Greyhound bus trip from Louisville, Kentucky, to Memphis, Tennessee.
Passengers on the Memphis-Chattanooga bus
Ilargi: Michael Panzner at Financial Armageddon has a nice little graph that not just invites discussion, it in fact probably invites potentially endless discussion.
Panzner introduces it like this:
Which Crisis?People are beginning to think that the worst of the crisis is behind us. But which crisis are they referring to? If they mean the financial crisis, they may be right. In fact, I would be surprised if the apocalyptic events of last fall did not mark a high point, of sorts.
However, there's plenty more trouble to come. From where I sit, the next big unraveling is playing out in the real economy. As the truth hits home that there is no recovery and those in charge have used up all their bullets, businesses and individuals that have been hanging on in hope will throw in the towel.
Once that happens, unemployment will ratchet up well into the double digits, bankruptcies, foreclosures and evictions will explode, those who have not yet adjusted their spending habits will make a dramatic about-face, and tax revenues will evaporate, driving many state and local governments to the brink.
He uses this as an introduction for Ambrose Evans-Pritchard's
Lehman is a footnote in the great East-West globalisation crisisYou can see why markets and governments both like to blame Lehman Brothers for the "Great Contraction". Such wishful thinking shields investors from the nasty reality that deeper forces are at work: it absolves officialdom from its own destructive role in fixing the price of credit too low for 20 years, luring us into debt. [..] Lehman no more caused the economic convulsions of the last year than the assassination of an Austrian prince caused the First World War.
But I want to focus on that graph, because it seems to provide a great little window to try and shed some clarity on what our various -and undoubtedly diverging- views on the topic of our various -and undoubtedly diverging- crises are.
First of all, my initial reaction was that we're nowhere near the top (which should really be the trough, the graph should be put upside down) of the financial crisis, and certainly not past it. The only thing that makes some of us believe so is the magnitude of government bail-outs, but they are very much part of the problem, not the solution. And Panzner's words say as much, but his graph contradicts it.
Secondly, the whole suggestion of a timeline is confusing to the point where it's downright faulty. While it's tempting to assume that the financial crisis will neatly give way to an economic one etc., it's also misleading. Of course we will see enormous social implications of the finance crisis, but we might just as well state that the finance crisis is a direct result of the social(-political) one.
The repeal of Glass-Steagall comes to mind as an example of a society deep in crisis. It was a consequence of the banking system gaining far too much power in the political scene, a situation that has only worsened since its acceptance in 1999. Not many people would recognize it as such, but that makes it no less accurate. Nor did the social-political problems in the US start there.
I think both the idea of a time sequence in the graph and the fact that it wishes to name crises as more or less separate events lead to an overall picture that leaves too much to be desired.
What helped was when I started thinking about the respective lines in the graph as different dimensions. That way, time becomes -mostly- a non-factor, while the crises can come together as both separate and simultaneous.
Because the crises we talk about here necessarily overlap, I think it should be clear from the start that there is a strong suggestion of issues that span, as it were, through multiple dimensions. Since that is not exactly something the human mind is perfectly equipped for, perhaps we can recognize right off the bat in there a first explanation for our difficulties in understanding where and how our crises overlap.
In physics -or even religion, for that sake-, we may have a sense that a 4th (no, not time) and 5th dimension exist, but we can't build a workable model from that. The sweet spot in 1 dimension is the middle of a line, in 2 dimensions the middle of a plane, in 3 the middle of a cube. But in 4? Or 5? 6? 21? Forget it, we can't point it out. We can't do it, at least not easily, and not intuitively. Math helps, and so do computers, since they have no such limitations. For us, though, all that remains necessarily abstract.
Perhaps that's also why we struggle so much with our efforts to make sense of these converging crises. To which, as we can all understand, we should really add a few more. Energy crisis, climate crisis, just to name a few. Overpopulation is another one.
Once you get to think about it, it seems impossible to decide which crisis came first. Our credit problems don't just have social implications, they also result from them. From one angle, like Panzner's, you might say that the finance crisis has peaked (or bottomed), but from another that seems a ridiculous thing to say.
And we can take it one -ultimate- step further. Perhaps it's our very inability to oversee all the converging problems, to for instance visualize anything more than three-dimensional, that leaves us so tragically ill-equipped to work our way out of the troubles caused by the complexities we ourselves have built.
At the same time, thinking about a simple thing like that little graph above might help to get us a bit closer. If you take the four two-dimensional crisis lines in the graph, and you imagine them in a 3-D setting, it's not that hard to see them converge in more and more intricate ways than they do in a 2-D world.
So well, there's a little thought experiment. One that will undoubtedly mean very little to some people, and more to others. I'm left wondering if it would actually be a potential aid if we'd approach our predicaments from the point of view of string theory or fuzzy systems, where multiple dimensions are no obstacle. We don’t have much to lose; the way we're going about it now, we're getting nowhere. Fast. We don't have the brains for it.
Wall Street Goes to Washington
J.P. Morgan Chase for the first time convened its board in Washington this summer, calling the directors to a meeting at the downtown Hay-Adams hotel, then dispatching them to Capitol Hill for meet-and-greets.
Last month, a firm run by the billionaire investor Wilbur Ross hired the head of Washington's top mortgage regulator to pick through the wreckage of the housing bust looking for bargains. And the world's largest bond fund, Pimco, which has traditionally assessed the risk of any new investment according to five financial criteria, recently added one more: the impact of any change in federal policy.
As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation's political and financial capitals. In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.
"In the old days, Washington was refereeing from the sideline," said Mohamed A. el-Erian, chief executive officer of Pimco. "In the new world we're going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly." Washington has become a dominant player. Over the past year, the Federal Reserve and the Treasury have injected trillions of dollars into frozen financial markets, snapping up unwanted bonds, extending guarantees to banks and slashing interest rates.
Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world's 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq. Now the Treasury and the Federal Reserve are embroiled in everything from credit cards and home loans to auto manufacturing, from overseeing executive pay to shaping boards of directors.
In response, senior executives of major financial companies are traversing the Beltway to meet lawmakers in person for the first time. Firms such as Fidelity Investments, BNY Mellon and even Goldman Sachs, which has prospered in the crisis relative to many other banks, are opening additional offices or bulking up their staffs in the capital. For decades, the federal government has played a key role in financial markets through regulation, public spending and monetary policy. But the government has now established itself as never before as the most dynamic actor in the still ailing economy. That prominence is sure to fade as the rescue programs wind down. Yet Wall Street executives say the legacy could be enduring.
The relationship "has changed in the sense that it's clear that every one of the firms, including Goldman Sachs, recognizes that they would not exist today had the government not stepped in when it did," one former senior bank executive said.
Aiming to avoid a repeat of the crisis, Obama administration officials, meanwhile, remain determined to overhaul the regulation of financial firms and markets. These measures, if enacted, would affect the essence of these businesses, altering what kind of activities they could pursue, how they would be shut down if they ran into trouble, and how much capital they must maintain, which directly influences profitability and their ability to lend.
"This crisis has and will fundamentally change the relationship between Wall Street and Washington for decades to come," said Richard H. Clarida, an assistant Treasury secretary under President George W. Bush who is now an economics professor at Columbia University. "It's often said that Wall Street is no longer the financial capital, that it's Washington, D.C., and that's certainly true. I don't think this is destined to change. I think this is going to be a fact of life."
Before the financial crisis, BlackRock's chairman Laurence Fink would speak with federal officials at most a few times a month, for instance when they called him in New York for information about mortgage markets or pensions funds or other areas in which his company was active. But now, as the chief executive of the nation's largest asset manager, Fink says he talks to officials at least once a day. He plans to open an office in Washington by next year to influence policy and has hired the lobbying powerhouse of Quinn Gillespie & Associates.
Three decades ago, Fink was a pioneer in bundling large numbers of mortgages, then slicing up these packages and selling off shares as securities. More recently, firms packaged subprime loans, which soured when the housing market collapsed, igniting the crisis. So the Treasury and Fed have tapped Fink's expertise. BlackRock emerged as one of their principal advisers as the agencies bailed out major companies and tried to put a price on their toxic assets. BlackRock is also managing tens of billions of dollars worth of AIG assets for the government. In August, officials selected the company to help arrange the purchase, partly using taxpayer money, of toxic assets from banks.
"We made ourselves available on issues that many people don't understand," Fink said. Although BlackRock, which avoided the plague of toxic assets, has turned to Washington by choice, some firms have been forced to Washington.
Take Citigroup, which has allowed its general counsel to move his office from Midtown Manhattan to a penthouse atop a historic Beaux-Arts building on Pennsylvania Avenue. The bank, whose executive board chairman was former Treasury secretary Robert E. Rubin, is no stranger to Washington. But badly hit by toxic assets during the mortgage meltdown, Citigroup received $45 billion in infusions from the Treasury and in return gave the government a majority ownership.
Steps from the Citigroup offices, Lone Star Funds, a Dallas-based private-equity fund, has opened an office on 13th Street Northwest for its general counsel and a banking executive as the firm seeks to expand its investments in distressed assets. "The federal government has really become a central figure in commerce . . . and we wanted to make sure we're really in tune with them and readily accessible," said Michael Thomson, Lone Star's general counsel and a Treasury official in the Clinton administration. "I predict we'll maintain a presence here moving forward. We'll change the way we do business in the U.S."
So, too, for Fink, who said much hinges on his relationship with Washington. He often has talked to White House chief of staff Rahm Emanuel, Treasury Secretary Timothy F. Geithner and his predecessor, Henry M. Paulson Jr. Fink was among the first regulators reached out to when they needed urgent advice on pricing exotic securities or predicting the global fallout from the failure of large financial firms like Lehman Brothers. "We are going to be spending more time inside the Beltway, either by helping the government or, if we are asked, shaping policy and decisions," Fink said. "It is beholden on us on behalf of our clients to have input in Washington."
Some firms are bringing Washingtonians to them. A year ago, James B. Lockhart III was the top federal regulator overseeing Fannie Mae and Freddie Mac when the Bush administration seized the two mortgage finance companies, saving the home loan market from collapse. When Lockhart said last month that he would step down from the Federal Housing Finance Agency, he was snapped up quickly. Today he is vice chairman of WL Ross, which is looking to make money by buying mortgage assets and loans cast off by lenders as unprofitable.
Officials such as Lockhart have become hot commodities. The revolving door between government and business is not new, and connections inside Washington have long been a calling card in the private sector. But some executives say the qualification Wall Street now covets is a fine-grain understanding of how regulators are managing the mortgage market and planning for its transformation. Lockhart's "expertise is what we are interested in," said Wilbur Ross, who hired the former regulator. "He's looked at an awful lot of mortgages, given the regulatory background he has. We are very interested in his expertise as opposed to his connections."
Other former federal officials are scrambling for a piece of the action. Joseph J. Murin, former president of Ginnie Mae, which guarantees securities linked to government-backed mortgages, and former Federal Housing Administration commissioner Brian Montgomery, set up a consulting shop on L Street in mid-August. The office door of their firm, the Collingwood Group, still has no sign. The walls are bare. Last week the coffee machine arrived, but not the filters. But calls are coming in from bankers and other investors outside Washington who are looking, for instance, to buy or sell loan portfolios and want someone with trained eyes to help evaluate their worth.
For Ross's firm, the government itself has become a vital business partner. The company, for instance, recently bid on a portfolio of toxic mortgages that came from a failed bank and were auctioned off by the Federal Deposit Insurance Corp. The Treasury also selected WL Ross to manage government efforts to buy distressed mortgage-backed securities. "Washington is the new Wall Street," Ross said. "No major capital transactions appear to occur without the intervention of Washington. To the degree that becomes a permanent part of the landscape is the question."
Out of sight is not out of mind. In their Los Angeles office, the managers of bond giant Pimco hold three-hour meetings four times a week to analyze investments, evaluating factors like growth potential and creditworthiness. Decisions made 3,000 miles to the east also loom large. "We're having to think much more about the role of government in the economy," said el-Erian, the chief executive. For example, Pimco projected late last year that the Fed, seeking to support the residential mortgage market, would intervene and buy home loans. So the bond firm invested in mortgages, benefiting when the Fed indeed acted. By contrast, Pimco avoided buying General Motors bonds in the months before the government bailed out the automaker. Pimco feared bondholders would suffer in a federal takeover, and they later did.
As much as financial firms have watched Washington, the federal government has been using its new leverage to demand intelligence from Wall Street about prospective deals, major hirings and executive compensation. Never before have public officials been in a position to extract these private details, and that change alone testifies to the new terms of this relationship. As a leading financial lobbyist put it: "The industry is bending over backward to give policymakers at Treasury and elsewhere a heads-up on . . . any big thing that's going on."
Treasury Girds for Debt-Ceiling Fight
The Obama administration, concerned about the possibility of a big political fight over the national debt, is looking at how it can continue funding the government in the event that Congress hinders its ability to borrow money. Treasury Department officials are examining tools employed by previous administrations, including disinvesting government retirement funds and suspending interest payments to federal accounts, according to people familiar with the matter. They are also looking at what to do in the unlikely event of a government shutdown.
