Shad fishing on the Potomac
Ilargi: Baron Munchausen is a truly unique human being, bigger than life and legendary for telling tall tales. He claims to have flown through the sky on top of a cannonball, gotten swallowed by a giant sea monster -and escaped- and traveled to the moon, among many other feats. Baron Munchausen was one of my favorite books as a kid, and I adore Terry Gilliam's film of the story. Still, as much as I may like them, I don't actually believe in tales that tall.
In yet another of the Baron's grand adventures, he manages to get out of a swamp, while on horseback, by pulling himself up by his own hair. It's that particular tale which comes back to my mind all the time when I read and hear about the economic recovery the US government and media these days claim has lifted the country out of the recession.
In my view, you can't call yourself richer just because you transfer the money you have from your old sock to your mattress, or from one bank account to another. Everybody understands these examples, but apparently for some reason human intelligence fails when the government is concerned. In that case, all of a sudden, money becomes some highly abstract notion, and anything is possible. Washington can make tall tales come true.
There is a situation imaginable in which government spending can provide a genuine -albeit temporary- boost to an economy. But this ain't it. It may work when there's a surplus. It simply does not and cannot work if and when a government is already up to its neck in debt before the additional spending starts. If that's the case, it's all just a sleight of hand trick that winds up leaving everybody poorer in its wake.
Not that you would know it for reading the once venerable Wall Street Journal:
U.S. Economy Gets Lift From Stimulus
- Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades. But there's little agreement about which programs are having the biggest impact. Some economists argue that efforts such as the Federal Reserve's aggressive buying of Treasury debt and mortgage-backed securities, as well as government efforts to shore up banks, are providing a bigger boost than the administration's $787 billion stimulus package.
Granted, the paper, though reporting it as fact, can't quite seem to believe it yet. It says the money, all the multi-trillions of dollars of it, "appears to be helping" the US out of the recession. It can't yet figure out, either, whether giving tax money to taxpayers works better than giving it to broke banks. I guess if that leads to confusion, the door is open to all sorts of tall tales.
- Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action. Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate.
Well, yes, if you throw a large enough amount at the issue, something will stick for a little while. That's not a surprise. Neither is it a recovery. It's just a very expensive way to hide the underlying problems. And it doesn't just hide them, of course, it makes them worse at the same time. Going as deeply into debt as we have, as individuals and as a nation, is bad enough. To pretend you can solve the problems caused by that debt without paying it off, or even seriously addressing it for that matter, is far worse.
It should be obvious, for instance, that the trillions thrown at Wall Street banks are wasted penny for penny, because those banks are, hard as it is to imagine, even deeper in debt than the government and its citizens. The fact that both the banks and the government continue to attempt so painstakingly to avoid anyone from taking a look at the bad loans and toxic paper they have in their vaults should tell you all you need to know on the subject.
The money handed to banks could have been used to make the basis of the economy stronger, which would have greatly alleviated the upcoming pain. Instead, Washington has chosen to make that pain more painful, a tall feat that will haunt America for many years to come.
You can't rise up from a recession or depression by shifting money around that you don't have in the first place. You'll have to take some sort of natural resources and add value to them though hard work and craftsmanship. And if you put it that way, it becomes glaringly clear how far America, as a society, is from being able to pull off anything of the kind. Against that backdrop, the idea of money as an abstract notion capable of miracles looks mighty tempting to a nation of 300 million obese burgerflippers.
The mortgage industry, responsible for much of the debt perversion, is actively thinking along with the government in trying to find solutions for its plight. It now suggests dissolving Fannie Mae and Freddie Mac, after these have been saddled with untold trillions of bad debt in mortgages and securities, and starting afresh with new entities, clean slates and government guarantees and all.
[Mortgage] Industry Seeks Fannie, Freddie Overhaul
- A mortgage-industry trade group is calling for Congress to transform Fannie Mae and Freddie Mac into several smaller privately held companies that would issue mortgage securities carrying an explicit government guarantee. The proposed framework [..] would give successor entities to Fannie and Freddie the authority to create securities backed by certain types of mortgages.
