Spotsylvania Court House, Virginia. Dead Confederate soldier near Mrs. Alsop's house. Grant's Wilderness Campaign, May-June 1864
Ilargi: I’ll try to take a slightly different approach today, while remembering the dead, and let someone else do the talking for a change.
Yesterday, I picked up the article below, written by an investment adviser named J. S. Kim, who puts his finger right where it hurts most. In my view, everybody needs to read it who can. Though I’ve never actually met Kim, and, since he charges about $3000 per hour for a private consultation, likely never will, I must say he has a remarkably sharp eye, and a pen that makes his analysis as good as probably anything I've seen recently.
Kim's words appeal to me especially because at this point in time I feel it's increasingly important to provide an appropriately sized counter-weight against the hollowed-out echo chamber of ultimately irrelevant here-and-gone exuberance that spreads around the world. It's as false as it is dangerous. People, on an individual, community and societal basis, will make decisions based on the illusion that growth is back and the recession but an unpleasant memory. Resources that might still have been used to build some kind of shelter from the storm are instead incessantly being wasted not on building solid foundations but on decorative gargoylic elements for the rooftop, never mind that the supporting walls have crumbled beyond any call at recognition or redemption. Are you realy hungry enough for good tidings to set your own house on fire?
What this will lead to, and indeed already has, is levels of poverty, both in scope and in depth, which we haven't seen in a long, long time. And which, unless we act to halt their advance, will blow our communities and societies to smithereens from the inside.
When I say that you can judge the quality of a society by the way it takes care of its weakest, many if not most Americans will immediately think of the word "socialism", even as they don't know what it means. But it's not about partisan political choices, about freedom, or the pursuit of happiness, or about big government. It's very simply about minimum requirements for a functional society, period. You can't have tens of millions of people being unemployed and/or living below the poverty line for extended lengths of time without resorting to oppressive measures of physical force aimed at keeping down those who have landed in your gutters. And if you would choose that option, one that many Americans would, knowingly or not, support, then freedom takes on the meaning of "the freedom to repress others", or even "the freedom to repress whoever you can", and down the line, as the single logical outcome, Orwell's "some animals are more equal than others".
While elements of this notion may seem to have much appeal to many of those who remain standing for now, don't be fooled. Unless you want to see soldiers and tanks overflowing your neighborhoods, not providing for your weakest is not an option. And no, you won't feel just as happy about your life, and that of your families, if and when on your way to work you’re forced to pass by children starving by the side of the road while clasping a shotgun in your lap. A functioning society, whatever political label you might prefer to stick on it, is possible only when its members manage to suppress the temptation to take so much for themselves that too little to survive is left for their neighbors.
And them there's your picks: either choose temporarily increased riches at the cost of blowing up your communities, or voluntarily give up on some of it in order to preserve them. Sure, we haven’t had to deal with issues such as these for decades now, and for most of us not in our lifetimes. That was because we were growing, or at least were able to fool ourselves into thinking we were. Present market developments have many among us believing we still are growing.
The human mind in all its segments and facets, developed over millions of years, is the ultimate and perfect sucker for such ideas. That doesn't make them any more true, though. You simply can't grow your economy by borrowing money from yourself. Still, that is, in the final analysis, the only underlying cause for the rally we're about to see run out the door never to return.
We are here, 25 years after 1984 has passed, and 61 years after George Orwell wrote his book by that name. If he could see us now, do you think he would he feel vindicated for being so right, or instead desperate that we have walked into the trap with our eyes wide open despite his warnings?
While you ponder that last question, and, if still possible, before my idea of letting "someone else do the talking for a change" turns even more silly, here's J.S Kim:
The Coming Consequences of Banking Fraud
by J.S. Kim
The Double Dip Recession, or the “W” shaped recovery that a minority of economists, such as Joseph Stiglitz, is now stating as a strong possible outcome of this current rally, should not be discussed in the realm of economics but rather in the more apropos realm of financial fraud. The fact that the upleg of the “W” shaped recovery that is occurring now will inevitably crumble in spectacular fashion will not be a result of any free market principle, but rather the direct consequence of a fraudulent scheme executed by an elite global financial oligarchy, otherwise known as Central Banks. If the mission of this current manufactured leg-up in Western stock markets was to fool the world into believing that global economies are recovering, then clearly, up until this point, the mission has been a resounding success. For those unfamiliar with the term “blowback”, it's a CIA term that was first used in March 1954 to describe the unintended consequences of US government international activities kept secret from the American people.
Though this term has primarily been used to describe the consequences of covert military operations, “blowback” is an appropriate term to use to describe the coming consequences of banking fraud because the US government, US Federal Reserve, Wall Street, the US Treasury, and the Exchange Stabilization Fund have all engaged in domestic and international financial and monetary transactions that have been kept secret from the world, and that will have severe and negative consequences in the not so distant future. In fact, I predict that the blowback of these activities will not only exceed, but far exceed, the fallout the world experienced in 2008 at the prior apex of this current crisis. Most people today can not even fathom how bad the situation will become primarily because of all the secrecy that the banksters have engaged in – in US Treasury markets, the gold markets, the US dollar markets, agriculture commodities, stock markets, and financial markets – in hiding reality from the people.
In an article I wrote three months ago, on June 10, 2009, titled, “Can Rising Stock Markets Serve as a Confirmation of a Crashing Economy?”, I stated, “Whether I am right or wrong about US markets tanking by summer’s end/fall’s beginning, if [we] position [our] investment assets based upon an understanding of the fraudulent monetary system, [we] can still continue to create wealth.” While true, I was a bit early in raising the proposition of a stock market correction the month before; I amended my prediction in June upon realizing the breadth of the manipulation schemes occurring in Western stock markets. In today’s markets, only a complete investment novice would try to predict market behavior without accounting for the massive government intervention schemes and forays into stock markets as well as the computerized manipulation of daily trading volume. One of the main reasons, but not the only one, that I amended my target for the end of this rally this past June to the fall season is the fact that fall normally marks the return of much higher daily trading volume from the traditional summer lulls.
Thus, it is a much more difficult proposition for Central Banks and computerized trading programs to manipulate a continued rise in stock markets in the face of higher daily trading volumes.
However, should daily trading volume remain surprisingly low or muted this fall, as is also a possibility, I have no doubt that this market rise can persist for an extended period longer before these false gains are eventually flushed away (but, of course, not before all US financial executives have had ample time to exit their positions quietly). In fact, the development of this false rally was the main topic of my article. The other scenario, one that includes a significant rise in daily trading volumes that trigger the start of a second massive decline in Western stock markets, would not surprise me either. It’s just a matter of observing the signs that forecast the waning efficacy of the fraudulent stimulus of Western markets (or for this matter, the fraudulent stimulus of Chinese stock markets too).
Remember that it is only the timing of this decline that I am uncertain of, but I am very certain that a significant decline of a shocking nature is coming. The last time I issued an adamant warning of a similar nature was on April 23, 2008, when again, the only issue about a market crash was timing, though the US S&P 500 index peaked just 18 business days after I wrote that article and proceeded to fall by more than 50%.
To truly gain more clarity regarding this recent Western stock market rally, consider a hypothetical scenario in which a person was kept ignorant of any action in the US stock markets for the entire previous six months. Instead, imagine that he or she was given the task of predicting US market behavior over the past six month period solely based upon cold, hard US financial and economic data stripped bare of any of the media-slanted headlines that perpetually spin bad economic data as positive or “less bad” than it truly is. Based upon the economic data produced from the last six months, what do you think this person would conclude? That stock markets have soared during this time or that they had crashed?
Of course, factor in the plethora of evidence about numerous PPT interventions to “save” markets during this time, and the strong US stock market rally no longer seems so illogical. But strip away any evidence of free-market manipulation and interference and in the face of true, undistorted economic data, our current market rally would be enormously puzzling. And this point alone should be sufficient to tell you how this rally will end. The inevitable conclusion of this rally isn’t just about the unsustainability of the massive bailout programs implemented by global Central Banks that have engineered this current market rally out of thin air, but its manifestation should trigger an investigation into the outright fraud committed by Wall Street, banking institutions, and Central Banks that has been aided and abetted by financial journalists.
For example, consider the following stories:
Demographers recently reported that Florida, the state known as the “mecca” for wealthy retirees in America, suffered its first population decline last year in more than 60 years, an event that delineates the collapse in wealth of American retirees and an event that is likely to repeat this year.
At the end of this past July, one of the largest ports in America, Long Beach, reported that the 20% year-over-year cargo business decline is among the sharpest since the Great Depression. This is not a trend specific to Long Beach. “It’s phenomenal how much things fell away even since December,” said Paul Bingham, managing director of global trade and transportation for IHS Global Insight, the business research firm that monitors North America’s biggest ports for the National Retail Federation.
