
But this time, it's different. The Federal Reserve—and, indeed, global central banks and governments—have responded with alacrity. Japan's central banks didn't adopt a zero-percent interest-rate policy until more than eight years after the crisis started; the Fed did so within 20 months. It took Japan nearly eight years to inject funds into troubled banks, compared again with 20 months for the United States to do so. And, Nishimura argues, efforts like the stress tests and TARP exits are bolstering confidence.
According to Nishimura's schema, in less than two and a half years, the United States has experienced as much trauma and recovery as Japan did in about 12 years. All of which means that if the dog-years analogy continues, things could start looking up by early next year. But we shouldn't get too far ahead ourselves. There are other lessons to be learned from Japan's experience of starts and stops. "We should be careful not to be very optimistic," Nishimura concluded. "That's my advice to myself."
Record fall in Japan prices fuels deflation fears
Deflation is clawing its way back in Japan, and that's not good news for an economy trying to recover from its worst recession since World War II. Japan's key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline. The result marked the biggest fall since the government began releasing comparable data in 1971.
Japan appears to be "heading for another lengthy period of deflation," said Richard Jerram, chief economist at Macquarie Securities in Tokyo. Lower prices may seem like a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. It can also increase debt burdens. The drop in underlying prices is "set to be persistent" and can lead to various problems for companies and individuals because interest rates will "be too high for prevailing economic conditions," Jerram said in a note to clients.
Japan underwent a destabilizing bout of deflation during the 1990s, and again earlier this decade, when the world's second-largest economy struggled to escape from a real estate and banking crisis. After the results, Japan's finance minister Kaoru Yosano expressed concerns about a significant slowdown in demand. "We continue to monitor price movements, and need to carefully implement economic management to avoid...a deflationary spiral," Yosano said at a news conference, according to Kyodo news agency.
With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent. But analysts point to the 0.5 percent decline in so-called "core-core CPI," which excludes food and energy, as a more troubling sign of weakness in underlying prices. Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.
The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation's capital are considered a leading barometer of price trends across Japan.
"This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions," said Kyohei Morita, chief economist at Barclays Capital in Tokyo.
Japan's central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year. Key indicators next week will offer a more complete picture of the health of Japan's economy. The government will report May industrial production data on Monday, and unemployment and household spending figures on Tuesday. The Bank of Japan will then release its closely watched "tankan" survey of corporate sentiment on Wednesday.
Risk of major social upheaval likely if bank bonanza continues
Is a Democratic administration and a Democratically controlled Congress presiding over one of the most regressive wealth transfers in history? Roosevelt Institute Braintruster Marshall Auerback investigates. State and local governments have been forced into draconian budget cuts, firing workers who are among the most reliable in making their mortgage payments–when they have jobs: firemen, policemen, teachers, civil servants.
Yet the Obama administration won’t spend even a small fraction of what it has wasted on the banks to cover state shortfalls. The guarantee of $5.5bn in short term notes for California was deemed to be fiscally irresponsible, yet hundreds of billions have already been allocated to the likes of Citigroup, AIG, and Goldman Sachs, all of whom have already beefed up salaries and bonuses as they emerge from the embrace of the federal government.
Good for the banks, bad for the economy
Banks are also benefiting from lending programs that effectively allow them to borrow at zero and reinvest in Treasuries at around 3%. A bank doesn’t have to do anything to make money. The banks’ return on equity is going to be very good. They are going to be able to restore their finances. While this is good for banks, is it good for anyone else? The problem is the government’s “free money” program means banks have little or no incentive to do any actual lending.
Combined with rising unemployment and the ongoing housing crisis, this means any recovery is likely to be muted, at best, especially given the ongoing weakness in the real estate market. Growing income inequality will likely be perpetuated and exacerbated with all of the resultant social strains. And in the meantime, the siren songs will grow that we are a nation addicted to debt, deficit spending our way to economic disaster.
Housing bubble lessons
Policy makers were slow to recognize the importance and magnitude of home price deflation. Keynes, Minsky, and Fisher understood that balance sheets matter to income and cash flow outcomes - it is not just the other way around, as convention has it, where income and cash flow results passively accumulate on balance sheets at a glacial pace.
The New Keynesians like Bernanke should have recognized this through their “financial accelerator” channels approach, but the near-ZIRP (zero interest rate policy) QE (quantitative easing) approaches have so far proven to be too little, too late. Moreover, there is now a wing of investors feeding fears that “monetization” and significant fiscal expansion may constrain the Treasury’s room to manoeuvre further. The upshot is that we have missed a golden opportunity to deal with the growing problem of income inequality. Instead, we have the paradoxical spectacle of an ostensibly progressive Democrat administration, and a Democratically controlled Congress, presiding over one of the most regressive wealth transfers in history.
As Keynes and Minsky realized a lifetime ago, durable asset markets, such as housing, do not clear as easily as markets for Chiquita bananas. This is especially true after asset bubbles have introduced structural excesses in parts of the capital stock - what the Austrians call “malinvestment” or distortions to the production structure. When there are large outstanding stocks of durable assets relative to the potential flow supply, lower prices are not necessarily the cure for low prices, as the traders in the Chicago pits are wont to assert. The bias toward viewing markets as self-regulating, self-adjusting mechanisms does not hold equally well across all markets in all conditions, as this generation has been brainwashed to believe.
Rather, lower prices can beget a stock overhang of existing owners who want to sell, especially if expectations about “normal” or future values are closely coupled with recent spot price trends. Following an asset bubble, when conventions about normal supply prices (or even legitimate valuation models in general) have been ruptured, recent price momentum does tend to become the main guide to expectations, as the trend extrapolating traders win the day against fundamental driven investors during asset bubbles.
Obama, Geithner, and Summers misguided
Obama, Geithner, and Summers misplaced their faith in lower prices as the cure to an excess supply situation in a durable asset market. They also they failed to understand that while lower spot prices may reduce new production, the desired selling out of existing stocks can swamp this flow supply reduction. Because of these misconceptions, they now think they face the choice of either having to let it all meltdown, or else using policy to synthetically reproduce the prior bubble credit conditions.
Or consider this analysis another way, from the increasingly prevailing view that US policy makers are somehow edging us toward a hyperinflationary abyss. Money created has to be spent on goods and services to get higher product prices. Professional investors are working with very simple quantity theory approaches. They are not thinking about transmission mechanisms from money to prices. There is no auction market for M1 and the CPI that automatically settles at the end of each day. The only auction market is spending by public and private sectors on produced goods and services each day, week, month, quarter or year.
Government is the only one increasing spending. The fact that nominal GDP is still falling tells us that the private sector is trying to save more than government is deficit spending, which is deflationary, not inflationary. Even arch monetarists such as Milton Friedman conceded that the path to inflation from money creation was through nominal GDP. In an inflation, people are eager to trade money holdings for produced goods and services or tangible assets. In a hyperinflation, even more so.
That is not what we have today. Banks are hoarding $1 trillion of cash on their balance sheets. Companies are in cash conservation mode and stripping down inventories, headcounts, and reducing capital spending. Households are saving and building exposure to near cash instruments.
Robust stimulus needed
When an economy experiences sharp and sustained shifts in private liquidity preferences, the policy response must be to create money and additional aggregate demand via government fiscal stimulus, or let debt deflation rip. The latter tends not to be terribly acceptable to democracies for the obvious reasons which Fisher had to learn first hand. Statements by President Obama that “we are out of money” do not help, because they imply that there is an operational constraint on fiscal policy, beyond which the government dare not go.
They feed the prevailing paradigm about “debt sustainability” and “national solvency” and thereby work at cross purposes. What President Obama, Fed Chairman Bernanke, and Treasury Secretary Geithner must say is that until the government deficit spending and the improvement in the trade balance exceeds desired net private sector saving, we can create all the money we want - it simply will not be enough to driver final product prices higher unless and until we succeed in restoring aggregate demand to sufficiently high credible levels where a self-sustaining economic recovery can take place.
In one sense, it is pointless blaming Wall Street for exploiting a system heavily rigged in its favour. They know that the game is stacked in their favour, so they are rationally taking advantage. But the sickest part about the whole episode is that the casino rule makers, Obama, Geithner and Summers, are perpetuating a flawed game that they had in their power the chance to end. In my more cynical moments, I have to wonder why TARP, which is essentially a purchase of financial assets (and, hence, better left in the hands of the Fed, as Treasury is supposed to buy ‘real things’) was placed in the hands of Treasury.
It’s almost as if this was planned deliberately so as to provide the anti-government folks with a cudgel with which to beat back supporters of activist government. My issue with Obama and his fiscal package is the same as Rob Johnson’s: taxpayer money is being deployed in hugely inefficient ways like Citi, BofA, AIG, and GM and discrediting fiscal policy in the process. Contrast this with the achievements of the New Deal. As Adam Cohen [says] in his new book, NOTHING TO FEAR ,“[WPA] workers constructed or repaired more than 125,000 buildings, including 83,000 schools; 800 aiports; 950 sewage plants; and 650,000 miles of roads. They built or improved 78,000 bridges and 25,000 playgrounds; terraced 271,000 acres of eroded land; and taught two million people to read. They also ran a famous Federal Art Project, which hired destitute artists to create murals for public buildings, posters, and paintings. The WPA produced a highly regarded series of state guidebooks and an acclaimed collection of interviews with former slaves, and it played a major role in building the San Antonio Zoo, New York City’s LaGuardia and Washington’s Reagan airports, and the presidential retreat at Camp David.
In 1965, on the program’s thirtieth anniversary, The New York Times quoted a dispossessed North Carolina tenant farmer living in an abandoned gas station, who had been rescued by a WPA job. ‘I’m proud of our United States, and everyting I hear The Star Spangled Banner I feel a lump in my throat,’ he said. ‘There ain’t no other nation in the world that would have had the sense enough to think of WPA.” This kind of puts the paucity of Obama’s fiscal goals in stark relief, doesn’t it?
The key is building a political case for the stimulus. This means getting people around a common objective where everybody is perceived to be benefiting and that the sacrifices are being borne fairly. This was clearly the situation in WWII when the budget deficit as a percentage of GDP got as high as 30.3% of GDP, yet nobody complained about the “sustainability” of government expenditures. The upshot was that by 1946, the GDP per capita was 25 percent higher than it had been in the last peace years before the War. GDP per capita continued to grow during the Marshall Plan years. Despite giving away two percent of U.S. GDP, American residents (and taxpayers) experienced a higher standard of living each year. And nobody spoke about us running out of money.
Bank bonanza must end
By contrast, the current bonanza for banks is neither economically efficient, nor politically sustainable. What is driving the change in portfolio preference shifts is not only a misguided paradigm, but also an inability for the Obama administration to make a sensible, coherent case in what they are doing and why they are doing it. Their actions, in fact, seem to suggest that everything is ad hoc and that they are operating out of their depth, in effect continuing the same policies of the Bush/Paulson period, but on a much greater scale.
Ironically, this ultimately will also prove highly inimical to the interests of finance itself. When most of the home owning voters cannot pay their major debt or have no incentive to pay their mortgage debt, there will either be a debtors revolt that society will sanction or there will be a bailout of such a magnitude that mega moral hazard will affect private lending forever. Once these things happen, you will no longer have the social rules for private risk based lending. In other words, financial markets will be unlike anything ever seen before in private economies. Is this really what Wall Street wants, let alone American society as a whole?
Both FDR and JFK had a brain trust that could help forge public opinion. Obama has his halo, Geithner, and Summers. We’ve known from the start that was a misstep. In the meantime, beyond automatic stabilizers, the door appears to be shutting to further active fiscal ease. I wonder if the stage is already being set for tax hikes, as rumors of a federal VAT (value added tax) have been floating around of late. Add this to rising commodity prices and interest rates, and the profile of any recovery may become increasingly in question, a la 1937-8.
Add to that additional bank write-offs, further credit contraction and a minimalist welfare system which leaves nothing in the way of social cohesion, and the prospects for major social upheaval look dangerously likely. What is missing is a vision of a new growth path for the US. If a public backlash is to be marshalled to something more than retribution, that needs to come to the fore. Once you get beyond the pothole and school patching, what industries can be pushed forward through public seed capital or public private partnerships?
The economist Hy Minsky pointed out a better way to solve both the liquidity and the income problem, while also providing full employment: by channeling government expenditure through an employer-of-last-resort program. The current crisis could have been mitigated if increased household consumption had been financed through wage increases and if financial institutions had used their earnings to augment bank capital rather than employee bonuses. The current system has failed because it was built on an incentive system that did just the opposite.
Plain-Vanilla Financing Could Melt Bank Profits
U.S.'s Bid to Help Consumers; Mystery of Compound Interest
The Obama administration's plan to protect consumers from bad deals on mortgages, credit cards and other financial products is an attempt to take the industry back in time and could put a dent in bank profits. The plain-vanilla guidelines are part of an ambitious effort by the Obama administration to force banks to offer mortgages and credit cards with simpler standard terms. "That was a market that used to be pretty strongly anchored on plain-vanilla products," said Michael Barr, the Treasury Department's assistant secretary for financial institutions.
The coming guidelines, part of a broader proposed overhaul of the financial-services sector, are likely to start with mortgages and eventually cover credit cards, car loans, payday loans and bank-overdraft programs. A plain-vanilla credit card, for example, isn't likely to have a lower introductory "teaser" rate. Card issuers wouldn't be allowed to "change the rules of the game" on consumers, as in cases where a 0% rate is applied to only part of their balances.
The complex loans of recent years didn't just confuse consumers. The bankers themselves ultimately misjudged whether customers would repay them. And the resulting credit crunch has forced lenders to drop many of their most risky products.
Some 95% of mortgage applications today are fixed-rate, says the Mortgage Bankers Association. "We're pretty plain vanilla today," says John Courson, president and chief executive of the group. Mr. Courson says he has no problems with the Obama administration's push to show consumers plain-vanilla mortgages but adds, "We don't want to create a barrier that makes it difficult for a borrower to have an opportunity to look at other products that better suit their financial needs."
Mandating plain-vanilla products would inevitably cut into banks' profitability, said Joseph Longino, a principal at Sandler O'Neill + Partners LP. "It would also make it a lot riskier to depart from the menu of plain-vanilla products," said Mr. Longino, who expects the industry to move to a bifurcation of products. "You'd see the plain-vanilla 'Good Housekeeping Federal Seal of Approval' on products for lower-income consumers...and more innovative products offered to wealthier, sophisticated consumers."
Mr. Barr, who is leading the consumer-protection efforts, said the "plain-vanilla" financial products have their roots in behavioral economics and psychology. It isn't enough to provide consumers with more disclosure and more information, since people often get easily overwhelmed and make mistakes, said Mr. Barr, a former academic who studied the financial markets. Most people, for example, don't understand the effects of compounding of interest -- which leads them to undersave and to overborrow -- a basic human failing that some financial institutions have an incentive to exploit.
The guidelines would come from a proposed Consumer Financial Protection Agency modeled in part on the U.S. Consumer Product Safety Commission, an independent regulatory agency charged with protecting the public from risks of death and injury from consumer household products. The commission develops voluntary safety standards with industry, enforces mandatory standards and bans products that pose unreasonable risks. In a similar way, the Consumer Financial Protection Agency could compel lenders offering alternative products to provide more disclosure and take on more liability risk.
According to the administration's "white paper" on the proposal, the agency "could impose a strong warning label on all alternative products; require providers to have applicants fill out financial experience questionnaires; or require providers to obtain the applicant's written 'opt-in' to such products."
US Banks Reap Record $9.8 Billion Trading Derivatives
The U.S. banking industry said it made $9.8 billion during the first quarter trading derivatives and securities as investors started returning to the markets amid signs the recession bottomed. The surge was led by trading in interest-rate derivatives, which allow investors to hedge against rate swings, as the banks reported revenues that were more than triple any quarter during at least the past five years, the U.S. Treasury’s Office of the Comptroller of the Currency said today in a report.
Revenue rose as banks, constrained by the worst financial crisis since the Great Depression, charged “wide” bid-ask spreads, or the fees that traders make from the gap between prices at which they’ll buy and sell the contracts, Deputy Comptroller Kathryn Dick said in a statement. Revenue from trading interest-rate contracts soared to $9.1 billion from $1.9 billion a year earlier and from a $3.4 billion loss in the fourth quarter of 2008, according to the report. Currencies contracts accounted for $2.4 billion in the 2009 first period. The banks lost $3.15 billion from trading credit.
The revenue report comes as Congress begins debating an Obama administration plan to regulate the privately negotiated derivatives markets, which the administration said helped to exacerbate the financial crisis. Bets on mortgage-linked securities using credit derivatives brought insurer American International Group Inc. to the brink of bankruptcy when the value of the contracts plunged and it couldn’t meet collateral calls.
The Obama plan calls for the most-common types of derivatives to be moved through clearinghouses designed to contain the risks of a bank default, following the September bankruptcy filing by Lehman Brothers Holdings Inc., among the largest derivatives dealers. The administration also is pushing for some of the contracts to be traded on exchanges or electronic platforms that would increase market transparency.
Derivatives Regulation Fight Lurks in US Climate Bill
The fight over regulating the $592 trillion over-the-counter derivatives market spilled over into climate-change legislation being debated in the U.S. House of Representatives today. A derivatives provision tucked inside the 1,201-page measure to limit greenhouse gases is intended to spur Congress to enact new laws reining in a largely unregulated swath of U.S. financial markets, according to Representative Bart Stupak of Michigan.
He added to the bill a measure that would regulate over-the-counter derivatives, accepting a stipulation sought by other Democrats that those rules would be repealed if Congress adopts broader market regulations. “Assuming this stays in the climate change bill, this will be law until broader regulatory reform is passed,” said Nick Choate, a spokesman for Stupak. Stupak’s proposal sets clearing and capital requirements and bans “naked” credit-default swaps. The rules would subject end users “to onerous terms, primarily the provision mandating the use of collateral to secure the majority of over-the-counter derivative trades,” said Ted McCullough, a managing director at Chatham Financial Corp. in Kennett Square, Pennsylvania.
