Baby girl of family living on Natchez Trace Project, near Lexington, Tennessee
Ilargi: I threw away four times more today than I kept. There are times when the parade of dunces becomes a bit much. As you may recall, we’ve had David Axelrod, Joe Biden and Laura Tyson in the past two weeks, all talking for teh WHote House, and igniting the discussion on a second Obama stimulus. Today, the big shots are at bat. Larry Summers and Obama step up to the plate to douse the fire they themselves lit, while Geithner praises Bernanke in what will be the latter’s epitaph. Everything’s going according to careful script.
I was watching Missing today. So I’ll get you Engdahl's take on things, even if he's the loose barrel he is. Sometimes it's good to remind ourselves that the guys responsible for today's mess have been at it for a long time. There's nothing new except for the fact that this time it happens at home. It doesn't take much for a man to start seeing his fellow men as faceless pieces of meat that can be discarded at will and for a profit. From Southeast Asia through South America to Iraq, it’s a sordid history. And proclaiming ignorance and innocence won't help you much, not when you've enjoyed the spoils.
Full Spectrum Dominance
For the faction controlling the Pentagon, the military industry, and the oil industry, the Cold War never ended. They engineered an incredible plan to grab total control of the planet, of land, sea, air, space, outer space and cyberspace. Continuing ‘below the radar,’ they created a global network of military bases and conflicts to advance the long-term goal of Full Spectrum Dominance. Methods included control of propaganda, use of NGOs for regime change, Color Revolutions to advance NATO eastwards, and a vast array of psychological and economic warfare techniques.
They even used ’save the gorilla’ organizations in Africa to secretly run arms in to create wars for raw materials. It was all part of a Revolution in Military Affairs, as they termed it. The events of September 11, 2001 would allow an American President to declare a worldwide War on Terror, on an enemy who was everywhere, and nowhere. 9/11 justified the Patriot Act, the very act that destroyed Americans’ Constitutional freedoms in the name of security. This book gives a disturbing look at the strategy of Full Spectrum Dominance, at what is behind a strategy that could lead us into a horrific nuclear war in the very near future, and at the very least, to a world at continuous war.
Lest anyone was thinking of turning bullish after listing to the siren calls of Bond and Winder, we present the following counterpoint.
From an email doing the rounds in the City of London on Friday morning (The author is an MD at one of the big banks):US Housing
It lead us into this recession & it will likely lead us out. -This asset class is the collateral spine of household & bank B/S. It remains a sine qua non for the mkt. Unfortunately, foreclosure filings are +18% yoy (May), the mort delinquiency rate (9.12%) is a record, prime defaults have just doubled (yoy) to 2.9%, new and existing home sales are still barely off their Jan lows (you’d need to see a 50% increase from here to be consistent with flat gdp), unsold inventory is still at 10.2 mths (even without shadow inventory from banks & Securitised Mort Trusts), 30% of mort are in negative equity & rising, -18.1% hse prices is still ugly….
Too much debt, not enough credit. -Declines in the housing & equity mkts have removed c$14tr from his net worth (Fed) at a time when he’s 3x the leverage of 20 yrs ago & carrying $13.5tr of debt. That process of de-leveraging is just starting. Delinquencies on Home Loans just hit 3.5% (ABI), a number that will grow in tandem with unemployment & US Personal bankruptcies (ABI) were +35% last seen. Look at the recent & salutary examples of the banks and Japan’s lost decade to remind us just how painful & prolonged the de-leveraging process can be.
The savings rate just hit 6.9%. It has reverted to 10% in prev deep downturns. That cld be exacerbated by a baby boomer generation who in previous recessions cld get credit & had a higher propensity to spend (in their 30’s) but who now can’t get credit & have a greater propensity to save (as they’re now in their 50’s).
The latest non-farm number (-472,000) wasn’t just worse than expectations, but was worse than the very worst print seen in either of the ‘80-’82, ‘90-’01 or ‘01-’02 downturns. Initial Jobless yesterday were better, but Continuing claims were worse (& a record high). Unemployment (beware the lagging mantra) is relevant because this is a credit related crisis & unemployment’s continued rise to & thru 10% (The Congressional budget is based on 8.1% ‘09) will generate more delinquencies & foreclosures. Moreover, the “leading” indicator components of the non-farm report-Hours worked (still at a record low & with a 70% correlation to GDP) & Temporary Hires (-37/-) are still showing falling leaves rather than green shoots.
Credit cards (the lender of last resort) are seeing record charge offs (Moody’s:-10.6% vs 9.9% in Apr) & cc outstandings are falling at a 20% annualised rate with consumer credit contracting by over $50bn since Lehman hit the tape. Remember, the consumer is just starting, not just ending his de-leveraging process.
A vote of No confidence. -51% of CEO’s (Business Roundtable) expect lower capex (the inventory replenishment is now a given for the mkt) & 49% expect lower payrolls going fwd. -Directors sold $2.9bn of stock in June (Trimtabs). The Sell/Buy ratio is a monster 10x, so the green shoot callers might be selling it, but the Corp insiders aren’t buying it.
70% of US equity rtns since 1900 (LBS) have been generated by dividends. -In Q2 just 233 S&P names raised their divi (a record low) & 250 names actually cut (2nd worst ever reading).
Valuations are not at a level that discounts any ongoing negative news. -Mkt bottomed (666) on 11.7x. The ave of of the last 11 bear mkts (where over 70% have seen a lower bottom) has been 9.9x (Haver) & there’s nothing ave about this recession. -Going all the way back to 1929 (NDR) and we find that PE multiple expansion has averaged 10% in the first 3 mths & 22% in the first 6 mths of recovery. We just clocked up 40%! With the “P” already there we need the “e” to catch up real fast to validate this rally.
US Technicals & Volume
Better to wear out than rust up? -Dow has broken its 8300 Head & Shoulders neckline support & 200 day move ave (FTSE has broken its 4295 Triple Top neckline, 200 day & failed to breach its channel top). Dow theory (DJT has failed to validate the main index highs) is also firmly in the bear camp. S&P has been clinging on by its fingernails but the breach below its 200 @ 887 & a subsequent fall below major support @ 875 wld frighten lots of rabbits.
-Ave daily vol has contracted by 30% on the S&P & c 50% on the Dow over the last 3 mths (Trimtabs). -Bear mkt bottoms (19 going back to the war) have typically been associated with steady eddy rallies on good vol (Hussman). The 4 episodes that were the exception & saw rel light vol also only rallied modestly. We’ve just belted the biggest rally since the Depression on thin vol with just slightly less depressing news….which reminds me of the Sage of Omaha’s axiom that “you can’t make a baby in a day by making 9 women pregnant”.
Light trading vol (compounded by higher vol on recent down days vs lower vol on recent up days), and a diminished response to “positive” news imply that we don’t need to see strong selling pressure to roll us over some more. Just buyer’s fatigue. And we need to beat (a 62% beat rate in Q1) not just meet consensus eps forecasts for Q2.
Today’s problem or tomorrow’s promise? May clocked up $64bn & June was similar. The prev record issuance was $38bn. There have only been 12 mths since ‘98 that Corp issuance has exceeded $30bn & the ave rtn of the S&P over the nxt qtr was btwn -4% to -7% (Trimtabs)
US Quotes (recent)
Moody’s:-”US housing wont hit bottom until 2010″.
Hayashi (Jpn Economy Minister) “The US economy has yet to hit bottom”.
S&P:- “CMBS credit deterioration is just beginning” ($400bn of commercial property re-sets to y/e). I think this space is armed & dangerous.
IMF:-”The retrenching of the US consumer is a huge adjustment that the whole global economy is going to have to absorb”.
Buffett (who’s a bull remember) “I had a cataract op on my eye recently & I still can’t see any green shoots”.
Moody’s:-”US housing wont hit bottom until 2010″. Hayashi (Jpn Economy Minister) “The US economy has yet to hit bottom”. S&P:- “CMBS credit deterioration is just beginning” ($400bn of commercial property re-sets to y/e). I think this space is armed & dangerous. IMF:-”The retrenching of the US consumer is a huge adjustment that the whole global economy is going to have to absorb”. Buffett (who’s a bull remember) “I had a cataract op on my eye recently & I still can’t see any green shoots”.
Our knight in shining armour. But… -The US is 25% of global gdp & China is 8%. -6% Chinese gdp grth (which we’re all now excited about) is actually still consistent with an ongoing global recession. -For every 1% that the US consumer shrinks, the Chinese consumer needs to expand by 6%. -Jpn shipments to China dropped -29.7% in May (-25.9% in Apr). -1/3rd of China’s gdp are exports (47% for Asia)….& those mkts are still contracting. People are talking up de-coupling again, despite the fact that that particular chocolate teapot got melted before.
California, Russian banks, CMBS, Sovereign risk (Baltic states), Swine Flu….
Geithner: Stimulus Working, Derivatives Blindsided Government
Despite persistently high unemployment, Treasury Secretary Timothy Geithner said Friday the Obama administration's economic stimulus plan is on the "expected path." "There's been substantial improvements in arresting what was the worst recession globally we've seen in generations," Geithner told lawmakers Friday. Geithner's remarks came amid waning public support for President Barack Obama's economic policies. Republican critics say the rising unemployment rate is proof that the $787 billion stimulus has not helped reverse the effects of the recession.
"I was just wondering, where do you think your plan went wrong?" asked Rep. Bill Posey, R-Fla. About 2 million jobs have been lost since Congress passed Obama's stimulus package in February. Unemployment now stands at 9.5 percent, the highest in 26 years. Some Obama allies have been calling for Congress to pass a second stimulus package. Geithner said the rate of decline in the economy has slowed, consumer confidence has improved, the financial system is healing, and concern about a financial meltdown has receded.
"Those are critically important signs of initial progress," Geithner said. Geithner said joblessness is an inescapable element of a recession and that unemployment continues to rise even as an economy begins to improve. Without the stimulus, he said, more jobs would be lost. Rep. Michael Rogers, R-Ala., challenged Geithner's assertion that business and consumer confidence was improving. "People are scared to death," he said. Geithner countered that the recession was a long time in the making and that recovery will take time as well. "We do not yet have an economy that's growing again," he said, "and I think it is likely it will take a while to grow out of."
Geithner's defense, before a joint hearing of the House financial services and agriculture committees, came in the midst of his call for greater government control over the generally unregulated but complex derivatives market, which he said contributed to the financial crisis. "Establishing a comprehensive framework of oversight is crucial," Geithner said in his opening remarks to a joint hearing by the House agriculture and financial services committees.
Despite apprehension among Republicans, the effort to add government restrictions to these more freewheeling financial instruments has support within the Democratic-controlled Congress. Indeed, Financial Services Committee Chairman Barney Frank is planning derivatives provisions that that are even stricter than what the administration is proposing. Derivatives are financial instruments whose value derives from something else, such as a mortgage-backed security or a commodity like oil. The allure of the over-the-counter derivative, as opposed to those swapped on exchanges, is that it can be individually negotiated and tailored to meet the specific needs of the buyer.
Under the administration's plan, so-called standardized derivative contracts would be traded on regulated exchanges or trading platforms. Dealers would be regulated, and participants would have to meet capital requirements to prevent over-leveraging. Banks and other parties would still be allowed to enter into customized contracts outside regulated exchanges, under the Obama plan, but the transactions would have to meet more reporting requirements.