At issue is the debt ceiling, a dollar limit controlled by Congress that dictates how much the U.S. can borrow. Treasury Secretary Timothy Geithner told the Senate in a letter last month that the $12.1 trillion ceiling could be hit as early as mid-October, and said it needs to be increased so the U.S. can continue funding operations and making debt payments. Mr. Geithner didn't indicate the increase he was seeking. With the U.S. borrowing about $30 billion a week, some economists say the Treasury will need an increase of as much as $1.5 trillion if it wants to avoid another request before the 2010 midterm elections. The U.S. could default on its debt if Congress doesn't raise the debt ceiling, but it is a remote scenario.
While requests to raise the debt ceiling are routine and Congress typically agrees, they can turn into protracted battles. Treasury officials are trying to play offense, telling lawmakers that the recovery is too fragile to risk raising questions about whether the U.S. will meet its obligations, these people said. The requests often turn into opportunities for lawmakers to attach other, often controversial provisions, which can delay action. Mr. Geithner's request comes at a politically sensitive time as concerns mount over the nation's record debt, ballooning budget deficit and reliance on foreign investors.
"In this environment, both [political parties] know that they can't have a serious question of whether Treasury would miss a debt-service payment," said Lou Crandall, a senior economist with Wrightson ICAP, a Wall Street fixed-income research firm. Some Republicans say they won't vote for an increase. They view the coming debate as a chance to shift responsibility for federal deficits onto congressional Democrats at a time when voters are increasingly fretful about federal borrowing and spending. Voting to raise the ceiling will likely pose a dilemma for more-conservative Democrats, and especially those up for re-election next year.
The Treasury reported Friday that the government ran a deficit of $111 billion in August, better than Wall Street and congressional predictions. Still, the U.S. is on track for its largest shortfall since World War II when measured as a share of the economy. With one month to go in fiscal 2009, the deficit totals $1.378 trillion. Mr. Geithner recently met with five big business trade groups, including the U.S. Chamber of Commerce and the Financial Services Forum, to ask for their support. Earlier this week, those groups sent a letter urging Senate leaders to approve the request, saying: "Raising the statutory debt limit is critical to ensuring global investors' confidence in the creditworthiness of the United States."
To prepare for the possibility the Treasury could find itself bumping up against the debt limit, it is looking at some of the actions taken in the past to sidestep default and continue funding the government. On six occasions since 1995 the government has taken unusual and controversial steps to continue meeting obligations, including shifting government employee-retirement funds out of Treasury securities and into idle cash, and withholding year-end interest payments to government trust funds. Senate Republicans seem likely to use the opportunity to underscore broader unhappiness with the level of the U.S. debt, suggesting they will withhold votes unless Democrats agree to deficit-reduction commitments.
Traditionally the "responsible vote" has been to agree to the increase, said Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee. "But unless there's some responsible action to control the running up of debt, then it's not responsible" to increase the limit. The House passed a debt-limit increase to $13.029 trillion earlier this year, but the measure has languished in the Senate. Senate Democrats say they haven't put together a strategy for passing the increase. It could be added to other must-pass legislation, such as a short-term spending measure to keep the government running when the fiscal year ends Sept. 30. The Senate could also take up the issue on its own.
Spending and federal debt have emerged as an important issue in the 2010 election season, which has already begun. Some Republicans believe spending and deficits are a top issue among voters, along with the economy, especially with all-important independents. In a Gallup Poll conducted Aug. 31-Sept. 2, 9% of respondents overall and 10% of independents now mention the deficit spontaneously as their biggest worry. That compares with 2% of respondents and 3% of independents a year ago. It is now in the top five among the public's concerns.
Democrats say Republicans overestimate the mileage they can get from the issue. They also attribute the current high deficit and debt to Republican policies, including the Bush administration's tax cuts and war spending. "No one likes to raise the debt limit -- the reality is there is an obligation," said Sen. Robert Menendez of New Jersey, who heads the Democrats' senatorial campaign committee. "At the end of the day, I think people will do what's responsible."
Federal Deficit Hits $1.38 Trillion Through August
The federal deficit surged higher into record territory in August, hitting $1.38 trillion with one month left in the budget year. The soaring deficits have raised worries about the willingness of foreigners to keep purchasing Treasury debt. The Chinese, now the largest foreign owners of U.S. Treasury securities, have expressed concerns about runaway deficits. Treasury Secretary Timothy Geithner and other administration officials have sought to address those concerns by insisting that once the recession is over and the financial system is stabilized, the administration will move forcefully to get the deficits under control.
Republican critics contend the administration does not have a credible plan to address future deficits. "The $9 trillion question is when will the White House do more than just pay lip service to tackling these jaw-dropping deficits that threaten our economic stability," House Republican Leader John Boehner of Ohio said in a statement. "Piling more and more debt on future generations while massively increasing federal spending is not a response." Private economists worry the country could face the grim prospect of seeing interest rates soar in future years and the dollar weaken as foreigners dump their U.S. holdings.
The Treasury Department said Friday that last month's deficit was $111.4 billion, below the $152 billion that economists expected. Still, the imbalance added to a flood of red ink already accumulated through the recession and massive spending needed to stabilize the banking system. The Obama administration last month trimmed its forecast for this year's deficit to $1.58 trillion, from an earlier $1.84 trillion. The recovery of the banking system led to the reduced estimate as it meant the administration did not need to get an additional $250 billion in bailout support for banks. The $1.58 trillion estimate for the full budget year signals that that administration expects the imbalance in September to be around $200 billion. That would be a sharp deterioration from September 2008 when the government closed out that budget year with a $45.7 billion surplus.
Many private economists have slightly smaller deficit estimates for the full year but all agree that 2009 will be a record-holder by a large margin. The previous record deficit in dollar terms was $454.8 billion last year. The administration's revised budget forecasts issued last month also underscored how much the government's fiscal picture has deteriorated. It is now projecting the deficit over the next decade will total $9 trillion, $2 trillion more than its estimates from a few months ago.
The deterioration partly reflects the country's deep recession, the worst since the 1930s. That downturn has cut into government receipts and pushed up spending in such areas as unemployment benefits and food stamps, along with the cost of fighting wars in Iraq and Afghanistan. In addition, the government is using a $787 billion economic stimulus program passed by Congress last February to jump-start growth and is spending massive amounts from the $700 billion financial bailout package passed in October 2008 to stabilize the financial system. The Treasury Department budget report for August showed the government collected $145.5 billion in revenues, a drop of 7.3 percent from August 2008.
It marked the 16th consecutive month that revenues have been lower than the previous year, a string that reflects how much the recession, which began in December 2007, has cut into personal income and corporate taxes. Spending in August totaled $256.9 billion, down 4.5 percent from the year before. However, that comparison was misleading because the deficit last month was lowered by timing shifts which saw some payments shifted into July because Aug. 1 fell on a Saturday. Primarily because of the timing shifts, last month's deficit was 0.5 percent lower than in August 2008.
For the first 11 months of the budget year, spending totals $3.26 trillion, up 18.7 percent from a year ago, while tax receipts fell 16.1 percent to $1.89 trillion. The spending increases include the administration's estimate that $174.2 billion has been tapped from the financial bailout fund and another $84.9 billion went toward propping up mortgage giants Fannie Mae and Freddie Mac. In addition, federal spending on unemployment benefits totaled $104.7 billion through August, up from $41.4 billion in the year-ago period.
Stiglitz Urges End to GDP 'Fetish' in Favor of Broader Measures
Joseph Stiglitz, the Nobel Prize- winning economist, urged world leaders to drop an obsession with examining gross domestic product and focus more on broader measures of prosperity.
“GDP has increasingly become used as a measure of societal well-being and changes in the structure of the economy and our society have made it increasingly poor one,” Stiglitz said in an interview today in Paris.
The remarks reflect Stiglitz’s study of the issue for French President Nicolas Sarkozy, who commissioned a report at the beginning of 2008 after the onset of the financial crisis. Stiglitz and other contributors to the report will present their results tomorrow in Paris at a daylong conference hosted by Sarkozy and attended by Finance Minister Christine Lagarde. Sarkozy isn’t alone in questioning current gauges of wealth. Barack Obama raised the issue during his campaign for the U.S. presidency and David Cameron, leader of the U.K.’s Conservative Party, has called for thinking about “general well-being” instead of just output.
A year after the collapse of Lehman Brothers Holdings Inc. forced governments to pump billions of dollars into banks to shore up the financial system, Stiglitz said that broadening the range of statistics considered by governments is vital as they grapple with reviving the world economy and limiting climate change. “So many things that are important to individuals are not included in GDP,” said Stiglitz, a Columbia University professor. “There needs to be an array of numbers but we need to understand the role of each number. We may not be able to aggregate everything together.”
Assessing government’s contribution to economic output, which ranges from 39 percent in the U.S. to 48 percent in France, is one of the shortcomings of the GDP model, as is its difficulty in estimating improvements in quality of products such as cars instead of just quantity, Stiglitz said. Similarly, increased household debt may drive up output numbers, whereas that doesn’t amount to a real increase in wealth, he added.
While Stiglitz doesn’t recommend dropping GDP altogether, he wants governments to consider such matters, along with issues of environmental sustainability, in policy making. “Most governments make a fetish out of it. If you take one message out of our report, make it avoid GDP fetishism,” he said. “The message is to encourage political leaders away from that.” Stiglitz, a former chief economist for the World Bank and member of the White House Council of Economic Advisers, is also confident that the world will move in that direction. “This information is important because it affects how you make decisions,” he said. “The approach will get greater and greater acceptance over time.”
Lehman is a footnote in the great East-West globalisation crisis
You can see why markets and governments both like to blame Lehman Brothers for the "Great Contraction". Such wishful thinking shields investors from the nasty reality that deeper forces are at work: it absolves officialdom from its own destructive role in fixing the price of credit too low for 20 years, luring us into debt. As my colleague Jeremy Warner puts it, Lehman no more caused the economic convulsions of the last year than the assassination of an Austrian prince caused the First World War.
There was the little matter of a rising Germany then, and a rising China now. Both scrambled the international system, albeit in different ways. The 48 hours that killed Lehman and AIG – and would have killed Merrill, Morgan Stanley, and Goldman Sachs within a week if Washington had not stepped in – merely brought to a head the inevitable exhaustion of a global order in which the West chokes debt, and the East chokes on export capacity.
As of last week, the ABX index of sub-prime mortgage debt showed that AAA-rated securities from early 2007 were trading at 28 cents on the dollar – AA was at 4 cents, near all-time lows. No one can say that $2 trillion (£1.2 trillion) of sub-prime and Alt-A debt is still trading at panic levels, exaggerating losses. The dust has settled. What we can see is that creditors will never recoup their money. The housing crash has tipped 15m US home owners into negative equity. A third of sub-prime mortgages are in default. Some 7.8pc of all loans backed by the Federal Housing Administration are in foreclosure or 90 days in arrears. This is why the US Treasury had to seize Fannie Mae and Freddie Mac, the $5.3 trillion pillars of US housing. It is not a liquidity crisis. It is a bankruptcy crisis.
Foreclosures reached 358,000 in August alone. More Americans are being evicted each month than during the entire Depression year of 1932. This is not to pick on America. Variants of the bubble occurred across the Anglosphere, Scandinavia, Holland, Club Med, and east Europe. Defaults will hit with a lag in Europe, but hit they will. The IMF expects global banks to lose $2.5 trillion by next year. So far they have confessed to $1 trillion.
We know why the bubble occurred. Call its Greenspanism. Central banks rescued assets each time there was a hiccup, but let booms run unchecked. They pulled "real" rates ever lower, creating addiction to monetary stimulus. Larger doses were required with each cycle, until we hit zero, and it is still not enough. Debt burdens rose to records across the OECD. Couldn't they see that this was cheating: stealing from the future? No, they were seduced by "inflation targeting" – watch goods, ignore assets – just as cheap imports from China rendered the doctrine obsolete. It always takes ideology to consummate massive error.
Asia in turn caused a global bond bubble by accumulating $5 trillion in reserves (a side effect of holding down currencies to gain export share). Long-term rates collapsed too. The global credit bubble was complete. The Great Game can continue only as long as deficit countries – currently, US (-$628bn), Spain (-$109bn), Italy (-$62bn), France (-$58bn), Britain (-$53bn), Greece (-$42bn), and east Europe – are willing to bankrupt themselves buying Asian goods. Obviously, this is absurd.
America's baby boomers have lost 45pc of their net worth. US pay fell 4.8pc in June year-on-year as hours were slashed. US consumer credit has contracted for six months in a row, falling by record $21.6bn in July. The US savings rate has risen from near zero to around 5pc. "Who will replace the US consumer to power global growth?" asked IMF chief Dominique Strauss-Kahn in Friday's Le Monde. "We have left the financial crisis, but we are still in the economic crisis. "
There is gaping whole in world demand. It is being filled by governments, all nearing the limit of fiscal stimulus. Some have exceeded it: Spain is to raise taxes by 1.5pc of GDP, and Japan's Democrats are retreating from spending pledges. China is trying to plug the gap, belatedly, by ramping up credit 70pc this year, but it will take a cultural revolution to induce the Chinese to spend. The liquidity is leaking into stocks, metals, and property.