As of September 4, 2009, shadowstats.com reported that unemployment in the US is now near 21% and is showing no signs of improving any time soon (when factoring in discouraged workers, part-time workers that can’t find full-time work, unemployed workers that have fallen off the unemployment roll, etc.). In fact, yesterday, Manpower’s Employment Outlook Survey reported that US employers’ hiring plans for the upcoming fourth quarter dropped to the lowest level in the history of its survey which dates back to 1962.
On August 15th, when BB&T (BBT) purchased failed US bank Colonial Bank, it wrote down Colonial Bank’s loans and real estate collateral by 37% and Colonial Bank’s construction loans by 67%. Yes, 67%! The severe markdowns of Colonial Bank’s assets should have set off warnings akin to a five-alarm fire among the financial media, but it did not, for the media increasingly caters to the interests of the elite bankers of this world at the cost of truth and freedom. If there are several things we can deduce from Colonial Bank’s failure, it is the following.
Though the Federal Deposit Insurance Corporation (FDIC) refuses to disclose the names of the banks on its “watch list”, it can be safe to assume that a bank just does not go bankrupt overnight and that the process of going bankrupt can be predicted many months in advance by personnel with access to a bank's financial statements and knowledge of its true financial condition. In fact, various newspaper articles reported that Colonial Bank was in negotiations with the FDIC as early as March, 2009, yet not one time, did the FDIC force Colonial Bank to come clean regarding its true financial health before it finally shuttered the bank five months later.
The fact that the FDIC is spotting massive trouble in the American banking system and covering it up should be massively worrisome to Americans. Because revelations regarding the truth about a US bank’s health only seem to occur after it fails, the favored handling of American banks with kid gloves by the FDIC should immediately beg the question, “How many more US banks are legitimately bankrupt today and just operating on fumes?”
Personally, I would not be surprised if sometime within the next six months, a considerably larger US bank failure causes a massive ripple effect of much greater consequence. Banks that are currently struggling with unreported and covered-up deepening problems of loan delinquencies such as Wells Fargo (WFC), may be among the large banks that are candidates for future bankruptcy despite the public categorization of such institutions in the “too-big-to-fail” category. Unfortunately, Wells Fargo, from a political standpoint, does not have the “most favored bank” status of a Citigroup (C) or JP Morgan (JPM), two institutions deserving of bankruptcy but clearly favored by the US Federal Reserve and the US government.
When one considers the fact that all government or state produced economic statistics have been massively distorted towards the side of optimism and away from reality throughout this global financial crisis, one should be even more worried when the occasional sparse negative statistic is reported, for it is likely that these statistics too are misrepresenting the truth.
Thus, in the face of all negative news that points to zero foundation and zero economic structural improvements, how has a multi-month stock market rally been able to spread across Asia, Europe and the US? Again, the answer is fraud, and thus should be analyzed through the prism of fraud and not the false prism of “economics”. There is no “economics” behind this latest global stock market rally, only fraud.
For many weeks in August, just four stocks accounted for as much as 40% of composite volume on the NYSE: Citigroup, Bank of America (BAC), Freddie Mac (FRE) and Fannie Mae (FNM). In early 2007, Citigroup, Fannie Mae and Freddie Mac accounted for roughly 1% -3% of NYSE volume, a far cry from its recent 35%+ collective weight of the composite NYSE volume. Remember that this huge volume anomaly persisted not just for one day but for weeks on end during August. If Citigroup, Bank of America, Fannie Mae and Freddie Mac were a pharmaceutical collective that just discovered a cure for cancer and AIDS, then such volume anomalies would make sense. However, such massive trading volumes, as a percent of composite volume for the entire NYSE index, makes zero sense for companies, that for all intents and purposes, are on government bailout lifelines. It makes no sense, that is, unless massive free-market intervention is occurring in an attempt to save these firms.
Again, when viewed through the “fraud prism”, such activity makes complete sense. It is obvious that the “Rise of the Machines” has created markets that are now dominated by computerized high frequency trading programs that can execute trades as quickly as 0.5 milliseconds and have as their sole purpose the creation of short-term market distortions driven by statistical arbitrage that can be used to game the system and cheat their clients. Though this link describes how this scheme works in commodity markets for those that have been following the New York Stock Exchange, the use of high frequency trading programs to game the system at the expense of the retail investor has been glaringly obvious especially in the trading behavior exhibited this past summer.
The ironic part of this huge scam that has merely just re-inflated another massive stock market bubble is that the segment of the public that is so easily angered by government bailouts, billion dollar bonus plans for Wall Street executives and the chicanery of JP Morgan and Goldman Sachs (GS) (and justifiably so), are the very same people that so passively accept the mountain of lies that passes for financial reporting today (inexplicably so). It is ironic that this same collective of people, instead of rejecting this mountain of lies, continues to listen to their financial advisers at global commercial investment firms, even though these advisers are the same group of people that miserably failed to see the crash that started in the spring of 2008, when the factors behind the pullback back then was just as clear as the factors behind the future pullback that will occur in the near future. It is ironic that this same group of people continues to support, participate and fund a system that cares only about using their clients' money to lie, cheat and steal from them when a simple withdrawal of funds from the system is the antidote to ignorance-induced paralysis that will once again create massive crisis-induced losses in the future. Pulling one’s money from one’s current firm and switching to another firm that participates in this web of lies and deceit is not a solution either.
It is ironic that it is the same group of people that so readily accepts the Western media’s correct analysis of China’s stock market as a huge bubble through the lens of Austrian economic principles that simultaneously rejects any similar notion as applicable to US or UK stock markets, and instead, readily embraces heavily flawed and unsound Keynesian economic principles when evaluating Western stock markets. It is ironic that the same group of people that foolishly equates being “American” with blind support of the US stock market (i.e. “being bearish on the US market is un-American!”) is also completely ignorant of both the massive fraud that is perpetrated in US stock markets as well as the tenets of the US Constitution that sound great objections and warnings to the ruinous and foolish monetary policies that are implemented by bankers as their “solution” to our current economic crisis. And finally, the greatest irony of all is that the anger that brews inside those that have been tragically hurt by this crisis can coexist with the failure to recognize that it matters not in America if the President has the last name Clinton, Bush or Obama – that monetary and fiscal agenda inside the US for the last 17 years has not wavered nor changed one iota during this period of time because it was not these men that have been in charge of the economy but the men that manufactured these men’s rise to power and that control the US Federal Reserve and the world’s Central Banks, and thus the global monetary policy.
If one can not see the connection between Presidents, Prime Ministers and the banking families that rule Central Banks, one merely needs to open up a newspaper and follow their lives after they leave government office. It is not just a coincidence that ex-British Prime Minister Tony Blair, after leaving office, took a part-time consulting job with JP Morgan’s Jamie Dimon that reportedly pays him $5 million per year as well as another well-paid consulting position with Zurich Financial Services. In office, Mr. Blair was a consultant to the banking oligarchs in secret; out of office, he is free to be a consultant publicly. And one can be certain that current UK Prime Minister Gordon Brown and US President Barack Obama will be offered very considerable salaries and fees by the world’s top financial oligarchs as thanks for their current and past service to them once they leave office as well (especially Gordon Brown, for selling out his countrymen and selling more than half of England’s bank reserves to ensure that the financial oligarchs could maintain the US dollar as the de-facto international currency for 10 additional more years than it deserved to hold this status).
In the end, what is the most frustrating facet of these huge con games executed by the financial oligarchs is that the group of people that this article is most intended to help is often the group of people that will take most offense to this article and most steadfastly refuse to see the truth. Instead, they will only realize the truth when the economic future unfolds to the blueprint of those of us the media labels as “gloom and doomers” because we base our predictions on reality instead of fantasy and lies. Instead of labeling us as “gloom and doomers”, if the media at large ever conducted an unbiased analysis of the predictions of the “gloom and doomers” for the past 3 years, they would discover that the “gloom and doomers” have been spectacularly accurate in the majority of their calls while the financial demagogues they continually fawn over (that only serve the interests of the bankers) have been spectacularly wrong in the vast majority of their predictions. Yet, those that serve the international banking cartel with glowing and rosy predictions of economic recovery never suffer the negative consequences of being wrong all the time as the mass media all too happily continues to provide the largest public platform and the loudest voices to these people. Perhaps, if it is accurate to label “gloom and doomers” as realists, then one should label the optimists that make their calls based upon perpetrated fraud as banking shills and cogs in the investing machine, for their societal contribution of greatest significance is an opiate cocktail for the masses that is a mixture of deceit and lies mixed with unbridled optimism.