Frank, in an interview with MSNBC after the hearing, said he would further limit the ability of businesses to enter into individualized derivative contracts. "We will specifically be requiring that in almost every case derivatives go on an exchange ... or a clearinghouse, that there not be these individualized deals," he said. "And if people are going to make individualized deals, they're going to have to have a lot more capital behind it."
Frank also said he would call for a ban on so-called naked credit default swaps, a type of derivative where buyers have no risk of exposure. Some Democrats have called for fewer customized derivatives contracts and a few have urged that some derivatives, such as credit default swaps, be banned.
The administration's proposal, part of a broader overhaul package, has opposition from much of the financial industry, which says it would raise costs and squash innovation. The industry insists any legislation be flexible enough to permit businesses to tailor contracts to meet their specific needs and not standardize all derivative contracts. Lawmakers have also questioned Obama's proposal to give more power to the Federal Reserve. On Friday, 17 members of the House Financial Services Committee, including three Democrats, sent Obama a letter asking him not to expand the Fed's authority until it is known whether Fed Chairman Ben Bernanke pressured Bank of America Corp. to acquire Merrill Lynch.
Geithner warns on looser European regulation
US Treasury Secretary Tim Geithner on Friday expressed concern that any move by Europe to allow looser rules on derivatives trading could prompt a shift overseas by traders eager to evade a US clampdown. The Obama administration is proposing to force greater transparency in the often opaque world of derivatives trading by forcing more of the financial instruments to be traded via standardised contracts and through central clearing houses.
Standardised contracts would have to go through central clearing while counterparties of customised over-the-counter trades would have to hold more capital to mitigate increased risk. Mr Geithner told a hearing of rare joint hearing of the House financial services and agricultural committees on Friday that there was “much more convergence” internationally on derivatives reform than on previous issues. However, he added: “There is a tendency in Europe to try to come up with a European solution... That is one example where frankly I’m a little concerned.”
US officials are worried that looser regulations in Asia and Europe could prompt the derivatives industry to engage in regulatory arbitrage. Facing domestic opposition to increased transparency for derivatives from businesses and from parts of Congress, Mr Geithner is also looking to head off the risk of the market moving to another jurisdiction. Barney Frank, chairman of the House financial services committee, pledged draconian sanctions against any country that tries to take advantage of tighter US rules to grab market share.
He told a hearing on Friday that legislation on derivatives would include “strictest possible sanctions for any outlying country like that” to the point that it “loses access to the American banking system”. The proposals still face a threat from inside the US, with some companies and Republicans arguing that they could impose undue costs and some Democrats advocating the banning of some products, such as credit default swaps. Mr Geithner told the joint House financial services and agriculture committee hearing that he did not intend to ban so-called “naked” credit default swaps, which give purchasers the ability to speculate on the creditworthiness of a company without holding an underlying bond.
He agreed with a suggestion that banks had a vested interest in keeping derivatives contracts as opaque and complex as possible to maintain high fees. “You want to make sure you’re not listening just to New York and Chicago,” he said. However, some non-financial companies that make extensive use of derivatives to hedge against volatile moves in markets - such as airlines mitigating the risk of a higher oil price - are fighting against more costly trading rules.
A collection of business groups, including the US Chamber of Commerce, wrote to legislators on Friday to ask that they “prevent an anti-derivatives sentiment from translating into anti-business legislation”. In his testimony, Mr Geithner left open the door to a future merger between the Securities and Exchange Commission and the Commodity Futures Trading Commission, whose combination the administration shied away from recommending. “There are a lot of compelling reasons made by people in this room and many others over a long period of time for merging both those agencies,” he said.
Obama Dismisses Idea of Second Stimulus
President Barack Obama on Saturday dismissed the idea the nation might need a second stimulus to jolt the economy out of recession and urged Americans to be patient with his economic recovery plan. Faced with rising unemployment numbers and criticism from Republicans who have already labeled the $787 billion stimulus a failure, Mr. Obama used his weekly radio and Internet address to remind voters that reversing job losses takes time.
He criticized Republicans for opposing the stimulus but offering few alternatives to the worst recession since the Great Depression. And he rejected talk of a second stimulus, an idea that has been discussed by Democrats and even famed investor Warren Buffett. "We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity," Mr. Obama, who is visiting Ghana on Saturday, said in his recorded message.
The stimulus included $288 billion in tax cuts, dramatic increases in Medicaid spending, about $48 billion in highway and bridge construction and billions more to boost energy efficiency, shore up state budgets and improve schools. The plan "was not designed to work in four months," Mr. Obama said. "It was designed to work over two years." Since Mr. Obama signed the stimulus into law, the economy has lost more than 2 million jobs and the unemployment rate has climbed higher than the White House predicted it would have ever reached without the stimulus.
Some companies say stimulus money helped avoid layoffs. Independent government auditors found that stimulus aid to states helped keep teachers off unemployment lines. But overall job numbers continue to suffer. Republicans have seized on this opportunity to criticize the president, but they have struggled to find their collective voice. At a news conference Friday, Republican lawmakers criticized the White House for spending so much, while simultaneously saying the administration wasn't spending it fast enough.
With the Obama administration now pushing for a costly overhaul of the nation's health care system, Republicans are casting Democrats as liberals on a shopping spree. In the GOP's weekly address Saturday, Virginia Rep. Eric Cantor, the House Republican whip, accused the Democratic-controlled Congress of reckless spending and careless borrowing. Though the Republican stimulus proposal this January had its own deficit-pushing price tag of $478 billion, Cantor and Republicans are trying to make their case against President Obama as one of fiscal restraint.
"For the stimulus alone, Washington borrowed nearly $10,000 from every American household," Cantor said. "Let me ask you: Do you feel $10,000 richer today?" In his speech, Mr. Obama twice referred to "cleaning up the wreckage" of a recession that began on President George W. Bush's watch. But with Mr. Obama's poll numbers slipping on economic issues, Republicans want to lay the economy at the president's feet. "This is now President Obama's economy," Cantor said.
Lunch with Larry Summers
Larry Summers, director of the US president’s National Economic Council, usually eats at his White House desk or sitting around a nearby table with other members of the economic team. But today, for Lunch with the FT, Summers’ aides have persuaded him to walk down the stairs to the Ward Room, a windowless alcove near the White House mess. The dark-wood panelling and nautically themed paintings are meant to evoke a naval officer’s dining room but these grace notes are muted by the plastic cutlery, paper plates and drinks sipped straight from their plastic bottles.
As he flips open a plastic box of Caesar salad with grilled chicken and unscrews the cap of a bottle of Diet Coke, Summers makes small talk – his son’s killer swing on the golf course, his own weekend tennis plans. But Summers – whom I first met as an undergraduate 20 years ago when I dropped into his office at Harvard to ask about the economic advice he was giving to the leaders of what was then the Soviet Socialist Republic of Lithuania – is not known for his casual conversation.
Today, dressed in a navy suit, white shirt and blue and white tie, with dark circles under his blue eyes that are not entirely hidden by his tan, the 54-year-old seems particularly focused on work. President Barack Obama’s decision last year to appoint Summers to lead the NEC was a surprise. From 1999 to 2001, Summers had served as Bill Clinton’s Treasury secretary and he was thought to be up for that job – if he, as a former Clintonite, were to have any role at all in the new administration.
But, instead, the Treasury went to Tim Geithner, and ever since Wall Street and Washington have been abuzz about the relationship between Summers and his former protégé – and about the balance of power between the two men and other economic heavyweights in the administration. As the Obama team has coalesced, Summers, who leads a daily economic briefing for the president, has seemed to emerge as the strategic mastermind of the administration’s macroeconomic response to the biggest crisis since the Depression.
His post and his past give him a unique perspective on the similarities and differences between Obama and Clinton. Summers is (in)famous for his bluntness but even he knows better than to tackle that question head-on. Instead, he praises the current president for the no drama Obama temperament America first discovered in the heat of last year’s primary battle. One source of that “calm, measured” outlook, Summers says, is Obama’s determination to use his presidency to effect long-term change – no matter how pressing the immediate problems.
“The president made two things clear to us early on,” recalls Summers, who answers my questions in full, idea-packed paragraphs, rocking gently back and forth in his seat as he gets into the flow of an argument. “He would do what he had to to fix the banking system, to get the economy out of the rut in which he was inheriting it. But he had run for president to do long-run, fundamental things, like fixing healthcare, like having real energy policy, like reforming education. And we weren’t going to be distracted from those things.”
Obama’s most important political calculation has been this decision to press ahead on all these fronts at once – and the success or failure of his administration will rest largely on whether that was the right call. This combination of long-term reforms and an immediate crisis reminds me of the last global financial meltdown I watched Summers, then deputy secretary of the Treasury, help navigate. It was 1998, the year of Asian contagion and Russia’s default and devaluation. Emerging market veterans of that crash have taken a certain bitter pleasure in pointing out that this time their former rescuer and scold – the United States – is at the centre of the world’s crisis, and in observing that Americans seem markedly less keen on their own unpalatable medicine now that they are the patient.
“I don’t think I would quite accept the characterisation that we’re in the position that the Russians were in in 1998,” Summers says when I draw the comparison. “The crises that we addressed during the 1990s internationally, in almost every case, took the form of a foreign lack of confidence in a country that led to a mass withdrawal of funds and made reassuring foreigners the central priority. That’s why interest rates often had to be increased. The American problem this time has more in common, at least qualitatively, with the Japanese post-bubble problem, where the issue was not reassuring foreigners but maintaining sufficient domestic demand to push the economy forward.”
He does, however, concede that fire-fighting feels different when it is your own home that is alight: “There have been moments, certainly, when I understood better some of the reactions of officials in crisis countries now than one was able to from the outside at the time. It is easier to be for more radical solutions when one lives thousands of miles away than when it is one’s own country.”
Between that financial meltdown and the current one, Summers lived through a crisis different in scale and substance but perhaps even more personally challenging – his tumultuous leadership of Harvard University. That experience, I suggest, may be the first time in a golden career when something went wrong for Summers. The son of two economists and nephew of two Nobel laureates in economics, he went on to become an award-winning, tenured Harvard professor of economics when he was just 28, then moved to top jobs at the World Bank and the Treasury. From there, following George W Bush’s election, he glided into the nation’s most prestigious academic post, becoming in 2001 president of Harvard. That role came to a rocky end in 2006, when he resigned under pressure from faculty critics. I ask what the episode taught him.
With a slight grimace – the question has been asked many times before – Summers offers his standard, Kissinger-esque line: “Harvard and Washington are both political environments and I’m not sure that Washington is the more political of the environments.” Beyond that, he allows that the “negative” lesson he learnt at Harvard was the need to “maintain focus on your top priorities and avoid diversionary controversies that were apart from the agenda”, a possible reference to comments about women and science that helped to scupper his already-troubled tenure.
Summers is more forthcoming on how his thinking has been influenced by his recent, part-time stint as an adviser at the hedge fund DE Shaw – a job that created a brief political flurry this spring when financial records released by the White House showed that Summers was paid about $5.2m (£3.2m) in salary and other compensation in the last of his two years at the firm.
The chief intellectual casualty of the current crisis has been the “efficient markets” school – the theory, associated with such erstwhile laisser faire gurus as Alan Greenspan, that market participants are governed by rational expectations and markets are self-correcting. As an academic economist, Summers has studied the shortcomings of that approach but, working on Wall Street gave him, he says, a more visceral understanding of the “self-referential” character of markets: “Markets are concerned with the ultimate health of economies and the like but they’re equally or more concerned with what the likely judgments of other market participants in the short run are.”