Yes, markets are sizzling, but industrial production is still down 23pc in Japan, 17pc in the eurozone, 13pc in the US and 11pc in Russia. We have a global glut of manufacturing plant. This is why companies will have to slash staff. Don't be deceived: profits can look good at first when firms cut into the bone. It is no strategy for an economy. We can all agree (except Germany, hiding bank losses) that the G20 in Pittsburgh should tighten ratios for lenders. But will we hear a word about the capital and trade imbalances of late 20th Century globalisation that caused this crisis? Probably not. It is easier to ignore the elephant in the room.
Insiders sell like there's no tomorrow
Can hundreds of stock-selling insiders be wrong? The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized. But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.
While a wave of insider selling doesn't necessarily foretell a stock market downturn, it suggests that those with the first read on business trends don't believe current stock prices are justified by economic fundamentals. "It's not a very complicated story," said Charles Biderman, who runs market research firm Trim Tabs. "Insiders know better than you and me. If prices are too high, they sell."
Biderman, who says there were $31 worth of insider stock sales in August for every $1 of insider buys, isn't the only one who has taken note. Ben Silverman, director of research at the InsiderScore.com web site that tracks trading action, said insiders are selling at their most aggressive clip since the summer of 2007. Silverman said the "orgy of selling" is noteworthy because corporate insiders were aggressive buyers of the market's spring dip. The S&P 500 dropped as low as 666 in early March before the recent rally took it back above 1,000.
"That was a great call," Silverman said. "They were buying when prices were low, so it makes sense to look at what they're doing now that prices are higher." In the case of firms such as discount broker TD Ameritrade, they are selling with abandon. Chairman Joe Moglia has netted more than $10 million in profits from stock sales since April, by selling shares on each of the last 106 business days, according to Securities and Exchange Commission filings.
A TD Ameritrade spokeswoman said Moglia's sales are being made under a pre-arranged selling plan he filed with the SEC last August. Under that plan, his brokers exercise some options he got eight years ago and sell the underlying shares every day the company's stock price is above a certain level. Moglia's not the only insider selling at TD Ameritrade. The company's founder and former chairman, Joe Ricketts, and his wife Marlene last month sold 5.7 million shares to help fund the family's purchase of the Chicago Cubs baseball team. They owned 16% of the company's stock at last count.
Silverman said the TD Ameritrade insider sales don't particularly raise concerns about the company's health, because "special circumstances" -- the Cubs deal and the pending expiration of Moglia's options -- are evident. He said it's potentially more worrisome when insiders suddenly make big sales without obvious motivating factors. Fossil CEO Tom Kartsotis has sold $25 million of the watchmaker's stock over the past month. Shares of Fossil have more than doubled since early March. Fossil didn't immediately return a call seeking comment.
At video game maker Activision Blizzard, CEO Robert Kotick and director Brian Kelly each made more than $10 million last month by selling shares after exercising stock options. While some of Kotick's options were due to expire next year, others weren't due to expire until 2014 in his case and 2012 in Kelly's. The stock sales took place at prices that were about 50% above their 52-week low. Activision didn't respond to a request for comment. Adding to the flurry of stock sales, companies are selling stock to the public at a brisk clip while buybacks have tailed off. All told, U.S. corporations have been net sellers of $105 billion of stock over the past four months, Biderman said.
Insiders have managed to cash in on some of those offerings. Healthcare payment administrator Emdeon, for instance, last month raised $155 million in an initial public offering. At the same time, selling shareholders led by private equity investor General Atlantic Partners raised $188 million. Though the wave of selling by insiders doesn't necessarily predict a pullback in their stocks or the market as a whole, it's hard to put a happy spin on the recent trends. "The disparity between buyers and sellers right now is vast," said Silverman. "That's the beauty of following insider trading -- these guys are talking with their checkbooks."
Obama Team to Take Credit for Signs of Recovery
A top economic adviser to President Obama began a concerted White House effort on Friday to claim credit for the improving economy, declaring that the turnaround is "not, in our judgment, an accident." Previewing a speech that Obama will give on Wall Street Monday, Lawrence H. Summers compared the government's actions to a successful but evolving response to a natural disaster.
"We are making a clear transition from rescue as the priority of public policy to sustained recovery," he told reporters in a briefing Friday afternoon. "We have moved back from the brink of financial catastrophe." Summers said the Obama administration can "take real satisfaction" from what he said is movement toward recovery but quickly added that the White House recognizes the depth of economic hardship that remains a legacy of last year's collapse.
"The level of unemployment is unacceptably high," he said. "We will not make the mistake of prematurely declaring victory or prematurely withdrawing public support for the flow of credit. . . . It is a mistake that we must not make today." Even as Obama ratchets up the fight over health care, administration officials are eager to keep the country's focus on the modest improvements in the economy: The stock market is up more than 15 percent since the beginning of the year, interest rates have fallen and banks are at less risk of default. On Thursday, the White House credited its $787 billion stimulus package with saving or creating more than 1 million jobs since its passage in February.
Republicans have increased their rhetorical attacks on the administration as the unemployment rate has continued to rise and the promise of economic growth has failed to materialize. House Republican Whip Eric Cantor (R-Va.) issued a statement on Thursday criticizing the president and his aides for offering happy-talk about the economy while many people still suffer. "The American people don't understand why the Administration continues to praise itself while workers keep losing their jobs," Cantor said. "Since President Obama took office, over 3 million Americans have lost their jobs, including 2.5 million people since the President signed his stimulus bill."
White House officials hope to use the Monday anniversary of the collapse of Lehman Brothers to renew their push for reform of the country's system of financial regulation.
There has been some resistance in Congress to some of the administration's proposals, including a plan to give the Federal Reserve broad authority to serve as the "systemic risk regulator" for a wide swath of financial institutions.
On Friday, Summers indicated a bit of room for negotiations on the specifics of the administration's plan. "We've seen the Fed as a natural place for systemic regulation," he said. "Just how the Fed will interact with other regulators -- just precisely what the configuration will be -- is obviously going to be a subject for discussion."
Uncle Sam the big player in home loans
In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home, and private lenders flooded the market, aggressively pursuing borrowers no matter their means or financial history. Now the pendulum has swung to the other extreme. Only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.
While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role — nearly 90 percent of all new home loans are funded or guaranteed by taxpayers — has far-reaching consequences for prospective homebuyers and taxpayers. The government has the power to decide who is qualified for a loan and who is not. As a result, many borrowers among both poor and rich are frozen out of the market. Nearly one-third of those who obtained home loans during the boom years of 2005 and 2006 couldn't get one today, according to mortgage industry analysts. Many of these borrowers were never really able to afford their homes and should not have gotten loans. But many others could, and borrowers like them are now running into tougher government standards.
At the same time, taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages. There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount.
The outlay has already reached about $1 trillion over the past year and is rising. During that time, the government has pumped more money into the mortgage market than has been spent on Medicare or Social Security or the defense budget, more even than Washington has paid to bail out banks and other struggling companies. "Absent government intervention, there would be no lending," said Nicolas Retsinas, director of Harvard University's center for housing studies. Government officials generally agree that it would be better for private lenders to resume their traditional role as major providers of finance for home loans. But policymakers now face some tough choices. They must decide how to reduce support for the mortgage market without letting it collapse. And they must decide what kind of support the government should provide in the long run.
"The problem was a long time brewing, and the problems in our mortgage finance system will take a long time to repair," said Michael Barr, the Treasury's assistant secretary for financial institutions. Fannie Mae and Freddie Mac were chartered by Congress four decades ago to create a marketplace in which mortgage lenders could sell the loans they made and use that money to make more loans. The two companies were owned by private shareholders and for a fee guaranteed investors in mortgage loans that they would get paid. After the government seized Fannie and Freddie, it offered them an unlimited line of credit and pledged to inject up to $400 billion to keep them solvent.
But this is not the only form that government involvement in housing finance takes. The Federal Reserve is purchasing hundreds of billions of dollars of mortgages with the aim of ultimately owning $1.25 trillion worth. This buying spree has flooded the mortgage market with money, forcing down interest rates and assuring lenders they have somewhere to sell their loans. The Treasury Department has a similar, though smaller, program. The Federal Housing Administration, meantime, is dramatically increasing the amount of home loans in insures. Its share of new mortgages jumped from 1.8 percent in 2006 to 18 percent so far this year, according to Inside Mortgage Finance.
All told, the government now stands behind 86 percent of all new home loans, up from about 30 percent just four years ago, according to Inside Mortgage Finance. For the first time in decades, the rate of home ownership ticked up, reaching 69.2 percent. Many first-time buyers were of lower income, and many such buyers were African-American or Hispanic. Fannie and Freddie, afraid of losing more market share, also began funding risky loans. Then, in 2006, the housing market began to tumble and many people couldn't or wouldn't pay their loans. Many borrowers had been put into loans they could not afford, and when the mortgages failed the results were catastrophic, precipitating the financial crisis.
The tighter market that emerged now excludes some groups of aspiring homebuyers. Although Fannie and Freddie don't make loans, they effectively set standards for the mortgage industry by detailing what kind of loans they will purchase from lenders and at what cost. All but gone are subprime mortgages, initially meant to help people with blemished credit until they could get another loan. Similar risks threaten to engulf FHA. Nearly 8 percent of FHA loans at the end of June were either 30 days late or in the process of foreclosure.
Around the World, Stock Markets Fell and Rose, Together
The United States stock market has just completed its best six months since 1933. From March 9 to Sept. 9, the Standard & Poor’s 500-stock index leaped by 53 percent. But the gain over that period, which began when stocks reached their nadir in March, was not enough to offset the losses recorded in the previous six months. Not since 1932 had the market suffered a half-year period as bad as that one. Investors clearly found it difficult to determine whether the Great Recession would turn into Great Depression II.
Amazingly, however, the American stock market was one of the least volatile markets in the world in the last year. It was among the best markets when it was plunging, and among the worst when it was soaring. Over all, it ranked near the bottom among international markets. Whatever else you might want to say about the virtues of international diversification, in this cycle it has done little to balance the risks of investing in any one market. When the markets went down, they nearly all went down. When the markets rose, they soared together.
If history is a guide, the strong recovery may be an indication that better prices are still ahead. Since World War II, there have been eight periods before the current market when the S.& P. 500 managed to rise at least 30 percent over a half-year period — in 1963, 1971, 1975, 1980, 1982-83, 1991, 1997 and 1999. A year later, the index had made further gains in seven of them. The exception was 1980, when the economy went into a double-dip recession and dashed the hopes of investors who had bet on a continued rise in stock prices.
Before that, the record was less impressive. Soaring prices in 1929 presaged the Great Depression, and a sharp rebound in 1930 proved to be a suckers’ rally. But big gains in 1932-33 and 1935 were followed by additional gains. Prices were little changed a year after large gains in 1938 and 1943. The accompanying graphic demonstrates the truth of an old adage: If you lose 50 percent of your money, and then gain 50 percent, you have not come close to breaking even.
Italy provides one of the best examples of that. Over the six-month period ending on Wednesday, the FTSE/MIB index of Italian stocks rose 81 percent in euros. With the euro also strong against the dollar during that period, the Italian index more than doubled, rising 109 percent from the perspective of a dollar-based investor. But an investor who put money in the Italian stock market exactly one year before, on Sept. 9, 2008, suffered a decline of 55 percent in euros, or 60 percent in dollars, during the next six months. The Italian market, like the American market, hit bottom on March 9 of this year. The net impact: For the 12 months, the Italian market was down 17 percent, whether measured in euros or in dollars.
The accompanying graphic shows the performance of major stock market indexes in each of the 19 countries in the Group of 20, as well as of a European-wide index that is shown because the European Union is the final member of the Group of 20, whose leaders will meet later this month in Pittsburgh, to discuss efforts to fight the world financial crisis.
For the entire year, the best performances were turned in by emerging markets, which are back in favor with investors hopeful of a resumption of global growth. China, whose market had plunged earlier than most, was the only one to rise during the six-month period through March 9, and was the best performer for the entire year. Brazil, Indonesia and South Africa also showed gains for the 12 months, while the Indian market broke even and the South Korean market nearly did the same.
For the entire year, the largest declines were in Saudi Arabia and Russia, oil producers that suffered from lower oil prices brought on by the global slowdown. The similarity in international performance can also be seen within markets. During the most recent six months, the three best-performing sectors in the S.& P. 500, and in the S.& P. Europe 350, were financials, industrials and materials. During the previous six months, they were the worst-performing sectors in both indexes.
Wen Signals Unprecedented Spending Will Drive Chinese Rebound
China’s Premier Wen Jiabao signaled he will maintain unprecedented government spending to drive a recovery from the slowest expansion in almost a decade. “China’s economic rebound is unstable, unbalanced and not yet solid,” Wen said yesterday in a speech at the World Economic Forum in Dalian, a city in northeastern China. “We cannot and will not change the direction of our policies when the conditions aren’t appropriate.”
Wen’s remarks reflect a commitment last week from the world’s biggest nations to maintain unprecedented fiscal and monetary measures to secure a recovery from the deepest postwar recession. The comments also may help reassure investors that a slowdown in new loans won’t derail China’s rebound. “The worst has passed, now it’s about whether China can maintain the strong momentum of a recovery that’s primarily been driven by policy stimulus,” said Wang Qing, chief Asia economist for Morgan Stanley in Hong Kong. “Very weak external demand is the key concern.”