As they often say that life imitates art, I close my article today with a speech from the film “V for Vendetta” that is frighteningly relevant if you listen to this speech with a critical ear and replace the references to the war on terror in this speech with the current war the bankster fraudsters are committing against the people. A sound money backed by precious metals, can be the people’s liberation from this war. Anything that falls short of such a solution will be just another scam in an already long line of scams, of a solution sold to the masses, that in reality, is no solution at all.
A Decade With No Income Gains
The typical American household made less money last year than the typical household made a full decade ago. To me, that’s the big news from the Census Bureau’s annual report on income, poverty and health insurance, which was released this morning. Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.
In the four decades that the Census Bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was seven years, ending in 1985.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s. So it doesn’t seem to have happened since at least the 1930s. And the streak probably won’t end in 2009, either.
Unemployment has been rising all year, which is a strong sign income will fall. What’s going on here? It’s a combination of two trends. One, economic growth in the current decade has been slower than in any decade since before World War II. Two, inequality has risen sharply, so much of the bounty from our growth has gone to a relatively small slice of the population.
U.S. Poverty Rate Rises to 11-Year High as Recession Takes Toll
The U.S. poverty rate rose to the highest level in 11 years in 2008 and household incomes declined as the first full year of the recession took its toll, government data showed. The poverty rate climbed to 13.2 percent from 12.5 percent, and the number of people classified as poor jumped by 2.6 million to 39.8 million, according to a Census Bureau report released today. The median household income fell 3.6 percent to $50,303, snapping three years of increases.
Today’s report highlights concerns that consumer spending will play a limited role in leading any recovery from the worst recession since the 1930s. Plunging home values and stock prices have fueled a record $13.9 trillion loss in household wealth in the U.S. since the middle of 2007. "The decline in incomes we’re seeing certainly has implications for consumer spending, particularly post-housing bubble when families can’t tap into home equity through loans," said Heather Boushey, a senior economist at the Center for American Progress, a research organization headed by John Podesta, a leader of the Obama administration transition team.
The poverty rate is likely to keep rising through 2012, even after the recession ends, adding to pressure on the Obama administration to enact a second economic stimulus package, said Isabel Sawhill, a senior fellow at the Brookings Institution in Washington, a policy research group. "We will likely have not only a jobless recovery but also a poverty-ridden recovery," Sawhill said. "The stimulus money is going to go away long before the poverty rate peaks."
She noted that the unemployment rate in 2008, the year covered by the census study, averaged just 5.8 percent, compared with 8.9 percent so far this year. The rate last month jumped to 9.7 percent, the highest in 26 years. Sawhill is among analysts forecasting a further drop in incomes this year, reflecting the worst job losses of any recession since World War II. Since the slump began in December 2007, the U.S. has lost 6.9 million jobs. Payroll cuts peaked at 741,000 in January and have since subsided, with 216,000 job losses in August, according to the Labor Department.
The rise in poverty is putting a strain on social services and charities. At the Atlanta Community Food Bank, demand in August was up by about 20 percent from a year earlier, said Bill Bolling, the founder and executive director. "There are a lot of people who have never needed help that need it now," he said. "It is quite a different environment." Three of four U.S. regions saw declines in real median household income in 2008 from the previous year -- the South, Midwest and West. Income in the Northeast was statistically unchanged, the census report showed.
Real per capita income for the U.S. as a whole declined by 3.1 percent last year to $26,964, the report showed. Economists surveyed by Bloomberg forecast unemployment to reach 10 percent early next year, even as they predict the worst recession in seven decades will come to an end in the second half of 2009. President Barack Obama in February signed into law a $787 billion stimulus package aimed at stabilizing the economy and creating or saving about 3.5 million jobs. So far, the bill has created or saved as many as 1.1 million jobs, the White House said today.
The number of people without health insurance coverage rose to 46.3 million last year from 45.7 million in 2007, the census report also said. The uninsured still accounted for 15.4 percent of the population, the same as in 2007, according to the Census figures. In order to cut health-care costs and make health care accessible to all Americans, Obama and Democratic lawmakers have proposed taxing private insurers, trimming spending in the federal Medicare program for the elderly and disabled and creating a more affordable public plan to expand coverage.
The poverty threshold in 2008 was defined as $22,025 in income for a family of four. The poverty rate typically rises during a recession and continues to climb even as the recovery begins, Census Bureau figures show. During the economic expansion of the 1990s, the poverty rate declined each year from 15.1 percent in 1993 to 11.3 percent in 2000. It then climbed to 11.7 percent in 2001, as the nation slid into recession, and continued its ascent to 12.7 percent in 2004.
Poverty Rate Rises; Uninsured Rate Stays Flat
Today the Census Bureau released its annual report on income, poverty and health insurance.
The data were collected in March of this year.
Highlights (and charts pulled from a Census Bureau slide show):
- The official poverty rate rose in 2008 to 13.2 percent, from 12.5 percent in 2007.
- Income at the 10th percentile fell by $500, while income at the 90th percentile ticked downward by $3,000. Comparing the change in income at the 90th and 10th percentiles over the past forty years suggests that inequality is increasing. Between 1967 and 2008, the income at the 90th percentile increased 63.1 percent, while income at the 10th percentile increased 32.4 percent.
- The percent of people who were uninsured remained essentially the same, at 15.4 percent. A smaller share of children were without health insurance, 9.9 percent — perhaps because more became eligible to receive government insurance.
Source: Census Bureau
- Nearly one in five children is living below the poverty threshold.
Source: Census Bureau
- Continuing the downward trend of the last eight years, a smaller percentage of people received private or employer-based health insurance last year compared to 2007. Subscription rates to government health insurance coverage grew. Census officials said they were unsure about the extent to which the increase in government insurance recipients was a result of more Americans qualifying for Medicaid and related programs for the poor. An alternate explanation would be that more Americans joined Medicare’s rolls.
Source: Census Bureau
- Among people ages 18 to 64, 20.3 percent were uninsured in 2008, up from 19.6 percent in 2007.
- Almost 45 percent of noncitizens were uninsured.
- The plurality of the uninsured are between the ages of 25 and 44.
Source: Census Bureau
- Of those who are uninsured, 21 percent make $75,000 or more.
Children in modern Britain living like 'times of Dickens'
Poverty levels in parts of Britain mirror "the times of Dickens", leaving schools struggling to cope with increasing numbers of children lacking the most basic personal skills, according to a teachers’ leader. Some pupils from the poorest areas arrive at school unable to dress themselves or use a knife and fork, with some even unable to use a toilet properly, she said. Lesley Ward, president of the 160,000-strong Association of Teachers and Lecturers, warned that many children were also being relied upon to raise younger brothers and sisters and lacked stable father figures in the home.
In a speech last night, Mrs Ward, a primary school teacher from Doncaster, said Labour had "tried hard on this issue" but had failed to fill the vacuum left by the death of the mining and manufacturing industries in many working-class communities. She said it meant a "small, significant and growing minority" of children were being raised in families with low expectations and a level of poverty "mirroring the times of Dickens". It was "next to impossible", she added, for schools to counter the effect of serious deprivation, family breakdown and a lack of parenting skills in many communities.
Her comments follow the publication of figures showing nearly three million children still live below the poverty line in Britain. Ministers have admitted there is little chance of hitting their target to half child poverty by 2011. It also comes amid fears that children’s education chances are still too strongly linked to family background. Private schools extended their lead over the state sector in GCSE and A-levels this summer. And figures published this week by the Organisation for Economic Cooperation and Development showed the UK had more teenagers out of work and without a college place than almost any other developed nation.
In her speech, Mrs Ward said: "I am talking about perfectly healthy children who enter school not yet toilet-trained. "Children who cannot dress themselves, children who only know how to eat with a spoon and fingers, and have never sat around a table to enjoy a home-cooked family meal. Children who think that the word ‘no’ means if you throw a wobbly it will miraculously turn into yes. "Children who get themselves, and sometimes their younger siblings, up in the morning. Children who bring themselves to school at very young ages. Children who sometimes don’t know who will be at home when they get home – if anyone. Children who don’t know exactly who the father figure is in the home from month to month."
She added: "I know of a pupil who actually saw, from the classroom window during a lesson, his house door being kicked in and his dad being led out of the door in handcuffs – this was during Sats week. He did not achieve the level he should have. Are we surprised?" Doncaster has already been at the centre of a series of child protection controversies. The local council was criticised in a damning report recently following the deaths of five children known to the authority. And last week police and social services came under fire for failing to stop two brothers in the nearby former pit village of Edlington terrorising the local community, culminating in a savage attack on two boys.