Might this “more textured understanding” have caused Summers to reconsider some of his views from the 1990s – a time when he and former Treasury secretary Robert Rubin led a pro-market faction in the Clinton administration that some critics believe is partly to blame for the current crisis? (They cite, for example, Summers’ support for the 1999 repeal of the Depression-era Glass-Steagall Act, which had separated commercial and investment banking.)
Summers’ reply amounts to a qualified yes: “I think I always had the sense that our regulatory system was about the protection of individual institutions, and the important problems are often about the protection of the system. I was very worried in the 1990s about predatory lending, about systemic risk, about the stability of Fannie and Freddie. But the political constellation at that time didn’t offer a chance really to do more than report and warn about it. It’s a different world today. As Keynes famously said, ‘When the facts change, I change my mind.’”
Onward, then, to the toughest economic challenge Summers faces today: the recession. Here, Summers turns sombre: “I don’t think the worst is over ... It’s very likely that more jobs will be lost. It would not be surprising if GDP has not yet reached its low. What does appear to be true is that the sense of panic in the markets and freefall in the economy has subsided and one does not have the sense of a situation as out of control as a few months ago.”
As the panic has subsided, the trendy new economic issue has become “exit strategy” – as in, when and how do governments shift from costly and aggressive intervention to levels of spending and taxation that are sustainable over the long term? Summers rejects the premise of the question. “I actually think that the right measures for doing the right things about the long-run deficit will also increase confidence, hold down long-term interest rates and capital costs, make mortgages cheaper, make mortgage rates lower and so will contribute directly to recovery. So I don’t buy the notion that there is some conflict between the budget imperative for growth and some other budget imperatives.”
So far, so orthodox. What is different about the Obama team’s economic vision is their aspiration that once this crisis is over, the US economy will be in different, and better, shape than it was before the bust. This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.
Summers admits that this rosy scenario depends on a lot more than the White House. Foreign policy watchers have tended to focus on the security issues this administration faces – the wars in Iraq and Afghanistan, the challenges of Iran and North Korea’s nuclear ambitions. But Obama’s most important international assignment may turn out to be coaxing the rest of the world into accommodating this reshaping of the US economy. As Summers puts it, “The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.” On this possibility, Summers is bullish. “The very great enthusiasm for accumulating reserves that one saw globally is likely to be a smaller factor over the next decade than it has been in recent years,” he predicts.
Summers has managed to eat about half of his salad and is now munching on one of the blueberry macadamia nut cookies an assistant brought in midway through our meal. It seems like a good moment to ask him the question that has bedevilled White House-watchers since he was appointed to head the NEC: what exactly is his job? “My role is to make sure the president gets access to the best economic thinking he can on everything that touches the economy” he says loyally. “That means making sure that no arguments go unscrutinised ... and it means helping everyone on the president’s economic team make the best case for whatever policies they prefer.”
The notion of Summers as an intellectual handmaiden, “helping” others refine their arguments, is at odds with his reputation as a supremely self-confident intellectual bulldozer. Since he moved into the White House there have been a few, mostly anonymous, complaints about his unwillingness to brook dissent but the real story is that there hasn’t been any public falling out among the team of economic rivals Obama has assembled.
Summers is not easily seduced but he seems thrilled by the demands of his current job. “It is certainly incredible, as intellectually challenging as anything I’ve ever done ... What makes it so challenging and exciting, as well as exhausting, is the range of subjects.”
Even so, Washington rumour has it that the NEC isn’t big enough for Summers and that he regrets not leading the Treasury and yearns to run the Federal Reserve. Does he? “I am totally engaged by the breadth of issues that I am asked to think about to support the president.” I push one more time: “Even for you, that’s enough?” “That’s more than enough.”
Schwarzenegger plays it cool as he battles with California's budget crisis
Arnold Schwarzenegger faces the fight of his life. The "Governator", best known for slugging it out in Hollywood blockbusters as an indestructible cyborg, displays steely confidence as he battles California's worsening budget crisis. As some of America's biggest banks yesterday stopped accepting IOUs issued by the cash-strapped state in lieu of money, Mr Schwarzenegger defended his handling of the crisis and denied playing a high-stakes poker game with political opponents over California's finances.
"It's not about who blinks first," he told the Financial Times in a Bedouin-style smoking tent outside his office. "It's not a game of chicken." California, which would be the world's eighth-biggest economy were it a country, began its fiscal year last week without a budget because of political gridlock. Mr Schwarzenegger, its governor, is at loggerheads with Democrats in the state legislature who oppose making reform of the state's welfare and social services system part of a budget deal. He insisted the changes were vital to keep borrowing in check.
Bank of America, Wells Fargo and JPMorgan had set a time limit on accepting the IOUs, which California has been forced to print as it faces a $26bn (£16bn) deficit. That limit expired yesterday, raising questions over how much the IOUs are worth and how people will be able to cash them. California is reeling from the collapse of the housing market and the economic slump. Unemployment is running at more than 11 per cent, well above the national average.
Trouble for Treasuries Lurks as California Melts
It’s time for investors in U.S. Treasuries to toke up, or at least support offers by pot smokers to help narrow California’s budget gap by paying taxes on marijuana. Ludicrous as that legalization ploy may sound, California and its Governator aren’t in a position to dismiss any possible help. Neither are holders of U.S. government debt who would suffer if California’s slow-mo meltdown eventually ripples across the entire country.
So far, the prospect of a California collapse hasn’t worried investors outside municipal markets. U.S. debt holders piled into $19 billion of 10-year notes offered on Wednesday, pushing yields below 3.4 percent. And California isn’t going to fall apart in a matter of days. While the recent issuance of IOUs to cover some bills is unsettling, the state is able to meet most of its obligations. Governor Arnold Schwarzenegger and his dysfunctional legislators may even find a way out of the current imbroglio.
The possibility that banks such as Wells Fargo & Co. and Bank of America Corp. may stop accepting the IOUs as of today, for example, may spur legislative compromise. Even so, that’s not going to solve California’s long-term, structural issues. Today’s problems follow a similar budget mess, and a temporary resolution of a $42 billion deficit, in February. Unless California overhauls the way it is managed or the U.S. economy stages an incredible comeback, the state’s budgetary woes will only deepen.
While saying the state’s default risk “remains low,” Fitch Ratings downgraded California earlier this week. It said California’s governmental gridlock “could persist, further aggravating the state’s already severe economic, revenue and liquidity challenges.” Plus, the enduring recession makes it more likely that California’s $26.3 billion budget gap will worsen, especially since the state is at the epicenter of the housing crisis and has higher unemployment than much of the rest of the country.
So what would President Barack Obama do if given the choice between allowing a California default and taking on more debt on behalf of taxpayers? Do the math. It only involves one figure -- 55. That’s the number of Electoral College votes held by California, the most of any state. It would also be tough to let California go to the wall after saving Michigan and the United Auto Workers via General Motors Corp. and Chrysler Group LLC, not to mention keeping Manhattan afloat through the bailout of Wall Street.
Then there is the threat a California default poses to the entire U.S. municipal finance system. On its own, California’s almost $80 billion in outstanding debt is a small slice of the municipal securities market, which the Securities and Exchange Commission recently estimated at about $2.6 trillion. The problem: if California defaulted, already gun-shy investors would likely hustle out of municipal issues just to be on the safe side. The last thing shaky credit markets need is another run. That prospect would certainly stifle opposition on Capital Hill to any rescue.
Legislators are also mindful that mom-and-pop investors hold plenty of municipal debt. And a lot of them are senior citizens, the most-active voting block. Not that the administration would necessarily cast a rescue as a California bailout. A program to give all states a helping hand would be more politically palatable. Perhaps Stimulus Round II, already being floated in Washington, would be a possible vehicle. Or the federal government may choose to provide a backstop, rather than actual funds, for state and local debt.
That was what California State Treasurer Bill Lockyer proposed in May, when he asked U.S. Treasury Secretary Timothy Geithner for help. While a cash bailout would be the worst case for Treasury investors, even a substantial increase in government liabilities will cause angst. And, if California got such a backstop, plenty of other states and municipalities will want the same. “If the states’ debt burdens are piled onto the federal debt, it should further increase the cost of borrowing for the federal government,” says Axel Merk, president and portfolio manager of Merk Investments LLC, a Palo Alto, California-based currency fund manager. “I don’t think it will happen, but the risk of it happening is real.”
Even California’s efforts to buy time with IOUs hold risk. In 1932, Chicago was hit with “the largest and most important bank panic of the Great Depression” after the public lost faith in IOUs issued by that city, according to an article by Joseph Mason, a Louisiana State University banking professor. The acceptance by large banks of California’s IOUs, given their questionable value, is also “probably not prudent at this time,” Mason wrote. The flip side is that if California ever defaulted, and the federal government did nothing, Treasuries would probably rally on any market disruption. Investors who count heavily on that outcome, though, may already be smoking something.
Talks intensify over closing California's $26 billion deficit
Against a backdrop of IOUs and expanding government furloughs, Gov. Arnold Schwarzenegger and legislative leaders expressed optimism Saturday that they were moving toward a compromise that could end California's fiscal calamity. Negotiations to close the state's $26.3 billion deficit restarted after two weeks of inaction and partisan bickering. Top lawmakers from both parties said a budget-balancing deal was possible in the coming week.
"I would say we're getting very close to a general framework, but there are still outlying questions," said Assembly Minority Leader Sam Blakeslee, a San Luis Obispo Republican, after emerging from a closed-door meeting between lawmakers and Schwarzenegger. They negotiated about 2 1/2 hours Saturday before ending talks for the day. They were expected to return to the Capitol on Sunday. Negotiations centered on the extent of budget cuts — which are expected to range from $14 billion to $15 billion — and what other steps might be taken to close the deficit.
The shortfall, which is the difference between the amount of tax money coming into the state and its previously approved spending obligations, amounts to more than a quarter of California's general fund, its main account for paying operating expenses. Schwarzenegger and Republican lawmakers also want reforms to welfare, pension, health care and in-home supportive service programs. They say preventing waste and abuse will save the state money, which in turn can be used to prevent cuts elsewhere in the budget. The governor's office has estimated its reform proposals will save $1.7 billion this fiscal year alone.
Democrats have criticized the reform proposals as peripheral issues that do not have a direct effect on the immediate budget deficit. They also say Schwarzenegger has overstated the savings. "There's a general appreciation that many of these reforms will produce savings, but we want to make sure we approach them in a thoughtful manner," Blakeslee said. Despite the differences, both Democratic leaders appeared upbeat as they left Schwarzenegger's office after a second round of talks that began Friday night.
Assembly Speaker Karen Bass, who walked out of negotiations earlier in the week, said there did not appear to be any insurmountable obstacles to reaching a deal. She described the talks as complicated.
"I think what has happened over the last 48 hours has been the most productive in the last several weeks," the Los Angeles Democrat said. "We are just not finished." Besides the welfare and social service reforms, education funding is one of the key negotiating points. Lawmakers are trying to decide whether it can be cut and, if so, by how much. Funding for K-12 schools and community colleges accounts for roughly half of annual state spending.