Nine months of falling exports, overcapacity in manufacturing and elevated unemployment have restrained the recovery generated by record lending in the first half of the year and a 4 trillion yuan ($586 billion) stimulus package. The Shanghai Composite Index plunged into a bear market, or a decline of at least 20 percent, on Aug. 31 amid concern that reduced new lending in the second half could damp growth. The index has since pared the slide to 16 percent, and remains up 37 percent from a year ago.
Stimulus steps have “yielded initial results,” arresting a downturn in economic growth, and the government will maintain a moderately loose monetary policy and a “proactive” fiscal stance, Wen said. He cautioned that some stimulus measures will “fade” and others will take time to become effective. The government is due to announce August figures for trade, industrial production, fixed-asset investment, retail sales and inflation today. Economists anticipate industrial production rose the most in a year and retail sales gained at a faster pace, according to the median estimates in Bloomberg News surveys.
Risks for the economy include asset-price inflation, after a record $1.1 trillion of new loans in the first six months. Bank of China Ltd. Vice President Zhu Min said in an interview in Dalian yesterday that 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,” Zhu said. “So you see asset bubbles in commodities, stocks and real estate, not only in China, but everywhere.” While China’s consumer prices have fallen for most of this year, Wen said policy makers are on alert for inflation risks.
The government said this week the employment situation remains “grave,” underscoring the need to promote economic growth to create jobs and preserve social stability as the Communist Party prepares to celebrate 60 years of rule on Oct. 1. While China’s gross domestic product is 70 times bigger than when Deng Xiaoping endorsed free-market policies in 1978, widening income disparities, corruption, pollution and ethnic tensions threaten to foster unrest. Five people died last week in protests in Urumqi, where ethnic Uighurs and Han Chinese are at odds, following unrest in July which killed almost 200 people.
The government’s goals are social harmony and stability and “steady and relatively fast” growth, the premier said yesterday, adding that the government is “taking all possible steps to expand employment.” China also faces the challenge of reducing the economy’s dependence on investment and exports for growth and boosting services and domestic consumption. Achieving that goal could reduce global imbalances in spending and saving that some economists blame for helping cause the global financial crisis. Domestic demand is playing a bigger role in China’s economy, Wen said yesterday.
The economy accelerated in the second quarter, expanding 7.9 percent, and economists forecast faster growth for the rest of the year. World Bank President Robert Zoellick said Sept. 2 that the nation’s expansion has aided trading partners and increased the chance of a global rebound.
“Asia is recovering faster from the economic downturn than other regions, in part thanks to China’s gravitational pull,” European Union Trade Commissioner Catherine Ashton said in Beijing this week. While cautioning of “many uncertainties” for the global economy, Wen said he saw “the light of dawn” and called for the green shoots of recovery to be tended through coordinated moves by world leaders. “Confidence is even more precious” than gold or money, he said.
Finance ministers and central bank governors from the Group of 20 emerging and developed nations meeting last week in London vowed to sustain efforts to secure a global recovery. “We will continue to implement decisively our necessary financial-support measures and expansionary monetary and fiscal policies,” they said in a joint statement. China’s premier also yesterday called for a global fight against protectionism in trade. A resurgence of China’s property market, rising auto sales and the fastest expansion of manufacturing in 16 months in August have added to signs that the Chinese economy recovery is maintaining momentum.
China’s house prices in 70 cities rose 2 percent in August, double the gain in July, after sales and investment climbed, the statistics bureau said yesterday. General Motors Co., the largest overseas automaker in China, more than doubled sales in the nation last month to 152,365 vehicles. China’s gross domestic product may increase 9.5 percent in 2010 after an 8.3 percent gain in 2009, the smallest in eight years, according to a Bloomberg survey of 22 economists conducted the week ending Aug. 28. Investors in recent weeks indicated doubt that the recovery will be sustained as exports slide and the government seeks to rein in overcapacity in industries such as steel and cement.
China Investigating U.S. Exports
The Chinese government announced on Sunday evening that it was opening investigations into whether the United States is subsidizing and dumping automotive and chicken meat exports to China, sharply escalating trade tensions two days after President Obama imposed tariffs on tires from China. China’s commerce ministry did not mention the tire dispute in its announcement on Sunday, taking pains to portray the investigations as “based on the laws of our country and on World Trade Organization rules.”
But the timing of the announcement, on a weekend and so soon after the tire decision in Washington, sent an unmistakable message of retaliation. The official Xinhua news agency web site prominently linked its reports on the tire dispute and on the Chinese investigations into “certain imported automotive products and certain imported chicken meat products originating from the United States,” without actually mentioning the tire issue in its description of the upcoming investigations.
The commerce ministry statement, posted on its Web site, also hinted obliquely at the harm that a trade war could do at a time when Western nations and Japan are still struggling to emerge from a severe economic downturn. “China is willing to continue efforts with various countries to make sure that the world economy recovers as quickly as possible,” the statement said.
The Chinese decision to open trade investigations represents an unusually strong response. Previous American decisions to impose quotas and tariffs on a wide range of Chinese garments and steel products over the past four years have drawn formulaic denunciations and threats to file W.T.O. cases, but not such a clear threat of bilateral retaliation against American exports.
States Face Drop in Gambling Revenues
Casinos and lotteries in most states are reporting a downturn in revenue for the first time, resulting in a drop in the money collected by state and local governments, according to new state data. The decline comes as states are rapidly expanding gambling in hopes of stemming severe budget shortfalls, and it indicates that gambling is not insulated from broader economic forces like recessions, as has been argued in the past.
The drop has led some gambling experts to wonder whether the industry is reaching market saturation, whereby a limited number of gamblers with a fixed amount of money to bet is being split across a growing number of gambling options. States that have been invested in gambling the longest have been hit hardest. Illinois reported a $166 million drop in tax revenue in fiscal year 2009, from 2008; Nevada had a $122 million drop, and New Jersey $62 million.
In hopes of enticing more gamblers, New Jersey lawmakers have repealed a smoking ban, and in Illinois they are considering allowing free drinks on riverboat casinos. “The data shows that states take a real chance in depending on gambling because this revenue is not likely to keep pace with growing budgetary needs,” said Lucy Dadayan, a senior analyst at the Nelson A. Rockefeller Institute of Government at the State University at Albany, which will release a report on the subject next week.
“In the absence of new types of gambling, it can become a zero-sum game as states compete for the same pot.” Others, however, argue that the current decline is temporary, and that the industry has plenty of room to expand. Some experts expect revenues to bounce back, but doubt they will be as robust as they were before the recession.
The 12 states that have casinos made $4.5 billion in fiscal year 2009, which ended June 30, a 7.4 percent drop from last year, according to the state data. Among the roughly 42 states with lotteries, 38 reported data indicating that they made $14.5 billion this year, a 2.6 percent drop compared with the earnings from the same states last year.
Gambling critics have long maintained that it provides short-term revenue at the expense of long-term social costs, like increased crime and addiction. But the new data also shows that the revenue collected by states and local governments is decreasing while competition for it is on the rise. Still, state leaders are looking for ways to get a piece of the earnings.
Here in Ohio, Gov. Ted Strickland, a Democrat and former Methodist minister, reversed his opposition to gambling and, in conjunction with the legislature, issued a directive allowing video slots at the state’s seven racetracks. In Colorado, voters last year backed an increase in betting limits at casinos, and Missouri voters approved the end of limits on how much a gambler can lose. “We need those slots like nobody’s business,” said Mildred Cox, 77, who for 28 years has run the concession stand at River Downs here, one of the seven horse racing tracks slated to receive some of the state’s 17,500 proposed new slot machines. “Look at this place, it’s desolate.”
Across from her, a crowd of older men, betting tickets in hand, stood staring at several televisions mounted on the wall showing races in other states and Canada. As a bell rang, the horses sprinted by, competing for a winning prize of $4,600. But the men barely broke their concentration from the televisions. “You can’t attract the best horses and the biggest bettors with purses like that,” said Ms. Cox, pointing outside at a largely empty grandstand.
Thirty years ago, gamblers had to go to Las Vegas or Atlantic City to bet legally. Now, a dozen states have commercial casinos, 12 have “racinos,” or slot machines and other games that are installed at racetracks, 29 states have Indian casinos, and at least 42 states and the District of Columbia, have lotteries. “When budgets get tight, expanding gambling always looks to lawmakers like the perfect quick-fix solution,” said John Kindt, a professor of business and legal policy at the University of Illinois who studies the impact of state-sponsored gambling. “But in the end, it so often proves to be neither quick nor a fix.”
Crime jumps 10 percent in areas with casinos, personal bankruptcies soar 18 percent to 42 percent and the number of new gambling addicts doubles, Mr. Kindt said. Predicted state revenue often falls short and plans frequently get tripped up by legal fights or popular opposition, he said. In Delaware, for example, Gov. Jack Markell said in March that he wanted to legalize sports betting in casinos, which he said would bring in $53 million in the first year to help plug an $800 million budget shortfall. But the plan was blocked by a federal court in Philadelphia on Aug. 24 on the grounds that it would undermine confidence in professional sports.
In Ohio, Governor Strickland reversed his stance on video slots at racetracks based on a “conservative” estimate that the new machines would net more than $760 million to the state. But the slots are not likely to arrive here any time soon because a lawsuit is pending before the Ohio Supreme Court that argues that the plan should be placed before the voters. The slots may also get overtaken by a proposed constitutional amendment that will be on the November ballot and would allow four full-fledged casinos, one each in Cincinnati, Cleveland, Columbus and Toledo.
Still, Frank J. Fahrenkopf Jr., president of the American Gaming Association, said states had plenty of reasons to want to expand gambling. “Even though our revenues are down during the recession, bringing a casino into a community will still provide new jobs, new tax revenues, new opportunities for local vendors and other benefits that didn’t exist before,” Mr. Fahrenkopf said. “It isn’t surprising that as consumers are tightening their wallets, and with less discretionary spending for entertainment, they are spending less when they visit casinos, too.”
About 60 percent of people who participate in casino gambling have cut back on spending on the activity, according to a 2008 national survey conducted by the association. Despite the downturn, revenue from racinos grew this fiscal year, producing $2.9 billion in taxes and fees in 12 states compared with $2.7 billion the year before, a 6.7 percent increase.
But Ms. Dadayan of the Rockefeller Institute said the racino windfalls might be short-lived because slot profits usually soften with time as their novelty wears off and more states add machines. If Pennsylvania and Indiana, where slots are new, are excluded, the total slot revenue from the other 10 states with racinos actually fell by $76 million in fiscal year 2009, a 4 percent decline.
Banks ready to risk your money again
A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk. Goldman Sachs, JPMorgan Chase and others - which have received tens of billions of dollars in federal aid - are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.
That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say. There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.
Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses. The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse - a precedent that could encourage even greater risk-taking from the private sector.
Lawrence Summers, director of the White House National Economic Council, says an overhaul of financial regulations is needed as soon as possible to keep the financial system safe over the long haul. "You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says. No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades.
Will they pile on bets to the point that a new asset bubble forms and - as happened with mortgage-backed securities - its undoing endangers banks and the broader economy? "We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund. Some risk-taking is good. When banks are willing to invest in companies or lend to home-buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion.
The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health. Because the largest banks' trading divisions make their bets with each other, their fortunes are intertwined. The collapse of one can threaten another - and another - if it is unable to pay off its debts. This so-called counterparty risk is a major reason the Obama administration's regulatory overhaul plan calls for the creation of a "systemic risk regulator."
The administration is also seeking tougher capital requirements for banks, arguing that banks' buying of exotic financial products without keeping enough cash on reserve was a key cause of the crisis. Treasury Secretary Timothy Geithner has urged the Group of 20 nations - which meets this month in Pittsburgh - to agree on new capital levels by the end of 2010 and put them in place two years later. Geithner hasn't said how much extra capital banks should be required to keep on hand. Data from the April-June quarter show that the banks are leaning heavily again on their trading desks for revenue.
During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, trading revenue had climbed to nearly 50 percent of total revenue, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern. Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.
The government hasn't just watched banks resume their freewheeling ways and prosper. It has been an enabler in the process. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp. - during both the Bush and Obama administrations - have made trillions of dollars available to the biggest banks through bailouts, low-cost loans and loss guarantees designed to stabilize the financial system. The failure of Lehman Brothers - the biggest bankruptcy in U.S. history - and the panicky sales of Bear Stearns to JPMorgan and Merrill Lynch to Bank of America, also have transformed Wall Street. The surviving investment banks have fewer competitors and more market share.
Five of the biggest banks - Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America - posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007 - when the economy was strong. Meanwhile, Bank of America and Wells Fargo today originate 41 percent of all home loans that are backed by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance. The banks made $284 billion in such loans in the first half of this year, up from $124 billion during the same period last year.
"The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "Their market share has grown and they have a lot of clout in Washington." Wall Street's recovery is also being aided by a stock-market rally that has driven the Standard & Poor 500 index up nearly 54 percent since March 9, when it hit a 12-year low.