“If no other legislation gets put in place to override the Stupak provision, it puts a lot of pressure on responsible businesses,” said McCullough, whose company specializes in currency and interest rate derivatives, in a telephone interview yesterday. Chatham advises clients with about $350 billion in contracts. “It’s definitely more onerous than what’s on the table” from President Barack Obama and Treasury Secretary Timothy Geithner, McCullough said.
Obama is pushing Congress to move most derivatives trading to regulated exchanges and impose oversight over all dealers as part of an overhaul of the U.S. financial regulatory system. The plan would require standardized contracts to trade on an exchange or “other transparent trading venues,” subjecting them to collateral and margin requirements. It would impose capital rules on all customized over-the-counter contracts, which are privately negotiated deals.
Stupak’s measure would expand the Commodity Futures Trading Commission’s power to regulate all energy commodities, including coal, crude oil, gasoline, diesel and jet fuel, heating oil, propane, electricity and natural gas. It would also repeal the 2000 regulatory exemption for energy swaps and other derivatives that let energy traders such as Enron Corp. operate outside federal supervision. It would ban so-called naked credit-default swaps, where the investor doesn’t actually own the underlying debt on the contracts being purchased.
“That’s something we oppose fundamentally,” Representative Michael McMahon of New York said yesterday in an interview, referring to Stupak’s provision. McMahon was one of 18 Democrats who opposed the derivatives measure in a June 17 letter to House Energy and Commerce Committee Chairman Henry Waxman and Representative Edward Markey, a Massachusetts Democrat, the primary sponsors of the climate change legislation.
Democratic leaders are still working today to win enough support to pass the climate bill, House Majority Whip Jim Clyburn of South Carolina said before the debate began. “We’re not there yet,” he said. The International Swaps and Derivatives Association and three other trade groups that would be affected said in a letter to House leaders yesterday that Stupak’s proposal “would disrupt the risk management capabilities of businesses and strip liquidity from important price discovery markets.”
House Agriculture Committee Chairman Collin Peterson, a Minnesota Democrat, said Stupak’s measure will be “superseded” by derivatives legislation he is drafting with House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, as part of the broader regulatory overhaul. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Credit- default swaps were created initially as a way for banks to hedge their risk from loans.
They became a popular vehicle for hedge funds, insurance companies and other asset managers to speculate on the quality of debt or on the creditworthiness of companies because they were often easier and cheaper to trade than bonds. Securities and Exchange Commission Chairman Mary Schapiro and CFTC Chairman Gary Gensler are seeking a dual regulatory structure for derivatives. Primary responsibility for derivatives tied to securities, such as credit-default swaps, should go to the SEC, Schapiro told a Senate subcommittee in Washington on June 22. Other derivatives, including those related to interest rates and commodities, should be regulated by the CFTC, Gensler told the same panel.
In the Senate, Agriculture Committee Chairman Tom Harkin, an Iowa Democrat, is pushing legislation that would require all over-the-counter derivatives trades be traded on a regulated exchange, not just standardized ones as the Obama administration is seeking. “Obama’s proposal is still fairly vague, there’s still a lot up in the air,” McCullough said. “We know what his principles are. But how that gets accomplished, we still don’t know.”
China Reiterates Call for New World Reserve Currency
China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar. “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.
The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.
President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent.
“It’s extremely unlikely the dollar will be replaced as the reserve currency,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “A currency needs to be internationalized and that requires a fully convertible capital account, which China doesn’t have. The second is that it needs to be adopted.” At the end of 2008 the dollar accounted for 64 percent of global central bank reserves, down from 73 percent in 2001, according to the IMF in Washington.
On June 13, Russian Finance Minister Alexei Kudrin reassured investors of the country’s confidence in the greenback by saying it was “still early to speak of other reserve currencies.” Brazilian Finance Minister Guido Mantega said on June 10 the government’s decision to switch some reserves into IMF bonds wasn’t aimed at weakening the dollar. Federal Reserve holdings of Treasuries on behalf of central banks and institutions rose by $68.8 billion, or 3.3 percent, in May, the third most on record, Bloomberg data show. China has started to pare its holdings, trimming them by $4.4 billion to $763.5 billion in April, the first monthly reduction since February 2008, according to U.S. Treasury Department data. Figures for May have yet to be released.
“There may be signs here of tensions mounting between the PBOC’s economic concerns over China’s holdings of dollars and the Chinese government’s diplomatic reasons for doing so,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London, wrote in an e-mail. Russian President Dmitry Medvedev, Chinese President Hu Jintao, Indian Prime Minister Manmohan Singh and Brazilian President Luiz Inacio Lula da Silva called for a “more diversified” monetary system to reduce dependency on the greenback at a June 16 meeting in the Russian city of Yekaterinburg. In May, China and Brazil began studying a proposal to move away from the dollar and use yuan and reais to settle trade instead.
Group of 20 leaders on April 2 gave approval for the IMF to raise $250 billion by issuing Special Drawing Rights, or SDRs, the artificial currency that the agency uses to settle accounts among its member nations. It also agreed to put another $500 billion into the IMF’s war chest. This month, Russia and Brazil announced plans to buy $20 billion IMF bonds, while China said it is considering purchasing $50 billion. “Special drawing rights of the IMF should be given full play, and the international body should manage part of its members’ reserves,” the central bank report said. IMF First Deputy Managing Director John Lipsky said on June 6 it’s possible to take the “revolutionary” step of making SDRs a reserve currency over time.
SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund. The value of SDRs are based on a basket of currencies, shielding them from swings in a single currency. One SDR is valued at $1.54. China is proposing the basket be broadened. The current weighting is: 44 percent for the dollar, 34 percent for the euro and 11 percent each for the yen and the pound. It doesn’t include the yuan.
The dollar’s dominance of global finance buffeted developing nations last year. Investors abandoned emerging markets after the September bankruptcy of Lehman Brothers Holdings Inc. eliminated demand for all but the safest, most easily traded assets, such as Treasuries and the dollar. A shortage of the U.S. currency forced central banks to pump reserves into their economies. “The excessive reliance on the credit of several sovereign currencies have added to the extent of risks and crises,” the central bank report said. “A currency with stable value in the long term is required.”
U.S. Stocks, Dollar Decline on China Calls for World Currency
U.S. stocks and the dollar dropped after China’s central bank reiterated a call for a “super sovereign currency,” while technology and agricultural shares retreated. Micron Technology Inc. spurred declines by computer makers after posting a wider-than-estimated loss because of an industry glut that drove prices below the cost of production. Monsanto Co., the biggest seed maker, dropped after Potash Corp. of Saskatchewan cut its second-quarter profit forecast.
The dollar slumped 0.7 percent against six trading partners as China sought to replace it as the global reserve currency. Oil fell 0.5 percent, dragging down shares of its producers. The Standard & Poor’s 500 Index decreased 0.6 percent to 915.04 at 9:32 a.m. Futures on the index expiring in September had risen as much as 0.4 percent after the Commerce Department said at 8:30 a.m. that Americans’ incomes increased the most in a year last month. The Dow Jones Industrial Average fell 43.31 points, or 0.5 percent, to 8,429.09.
“There will be diversification among global central banks,” said Beat Siegenthaler, chief emerging markets strategist at TD Securities Ltd. in London. The comments from China “tend to remind traders of that, but there’s still a question about the time horizon.” China, the biggest foreign owner of U.S. Treasuries, cut its holdings of government notes and bonds by $4.4 billion to $763.5 billion in April, according to data released on June 15 in Washington. People’s Bank of China Governor Zhou Xiaochuan in March urged the IMF to expand the functions of its unit of account and move toward an international reserve currency to reduce dependence on the dollar.
The Dollar Index fell below 80 as the People’s Bank of China said that the IMF relies on too few foreign currencies. The central bank was commenting in an assessment of the country’s financial situation at the end of 2008 posted on its Web site today. Group of 20 leaders on April 2 gave approval for the IMF to raise $250 billion by issuing Special Drawing Rights, or SDRs, the artificial currency that the agency uses to settle accounts among its member nations. It also agreed to put another $500 billion into the IMF’s war chest.
“There’s a very strong case to be made for reducing the reliance on the dollar,” said Steven Barrow, a currency strategist with Standard Bank Plc in London. “But the market is making a mountain out of a mole hill.” Technology stocks in the U.S. retreated. Micron dropped 4.3 percent to $5.07. The nation’s biggest producer of computer- memory chips reported a third-quarter loss of 36 cents a share. Analysts estimated a loss of 43 cents, according to a Bloomberg survey. Sales fell 26 percent to $1.11 billion in the period, which ended June 4. Intel Corp., the biggest maker of computer chips, slipped 0.8 percent to $16.18. Microsoft Corp., the largest software developer, fell 1.3 percent to $23.48.
Agricultural stocks slumped after Potash Corp. of Saskatchewan Inc. cut its second-quarter profit forecast amid weakening demand. K+S AG, Europe’s biggest producer of potash for fertilizer, this week slashed its 2009 and 2010 forecast for global sales because of weak farmer demand. Monsanto, the world’s biggest seed producer, fell 1 percent to $74.88. Potash slumped 2.6 percent to $91.05. The S&P 500 rebounded 36 percent through yesterday from a 12-year low on March 9 amid speculation the deterioration in the global economy is slowing. The benchmark index for U.S. equities has slipped 0.1 percent this week.
“The S&P 500 had a very good run from the bottom,” said Kevin Caron, a portfolio manager in the Florham Park, New Jersey-based wealth management unit of Stifel Nicolaus & Co. “You can only go so far on things getting less bad.” Stocks and credit markets have rebounded since the U.S. government and Federal Reserve pledged $12.8 trillion to combat the first global recession in five decades and almost $1.5 trillion in losses and writedowns at financial firms from the collapse of subprime mortgages.
The cost of borrowing in dollars for three months in London fell below 0.6 percent for the first time today, according to the British Bankers’ Association. The London interbank offered rate, or Libor, that banks charge for three-month loans fell less than half a basis point to 0.598 percent. The Libor-OIS spread, which measures banks’ reluctance to lend, has narrowed to 38 basis points, from a record 364 basis points in October, following the collapse of Lehman Brothers Holdings Inc.
Analysts covering S&P 500 companies began to boost 2009 profit estimates for the first time this year in May as economists predicted the U.S. economy will start to expand next quarter, weekly data compiled by Bloomberg show. Global market liquidity is at its strongest level since November, according to an index updated today by the Bank of England. The index, which measures market prices, including gaps between bid and offer prices, the ratio of returns to trading volumes, and spreads in the credit market, reached a low in April.
Soros Goes Long as World Bank Shorts Recovery
People don’t tend to make lots of money betting against George Soros. The hedge-fund manager has made billions speculating on markets. And so it came as a relief to many when on June 20, Soros told Polish television that the worst of the global financial crisis “is behind us.” To many, it was a sign the famed market-timer is going long on a global recovery.
My money is on the World Bank. By contrast, the lending institution appears to be shorting the “green shoots” that optimists see sprouting around the globe. The World Bank on June 22 said recessions will be deeper than it estimated in March. It now expects the world economy to contract 2.9 percent this year, compared with a previous forecast of a 1.7 percent decline. Things may get worse than the numbers suggest. That’s because the developing world, the one part that’s still growing at the moment, is experiencing a capital flight that will swell the ranks of the poor and the unemployed.
The least-appreciated side effect of this crisis is how living standards of poorer nations will be set back. Huge economies such as the U.S., Europe and Japan were hit hard and fast by the credit crisis that began on Wall Street. The effects on less affluent nations haven’t been given enough attention. For the developing world, this crisis is unfolding in slow motion.
Money is moving in the wrong direction, a dynamic that risks holding back the parts of the world on which investors and executives are depending for growth. Even if a global recovery begins this year, poorer economies will lag behind rich nations. Developing economies that need rapid growth may experience weak growth for years to come. The World Bank warns of “increasingly grave economic prospects” for developing nations amid reduced capital inflows from exports, remittances and foreign direct investment. After peaking at $1.2 trillion in 2007, inflows this year may fall to $363 billion.
The upshot is that investors abandoning developing economies may be sowing the seeds of a renewed slump. And governments in Asia, by neglecting the importance of domestic growth, are paving the way for a rough several years ahead. Asia’s 1997 crisis was a fast, furious and deep one. Yet the region was able to recover rapidly because the U.S. was booming at the time. Then-Federal Reserve Chairman Alan Greenspan referred to the U.S. as an “oasis of prosperity,” and it was the engine that powered Asia’s impressive snapback.
No such oasis exists today. China isn’t there yet in terms of size or influence, and neither is India or Brazil. Developing nations are on their own to produce growth at home as opposed to exporting their way to recovery. It will require some serious policy changes from Seoul to Hanoi. The good news is that many Asian governments have latitude to boost public spending, while central banks have scope to cut interest rates.
The bad news is that the absence of large domestic consumer markets will make those efforts less potent. Nothing would restore Asia to health faster than an export recovery. One is unlikely to happen anytime soon. A “crowding-out” dynamic of historic proportions won’t help. The crisis is devastating public finances and the U.S., Japan and Europe are issuing mountains of debt.
“Even on optimistic assumptions, in a number of industrial economies, debt burdens stand to rise by anything from a third to almost 100 percent over the next five years,” Russell Jones, London-based head of fixed-income and currency research at RBC Capital Markets, wrote in a June 22 report. “On less optimistic assumptions, the prospective debt dynamics are truly explosive.” If you are a Group of Seven economy, selling debt shouldn’t be much of a problem. If you are Indonesia or the Philippines, the boom in global issuance will complicate efforts to attract bids at bond auctions.
Soros, in his June 20 interview, called the crisis the most serious in his 78 years. “This is the end of an era,” he said. “The question is what’s going to come out of it in the future.” The answer may be found in the details of recent World Bank reports. One new element will be reduced aid from advanced economies because the crisis is weighing on their finances. Another is the need for international coordination to revive domestic demand through stimulus spending.
The G-7 is a pretty useless entity these days. That’s why meetings of the Group of 20 nations now get more attention. Even as stock markets calm down a bit, the effects of the credit crisis continue to flow into the economy. As nations experience more of the fallout, their challenges are likely to boomerang back into markets. As this vicious cycle plays out, better insights may be coming from Washington lenders than investors in the trenches.
Bailout of U.S. Banks Gives British Rum a $2.7 Billion Benefit
In June 2008, U.S. Virgin Islands Governor John deJongh Jr. agreed to give London-based Diageo Plc billions of dollars in tax incentives to move its production of Captain Morgan rum from one U.S. island -- Puerto Rico -- to another, namely St. Croix. DeJongh says he had no idea his deal would help make the world’s largest liquor distiller the most unlikely beneficiary of the emergency Troubled Asset Relief Program approved by Congress just four months later.
Today, as two 56-foot-high (17-meter-high) tanks for holding fermenting molasses will soon rise from the ground on the Caribbean island of St. Croix, the extent to which dozens of nonbank companies benefited from last October’s emergency financial rescue plan is just beginning to come to light. The hurried legislation adopted by a Congress voting under the threat of sudden global economic collapse led to hidden tax breaks for firms in dozens of industries. They included builders of Nascar auto-racing tracks, restaurant chains such as Burger King Holdings Inc., movie and television producers -- and London’s Diageo.
“It’s kind of like the magician’s sleight of hand,” says former House Ways and Means Committee Chairman William Thomas, a California Republican who ran the committee from 2001 to 2007 and oversaw all tax legislation. “They snuck these things in a bill that was focused on other things.” Congress inserted the tax benefits for companies other than banks in a fog of confusion and panic after the House of Representatives rejected the first attempt to fund the bank support effort urged by then President George W. Bush and Treasury Secretary Henry Paulson.
Lawmakers rubber-stamped the package of arcane, if innocuous-sounding, tax items with one eye on the calendar. An election was only a few weeks away, and legislators were desperate to return home to campaign for their own re-election. A year later, lawmakers and the public are just now discovering some of the curious subsidies tucked into TARP and the government’s other massive intervention programs. Four months after TARP took effect, President Barack Obama pushed through a $787 billion bill intended to pump up the nation’s economy.
That legislation included $20 billion in tax breaks for companies that produce energy from wind and other alternative sources as well as $1.6 billion in relief related to the tax treatment of canceled debt for Sprint Nextel Corp., the third- largest U.S. mobile-phone-service company, and other firms. Like TARP, the stimulus bill was passed quickly, with little scrutiny. “You had this remarkable brief period with no transparency, filled with backroom deals being made and an absolute blackout of information,” says Jim Lucier, a senior political analyst at Capital Alpha Partners LLC, a Washington firm that tracks legislation for hedge funds and institutional investors. Referring to TARP tax breaks, he says, “It’s ridiculous and it’s a product of the legislative sausage-making machine.”
Max Baucus, the Montana Democrat who chairs the Senate Finance Committee, spent much of 2008 searching for a way to enact the tax provisions, says Russ Sullivan, the committee’s staff director. Baucus recommended to Majority Leader Harry Reid of Nevada that the tax breaks be included in the October bailout bill, Sullivan says. Baucus made the pitch after Paulson’s first push to get the bailout bill approved was defeated by the House on Sept. 28. That action precipitated a 778-point fall in the Dow Jones Industrial Average that afternoon. The tax breaks, Baucus told senators at the time, wouldn’t be controversial because most renewed current law and would bring Senate support for the bill, Sullivan says.
The largest added measure would spare more than 25 million U.S. households from a scheduled increase in the alternative minimum tax -- a special levy that eliminates many deductions when they become too high relative to income -- for one year by temporarily indexing the tax for inflation. Baucus didn’t know until months later, Sullivan says, that one of those added provisions would steer about $2.7 billion to Diageo over the next three decades. That’s because Diageo wasn’t even mentioned in the bill and lawmakers didn’t realize they were ratifying deJongh’s deal by extending the underlying tax policy that made the agreement possible in the first place.