The possibility of a breakthrough in resolving California's mammoth budget shortfall comes a week after the state began issuing IOUs to thousands of vendors as a cash-saving move. State workers also have begun taking three days off a month without pay, cutting the salaries of more than 200,000 government employees by 14 percent. The state's fiscal picture has become progressively worse since Schwarzenegger and lawmakers passed the budget for the current fiscal year last February during an unusual midyear session.
Personal income taxes declined 34 percent during the first five months of the year, a slide that has accelerated as the recession continues to strangle California's economy. On Friday, the state controller's office reported the state had spent $10.4 billion more than it collected in the fiscal year that ended June 30. It is now without sufficient cash to cover all of its payment obligations. If the budget isn't balanced by late August, the state will have to defer payments to its pension funds and may issue IOUs instead of paychecks to state employees. The unprecedented drop in tax revenue is forcing Schwarzenegger and lawmakers to make difficult choices, with deep cuts proposed to education, health and social service programs.
At the same time, Schwarzenegger and Republican lawmakers are standing fast against additional tax increases, limiting lawmakers' options for closing the deficit. The two-year budget package approved in February increased sales, personal income and vehicle license taxes, and Republicans say the state's economy cannot absorb additional tax hikes. While the governor and lawmakers try to reach a compromise, some of the state contractors who are being issued IOUs will have to start scrambling to find banks that will cash the warrants. Bank of America Corp. and other major banks said Friday was the last day they would honor the IOUs, which cannot be redeemed until Oct. 2.
Housing and Banking Deception: 23,000 to 28,000 Foreclosed Homes kept off the MLS or Public View in California each Month
The math in California housing simply does not add up. Given the amount of sales and monthly foreclosures over the past few months, it would appear that banks are sitting back while a gigantic backlog of foreclosures grows. A few in the media are calling attention to this obvious fraud but not many. The California housing market is reeling from an epic mulit-decade long real estate bubble. For the past few months, foreclosures have been hitting at a record pace yet the official MLS inventory is falling lower and lower. I have pulled up data for the largest California counties with MLS data from March and compared it to July and what you will see is simply astonishing. I will compare this data with actual foreclosures and what you see is banks are taking homes back, failing to list them on the MLS, and basically sitting back probably hoping the government bails them out.
Let us first look at the March and July snapshots of inventory:
*Source: MLS data
As many of you know, the spring and summer are usually the hottest selling seasons and this normally will see both a jump in sales but also inventory. What we see here instead is a massive drop in inventory of 26 percent in 4 months! This data here isn’t the big shocker however. When we start looking at sales and actual foreclosures, that is when we start realizing something is terribly amiss:
It is safe to assume that for June, taking an average from the past 3 months would give us a total of 38,000 to 40,000 additional homes sold in California for last month. So with that information, we can add the last 4 months to see that a total of approximately 151,000+ homes sold in California. Looking at our list of the largest California counties, we notice that the list on the MLS dropped by 44,439. But we know that over half of homes sold are foreclosure re-sales. This means in the last four months out of the 151,000 homes sold in California, some 75,000 to 80,000 homes that sold were distressed properties.
And here is where the major data discrepancies begin for the California housing market. Let us look at the distress inventory for this same timeframe:
In the same time that California was selling an average of 38,000 homes a month, an average 47,000 homes were being foreclosed on. So even looking at this basic data set for 4 months, we know that in March 20,787 homes that sold were foreclosure re-sales. But during March, we know that California had 48,927 actual foreclosures (we aren’t counting the 58,959 notice of defaults that will become foreclosures in 6 to 9 months). This pattern holds for April and May and I would assume June as well. So what is the bottom line? Some 23,000 to 28,000 homes per month that are foreclosed or now owned by the bank don’t make their way to the public MLS! That is why in this short time frame, we see the actual public data dwindle because organic sales from non-distressed properties are accounted for, but the building distress market is kept off the books and this is enormous. In fact, the MLS data is well accounted for:
Non-distress CA homes sold:
June*: 17,191 (running average from previous 3 months)
And this would make sense since in our tiny subset, we accounted for 44,000+ homes that came off the MLS in this timeframe without including all California counties. Yet this is tremendously deceiving to the public. The pundits are spinning this data just like they spin the terrible unemployment numbers and are saying look at how quickly inventory is dropping. Well sure, this is the only data that we can see. But knowing the rest of the story we know that some 23,000 to 28,000 foreclosed properties are sitting somewhere either being sold off in bulk to investors or simply put, just sitting. We know that looking at closed escrow sales data that over half of the market is foreclosed properties so this is the market. I’m not the only one seeing this:
“(LA Times) The percentage of Los Angeles County mortgages delinquent by 90 days or more in May was nearly double the rate last year, First American CoreLogic reported today.
May’s 9.5% delinquency rate for L.A. County was up from 5% of mortgages late by 90 days or more in May 2008. First American bases its foreclosure analyses on public records.
While the default rate has nearly doubled, the number of homes actually being sold at auction — the final foreclosure stage — has shrunk. In May, the L.A. County repossession rate was down to 1% of mortgages, from 1.1% a year ago. This discrepancy is the “foreclosure backlog” now looming over the housing market. It’s caused by various government-mandated and voluntary foreclosure moratoriums, and possibly by lenders trying to manage the flow of repossessed homes entering the market.
Nationally, First American reported 6.5% of mortgages were in default in May, up from 4% in May 2008. The national repossession rate was 0.7% in May, up from 0.6% in May 2007.”
The amount of inventory being kept off the public view is simply enormous. This is going to end badly for a state with a massive fiscal budget problem. I have yet to see any deeper analysis trying to pinpoint the actual figure since it is hard to get any accurate figures from banks, but looking at data we know to be true, we know something is absolutely rotten in Denmark.
Morgan Stanley, Goldman Sachs Plan To Rebrand Failure As Success
I have wonderful news to report to everyone! Apparently I have woken up today in a parallel universe, where the sun is shining and the birds are singing and my coffee tastes like malted orgasm. There's something called a "Dylan Ratigan" on my teevee, asking shouty sports pundit Stephen A. Smith about auto bailouts, so it's not like EVERYTHING makes perfect sense, but here's the real good news! Apparently, the financial collapse in the derivatives market never happened! EVERYTHING OLD IS NEW AGAIN AND WILL SUCK AGAIN, YAY!
From this bizarro universe's Bloomberg:Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.
Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody's Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.
Ahh, apparently this parallel universe's version of Choire Sicha is just as critical of these geniuses as he is in the real one. This is blockquoted for maximum sarcasm:HOW COULD THIS IDEA FAIL? How could anyone not want to put their money in this? This is so dizzying, it's like it is 2003 outside, and everything is new and shiny again.
You know what is going to be neat? Seeing which ratings agency bites first at giving this turd sandwich a AAA rating! All of us in this parallel universe plan on running around the streets with our pants off that day, because there are no consequences for failure, ever, apparently.
UPDATE, from my exasperated father, who writes:
<It will be interesting to see who buys this shit but we may never know. Some people never learn. BUT! If you offer it at a price and a rate, somebody can be found to speculate on anything, and if you sell it to somebody connected or to someone who is "too big to fail"...well we have already proven that we can handle the "moral hazard" argument. Here we go again. Look at the names associated with all this. And the one you have to wonder about the most is the rating's agency, Moody's. They must feel like they are invisible and bullet-proof because they certainly have escaped real scrutiny in all of this that has just passed. And! They are paid by the issuers to give them a rating on this shit. Not much independence there!
Even the Employed Lose with Hour and Wage Cuts
Job losses tell only part of the story. Economists worry that falling work hours and pay will produce "the mother of all jobless recoveries"
In some respects, Kristi Pohly is lucky. The 33-year-old marketing manager still has her job at Pharmatech Oncology in Denver, having worked there for more than six years. But the recession has hit Pohly from another angle. At the beginning of June, she and her co-workers took a 25% pay cut and switched to a 32-hour workweek. Pohly had been earning $55,000 at Pharmatech; her pay is now $41,250, or about $400 per month less on a take-home basis. To keep up with the $1,100-per-month mortgage on her house, Pohly took in a roommate at the beginning of that month. The transition, she says, hasn't been easy. "We are working 20% less, but getting paid 25% less. Morale has pretty much hit the floor."
Pohly's plight reflects patterns emerging in the job market that go beyond the headline unemployment rate and job-loss numbers. In addition to the loss of 467,000 jobs in June, economists worry about the impact of stagnating or falling pay and reduced hours of workers. Buried in the June jobs report is this critical bit of information about the labor market: The average workweek for the month fell 0.1 hours, to 33 hours, the lowest ever recorded for data that go back to 1964. Average weekly earnings, meanwhile, actually fell to $611.49 in June, from $613.34 in May. Hourly earnings remained flat. Economists say the combination of reduced hours and pay, along with continued job losses, could significantly slow a recovery as even the employed lack the means to boost their spending.
"The amount of money taken home is not about the number of jobs but about hours worked," says Mike Englund, chief economist for Action Economics, an economic forecasting firm. "The contraction in underlying income [of those working] is pretty powerful. The job market is continuing to contract at a rapid clip." David Rosenberg, chief economist and strategist for Gluskin Sheff & Associates, a Toronto wealth-management firm, also draws gloomy conclusions: "The combination of job loss and decline in hours worked [in June] means there was effectively a decline of at least 800,000 jobs." He says if these trends continue, the economy will enter a downward spiral of lower consumer spending and falling prices, or deflation. What's worse, unemployment may not peak for another two years. In that case, Rosenberg says, we are destined for "the mother of all jobless recoveries."
Footing More of the Bill
Cuts in pay and hours are rippling throughout the economy in businesses large and small and industries from mining to retail. It is well known that such large employers as FedEx, Hewlett-Packard, and Best Buy have trimmed pay. But the trend is also playing out at countless small businesses and nonprofit organizations. With donations and grant awards reduced, the staff of SAVE, a suicide prevention nonprofit in Bloomington, Minn., is enduring a number of cuts. On top of a salary freeze that's been in place since May, staff will get salary reductions of 10% to 20% beginning July 22.
As of July 15, SAVE staff will see the elimination of such benefits as their 3% employer 401(k) match, and long- and short-term disability and life insurance. They'll also have to start footing the bill for 25% of their health-insurance premiums, which had been fully paid by the organization. Daniel Reidenberg, executive director of SAVE, says he's also considering reducing staff hours. But he is worried about potential consequences. "Rising anxiety and depression means the need for our services is greater than ever before," says Reidenberg. "It's the worst possible time for us to be cutting back."
"A Step Back"
For many workers, hours have already been cut. As of July 10, Matt Garville, 23, will no longer be working Fridays at his job as an account coordinator for a Manhattan public relations firm. That means a 20% salary cut, along with the loss of his health benefits. Having graduated from Fordham University in 2008 with a degree in economics and journalism, Garville started working at the firm just three months ago. "I really like it here, but I am worried," he says. "I thought their hiring me meant it is [a] relatively stable [job]. I guess not."
Garville says the pay cut means he won't be able to afford moving from his parents' home in Old Tappan, N.J., into New York City to live with friends. "It's a step back," he says of the pay cut. "No one wants to take a step back." He is trying to make the best of the situation by making use of his newly spare time. He says his order of business on days off will be running errands he previously didn't have time for, like getting his hair cut and his DVR player fixed. "Then I'll be networking," he says. "These days, no job is secure."