Despite the return to profitability, these aren't the high-octane days from before the crisis. To qualify for government backing, the biggest Wall Street firms are no longer allowed to supercharge their returns by borrowing up to 30 times the value of their assets to place bets on stocks, bonds and other investments. Businesses supported by Wall Street bankers and traders say they've also noticed changes. Namely, their customers aren't spending as much on food, drinks and entertainment as they did during the boom years.
At Fraunces Tavern, a high-end bar just around the corner from the New York Stock Exchange, the Wall Street workers who used to drink $25 glasses of port are scarce these days. "Now we're doing happy hours," says Damon Testaverde, one of the owners of Fraunces Tavern. "We never did that. There's just less bodies around." But one thing fundamental to Wall Street hasn't changed: Big banks and their traders are still finding creative - some say speculative - ways to profit.
They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe. In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing. But now, as the financial system recovers, the government plans to phase out these backstops - leaving banks more vulnerable to big bets that go bad.
One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley.
"It may be unpleasant to hear that the traders are riding high," said Walter Bailey, chief executive of boutique merchant banking firm EpiGroup. "But, hey, it's a pay-for-performance thing, and they're performing like mad." And that means the return of another Wall Street mainstay: Lavish compensation. After 10 of the largest banks received a $250 billion lifeline from the government last fall, some lawmakers were outraged that employees were being paid seven-figure salaries even though their companies nearly collapsed. A handful of top executives, including Citigroup CEO Vikram Pandit, have agreed to accept pay of just $1 this year. But the compensation of most high-performing traders hasn't changed.
Goldman spent $6.6 billion in the second quarter on pay and benefits, 34 percent more than two years ago. And Citigroup, now one-third owned by the government after taking $45 billion in federal money, owes a star energy trader $100 million. The CEO of Goldman, Lloyd Blankfein, said at a banking conference in Germany last week that excessive banker pay works "against the public interest." He said bonuses are important to attract and retain top talent, but "misapplied, they can also encourage excess."
The Obama administration has proposed measures to diminish the risk posed by large banks. They include forcing banks to hold more capital to cover losses and trying to increase the transparency of markets in which banks trade the most complex - and potentially risky - financial products. One major component of the Obama plan - creating an agency to oversee the marketing of financial products to consumers - will be difficult to pass in Congress. Industry lobbying against it and other proposed financial rules has been fierce.
Lobbyists for hedge funds, the large investment pools that cater to the rich, have been able to fend off proposals that would require them to register with the SEC and regularly disclose their holdings. And they, too, are profitable again after a dismal 2008. The 1,000 largest hedge funds in Morningstar's database posted average returns of 11.9 percent through July. In 2008, those same funds lost 22 percent on average. "Have there been changes around the edges?" says Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital. "Absolutely. Have their been systematic changes? Absolutely not."
Mortgage problems are walloping Americans' credit scores
When you do a short sale of a house, or modify the mortgage, is there much of an effect on your credit score? What if you walk away from the mortgage altogether? A scoring company created by the three national credit bureaus -- Equifax, Experian and TransUnion -- has some eye-opening numbers. VantageScore Solutions, whose risk-prediction scores are now being used by some of the largest mortgage companies and banks, has found that the way consumers handle their mortgage problems can have profound effects on their credit scores.
For example, loan modifications that roll late payments and penalties into the principal debt owed on the house can actually increase borrowers' scores modestly. Refinancings of underwater, negative-equity mortgages -- which the Obama administration's Making Home Affordable program offers through government-controlled Fannie Mae and Freddie Mac -- may have little or no negative effect on scores, even though the homeowners might have been tottering on the edge of serious delinquency before refinancing.
The Vantage credit score, the primary competitor to the long-dominant FICO credit score, rates borrowers on a scale range of 501 (subprime, the highest risk) to 990 (super-prime, the lowest risk). Unlike Fair Isaac Corp.'s FICO scoring system, whose scores can vary by 50 to 100 points based on which bureau supplied the underlying credit data, Vantage scores are about the same for each consumer.
When homeowners negotiate a short sale with lenders, they sometimes assume that there will be relatively little effect on their scores. After all, the loan was successfully paid off, there was no foreclosure, and the lender voluntarily agreed to accept a lower balance than was owed. But according to VantageScore researchers, short sales can trigger big drops in credit scores. Sarah Davies, senior vice president of analytics, said a homeowner with an excellent score of 862 might plummet 120 to 130 points after a short sale.
Although it's true the lender may lose less money through a short sale compared with a foreclosure, "it's still a derogatory event," Davies said. The full debt was not repaid and the lender lost money. What happens when borrowers walk away from their mortgage debts altogether -- the so-called strategic defaults that have become commonplace in some large markets such as in California? They should expect 140- to 150-point hits to their scores, plus negative marks on their credit bureau files for as long as seven years.
People who file for bankruptcy protection covering all their debts (mortgage, credit cards, auto loans, etc.) will get hit with an average 355- to 365-point drop in their scores. Bankruptcies remain on borrowers' credit bureau files for 10 years. With all the mortgage delinquencies, short sales and foreclosures experienced by U.S. consumers in the last couple of years, has there been a deterioration of average scores across the board? Absolutely.
For example, roughly 36.6 million of the 213 million consumers tracked by the three national credit bureaus in the first quarter of 2008 had Vantage scores above 900 -- the super-prime credit rung. That select group represented 17.2% of the country's consumers.But by the end of the second quarter of this year, just 15.4% -- 33.3 million out of 216.9 million individuals' files -- were left among the elite. By credit industry standards, that's huge.
More Americans' scores are slipping into the worst credit category as well. In the third quarter of 2006, 34.4 million consumers were in the lowest segment -- 16.6% of 206.9 million individuals. But by the second quarter of this year, 18.3% of all files were in that category -- 39.8 million consumers out of 216.9 million.
Most of these changes -- fewer people with excellent credit, more people in the lowest brackets -- have been caused by late payments on home mortgages, serious delinquencies, short sales and foreclosures, according to VantageScore researchers.
But the bottom-line good news about scores is that homeowners facing financial stress can experience minimal dings to their credit if they contact their loan servicer or lender early in the game -- when they first discover that they may have trouble making their monthly payments -- and take the first steps toward a loan modification or refinancing.
"Start that conversation early," said Barrett Burns, a former lender and now chief executive of VantageScore. If you wait and fall several payments behind before seeking a modification, "you can lose 240 points on your score" and damage your ability to obtain credit for years.
Wall Street’s New Gilded Age
by Niall Ferguson
Since its birth, the United States has grappled with the problem of an over-mighty financial sector. With the exception of Alexander Hamilton, the Founders' vision was of a republic of self-reliant farmers and small-town tradesmen. The last thing they wanted was for New York to become the London of the New World—a mammon-worshiping metropolis in which financial capital and political capital were rolled into one. That was why there was such resistance to creating a central bank, and why—despite two attempts—we have no Bank of the United States to match the Bank of England. That was why populists railed against the adoption of the gold standard after the crash of 1873. That was why there was so much suspicion when the Federal Reserve System was created in 1913. That was why government regulation of Wall Street was so strict from the Depression until the 1970s.
But now, barely a year after one of the worst crises in all financial history, we seem to have returned to the Gilded Age of the late 19th century—the last time bankers came close to ruling America. A few Wall Street giants, led by none other than -JPMorgan, are back to making serious money and paying million-dollar bonuses. Meanwhile, every month, hundreds of thousands of ordinary Americans face foreclosure or unemployment because of a crisis caused by … a few Wall Street giants. And what makes the losers in this crisis really mad is the fact that there's now one law for the small debtors and another for big ones. If you lose your job and fall behind on your $1,500 monthly mortgage payment, no one's going to bail you out. But Citigroup can lose $27.7 billion (as it did last year) and count on the federal government to hand it $45 billion.
A hundred years ago, people angrily compared the House of Rothschild to a giant octopus with its tentacles wrapped around the U.S. economy. Today it's the turn of Goldman Sachs to be likened to a "great vampire squid." To understand why, you need to go back 12 months.
With the bankruptcy of Lehman Brothers Holdings Inc. last September, 9/15 supplanted 9/11 as the costliest day in the history of New York City. It was also the most cataclysmic American bank failure since 1931.
The Lehman bankruptcy was in fact only one of seven events that, in the space of just 19 days, signaled the end of an epoch. On Sept. 7, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) were nationalized. On Sept. 14, Merrill Lynch was bought by Bank of America. On the same day that Lehman failed, the money-market fund Reserve Primary "broke the buck" because of losses on unsecured commercial paper it had bought from Lehman. The next day—to avoid a lethal chain reaction in the market for credit default swaps—the insurance giant AIG was given an $85 billion bailout by the Federal Reserve. On Sept. 22, the investment bank went extinct as a species when Goldman Sachs and Morgan Stanley converted themselves into bank holding companies. Finally, on Sept. 25, Washington Mutual was placed into the receivership of the Federal Deposit Insurance Corp. (FDIC).
Not everything that has gone wrong in the world economy since 2007 can be blamed on these seven events, much less on the Lehman bankruptcy alone. At most, about a fifth of the total 50 percent decline in the U.S. stock market between the peak of October 2007 and the low of March 2009 could be attributed to what happened in September of last year. (October 2008 was an even worse month for stocks.) But other indicators better reveal the scale of the financial trauma. In the 24 hours after Lehman failed, the London Interbank Offered Rate (LIBOR, for short)—the rate that financial institutions charge each other for unsecured borrowing—soared 3.33 percentage points, to 6.44 percent. The commercial-paper market froze. The resulting credit crunch set off a chain reaction. Firms canceled orders and started laying off workers. International trade collapsed.
Equally dramatic—and more long-lasting—has been the effect of the crisis on government policy. Prior to 9/15, it seemed unlikely that Congress would approve a large-scale bailout for Wall Street. Treasury Secretary Henry Paulson had told potential buyers of Lehman Brothers there would be "no government money" to sweeten any takeover deal. Even after the Lehman failure, it still took two attempts to secure passage of the $700 billion Troubled Asset Relief Program through Congress. Since then we've witnessed the fiscal equivalent of a dam bursting. We're now looking at $9 trillion of new federal debt in the decade ahead.
Prior to 9/15, the Federal Reserve Board argued that the Fed could not buy "shaky assets" from Lehman, but could only lend against "good collateral." In the week that followed, the Fed's balance sheet leapt upward by 21 percent after the institution announced it would accept equities as collateral for the first time in its history. Other new measures included the FDIC's guarantee of all bank debt—a remarkable undertaking given the quantity of bonds issued by U.S. banks.
Six months earlier the Treasury and Fed had saved Bear Stearns from bankruptcy by brokering its sale to JPMorgan Chase. Though shareholders and bondholders had lost money, they had not been wiped out completely. By treating Lehman differently, the authorities shattered the illusion that some major financial institutions were "too big to fail." But starting with the bailout of AIG just a day later, they quickly began the expensive process of trying to restore that illusion. Now it's no longer an illusion. It's become a very dangerous reality.
In April this officially became the longest recession since World War II. The International Monetary Fund expects the U.S. economy to shrink by 2.6 percent this year. The unemployment rate is heading for 10 percent. With numbers like that, you'd think some radical reform was in order. But no. Despite much talk on both sides of the Atlantic of new financial regulation, the likelihood is that the most important flaw in our financial system will not be addressed. On the contrary, the emergency measures taken a year ago have made it significantly worse. That flaw can be summed up in a single phrase: banks that are "too big to fail." Let's call them the TBTFs.
Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street's "bulge bracket," the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.
Last year's crisis made this problem worse in two ways. First, it wiped out three of the Big 15: goodbye Bear, Merrill, and Lehman. Second, because the failure of Lehman was so economically disastrous, it established what had previously only been suspected—that the survivors were TBTF, effectively guaranteed by the full faith and credit of the United States. Yes, folks, now it's official: heads, they win; tails, we the taxpayers lose. And in return, we get … a $30 charge if we inadvertently run up a $1 overdraft with our debit card. Meanwhile, JPMorgan and Goldman Sachs executives get million-dollar bonuses. What's not to dislike?
None of the regulatory reforms proposed so far do anything to address the central problem of the TBTFs. What did Treasury Secretary Timothy Geithner propose over the summer?
• The Fed should become the "system risk regulator" with power over any "systemically important" institutions, a.k.a. TBTFs. But wasn't it that already?
• The originators of securitized products should be required to retain "skin in the game" (5 percent of the securities they sell). What, like Bear and Lehman did?
• There should be a new Consumer Financial Protection Agency. So what were the other regulatory agencies doing? Oh, yes, protecting the TBTFs.
• There should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
• And "federal regulators should issue stand-ards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value." I can't wait to hear what those will be.
At the recent G20 finance ministers' meeting the only significant difference was a call for the TBTFs to raise more capital and become less leveraged "once recovery is assured." Even that has elicited protests from the bankers. Before the ink was dry on the G20 communiqué, JPMorgan published a report warning that proposed regulatory changes would reduce the profitability of the investment-banking operations of Deutsche Bank, Goldman, and Barclays by as much as a third.
The compensation issue, by the way, is a red herring. Politicians like to focus on bankers' bonuses, because everyone can be shocked by the fact that Lloyd Blankfein, the Goldman CEO, gets paid 2,000 times what Joe the Plumber gets. But that's a symptom, not a cause, of the deep-rooted problem. The TBTFs are able to pay crazy money because they reap all the rewards of risk-taking without the cost: the risk of going bust. Ask yourself, how did Goldman make those handsome second--quarter profits of $3.4 billion? Yes, by leveraging up and taking on more risk.