Paulson requested $700 billion for TARP. Congress added $150 billion in tax breaks and other spending when it crafted and passed the legislation in October. While many U.S. lawmakers didn’t know about the Diageo benefit when they voted for the bill, Puerto Rican officials did -- and they didn’t like it. DeJongh’s compact with the British liquor company meant his territory would get a much larger share of federal tax dollars from rum exports -- and Puerto Rico would lose that money. “We learned about it in March when Puerto Rico complained,” Sullivan says of the Diageo deal. The committee is reviewing the arrangement. Its only concern is whether the U.S.V.I., and thus the U.S. government, is contractually obligated to give tax revenue to the company. Under the terms of the deal, the U.S. gives the money to the U.S.V.I., not the company.
“The Virgin Islands can do what they want to with their source of revenue,” Sullivan says. The legislation, which includes dozens of narrowly written provisions, created a new class of bailout beneficiaries. One, championed by Michigan Representative Dave Camp, the top Republican on the tax-writing House Ways and Means Committee, and supported by Baucus, is saving Nascar track builders $109 million in taxes this year by allowing more generous write-offs.
Other tax breaks backed by Baucus help restaurant franchises make renovations by shortening depreciation schedules. Another shaves $478 million during the next decade from tax bills to movie and television producers as a better way of encouraging them to shoot in the U.S. Rose City Archery Inc. of Myrtle Point, Oregon, which makes wooden arrows designed for children, also benefits. The legislation saves the company up to $200,000 a year because it repeals a 39-cent-per-arrow excise tax on Rose City’s products.
The company, which makes arrows used by the Boy Scouts of America and other youth organizations, says it costs 30 cents to produce an arrow and so it was being taxed at a rate of more than 100 percent. The added tax breaks prevented the TARP legislation from being rejected a second time, says Michael Steel, a spokesman for House Minority Leader John Boehner. Twenty-six Republicans, including Tim Murphy of Pennsylvania, John Shadegg of Arizona and Zach Wamp of Tennessee, reversed their earlier no votes. Each of the tax provisions has a story -- and plenty of defenders. Congress first passed the tax benefit for Nascar in 2004. It was intended to shield stock-car racetrack companies such as International Speedway Corp. from Internal Revenue Service audits over its use of seven-year depreciation schedules. That time period was originally set for use by amusement parks.
The IRS wanted the Daytona Beach, Florida-based owner of the Daytona International Speedway and Talladega Superspeedway and its competitors to deduct construction costs over a longer period. The change in the racecar-track tax law will cost the U.S. $100 million during the next decade, according to estimates by the congressional Joint Committee on Taxation (JCT). “The IRS should not be able to whimsically reclassify anyone’s tax liability after two decades, which is what they tried to do with regard to motor-sports facilities,” says Sage Eastman, a senior adviser on the Ways and Means Committee. “Congress originally acted to provide clarity and certainty in the tax law.”
Restaurant chains say that they, like racetracks, needed help with construction accounting. Fred Rosenthal, president of Beltsville, Maryland-based Jasper’s Restaurants, says his industry needed shorter cost-recovery periods for renovations to restaurants. The October bill changed that time to 15 years from 39 and 1/2 years. That will cost the IRS $8.7 billion over the next decade, according to the JCT. At issue in the Diageo case is a federal tax policy known as the rum cover over. That’s the share of a $13.50 federal excise tax on every so-called proof gallon of rum sold in the U.S. The money is collected by the U.S. Treasury Department, which then rebates it to the governments of Puerto Rico and the U.S.V.I. to help them pay for social services such as Medicaid. As territories, Puerto Rico and the U.S.V.I. get few direct appropriations from the federal government.
The tax has two parts: a permanent $10.50 federal tax dating to 1917 that Washington turns over in full to the territorial governments and a $3 additional tax added in two phases in 1984 and 1993, of which $2.75 is rebated. That second, additional tax expires every two years. That’s the portion that was renewed by Congress as part of the October bailout. Iowa Senator Charles Grassley, who has served in Congress since 1975 and is now the top Republican on the tax-writing Senate Finance Committee, says he didn’t know about the Diageo agreement. He also says the rum provision always takes him by surprise when it’s due to be renewed in what Congress calls ’’tax extender bills.’’
“Every time this comes up, I think it’s a new issue and I take it to my staff, and they say, ‘Oh, no, we’ve been doing this for 20 years,’” Grassley says. Ed Kleinbard, who resigned as chief of staff of the nonpartisan JCT in May to become a professor at the University of Southern California’s Gould School of Law, says Congress routinely deals with the tax extenders the same way it dealt with the bailout legislation itself: It doesn’t study the details. “The fact is that temporary tax subsidies are not reviewed for substance when they are renewed,” Kleinbard said in a May 7 speech to the American Bar Association. “Instead, the entire herd of ‘extenders’ is paraded through the legislative process as a unit,” he says. “And just as good cowboys do not lose many yearlings, it is virtually unheard of for an ‘extender’ to get separated from the rest of the herd and not get renewed.”
That means provisions such as a $5,000 tax credit for first-time buyers of houses in the District of Columbia have become a de facto part of the tax law since first becoming a temporary benefit in 1997. It also effectively cements a $33 million break for companies that invest in American Samoa. That benefit had been targeted at tuna canners such as Del Monte Foods Co., which owned the StarKist tuna brand until Seoul, South Korea-based Dongwon Group bought it in June 2008. Del Monte is based in House Speaker Nancy Pelosi’s San Francisco district. The $2.7 billion Diageo tax break in the October bailout bill gives the most financial aid to a non-U.S. company.
“I don’t think that the taxpayers knew they were investing in Captain Morgan when the Congress was considering the first bailout bill,” says Steve Ellis, vice president of Taxpayers for Common Sense, a Washington-based government watchdog group. “What happened is we sent taxpayer money to effectively build a distillery in the Virgin Islands that will benefit Diageo, one of the world’s largest conglomerates,” Ellis says, The Diageo deal started shortly after deJongh took office in 2007. The governor says the company contacted him to say it planned to leave Puerto Rico after having decided the U.S.V.I. might be a better location to produce Captain Morgan.
He negotiated with the company for 18 months before cementing the arrangement in June 2008.
Diageo bought Captain Morgan from Seagram Co. in 2001 and was making plans to move from Puerto Rico in any circumstance, says Diageo executive Dan Kirby, who’s in charge of what the company has dubbed “Project Island.” It wanted a long-term supply of rum and direct control of production. So it decided not to renew its contract with the current maker of its base rum, family-owned Destileria Serralles Inc. in Ponce, Puerto Rico. In the deal, the U.S.V.I. agreed to build a distillery for Diageo, using $250 million in public bonds that will be repaid with federal excise taxes from the U.S. The U.S.V.I. will give subsidies representing as much as 44.5 percent of that revenue to Diageo to promote Captain Morgan and provide a form of funding for molasses from sugar-growing countries.
Fitch Ratings on June 19 rated the bonds BBB-, one notch above junk, and cited, “a potential change in the USVI’s use of matching funds to incentivize distillers.” It gave the debt a so-called stable outlook based on “the expected continuation of the matching fund payments by the U.S. government.” Fitch noted that one risk was the introduction of legislation proposed by Puerto Rico resident commissioner Pedro Pierluisis to deny Diageo any tax benefits. “Passage of such legislation in Fitch’s view is remote,” the agency said. Diageo also qualifies for additional tax incentives, reducing its U.S.V.I. tax liabilities to as low as 3.5 percent, from 35 percent. In exchange, Diageo agreed to stay in St. Croix for at least 30 years and hire 40 or more local workers.
In March, deJongh, 51, describes the history of the agreement in his office in the Government House, a mustard- colored stucco building that blends in with the colonial Danish architecture of Christiansted, St. Croix’s largest town. He says he traveled to Washington in June 2008 to brief federal officials. He met with Representative Charles Rangel of New York, who’s chairman of the Ways and Means Committee; Senate Energy and Natural Resources Committee Chairman Jeff Bingaman of New Mexico; West Virginia Senator Jay Rockefeller; and then Interior Secretary Dirk Kempthorne. “We wanted to be very upfront with everybody about what we were doing,” says deJongh, a former commercial banker for what’s now JPMorgan Chase & Co. As part of the transparency, he says, all of the information was posted on the territorial government’s Web site. “I don’t view it as federal money. I view this primarily as dollars that the federal government has said to the territories, ‘They’re means by which you can grow,’” deJongh says.
For Diageo, the deal was a coup that will give the company more control over production. It will also cut costs and expand the market for Captain Morgan rum, which is already the fastest- growing major rum brand in the world, according to London-based Euromonitor International Plc, which tracks such information. “It’s outrageous that someone said, ‘I’ll give you 50 cents on the dollar to move your location’ to a foreign-based company where nothing new was being created,” former Representative Thomas says. Diageo, which had a stock market value of 21 billion pounds ($35 billion) as of June 8, reported net sales of 5.07 billion British pounds in 2008. Revenue from selling rum accounted for 5 percent of Diageo’s income. Still, Captain Morgan, named for Henry Morgan, the 17th-century Jamaican privateer, is a major driver of earnings for Diageo, spokeswoman Zsoka McDonald says.
The company’s other premium brands include Guinness beer, Jose Cuervo tequila and Johnnie Walker whisky. Captain Morgan has about 25 percent of the global rum market, according to Euromonitor. Diageo’s share price declined 12.8 percent in 2009 as of June 8, trading at 842.5 pence ($13.73). In February, the company cut its earnings forecast for the year to a projected profit of 4 percent to 6 percent, less than its previous estimate of as much as 9 percent, because of the weak global economy. Diageo executive Kirby and Michael Bertman, the company’s Washington lobbyist, walk the property line where the distillery will be built on St. Croix. Kirby, 52, says an estate once owned by Alexander Hamilton had rum shipped from St. Croix to George Washington’s soldiers to keep them warm at Valley Forge during the American Revolution.
“Is it better for Captain Morgan to come here with the inducements? Yes,” Bertman, 42, says. “It’s better than we have now, without a doubt, to create a better price for our rum. We’re a lot bigger, and we’re going to get a lot bigger.” Bertman says the tax revenue generated by Captain Morgan will help the U.S.V.I. more than it served Puerto Rico -- even after Diageo pockets its share -- because Puerto Rico’s $74 billion economy dwarfs that of the U.S.V.I., with a $1.6 billion economy. “It’s a much different place than Puerto Rico,” he says. “The impact of this money on this territory compared to that economy, it’s very, very different.”
In Puerto Rico, however, deJongh’s deal is seen as nothing short of theft. “Being creative as a governor is one of the things that you get elected to do, but I’m not sure that you can call this creative; it’s acting like a pirate,” says Roberto Serralles, a vice president at Destileria Serralles. The company has made Captain Morgan for a quarter century and may have to lay off 330 workers when production moves to St. Croix, Serralles, 42, says. The territory’s lobbyists and allies have introduced legislation seeking to undo deJongh’s deal.
Puerto Rico -- home to Bacardi Corp., which has the world’s best-selling rum brand according to Euromonitor -- has for years produced more of that liquor than any other location in the world. As a result, the island received the lion’s share of the U.S. tax rebate, or about $400 million a year. The Diageo move will cut that take by about half. It uses the money to fund public service programs for its 4 million residents, who are U.S. citizens. Puerto Rico receives $4,260 per person in federal spending compared with an average of $8,339 in the 50 U.S. states, according to Census Bureau data.
“This has been, you know, a buffer, it’s been a shock absorber,” says Puerto Rican Secretary of State Kenneth McClintock, who says the revenue amounts to about 10 percent of the commonwealth’s operating budget. “Puerto Rico does need that money -- and right now. As a result of the Diageo thing, we’re going to lose out on a lot,” McClintock says. Bacardi Chairman Joaquin Bacardi says his company will benefit from Diageo’s move to St. Croix. “I feel that we will only be strengthened by the decision of the competition to leave, because we will be the sole, 99 percent basically, Puerto Rican rum brand,” he says. He likens the brand’s appeal to that of Florida oranges or wine from California’s Napa Valley.
McClintock, Serralles and Puerto Rican officials say that if Congress repeals the Diageo deal, the entire tax rebate program could fall into jeopardy. Thomas says the Diageo deal should be stopped. “No one should allow it to continue,” Thomas says. “To steal business from one island to another -- that’s not value added; that’s just crazy.” A looming $5.5 trillion federal deficit by the end of 2013 may force Congress to challenge tax laws benefiting restaurant chains, racecar track builders and a London-based liquor company. But if history is any guide, taxpayers may find more hidden expenses in financial rescue legislation yet to come.
The Fed: The Bond Market's New Hedge Fund?
The bond market got a big shock in March when the Federal Reserve announced plans to buy $300 billion of Treasuries. Rates on long-term bonds, which had been rising, dropped 17% in a single day as prices soared. Traders who bet against Treasuries took a nasty hit while managers who owned them got a quick boost. Investors don't know how to deal with this new and massive force in the bond market. "The Fed's like a hedge fund at a poker game," says Jason R. Graybill, a senior managing director at Carret Asset Management.
For years the central bank has kept a tight grip on short-term interest rates by adjusting the rates at which banks lend to each other. Long-term rates, though, typically fluctuate based on investor perception about the U.S. economy. But now the central bank is meddling with long-term rates by purchasing Treasuries and mortgage bonds as part of a broader effort to revive the economy. As rates inch up, there's speculation on Wall Street that the Fed may purchase $1 trillion more in Treasuries to keep rates in check.
But the Fed either doesn't have—or doesn't want—the same all-powerful sway with long-term rates that it has with short-term ones. At most, says Brian Brennan, manager of T. Rowe Price U.S. Treasury funds, the central bank can only slow long-term rates, much "like putting an umbrella under a waterfall." Meanwhile, the debt purchases are amping up market volatility and leaving bond investors scrambling. The Fed is keeping "the marketplace off balance," says George L. Ball, chairman of independent brokerage Sanders Morris Harris Group.
It's been a tough lesson for the market. When the Fed said in March that it wanted to keep rates low by buying bonds, many investors took the words at face value. For weeks the Fed purchased bonds every time rates approached 3%. Investors assumed the Fed had drawn a line in the sand to keep bonds below that—and they dutifully stepped in to buy at the same time.
They were wrong. On Apr. 29 the interest rates on 10-year bonds blew past 3%. Why? The U.S. flooded the market with new Treasuries, depressing prices and boosting rates. Compounding matters, better-than-expected economic news prompted investors to dump U.S. bonds in favor of riskier assets. All that set off a chain reaction: Traders rushed to sell bonds and inflation hawks bet against them, which sent rates skyrocketing to nearly 4%. They currently hover around 3.7%. "People had too much confidence in the Fed," says Don Galante, senior vice-president for fixed income at MF Global, a broker.
Traders and managers are adjusting to this new uncertainty. Some are avoiding U.S. bonds and buying corporate bonds, where prices are based largely on underlying fundamentals. Others are trying to capitalize on the Fed's moves. Carret's Graybill, for example, is doing the opposite of the government: He's buying when Treasury is selling, since the additional supply tends to depress prices. "Our clients aren't enthused by the volatility," says Max E. Bublitz, chief strategist for money manager SCM Advisors. "But it's an unbelievable opportunity."
Freddie Mac May mortgage investment portfolio down annualized 9.9 pct, delinquencies rise
Freddie Mac, the second-largest U.S. home funding company, on Friday said its mortgage investment portfolio shrank by an annualized 9.9 percent rate in May, while delinquencies on loans it guarantees accelerated. The portfolio decreased to $823.4 billion, for an annualized 5.6 percent increase year to date, the McLean, Virginia-based company said in its monthly volume summary. In May 2008, the portfolio was $770.4 billion.
Delinquencies, which increase stress on the company's capital, jumped to 2.62 percent of its book of business in May from 2.44 percent in April and 0.86 percent in May 2008. The multifamily delinquency rate also rose, up 0.02 percentage point to 0.12 percent in May. A year earlier it was 0.03 percent. Freddie Mac said refinance-loan purchase volume was $40.3 billion in May, down from April's $43.3 billion. March's $52 billion was its largest refinance month since 2003.
The amount of mortgage-related investments portfolio mortgage purchase and sale agreementsentered into in May totaled $5.3 billion, up from April's $956 million. The company's total mortgage portfolio decreased at a 1.6 percent annualized rate in May to $2.228 trillion. In early September 2008, the U.S. government seized control of Freddie Mac and its larger sibling, Fannie Mae, amid heightened worries about shrinking capital at the congressionally chartered companies.
The government is now relying heavily on Fannie Mae and Freddie Mac in its efforts to stimulate the U.S. housing market, which is in the midst of its worst downturn since the Great Depression, by buying more mortgage loans, easing refinancing and helping homeowners avoid foreclosure.
Unemployment Vexes Foreclosure Plan
Rising unemployment is complicating the Obama administration's effort to reduce foreclosures and stabilize the housing market. The first wave of mortgage delinquencies was sparked by borrowers who took out subprime mortgages and other risky loans that became unaffordable, causing them to fall behind on their monthly payments. But the current wave is increasingly driven by unemployment or underemployment, economists and housing counselors say.
The Obama foreclosure-prevention plan was "built around the subprime crisis model, not the unemployment crisis model," said Michael van Zalingen, director of homeownership services for the nonprofit Neighborhood Housing Services of Chicago. The Obama program provides financial incentives to mortgage-servicing companies and investors to reduce mortgage-related payments to 31% of monthly income. But many borrowers don't have sufficient income to qualify for a loan modification under the plan. Mr. van Zalingen said roughly 45% of the more than 900 borrowers who sought help at two recent counseling events would fall into that category even if their interest rate were dropped to 2% and their loan term were extended to 40 years.