With the job market on such shaky ground, it can be hard for many workers to believe the economy is producing "green shoots" that point to better days. While Action Economics' Englund is still hoping for a return to positive economic growth in the third quarter of this year, he says troubles in the job market could jeopardize that timing. "If income isn't growing and if hours worked don't rise in the second half of the year, it's going to be hard for the consumer to recover," says Englund.
Barney Frank proposes home loan plan for jobless
Congressman Barney Frank wants to prevent unemployed homeowners from losing their houses by giving them government money to pay their mortgages. The Newton Democrat, chairman of the House Financial Services Committee, will hold a hearing in Washington today on his proposal to spend $2 billion to prevent foreclosures on borrowers who don’t qualify for other mortgage aid programs because they are unemployed. The funds would come in the form of loans, and borrowers would have to pledge their homes as security.
The catalyst for the proposal is a growing jobless rate that reached a 26-year high of 9.5 percent in June, Frank said. “It’s not a forgiveness program,’’ Frank said yesterday in an interview with The Boston Globe. “We do have serious unemployment.’’ The proposal is a revival of a 1975 program called the Emergency Housing Act, which was enacted during a recession. Frank would fund his program with the dividends the US government is getting from financial companies that received taxpayer funds from the $700 billion industry bailout.
Among those scheduled to testify at today’s hearing is Brian A. Hudson Sr., the chief executive of the Pennsylvania Housing Finance Agency, which since 1983 has been providing similar mortgage help to residents facing a short-term setback such as illness or unemployment. “There has to be a reasonable likelihood that the homeowner will be able to resume making the mortgage payment without state help,’’ Hudson said in prepared remarks released by Frank’s committee, because the “assistance is temporary.’’
So far, 42,700 Pennsylvania families have received help, with the average loan at $10,500, or “less than the $35,000 it costs to complete most foreclosure actions,’’ Hudson added. The hearing comes just days after the Federal Reserve Bank of Boston released a study that showed lenders are reluctant to modify mortgages of most delinquent borrowers because they either are likely to again have trouble making payments, or conversely, can fix their problems without the financial help.
Paul Willen, a Boston Fed senior economist and coauthor of the study, had called for nearly exactly what Frank is now proposing: directing government aid to borrowers. “This will work,’’ he said. “If you are assisting a borrower to pay their monthly payment, the lender can’t complain. That will prevent foreclosures.’’ Frank’s proposal would also spend $1 billion to build and preserve affordable housing, $1.5 billion to redevelop foreclosed and abandoned homes, and $2 billion to protect tenants in apartment buildings whose owners can’t pay the mortgage.
He calls the $6.5 billion package, “TARP for Main Street,’’ a reference to the government’s Troubled Assets Relief Program. To date, the Treasury has received about $6.7 billion in dividend payments from its TARP investments, according to the Government Accountability Office. Sheila Crowley, the president of the National Low Income Housing Coalition, said Frank’s proposal would help allay criticism the government bailout is helping bankers more than people suffering from the country’s financial crisis.
“For people who are truly suffering in the recession, TARP is most likely seen as a bail-out of the very people who are to blame for getting us into this mess,’’ she said in prepared remarks. But Mark Calabria, director of Financial Regulation Studies at the Cato Institute in Washington, said the TARP dividends should be used to offset losses the government may incur from the bailout program. “Diverting those dividends for purposes other than offsetting TARP losses will only leave the taxpayer with a larger hole to fill,’’ Calabria said in a written testimony submitted to Frank’s committee.
Recession Creates Legions of Newly Homeless
Louis Gill doesn't like to turn anyone away. The director of the Bakersfield Homeless Center in California has taken to laying out cots and mattresses between the shelter's 174 registered beds to cope with the rush of homeless families brought to his doors by the financial crisis. "Last year we saw a 34 percent increase in homeless families and a 24 percent increase in homeless children," he said. "Why do we go beyond capacity? Because in a just society, a child should not have to sleep outside or in a car."
Gill is a frontline witness to the change in the makeup of the country's homeless. The stereotype of a homeless person as a single man no longer applies. A resident of the Bakersfield center is far more likely to be a young mother with a "good, solid job and a mortgage that she just couldn't pay." "They're like folks you know and that you've worked with," Gill said. "Maybe the work's not there right now. Maybe they got behind on their payments. But the idea of a typical homeless person has changed. We're seeing individuals come in that have never had to access the safety net before."
Government figures support Gill's experience. The ravages of the recession, including a surge in foreclosures and unemployment approaching 10 percent, have driven thousands of families onto the streets. Although the number of homeless individuals remained relatively stable between 2007 and 2008, the number of homeless families rose 9 percent, and in rural and suburban areas the number jumped by 56 percent, according to a report released last week by the Department of Housing and Urban Development.
In real terms, homelessness is still concentrated in urban areas and among adult males; 20 percent of all homeless people live in three cities: Los Angeles, New York and Detroit. About 1.6 million people used an emergency shelter between October 1, 2007 and September 30, 2008, including 516,700 people in families. But administration officials acknowledge that the economic crisis is turning stereotypes about the homeless on their head.
"The typical homeless person has changed to become less focused on the chronically homeless or single-individual homeless to somebody who is part of a family, whether it be a mother or a father or a child in a homeless family," HUD Secretary Shaun Donovan said. "I think what that tells us is that the economic crisis is forcing more families who had previously been well-housed into homelessness."
Women comprise 81 percent of adults in homeless families, according to the report. And unlike homeless men, who are usually middle-age, homeless women tend to be young -- under 25 -- with children under 5. "The life of a homeless woman is particularly fraught with danger," said Suzanne Wenzel, a community psychologist and professor at the University of Southern California School of Social Work. "These young women are at much greater risk of being victimized when they have no stable home. It can be more difficult to obtain needed services. For anyone in this situation, it is destabilizing and extremely stressful. That's why these new figures are horrifying." The report did not address the causes of homelessness or why some groups are disproportionately affected.
HUD's study measured changes in the number of homeless between 2007 and 2008, before the height of the economic crisis, and Donovan acknowledged that the data does not reflect "the great many more families who were living on the edge, doubling up with friends and family members, and struggling to stay out of the shelters and off the streets." Some case studies collected by the department's Homelessness Pulse Project suggest that rural and suburban areas were particularly ill-equipped to cope with the new wave of homelessness. And many of the states that experienced the largest increases in homelessness are predominately rural.
In Mississippi, the number of homeless increased 42 percent last year; in Wyoming, 40 percent; Montana and Missouri, 23 percent; and Iowa, 22 percent. "Starting about a month or a month and a half ago, our phones have not stopped ringing," said a Kentucky emergency shelter provider in one of the case studies. "We have had to turn away or refer families due to our full capacity shelter. The department has allocated $1.5 billion over the next three years to combat homelessness nationwide, and at the local level, there is interest in increasing resources to help women and children before they become homeless, officials said.
US homeless numbers include more families
The face of homelessness in the United States is changing to include more families and more people who live in the suburbs and rural communities. The number of homeless has remained steady since 2007, but within the overall count are trends that can tell officials where federal resources would do the most good, the Housing and Urban Development Department says in its annual report to Congress being released Thursday. About 1.6 million people used a homeless shelter or lived in transitional housing between Oct. 1, 2007, and Sept. 30, 2008 — about the same as the year before. But within that group, the number of families grew 9 percent, from about 473,000 to 517,000.
Officials said they also saw more demand for transitional housing in the suburbs and in rural areas of the country. Residents of suburban and rural communities made up about a third of those in need of housing, up from about 24 percent the year before. HUD also attempts to count the number of homeless at a single point in time. In January 2008, about 664,000 people were in homeless shelters or in the streets on a single night. That's a drop of about 7,500 from the year before, but officials point out that the count occurred just as the nation's economic woes were beginning and did not account for soaring unemployment and other economic problems that have kicked in during the subsequent months.
The time lag associated with the national survey has led HUD to try a scaled-down, regional approach in hopes of obtaining more timely information each quarter. The first installment of that effort will also be released Thursday as part of the congressional report. The report showed that the number of people entering homeless shelters in nine regions of the country grew from 60,371 in January to 61,280 in March. Four regions experienced an increase in shelter counts. Five saw a decrease.
Participants in the quarterly reporting include New York City and Washington, D.C., as well as smaller cities like Richmond, Va., and Shreveport, La., and more rural regions, such as 118 of Kentucky's 120 counties, excluding the state's two largest cities of Lexington and Louisville. HUD Secretary Shaun Donovan said the annual report to Congress sheds light on how today's housing crisis and job losses are playing out in shelters and the streets. With the quarterly reporting, "we will be able to better understand the impact of the current economic crisis on homelessness across the country," Donovan said.
The quarterly report includes anecdotal summaries. For example, the case manager at a Richmond shelter reported seeing a greater number of "individuals who have held professional, skilled-craft positions." An official in Kentucky said, "One day last month, we had to turn away three families due to full capacity." Officials in Shreveport reported a decrease in demand that they attributed to hurricane victims gradually moving back to New Orleans.
Americans swap homes for hotels as recession bites
Some Americans are swapping homes for motels as the ranks of the homeless swell during the recession, crowding out shelters and forcing cities and states across the country to find new types of housing. In Massachusetts, a record number of families are being put up in motels due to high unemployment and the rising number of homes going into foreclosure, costing taxpayers $2 million per month but providing a lifeline for desperate families.
"I feel like this has saved my life," said Tarya Seagraves-Quee, a 37-year-old former nurse. Seagraves-Quee has lived in a cramped one-bedroom suite in a hotel in Cambridge, Massachusetts, with three of her four children for nearly two months. "I'm managing the best way possible. I've learned to make things in the microwave oven." In Massachusetts, homeless shelters are at capacity. State law requires temporary accommodation for those without shelter, leading authorities to place 830 families, including 1,125 children, in 39 motels -- an unprecedented number.
"This truly is the highest we have ever seen it," said Nancy Paladino, director of the family team for the Boston Health Care for the Homeless. Other cities are noticing a similar trend. In Indianapolis, Indiana, overcrowded homeless shelters are turning families away, forcing growing numbers to seek vouchers for hotels provided by nonprofit groups such as United Way.
"Anecdotally, it's increased," said Michael Hurst, director of the Coalition for Homeless Intervention and Prevention Indianapolis.
The advocacy group started to compile statistics on the number of homeless families living in hotels this year after noticing signs of an increase. "The hotel owners will tell you it has increased. The homeless service providers and the school officials will say we know there are more people living in hotels and putting their kids in school because that is the address they are giving us."
In the Dallas-Fort Worth metropolitan area, the large Wilson family turned to a budget motel as a weeklong transition between a homeless shelter and an apartment. "Each step we're going it's just a stepping stone," said 42-year-old Frederick Wilson as he sat with his wife, Annette, in a one-bedroom suite they share with four of the six children in their care, including a grandchild.
Called by God, they said, to move from Minnesota to Texas, the family has rapidly made a shift from homeless status to paid employment. Annette has just landed a job as a bus driver, while Frederick said he will work in an office that offers clerical support to Medicaid patients. They spent two-and-a-half weeks in a homeless shelter in Dallas and were preparing to move into an apartment from the motel. The Urban League, an organization that helps struggling African Americans, is paying the $204 cost of their suite, which does not include sheets, pillows or toilet paper.