Right now we don't need a charade in which politicians claim they are going to regulate the big banks more tightly. (These are the same politicians who were supposed to be regulating Fannie and Freddie, remember.) What's needed is a serious application of antitrust law to the financial-services sector and a speedy end to institutions that are "too big to fail." In particular, the government needs to clarify that federal insurance applies only to bank deposits and that bank bondholders will no longer protected, as they have been in this crisis. In other words, when a bank goes bankrupt, the creditors should take the hit, not the taxpayers.
Do I think we'll get either of these things? For now I don't. The political will is ebbing fast, health-care reform is looming too large, and guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs. Yet if the status quo persists, the danger of a populist backlash against both Wall Street and Washington will only grow. Such a backlash has more than one precedent in U.S. history.
The second Bank of the United States, established in 1816, became the focus of a powerful political campaign against "money power." Though it survived a legal challenge by the state of Maryland, the Philadelphia-based bank fell victim to President Andrew Jackson, who recognized the electoral advantages of an attack on the "monster." When the bank's president, Nicholas Biddle, applied to have its charter renewed in 1832, Jackson vetoed it, vowing: "The Bank is trying to kill me, but I will kill it." Despite Biddle's effort to precipitate a financial panic in retaliation, "Old Hickory" carried the day, and in 1836 the bank lost its public status. Without government backing, it did not last long. In October 1839 the bank suspended payments, and in 1841 it disappeared.
TBTFs, be warned. But Old Hickory, where are you when we need you?
Proposed Debit Card Regulations Could Cause 1,000 Banks and 2,000 Credit Unions to Fail
New regulations that offer consumers additional rights and protections when using credit card have become law and are going into effect and now Congress will very likely focus on adding additional protections for users of checking accounts and debit cards. In a recent press release, Rep. Carolyn Maloney (D-NY) described the legislation that she is drafting:
"Now that credit card legislation has become law, Congress will likely focus on consumer protection related to checking accounts and debit cards. This NY Times article, Overspending on Debit Cards Is a Boon for Banks, looks at the overdraft issue and the bill introduced by Representative Carolyn Maloney, Democrat of New York. Her press release described the bill:"
[The legislation] would require notice to customers at the ATM or point-of-sale terminal when a purchase is about to trigger an overdraft – and would give consumers at the transaction point a choice of whether to accept or reject the overdraft service and the associated fee and requires disclosure of the terms and charges associated with an overdraft program and an opportunity for account holders to opt in, rather than being automatically enrolled.
The legislation may have a major impact on banks as well as customers that never incur overdraft fees. According to Michael Moebs, an economic advisor for many banks and credit unions stated that Rep. Maloney’s legislation would effectively kill overdraft services, which could cause up to 1,000 banks and 2,000 credit unions to fold within the next two years. The reason for these potential failures is that 45% of banks collect more in overdraft fees than they make in profits. In a recent New York Times article, Moebs stated, “Will they be able to replace it with another fee?” Mr. Moebs said. “Not immediately and not soon enough.”
According to an FDIC report, NSF-related fees accounted for 24.8% of the total non-interest income earned in 2006. Unsurprisingly, the banking industry vehemently opposes the legislation. Some banks have suggested they may need to add a $10 to $20 monthly fee on every “free” checking account to make up the revenue. Rewards from debit cards and rewards checking accounts would almost certainly be slashed as well.
To fix the system we must break up the banks
In coming up with solutions that address the immediate crisis but fail to tackle dangerous systemic issues, the Group of 20’s emerging ideas on the banking industry bear a striking resemblance to the Americans’ response to the dotcom crash of 2001-02. Back then, the burst bubble exposed biased research and stock price manipulation on Wall Street and dubious accounting practices in US companies. Out came a new set of rules cleaning up the links between research analysts and investment bankers and laying a heavy hand on corporate chief executives.
These measures extinguished the fire but neglected more fundamental problems. By the time the regulations were in place, the investment banks and elements of the corporate sector were already deeply involved in new and even more dangerous practices. We speak, of course, of the derivatives-based leverage of banks’ balance sheets that brought down a range of previously sound institutions, dragged the global economy into recession and ripped up accepted economic theories.
We see exactly the same mistakes being made this time around. If effectively implemented (not the only possible outcome), the G20 finance ministers’ steer towards more and better capital, constraints on leverage and contingency plans for banking failures would help to avoid a repetition of the current crisis. But they are barely sufficient to give the financial services system the kind of radical overhaul it needs. That would entail tackling a defective business model. Banks are allowed to mix plain vanilla deposit-taking and lending with high-risk investment banking. They are allowed to act for clients on both sides of a trade and take a proprietary turn out of the middle. In capital markets transactions they are able to act for those seeking capital and those providing it. Conflict of interest is embedded and this is unfair on other market users. It is “heads we win, tails you lose” as the banks make off like bandits in the good times and become pious onlookers as the taxpayer foots the bill when it all goes wrong.
Fixing the system requires this business model to be broken up and we would go beyond conventional Glass-Steagall type solutions. Activities such as corporate finance, providing advice for investors and proprietary trading should be separated from each other as well as being split off from deposit-taking. This would create smaller, less profitable institutions and solve a number of problems, many of which have been caused by financial institutions over-trading. The system we advocate would restore the balance of economic power towards industries other than finance. It would stem the flow of capital that goes into bankers’ bonuses (a problem that the proposals coming out of G20 seem unlikely to solve) and would rid the world of financial institutions that were too big to be allowed to fail.
Many heavyweight thinkers have dismissed narrow banking (a less radical option than the one we advocate) as, to quote Lord Turner, chairman of the UK’s Financial Services Authority, “not feasible”. They point out that although Northern Rock was not an investment bank and Lehman was not a deposit-taking bank, both failed. This is another example of fighting the last war. The real problems are not the specific causes of the crises of 2008 (banks) or 2001 (dotcom) or 1998 (Long-Term Capital Management) or 1989 (US Savings and Loans), but the enduring power of finance to be socially and economically disruptive.
We do not expect politicians and regulators to restructure the global financial services industry at what is still a critical moment for the economy. But it is regrettable that they appear to have shut the door on even having such a conversation. A starting point, as we have argued before, would be to set up a banking commission informed but not dominated by people from outside the industry. Its remit would be to consider structural change and how the financial services industry can serve the wider social and productive needs of the economy. This crisis has offended people’s basic notions of fairness. The connection between effort and reward must be proportionate and the playing field needs to be level if we are to secure a fully functioning market economy underpinned by political stability. That is why there is no option but to start the discussion we advocate.
The economics of folly
Twelve months on from the collapse of Lehman Brothers and much about the event remains mysterious. It was the trigger that caused a deep recession, which began in the United States, but steadily crept across Europe and Asia, morphing into a global catastrophe worthy of a potboiler novel. Within weeks of Lehman’s failure, banks throughout the world were teetering, trade finance had dried up, and major Asian exporters were suffering declines in output on a 1930s-scale. When journalists and pundits talked about the “end of globalisation”, the “end of market fundamentalism” or indeed the “end of capitalism itself”, people nodded their heads. It certainly felt like the end of something.
The human mind has a need for grand narratives of this sort. They give structure to events that are otherwise chaotic and disorienting. It is comforting to think that an event of such magnitude has a similarly large-scale explanation. But what if there was nothing inevitable about the Lehman’s shock? What if the real cause was something as mundane as stupidity? Behavioural finance has challenged the efficient markets hypothesis by casting doubt on its premise — the rationality of market participants. Historians have always had a more sceptical view of the decision-making capabilities of human beings, especially leaders and governments. The classic work on the subject is Barbara Tuchman’s “The March of Folly,” which chronicles profound miscalculations such as the Trojans’ decision to accept a gift from the Greeks, the Japanese attack on Pearl Harbour and American policy during the Vietnam War.
Ms Tuchman defines folly as “the pursuit of policy contrary to the self-interest of the constituency or the state involved”. Her key criteria are that the policy must have been perceived as counter-productive in its own time, and that a feasible alternative course of action must have been available. The fall of Lehman ticks both boxes. The risks of allowing a systemically important financial institution to go bust were well-known; six months earlier the US authorities had backstopped JP Morgan’s takeover of the failing Bear Stearns in order to avoid exactly such an outcome. And as for the feasible alternative – they could have simply repeated the Bear Stearns formula, as they were soon to do with Merrill Lynch.
It is still unclear what was going through the minds of the key decisionmakers at the time. Were they running scared of anti-bailout public sentiment, just a few weeks ahead of the presidential election? Did they believe they needed a sacrificial victim to justify other bailouts? Whatever the motivation, the result was folly. Like the Japanese leaders who believed that attacking Pearl Harbour was the “safe” option, they ended up destroying what they though they were protecting—the credibility of the administration, the prestige of Wall Street, the global standing of the United States. Backstopping a takeover of Lehman would have been a trivial outlay compared to the eye-popping sums that governments would soon be pouring into financial institutions.
According to Ms Tuchman, folly is rooted in self-delusion, the source of which is “wooden-headedness”— the habit of “assessing a situation in terms of preconceived fixed notions while ignoring or rejecting any contrary signs”. Self-delusion was not restricted to the policy-makers. Think of Lehman chief executive Richard Fuld rejecting a last-minute Korean take-over bid because the price was too low. Within a week the Lehman’s stock—in which he and many of his colleagues were heavily invested—was worthless.
Think of the politicians and commentators who cheer-led the folly with solemn talk of moral hazard and the need for creditors to take their lumps – without understanding the effect on the money markets. Think of the media and the public who delighted in the spectacle of Lehman staff exiting their offices with their possessions in plastic bags – without considering that the biggest victims of a financial meltdown are always the weakest members of society. So what would have happened if the authorities had arranged a Bear Stearns type deal for Lehman? The inter-bank market would not have gone into toxic shock; panic-stricken consumers would not have suddenly stopped buying cars and other goods; tens of millions of Asian workers would not have been laid off; government deficits would not have soared to once unimaginable levels.
To be sure, the US economy would still be in rocky shape, with serious debt problems in the household sector and a broken financial industry, much of it surviving on direct or indirect government support. The world would still be in recession—for most countries, a bad but “normal” one. As the Japanese proverb says, there is no medicine for stupidity. It is an underappreciated force in human affairs, from ancient times to modern. Financial regulation needs to assume its existence – in the behaviour of investors, financial professionals, and, most important, the policy-makers and regulators themselves.
Dutch government warns of deep spending cuts ahead-reports
The Netherlands is on the brink of a period of deep government budget cuts as the government aims to cut up to 20 percent in spending in some areas to cope with the global recession, Dutch media reported. The government will unveil its 2010 budget on Tuesday, but the major figures leaked out on Friday with media reports saying flat economic growth and a budget deficit of 6.3 percent of Gross Domestic Product (GDP) are expected in 2010. The leaks continued on Saturday, when a newspaper and a TV station said they got their hands on the budget documents, revealing the government was looking at drastic cuts to improve its finances.
"We know one thing: after the crisis we will encounter stubborn problems, particularly the labour market and government finances. Doing nothing is no option, difficult choices will be unavoidable," Finance Minister Wouter Bos was quoted saying in the budget documents by commercial broadcaster RTL 4. The Dutch cabinet believes 'fundamental political reconsiderations' are necessary and wants a broad social debate about how the Netherlands can emerge in 2020 "cleaner, smarter, stronger, more solid and with greater solidarity".
It has become almost an annual event for the budget to be leaked to the Dutch media prior to its official publication, with RTL especially successful in obtaining draft documents. The Netherlands is the eurozone's fifth-largest economy and heavily reliant on trade, with exports equivalent to 70 percent of GDP. That has made the global recession's impact especially hard. The economy has contracted for five straight quarters and the government pumped more than 31 billion euros into the system to either buy or shore up struggling banks and insurers in the past year.
To improve its finances, the government is mulling changes in social security, safety and government administration. It plans to revamp the tax system, amend fiscal subsidies, rules and taxes in the housing market and cut back overseas development aid, foreign postings and peacekeeping missions, RTL 4 reported. Changes also loom for healthcare spending, child allowances and subsidies for projects in non-sustainable energy. The Dutch government is not expected to make budget cuts next year but will have to cut spending by a total 35 billion euros in later years, Dutch broadcaster NOS has reported.
Economists had expected no big cuts next year for fear of stalling what little recovery was underway. De Volkskrant, which also said it had seen the budget documents, said gas revenues are expected to fall to 10.3 billion euros this year and 9.8 billion in 2010 from 14.7 billion in 2008. Gas has played an important role in supporting the government budget in recent years. Inflation is seen stable at 1 percent in 2010.
New York Faces Dramatic Consequences of Crisis
The global financial crisis began in Manhattan, and its effects are being felt far more strongly there than elsewhere. Mayor Michael Bloomberg says the situation is critical. Millions are fighting to keep their jobs. Is what is happening in New York today a harbinger of the fate of the rest of the world?