- Shares of both Fannie and Freddie fell by more than 17% Tuesday in New York Stock Exchange trading. The price drops followed a Monday report from FBR Capital Markets that said there is "no fundamental value remaining" in the companies' shares.
- The MBA's plan calls for government agencies, rather than the new companies, to assume the "mission" of promoting affordable housing that Congress has long assigned to Fannie and Freddie.
That mission of promoting affordable housing, for one thing, in a nefarious lie that threatens the very survival of the US as a nation. Fannie and Freddie, clearly, and inevitably, have made homes more expensive, not more affordable. They have indeed driven prices up to such an extent, people can only hope to afford a home if they get a mortgage to be paid out over dozens of years. The only party that profits is the banking system.
Over the course of a loan, borrowers routinely pay 2, 3 or even 4 times the value of the loan itself, a value that has little or no connection to the cost of building the home. WIthout Fannie and Freddie offering to buy up every single loan in sight, that would not be possible. Fannie and Freddie are then, in essence, the instruments used by the banks and the government to tie people down in debt for most of their lives.
Creating new entities, whether private or public, or switching to Ginnie Mae and the FHA and FHLB systems, does nothing to solve the underlying issues. It will presumable even make them worse in the short term, because there will be the illusion of plenty new opportunities, prices will be artificially kept high etc. The federal government needs to get out of the housing market, never to return. Local governments and local lenders can perhaps have a place in the field along the lines of "It's a wonderful life".
The involvement of the federal government and their Wall Street associates will only, and always, cost the man in the street money, in most cases lots of it. To see how and why, look at the numbers of foreclosures out there. The vast majority of them involve explicit or implicit government guarantees.
We can neither pay off our debts, nor emerge from this recession, nor rebuild our shattered homes, by defying gravity and pulling ourselves out by our own hair. It's gravity that sets the limits and boundaries we need to learn to live with, and fooling ourselves into thinking we can ignore and deny those limits will eventually inevitable come at a very steep price. We can enjoy hearing people tell tall tales. We can't live them.
[Mortgage] Industry Seeks Fannie, Freddie Overhaul
A mortgage-industry trade group is calling for Congress to transform Fannie Mae and Freddie Mac into several smaller privately held companies that would issue mortgage securities carrying an explicit government guarantee. The proposed framework, to be released Wednesday by the Mortgage Bankers Association, would give successor entities to Fannie and Freddie the authority to create securities backed by certain types of mortgages. The new companies would guarantee the securities against defaults on the underlying mortgages.
The new companies would also pay fees into a federal insurance fund, which would guarantee interest and principal payments to bondholders if the companies were unable to make them. Such an insurance fund, designed to kick in only if the companies were to suffer catastrophic losses, would provide explicit federal backing. That would replace the current system, in which investors have long assumed that the government would stand behind Fannie and Freddie.
Some foreign investors in China and elsewhere lost confidence in that fuzzy implied guarantee last year and reduced their holdings of the companies' debt, though the U.S. government has propped up Fannie and Freddie with capital infusions. "If we're going to restore and maintain investor confidence and...consistent liquidity, that is going to require an explicit backstop," said John Courson, chief executive and president of the MBA. Shares of both Fannie and Freddie fell by more than 17% Tuesday in New York Stock Exchange trading. The price drops followed a Monday report from FBR Capital Markets that said there is "no fundamental value remaining" in the companies' shares.
The MBA's plan calls for government agencies, rather than the new companies, to assume the "mission" of promoting affordable housing that Congress has long assigned to Fannie and Freddie. The new companies also wouldn't be allowed to hold large amounts of mortgages and securities under the proposal. Fannie and Freddie hold large investment portfolios in mortgages. The proposal comes a year after the government seized control of Fannie and Freddie through a legal process known as conservatorship. It is one of several such plans likely to be floated this fall as debate heats up in Congress over how the government should restructure the $10 trillion home-mortgage market.