In Phoenix, demand for emergency accommodation is swamping available services as the recession and spiraling foreclosures turn even more families out of their homes. One nonprofit bought two former hotels -- a Days Inn and a Super 8 -- in a gritty downtown neighborhood to provide emergency accommodation for homeless and low income families. When the $23 million project is finished in September, it will be able to house 156 families, up from 112 now.
"We've seen a whole new subset of homeless families due to job loss and foreclosures, and our waiting list has doubled in the past year," said Nichole Barnes, chief fund development officer of the UMOM New Day Centers. "Some were previous homeowners. Due to the housing market out here, they'd got into a mortgage with a flexible interest rate. Some were working full time, but lost their jobs, went through their savings trying to save their home, and then found themselves without a home due to foreclosure," she said.
In many cities, foreclosures are a big part of a spike in homeless and rise in families living in hotels or motels. Nearly 80 percent of homeless services providers and advocacy agencies say at least some clients became homeless as a result of a foreclosure, according to a joint report by four of the largest U.S. homeless advocacy groups. Staying with family or friends and in emergency shelters were the most common post-foreclosure living conditions, followed by hotels or motels, according to the June report.
"In many areas shelters are now completely full, so the only option to keep their families together is to rent a motel room for $200 a week. That's pretty standard for many who lost their homes to foreclosure," said Michael Stoops, executive director of the National Coalition for the Homeless. Unlike Massachusetts, most states do not pick up the tab. "People are spending 80 percent of their total income on hotels," he said. "And food costs are higher because they can't cook."
In Cambridge, Massachusetts, Seagraves-Quee found refuge at a budget hotel after losing her job in Georgia more than a year ago and going without health care for 10 months. She suffers from multiple sclerosis, anemia and lupus, and was recently found to have two cancer spots on her breast. Two of her children, aged 16 and 6, are autistic. She spent $700 -- almost all her savings -- on plane tickets to Boston, where she had relatives. Soon the family was in a shelter.
Local authorities later moved her to the hotel and Seagraves-Quee was given medical treatment as part of a program carried out by Boston Health Care for the Homeless. "Right now, I am picking up from where I left off in Georgia 10 months ago. When I got here I was in really bad health," she said. "I've heard some people say 'Oh that is a ghetto shelter.' But to me it's a wonderful place."
Mortgage defaults spread as even 'safe' borrowers falter
The mortgage default crisis has an ominous new face. It's your neighbor with a traditional fixed-rate loan. No longer is the real estate bust simply the result of exotic, subprime loans that doubled payments and blew up in homeowners' faces. As the Sacramento economy buckles, even the safest mortgages have become part of a new wave of loan defaults, experts say. With capital-area job losses reaching 45,000 in the past year and unemployment at 11.1 percent, lenders, bankruptcy attorneys and debt counselors all say they're seeing rising delinquencies among prime borrowers with fixed-rate loans and good credit.
Many of those slipping into trouble are state workers, the mainstay of Sacramento's economy. "The tide has definitely shifted," said Pam Canada, executive director of the Neighborworks Homeownership Center of Sacramento, a nonprofit loan counseling firm. "We're seeing more people with a loss of income." Prime fixed-rate mortgages, with the most favorable interest rates and 15-, 20- or 30-year terms that guarantee the same monthly payment for the life of the loan, have long been the bulwark of American homeownership.
There are 3.3 million of them in California – 56 percent of all mortgages. But nearly 4 percent were delinquent in the first quarter, according to the Mortgage Bankers Association. That number was less than 1 percent two years ago, when the default crisis was dominated by subprime loans. The MBA says layoffs are now hitting more educated borrowers. "There tends to be a higher correlation there with having a fixed-rate mortgage," said Jay Brinkmann, chief economist of the lender trade group.
It's not just the layoffs creating trouble for traditionally safe loans. Many area workers have had to absorb wage cuts. Others who lost jobs have found new jobs that pay less. Or they have found only part-time work. Many workers who depend on overtime pay have also seen it disappear or dwindle. Finally, in a capital region defined by a massive state government work force, furloughs have grown to three days monthly, approximating a 14 percent salary cut. Gov. Arnold Schwarzenegger is proposing still more pay cuts for an educated population that's increasingly showing up at nonprofit mortgage counseling centers.
This upheaval has had a ripple effect on small-business owners like Michael and Winnie Kyalwazi, owners of Cafe Le Monde at McClellan Business Park. They've fallen behind on their fixed-rate house payments because business is down 25 to 30 percent, said Michael Kyalwazi. "This is a short setback, the way I look at it," he said. "We're viable. We just need some breathing room." It's a familiar sentiment.
"Most want to pay, but they can't because they're underemployed and have cuts in income and cuts in commissions," said Paul Rigdon, vice president for lending at Sacramento's SAFE Credit Union. "We're seeing all kinds of income-related problems." As the newest turn in a housing crisis that has seen 40,000 area foreclosures and heartbreak in thousands of other homes, trouble for prime borrowers is one more obstacle to a housing recovery any time soon.
Lending-industry officials say it's harder to restructure loans for jobless people who can barely afford any payment. Worse, economists say rising defaults and the foreclosures to come among these borrowers are likely to persist long after unemployment peaks sometime next year. "Foreclosures and delinquencies have a long tail, and we will see that continue for several quarters after a turnaround in unemployment," said the MBA's Brinkmann.
Forecasters at Stockton's University of the Pacific predict unemployment in the capital region will peak late next year at 12.3 percent – and remain in double digits through 2011. If so, problems with prime loans are likely to linger in a region having a hard time catching a break. Already in the foreclosure process is Ron McClure of Roseville. He bought a $600,000 house at Sun City Roseville in 2003, using a prime, fixed-rate loan that cost him $3,200 a month.
That worked until the housing market collapsed. McClure, partner in a small home-building business, saw his income collapse with it. Six months ago, he stopped making payments on the house. "Right now I'm just talking to attorneys about bankruptcy options," he said. "Hopefully, I'll find a job and be able to save it." McClure is working through a support organization, the Sacramento Professional Network, to find a job in his original line of work: information technology.
In Elk Grove, state employee Dwain Barefield believes he will soon miss his first fixed-rate mortgage payment. His finances were already complicated by $25,000 in legal bills he ran up from a divorce that took 10 years. But the bigger problem: refinancing in 2005 from a 30-year fixed-rate mortgage to a 15-year fixed-rate loan to pay it off faster. That decision, made as the economy soared, doubled monthly payments to $1,850 on a house he bought in 1987. Now come state furloughs.
A data processing manager at the Department of Motor Vehicles, Barefield said the first two furlough days starting in February cost him about $400 a month in take-home pay. A third, which began this week, will take another $200. "Two days was bad enough; three days is really going to make it bad. If I pay the mortgage, there is something (else) I won't be able to pay," he said. "Something's got to give." Elk Grove bankruptcy attorney Jonathan Stein said Barefield's tale is becoming a norm.
"The majority of the people calling me now who are losing their homes are state workers," he said. At SAFE Credit Union, Rigdon said most prime, fixed-rate borrowers can prevent foreclosure. He said SAFE has been extending the payoff terms of mortgages, cutting interest rates and even suspending payments temporarily to help borrowers cope.
"We're able to work with most people who want to work with us on that," he said. So far, the conventional fixed-rate loan problem is mostly showing up in delinquency statistics. At the Bay Area foreclosure-tracking firm, ForeclosureRadar.com, president Sean O'Toole said it's not showing yet in foreclosures. But it will. Said O'Toole: "The folks getting into trouble now are probably six months to a year from being reflected as foreclosure statistics."
UK can't afford another fiscal rescue, warns IMF
Britain is the world's only leading economy unable to budget for any kind of economic rescue package next year, the International Monetary Fund has warned. In calculations that will spark further criticism over the state of the public finances, an IMF paper presented to world's leaders has laid bare how the UK's indebtedness has left it unable to provide the vital stimulus the economy could need over the next 18 months.
Every other G20 country apart from the UK and Argentina has been able to budget for temporary spending increases or tax cuts next year to help drag their economies out of recession, according to the paper, presented to a recent G20 meeting in Basel. Even Germany, whose finance minister Peer Steinbruck has accused the UK of "crass Keynesianism", plans to spend a full 2pc of its economic output on such measures next year. The news underlines the fact that with Standard & Poor's having warned recently about the parlous state of the UK accounts, Britain has very little leeway to afford new emergency measures. However, sceptics will warn that it also makes it doubly likely that in the pre-Budget report this autumn the Chancellor will announce extra measures to keep Britain in line with its G20 counterparts.
The UK entered the recession with the worst structural budget deficit in the Western world, leaving it with little room to borrow in order to lessen the impact on profits and unemployment. Although the IMF last week said it now expects the British economy to return to growth next year, its calculations over the implications of the deficit underline the fact that any recovery will be tepid. A Treasury spokesman said: "As the Chancellor has repeatedly said, we are supporting the economy now while living within our means, including by halving the deficit over five years."
As Labour and the Conservatives prepare themselves for a likely general election next June, political debate has become dominated by their respective plans to cut spending over the coming years. However, the IMF figures underline the fact that even before the threat of spending cuts, Britain is facing a comparative squeeze next year because of its fiscal position. According to the IMF calculations, Britain is spending 1.5pc of gross domestic product on emergency measures this year, largely constituting the temporary VAT cut. This compares to 2pc in the US, 4.1pc in Russia and 2.7pc in Japan. The average stimulus within the G20 next year is 1.6pc, compared with Britain's zero percent contribution.
The IMF has already warned the Government that its plans to cut public debt do not go far enough. In its most recent assessment of the UK economy, the IMF said the Chancellor must start paying back debt significantly earlier than projected in April's Budget. The organisation favours sharper spending cuts and bringing the Budget back into balance over an electoral term. The Organisation for Economic Cooperation and Development has also made grim predictions about the state of Britain's public finances. It is forecasting the fiscal deficit next year will climb to 14pc of GDP, higher than Ireland or Iceland, and the worst in the industrialised world.
European Car Markets Stall
A daunting thought for the struggling European car makers: don’t expect a recovery in demand this or next year. The Chief Executive of French carmaker Renault, Carlos Ghosn, said he expects 2010 to be "as difficult as 2009" as the crisis in the worldwide auto industry continues. "I am not expecting an immediate recovery," he told Europe 1 radio. Demand for cars has been rapidly falling. According to investment bank Nomura, there is an overcapacity of 3 million cars of every year, in a market under normal conditions.
In 2007, 14.8 units were sold in Western Europe but demand has quickly dropped. And Nomura estimates sales to hit only 12.5 million units this year in the same region. “As we go into the second half of the year, European automakers are going to lobby their governments to get them to extend their respective scrapping incentives as underlying demand is still very weak,” said Michael Tyndall, Nomura International in London. “Ghosn’s message is one to governments that they need to continue supporting the industry.”
So-called "cash for clunkers" programs have been introduced across Europe. The incentive programs have slowed losses in countries like France and have boosted sales in Germany. A similar American program is gearing up and should boost hopes for Ford Motor, the Fiat-controlled Chrysler and General Motors, which will shortly emerge from bankruptcy. Tyndall said carmakers needed subsidies until demand picks up again. As long as unemployment continues to rise, demand for cars is likely to continue to fall, and in that scenario car manufacturers will need more support.” Tyndall said he expects Ghosn in his capacity of also head of the European Automobile Manufacturers Association to lobby strongly in favor of government schemes that offer cash for drivers to scrap old cars for new.