Mrs Ward, who has just been appointed president of the ATL, the third biggest teaching union, said low expectations had been created among parents following the decline of heavy industry. Typically male-dominated jobs have been replaced in many areas by part-time, low-paid service jobs filled by women, she said. Speaking in central London on Wednesday, she said: "Teachers all over the country are working in areas like this. Areas where often more than half the children receive free school meals, where one in ten of the school population is on the at risk register, where 10 per cent, or more, of the children in each class have some form of special need.
"These children come from some of our poorest communities, starting school with the huge weight of deprivation on their shoulders, and it can be next to impossible to counteract the effects of such deprivation. I would like to stress I am not talking about the whole of our school population, but a small, significant and growing minority." The comments come as a survey published today found more than a third of parents believed Labour had failed to live up to its election pledges on education.
Almost nine in 10 said all political parties hyped up their promises to secure votes, according to the study by the charity Edge, although most parents did not believe the Conservatives would fulfil their pledges to make schooling a priority. A spokesman for the Department for Children, Schools and Families said: "There has been an enormous programme of social reform over the past 10 years that has lifted 500,000 children out of poverty and in June the Government enshrined in legislation it's commitment to eradicate child poverty by 2020. "Most three and four year-olds now access free childcare, thanks to £3 billion of annual funding by Government, which helps many parents get back to work.
We have also committed to spending around £2 billion more by 2010 on public services aimed at breaking cycles of deprivation - key to meeting our 2020 target. These focus on childcare, raising attainment, improving schools, reducing health inequalities and improving school transport." Nick Gibb, the Tory shadow schools minister, said: "It’s impossible for teachers to get on with the job of teaching if children in the class have not mastered some of the basic life skills. "There are pockets of the country that have been written off over the past few years with a culture of low expectations, low levels of educational achievement and high numbers of people not working. We’re determined to address these problems and not leave any sections of society behind, so that all children have the opportunity to succeed."
The Myth of a Jobless Recovery
Like all good parrots, the talking-heads in the North American media can be counted upon to regurgitate buzz-words over and over again – even when they don't have the faintest idea what those words mean. The latest example of mindless droning from these pseudo-reporters is that the U.S. economy is headed for a "job-less recovery". As with all oxymorons, no intelligent person would/should be foolish enough to add these buzz-words to his/her lexicon. By definition, an "economic recovery" means a net increase in economic activity, which also dictates positive wealth-generation. When an economy is producing wealth, this must also result in job-creation.
We can invent scenarios where such job-creation is delayed. For example, an economy with a large, but mostly automated manufacturing sector could see a surge in demand (and production) as economic conditions improve. Over the short-term, it is certainly possible that such an economy could sell most of its production abroad. Thus, an economy generating a significant increase in net wealth could temporarily produce little new employment in the domestic economy.
However, this must only be a temporary situation. Though the "trickle-down" theory of right-wing capitalists has been thoroughly discredited as a model for economic growth, there is a kernel of truth buried within this propaganda. When an economy produces significant amounts of wealth, even if that wealth-creation is focused primarily in the hands of the wealthiest members of society, these people spend some of that money – creating wealth and employment opportunities for the "little people" further down the economic ladder.
The "trickle-down" theory fails as an economic model for the same reason the phrase "job-less recovery" fails the test of rationality. When only the wealthiest people in a society have disposable income (people with enough wealth that they don't need employment income to keep spending), it is mathematically impossible to have a robust economy. The reason for this revolves around an economic concept known as the "marginal propensity to consume". While this sounds complicated, like most jargon, it is actually quite a simple and obvious notion when explained in ordinary English. Basically, the lower a person's level of wealth/income the more they spend out of each new dollar they receive.
Thus poor people have a marginal propensity to consume of "1" (or 100%), because due to their minimal wealth, they are forced to spend their money as fast as they receive it – just to survive. Conversely, at most, a billionaire might have a marginal propensity to consume of 0.1 (or 10%) - and likely far less – since these people have so much wealth (and consumer goods) already, that there is little need or motivation to spend any more each time their wealth increases by another dollar.
Plutarch, a Greek philosopher, uttered this famous quotation over 2,000 years ago: "An imbalance between rich and poor is the oldest and most fatal ailment of all Republics". The reason this is true is based upon our marginal propensities to consume. When wealth is evenly dispersed in a society, this means that a high percentage of that wealth is in the hands of people with a high marginal propensity to consume.
These people spend a high percentage of each dollar they take in. And then the person receiving that dollar spends a high percentage of that dollar, and so on and so on...
Conversely, in a society where wealth is highly concentrated in a tiny percentage of the population (like the United States, today), only a small fraction of each new dollar of wealth which is produced gets spent. This small "multiplier effect" dictates weak economic activity – since instead of being spent and re-spent, money collects in large pools of "idle wealth", which produces no economic benefit for a society.
Nowhere are these economic principles more true than in a consumer economy like the United States. With the exodus of manufacturing, the U.S. economy now produces little wealth. Therefore, for well over a decade this economy has become totally dependent on ultra-high levels of consumption to sustain the economy. In fact, for over two years, the U.S. as a whole had a negative savings rate – meaning a marginal propensity to consume of greater than 100%.
As we have seen (and as any child could predict), this was totally unsustainable. However, what makes this brief period of insanity truly frightening is that with an extremely heavy concentration of wealth, during the time when the economy had a negative savings-rate, the wealthy were still socking-away billions of dollars per year – meaning those at the bottom were spending much more than 100% of their incomes. This brings us back (finally) to the mythical "job-less recovery".
Apart from the phony, "economic growth" of the U.S. tech-bubble, followed by the even more-fraudulent housing bubble (where illusory "wealth" produced temporary jobs), all that Americans have experienced for roughly twenty years are "job-less recoveries". However, as I have illustrated with fundamental principles of economics (which are based upon both mathematical and logical certainty), you cannot have a healthy economy (i.e. a real "recovery") without the masses having significant spending power – since at no time in human history has the spending of the wealthy been enough to produce a healthy economy (this was "old news" 2,000 years ago).
Therefore, if the masses don't have jobs, then the only way they can spend money is to borrow money. Here, at last, we expose the truth of the "job-less recovery": in previous years, Americans were able to create the (temporary) illusion of economic health through excessive borrowing – and then spending those borrowed dollars virtually as fast as they borrowed.
Essentially, simply saying "job-less recovery" became a sort of self-fulfilling prophecy, where like "Pavlov's Dogs", Americans would automatically begin spending again (with borrowed dollars) as soon as they were told the economy had "recovered". There have been no "job-less recoveries" in the past – not in the United States, or anywhere else in the world. All that happened in previous "job-less recoveries" is that Americans mortgaged their futures (and the futures of their children) through dramatically increasing their debt levels, and then recklessly spending those borrowed dollars on mostly pointless consumption.
As stated before, this is completely unsustainable – and now, today, that binge is over. Americans have maxed-out their credit. The days of borrowing-and-spending are over. As a result, the only thing which can pull the U.S. economy out of what appears to be a terminal, downward spiral is real economic growth – and the jobs which always accompany such growth.
When the talking-heads (and the propagandists who put those words in their mouths) say the words "job-less recovery", what they are really saying is "no recovery at all". While in past years, the magic of credit-cards could conceal that false propaganda, that "magic" is a thing of the past. Today, the absurdity of the "job-less recovery" is about to be exposed in the U.S. once-and-for-all – with sufficient clarity that even the mindless, media talking-heads will be able to see the inherent falsehood in this myth.
Consumer Credit Collapse
Hoping for a consumer-led recovery? Don't hold your breath. The latest data from the Federal Reserve shows that the year-over-year decline in total consumer credit is collapsing at an accelerating rate. God forbid consumers go back to living within their means.
U.S. Foreclosure Filings Top 300,000 for Sixth Straight Month
Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments. A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier, and down 0.5 percent from July, the Irvine, California-based company said in a statement. One in 357 households received a filing.
Foreclosures rose from a year earlier as companies cut payrolls by 216,000 workers last month, boosting the U.S. jobless rate to 9.7 percent, according to Labor Department data released last week. The rise in unemployment is having a bigger impact than an effort by the U.S. government and banks to modify mortgages and prevent foreclosures, said Morris A. Davis, an assistant real-estate professor at the Wisconsin School of Business.