Many of those unqualified borrowers suffered job losses or a reduction in income, Mr. van Zalingen said. Roughly 27% of borrowers who called the mortgage industry's national "Hope Hotline" in the second quarter of 2009 cited unemployment as the primary or secondary reason for their mortgage problems, up from 9.7% in the second quarter of 2008. The administration is considering making changes to the loan-modification program to address the current employment landscape.
"We recognize that unemployment is a significant complicating factor," said Deputy Assistant Treasury Secretary Seth Wheeler. "We are studying what more we can do." The Obama program currently calls on mortgage-servicing companies to consider options other than loan modifications for borrowers who can't qualify for them for a range of reasons, including loss of income. One possibility is a forbearance plan that allows borrowers to hold off from making mortgage payments for several months while they look for work. But there are no specific guidelines for determining who should get forbearance and for how long.
The administration is weighing whether it should provide more specific guidelines for how mortgage companies should work with borrowers who have lost their jobs but are believed to be good candidates for re-employment. It is also considering providing additional incentives to encourage servicers to offer forbearance plans. Several Federal Reserve economists, meanwhile, have suggested the government pay a share of the mortgage payment, for a limited time, for borrowers who see a significant disruption in their income.
Other options include providing short-term loans to borrowers who have lost jobs, or giving special treatment to borrowers likely to become re-employed soon. Administration officials haven't taken a position on these options, and said each brings its own challenges. The rise in unemployment-related delinquencies comes as 20 mortgage-servicing companies are ramping up efforts to modify troubled loans under the Obama plan. More than 200,000 borrowers have received modification offers under the program, which could help as many as four million borrowers, according to administration officials.
Housing counselors say that modifications under the plan are producing substantial payment reductions for some borrowers. But they complain that many are being kept waiting for help as mortgage-servicing companies get up to speed. In the meantime, there are signs the overall mortgage-delinquency problem is getting worse. The percentage of mortgage loans that were at least 30 days past due but not yet in foreclosure climbed to a record 8.49% in May, up from 8.08% in April and 5.66% a year earlier, according to LPS Applied Analytics.
Car Liability, Dealers Pose New Hurdles For GM Plan
The U.S. Treasury Department is negotiating with more than a dozen state attorneys general to roll back two key features of General Motors Corp.'s bankruptcy plan that would have wiped out billions of dollars in potential claims from car-accident victims and closed auto dealers. The discussions show how the federal government's GM rescue is brushing up against the limits of its ambitious legal approach, which attempted to use the Bankruptcy Code to override many state legal contracts and protections.
This could ultimately expand the cost of GM's $60 billion bailout, though government officials say it shouldn't delay the emergence of a "new GM" from bankruptcy protection. President Barack Obama's auto task force is considering a plan that would allow those injured in past or future accidents involving GM vehicles to sue the auto maker in state courts after the company emerges from bankruptcy protection, people involved in the discussions said. Under the current reorganization plan, hundreds of car-accident victims have lawsuits against GM in various stages of the legal process that would be effectively washed away.
An ad hoc committee of consumer victims objecting to GM's plan says it represents more than 300 people with personal injury claims exceeding $1.25 billion. Following pressure from the attorneys general, the administration is also discussing how it might yield on mounting challenges from GM's auto dealers. More than 1,300 dealers are slated to be shut down under the current reorganization plan, but many of them say the plan violates standing state franchise law. If they get their way, dealers who want compensation from GM for terminating their contracts could take their cases to court.
If a "new GM" is forced to take on product-liability claims and compensate dealers more than it planned, the company might be less attractive to a private buyer when the government attempts to divest itself of its stake.
Settlement talks are still at an early stage and could be scuttled. But if a settlement is reached, it would represent a major victory for auto dealers, consumer-rights groups and a handful of state attorneys general. A GM spokesman declined to comment on the talks. Dealers have been lobbying Capitol Hill to try to stop GM's plan to shutter dealerships in every state except Alaska. The dealers say the plan could cost more than 57,000 jobs.
The exact nature of any potential settlement remains unclear, including how victorious product-liability plaintiffs could later collect. A trust fund for product-liability claims hasn't been discussed, said people familiar with the matter. The Obama administration's current plan is to direct accident victims who have already won damages, as well as those with pending lawsuits, to make claims against GM's old estate. They would be unable to bring claims against the new GM and would probably receive little or no recompense. This approach was already approved in Chrysler's bankruptcy case.
But the government is getting more pushback in the case of GM, in part because of the scale involved: GM has some 69 million cars and trucks on the road, more than twice what Chrysler has. In some cases, the legal battle is also pitting the White House against political allies. Settlement talks have heated up in recent days ahead of GM's Tuesday court date, when it will ask a judge to bless its plan to move desired assets to a new government-owned company. Another lengthy round of talks is slated for Friday. So far the two sides have made more progress on the auto-dealer dispute than the product-liability issue, said people involved in the talks.
"The case law is unclear and ambiguous on the issue of future product-liability claims. So when the case law is all over the map, a lot of times it makes sense for both sides to settle," said one administration official. Not all pending lawsuits against GM would be successful in any case. The auto maker, like many large companies, faces many lawsuits stemming from alleged product defects that are often deemed meritless. In addition, GM's plan to leave any potential claims behind through a bankruptcy sale is a court-sanctioned method used by many companies when they reorganize under Chapter 11.
But companies don't always leave such claims behind. In a landmark bankruptcy case, A.H. Robins, a company that marketed intrauterine contraceptives, sold itself to new owners that set aside money to cover potential legal claims. Last year, GM set aside $921 million for product-liability litigation, and in 2007 it had $1.1 billion available. "Everyone agrees there has to be some access to the courts," said Maryland Attorney General Douglas Gansler, a Democrat who co-chaired Mr. Obama's presidential campaign in the state. The auto task force has been caught off guard by the recent outcry from attorneys general and consumer groups.
The task force modeled GM's bankruptcy plan after Chrysler's, without giving much weight to the potential fallout from leaving product-liability claims behind, said people familiar with the matter. The administration was "simply trying to come up with the most commercially viable GM possible," said one of the people. In opposing GM's product-liability plan, state attorneys general are raising a number of complex legal issues, ranging from the power of federal bankruptcy courts to supercede state law to constitutional due-process rights of Americans to sue GM if they're injured by the auto maker's vehicles in the months and years ahead.
GM, though a new company when it emerges from Chapter 11, will still make cars. The attorneys general say the Bankruptcy Code forbids companies to leave behind product-liability claims when the exiting company amounts to the same business that sought bankruptcy in the first place. "The new GM is clearly the old GM for manufacturing and operational purposes," said Connecticut Attorney General Richard Blumenthal. Critics also say bankruptcy courts have limited jurisdiction and can't make a sweeping decision that affects all 50 states as well as millions of Americans who aren't aware they might have claims because they haven't yet been in accidents.
Case law on the issue of so-called "successor liability" isn't well settled. But many court decisions have limited the ability of a bankruptcy court to discharge future claims, in part because companies can't give fair notice to people who haven't yet suffered injuries. U.S. Supreme Court Justice Ruth Bader Ginsburg voiced concern about the transfer of these liabilities in a case on asbestos claims decided earlier this month. But other legal experts say the Bankruptcy Code trumps state laws governing product liability. They argue that honoring claims of unsecured creditors would violate the code's tenet of paying secured creditors first and treating unsecured claims the same way those of bondholders and others are treated.
Callan Campbell, a recent high-school graduate, was a week away from starting classes at a local community college in August 2004 when the 1996 GMC Jimmy sport-utility vehicle she was riding in flipped over and rolled several times. Today, she's a quadriplegic, confined to a wheel chair and suffering regular back spasms. Ms. Campbell, now 23 years old, sued GM in a Pennsylvania court, alleging that faulty manufacturing caused the SUV's roof to crush in and paralyze her. Ms. Campbell has since had hip surgery and developed arthritis. A life planner estimates her future medical bills and future need for durable equipment and home modifications would cost more than $4.5 million, according to court papers.
A GM spokesman declined to comment on Ms. Campbell's case, which has yet to go to trial. Ms. Campbell's mother, Deborah Glosek, says she refuses to believe Mr. Obama would allow GM to discharge any damages her daughter might win in court. "If someone would just tap him on the shoulder," she says, "I can't imagine he wouldn't think of these people." Ms. Campbell says she wants justice for life-altering injuries that shortchanged her plans to run a flower shop. "It's more than me losing any potential for a job," she says. "I lost so much more than that. And they need to repay me."
SEC gets tough on Wall Street tribalism
by Gillian Tett
In recent years, Henry Hu, a finance professor of Texas University, has often been a thorn in the side of the banking world. In his academic research, Hu has repeatedly highlighted the systemic risks created by credit derivatives and other complex instruments. Most recently, he has expressed alarm about the so-called “empty creditor” problem – or the fact that lenders, such as banks or hedge funds, are increasingly using credit derivatives to hedge in ways that create perverse incentives to tip companies into default.
Now, however, Hu is being given a chance to put his theoretical musings into practice. The Securities and Exchange Commission will soon announce that Hu is joining the agency, in a senior risk position. And that will give him practical input on many policy issues – such as the emotive “empty creditor” matter. The move is an intriguing straw in the wind of some bigger shifts in Washington. Until now, the SEC staff has been dominated by lawyers and accountants, trained in law enforcement or an efficient market ethos. But last year Mary Schapiro arrived as the new head of the SEC and she is now quietly trying to widen the employee pool, by recruiting not just academics – such as Hu – but former traders, bankers and investors too.
In part, that reflects the SEC’s desire to plant flags in a regulatory turf war, and stave off justifiable political criticism of its past (multiple) failures. It also, though, reflects a little-known quirk of Shapiro’s own past: before she moved into the world of law and finance, she studied social anthropology as an undergraduate. As a result, she has always firmly believed in the importance of analyzing incentive structures to change financial behaviour – and focusing on incentives when creating policy. Recruiting former traders and behavioural finance experts such as Hu is one part of a drive to do that.
But there is a second, more tangible, reason why Hu’s appointment is striking. Ever since the Obama administration said earlier this year that it plans to regulate the derivatives world, a furtive fight has been brewing about who will run that. In theory – as most Washington officials, such as Shapiro, know well – the logical solution would be to create a unified oversight agency. That would mean merging bodies such as the SEC and CFTC. But last week the Obama administration timidly ducked that task, fearing a political firestorm. That means that the Washington regulatory scene remains marred by the type of tribal warfare pattern that should be only too familiar to Shapiro from her days as a former anthropology student.
Unsurprisingly, Wall Street banks are now trying to exploit these tribal divisions to the full. In recent weeks some have been lobbying for the Federal Reserve or the CFTC to take responsibility for derivatives, since they think that the CFTC would adopt a lighter- touch approach than the SEC (which, is ironic, since a decade ago the banking industry was furiously lobbying to keep the CFTC away from derivatives). But the US Treasury has now signalled that while the CFTC will have responsibility for regulating interest rate, foreign exchange and commodity derivatives, credit derivatives are likely to pass to the SEC. And this week Schapiro forcefully stuck her flag in that patch, stating in public testimony that the SEC will be the primary regulator for credit derivatives.
The practical implications of that remain to be seen. Though the Obama administration unveiled its white paper on reform last week, that paper was vague on most crucial details and the practical implications are likely to take months – at best – to be sorted out. However, Shapiro, for her part, appears keen to rein in the credit derivatives sphere, using incentives such as sliding scale of capital and margin requirements to push as much activity as possible onto exchange and clearing houses. She is also determined to clamp down on some of the abuses that have marred the credit derivatives sphere in recent years. Hence Mr Hu’s timely arrival.
But in practice, SEC officials know they will need to share some oversight functions with the CFTC. And Wall Street banks are gearing up for a furious lobbying campaign, in an effort to water down some of the reform proposals. They are also determined to exploit any regulatory cracks they can find, not just between the CFTC and SEC but Europe and London too. It remains unclear whether Shapiro will have the political clout to navigate – let alone win – all these tribal fights. She has not hitherto been regarded by Washington insiders as a real firebrand, or heavy hitter.
Nevertheless, her soft-spoken, pragmatic style is respected, and many of her ideas strike me as laudable common sense. In that respect, I hope she succeeds (and not just because I share a background in anthropology). Nevertheless, she has her work cut out. So does Hu. Stand by for plenty more debate on the “empty creditor” issue in the coming months – particularly given all the companies that could yet tip into default.
Bernanke Flubs Tryout, Still Up for Leading Role
Somewhere in the West Wing, Larry Summers is smiling. The Obama administration economist, whose name is never invoked without “brilliant” attached to it, has been touted as a likely successor to Federal Reserve Chairman Ben Bernanke. Bernanke’s four-year term ends in February, and the subject of his reappointment is starting to preoccupy the political class in Washington. Summers was probably tuned in yesterday when his primary competition for the job endured withering questioning from members of the House Oversight Committee on the behind-the- scenes dealings in connection with Bank of America Corp.’s acquisition of Merrill Lynch & Co. If this was Bernanke’s out- of-town tryout, the revue needs work before moving to Broadway.
Testifying under oath, Bernanke told the committee in no uncertain terms that “neither I nor any member of the Federal Reserve ever directed, instructed or advised Bank of America to withhold from public disclosure any information relating to Merrill Lynch, including its losses, compensation packages or bonuses, or any other related matter.” He said the Fed had acted with the “highest integrity” in facilitating the merger.
Members of Congress weren’t buying. If Bernanke didn’t advise Bank of America Chief Executive Ken Lewis to withhold material information from shareholders and didn’t threaten to remove the board of directors and management if Lewis walked away from the deal, they wanted to know who did. In their hostility to Bernanke, lawmakers were the very model of bipartisanship. (Ranking member Darrell Issa, Republican of California, wasn’t kidding when he said “I look forward to continuing this on a bipartisan basis.”)
Bernanke could have used a presentation-skills coach, not to mention a make-up artist. He looked tired, which is understandable for someone running on little sleep and maximum stress. He was uncomfortable with the subject matter, preferring the arcana of output gaps and inflation expectations to fending off accusations of improper conduct on the part of the Fed. Several times under pressure, he fell back on “I don’t recollect” or “I don’t recall” the details of a particular conversation or e-mail.
The Fed chief was asked repeatedly whether he threatened to fire Ken Lewis and his board; whether he instructed former Treasury Secretary Henry Paulson to convey that threat; whether he promised a specific amount of government money if the deal were consummated; and whether he had knowingly withheld information on the merger from other regulatory agencies. And he repeatedly answered in the negative. In so doing, he violated what my colleague calls the First Rule of PR: Never deny beating your wife. Never say, “I’m not a crook.” When you do, you lose.
Bernanke lost on defense. Not that his offense was anything to write home about, considering he can run circles around lawmakers, many of whom look as if they are reading their staff- prepared opening statements for the first time. He dodged questions about whether Lewis and Paulson were lying when they claimed he was the bearer of threats. As far as the audience is concerned, a dodge is as bad as negative denial (see First Rule of PR above).
Interestingly, Lewis refused to use the word “threat” to describe government pressure to complete the merger at his June 11 House Oversight Committee hearing. (It must have something to do with the lawyers’ coaching on safe word selection.) Previously, he told New York State Attorney General Andrew Cuomo that, on learning of Merrill’s mounting losses in December, he tried to invoke the material adverse conditions clause to scuttle the deal and was threatened by Paulson.
Even as the lawmakers grilled Bernanke on the details of the Bank of America-Merrill Lynch merger, they praised him for the job he was doing holding the financial system together. Which brings us back to Larry Summers and Bernanke’s reappointment. Economists downplayed the role of yesterday’s testimony in any decision to reappoint the Fed chairman. They respect Bernanke and are glad they aren’t in his position. Financial-market types, on the other hand, were quick to declare Bernanke toast, crown Summers as the heir apparent and concoct a conspiracy theory to fit the facts.
Summers may have to wait his turn. It would be hard to find someone more suited for the job of Fed chairman than Bernanke. His performance yesterday has nothing to do with his unique qualifications for the position. All the elements for the worst financial crisis since the one he studied and wrote about (the real Depression) were in place when he became Fed chairman: a housing bubble built on a sea of bad loans and too much leverage. Bernanke has transformed the Fed into a collegial institution, which is a good thing because the Fed chairman needs all the help he can get right now. Summers, for all his brilliance, consistently earns poor grades in “plays well with others.” Unless President Barack Obama wants a solo pilot, he would do well to tap Bernanke for a second term.
Nominees emerge for U.S. panel on Wall Street meltdown
A bipartisan panel armed with subpoena power to investigate causes of the Wall Street meltdown is on the brink of being launched, as Congress embarks on an ambitious effort to reform policing of the financial sector. A short list of names has emerged for the Financial Crisis Inquiry Commission that includes former Republican presidential candidate Fred Thompson; former Democratic head of the Commodities Futures Trading Commission Brooksley Born; and Alex Pollock, a fellow at the conservative think tank American Enterprise Institute, according to a source familiar with the matter.
Congress last month created the 10-member commission to study how fraud, regulatory lapses, monetary policy, accounting, lending practices and executive pay contributed to the worst U.S. financial crisis since the Great Depression. House of Representatives Speaker Nancy Pelosi has said the panel is modeled after the Pecora Commission, a Depression-era U.S. Senate panel that investigated the causes of the 1929 Wall Street crash. "I think the announcement should be coming in the near future," Pelosi spokesman Nadeam Elshami said about the naming of the appointees.
The source, speaking anonymously because discussions were still ongoing, said other possible appointees include Bill Thomas, former Republican chairman of the House Ways and Means Committee; Jake Garn, former Republican senator; and Bob Graham, the former Democratic senator and Florida governor. Born, Pollock and Thomas declined to comment. Thompson, Garn, and Graham did not immediately respond to messages.
The crisis commission must report its findings to Congress in December 2010. Its work will run parallel to Congressional efforts to draft the most dramatic overhaul of the financial regulatory system since the 1930s. President Barack Obama has said he hopes reform legislation can be finalized by the end of this year. Obama's proposal, unveiled earlier this month, calls for the Federal Reserve to police systemic risks to the economy and proposes consolidating primary bank supervision into a new regulator. The plan also calls for creating a new consumer financial product watchdog and for giving the federal government the power to unwind troubled firms whose stability impact the broader financial system.