The Obama administration has said it will issue its own recommendations on the future of the housing-finance system early next year. While the administration has moved quickly to remake sectors from autos to banks, addressing the future of Fannie and Freddie hasn't been a priority. In part that's because the administration is using the government-backed companies to help with foreclosure-prevention efforts and to stabilize the housing market. Together with the Federal Housing Administration, Fannie and Freddie now purchase or guarantee nearly nine in 10 new mortgages, since private buyers of such loans have been absent amid the housing bust.
Fannie and Freddie have taken nearly $96 billion of capital infusions from the U.S. Treasury since last November. The companies have received nearly 10 times that amount in additional support through purchases of debt and mortgage-backed securities by the Treasury and the Federal Reserve. Analysts expect the housing-finance debate to drag on for months, if not years. Republicans have argued that Fannie and Freddie were brought down as a result of a decade-long affordable-housing push that steered them into loosening their standards. House Republicans have put forward their own plan that would end government conservatorship of the companies within the next 18 months.
Democrats have said that the companies' troubles stemmed from a poorly regulated private-lending market that encouraged Fannie and Freddie to make questionable decisions in an attempt to regain market share they lost to Wall Street firms. "If we learn the wrong lessons, we'll create a system that doesn't bring capital to underserved communities," said Sarah Rosen Wartell, an executive vice president at the Center for American Progress, a liberal think tank that has close ties to the Obama administration. The center has convened a study group on the future of housing finance that will issue a report this fall.
A report published last month by analysts at Moody's Investors Service said that the likelihood that both companies would be replaced with a new entity "continues to increase as their losses mount." The report predicted that it could take at least a decade of government ownership before Fannie and Freddie become viable stand-alone entities.
While the companies' full losses won't be known until the housing market stabilizes, losses could reach $175 billion by the end of 2010, according to an estimate by Bose George, an analyst who covers the companies for Keefe, Bruyette & Woods. The Obama administration appears unlikely to seek an extension from Congress of emergency authority that allows the U.S. Treasury to buy the agencies' debt, which expires Dec. 31. The Treasury is instead expected to take steps to assure the marketplace that the government will continue to keep borrowing costs low for the companies.
The End Of Peak Homeownership
Death print of an ETF
Market regulators might not yet realise it, but it seems even the whiff of more regulation gets results these days. In the field of energy price speculation, nothing speaks as eloquently about the likelihood of impending new rules as the move by Deutsche Bank this week to scrap a product that lets investors bet on oil prices.
As the FT reported on Wednesday, Deutsche said it would redeem all its memorably-named PowerShares DB Crude Oil Double Long exchange-traded notes, which use leverage to double returns from price moves in crude oil. This makes it the first exchange-traded commodity product to go completely under –others so far have only suspended new share issues — as Wall Street braces for a potential regulatory crackdown on energy speculation.
As of Tuesday, there were $425m of such notes. Deutsche’s move will effectively see it buy-out shares from existing investors before selling the oil assets on September 9. The action, as the FT notes, “could set a precedent for similar actions by other investment managers”.
The big question, of course, is what footprint might the fund’s liquidation leave on underlying futures prices, and to what degree the wider market might take advantage of a semi-distressed seller coming its way next week.
Olivier Jakob of Petromatrix, forsees a number of scenarios. As he noted on Wednesday (our emphasis):
Two weeks ago, Deutsche Bank decided to stop issuing new shares on its WTI Double-Long ETN. Yesterday it announced that it is taking the decision to shut-down the ETN next Wednesday (Sep 9th).
The WTI positions held by the DXO are in July 2010, therefore they will have to sell about 11’000 July WTI contracts (a third of the July2010 Open Interest). While this will have a flat price impact next Wednesday we think it is too early to already pre-emptily sell in front of it. We would rather buy the WTI spreads to July 2010 as we would imagine that Deutsche will buy the spreads to bring the flat price length closer to the front to find enough liquidity for the liquidation of the Fund.
If Deutsche Bank does not buy the spreads in front of the liquidation then the risk will be for a strong strengthening of the spreads to July when the holdings of the Funds are sold next week. If holding a bullspread front to back does not fit in the book, the alternative would be to sell the July/Aug or July-to-back spread or sell the July WTI to Brent spread, buy the Jul 2010 cracks.