They still remember how things used to be. That's part of the problem. New York's heroes, the men and women who only yesterday considered themselves the knights and conquerors of Manhattan, remember all too well what New York was like in the 1970s -- the era before seven-figure salaries came to the Big Apple. They remember -- and they see the signs. That's why they're afraid.
Cathy used to be a banker. Today she is homeless and living in Tompkins Square. She thinks about the heroin and the stench. In the 1970s, Cathy had a small apartment not far from here on Orchard Street. It was broken into three times. She remembers the burning cars and broken glass, the plumes of smoke and the cops who shouted "Fuck you!" every time they lashed out. Restaurateur Fred Austin says he had the doors taken off the toilet stalls at Katz's restaurant because of the junkies. If they were going to shoot up in front of all his guests, he at least wanted them to feel embarrassed.
Tom Birchard, the owner of the Veselka diner, says he adopted the New York walk in the 1970s: fast, determined, always scanning two blocks ahead, looking behind you every 10 steps or so, staying more than arms-length away from doorways, and crossing the street or even turning around altogether if two or more black men came towards you. Aside from the murders, the whores and the knowledge that areas like Harlem and the Bronx were strictly out-of-bounds for whites, Mayor Michael Bloomberg says the subway was the worst thing about New York. "The subway was hot and never on time. Everything was damp and grimy, and full of trash," that is how he recalls the days when people went in and never came out again. "It was an inferno."
Only Grace on Wall Street says she isn't afraid of becoming poor again. That was during our first conversation, six months ago. Grace Dolan Flood said her fear lay elsewhere. "I'm afraid I may have lived the wrong life," she said. "You spend so many years, put so much energy in, and suddenly you're out. And then what?" It's the New York 2009 feeling: A mixture of doubt, worry, and fear. Fear that it won't be worth all the investment, the effort, the constant battles. Fear of drugs in schools, of playgrounds becoming crime scenes again, of broken windows, of decline. Fear of a future that feels like the past.
If you go looking for the New York feeling in southern Manhattan, on Wall Street, in the East Village, on the Lower East Side, or in Tribeca, you'll come away with more than your fair share of doubt about the city. New York City consists of five boroughs and thousands of districts. It's simply too big for gross generalities.
I speak to billionaire realtor Donald Trump on the phone. "My friend!" he says in greeting, "New York's doing great. We have a splendid police chief, a splendid mayor, we're in splendid shape." But Donald Trump's opinions are those of the minority this summer. Jamie Johnson sits in a café on Union Square. The 30-year-old pharmaceuticals heir and documentary filmmaker ("Born Rich") says, "The whole city is seriously in danger of losing its meaning. People feel vulnerable. An entire generation that never witnessed hardship are now realizing they'll never fulfill their dream that things will keep on getting better: Cool school, cool grades, cool job, cool money. And that scares them."
Why is this? Because since September 2008 New York has been the epicenter of the global financial crisis. This is where it all began, and this is where the effects were first seen. And felt. Stores are closing or barely scraping by, offering "three suits for $250." No one is buying. "Food traffic" -- taxis ferrying people straight across Manhattan to the coolest restaurants -- has dwindled to a trickle. Theft, violent and drug crimes are on the rise. There are New Yorkers who pretend to be surprised if a bar only accepts cash, say they're going to an ATM, and never return.
"Impulse shopping," the practice of popping down to a boutique over lunch, has died a death. 6.5 percent of all the stores in Manhattan are now vacant: a 20-year high. On Fifth Avenue, the Western world's premier shopping district, 15 percent of the shops between 42nd and 49th Street have closed. Even Brooks Brothers has left nothing but boarded-up windows. And scaffolding. And signs: "For sale," "for rent," "for free." The city's restaurants are advertising "recession dinners": A hot dog and a beer for $5. Suddenly you can get tables again -- anywhere, anytime -- and the concierge will often ring you back and make you an offer. It feels like the end of snobbery.
The potholes are getting bigger. And could it be there are more rats since the collapse of Lehman Brothers? Garbage sacks pile up because restaurants and hotels have to pay for them to be taken away, but would rather save their money. Homeless people wander the streets, apartments remain empty, landlords offer discounts -- unthinkable circumstances just a short time ago, at least here in Manhattan and over in Brooklyn. People react differently to crisis. When Andre Wechsler from Düsseldorf lost his job on Wall Street, he opened up a hot dog stand selling German currywurst on First Avenue. City magazines praised him for his smart, tasty, "so German" idea.
A hundred yards further on, Cathy sits on a bench. "I'm exhausted," she says. "I have no insurance, no job, no place to live." Cathy sleeps in subway carriages or on the benches in Tompkins Square Park. She's a bag lady now in a raincoat, with all her belongings in a shopping cart. Cathy used to be a broker at Merrill Lynch, but she never put anything aside. Now she has nothing. When people like Cathy lose their jobs in a city without a welfare net, they fall rapidly -- and far.
It's a chain reaction. Wall Street was the city's engine, and since 1990 New York has been a monothematic metropolis. If a bankrupt Lehman Brothers puts 25,000 people out of work, it robs the city of millions in taxes, revenues that are desperately needed for education, the police force and road repairs. Children are taken out of private schools, cleaners and gardeners are let go. This affects the real estate market and all consumer activity, and taxis drive around empty save for the driver, desperately hunting for the few tourists who still have money to spend. And then AIG and Merrill Lynch cut thousands more jobs. So could New York's current woes beset Berlin and the rest of the world tomorrow? As so often, New York could become a standard, a model, only this time of fear; a new weltschmerz in the true sense of the word?
A Bubble Develops Every Ten Years
Grace Dolan Flood thinks fast and talks fast. She used to be a saleswoman, after all. Her job was to build relationships, trust. Grace called companies and private customers and tried to convince them to invest their money in Swiss investment bank UBS. Her colleagues invented new investment models, Grace found investors to fit the model. For this she traveled, forgot about her family, vacations, private life, like so many New Yorkers she just worked, she says. For a decade-and-a-half, Grace worked on Wall Street earning at least $300,000 a year, often more.
It bought her an apartment on Chambers and Greenwich with a great view over a relaxed neighborhood. And the Jaguar in the garage. And the status of a Wall Streeter. Fancy clothes, too -- including a $800 Prada dress Grace never got around to wearing. Grace drank tea during our first conversation. Her skin is freckly, her hair red. She wore an Aston Villa jersey. Of course Flood knew the market. She knew the cycles and she knew that a bubble develops every 10 years "when everyone gets too excited again about exactly the same thing," as she puts it. Grace bought when others were selling. That's how she got this apartment shortly after 9/11, when it cost just $435,000 because everyone else was fleeing Lower Manhattan. Today it is worth $900,000.
Grace saw the crisis coming, braced for it, bought some stock in falling markets, and hoarded cash to keep her options open. She thought a storm was coming. She hadn't anticipated the end of the world. In May 2008 Grace lost her job. So she started looking for another. But the Wall Street Grace knew inside out no longer existed. At first she reacted the same way she had always done: She called headhunters who got her interviews. She leaned on her network, but it was over. No-one could help anyone anymore.
Grace says she has an excellent reputation: "I can build relationships, I'm well-educated, a team-player, customer-oriented. That's my reputation." But no-one was interested in her reputation any longer, and her interviews were always followed by silence. Grace gets herself a cardigan and a beer, stepping over a packing case in the process.
The effects of the crisis are plain to see in Manhattan. Virgin has closed its largest outlet worldwide on Times Square, and the ladies on the Upper West Side ask for their purchases to be put in plain, unmarked brown paper bags. Economist Colin Camerer told New York magazine that behavior considered glamorous in good times is seen as revolting when times are bad. Where is all this leading? The mayor finds himself espousing conflicting views, claiming the situation is worse than ever -- and yet not as bad as people think.
The reasons for this contradiction are clear. On the one hand Michael Bloomberg has to explain why he wants to be re-elected for a third term in November. That used to be impossible and against the rules of the game. Until, that is, he got the municipal authorities to change the rules. Bloomberg says New York is in a state of emergency and needs him because he alone can lead the city out of the crisis.
On the other hand, Bloomberg has put $90 million of his own money into his election campaign. And when you accompany him on the campaign trail visiting first the Hispanic Chamber of Commerce in Queens, then a carpenters' and cabinetmakers' association meeting at the Sheraton on 53rd Street, and finally an award ceremony for a Jewish businessman, you often hear him enthusing about New York being "the most amazing city in the world" whose "best days lie ahead" because it will "beat this crisis" just as it has others.
Bloomberg seems to epitomize New York. His staff say he is quick and intelligent, manic, quick-tempered, and a little megalomanic. For instance, he prefers to live in his townhouse on Central Park rather than the mayor's official residence, a white-and-yellow villa on the East River, because he thinks Gracie Mansion is too small for his needs. Yet he pretends to take the subway just like his voters -- even though his chauffeur drives him to the subway. But when one of his citizens accuses the mayor of bending the democratic rules to allow him to seek a third term in office because no-one could match his media influence or spending power, Bloomberg replies, "you're a disgrace!"
The Michael Bloomberg who opens every conversation with the words "Call me Mike" is a small man. He is independent. He once was brave. Manhattan reporters say Bloomberg had a splendid first term in office in the years before business was stifled by bureaucracy, then sacrificed his second term to his ambition of running for president. His best joke is "It only rained twice last week: Once for three days, once for four." He cracked it six times the day I spent with him, though his followers insist he's a funny guy. They also claim he has lots of ideas for how to save New York from demise.
The mayor denies New York depends entirely on Wall Street. "We are the fashion capital of the world, the medical capital, the media capital," Bloomberg gushes. His municipal government estimated 75,000 jobs would be lost in the financial industry and a further 300,000 elsewhere in New York. So far, only about 100,000 have been lost. The city has set up a fund to issue small business loans for startups. There is also a retraining program for jobless Wall Streeters. "We're pumping $7.5 billion into public schools," says Bloomberg the campaigner. "We will emerge from this crisis stronger than we entered it."
Tom Birchard drinks a latte in front of the Veselka, a veritable New York institution founded by Ukrainian immigrants on the corner of Second Avenue and 9th Street in East Village. Birchard took over the place from his father-in-law. He has white hair, blue eyes and wears what every New Yorker wears in summer: shorts, a T-shirt and sneakers.
"Everyone Around Here Was on Welfare or Drugs"
Like so many others before him, Birchard came here seeking work. His father, a staunch Republican, worked for the Campbell soup company before teaching airmen how to drop bombs accurately. Tom wanted to get out of Pennsylvania, so he moved to the East Village in 1967. "It was crazy here, and it became my home overnight," he recalls. Here there were blacks, lesbians and gays, and Andy Warhol would come by in the evening from his place further up on Central Park. At the time, Tom Birchard didn't know what he wanted to do in life. It didn't matter. He ate breakfast at the Veselka, met his first wife, his father-in-law died, and Birchard finally realized where he would spend the rest of his life: at the Veselka.
Back then, kids used to play lacrosse on Second Avenue. Car repair men would grease engines on the sidewalk. Painters painted, writers wrote, musicians rehearsed, and hippies watched, read, listened and got stoned. Manhattan was a different place, a good place to be in those pre-70s days. There was a Polish woman at the Veselka who took your order, set the tables, cooked the borscht, served the borscht, took your money and washed up. And she wasn't fast. But then the city ran out of money, couldn't pay its bills, bureaucracy and construction projects became too expensive, and tax revenues couldn't cover the costs. The subway ground to a halt, the potholes were covered with sheets of steel, the rats came out, and the district turned bad.
Birchard says the "Mafia clubhouse" used to be over there on the corner of First Avenue. Its runners went around collecting money for the numbers game racket. Heroin replaced hash, the hippies became pimps and prostitutes, break-ins and murder shot up. It happened right here, around the corner, in front of the door, even inside the restaurant, which was only half as big as it is now. The people of the East Village carried knives, and Birchard recalls that every apartment got robbed. They stole the TV out of his place, which cost him 125 dollars a month. "East of Avenue A landlords burned their own houses down because no-one was paying rent anymore. Everyone round here was either on welfare or on drugs," he says.
And then -- doesn't it always? -- the pendulum swung back. Cheap housing attracted young artists, chess-piece carvers, and designers, cafés opened up and students from New York University over on Washington Square flocked to the Veselka after the Village Voice wrote about Tom Birchard's blini, a kind of Eastern European sweet pancake. Then came the 1990s; the decade of money. Wall Street took over New York, and the East Village was taken over by those who could afford $2,000 rents. Next to arrive were the fast-food chains: Starbucks, Dunkin' Donuts and the like. "Give me a break," Tom says. "Stop! That's enough now!"
And now? The city is at a junction. Everyone can sense it. Will the 70s return, ushering the past back in? History rarely repeats itself, and it certainly never ends. Nor will this city ever stop developing. It is changing simply because immigrants will continue to come to New York, changing entire blocks, and with them the rules. A new, once unimaginable, New York under Mayor Bloomberg is coming to terms with global warming and cycle paths on Times Square, Ninth Avenue, from east to west, and only the taxi drivers still veer from left to right across six lanes of traffic, mowing down cyclists in the process. White bicycles, so-called "ghost bikes," are tied to lampposts as memorials to the victims.