The Financial Crisis Inquiry Commission will study what led to the failure of several large Wall Street firms, which prompted Congress last year to pass a $700 billion financial bailout that has been unpopular among voters. The U.S. economy has shed six million jobs since December 2007 in the midst of a recession that has seen the jobless rate hit 9.4 percent. The crisis commission was given the power to hold hearings and to subpoena witnesses' testimony as well as correspondence and documents.
Back in February, Barack Obama’s presidency suffered an early setback when Judd Gregg, the Republican senator from New Hampshire, withdrew as his nominee for commerce secretary. Mr Gregg, who was to be the most high-profile exhibit of Mr Obama’s bipartisan credentials, decided he could not belong to an administration that would preside over such high budget deficits. The figure then being projected for this year was above the $1,000bn mark for the first time. But in the few short months since, the number has rocketed much further – to $1,800bn (£1,106bn, €1,291bn) or 13 per cent of gross domestic product.
The Congressional Budget Office, a nonpartisan watchdog, forecasts that the US will post deficits in excess of a trillion dollars in each of the next 10 years. Even on its relatively optimistic assumptions for economic growth, moreover, the CBO predicts national debt will double to 82 per cent of GDP in the next decade – a level not seen since the second world war. This would push the US close to the chronic debt levels seen in Japan and Italy. “People used to talk about America’s long-term fiscal crisis,” says Douglas Elmendorf, head of the CBO. “That crisis is now.” Once merely a worthy subject of concern, America’s fiscal outlook has rapidly become the object of widespread alarm.
“Aside from weapons of mass destruction and terrorism, America’s fiscal situation is the most dangerous challenge facing the country,” says Mr Gregg. “Unchecked, it will reduce growth, weaken the dollar and ultimately undermine America’s global leadership role.” The administration cannot be blamed for what is this year an almost entirely inherited deficit. Mr Obama’s new spending accounts for only about one-tenth of it. The effects of the recession, the costs of the bank bail-out and the structural legacy of the three large tax cuts and two wars bequeathed by George W. Bush account for the remainder.
Nor do critics, including Mr Gregg, blame the new president for pushing through a $787bn two-year fiscal stimulus within a month of moving into the White House. “We needed to dig the economy out of a hole,” says Mr Gregg. “I understand that.” But politics is quick to change. The otherwise deeply unpopular Republican party is starting to sense an opportunity. A rapidly growing proportion of the US public is registering anxiety at the sea of red ink pouring out of Washington. In the past week, two prominent polls showed that twice as many Americans were concerned about growing budget deficits as reforming healthcare – Mr Obama’s overriding domestic priority.
Mr Obama’s approval ratings remain high at around two-thirds. But the popularity of many of his policies is dropping sharply. In spite of the fact that US unemployment is rising sharply and set to exceed 10 per cent this year, one recent poll found that 60 per cent of the public were concerned that the president had no plans to tackle the deficit – a dangerous number if it starts to harden. Even strong supporters of the administration, such as Roger Altman, who was Bill Clinton’s deputy Treasury secretary in the last period the US posted budget surpluses, worry about continuing on this trajectory.
“The concern is that we get a subnormal economic recovery next year and the year after, which depresses revenues, leads to even higher debt and then we get a crisis,” says Mr Altman. “At that point you would expect a combination of Main Street assisted by Wall Street to force Washington to correct the situation.” Even on its existing course, many economists believe the US is heading for a debt crisis. The most pressing anxiety is over the declining confidence of foreign investors, whose support for the dollar has helped fund America’s growing trade deficits over the last decade. In the last three months, the yield on the 10-year Treasury bond has almost doubled from just above 2 per cent to almost 4 per cent.
The administration points out that this simply takes the 10-year interest rate back to its level just prior to the financial market meltdown last September – a sign of a return to normal as fears recede of a second Great Depression. But in a recent survey by International Strategic Investors, a boutique investment bank, 40 per cent of bondholders said the sell-off was caused by concerns over rising US budget deficits. Only 28 per cent saw it as a “normalisation of yields”. Although Chinese and other foreign investors would principally damage themselves by withdrawing precipitously from the dollar, since it would devalue their remaining holdings, they are making growing rumblings about the unsustainability of America’s course.
Any reversal in foreign sentiment would plunge the US into deeper recession by causing a sharp rise in interest rates. Last month Standard & Poor’s, the credit rating agency, shocked the British government when it put the UK’s triple-A sovereign credit rating on a negative watch. A similar step for the US would send far bigger shock waves. As Ben Bernanke, governor of the Federal Reserve, told Congress this month: “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” All this leaves Mr Obama in a deepening quandary.
In Augustinian style, he needs to keep pumping the economy in the short term, since consumers, who are the mainstay of the US economy, are unlikely to resume spending soon. But he needs simultaneously to reassure investors that he has put in place plans for a return to fiscal responsibility the moment recovery sets in. The White House promises to halve the deficit it inherited by the end of Mr Obama’s first term in 2012. But few believe the economic growth numbers on which its projections are based. “I probably shouldn’t say this but President Obama’s plans remind me of George W. Bush,” says Douglas Holtz-Eakin, a former head of the CBO who was John McCain’s chief economic adviser during the the presidential election. “Both presidents experienced a crisis – 9/11 and the financial meltdown. Both promised to halve their resulting budget deficits. Neither were credible.”
Liberal critics of Mr Obama fear precisely the opposite. Although Mr Obama paid little respect during the campaign to the Clinton years, which concluded with three consecutive budget surpluses, they note that he is surrounded by key figures from the 1990s. These include Tim Geithner, Treasury secretary, and Lawrence Summers, chairman of the National Economic Council. They also note how rapidly Mr Obama has shifted his emphasis in the debate over universal healthcare from the goal of expanding access to that of imposing fiscal discipline on a sector that now accounts for almost one-fifth of the US economy and is set to rise to one-third on its current course.
“We used to say we wanted to achieve two things: universal coverage and fiscal discipline,” says a senior administration official, pointing to the change in emphasis: “Now we say we want fiscal discipline and universal coverage.” Mr Obama has also pledged to ensure that the $100bn-$150bn a year healthcare reform will be “budget-neutral” – requiring no net extra spending. Some liberals see this as a straitjacket that could pare back the benefits he promised to extend to the 47m Americans without insurance and the tens of millions who are seen as underinsured. Conservatives, meanwhile, flatly refuse to believe it. “Obama wants healthcare spending to be budget-neutral and I want to be six foot four and have a full head of hair,” says Mr Holtz-Eakin.
But even if Mr Obama does ensure that expansion of healthcare is fully paid for, existing spending on healthcare and the Social Security retirement scheme remains on a path that will eventually bankrupt the federal government. Peter Orszag, his budget director, recently hinted in an article for the Financial Times that the administration would next tackle the looming deficit in Social Security contributions. Technically, this could be achieved relatively easily – all it would require is a minor downward adjustment in benefits or a small increase in the retirement age. Politically, though, it could prove very difficult.
Conservatives want to switch the system from defined benefits to defined contributions – a move Mr Bush tried and failed to achieve in 2005. Democrats want to preserve the existing arrangement, which is often described as the “third rail of American politics”. Either way, Social Security is a minor problem compared with the vast looming deficits in Medicare and Medicaid, the government-funded health programmes for retirees and the very poor. By 2040, spending on both is set to more than triple to 20 per cent of GDP, which is the size of last year’s entire federal budget.
Conventional wisdom says Mr Obama should set up a bipartisan commission to tackle the problem. This would be the only way of shielding both parties from the political fall-out that would undoubtedly result from a cut in benefits. But the president has studiously avoided committing to such a proposal, which was last used to prolong Social Security’s solvency under the commission headed in the early 1980s by Alan Greenspan before he became Fed chairman. Most Republicans, meanwhile, would agree to join the commission only if it excluded the possibility of tax increases – a precondition that would in effect kill the exercise before it began. Ultimately, Mr Obama may be forced to turn to Republican moderates, such as Mr Gregg and even Mr McCain, if he wanted to get it off the ground.
A plausible alternative scenario is that Mr Obama will head into next year’s midterm congressional elections, which will help determine his re-election chances in 2012, facing a sullen electorate that fears the Democrats are taking their country towards bankruptcy. It might not be fair – Mr Bush, rather than Mr Obama, deserves most of the blame for America’s deepening structural deficits. But it is the kind of message that could help bring a moribund Republican party back to life. “Ultimately, America is a conservative country,” says Mr Altman. “History suggests that if Main Street thinks we’re heading for the rocks, it will force a change of politics in Washington.”
World Trade, Baltic Dry and "Green Shoots"
by Ben Bittroff
FN: World trade has collapsed and shows little signs of recovery. Japan posted a 41% yoy drop in exports. The Baltic Dry Index (BDI) bounced quite a bit off the lows, but has now started to stall.
As more shipping capacity comes online (yeah they're still building like crazy) and demand continues to slide (yeah demand is still cliff diving) expect the BDI to curl over and plunge.
Box lines staring at $50bn revenue collapse: "TOP container lines could see $50bn or more wiped off their combined revenues this year as conditions continue to deteriorate, industry experts predict.
A new forecast from shipping analyst Alphaliner puts the anticipated drop in revenue from 2008 levels at $40bn-50bn.
This is broadly in line with Drewry Shipping’s projection of a $55bn collapse in revenue from last year’s income of $220bn, which will catapult the entire industry deep into the red.
Drewry said container lines would only be able to find savings of around $30bn, leaving a gap of $25bn, which will push the industry from a modest collective profit in 2008 to a massive deficit of around $20bn in 2009.
This is down from a very early projection Drewry prepared before first quarter results were published.
Alphaliner’s latest forecasts are also based on the performance of top lines in the first three months of the year, when income of those monitored plunged 35% as volumes collapsed by 20% and average freight rates declined 15%.
A survey of 11 of the top 20 lines that report a breakdown of their liner shipping results found that revenue in the January-March period shrank to $14.5bn from $22.4bn a year earlier.
The 11 lines surveyed account for 45% of total fleet capacity.
Of those 11, the two big Chinese lines, China Shipping and CoscoContainer Lines saw the biggest percentage decline, each suffering a drop in revenue of more than 50%.
World number one Maersk Line posted a 28% drop, the smallest reported. Other global carriers saw their revenue contract by about 33%-40%. Figures for Mediterranean Shipping Co, Evergreen and CMA CGM were not included.
Alphaliner noted that no region had been spared in the latest slump. Volumes were down in all parts of the world, leaving carriers unable to shift capacity from a weak trade lane to one faring better.
Furthermore, NOL’s latest results “suggest that there is still some way to go before any recovery is seen,” Alphaliner said.
Trade conditions continue to deteriorate. Drewry reported that average spot rates from Hong Kong to Los Angeles slid over the past week to $914 per loaded 40 ft container from $921 a week earlier and $2,043 in June 2008."
Value of Japan exports falls 41% year on year: "Japan's tentative export rebound faltered in May as shipments fell 41 per cent by value year on year amid a rising yen and continuing weakness in sales in key markets for the nation's electronics and cars.
While most economists believe the world's second largest economy is bottoming out after suffering its sharpest postwar slump, yesterday's trade statistics highlight the shallow roots of a recovery likely to remain highly reliant on external demand and debt-funded fiscal stimulus.
May's year-on-year decline outpaced the 39 per cent drop recorded in April. On a seasonally adjusted month-on-month basis, exports slid 0.3 per cent in May, after having risen in both March and April."
M&A activity lowest in five years
Record levels of capital markets activity during the first six months of the year failed to lift the volume of worldwide mergers and acquisitions as chief executives remained cautious about launching big deals. Non-financial groups raised almost $887bn in the bond markets in the first half, 64 per cent more than the same period last year when $540.3bn was raised, according to data from Dealogic. However, this did not translate into higher levels of M&A activity, which totalled just $1,100bn, the lowest semi-annual volume since the first half of 2004.
This was in spite of a flurry of activity across sectors including Xstrata’s $48.3bn hostile approach for rival mining group Anglo American. Dieter Turowski, head of European M&A at Morgan Stanley, said past cycles suggested there would be 18 to 24 months of reduced volumes ahead. “We have reached the bottom, but recovery will be slow and fragile,” he said. “One encouraging sign is that we have incredibly open bond and equity markets. That means investment-grade companies can finance their deals and even resurrect some of those which were put on hold because of the turmoil in capital markets.”
Global equity capital markets issuance was dominated by offerings from the finance sector in the second quarter as banks rushed to raise money to repay funds from the US troubled asset relief programme. Banks and financial institutions raised $89bn via 92 deals – the highest quarterly count on record. However, this was not enough to boost the overall volume of equity capital market offerings, which totalled $330bn via 1,738 deals in the first half, the lowest since 2005 and the lowest deal count since 2003.
“Capital markets activity remains strong. M&A is coming back slowly and we expect to see more bear hugs and share offers,” said Sebastian Grigg, head of UK investment banking at Credit Suisse. Goldman Sachs ranked as the top M&A adviser globally, in Europe and in Asia, while Morgan Stanley took pole position in the US. Advisers generated just $4.9bn in fees in the first six months of the year – less than half the $11.4bn in the period last year. Boutique M&A firms increased their revenue wallet share to 15 per cent, from 13 per cent for the first half of 2008. Private equity buy-outs still remain depressed and totalled just $22.9bn, the lowest half-year volume since 1997.
Michigan Braces for a Surge in Welfare Applications
Michigan's generous jobless benefits and strict eligibility rules have kept the welfare rolls down despite the state's 14.1% unemployment rate, the highest in the country. But a surge in jobless workers reaching the time limit for unemployment benefits in coming months could change that. A major test for the state's welfare system could come by January, when nearly one in seven unemployed workers will have exhausted their jobless benefits, unless the laws change, said Norm Isotalo, a spokesman for Michigan's unemployment-insurance agency.
Many of the more than 680,000 unemployed workers in the state are collecting jobless benefits, which last for as long as 79 weeks. Other states with high unemployment, such as Florida and Oregon, have already seen significant increases in welfare caseloads. "We're expecting a huge influx of applications in the next few months," said Barbara Anders, the director of adult and family services at the Michigan Department of Human Services. About 100,000 people's jobless benefits will expire by January. Officials hope for funding to add staff to handle the influx, and the state Senate appropriations committee has approved hiring 200 more staffers.
"We believe that the safety net remains strong in Michigan," said Liz Boyd, a spokeswoman for Democratic Gov. Jennifer Granholm. She added that the state's food-assistance and Medicaid programs have expanded. In contrast to most other big states, welfare caseloads in Michigan are 4.8% below year-ago levels, though the total number of cases has stopped falling in the past four months. In April, the state reported about 70,000 families were receiving welfare under the federal-state Temporary Assistance for Needy Families program, or TANF. But nearly one in seven residents, or 1.4 million in all, are receiving food stamps -- a clear symptom of Michigan's economic distress.
The state has some of the strictest welfare rules in the nation, dating back to its pioneering welfare-overhaul efforts in the 1990s. Michigan is one of four states that closes a family's case the first time it fails to comply with a requirement -- such as spending a set amount of time searching for a job -- according to the Urban Institute, a Washington think tank. Michigan is the only one of those four states that also suspends a family's benefits for three months when it doesn't comply; the other three suspend them for one month. Families that are suspended for breaking the rules must reapply for benefits.
Local advocates for low-income people cite Michigan's rules limiting the income or assets of would-be welfare recipients. A family of three that earns more than $814 a month is ineligible for welfare in Michigan, a threshold that hasn't changed in more than two decades, said Sharon Parks, president of the Michigan League for Human Services, an advocacy group for low-income people. "The fact that it's stayed the same means that you have to be poorer and poorer to qualify for cash assistance," Ms. Parks said.
In the 1990s, under Republican Gov. John Engler, Michigan developed one of the nation's first programs to push welfare recipients to work, an approach adopted nationally in 1996. The rules tightened further under Ms. Granholm in 2006. The rules allow families to receive benefits for a maximum of two years, and toughened penalties for not following work requirements. Before Michigan's welfare office will open a case, an applicant must first visit a Michigan Works office to register for a job-search program, and report frequently thereafter, which some advocates say has discouraged applications in a state where jobs are scarce.
"It's just perceived to be this roadblock to getting assistance," said Kristin S. Seefeldt, assistant director of the National Poverty Center at the University of Michigan, who has followed 45 low-income women for the past four years.
For those who already have jobs, the job-search program doesn't bend around work schedules. For others, the job-search program primarily consists of spending hours looking at want ads. "They could do that on their own, and the amount of money they'd get from TANF isn't worth it" for some people, Ms. Seefeldt said. The monthly welfare check for a family of three in Michigan is $492, or $5,904 a year.
Unemployed Hit the Road to Find Jobs
After seven months without a paycheck, Tim Ryan turned into a werewolf. Laid off from a construction job, Mr. Ryan finally found work last month playing the wolfman at Clark's Trading Post, a tourist attraction in the White Mountains of New Hampshire. For $12 an hour, about half what he made before, he dons furry rags, a coonskin cap and an eye patch and jumps out of the woods when the Trading Post's steam train chugs by, snarling and growling at passengers.
The job is nearly two hours north of his home in Pittsfield, N.H., too far to commute. So Mr. Ryan sleeps in an old, mold-ridden cottage with no running water that someone lets him use free. "These days, you have to do things you never thought you would," says the 52-year-old. "You have to go to extremes." With the unemployment rate at 9.4%, some Americans are willing to go wherever they can to nab a job, even if it is temporary. To adapt, they find living quarters near the job in campers or cheap apartments, giving up normal family life for a paycheck, in a contemporary echo of the itinerants who roamed the country for work in the Great Depression.