“As the scrapping schemes play themselves out essentially I take the view that auto market stagnation will be the order of the day,” said Howard Wheeldon, a senior strategist at BGC Partners. “For Renault and Peugeot I would forecast continuing unhappy times.” Goshn himself said on Friday that an end to such scrap schemes could be difficult for the industry. He said he was in favour of a gradual transition rather than a sudden end to such schemes would help prevent a brutal shock for markets.
Renault was granted a 3 billion euro ($4.2 billion) loan earlier this year along with rival PSA Peugeot Citroen which received the same amount. Ghosn said the company will start paying the money back when it was reasonable to do so, but that it was “in no particular hurry”. Shares of Renault fell 2.07% to 22.27 euros in Paris , becoming one of the most important declines on the CAC.
Crisis is unique opportunity for Europe, commissioner says
There are digital locks on the doors in the corridor where Neelie Kroes has her office. There is sensitive information here, about cartels suspected of price-fixing for instance. This week energy companies E.on and GDF Suez were fined 1.1 billion euros each. Microsoft, Heineken and Intel have suffered the same fate. On days like those, Kroes likes to greet visitors with the words: "I made some money for Europe today. You do realise this money will be refunded to the member states?"
For years, state aid had been a relic from the interventionist 1970s. Now, because of the crisis, more and more governments want to keep national companies afloat. While doing so, they're trying to bend the very rules they imposed themselves. Brussels has to weigh each request. Any disguised protectionism could lead to a new economic race between member states.
Kroes tries to be flexible, but when necessary she will go for a firm no. The German Commerzbank was forced to sell a large part of its activities. The Royal Bank of Scotland has to reorganise. Last year Kroes issued guidelines for governments to bail out the banks. Now she is drafting new guidelines for governments to get out of banking again in maximum five years.
These are crucial times for the European Union. When prime ministers and ministers fail to get past Kroes they tend to call her boss, Commission president José Manuel Barroso. That often leads to high drama. Kroes, however, can only talk about it in general terms. The European parliament is dragging its feet on giving Barroso a second term, and Kroes would like to stay in this job for another five years too. Better to be discreet.
Are we leaving the crisis behind us yet?
"We're not quite there yet. It's hard to say when we will be. The economy is all about emotions. There is no confidence yet in the banking and other sectors. People are cautious about investing. Credit is hard to get. People are not taking chances. They're on the fence. It's a vicious circle. If we're going to see a recovery, we first need a healthy banking sector. We're not there yet. The banks are often more concerned with themselves than with solving the real problem. They're just not that interested in the bigger picture."
Last week, while addressing bankers in London, you said that governments need to get out of banking because governments are not banks. The next day some newspapers wrote: Brussels Strangles The City.
"Facts and figures tell us that there is no money for a second round of bail-outs and that some banks are barely viable. You have to restructure them instead of putting them on life support."
So the crisis is not over?
"We're going to get more problems in many sectors. We've had the car industry and the German department stores. It's not over. But I'm optimistic by nature. What we need to do is to change our mindset."
"Everybody. From the boardroom to the kitchen table. Unlike the US, Europe has a social safety net. That's a good thing. But it has meant that people are slower to realise what has happened. Look at Germany. They have an election coming up in September and they’re asking themselves: how many jobs can we afford to lose now?"
That puts you in a tough spot.
"It sure does. It was easy to explain why so much money needed to go to the banks: they are the lifeline of the economy. Even demonstrating Polish shipyard workers understood that. They angrily asked: if you're going to allow capital injections for banks why not allow them for our shipyards too? But now that if the car industry is getting state support aid too..."
That's impossible to explain?
"Those shipyards need to be made commercially viable. Just like the car factories. If we're just going to write cheques to keep overcapacity in place, we will miss the opportunity to make that industry healthy again, to give it a future. In that case the problem will get worse. It's different in the US where tough realism prevails, with big consequences."
Is that better?
In an interview with NRC Handelsblad on May 30, WTO boss Pascal Lamy warned against protectionism. The same week the Germans bailed out Opel.
"The Opel dossier has not passed for every country yet. Governments can't keep factories open just for the sake of it. There has to be a sound business plan as a basis. That's what I told Paris earlier, too."
You mean when president Sarkozy promised to help Peugeot and Renault on the condition that there would be no lay-offs in France?
"It's easy to fight protectionism in the general sense. Then everybody agrees with you: 'Of course we don't want to be protectionist. That's a bad thing.' But then the first case comes along, and suddenly it becomes very difficult."
Do you see a parallel with the 1930s: protectionism, polical populism?
"If we're not careful, yes. That's why we need to be right on the ball. We need to explain to people that things would have been much worse if it wasn't for the euro and the internal market."
Will there be more Europe or less Europe when the crisis is over?
"There is, I think, no way back. The crisis is a unique opportunity to make progress. The question is are we going to seize that opportunity? There is a changing of the guard at the commission. There is uncertainty about the Lisbon Treaty, meaning the future relationship between governments, the European parliament and the Commission. That slows things down."
What do you like about your job?
"To be part of this crucial phase in the history of Europe."
What don't you like about it?
"Having to compromise."
Compromise on state aid?
"No, not as far as my decisions are concerned. I mean as a member of the commission."
Didn't you water down the state aid rules?
"No! The principles are still standing strong. I've had to be more flexible about implementing them temporarily. The weather is bad out there, so you have to make the framework more flexible or everything goes down the drain."
What's going to happen next with the banks?
"This will be the moment of truth. Things don't always move as fast as I would wish them to. Some banks will have to be restructured. We don't want to have another crisis on our hands in a few years’ time. My nightmare scenario is my granddaughter asking me one day: 'Did you really do all you could?' and that I would have to answer: 'Just a little bit.'"
You've had some fierce clashes with The Hague.
"It's part of the job. No one gets preferential treatment. Ever. [Dutch finance minister] Wouter Bos has some tough issues to deal with but they will not be resolved by waiting."
Do you want to stay on as commissioner?
"That's up to the Dutch government to decide."
But do you want to?
"Only if it is this portfolio, not another one."
Your new director-general is from the Netherlands. Is it possible to have two Dutch people in charge of the competition directorate-general?
"Can you show me where there is a rule that says this is not possible? I can't find where it says that the director-general and the commissioner have to be from two different countries."
Perhaps it's an unwritten rule.
"Barroso wants to return to the same position. So why not me?
This $17 Trillion Divorce Won’t Be a Pretty One
Returning from China last month, U.S. Congressman Mark Kirk had a bearish take on a high-level visit by American officials. Treasury Secretary Timothy Geithner claimed the U.S.’s biggest creditor voiced great confidence in its debt. Kirk, an Illinois Republican, came back with the opposite impression. “China is beginning to cancel Congress’s credit card,” he told Fox News on June 10. It “doesn’t want to lend much more money to the United States and especially is worried about the Fed’s policy of printing money to buy new debt.”
A month later, there’s no doubt about whose assessment was more accurate. Chinese leaders are clearly very concerned about the dollar. How they will react is a key question hanging over markets, and it’s time to take the discussion to the next level. Everyone knows China wants to reduce its dollar holdings. Little is known about how that process may unfold and how much work and preparation needs to go into it. Lots, in fact.
Think of China and the U.S. in history’s most expensive divorce. The two economies total $17 trillion of output, and polls in China show little support for adding to almost $800 billion of U.S. Treasuries. This argument can be broadened to the rest of Asia. The idea that China or Japan -- with $686 billion of Treasuries -- can just start selling massive blocks of dollars is ridiculous. It would devastate markets the world over and the fallout would boomerang back on Asia. If you think markets are shaky now, just wait until word of a central-bank fire sale gets around.
Sure, Singapore (with $40 billion of Treasuries), India ($39 billion) or South Korea ($35 billion) could try to dump dollars on the stealth. Good luck in this highly connected, around-the-clock world. News that a key economy seeks a first- mover advantage over peers would inspire copycat selling. Expect investors and traders to respond with massive sell orders. Warren Buffett can discreetly trim Berkshire Hathaway Inc.’s interest in a company or a currency. How a central bank divests itself of tens or hundreds of billions of dollars on the sly is another matter.
Governments that may be concerned about getting stuck with their dollars for good have a point. And by curtailing investments in dollars today, Asia is ensuring that the U.S. currency will be worth less a year from now. Bernard Madoff can tell you a thing or two about how this process works. What may be necessary is a global framework or pact to end the dollar’s dominance. A “Plaza Accord” of sorts may be needed to dismantle the so-called Bretton Woods II system of tying currencies to the dollar that emerged after the global crises of 1997 and 1998. A Dollar Accord, anyone?
Just as stocks take a hit when additional shares are issued, Asia faces a debt-dilution dynamic for which it never bargained. The Federal Reserve’s zero-interest-rate policies don’t help. And Asia can’t do a lot on its own here. This process will require considerable cooperation, be it through the International Monetary Fund, the Group of 20, the Asia-Pacific Economic Cooperation forum, the Association of Southeast Asian Nations or a yet-to-be-created entity. Goals must be set, mechanics discussed and timing negotiated. If ever there were a time for a currency summit, it’s now.
Politics will be a stumbling block. It’s hard to envision the U.S. signing on to scrap the dollar as the reserve currency. Neither the euro nor the yen is ready to replace it. And China’s designs on currency domination are a decade away -- or longer. The amount of scrutiny the dollar’s successor would face makes you wonder who would want to print the reserve currency. That explains why the most credible argument making the rounds involves the IMF’s so-called Special Drawing Rights, or SDRs.
They are really an account of exchange, rather than legal tender, and are calculated according to a basket of currencies consisting of the dollar, euro, yen and pound. Chinese central bank Governor Zhou Xiaochuan wants the IMF to move toward creating a “super-sovereign reserve currency.” Or, here’s another suggestion: Brady bonds for less- troubled economies. The idea behind bonds created in the 1980s as part of Latin America’s debt restructuring was to let investors swap their claims on nations in turmoil for tradable instruments. A similar process may work with the dollar.
Rumors of the dollar’s demise are no longer exaggerated. What is being exaggerated, though, is how easy it will be for Asia to get out of the quandary it’s in. Cutting off the U.S. government’s credit card, for example, means American consumers can’t buy your goods. And any sudden divorce between the world’s two main economic powers won’t be pretty. Far from it. It’s time to figure out what the next step is, and policy makers need to get serious. Complaining about our dollar-based system won’t get us there. Some brainstorming about where to go from here would be far more constructive.
China Fails to Attract Enough Buyers in Bill Sales
China failed to attract enough bidders in a government debt sale for a second time this week on speculation record bank lending will spark inflation in the world’s third-largest economy. The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.
The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market. “The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”
The Ministry sold 12.48 billion yuan of 91-day bills at 1.15 percent, compared with 0.84 percent at the last such auction on June 19. It issued 12.65 billion yuan of 273-day bills at 1.25 percent, up from 0.88 percent at a previous sale on June 5. The People’s Bank of China yesterday resumed one-year bill sales after an eight-month pause, signaling a shift from an “extremely loose” policy, Goldman Sachs Group Inc. said.
Chinese banks extended 1.53 trillion yuan of new loans in June, more than double the amount in May, the central bank said on July 8. Housing sales surged 45.3 percent in the first five months of this year, the National Development and Reform Commission said today.