"The foreclosure numbers are largely unemployment related," Davis, a former Federal Reserve Board economist, said in an interview. "As long as 15 million Americans are unemployed, record foreclosures will continue." Foreclosures aren’t abating even as demand is returning to the U.S. housing market after a three-year slump. The number of contracts to buy previously owned homes rose more than forecast in July and increased for a record sixth consecutive month, while mortgage buyer Freddie Mac said the average price rose 1.7 percent in the second quarter.
Nevada had the highest foreclosure rate in August, with one in every 62 households receiving a filing, even with an 8.4 percent decrease in foreclosures from July, RealtyTrac said. August filings were up 53 percent from a year earlier, with 17,902 Nevada properties receiving a foreclosure filing. The second-highest foreclosure rate in August was recorded in Florida, with one in every 140 households receiving a filing, followed by California, where one in 144 households received a foreclosure filing.
A 9.6 percent month-to-month decrease in filings helped lower Arizona’s foreclosure rate to fourth-highest in August from third-highest in July, RealtyTrac said. One in every 150 Arizona households received a foreclosure filing last month, still more than twice the national average, the company said. Forty-seven banks have begun 360,165 modifications through the U.S. government’s Making Home Affordable program, up from about 235,247 in July, the U.S. Treasury said in a report yesterday.
Bank of America Corp. and Wells Fargo & Co., among the worst performers of banks in the foreclosure-prevention plan, stepped up their pace of mortgage modifications by at least 60 percent last month. Bank of America more than doubled its number of modifications started to 59,891 in August from July, while Wells Fargo increased by 64 percent to 33,172. While the loan revamps may prevent some foreclosures, many homeowners facing repossession have prime loans, mortgages considered less risky than the subprime loans blamed for much of the housing crash, and can’t make their payments because of job losses, said Richard K. Green, director of the University of Southern California Lusk Center for Real Estate.
"When people live in a housing market that’s dropped 30 or 40 percent, and they lose their jobs, that’s a recipe for default," Green said. About 4.3 percent of U.S. homes, or one in 25 properties, were in foreclosure in the second quarter, the Washington-based Mortgage Bankers Association said last month. That’s the most in three decades of data, and loans overdue by at least 90 days, the point at which foreclosure proceedings typically begin, rose to 7.97 percent, the highest on record.
In the RealtyTrac survey, Michigan, Idaho, Utah, Colorado, Georgia and Illinois accounted for the other states with the top 10 highest rates of foreclosure filings. Six states accounted for 62 percent of the nation’s foreclosure filings. New Jersey had the 11th highest rate with 8,316 filings, a 28 percent increase from a year earlier. Connecticut ranked 24th with 2,189 filings, a 22 percent increase. New York had the 39th highest rate with 5,350 filings, down 2.3 percent. Las Vegas had the highest foreclosure rate among metropolitan areas with a population of 200,000 or more. One in every 53 households received a notice in August, up 48 percent from a year earlier and down 11 percent from July. Also in Nevada, the Reno-Sparks area had the seventh-highest foreclosure rate, with one in 86 households receiving a filing, RealtyTrac said.
California had six metropolitan areas among the top 10. Stockton and Merced ranked second and third; Riverside-San Bernardino-Ontario, Vallejo-Fairfield and Modesto were fourth through sixth; and Bakersfield was 10th. Two Florida metropolitan areas were in the top 10, with Orlando- Kissimmee at No. 8 and Cape Coral-Fort Myers at No. 9, according to RealtyTrac, which collects data from more than 2,200 counties representing 90 percent of the U.S. population.
Major Banks Still Grappling With Foreclosures
A year ago this week, the financial crisis sent the stock market off a cliff. At the heart of troubles was a plague of bad home loans. Millions of people couldn't pay their mortgages, and banks were losing billions of dollars. The foreclosure mess hasn't improved. The numbers keep getting worse, with foreclosures at record highs and rising, despite a major effort by the Obama administration to prevent them.
At Bank of America, which manages more home loans than any other bank in the country, Senior Vice President Ken Scheller is in charge of "home retention" — an effort he says is designed to "keep as many people in their homes as possible." His offices are in the middle of a giant call center in Plano, Texas. It's the front line of the foreclosure crisis: If somebody can't pay his or her mortgage and calls Bank of America, the call gets routed through these offices. Scheller says this group and others like it are receiving about 2 million calls a month.
In June 2008, Bank of America bought home lender Countrywide, which was at the center of the mortgage storm and was quickly collapsing. As a result, Bank of America now manages Countrywide's loans, too. Scheller, who used to work for Countrywide, says the bank now has 8,000 people who are dealing specifically with the foreclosure crisis. He says that number doubled in the past year.
Tiffany Palmer, who works on the call center floor, says more and more homeowners are in trouble because they've had their hours cut at work or because a spouse has lost a job. With the recession, a lot more middle-class people with decent credit can't pay their mortgages. Nationally, one-third of the people who are falling behind on their mortgages are in traditional "prime" fixed-rate mortgages.
Cutting people deals often makes good business sense, because lenders can lose tens of thousands of dollars if they have to foreclose. Scheller says in most cases, modifying the interest rate on a loan, which gets the customer making payments again, "is a much better financial situation for everyone." Economists, including Federal Reserve Chairman Ben Bernanke, have repeatedly said that preventing foreclosures is good for the housing market and the whole economy. But, in many cases, loan modifications aren't going through.
The U.S. Treasury Department has started issuing banks foreclosure report cards. The most recent one, out Wednesday, found that under the president's plan, Bank of America had modified 7 percent of loans that were more than 60 days delinquent. JPMorgan Chase extended loan-modification offers on 25 percent of its delinquent loans. CitiMortgage was at 23 percent, and Wells Fargo had modified 11 percent.
Janine Emlinger, a 48-year-old homeowner in Curtice, Ohio, says she's been trying for a year to get a loan modification, but Bank of America keeps losing her documents. So she keeps falling further behind on her payments. "It's very, very stressful, and it weighs heavy on you," she says. "I don't know where we're going to go." Emlinger has been in her house for 22 years. She says she thought she was getting a fixed-rate loan but wound up with an adjustable loan that made her payments skyrocket. The mortgage company that made the loan went bust. Bank of America is now managing, or "servicing," the loan, so it basically decides whether Emlinger gets to keep her house.
Emlinger seems like the perfect candidate for a lower interest rate. She got hit by a truck while mowing grass for the city and will get disability checks for the rest of her life.
Lenders and investors say they don't want to make loan modifications in cases where the borrower is just going to default again. But Emlinger is one of those cases in which everybody would win. She has a stable income to keep paying a mortgage at an affordable interest rate. When NPR inquired about her case, Bank of America said it was starting to negotiate a loan modification. But it's unclear why she was denied so many times over the phone.
"I see everyday people who are denied for loan modifications where we don't quite understand what the rationale is behind it," says Mark Pearce, a deputy banking commissioner in North Carolina who is part of a nationwide foreclosure task force. Pearce says it's not just Bank of America; banks are making these decisions inside a black box in their computer systems. It's not transparent. What's more, he says, homeowners often aren't told why they don't qualify. "Oftentimes we find that the rationale is that the paperwork didn't get filed, or they lost a document, or they needed updated financial information and didn't get it," Pearce says.
A lot of people think the banks are just overwhelmed by the millions of people who're in trouble, and that they haven't put the right technology and training in place. Others think the banks may be skeptical that these modifications are actually going to work. Whatever the reason, Pearce says, even now, a couple of years into the mortgage crisis, the systems to prevent foreclosures often seem scrambled.
At the Bank of America call center, I sit next to Crystal Ingram as she takes a call from a homeowner who is losing one of his two jobs. He's having trouble making his payments. So she plugged his financial information into her computer, explaining that she's going to see about a recommendation for a loan modification. But, after a few seconds, the computer says the person doesn't qualify.
"I'm not getting a recommendation for a modification," Ingram tells the homeowner. "You are going to have to come up with some more income." She tells the borrower he has to be able to support even a reduced mortgage payment, and he doesn't make enough money to do that. That sounds reasonable. Except that as I look over her shoulder at the borrower's income, he still makes $2,400 a month, and judging by what he owes — around $200,000 — it appears that he actually should qualify for help through the government's Making Home Affordable plan.
I ask Ingram about this, but she says that that isn't right. "No, he does not qualify," she says. But, in this case, too, after NPR inquired further with supervisors, it turned out that the homeowner actually did qualify. So, even just while I was at the call center, either the computer or somebody made a mistake, and a homeowner got rejected when he shouldn't have. In the end, the bank did offer the homeowner a loan modification. Bank of America says that while NPR's inquiry may have expedited that decision, the bank would have come to the same conclusion through its own review process.
Housing advocates say major banks are denying help to thousands of people who should qualify, and many don't get saved by a second look. Meanwhile, this year alone, 2 million people are on track to lose their homes through foreclosure — the most since the Great Depression.