Evidence of this labor trend is mostly anecdotal. In Linden, Tenn., where more than 300 people lost their jobs when an auto-parts plant closed in September, at least 20 now work three hours away in Paducah, Ky., manning tugboats on the Tennessee River, says John Carroll, the mayor of Perry County, Tenn. While there, they sleep on the tugboats. The unemployment rate in their home county is 22%. In Detroit, where layoffs have hit about half of the 5,000 members of the International Brotherhood of Electrical Workers Local 58, a union official says he has a list of 2,200 members who are willing to travel for work, up from 1,400 last year. "We have guys all over the country: California, Chattanooga, West Virginia, Las Vegas," says Bob Hines, the local's assistant business manager.
A provider of corporate temporary housing, Oakwood Worldwide, has seen a 6% rise this year in rentals of furnished apartments, which it attributes to more people taking temporary jobs away from home. And ITT Corp. says it relocated more new hires in 2008 than ever before -- 13%, versus a typical 3%. Many employees are moving just themselves, keeping their families and their homes in a different state, says ITT's director of human resources, Lisa Simeon.
U.S. Census surveys of mobility actually don't report more people moving, but fewer. The surveys, however, ask respondents whether they are living somewhere other than where they did a year before. They don't measure workers who are currently away from home but don't consider themselves to have moved. "There is this partial-mobility strategy" now, says demographer William Frey of the Brookings Institution, in which people are starting to move in a makeshift and impermanent fashion. He likens it to the way many Mexican workers come to the U.S. and leave their families behind.
There are costs to this strategy. Spouses left at home must do the work of both parents. Children miss out on things. Loneliness is a steady companion for the parent on the road. Researchers have long documented strains on families that are separated. A study last year by the Rand Corp. think tank found that in families with a member in the military, the spouse at home tended to have poorer mental health and report more behavioral and emotional difficulties among the children than in the general population. Workers who live away from home often say they know of the toll but endure it because they expect the dislocation to end when the recession does.
The partial-mobility strategy is common in Big Spring, Texas, halfway between Dallas and El Paso. The local Suburban East RV and Mobile Home Park Campground is packed with men who have come from all over to erect wind turbines along Interstate 20. "I got me a camper for our vacation time. I never thought I'd be living in it," says Jerry Beaty, 48 years old, who is living at the RV park, two hours away from his family in Abilene, Texas. For years, he had steady work in Abilene maintaining and remodeling doctors' offices. It dried up when medical facilities tightened their budgets.
During 28 years of marriage, Mr. Beaty says, he and his wife, Cathey, had been apart just two nights, when he went deer hunting. "She boohooed a lot, and it was hard on me, too," he adds. Now, Mr. Beaty works six days a week, in 10,5-hour shifts, on the turbine-building job near Big Spring, getting up at 4 a.m. and going to bed by 9 p.m. There isn't much to do in the evening. On Thursdays, the turbine crews at the campground go to Brenda's BBQ in Big Spring for the $11.50 all-you-can-eat special. Two turbine workers have pitched in to plant a garden at the campground.
Mr. Beaty's wife, who is a nurse, arrives from Abilene for weekend visits on Friday, while Mr. Beaty is still working. He can hardly wait to get back to his camper to see her. "The 30 miles from work back to the campground seems like forever," he says. On Sunday evenings, Cathey Beaty leaves. "It's kind of sad," she says. "I come home to an empty house again, and he's stuck in that itty-bitty town." But, she says, "you take work where you can get it. You don't like it, but you suck it up; that's what you do."
In fact, for workers willing to make a more permanent move, there are regions of the country, such as the Dakotas and parts of Iowa and Nebraska, where work for people in professions such as carpentry is still ample. The unemployment rate in Bismarck, N.D., for instance, is 3.7%. In Iowa City, Iowa, it's 3.2%. But picking up and moving the whole family is a complicated undertaking, to say nothing of the difficulty of selling a house in today's market.
The family separation, when just one half of a couple moves, is especially wearing for those with young children. Lance Meudt's home is Dodgeville, Wis. He recently took a six-month job as an electrician two hours away in Cedar Rapids, Iowa, renting a small apartment there for $450 a month. "There was no work in my vicinity, and with two little kids and another on the way, I have to make a living. But it's definitely hard being away from my kids, and hard on my wife, too," says Mr. Meudt, 33.
Back in Dodgeville, Lori Meudt, a stay-at-home mother, looks after their children, ages 4 and 2, and has a baby due in November. It is "those evening hours till bedtime that I find the loneliest," she says. "One night, there were toys all over, and the house was trashed, and I just started crying and saying, 'I can't do it anymore. I can't keep up.'" Some workers move for jobs only to be laid off again, caught in a wearying cycle. "It's been bad luck after bad luck," says Mark Salmoni, a 50-year-old electrician who says he has been on the road, from West Virginia to Iowa, on seven different jobs since being laid off at an oil refinery near Detroit 18 months ago. On one assignment in West Texas, he says, "we got there and the project supervisor said, 'We're gonna money you guys up. You guys are gonna get at least 12 weeks.' We got two and a half."
Mr. Salmoni is leaving again soon, this time for work at a coal plant in West Virginia. His wife, Joan, is home in Detroit with their two teenage children. If it weren't for her part-time job at Home Depot, "we'd be selling stuff," Mr. Salmoni says. For employers, having lots of people willing to go where the work is makes recruiting easier. When Anne Englert, whose family owns Clark's Trading Post in New Hampshire, advertised tryouts for a new wolfman in April, she drew a dozen enthusiastic applicants, former construction and millworkers from throughout the state. "Almost everyone hadn't had a job for six months or more," she says. "They were ready to do anything."
That includes sharing the spotlight with the Trading Post's other stars, three docile black bears that have learned to drink root beer in front of the audience and then toss the cans in the recycling bin. Mr. Ryan's wolfman job at the Trading Post runs only through October. It carries no fringe benefits and pays less than half the $22 an hour, plus gasoline money, that Mr. Ryan says he got until November at a job building oil-change shops. But he's grateful. His unemployment checks were about to run out, as was a short moratorium that his mortgage lender had granted him. His family briefly had to go on food stamps. He grabbed the job, even though for the first weeks he had nowhere to sleep but his 10-foot camper.
Though happy to be bringing in money again, Mr. Ryan is troubled about missing out on family things with his son, age 12, and daughter, 15. "I won't be able to see my kids but once a week. I love to put my kids to bed at night and say their prayers with them," he says. He finds it easy, though, to slip into character as the wolfman. Tall, with chiseled arms, he has shoulder-length blondish-gray hair and a long, bristly beard. "I'm kind of scary," he says. "People keep saying they'd never thought I'd get paid for my looks."
When the first steam-train ride of the summer season left Clark's Trading Post on Memorial Day weekend, the conductor warned passengers that after crossing the river on a covered bridge, they would be in wolfman territory. Soon, a gunshot and an evil cackle were heard from behind the birches. Out roared Mr. Ryan, wearing rags, covered in dirt and waving a club. He chased the train, growling and hollering, "You're gonna be sorry! They'll be trouble for all of ya! Now you've done it!" Children dived into their parents' arms, scared but laughing. "That was a blast," Mr. Ryan said afterward, resting in the woods before the next train. Now that he's working, he added, "hopefully I'll be able to sleep at night."
Bonds Beat Loans for Banks Driving Down Yields
Cullen/Frost Bankers Inc. Chairman and Chief Executive Officer Dick Evans knows why Ben S. Bernanke is having so much trouble pulling the economy out of its worst financial calamity since the Great Depression. Deposits at the San Antonio-based bank are growing a record 20 percent this year while loans shrink for the first time since mid-2007. Business owners are “being extremely cautious,” said Evans, who is pumping depositors’ money into Treasuries and municipal bonds.
Evans isn’t alone. Commerce Department data show that as the economy slows, Americans are hoarding cash at the fastest rate in 15 years while commercial and industrial loans have fallen 8.2 percent since peaking in October, according to the Federal Reserve. About 60 percent of banks said requests for business loans dropped in the first quarter, a Fed survey shows. Banks are putting their cash into the bond market, with holdings of Treasuries and debt of Fannie Mae and Freddie Mac rising 14 percent to $1.27 trillion in the week ended June 10 from a year earlier, the Fed says. As recently as January, bond holdings were up 18 percent, the most since the Fed began tracking the data in 1973.
“Economic activity is likely to remain weak for a time,” Fed Chairman Bernanke and his colleagues on the Federal Open Market Committee said in a statement this week as they left the target interest rate for overnight loans between banks unchanged at a record low of between zero and 0.25 percent. “The recovery really hasn’t got going,” billionaire investor Warren Buffett said in a Bloomberg Television interview on June 24. Yields on 10-year Treasury notes fell 21 basis points this week, to 3.58 percent, at the same time that the government sold a record $104 billion of debt.
The U.S. may issue $3.25 trillion of securities in the year that ends Sept. 30 to finance stimulus plans, according to Goldman Sachs Group Inc. Companies are also selling record amounts of bonds, raising $751 billion so far this year, 22 percent more than in the same period of 2008, according to data compiled by Bloomberg. The biggest bond investors say the economy won’t return anytime soon to the 4.8 percent growth recorded before credit markets seized up in the third quarter of 2007. President Barack Obama’s administration forecasts that the unemployment rate will likely exceed 10 percent in coming months, the highest since 1983.
Mohamed El-Erian, the CEO of Newport Beach, California- based Pacific Investment Management Co., which managed $756 billion as of March 31, says by this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under.” The Washington-based World Bank said June 22 that the global economy will contract 2.9 percent this year, compared with a previous forecast of a 1.7 percent decline.
Using deposits to buy bonds instead of making loans is “probably not good news for the growth of the economy in general,” said Steven Major, the global head of fixed-income research at London-based HSBC Holdings Plc. “Every government bond they buy means it’s less money they can lend into the real world.” The consumer savings rate is rising as Americans grow more concerned about losing jobs and the economy slows. Gross domestic product contracted 5.5 percent in the first quarter, the government said yesterday. Household savings increased to 6.9 percent in May, the highest since December 1993, the Commerce Department said today.
Deposits grew 7.4 percent faster than loans last year, the widest gap since 1978, according to Melissa Roberts, an analyst at KBW Inc., a securities firm in New York. At the 30 lenders that control about two-thirds of the country’s banking assets, deposits reached $3.96 trillion as of June 10, up 16 percent from $3.43 trillion in May 2008, Fed data show. The institutions, which each have at least $40 billion in assets, held $787 billion of Treasuries and agency debt, 21 percent more than in May 2008, according to the Fed. Bond purchases may temper a rise in borrowing costs as the government sells debt to finance a record $1.8 trillion budget deficit, according to Major.
Combined with the $1.45 trillion committed by the Fed to buy housing debt this year, bank purchases have helped suppress mortgage rates by supporting the price of mortgage-backed bonds guaranteed by Fannie Mae and Freddie Mac, according to Michael Love, a financial institutions analyst with Moody’s Capital Markets Research Group in New York. Rates on 30-year fixed-rate mortgages averaged 5.18 percent this year, compared with 5.92 percent in 2008, according to Bankrate.com in North Palm Beach, Florida.
Investors in Treasuries have lost 4.6 percent this year, compared with a return of 14 percent in 2008, according to Merrill Lynch & Co. indexes. Agency debt has lost 0.74 percent, while state and local government debt has gained 7 percent. Banks have looked to the debt market during economic slowdowns to build up cash by investing in tradable securities with the least credit risk, while waiting for interest rates and loan demand to increase, said Richard Spillenkothen, the Fed’s lead banking regulator from 1991 to 2006. He’s now with Deloitte & Touche LLP in New York.
During the last recession, from March to November 2001, banks’ government debt holdings rose 4.84 percent to $1.3 trillion, according to data compiled by Bloomberg. Lenders with funds to put to work are torn between keeping money in short-term securities so they can re-invest it when interest rates rise, and trying to boost earnings by buying longer-term, higher-yielding debt, said S.J. Guzzo, who advises bank clients on fixed-income portfolio strategies for St. Petersburg, Florida-based brokerage Raymond James Financial Inc.
“It’s a real conundrum for them because they’re having to stay short for liquidity or cash flow knowing that rates are going to rise at some point in the future, yet the problems in the loan portfolio cause pressure on earnings,” Guzzo said. Net income of the 8,246 lenders insured by the Federal Deposit Insurance Corp. in the first quarter dropped 61 percent from a year earlier as they added to reserves against bad debts, took charges and collected less income from packaging and selling loans as securities. One of every five institutions posted a net loss last quarter, according to the FDIC’s quarterly banking profile.
Oriental Financial Group Inc., a San Juan, Puerto Rico- based bank that had $9.1 billion in financial assets at the end of last year, was cut to “sell” by Sterne Agee & Leach Inc. analyst Adam Barkstrom on June 9 because of estimated losses in its securities holdings. Investments, 83 percent of which are agency debt and mortgage securities guaranteed by Fannie Mae and Freddie Mac, may lose about $80 million in the second quarter, according to the analyst’s calculations.
Oriental Financial has 80 percent of its assets in securities and 20 percent in loans, the opposite of a typical bank, Barkstrom said. Steven Anreder, a spokesman for Oriental Financial, declined to comment. Cullen/Frost, with about $15 billion in assets and 100 branches in Texas, is investing in municipal debt and Treasuries maturing in one to two years, Chief Financial Officer Phil Green said. The 25 basis-point difference between what it earns on Treasuries and pays in interest on deposits compares with a spread of 180 basis points in the first of half of 2007, he said. A basis point is 0.01 percentage point.
“We are aggressively calling on customers for loan business, and once they decide to borrow money and build again, we want to have the liquidity to put the money to loans,” Evans said. The bank is buying short-dated bonds “so we’ll be ready when the economy turns,” he said. Larry Winum, president of Glenwood State Bank in Glenwood, Iowa, has also seen deposits outpace loans, driving him to invest in Treasuries and Iowa municipal bonds. The Iowa lender has $100 million in assets. “A bank like ours might not make as much money, but we sleep better at night,” Winum said.
Bank of the West, a $278 million lender based in Grapevine, Texas, is investing in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac and municipal bonds, Vice Chairman Cynthia Blankenship said. The bank’s loans grew 8 percent last year while deposits rose 20 percent, she said. “We have had some challenges deploying those dollars that are being saved,” Blankenship said. “You can’t be earning less than what you’re paying out. That’s always a challenge in a rising-rate environment.”
Rates Low, Firms Race to Refinance Their Debts
A growing number of companies, looking ahead to a massive pileup of debt maturing in the next few years, are rushing to refinance their loans, fearful that the window in the credit markets could close at any time.
Companies from SunGard Data Systems Inc. to Cablevision Systems Corp. are buying extra time to repay their debts -- even though many of their loans don't mature until some time from 2012 to 2014. These companies are seeking to sidestep what is likely to be the biggest-ever wave of loan refinancing among risky companies as $440 billion in debt comes due in a span of three years.
That is about 85% of the $518 billion in current leveraged loans outstanding, according to Standard & Poor's Leveraged Commentary & Data. Some firms have asked banks and other holders of their loans to give them two or three additional years to repay, offering higher interest rates to those lenders that agree. Others are issuing junk bonds or stock, using the cash raised to repay some of their loans well ahead of schedule. The pre-emptive moves demonstrate rising concern about the massive bubble of lending that developed from 2005 to 2007.
Bankers and borrowers alike worry that the overhang could create serious problems in the years ahead if financial markets don't heal enough to allow hundreds of non-investment-grade companies to refinance their debt. The rush to refinance underscores the fragility of the recent recovery in the credit markets, which has pulled up prices of risky corporate bonds and leveraged loans over 30% this year. "It's hard to predict how many windows will be open between now and when you actually need to refinance or pay off debt," says Michael Ruane, chief financial officer of SunGard.
Earlier this month, the financial-services technology company reached an agreement with its lenders, including banks such as J.P. Morgan Chase & Co. and Barclays Capital, to extend the maturity of $2.5 billion in loans by two years and bump up its interest payments by about two percentage points a year. Back in 2005, the takeover of SunGard by private-equity firms marked the start of a wave of giant leveraged buyouts that were financed with multibillion-dollar leveraged loans. SunGard had roughly $5 billion in term loans scheduled to mature by 2014, but now half of that will come due in 2016. "We decided to deal with it sooner rather than wait until 2014," Mr. Ruane adds. "Who knows what the markets will be like then?"
Other firms are trying to get in front of the refinancing wave, fearing that a late-stage rush by many companies to raise money at the same time could add further stress to the markets. "We figured it would be good for everyone if we bought some sort of an insurance policy by reaching an agreement with our lenders to extend our loan," said Seifi Ghasemi, chief executive of Rockwood Holdings Inc. The Princeton, N.J., chemicals company recently extended the maturity of $1.2 billion in loans by two years to 2014. Rockwood agreed to pay its lenders 4.25 percentage points above a minimum London interbank offered rate of 2%. The rate on its loan was previously 1.75 percentage points above Libor.
"Now we can concentrate on running our business over the next five years without worrying too much about refinancing," Mr. Ghasemi said, adding that the whole exercise took about three weeks. In recent weeks, hospital operator HCA Inc., Georgia-Pacific Corp. and Weight Watchers International Inc. have approached their lenders about possible loan extensions. So far this year, companies have obtained or sought extensions on at least $11 billion in loans, according to S&P LCD.
The loan-extension wave, dubbed "amend to extend" by market participants, is proving to be an economically cheaper alternative for companies than issuing new debt. "It's like self-help -- instead of finding new lenders, companies are asking their existing lenders to help," said Denis Coleman, co-head of leveraged finance at Goldman Sachs Group Inc. Extending an entire loan isn't easy -- borrowers typically need approval from all lenders to push out the maturity or to change other major terms of their loan agreements. So companies are taking a less onerous path of extending the maturity on a portion of the loan, a move that requires just 50.1% lender approval. The rest is typically kept at the old terms.