The Shanghai Composite Index has jumped more than 80 percent from last year’s Nov. 4 low. Guilin Sanjin Pharmaceutical Co. and Zhejiang Wanma Cable Co., the first two companies allowed to go public in China since September, were suspended in Shenzhen trading after surging on their stock market debut today. “More initial public offerings will come, which will further tighten liquidity,” said Shi Lei, an analyst in Beijing at Bank of China Ltd., the nation’s third-largest lender. “Investors are quite bearish on short-term bonds.”
The yield on the 2.29 percent treasury note due April 2014 surged five basis points to 2.53 percent, and the price of the security dropped 0.20 per 100 yuan face amount to 98.95, according to the Interbank Bond Market. A basis point is 0.01 percentage point. “We doubt their aim was to cause distress in the government’s deficit financing effort,” Christian Carrillo, a bond strategist at Deutsche Bank AG in Singapore wrote in a research report today. “It appears the signaling aim of the PBOC has gone wrong especially given our understanding is that top level governors are very uncertain about the economic recovery.”
China’s bond market swelled in size by 16 percent in the year-ended March 31, paced by corporate bond sales, according to the Asian Development Bank. Demand has been waning in recent weeks. Before this week’s failed one-year auction, a sale of five-year government securities on July 3 drew bids for 1.42 times the debt on offer, compared with a 1.65 bid-to-cover ratio in a sale of 10-year notes on June 17. Investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst recession in six decades, the International Monetary Fund said on July 8. The IMF forecasts China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009.
Policy makers will probably refrain from raising interest rates as the government aims for 8 percent economic growth this year to create jobs and maintain social stability, according to a Bloomberg survey of economists. China’s consumer prices dropped 1.4 percent in May from a year earlier, after falling 1.5 percent in April, according to the statistics bureau. The benchmark one-year lending rate will stay at 5.31 percent and the deposit rate at 2.25 percent this year, according to the median estimate of 15 economists surveyed by Bloomberg News.
China’s exports fell for an eighth month, dropping 21.4 percent in June from a year earlier, the state-run Xinhua News Agency reported today, citing customs data. “Despite the lack of success in selling the intended amount of bills, it is unlikely that the government would switch its tactics to hiking interest rates,” said Sherman Chan, an economist with Moody’s Economy.com in Sydney. “They are trying to mop up excess liquidity without raising rates.”
Ilargi: Not a finance topic, but I'm sure a must read for many of you.
China’s Ethnic Fault Lines
The myth of a monolithic China was shattered this past week. Running barely beneath the surface of what the government has sought to portray as a “harmonious” society, the fracture created by the Urumqi and Lhasa riots threatens to shake the country.
Foreigners and the Chinese themselves typically picture China’s population as a vast Han majority with a sprinkling of exotic minorities living along the country’s borders. This understates China’s tremendous cultural, geographic, and linguistic diversity—in particular the important cultural differences within the Han population. Across the country, China is experiencing a resurgence of local ethnicity and culture, most notably among southerners such as the Cantonese and Hakka, who are now classified as Han.
Cultural and linguistic cleavages could worsen in a China weakened by internal strife, an economic downturn, uneven growth, or a struggle over future political succession. The initial brawl between workers in a Guangdong toy factory, which left at least two Uighur dead on June 25, prompted the mass unrest in Xinjiang on July 5 that ended with 156 dead, thousands injured and 1,500 arrested, with ongoing violence spreading throughout the region.
China is also concerned about the “Kosovo effect,” accusing its Muslim and other ethnic minorities of seeking outside international (read Western) support for separatist goals. But ethnic problems in President Hu Jintao’s China go far deeper than the “official” minorities. Sichuanese, Cantonese, Shanghainese, and Hunanese are avidly advocating increased cultural nationalism and resistance to Beijing central control. Ethnic strife did not dismantle the former Soviet Union, but it did come apart along boundaries defined in large part by ethnic and national difference.
The unprecedented early departure of President Hu from the G-8 meetings in Italy to attend to the ethnic problems in Xinjiang is an indication of the seriousness with which China regards this issue. The National Day celebrations scheduled for October 2009 seek to highlight 60 years of the “harmonious” leadership of the Communist Party in China, and like the 2008 Olympics, its enormous success. The rioting threatens to derail these celebrations.
Officially, China is made up of 56 nationalities: one majority nationality, the Han, and 55 minority groups. The 2000 census revealed a total official minority population of nearly 104 million, or approximately 9% of the total population. The peoples identified as Han comprise 91% of the population, from Beijing in the north to Canton in the south, and include the Hakka, Fujianese, Cantonese and others. These Han are thought to be united by a common history, culture and written language; differences in language, dress, diet and customs are regarded as minor. An active, state-sponsored program assists the official minority cultures and promotes their economic development (with mixed results).
Sun Yat-Sen, leader of the republican movement that toppled the last imperial dynasty of China (the Qing) in 1911, promoted the idea that there were “Five Peoples of China”—the majority Han being one and the others being the Manchus, Mongolian, Tibetan and Hui (a term that included all Muslims in China, now divided into Uighurs, Kazakhs, Hui etc.). Sun was a Cantonese, educated in Hawaii, who wanted both to unite the Han and to mobilize them and all other non-Manchu groups in China (including Mongols, Tibetans and Muslims) into a modern, multi-ethnic nationalist movement against the Manchu Qing state and foreign imperialists. This expanded policy with the recognition of a total 55 official minority nationalities, also helped the Communists’ long-term goal of forging a united Chinese nation.
Cultural diversity within the Han has not been officially recognized because of a deep (and well-founded) fear of the country breaking up into feuding kingdoms, as happened in the 1910s and 1920s. China has historically been divided along north-south lines, into Five Kingdoms, Warring States or local satrapies, as often as it has been united. Indeed, China as it currently exists, including large pieces of territory occupied by Mongols, Turkic peoples, Tibetans, etc., is three times as large as it was under the last Chinese dynasty, the Ming, which fell in 1644. A strong, centralizing government (whether of foreign or internal origin) has often tried to impose ritualistic, linguistic, economic and political uniformity throughout its borders.
The supposedly homogenous Han speak eight mutually unintelligible languages (Mandarin, Wu, Yue, Xiang, Hakka, Gan, Southern Min and Northern Min). Even these subgroups show marked linguistic and cultural diversity. In the Yue language family, for example, Cantonese speakers are barely intelligible to Taishan speakers, and the Southern Min dialects of Quanzhou, Changzhou and Xiamen are equally difficult to communicate across. The Chinese linguist Y. R. Chao has shown that the mutual unintelligibility of, say, Cantonese and Mandarin is as great as that of Dutch and English or French and Italian.
Mandarin was imposed as the national language early in the 20th century and has become the lingua franca, but, like Swahili in Africa, it must often be learned in school and is rarely used in everyday life across much of China. The country’s policy toward minorities involves official recognition, limited autonomy and unofficial efforts at control. Although totaling only 9% of the population, they are concentrated in resource-rich areas spanning nearly 60% of the country’s landmass and exceed 90% of the population in counties and villages along many border areas of Xinjiang, Tibet, Inner Mongolia and Yunnan. Xinjiang occupies one-sixth of China’s landmass, with Tibet the second-largest province.
Surprisingly, it has now become popular, especially in Beijing, for people to “come out” as Manchus or other ethnic groups. While the Han population grew 10% from 1982 to 1990, the minority population grew 35% overall—from 67 million to 91 million. The Manchus, long thought to have been assimilated into the Han majority, added three autonomous districts and increased their population by 128% from 4.3 million to 9.8 million. The population of the Gelao people in Guizhou shot up an incredible 714% in just eight years. These rates reflect more than a high birthrate; they indicate “category-shifting,” as people redefine their nationality from Han to minority or from one minority to another. In inter-ethnic marriages, parents can decide the nationality of their children, and the children themselves can choose their nationality at age 18.
Why is it still popular to be “officially” ethnic in today’s China? This is an interesting question given the riots in Xinjiang recently and in Tibet last year, not to mention the generally negative reporting in the Western press about minority discrimination in China. By the mid-1980s, it had become clear that those groups identified as official minorities were beginning to receive real benefits from the implementation of several affirmative action programs. The most significant privileges included permission to have more children (except in urban areas, minorities are generally not bound by the one-child policy), pay fewer taxes, obtain better (albeit Mandarin Chinese) education for their children, have greater access to public office, speak and learn their native languages, worship and practice their religion (often including practices such as shamanism that are still banned among the Han) and express their cultural differences through the arts and popular culture.
Indeed, one might even say it has become popular to be ‘ethnic’ in today’s China. Mongolian hot pot, Muslim noodle and Korean barbecue restaurants proliferate in every city, while minority clothing, artistic motifs and cultural styles adorn Chinese private homes. In Beijing, one of the most popular restaurants is the Tibetan chain Makye-ame. There, the nouveau riche of Beijing eat exotic foods such as yak kabobs served by beautiful waitresses in Tibetan clothing during Tibetan music and dance performances. With the dramatic economic explosion in South China, southerners and others have begun to assert cultural and political differences.
Whereas comedians used to make fun of southern ways and accents, southerners (especially Shanghainese) now scorn northerners for their lack of sophistication and business acumen. As any Mandarin-speaking Beijing resident will tell you, bargaining for vegetables or cellular telephones in Guangzhou or Shanghai markets is becoming more difficult for them due to growing pride in the local languages: Non-native speakers always pay a higher price. Rising self-awareness among the Cantonese is paralleled by the reassertion of identity among the Hakka, the southern Fujianese Min, the Swatow and other peoples now empowered by economic success and embittered by age-old restraints from the north.
Interestingly, most of these southern groups traditionally regarded themselves not as Han but as Tang, descendants of the great Tang dynasty (618-907 A.D.) and its southern bases. Most Chinatowns in North America, Europe and Southeast Asia are inhabited by descendants of Chinese immigrants from the mainly Tang areas of southern China. The next decade may see the resurgence of Tang nationalism in southern China in opposition to northern Han nationalism, especially as economic wealth in the south eclipses that of the north.
Some have postulated that the heavy coverage by the state-sponsored media of the riots in Xinjiang, as opposed to the news blackout in Tibet, was a deliberate effort to stimulate Han Chinese nationalism and antiminority ethnic sentiment, in an effort to bring the majority population together during a period of economic and social instability. China’s very economic vitality has the potential to fuel ethnic and linguistic division, rather than further integrating the country. As southern and coastal areas get richer, much of central, northern and northwestern China hasn’t kept up, increasing competition and contributing to age-old resentments across ethnic, linguistic and cultural lines. Uneven distribution of wealth has fueled deep resentment in the poorer, often ethnic regions of China.
The result of all these changes is that China is becoming increasingly de-centered. This is a fearsome prospect for those holding the reins in Beijing and perhaps was a factor in the decisions to crack down on the June 1989 demonstrations in Tiananmen Square, keep a tight rein on the Olympics and respond swiftly and harshly to riots in Tibet and Xinjiang. Last year the government admitted to more than 100,000 “mass incidents” of civil unrest.
A China weakened by internal strife, inflation, uneven economic growth or the struggle for political succession could become further divided along cultural and linguistic lines. China’s threats will most likely come from civil unrest, and perhaps internal ethnic unrest from within the so-called Han majority. We should recall that it was a southerner, born and educated abroad, who led the revolution that ended China’s last dynasty. When that empire fell, competing warlords—often supported by foreign powers—fought for turf.