Lessons to be learnt
Jim Rogers, Chairman of Rogers Holding: We need some more Lehmans so we can get out of this. Over the past 20 years Messrs Greenspan and Bernanke introduced crony capitalism to the West which is leading to a lost decade[s]. Market fundamentals are that failures should collapse and be replaced by creative new forces rather than being propped up as zombies. Financial institutions have been failing for centuries and the world has survived. Had the central bank allowed the failure of Long Term Capital Management to run its course, Lehman, Bear Stearns, et al would still be here.
Everyone would have lost so much capital and fired so many incompetents that the madness of serial bubbles (dotcoms, housing, consumption etc) would never have occurred. Consider the alternative had they propped up the bankrupt Lehman. There would be even more of the same insanity in our central banks and governments than we have now. The idea that a problem of too much debt and too much consumption can be solved by more gigantic debt and consumption is ludicrous.Would that governments stop interfering with fundamental principles and let the market clean out mistakes! Marx is singing in his grave there in London as the US government now controls the auto, mortgage, insurance, banking, et al industries and he has not fired a shot. Letting Lehman fail was perhaps the only thing governments have done right during this whole drama.
Meredith Whitney, Head of Meredith Whitney Advisory Group: I was most nervous a year ago about the real risk to retail deposits. People weren’t paying attention to the scariest part of the system – the collapse of Wachovia and Washington Mutual, which happened without damaging retail deposits on a systemic basis. One of the more concerning things now is that the government is supporting such a large part of asset prices. If they take their foot off the pedal with an exit and asset prices fall, that will be a real test and could hit banks again. We are clearly not out of the woods yet. We are more stable than a year ago and, importantly, the underlying retail deposits are surely safer. But, across the US, the top five banks still have the top market share in all the major states. Their asset levels are artificially propped up. They have written up their assets correspondingly. I’m worried about the effects when the central banks stop buying.
Rodgin Cohen, Chairman of law firm Sullivan & Cromwell: [The markets] were extraordinarily chaotic, extraordinarily fragile and, certainly in my lifetime, the closest they have ever been to collapse ... There were those that were more comfortable that we would somehow get through it ... The optimism came from ... a lack of understanding about how much you didn’t know. If there is a single factor which is the principle source of what has happened, it is the absence of knowledge of how much risk was in the system and where it was. The one statement I remember making to the government in arguing for Lehman to be saved was that you were trying to deal with a raging fire. Could you know how deep and how wide you had to make the fire break to make sure the flames could not get over it? My view was, nobody could be sure since we were in absolutely unique circumstances. We had never seen such a fire.
Five Points Worth Making On The Markets, Earnings, And The Economy
by David Rosenberg
1. This remains a hope based rally with strong technicals All the growth we are seeing globally this year is due to fiscal stimulus. I say that because during this six-month 50%+ rally in the S&P 500, the U.S. economy has shed 2.4 million jobs, which is almost as many as we lost during the entire 2001-02 tech wreck in just six months. The market's ability to shrug off the loss of 2.4 million jobs is either a sign that it is treating this as old news or sees the cost- cutting as good news for profits. Either way, what we are seeing transpire is without precedent the magnitude of the employment slide versus the magnitude of the market advance. Truly fascinating stuff.
2. Companies have not really been beating their earnings estimates only the very final estimates heading into the reporting quarter. For example, the consensus view for 3Q EPS at the start of the year was $21.00, last we saw the estimates were down to just over $14.00. But there is a deeply rooted belief that earnings are coming in better than expected. This is a psychology that is difficult to break. It is completely unknown (for some reason) that corporate revenues are running at a -25% YoY rate, which compares to the -10% we saw at the worst part of the 2001-02 bear market and the -3% trend at the most negative point in 1991.
3. Valuation is a poor timing device but even on "normalized" trailing 10-year earnings, the S&P 500 is trading near 18x, which is now above the historical average of 16x.
4. All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government's share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today's stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a "normalized" $80 operating EPS estimate that strategists are now starting to pen in for 2011.
5. While Mr. Market may be pricing in a fine future for the U.S., but when the 3-month Treasury-bill yield is 13bps north of zero, which is completely abnormal, you know that there are still substantial fundamental imbalances that need to be worked through.
No Big Fix for Global Finance
New regulations will be tepid—and will leave the global financial system, and taxpayers, at risk. World leaders are talking bravely about fixing the global financial system. As the Group of Twenty heads toward an important summit in Pittsburgh on Sept. 24-25, they are vowing to bang out a regulatory structure that will keep rich, careless bankers from once again driving their firms to ruin and then getting bailed out by taxpayers. Finance ministers and central bankers who met in London earlier this month reported "substantial progress in delivering our ambitious plan."
But their plan is far less ambitious than what some voices were advocating as recently as last spring. Bank lobbyists have fought back hard, and recent improvements in the global economy and financial markets have robbed momentum from the reformers. What's more, truly ensuring change on a global scale would probably require a single international regulator with power to intervene in local affairs. Yet there is little appetite for that among the G-20, which includes the major industrialized countries as well as China, Brazil, and other developing powers. The likely result? A package of worthy but lukewarm reforms that leave the global financial system—and taxpayers—exposed to another costly bust some years down the road. "We're not going to have a revolution," says Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics who advised Treasury Secretary Timothy Geithner before G-20 meetings last spring. "The question is to what extent you're going to have, over the next year, a substantial evolution."
International and U.S. proposals on the table target the hot topics: increasing capital requirements, corralling the "shadow banking system" of nonbank lenders, and otherwise trying to ensure that risk doesn't balloon out of control. But in most cases they rely on the kinds of tools that failed the last time around, when supervisors proved less than vigilant, turf squabbles impeded regulation, and fears of foreign competition led governments to yield to industry demands for a lighter touch. In the chaotic months following the bankruptcy filing of Lehman Brothers on Sept. 15, 2008, few ideas seemed too extreme for consideration. Break up the giant banks. Regulate the survivors like utilities. Ban casino-like bets on the possibility of default by corporate borrowers. Prohibit credit-rating agencies from being paid by the agencies they rate. Above all, build a mechanism so that even huge multinational banks could fail without jeopardizing other firms and national economies.
The G-20 plan doesn't do any of that. It focuses on bolstering the cushions of capital that financial firms must hold, making sure they have the liquidity to survive a cash squeeze, and strengthening the supervision over them. By the end of this year global regulators are supposed to come up with a plan for banks to build up capital buffers in good times that they can draw down in bad ones. That would discourage banks from overlending in booms and choking off credit in busts, as they tend to do. Unfortunately, experience shows that banks are good at getting around tougher capital standards or persuading regulators to ease them. The G-20 nations aren't even seeking fundamental restructuring. Banking firms could continue collecting government-insured deposits with one hand and, in other subsidiaries, make risky bets on the market—though the cost of doing so could rise.
To succeed, rules also must be applied consistently around the world, but gaps are appearing in European and U.S. officials' united front. European regulators want to establish explicit boundaries for bankers' pay and tie capital requirements to the risk of an institution's underlying assets. U.S. officials, on the other hand, are resistant to strict pay limits and are focused on the capital requirements of the biggest and most important institutions. Scariest of all, there is still no procedure for countries to share responsibility for the takeover and resolution of a failing multinational financial firm like Lehman or insurer American International Group (AIG). Another uncontrolled failure today could set off a global domino chain of failures. Says Raghuram G. Rajan, the former chief economist at the International Monetary Fund who currently teaches at the University of Chicago's Booth School of Business: "The difficulty of international dialogue means [establishing a procedure] will take forever, by which time people will have forgotten and something much more diluted will have come out."
International coordination isn't the only stumbling block. The U.S. is moving gingerly even on purely domestic issues. For example, regulating insurance conglomerates like AIG is proving tricky. Under the reorg plan being pushed by Geithner, U.S. insurers would continue to operate under a patchwork of state regulation, though the largest would get additional scrutiny from the Federal Reserve or a committee of federal regulators. Officials in the Obama Administration also considered consolidating the Securities & Exchange Commission, which oversees the securities market, and the Commodity Futures Trading Commission, which polices futures and commodity markets. But they concluded it would take too much political capital to buck the congressional agriculture and financial committees that split responsibility for the agencies—and that enjoy the campaign contributions that follow the oversight. Now the proposal calls for just one of more than a half-dozen federal financial regulators to disappear.