"Companies don't want to run up against their maturities and their lenders don't want them to default. Exchanging yield for maturity helps both parties meet halfway," said Andy O'Brien co-head of leveraged finance at J.P. Morgan.
While the amendments are helping companies buy time, there are risks. If the economy doesn't recover sufficiently, the strategy may simply delay the day of reckoning for many risky borrowers. Mr. Ruane of SunGard says his firm decided to fork out more in interest now to remove some uncertainty about the future. "Time will tell whether this was a good decision," he adds.
The Strangeness Of The Tarp Exit Bonds
When the government decided to require banks that wanted to exit the Troubled Asset Relief Program to issue non-guaranteed debt, it set the stage for one of the strangest groups of bond issuances in recent memory. The banks found themselves having to sell bonds in something akin to a distressed debt sale, yet the pricing of the debt was affected by an implied government guarantee. Normally companies issue debt because they have a specific financial need--old debt coming due, an acquisition to fund--or they feel they have an opportunity for an inexpensive source of capital, and their debt is rich in some way.
Issuers treat this decisions opportunistically. Buyers have to take this into consideration because if the sellers are right, it is a bad deal for the buyer. As the saying goes, "If Goldman is selling, why are you buying?" But the government's decision to require a bond sale as a condition of exiting the TARP changed this dynamic. Now the banks were motivated to sell by something the market hadn't see before--a government requirement. It was, in a sense, akin to an exit financing that a company might do to raise money out of bankruptcy.
Buyers could purchase the bonds confident that they were getting a much better deal because the sellers weren't opportunistically entering the market. Even stranger, many investors market continue to doubt that any of the top tier financial firms would be allowed to fail. This means that even if debt is issued on a non-guaranteed basis, it essentially enjoys a protection akin to that once enjoyed by Fannie and Freddie securities.
One key sign to watch for is whether the debt of these implicitly protected financial firms begins to be traded outside of ordinary corporate debt trading desks or by specialized sub-groups within those units. The so-called "agency debt" of Fannie and Freddie was traded by Treasury trading desks. For now, most banks still lump implicitly protected financial firm debt with ordinary corporates. But we're told there are discussions to change this at some banks.
The Triumvirate of Wealth
Triumvirate n (1584) 3: a group or association of three
There is a battle under way right now. In this battle there are three things to watch.
What is a dollar?
To different people and groups it is different things.
To the average American the dollar is a unit of measure for trade and the denomination of debt owed. To the Chinese the dollar is a mandatory middleman for international trade and a mandatory store of value for the excess wealth China receives from trading with the West. To bankers the dollar is the denominator of contracts holding others in debt to the bank.
There is a particular meme spreading right now that a very large mountain of contracts denominated in US dollars is somehow SUPPORT for the US dollar. As one example, I quote the latest Prudent Squirrel newsletter:There is no clear alternative to the USD system at present. China, Russia, Brazil, India are taking steps to diversify their foreign exchange, but the amounts involved are a few tens of $billions, and nothing compared to the USD footprint world wide which I previously estimated at $2200 trillion for all USD stocks, bonds, contracts world wide, not to mention that all important commodities are still priced in USD – sort of like the US having its own private world wide ‘comex’ in everything from money markets to commodity markets to you name it.
That's $2.2 Quadrillion in contracts denominated in US dollars! That is not wealth. That is one entity holding a contract that INDENTURES another entity or individual.
The question I want to ask is does this mountain of contracts lend de facto SUPPORT to a continued dollar regime? Or is it the fatal FLAW of the regime?
Chris Laird seems to think that the usage demand of the dollar as a middleman for international trade must somehow be weighed against contracts of debt held by the banks. And if the debt weighs more than the net usage demand, then the dollar must continue on as the reserve currency.
But as I said, the dollar is different things to different people.
And my thesis is that the dollar's Achilles' heel is that it must perform TOO MANY functions. The dollar's fatal flaw is that if any one function fails, they all fail.
Think about the mountain of contracts held by the banks. Compare this mountain to a bag of groceries. If the price of a bag of groceries goes from $20 to $100, the entire mountain of contracts (derivatives) collapses and the banks go bust.
Now think about global usage demand. This is a funny thing. Intuitively you would think that if the price of oil rises it will hurt the dollar. But in fact the opposite happens. As the price of oil climbs, all the world must buy more dollars to get the same amount of oil!
This creates demand for dollars which keeps the dollar strong. But here's the Catch 22. The rising price of oil also raises the price of a bag of groceries. This puts downward pressure on the value of the dollar. All those banks holding contracts denominated in dollars lose value when the price of a bag of groceries goes up.
So the dollar's interconnectedness in the global marketplace combined with its reliance on performing too many functions creates a very unstable environment for survival (of the dollar).
If all of a sudden dollars were not needed to pay for the rising price of oil, there would not be the usage demand to counterbalance the rising price of everything else. And this is why a few tens of billions in usage by the BRIC countries is a DEADLY threat to the $2.2 Quadrillion in derivative contracts.
What is gold? What functions does it perform?
To different people and groups it is different things.
But not for long. Soon it will perform its one and only function, wealth reserve par excellence!
But for now, to those bankers who sit precariously on a mountain of contracts denominated in dollars, gold is a tool used to lie to the people about wealth. There are a couple problems though. Most of the people being lied to have no wealth to preserve. And those that do are starting to see through the lie.
One more thing. In order to lie through gold, they must have a fractional reserve of gold from which to pay physical gold to those that see through the lie. For the last 10 years that gold has been provided by Gordon Brown and the central bankers. But now things have changed. Now the central bankers are net BUYERS of gold.
The lie is coming to an end.
During the last century many things have come and gone. Wars, nations, leaders, parties, ideas, ideals, blood was shed, promises broken, much chaos. But one thing has been steady. The evolution of gold!
First we had a regime of fixed gold prices ($20, $34, $42) and all the while the dollar printing exploded! Then we had the regime of semi-fixed gold prices from 1971 to 2001, and dollar printing exploded even more! Finally we had a decade of "controlled demolition" or controlled gold price inflation, as gold tripled in value at the same time as oil rose SIX times in price and the US dollar printing EXPLODED like never before!
So what is next in the steady evolution of gold? It is free gold pricing and the recognition of its one and only function, wealth reserve par excellence! This is next!
What to watch for? Watch for when gold starts to outrun oil to the upside. So far over the last 10 years gold is up 3 times and oil is up 6 times. When gold outperforms oil it will mean that the process has shifted into high gear. I expect we could see this shift during the summer or fall.
What about oil?
Do we have an energy crisis on our hands? Did we have an energy crisis in 1973?
How can we possibly know?
Certainly a monetary crisis and an energy crisis are not mutually exclusive. They can happen at the same time. But what we know for sure is that monetary manipulation distorts free market pricing mechanisms, causes massive malinvestment, and masks the reality of whether or not we are facing a true resource crisis.
In just one year we have seen the WILD fluctuation of the price of oil from $147 to $30. At $147 per barrel the producers and anyone holding oil should have been jumping out of their seats to sell, yet we were told there was a shortage. At $30, we were told that demand was low. Buyers should have been jumping out of their seats to buy! So why all the confusion?
Can we really know the true availability of resources while prices are so distorted by currency fluctuations in our fiat system? No, we can only speculate.
No disrespect to my favorite active Peakist! As I have said before, I am agnostic when it comes to this subject. And yes, Hugo, I did read your post.
So how will we know when the end is near? When Helicopter Ben comes under attack for being too tight with the printing press, the end is near. When helicopter drops are not enough to satisfy the beast, the end is near. When the US borrows more in one week than it did in an entire year seven years prior, the end is near. When scorched earth self-preservation tactics, in-your-face theft of public funds, and outright corruption is done in broad daylight without fear of reprisal, the end is near. This is what to watch for.
Exporters warn of German credit squeeze
Germany’s powerful export industry is warning of a credit squeeze in Europe’s largest economy even after the European Central Bank’s injection this week of one-year liquidity into the eurozone banking system. The German BGA exporters’ association on Thursday forecast a “dramatic deterioration” in credit conditions in coming months, which would result in “massive financing squeeze”. Anton Börner, BGA president, told the Financial Times that “for middle- and long-term credit we already have significant difficulties”.
Even for short-term credit, he expected banks to “exert massive pressure on borrowers”. Mr Börner blamed the squeeze on the delayed impact of the hit Europe’s banks had taken from “toxic” assets as a result of the global economic crisis. The alarmed tone is significant because German policymakers have argued that the export-dependent country is not facing problems in the supply of credit to business or households. Instead, the economy is seen as being hit by a global collapse in demand for its industrial products.
Earlier this month the Bundesbank warned gross domestic product would contract by 6.2 per cent this year, but it “assumed that the situation on the financial markets will gradually ease and that Germany will not experience a general credit crunch”. Late on Wednesday, the VDA German automotive industry association also warned its members were facing increasing difficulties obtaining credit. The severity of continental Europe’s recession was underlined on Thursday by a 35.5 per cent fall in eurozone industrial orders in April compared with the same month a year before, reported by Eurostat, the European Union’s statistical office. That was the steepest such fall since records began in 1996. Germany reported a 39.5 per cent drop.
Compared with March, eurozone industrial orders were 1 per cent lower. Although the pace of decline has slowed since late last year, the latest data still suggest a rebound in industrial production is still some way off. This week’s first-ever ECB offer of €442.2bn ($621.3bn, £377bn) in one-year funds created huge demand because of a growing realisation by banks that emergency liquidity may not be available again on such favourable terms. The ECB had pledged to meet all bids in full, but is aware that the success of the operation will depend on banks passing the funds on to the wider economy.
Speaking earlier this week Axel Weber, Bundesbank president, stressed banks’ duty to help avert a credit shortage. He has been the most vociferous among ECB policymakers in arguing that unconventional steps to combat the recession should be channelled through the banking sector. For the first time, Mr Weber indicated he could back ECB measures bypassing the bank sector, but stressed he did not believe any such steps were yet necessary.
German Inflation Remained at Zero for Second Month
Germany’s inflation rate remained at zero for a second month in June, the lowest level in at least 13 years, after energy prices declined. Consumer prices, calculated using a harmonized European Union method, rose 0.4 percent from May, the Federal Statistics Office in Wiesbaden said today. The annual rate of zero is the lowest reading since harmonized data were first compiled in 1996. Economists predicted prices would fall 0.1 percent, the median of 21 forecasts in a Bloomberg News survey showed.
Crude oil prices have halved over the past year, pushing down inflation just as companies cut jobs and spending to stem the deepest recession since World War II. While the Bundesbank expects inflation to average just 0.1 percent this year and 0.5 percent next year, President Axel Weber said this week he sees “no relevant risk of deflationary effects.” “Inflation will slightly turn negative in the coming months but in my view the deflation debate is misplaced,” said Jens Kramer, an economist at Nord LB in Hanover. “In the course of 2010 inflation will moderately move towards 2 percent.”
Germany’s non-harmonized inflation rate increased to 0.1 percent from zero in May. In the month, prices rose 0.4 percent. Import prices in Germany, Europe’s largest economy, dropped 10.4 percent in May from a year earlier, the Federal Statistics Office said. That’s the biggest annual decline in more than 12 years. The German economy will shrink 6 percent this year, the Bundesbank said on June 5. At the same time, business confidence rose for a third month in June and consumer confidence increased for a second month as the economic outlook brightened and retreating prices boosted household purchasing power.
The coalition government led by Chancellor Angela Merkel, who faces national elections in September, is spending about 85 billion euros ($118 billion) to stimulate growth, including tax breaks and investment in infrastructure. The European Central Bank has cut its benchmark rate to a record low of 1 percent, citing “dampened” price developments. President Jean-Claude Trichet expects inflation in the 16-nation euro region “to decline further and temporarily remain negative over the coming months, before returning to positive territory by the end of 2009.”
British banks highly vulnerable to future shocks, Bank of England warns
Britain's banks remain over-indebted, highly vulnerable and harbour growing funding gaps which leave them susceptible to future shocks, the Bank of England has said. In a warning to bankers and consumers after months that have seen large jumps in share prices and hopes that the banking system is recovering, the Bank used its Financial Stability Report to emphasise that the UK remains highly vulnerable to potential shocks. With the Government poised to deliver its White Paper on financial regulation next week, the Bank also cautioned that life for financial institutions was about to change forever, with big banks facing a whole spectrum of new restraints on their size, structure, business plans and lending.
The report, published today, said: "While pressures on the major global banks have stabilised over the past few months, their balance sheets remain impaired. Banks' leverage remains high, with the possibility of further impairment of assets placing continued pressure on profitability and capital ratios. Future revenue generation will need to balance the desire to deleverage with the need to generate new business at profitable spreads. "At the same time, the major UK banks maintain a high and rising customer funding gap. The withdrawal of overseas funding and competition for domestic deposits has added to these funding pressures."
The report revealed that the funding gap – the shortfall between what banks have in deposits and what they lend out to customers – has further widened in the past year to more than £800bn. The increase underlines the scale of adjustment that they will have to undergo before life returns to relative normality. The report also pointed out that the amount banks have in liquid assets remains low, while the leverage ratios remain high, saying: "As long as these balance sheet vulnerabilities persist, there is a risk to the banking system from further adverse economic or financial sector developments, which could in turn affect lending and economic recovery."
In a sign of the strain facing nations' public finances – including the UK's – the report also revealed that the threat of a sovereign debt default has become one of the biggest concerns for investors. A survey put together for the report identified sovereign risk as a financial stability concern for the first time. The report also laid out a number of key criteria banks will have to fulfil in the future – reforms which could transform the structure of the financial system. Among its recommendations were that in future banks should "face a credible threat of closure or wind down", should have a "risk-based, pre-funded deposit insurance system", should increase their levels of capital and liquidity, depending on their size, and should provide a "will" which explains how to dismantle them in the event of insolvency. Banks must also provide the authorities with more information about their interlinkages, to ensure that the collapse of one will not bring down a whole series of institutions, the Bank said.
Money floods out of Iran as election crisis continues
Millions of pounds in private wealth has begun flooding out of Iran in the wake of mass demonstrations which have paralysed commercial life after the disputed re-election of President Mahmoud Ahmadinejad. Fears of a new round of crippling sanctions are also thought to have fuelled the movement of money out of the country. Western intelligence agencies have reported that prominent private businesses and wealthy families have moved tens of millions of dollars out of Iranian banks into overseas accounts.
The Italian foreign intelligence service is said to have detected multiple transactions, each of up to $10 million dollars, by Iran's big four banks on behalf of Iranian families seeking a safe haven for funds. Iran has already been hit by three rounds of financial sanctions from the UN over its nuclear programme, which have limited its access to international finance and world trade A spokesman for HM Treasury hinted that further action could be taken, particularly in relation to Mojbata Khamenei, the powerful son of Iran's Supreme Leader Ali Khamenei, who runs his father's office.
"We do not have this person on the sanctions list and while we do put people on the list on human rights grounds we do it very much in conjunction with the EU and the UN," the spokesman said. "We can be very aggressive in pushing within those bodies, though I'm not saying we're doing so in this case." It came as one of Iran's leading foreign investors, the Austrian oil and gas firm OMV, said it would not invest any more money in a large offshore gas project and gave warning that it would pull out of the country if Iran demanded more cash.
Helmut Langanger, its Iran representative, said the political environment would have to improve before it put any move money into the giant South Pars offshore gas field. "They are proceeding with the project on their own without us," he said. In the US, Republican congressman Mark Kirk has claimed there is growing support for a bill he is sponsoring which would strip American support for foreign companies supplying refined petroleum to Iran. Iran is a large oil producer but decades of financial isolation means it must import petrol and other end products from abroad.
Reliance, the Indian operator, provides one-third of Iran's daily needs while also enjoying a massive trade loan from the US. Another bill that would exclude companies involved in the trade from doing business in the US was put on hold earlier this year as a gesture from President Barack Obama to improve relations. The fallout from the pro-democracy demonstrations is expected to embroil Iran and the Gulf in a new cycle of instability. Sami Alfaraj, a leading Gulf expert, warned Iran was unpredictable and that meant the stability of the oil-rich region was in the balance.
"Iran could launch foreign attacks," the director of the Kuwait Centre for Strategic Studies said. "It could disrupt the shipping lanes of the Gulf, drive up the cost of doing business, use its cells in Egypt and Iraq or Jordan to create havoc, trigger a new confrontation with Israel. All these options would have an economic impact. We have all reached an affinity of threat from Iran." The leading contender in the rigged presidential election, Mir-Hossein Mousavi has targeted the influential business class by calling on merchants to close their businesses. Tehran's bazaar, which covers two square miles and plays an economic role similar to the City of London, is mostly closed but some shops have opened.
White House lobbies wavering lawmakers
The White House on Thursday shifted into high gear to persuade wavering Democratic lawmakers to vote for a bill that would install America’s first carbon cap and trade system – a vote likely to take place on Friday. The vote, which Nancy Pelosi, the Democratic speaker, said she was confident would pass, would commit the US to reducing its emissions to 17 per cent below 2005 levels by 2025. It would also set up a market in carbon permits to stimulate investments in alternative energy.
Calling the bill “extraordinarily important”, Barack Obama on Thursday said its enactment would “finally spark a clear energy transformation that will reduce our dependence on foreign oil and confront the carbon pollution that threatens our planet”. White House officials say it would also strengthen the president’s hand at the Copenhagen summit on climate change in December. The bill would still need to pass the Senate, considered a much tougher hurdle. However, Republicans, who are expected to vote heavily against the bill, say it would impose a giant future tax on Americans.
This is in spite of two studies, by the Congressional Budget Office and the Environmental Protection Agency, that estimate the bill would increase electricity charges by between 22 cents and 48 cents a day – the price of a postage stamp. “This will be one of the defining debates of the 2010 cycle [mid-term elections],” said John Boehner, the Republican House leader. “No matter how they spin it, this isn’t a jobs bill – it is a jobs-killing bill.” Environmental groups are divided over the bill’s merits, with some arguing that it would mark a historic feat during a recession.