The New York of the Wall Street era was a city of egoists. Now rich unemployed people offer to help serve poor unemployed people in soup kitchens, the "city meals-on-wheels" service is growing, and former bankers now want to coach school baseball teams. If money makes people narcissistic, does a lack of it make them better? Seminaries are reporting a rise in intake. Sociologists claim the new New Yorkers are starting to appreciate the value of regular work again. "In the past people didn't give a damn about safety. Safety was something for low-fliers," says Barry Schwartz, a psychologist at Swarthmore College in Pennsylvania. But now more and more people are realizing that "safety is more important for our happiness than wealth."
In years gone by, urban researchers described New York as a "hedonistic treadmill," the city of "maximizers." Everything had to be perfect, then even better, and everything was constantly being questioned because there was too much choice. New Yorkers were never content. Is this changing? Will calm come, composure even? Will what you do become more important than what you buy? The same sociologists say aid organizations don't need more helpers because they're running out of money. The same sociologists say the worst thing that could happen to an urbanite is to lose his job because the failure and disappointment plunges them into the abyss here as in all other major Western cities.
Perhaps the city will soon be divided anew -- here the new communities, there the new ghettos -- and return to the rough New York of Martin Scorsese's "Taxi Driver," a New York of cheap rents, trash and murder. Another incendiary issue is that black men, an above-average proportion of whom are poorly or under-educated, are far more likely to lose their job than any other socioeconomic group. Grace Dolan Flood says the city is spiraling downward, but New York is not a place that gives up, nor is America a powerless nation. "We're not just going to roll over and die," she says defiantly.
Grace would like to buy real estate. Right now. She could live off 10 or 12 apartments. But banks aren't handing out loans. She applied to become a New York City schoolteacher. She was invited for an interview -- that was the first hurdle. Teachers in New York earn $46,000 a year. She got through the entire application procedure before the program was axed. The city wouldn't be hiring any new teachers. "Sorry," they said. They had to cut costs.
"Winding down my upper-class lifestyle won't be hard," Grace says, pointing to her Irish heritage. Her family came to New York when Ireland was the poorest country in Western Europe. The Dolans lived in Brooklyn before it became fashionable. Her father unloaded cargo planes at Kennedy Airport, but he was also a janitor and cleaned offices. Sometimes he took his kids along. "I can still clean any bathroom in five minutes flat," Grace says. Her parents were determined all five of their children would have middle-class lives. They succeeded, and all five went to college. "I wanted my parents to be proud of me," Grace says. "Immigrants will lead this country out of the crisis because immigrants don't assume they have a right to a better life. They fight for it."
Grace has rented out her apartment. She can no longer afford the once paltry sum of $3,500 she needs to pay off her loans and feed herself every month. She found a cheaper place for herself. Grace no longer spends $2 every morning buying the New York Times. And who needs a $5 latte from Starbucks? In the past, Wall Streeters went out to eat every day. Today former Wall Streeters go out for a meal on Saturdays, skip the appetizers and drink beer instead of wine.
'We're at a Watershed. Everyone Knows That'
Fred Austin knows Lower Manhattan well; the people, the "New York feeling." He grew up here. Austin sits at the back of Katz's, the restaurant he runs on Houston. Over there is where Meg Ryan showed Billy Crystal how women fake an orgasm in the famous scene from the movie "When Harry Met Sally." Here's where Bill Clinton ate. It's a room full of photos; a museum that renews itself every day. The pastrami sandwich is its specialty.
The humor is Jewish: How many people work here? "Half of them," Austin replies.
Austin says New York is and remains the center of the creative world: "All the creative, smart money comes here. That's not going to stop all of a sudden. Young people are moving to New York, and they want to live, not suffer. Thirty years ago, people were predicting that cities would eventually die out. But no longer. We're a long way from the New York of the 70s. The crisis may be depressing and its effects wide-reaching, but urban culture -- a blend of ideas, strength, and energy -- simply can't be replaced. We're making a comeback."
Fred eats a pickle and sips his coffee. He has a bald head and a goatee, and wears a red checked shirt. Then he says, "The entire city now understands there's too much at stake, and none of us wants New York to break apart. We're at a watershed. Everyone knows that." It's August in New York in a rainy summer. Months have passed since our first conversation, and Grace Dolan Flood has found a job. She now teaches young Wall Streeters about investment banking. "It's great to be back," she says.
Are there any signs of improvement? The Bloomberg administration seems to think so. Grace Dolan Flood agrees. "Crises come and crises go," she says. The figures show that more stores are closing and fewer people are spending their money. The fact that Goldman Sachs is making billions again -- just like before the crisis -- won't save the rest of the city. The figures show that things are going to get worse in the coming months and possibly years.
The people of New York want to beat the crisis, of course. They speak of their courage, their imagination. The Big Apple is still a dynamic city of 8.3 million. But didn't the crisis come about because so many Americans ran up huge debts so unthinkingly in the belief that they deserved another car or another house? Is it because the story about the extraordinary country with the world's best workers has been exposed as a myth or a lie? Could it be that the United States and even the New York of 2009 are too sluggish to change quickly in the face of such a crisis?
Tom Birchard, the owner of the Veselka, says he hasn't forgotten the watchful walk he adopted in the 70s. Yet he hopes New York will bounce back, as always. "We've had lots of practice in survival," he says. "As long as there's a way to survive, we'll survive." Then he grins and adds, "So many of the really funny, crazy guys that said Manhattan had lost its cool because they couldn't afford to live there anymore: They're all coming home."
Birchard is sure he can detect some sort of a cleansing effect. Speculators are going, artists are returning. Although it's still quite quiet and subtle, he can sense the city humming again, a kind of buzz that almost feels like 1969 again. Not quite a new New York feeling, but something's definitely happening. Perhaps a city like New York needs a crisis like this every 10 years or so.
Americans have become weak and fearful things
by Joe Bageant
Today, a friend forwarded to me a news article with this headline: "Fines proposed for going without health insurance." Here are some things I don't get:
- If folks can't afford to reroof the Old Manse or buy groceries or put retreads on the Jimmy, how (and why) are they going to get insurance, and
- If they can't afford insurance, how are they going to afford the alleged fine, and
- Who is the Insurance Police, who's going to rat me out, and
- Why did The Bastards wait until the whole country is unemployed to pull this shit, and
- Who elected these boobs -- wait, I have a long-standing soft spot for boobs; make that "idiots" -- anyway, and supposedly to act in our interests? Not me.
My elected representatives so far stand mute on these salient and vexing points. I tell ya, I'm glad I'm old and won't have to watch much more of this nonsense go by. Although, my Ma's 85 and going strong, still tearing up trees and throwing rocks, I seriously don't think I can take it. I'll blow the beans out of my pressure cooker one of these days. And you? Well?
It's like this ole buddy. Mandatory insurance can be made to sound worse than it is. Especially given that the word mandatory scares the hell out of Americans, even though we already have mandatory drivers license and drivers insurance, income tax, building permits, school attendance, vehicle registration, home insurance for mortgages, personal identification, security scanning at airports, income tax filing, dog licensing, sales taxes, etc. (Looking at this short partial list, I can hear the libertarians locking and loading as we speak).
For example, Spain, which is now considered to have the best overall health system in the world, has mandatory health insurance. So do many other countries, though they do not think of it in those terms, and though they are often technically purchasing it from the government at very low costs, which they perceive (and rightfully so) as a tax. This helps offset the government cost of insuring retired, poor, unemployed and others who cannot afford insurance. The government covers these people anyway, but must recover the cost. (What a novel idea for running a government! Knowing how you are going to pay for things.)
A U.S. "public option" (we are not even allowed to utter the term socialized healthcare, or even universal healthcare, because anything universal,which is to say fair to all, is a goddamned commie plot -- the cold war lives on in our capitalist state indoctrination) could cover everyone unable to afford afford insurance by providing it at such extremely low cost. So low that even people below the poverty level, and thus qualify for supplemental income tax rebates, would have insurance. It would simply be deducted from their $500 tax rebates or whatever. So they would never even see it being paid for.
The insurance companies love the mandatory part, which would deliver millions of new customers into their hands and let them set the price. But they hate any so-called public option, which would give those poor customers an alternative. So they've done a pretty good job of torpedoing the public option. Good enough to scare Obama off it for a while, even though any such public measure of his would always have been a half measure and still depended upon the insurance corporations to exist. Now it's back, but who knows what it looks like now, or will look like when the fight is over.
And insurance companies especially fear the possibility of a national health card, which inevitably comes with any sort of government sponsored public healthcare. It's just too damned efficient. For instance, in France, doctors have no files, just a card reader and an Internet connection that links to the patient's permanent files and scan images. But it also tracks costs, fees and billings. And in France (or Germany, I forget) if the doctor is not paid within 72 hours, the insurance company is fined.
Health insurance companies in Germany are totally non-profit, but sell other insurance -- auto and home -- for profit. They see providing efficient health coverage as a good leader item and a chance to show off their performance to customers. A public option is the first step toward such a system, or something similar. But I suspect we will never see a national health card. These thugs in America would never stand for it. They like to count their money unseen.
Elected officials, the strong liberal ones at least, are mute on this because to say anything resembling the above is political death. The brownshirts who worked them over at town hall meetings at the behest of the healthcare industry would not be so easy on them next time, given what's at stake for the capitalist overclass. Which is to say the healthcare industry's corporate criminal cartel.
And besides, they own the joint. Our government is now a corporate criminal enterprise extorting the wealth productivity of the people. The people are so used to it and so conditioned they no longer know how to ask questions or extrapolate outcomes. They just react in fear of any new public proposal that would change the status quo.
As for the mandatory part and the fines, that is a red herring if ever there was one. People who have a hard time paying for healthcare (and who doesn't?) get scared out of their britches by such threats. That's why the Republicans put it in there. To scare people away. First you take a good and reasonable thing like universal healthcare, and turn it into a scary authoritarian mandatory thing with grave punishments. Put some stink all over it, something obvious and odious. Make it a burden AND a threat.
That is one of the poison pills for the bill. There will be others to come. After the death panel thing, and the way the people swallowed it, we already know the outcome. Hell, one of the anti-healthcare lies being circulated around here right now is that Obama wants to have mandatory abortions of anyone born with low IQ or is otherwise substandard. Which is OK with me because it would spell the end of the Republican Party.
But whatever they do, there will be no rounding up and fining of the underemployed, unemployed or broke. That's 50 million people these days. Any effort would be mostly a paperwork exercise, at this point. And besides, they do not want your body. They want your money. Thug's work the neighborhoods where the money is, not where it ain't. We live in an extortion based criminal enterprise masquerading as a government, so one shudders to think of the paperwork liens that could be placed on homes, etc. They are paperwork too, but have the strength of law behind them. The commissariat judges who provide the legal muscle for the cartels.
All of which is moot as long as medical and pharma costs in this country are astronomical and still rising, making doctors, executives and major shareholders in the crime syndicate richer than ever. And as long as drone missiles, 400 military bases and two ongoing wars keep draining an already looted public treasury that is forced to run international indebtedness anyway. Whenever we see something like the mandatory health insurance covered in the media, it is there for effect, not to inform us. It is there to cloud the issue and scare the piss out of people toward the ends of the corporate state. To make them fearfully ask the wrong questions and miss the real issue.
The real question is this: When are we going to rise up against our government and the criminal cartel that owns it?
And with each passing day I am more convinced that the answer is -- never. That takes true inner convictions and ideals, not to mention courage. The real thing, not political rhetoric and ideology. Convictions are measured by actions. And true convictions are arrived at through the clear-eyed self-examination and deep questioning and personal sacrifice of individuals. And defining one's self as something necessarily other than the state. We failed to do so too long ago. We are now state property.
A mass of people rallying and surging back and forth in response to state manufactured pseudo events and faux choices. If I still loved this country I would weep for it. But I've watched us too willingly acquiesce to this fate for too long. I don't think we have the reservoir of cultural, moral, spiritual and political strength to turn things around. Or even conceive of what can be, other than what we've seen. Instead, we are issued empty terms as convictions, such as democracy and diversity.
Surely though, the noisy pseudo drama of pseudo choices will go on in a pseudo democracy. If I were a younger man, it might possibly be instructive, in a chilling way. But a guy gets tired of learning the same old lesson year after year, decade after decade. The lesson being that Americans have become weak and fearful things. Ignorant of any sort of real self agency in shaping their country's government.They embrace the notion of "working within the system." Then too, the consequences for doing otherwise are dire. Our corpo-government crime syndicate makes that very clear. In a mob neighborhood, everyone is afraid.
In closing let me say, by all means go ahead and blow the beans out of your pressure cooker. I did. And I found that it left me with a clearer head (or maybe a less cluttered delusion of my own, who is to say? But either way, now the decor inside the old cranium allows me to sleep better at nights). People will call you nuts, say you've gone over the brink. But I find that there is plenty of fine company down here at the bottom of the cliff.
In art and labor,
PS: I hear on the BBC this morning that the US is still number two (behind Switzerland) in economic output. The difference between the quality and security of our lives and that of the Swiss can be seen as a measure of what is siphoned off by the cartel. Evidently there is quite a bit of wealth being produced by the people left to steal, leaving public amenities and the people to run on pure debt. Thus, don't expect our criminal overlords to let up on us any time soon.