One way or another, WTI July 2010 should find some specific pressure next week, according to Jakob.
As for what all this means for commodity ETFs generally, Matt Hougan, director of exchange-traded fund analysis at IndexUniverse.com, told the FT: “It’s ominous… it’s the first shoe to drop, and won’t be the last.”
Two months left to read the book on US collapse
Professor Igor Panarin, whose book "The Crash of America" is just out, claims that by November the book will be yesterday’s news. Panarin believes President Obama will lead his country to a breakup. Panarin compares Obama to former Soviet president Mikhail Gorbachev."Obama is "the president of hope", but in a year there won’t be any hope. He’s practically another Gorbachev – he likes to talk but hasn’t really managed to do anything. Gorbachev at least had been a secretary of a regional communist party administration, whereas Obama was just a social worker. His mentality is totally different. He’s a nice person and talks nicely – but he’s not a leader and will take America to a crash. When Americans understand that – it will be like a bomb explosion," Panarin said, speaking to journalists during the unveiling of his book.
Panarin made his controversial forecast back in 1998, saying 2010 would be the starting point of the collapse. He spent the following eleven years monitoring the events around the US and says they largely confirm his theory."Today I received another confirmation that the collapse of the dollar and the US is inevitable. Japan’s Democratic Party won the election, and I’d like to remind you that its leader [Yukio Hatoyama] has the snubbing of the dollar among his economic plans. In plainer words, he plans to transfer Japan’s monetary reserves from US dollars into another currency. The move will seriously accelerate the dollar’s exchange slump as early as this November. Disintegration will follow shortly," he added.
Amid all these pessimistic statements, Panarin – once labeled by a WSJ journalist as "a polite and cheerful man with a buzz cut" – insists he is by no means a US-hater but, rather, just a scientist."I’m not anti-American, the US population has nothing to do with the part of its political elite that implements an absurd and aggressive policy that aims to create conflicts around the planet…….I hope to see the reasonable part of the American elite – I know there is one – benefiting in these two months left till the collapse. I can name two people that belong to this reasonable part – US Secretary of Defense Robert Gates and Under Secretary of State for Political Affairs William Burns. If they triumph in the political strife, the consequences of the collapse will be minimized."
"The 2009 US budget deficit is 4.5 times the 2008 deficit, while firearms sales are up 40%. On October 1, the coupons that were given to state workers are to be cashed out. When the workers realize that they are getting nothing for those coupons, they will take out their firearms and chaos will unfold. Meanwhile, in a separate issue, as the financial year draws to a close on September 30, its results will be published. They are destined to shock investors worldwide.
After that, and the snubbing of the dollar by Japan and, especially, China, which will transfer 50% of its international operations to Yuan starting in 2010, the currency will then flow like a landslide out of style. Argentina and Brazil are excluding the dollar from mutual financial operations starting January 2010, while Brazil offers to move toward alternative currencies throughout the whole of South America," Panarin noted.
He also suggested Russia follow suit and begin selling oil and gas for roubles. Panarin still leaves room for miscalculation, which would actually make him happy. And should the collapse not start in November, he is ready to explain why it didn’t happen by December. But at the moment, the collapse looks quite likely."In my opinion, the probability of the US ceasing to exist by June, 2010 exceeds 50%. At this point, the mission of all major international powers is to prevent chaos in the US," Panarin concluded.
U.S. Companies Cut More Jobs Than Forecast in August
U.S. companies cut more jobs than forecast in August and boosted their workers’ productivity the most since 2003 in the second quarter, signaling employers are seeking to cut costs further even as the economy stabilizes. A survey by ADP Employer Services showed businesses reduced payrolls by 298,000 after a 360,000 decline in July. The Labor Department in Washington said productivity, a measure of employee output per hour, rose at a 6.6 percent annual rate in the three months through June.
With labor costs declining and employment continuing to deteriorate, today’s reports buttress the case for the Federal Reserve to complete its plans to buy $1.75 billion of bonds and forego raising interest rates until next year. Slack in the job market helps reduce any inflationary pressures stemming from the central bank’s record liquidity injections. "Inflation risks are minimal and the key issue they should focus on is spurring growth," said Michael Moran, chief economist at Daiwa Securities America Inc. in New York, who accurately forecast the gain in productivity. "There’s a turn under way in the labor market, though it’s a very slow turn."