“Anyone looking at this three months ago would not have estimated we would have got here – so we are encouraged,” said Steve Cochran, director of the Environmental Defense Fund. Others argue that the dozens of compromises Democratic leaders have struck with their colleagues from the rural and manufacturing belts have made a hash of the bill’s framework. “In order to get the votes, the bill’s managers have taken off most of its environmental edge,” said Rob Shapiro, chairman of the US Climate Task Force, which backs a carbon tax. “If we were to pass a toothless bill like this, we would probably have to wait five or 10 years for another chance to do it right.”
For example, in contrast to Mr Obama’s campaign promise that 100 per cent of the permits would be auctioned off, the bill gives away 85 per cent for free and only moves to a full auction in 2030. Likewise, an EPA study this week said the large volume of foreign “offsets” – projects such as tree planting that count towards domestic emissions credits – meant US emissions could actually increase between now and 2025. In addition, in a recent compromise with Collin Peterson, the centrist chairman of the House agriculture committee, Democratic leaders allowed the definition of an offset to be set in some cases by the US agriculture department – a much softer challenge than the EPA. Finally, lawmakers have diluted the “20 by 2020” clause, which mandates power generators to produce a fifth of output from renewable energy by 2020.
International Forecaster June 2009 - Gold, Silver, Economy + More
by Bob Chapman
Part 2 of dissertation (continued from last issue)
This idea of a non-bank currency issued directly by a government free of any interest burden is along the lines of what Presidents Lincoln and Kennedy did, and tried to do, respectively, for the US. Their boldness in promoting the welfare of US citizens cost them their lives. They did not want to become interest slaves to a private national bank, and chose to issue our own official currency directly from our Treasury Department free of the interest burden imposed by a privately owned, debt-based, European-style fractional reserve banking system, which is what our Founding Fathers fought a war to free themselves, and their posterity, from.
Note that Baron Rothschild started and bankrolled the War of 1812 when the first private US central bank charter was not renewed by our then gutsy Congress, which, unlike our current corrupt and cowardly Congress, saw through the ruse of the British crown, which was attempting to take back its colonies via monetary extortion. Lincoln made the mistake of not backing US notes with gold and silver as required by our Constitution, an error that was confirmed as being a mistake by the Supreme Court of the United States, and the US notes that were used to fund the Civil War efforts of the North soon became worthless, triggering a long, hard, devastating depression in the 1870's. President Kennedy was assassinated before Executive Order 11110 could be implemented, and the Fed was allowed to continue on with its blatant criminality.
You might also note that Presidents Garfield and McKinley were both ardently opposed to the idea of a private central bank, and we know what happened to them. Andrew Jackson, who the Illuminists tried to assassinate on multiple occasions, was our most vehement objector to a private central bank, and his face now appears on the front of a twenty dollar bill. If he was alive today, he would throw a "hissy fit" the likes of which has never been recorded in human history. This is the way the Illuminists chose to rub Jackson's face in their final victory to establish a private central bank with the passing of the Federal Reserve Act in 1913, albeit their insult was delivered posthumously. In addition, President Lincoln's face is on the front of a five dollar bill, which is yet another posthumous insult to the leader who rejected the European Illuminists and their private banking interests. Next we'll see President Kennedy's face on the front of a thousand dollar bill, which will be created so that you don't need a wheelbarrow to cart around the cash necessary to pay the ridiculously high prices of goods and services that will be caused by the coming hyperinflation. On second thought, let's not give them any more ideas!
So, in the case of the Federal Reserve Note (which is a private note backed by the full faith and credit of the US government, and not a US note issued directly from the US Treasury), do these two ingredients for the creation of hyperinflation exist? Currency speculators we always have, but are the Fed and our Treasury Department corrupt enough to keep printing the dollar so speculators can short it into oblivion by creating a dollar carry trade? Is the Pope a Catholic? Does a bear crap in the woods? So the answer to that question is: Abso-freaking-lutely!!!
But the Illuminists had a problem. They could not print money, thus creating an interest-bearing debt for the US government, without the consent of the US Treasury, which was in turn limited as to how much it could borrow by the US Congress. So how on earth could they get the Treasury and Congress to spend a totally unprecedented amount money by borrowing it at interest from the Fed, which then creates it out of thin air, such that hyperinflation, and the destruction of the US economy to pave the way for world government, is accomplished as the desired and ultimate end? The politics of such a move would be horrendous unless justified by an extremely compelling reason.
Naturally, they would have to start their sting operation by buying off or compromising the Executive Branch and its various Departments, especially the Treasury Department, as well as the Legislative Branch, the Judicial Branch, and most of the relevant regulatory agencies, which they had very nearly accomplished already in any case when they put their plans for a hyperinflationary recession, followed by a deflationary depression, into motion. And remember, the ultimate aim of this sting operation is to take down the US economy, along with the economies of Canada and most of Western Europe, to pave the way for world government, which they will attempt to put into place in the ensuing chaos.
So what is an Illuminist with a compelling desire for hyperinflation to do? We'll tell you what they did.
They started by having the Fed create profligate amounts of money and credit well beyond the amounts necessary to absorb any increases in production, thus creating an elevated level of inflation for almost two decades. They continuously lied officially about the rate of inflation by understating it. This was done to cover up their destruction of our economy via free trade and globalization by creating bogus increases in production that were just inflation in disguise. This inflation was implemented to get us started down the road to economic destruction from which a hyperinflationary environment could be created.
To take us out of recession, and prevent the purging which our economy needed from the destruction wreaked in the early 1990's in the aftermath of the Savings and Loan Crisis and the collapse of the real estate market, both of which they also created, they pushed tech stocks into a dot.com bubble, followed by a real estate bubble to cover up the dot.com destruction, which real estate was then re-bubbled after 9/11 via ultra-low interest rates and their if-you-can-fog-a-mirror-you-can-have-a-mortgage-loan policy. This was done to keep the debt snowball rolling, and to prevent the purging of losses from fraud and speculation out of our economy by keeping those losses in the system so they could later become the reason for future defaults, losses and bailouts that would help lead us into hyperinflation when the Illuminati were ready.
They engineered the 9/11 false flag attack to take US citizens, via fraudulent intelligence, into a multi-trillion dollar, two-front war in Iraq and Afghanistan to get the big spending sprees started. These were wars for profit intended to enrich Illuminists while simultaneously bankrupting America and pushing us down the road to hyperinflation.
They bankrupted the Social Security system by stealing from its reserves to pay for Illuminist pork projects and benefits for illegal immigrants (slave labor), drove up medical and pharmaceutical costs, and created an entitlement indebtedness in the tens of trillions of dollars that they know can never be repaid, thus ensuring the destruction of the dollar by curtailing the ability of the US to repay its creditors, and providing a backdrop for huge bailouts and expenditures to keep paying out benefits and to fund medical insurance reforms that can only be paid for through debt monetizations that will propel us toward hyperinflation.
They got rid of the Glass, Steagall Act via the Gramm, Leach, Bliley Act so they could defraud investors with new flimflam financial products in the complete absence of any checks and balances. They deregulated the already opaque OTC derivative market with the Commodity Futures Modernization Act so that derivatives could be issued naked (without collateral backing the guarantees against default) to back securities that in many cases were not even owned by the buyers of derivatives backing those securities (credit default swaps), and further allowed investors to gamble on interest rates (interest rate swaps), thus turning the entire OTC derivatives market into a gambling casino. They continued to foster mortgage and other consumer loan fraud, via liar loans, false appraisals, slack credit standards, false derivative ratings and fraudulent derivative sales, using Fannie, Freddie and the unregulated OTC derivative market to accomplish their dirty work until a Quadrillion Dollar Derivative Death Star was created. All of this fraud was allowed in order to plant and build a fatal flaw into the entire debt system, and this flaw would be used to ignite the Derivative Death Star, and start the bankster-gangster bailouts that will eventually run into the tens of trillions of dollars unless stopped by US citizens. How's that for spending us into hyperinflation!
They also allowed investment banks to use 40 or even as much as 60 to 1 leverage to fund the Derivative Death Star, and allowed commercial banks to reduce their reserve requirements to unprecedented levels. They increased money and credit to psychopathic levels to feed the hedge funds, pensions funds, endowment funds, and sovereign wealth funds, which then went berserk on a wild spending binge, thus driving stock and bond prices up to ludicrous levels, which have now imploded or are in the process of imploding, thus giving more cause for bailouts and profligate borrowing and spending by our government at taxpayer expense, once again socializing losses after profits have been privatized.
By exposing the fatal flaw just alluded to that was built into the debt system via rampant fraud, they created an implosion of financial markets by showing how vulnerable, flawed and over-rated derivatives really were (in this case, the exposure of the fatal flaw may have happened sooner than planned by an untoward event, thus throwing a wrench into the works), and set up the 19 anointed financial institutions, and the Fed, as too-big-to-fail institutions, and made sure that no Illuminist companies were allowed to fail. Instead of allowing failure through bankruptcies to purge the economy, they bailed out Illuminist banks and corporations in typical crony capitalist fashion at taxpayer expense, thus socializing losses after profits had been grandly earned and privatized, using the oh-we-can't-let-this-happen routine and the fear of increased unemployment and horrendous amounts of asset losses, which will of course occur anyway further down the road, but this time on steroids. Needless to say, non-anointed companies can go suck an egg.
They hid the losses of Illuminist-anointed financial institutions via false accounting which was approved by "regulators," and caused the BLS and other government agencies to lie about every known economic statistic, in order to convince taxpayers and private investors that there are Green Shoots and that they should once again invest in these zombie institutions which later will implode, thus rendering the stock worthless. In the meanwhile, they allowed non-Illuminist companies to fail, thus reducing their competition and consolidating their power. They then had their government flunkies create fascistic, socialized spending programs, and termed the first of what will be many such programs as an "economic stimulus," when in reality these are all going to be nothing more than flash-in-the-pan, pork-laden masterpieces of profligate spending that stimulate nothing, create few if any permanent jobs, and virtually ignore the middle class, which got a token tax break - big deal. As the economy unravels, they will just keep up the same oh-we-can't-let-this-happen routine, and continue to play on taxpayer fears while they totally ignore the Constitution which in no way authorizes these bailouts of private companies on a secret, crony-capitalist basis, which bailouts are also being extended to foreign banks and corporations stung by the Illuminist derivative fraud (hence the lack of lawsuits). In this fashion, they will continue to spend and spend as the PBGC and FDIC go bankrupt while our middle class is wiped out. This spending will have to monetized. Hyperinflation is the inevitable outcome.
They have also created Public Private Investment Partnerships so Illuminist institutions can buy their toxic waste from each other in what will be a failed attempt to prop up toxic derivative prices, with the public being the big loser because they will absorb most of the losses while most of the profits, if any, will go to Illuminist investors. This is just another method of converting private red ink into public red ink, thus adding to the debt blob that will debauch the dollar and help send us into hyperinflation.
The Fed will continue to absorb the toxic waste of its member banks, setting itself up as the ultimate too-big-to-fail zombie financial institution which is now helpless to stop the oncoming hyperinflationary freight train because all its assets are unmarketable cess pools of toxic waste that no one in their right mind would purchase for more the 10 cents on the dollar. Thus, the Fed has been intentionally disabled from fighting against the inflationary consequences that will result from the rampant spending and bailouts that are now ongoing right before your eyes. The Fed has been hamstrung so that hyperinflation can be assured. They can no longer suck money out of the system because the value of their assets is laughable.
After they achieve an elevated level of inflation by all this spending on pork, bailouts and socialist programs while the hamstrung Fed continues to profligately spew out money and credit at an ever-increasing rate via monetization of treasuries which investors are starting to shun more and more for obvious reasons, interest rates will rise, the real estate, stock and bond markets will collapse, credit default and interest rate swaps will implode, and suddenly there will be tens of trillions in losses that of course will have to be bailed out.
As this debacle transpires, everyone owning dollar-denominated assets will be running for the exits, all the dollars parked in foreign currency reserves will be repatriated, and the currency speculators will go to town as the Fed pumps out money in ever-increasing quantities to fund bailout after totally illegal and disgusting bailout. This will mark the start of the period during which the Much Greater Depression will be at its most severe level, and is where will we be Weimarized. You won't know about the foreign investment until it is too late because, conveniently, like the cessation of M3 statistics by the Fed, the FTC no longer provides figures regarding foreign investment in the US.
During this whole process, only the Illuminist institutions and corporations will receive any bailouts, so in the end, all the money for which taxpayers and their descendents become indebted will have been paid as salaries and bonuses to the Illuminati and their henchmen, and as free booty to their Illuminist business corporations to keep them from failing and to resettle them overseas. Taxpayers will be lucky if they get a lump of coal in their stockings as they watch their pensions, benefits and entitlements trickle down to nothing, especially after hyperinflation becomes full blown. Note how the losses are allowed to be trickled out as slowly as possible so that taxpayers are less prone to say that the losses are just too big to handle and that the elitist institutions must be allowed to fail and let the chips fall where they may as the market sorts things out.
The financial institutions of elitists and oligarchs, including the Fed and other privately owned Illuminist central banks around the world, are eventually going to be discarded in favor of a new super-entity, like the IMF and World Bank combined into a single monstrosity and shot up with mega-steroids, while they simultaneously introduce (stuff down everyone's throats) a world currency along with Draconian world financial regulations. This will occur after they futilely attempt to bail themselves out to the tune of tens of trillions of dollars so they can bankrupt and monetize virtually all developed nations to death, thereby sending us all inexorably down the road to hyperinflation. Then comes world government, and the fulfillment of George Orwell's horrific, nightmarish vision, as well as the Mark of the Beast.
HELLO, AMERICA, ARE YOU GOING TO PUT AN END TO THIS CRAP, OR WOULD YOU RATHER BECOME A BUNCH OF SLAVING, SERF SLOBS FOR THE ILLUMINATI! THERE ARE INTERNMENT CAMPS AND ABJECT POVERTY IN YOUR FUTURE IF YOU FAIL TO ACT!
How do we put an end to this mess, and stop the Illuminati dead in their tracks? You buy gold, silver and their related shares as a failsafe. You pass Ron Paul's bill to audit the Fed, and expose their skullduggery. You then put an end to the Fed as the public screams for their blood. For US citizens only, in compliance with the requirements of the US Constitution, you issue interest-free, gold-backed US dollar notes to replace, dollar for dollar, all Federal Reserve notes. You then take all the old Federal Reserve notes that have been exchanged, load them on dump trucks, take them to the Federal Reserve in Goldman Sachs South, and dump them at their front door.
You place a sign on the pile that reads: "We now consider our debt to the Federal Reserve Bank to be paid in full, and will cease all future interest payments. Incidentally, this pile of "worthless paper" is no longer legal tender in the US. Have a nice day." Foreigners will have their treasury bonds and dollars redeemed in oil, coal, natural gas and other commodities, in a percentage that is based on how many jobs and plants they stole from our economy, how many subsidies they gave their industries, the extent to which they debased their currencies to gain unfair trade advantages, the extent to which they imposed trade tariffs and import duties on our exports to their countries, and the amount they would have received had the Illuminists successfully ignited hyperinflation. These bonds would be retired over time as they came due.
We also obviously have to purge government of all Illuminist influence by arresting, trying, convicting and sentencing all Illuminist criminal co-conspirators for their myriad of felonies and acts of high treason. All Illuminist assets would be seized and applied to the national debt, and we would apply all gold seized, by force if necessary, no matter where it might be found, until we have enough to properly back our new currency, which would remain the world's reserve currency. Rockefeller alone could probably retire the entire official US debt and replace our gold reserves.
Banking leverage would be greatly reduced, and there would be proper regulation of financial markets by both the federal and state governments acting in concert with one another to protect consumers, and no conflicts of interest between Wall Street, corporate America, and the federal and state governments would be tolerated. Oil, coal, natural gas and power generation facilities, along with pharmaceutical companies, would be nationalized, all publicly owned energy resources would be tapped, and all patents unused for over five years would be taken by eminent domain, with all profits from these resources and patents being used to pay for our debts.
After our debts were retired, these industries would be privatized again, and any unused/unsold patents would be returned to their owners, except to the extent they were necessary to fund the much reduced activities of our federal government. All companies that are currently insolvent would be forced to go bankrupt, and the economy would be purged, with the markets working out the details free of the influence of the PPT, which would be dissolved. Illuminist judges, officials of the Administration, and members of Congress found to be in cahoots with Illuminist criminals would be immediately impeached and then tried criminally. Class action lawsuits would be prosecuted on behalf of all members of the public screwed out of their rightful profits by the Illuminists, the PPT and our regulatory agencies. All lobbying would cease. Term limits would be imposed.
Each and every candidate for a particular office would receive the same amount of money with which to conduct a campaign. The income tax would be repealed and a reasonable national sales tax would be implemented, with a mandatory periodic reduction and phase out over time. The tax would be phased out as we reduced the size of our federal government and returned powers back to the states. The tax would cease when our budget was balanced and a proper Constitutional balance between federal and state powers was achieved. Trade tariffs and import duties would be imposed on a Golden Rule basis, meaning, we will charge you whatever you charge us, and we will grant subsidies and manipulate our currencies to achieve parity with whatever you do on your end. We will also charge duties to make up for the difference in our relative standards of living so you stop using your citizens as slave labor to undercut our workers. All illegal immigrants would be ejected. Any legal immigrants would be processed faster.
Our troops would be returned home except for a few key positions, and we would mind our own business except where military action is absolutely necessary to defend our nation, as opposed to supporting a nefarious elitist agenda. And this is just for starters. Real reform of our educational and health systems would then follow. Once we had our own house in order, we would help the nations of the world succeed and progress as never before. World government would be outlawed as treasonous, and anyone promoting it would be given life without parole if they were convicted. God would be given preeminence in our society once again as the separation of church and state was applied the way it is supposed to be: that Congress shall pass no law that would establish a national religion or that would abridge the free exercise of religion. Period.