The Administration's goal of consolidating all financial consumer protection in a single agency—perhaps its boldest proposal—is running into a buzz saw of bureaucratic infighting and industry lobbying. "Our strategy is to kill it," says one lobbyist for the financial-services industry. Furthermore, banks selling complex derivatives—essentially financial bets—would be free to continue writing "custom" contracts under the Geithner plan. That would sidestep many of the protective mechanisms built into the brand-new exchanges and clearinghouses designed to temper the risk of such instruments. It's not just bank-hating liberals who are concerned. R. Glenn Hubbard, who was President George W. Bush's chief economic adviser from 2001 to 2003 and is now dean of Columbia University's business school, is generally reluctant to interfere in the markets more than necessary. Yet he says he's disturbed by what he sees now. Hubbard favors stronger measures to improve the security and transparency of derivatives trading. "Ironically, the Obama Administration is less tough on Wall Street than many market participants and academics who have recommended reform," Hubbard says.
To be sure, the plans in the works are better than nothing. One clever idea proposed in the Treasury documents is to require financial firms to sell a big issue of bonds that would automatically convert to equity if money were tight. Such securities would relieve the firms of their debt payments and replenish their capital even in panicked markets. Another idea Geithner favors is to force big firms to draw up plans that regulators could use to dismantle the institutions. (One reason Lehman Brothers was so hard to shut down was that it had more than 600 subsidiaries.) And the new capital rules may dissuade banks from collecting deposits while participating in risky trading activities. They would have "no choice" but to separate into "specialized entities," Karen Shaw Petrou, co-founder of consultancy Federal Financial Analytics, predicted in a Sept. 4 report. Douglas J. Elliott, a former JPMorgan Chase (JPM) banker now at the Brookings Institution, generally praises the reforms: "If you believe the single biggest problem was that everyone got careless, then you'll be happier because everyone will have to be more careful."
Trouble is, the reforms are weaker than expected, and they're likely to be watered down even more by the time they're passed. As markets recover, lobbying for laxer regulation will intensify. Already financial engineers are at work on an array of insurance, derivative, and other products designed to exploit loopholes in the new regulatory regimes. Meanwhile, the biggest financial firms have only gotten bigger and harder to control. The Economic Policy Institute notes that the four biggest U.S. banks have about 45% of industry assets, up from around 27% in 2003. Reform? Yes. Fundamental change? Not by a long shot.
EU To Establish Powerful Financial Authority
Banks in Europe are facing tough new scrutiny from a planned European financial supervisory authority. It would be more powerful and could take action to prevent systemic problems if national authorities did not. One year after the outbreak of the worst economic crisis since World War II, the European Union is close to creating an EU-wide financial markets regulatory authority. In its Thursday edition Germany's Süddeutsche Zeitung reported that it had obtained draft regulations that, if approved, would create three powerful supervisory authorities alongside an early warning system which would monitor banking, financial markets and insurance and pension funds across Europe. The authorities could take action to prevent a repeat of the current financial crisis that precipitated the global economic slump. The steps to create the new authority came at the request of EU member states.
According to the plans, the European controllers would be given the right -- in cases where a crisis is foreseeable -- to directly intervene in financial markets. The newspaper reports that the European Commission plans to present its draft regulations on Sept. 23. The plans state that the financial oversight system would be built as a network. A European Systemic Risk Council would be created at the European Central Bank level to identify emerging dangers and serve as an early warning system for Europe's markets. And three new agencies are also planned for controlling banks, stock markets and insurance companies.
Banks would be monitored by a London-based European Banking Authority (EBA). Trade in securities will be controlled by a Paris-based European Security and Markets Authority (ESMA). And insurance and pension funds would be reviewed by a European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt. Under the plan, the new oversight authorities would be in operation by 2011, and they will be allowed to issue direct orders if they feel that national supervisory authorities aren't acting decisively enough when a financial institute, involved in cross-border business or which could threaten the stability of markets, runs into trouble. The authorities' right to issue directives, however, would be limited to measures "that have no impact on the financial responsibilities of the member states."
With this limitation, Brussels officials are adhering to a decision made by leaders of the EU member states. At a summit in June the German and British governments insisted that the decisions of the European financial supervisory authority not have direct influence on decision-making relating to national budgets. The proposed regulations also provide member states with the right to contest any decisions -- and either the EU finance ministers or the European Commission would give the final ruling in any dispute. The aim of the powerful new body is to identify problems and to take appropriate actions to prevent them from spiralling into a crisis like the recent recession, which was sparked by the crash of the subprime mortgage market and the spectacular collapse of investment bank Lehman Brothers.
Weak pound might not be enough to rescue UK economy
Sterling was meant help lift Britain out of recession, but with oil exports falling there are long-term concerns over the trade deficit. In theory it ought to be pretty simple. You are heading into a nasty recession. The markets, seeing this impending threat, pull their cash out of your country. Your currency falls, but this in turn encourages people to buy more of your (cheaper) goods; and encourages your own citizens to buy locally rather than sucking in goods from abroad. The end result is that, little-by-little, the economy starts to recover, and you pull your way out of economic misery.
That, at least, is the textbook explanation for how a currency depreciation helps a stricken economy bounce back to health. All else being equal, as economists like to say, the currency is the automatic mechanism which helps an economy recover. And if ever you were after some examples from economic history, you need look no further than the UK. Almost every major British recession has been accompanied by a sharp fall in the pound. It happened in the early 1990s, as Britain left the European Exchange Rate Mechanism and sterling slid; it happened in the 1930s when the UK left the Gold Standard. In both cases, economists believe that the devaluations helped Britain avoid far worse economic contractions than would have otherwise occurred. And so, when the pound started sliding lower against both the euro and the dollar around 18 months ago, history seemed poised to repeat itself. The pound is currently around 20pc weaker than at the start of the crisis, having clawed back some ground in recent months. However, despite hopes that this would boost Britain's exports, the evidence is rather less encouraging. Official trade data, published by the Office for National Statistics on Wednesday, showed that British exports have hardly recovered.
Indeed, the data showed that although the deficit had improved slightly in previous months, it actually widened in July from £2.37bn to £2.44bn. In previous months economists could explain away the continued disappointment from trade figures as being due to the fact that the world was in deep recession. In other words, cheap and attractive as Britain's goods have become, our main trading partners in Europe and the US have been too deep in recession to be able to stump up for them. But now that France, Germany and Japan are out of recession, with the US and other economies likely to follow soon thereafter, this excuse is wearing somewhat thin. Indeed, Malcolm Barr, economist at JP Morgan, said the impact of a weaker pound on sterling had been "disappointing" so far, with no convincing evidence that the pound was boosting trade at all. "It may be that you've just got to be patient and let [the depreciation] work its magic," he says. "If you look at the normal lags, it will be probably be later in the year that we get more convincing evidence that the UK's exports have been given more of a lift compared with other countries."
But patience can only do so much. Economists talk about the so-called j-curve effect, which means that the initial months after a depreciation are often paradoxically tough for an economy. As we saw in the past year, the weak pound has kept inflation higher, and so pushed up costs for businesses, so the benefits of depreciation have not yet fed through. Likewise, it takes time for manufacturers and consumers to react to changes in currency; they do so over a course of months rather than days or weeks. The upshot is that it often takes some time before the benefits of a devaluation feed through. However, experts at the Bank of England remain convinced that the fall in sterling has been one of the key invisible supports for the UK economy over the past year. They point to the fact that Britain's peak-to-trough fall in economic output still looks far less severe than that of Germany, which has been weighed down by the strength of the euro. They motion to car production statistics, which show that Britain's vehicle factories are starting to produce car after car which are then being shipped out to continental Europe.
Indeed, the Bank, which has a foreign exchange fund of its own in case of currency emergencies, has not ruled out intervention in the markets if necessary. It also views one of the prime successes of its Quantitative Easing programme is that it helped keep the pound lower than most of Britain's rivals throughout the crisis, without having to resort to outright currency level targeting. A more salient question that remains is whether the decade that preceded the crisis, during which the pound was extremely strong, saw the collapse of so many manufacturers that, in effect, there is little export industry left in the UK. Moreover, many of Britain's exports during that period consisted of financial and professional services. But it is facile to suggest Britain does not make anything. Countless overseas companies have chosen to base factories in the UK; this trend should only increase with a weak pound, as it did in the 1930s and the late 1990s.
A deeper long-term worry concerns the North Sea. The reason the trade figures dipped back into deeper deficit on Wednesday was that oil exports are declining faster than expected. For the past two decades, British exports, and hence prosperity, have been sustained higher than they would otherwise have been by North Sea oil. With this source of income running dry, the UK will either need to find a substitute, in terms of higher productivity, or to see its standard of living deteriorate. The weak pound may well help through this crisis. It cannot prevent this longer-term crunch.
European Commission sees galloping UK debt crisis
Britain's public debt will explode to 180pc of GDP within a decade unless future governments take drastic measures to restore fiscal probity, according to a confidential study by the European Commission. The projection is more than twice the level forecast by the UK Treasury, which expects the debt to peak at around 80pc before gradually falling as growth revives and tax revenues come back to life. What is shocking is that UK risks decoupling from the other major economies in Europe, vaulting past Germany, France and even Italy into a wholly different league. Ireland is in the worst shape, with debt projected to reach 200pc of GDP.
The report is being prepared for the October meeting of EU finance ministers in Göteborg, which will focus on the exit strategy from the economic crisis and the long-term sustainability of EU public finances. The figures are based on the assumption that the emergency fiscal support of the last year is withdrawn in an orderly way by 2011, but that there is no further retrenchment thereafter. "It is a no-policy-change scenario, not a prediction of what will happen," said one official. The Commission fears Britain will suffer lasting damage as result of the financial crisis and the bursting of the property bubble. Neither banking nor construction will recover quickly, relegating the country to a lower growth trajectory.
Brussels warned Britain before the onset of the crisis that public spending was out of hand, repeatedly reminding Gordon Brown that the credit boom was masking the true scale of the problem. The UK ran deficits of 3pc of GDP at the top of the cycle, while Spain was running a surplus of 2pc. Britain was the only major country to face the EU's excessive deficit procedure in 2007, even before recession played havoc with state finances. Stephen Lewis, chief strategist at Monument Securities, said that once public debt goes much above 100pc of GDP it becomes hard to reverse. "The debt snowballs because interest costs alone push up the deficit, so you can race up to 180pc very fast."
Attempts to bring the debt down by a spending squeeze can prove counter-productive because lack of growth itself drives the deficit higher. "Once you get there your trapped," he said. Britain's debt briefly touched 252pc of GDP after World War Two, but the circumstances were then entirely different. War-time spending could be slashed instantly and the demographic balance of young and old was still positive. Debt anywhere near 180pc of GDP today would test the UK Gilt market to destruction. While Japan is still able to fund an even higher level of debt without paying exorbitant rates, it is does not depend on foreigners to cover the bond auctions.
China says on track for 8% growth in 2009
China said Friday it was on track to achieve its target of eight percent economic growth in 2009 as a new flood of data suggested that massive stimulus spending was paying off. Investment on fixed assets in China's cities was steady in August but exports for the first eight months of the year fell more than 20 percent, indicating that government spending is now the main prop to growth. "The data from January to August has laid a good foundation for realising the eight percent economic growth target for the full year," Li Xiaochao, a spokesman for the National Bureau of Statistics (NBS), told a press conference. "So far, the main reason why the overall economy is stabilising and starting to recover is that we adopted the stimulus package to expand domestic demand."
Retail sales, the main measure of consumer spending, rose 15.4 percent in August compared with the same month last year, the government said. In July, the figure was up 15.2 percent from a year earlier. The consumer price index, the main gauge of inflation, fell 1.2 percent in August year-on-year, the NBS said in a statement. August's inflation figure was the seventh consecutive monthly decline, and compared with a 1.8 percent decrease in July. But Li sounded a note of caution, saying China has "a lot of work to do" to reach the eight percent growth threshold -- which is seen as vital to maintain job creation and thus stave off social unrest.
Growth in some industries was still slow, the official said, with China's export-driven economy suffering fallout from the global crisis. Before the crisis struck, the country had experienced double-digit annual growth from 2003 to 2007 and again in the first two quarters of last year. That had slowed to 6.1 percent in this year's first quarter, before a pickup to 7.9 percent in the second quarter. Last year, China unveiled a four-trillion-yuan (580-billion-dollar) stimulus package aimed at boosting domestic demand as exports plunged and economic growth slowed.
On Thursday, Premier Wen Jiabao said China's recovery momentum was "not yet stable" and that it was too soon to back away from the stimulus policies. Exports for the first eight months of 2009 stood at 730.7 billion dollars, down 22.2 percent year-on-year. But the monthly figures showed some improvement with August exports at 103.7 billion dollars, up 3.4 percent from July. China's trade surplus in August totalled 15.7 billion dollars, up from 10.6 billion dollars in July.
Industrial output expanded by 12.3 percent in August from a year earlier, compared with a 10.8 percent expansion in July. Electricity output rose for the third straight month as factories cranked up activity.
Investments in urban fixed assets rose 33 percent in the first eight months of the year, on a par with growth of 32.9 percent in the January-July period. Analysts said the numbers had beaten market expectations -- shares closed up 2.22 percent on the news -- but China was not yet out of the woods.
"I think that the data is stronger than expected but I would argue for caution, because activity collapsed this time last year and comparisons against last year will always be favourable," Ben Simpfendorfer, a Hong Kong-based economist at Royal Bank of Scotland, told AFP. "There was a worry that the fiscal stimulus was fading in the second half but the stable fixed asset investment data should ease those concerns," he said. UBS China economist Wang Tao said: "The trend is quite clear -- the underlying economy is improving and economic activity will continue to increase."
New loans rebounded in August to 410.4 billion yuan after falling to 355.9 billion yuan in July, as lenders continued to pump money into the economic recovery effort, and easing fears of tighter credit. "The solid bank lending is consistent with assurances from senior officials in recent weeks that they intend to keep policy accommodative in the near term," said Brian Jackson, a strategist at Royal Bank of Canada.
Bank of China’s Zhu Sees 'Bubbles' in Asset Markets
Bank of China Ltd., which led the nation’s $1.1 trillion lending spree in the first half, said ample liquidity has caused "bubbles" in stocks, commodities and real estate. "The potential risk is that a lot of liquidity goes to the asset market," Vice President Zhu Min said in an interview in Dalian today. "So you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere." China’s record credit expansion, which helped the country’s economy expand 7.9 percent in the second quarter, has raised concerns that bank loans have been diverted and used to buy stocks and real estate, fueling unsustainable gains in equity and property markets.
"There’s no way for the real economy to absorb so much liquidity," said Liu Yuhui, a Beijing-based economist at Chinese Academy of Social Science. "Policymakers in China and around the world are well aware of the harm that could do, but they are unwilling to sacrifice short-term growth and wean the economy from addiction to the stimulus policies." The Shanghai Stock Exchange Composite Index has gained 61 percent this year, compared with a 20 percent increase in the MSCI World Index of 1,659 companies. House prices in China’s 70 biggest cities rose at the fastest pace in 11 months on record lending and climbing confidence, according to a National Bureau of Statistics report today.
Bank of China advanced 1 trillion yuan of new loans in the first six months, more than any other Chinese lender and the gross domestic product of New Zealand. The Beijing-based bank, the nation’s third-largest, said last month it plans to slow credit growth in the rest of the year and improve loan quality. China’s Premier Wen Jiabao said today the nation "cannot and will not" pull back from policies designed to revive the world’s third-biggest economy. Stimulus measures have "yielded initial results and we have arrested the downturn in economic growth," Wen said in the keynote speech at the World Economic Forum in Dalian, a city in northeastern China.
China Construction Bank Corp., the nation’s second-largest, said last month it will cut new lending by 70 percent in the second half from six months earlier to avoid a surge in bad debt. Chairman Guo Shuqing said excess cash in the banking system has led to asset bubbles. An estimated 1.16 trillion yuan ($170 billion) of loans were invested in stocks in the first five months of this year, China Business news reported June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council.
The China Banking Regulatory Commission said on Sept. 3 it will implement stricter capital requirements for banks. Lenders were also required to raise reserves to 150 percent of their non-performing loans by the end of this year, up from 134.8 percent at the end of June. The Shanghai Composite Index fell into a so-called bear market last month on concern slowing lending growth and tighter capital requirements would derail a recovery in the world’s third-biggest economy. The gauge has bounced back this month, rising 9 percent.
New loans in July were less than a quarter of June’s level. August new-lending figures are scheduled to be released on Sept. 11 and may show a 10 percent decline to 320 billion yuan, according to the median estimate of nine analysts surveyed by Bloomberg. Loans surged in the first six months of this year after the central bank scrapped quotas limiting lending in November to support the government’s 4 trillion yuan stimulus package and key industries including petrochemicals, steel and automakers.
Zhang Xiaoqiang, vice chairman of National Development and Reform Commission, China’s top economic planning agency, said he sees "little bubbles" in the nation’s new energy sector and is looking into measure to curb excesses at an early stage to allow for healthy development for the industry. Crude oil prices have risen 62 percent this year, gold has gained 13 percent and copper has more than doubled.