A separate report today showed factory orders advanced in July by the most in a year as companies sought to rebuild inventories after a record draw-down in the first part of 2009. The Commerce Department said orders increased 1.3 percent after a 0.9 percent gain in June. The Fed later today is scheduled to release minutes of its August policy meeting, when the Federal Open Market Committee decided to complete its planned $300 billion of Treasuries purchases by the end of October. Officials in recent days have differed in their outlook for the larger $1.25 trillion program to buy mortgage-backed securities.
Following the last two recessions, the central bank waited for at least a year after the unemployment rate peaked before raising rates. The Labor Department in two days is forecast to report the jobless rate rose to 9.5 percent in August from 9.4 percent in July; economists project it will reach 10 percent in early 2010. The ADP report, forecast to show a decline of 250,000 jobs, underscores the danger that the consumer spending that accounts for 70 percent of the economy may be slow to gain traction in coming months.
The report showed a drop of 152,000 workers in goods- producing industries including manufacturing and construction, while service providers cut 146,000 workers. Financial firms trimmed jobs by 19,000, ADP said, the 21st consecutive monthly drop for the industry. Whirlpool Corp., the world’s largest appliance maker, said Aug. 28 that it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs, or 1.6 percent of the company’s workforce.
"Considering the severity of the recession and uncertainty over the strength and sustainability of the recovery, the labor market’s recuperation will be slow and painful," said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania, which forecast a drop of 290,000. Productivity of U.S. workers rose in the second quarter at the fastest pace in almost six years, the Labor Department’s data showed, as companies squeezed more out of remaining staff to boost profits. Labor costs, adjusted for the gain in efficiency, fell by a revised 5.9 percent annual pace, the most in nine years. Lower expenses helped boost profits last quarter by the most in four years, a necessary first step in slowing firings. Productivity gains also help curb inflation.
Makers of durable goods from Intel Corp. to Rockwell Collins Inc. are among those seeing demand stabilizing as customers here and abroad, buoyed by growing profits and more accessible credit, begin to invest in new equipment. The gain in factory orders was restrained by a decline in non-durable goods such as oil and food that masked a jump in demand for new equipment. A rebound at automakers resulting from the government’s "cash-for-clunkers" plan may give orders an added boost in coming months as dealers restock.
"Inventories are very lean and businesses are now going to have to increase production given the gain in orders," said Michelle Meyer, an economist at Barclays Capital Inc. in New York. Leaner workforces allowed companies to protect earnings while the economy shrank at a 1 percent annual rate last quarter. Corporate profits rose 5.7 percent from the prior three months, the biggest gain since the first quarter of 2005, Commerce Department data showed last week. Dell Inc., the world’s second-biggest maker of personal computers, topped second-quarter profit and revenue estimates after slashing costs. Chief Executive Officer Michael Dell, on a quest to save $4 billion a year, has farmed out 40 percent of the Round Rock, Texas-based company’s manufacturing.
Joblessness Still Plagues Metro Areas
Unemployment rates in 372 U.S. metropolitan areas continued their upward climb in July, Labor Department figures released Tuesday show. Some 19 metros now have unemployment rates above 15%; eight are in California, hard-hit by the real-estate collapse, and five are in Michigan, suffering from the auto industry's downturn. El Centro, Calif., continues to have the nation's highest unemployment rate, rising to 30.2% in July. Yuma, Ariz., is next with 26.2%. The national average in July was 9.7%, not seasonally adjusted. The Labor Department will update the latter figure Friday.
There were a few bright spots in July, mostly in interior states less affected by the real-estate boom and bust and aided by relative strength in natural-resources industries. Bismarck, N.D., posted the lowest jobless rate in July, 3.1%, followed by Fargo, N.D., and Rapid City, S.D., at 4.3% each. Among the biggest cities with a million people or more, Detroit's unemployment rate was highest, at 17.7%, followed by Riverside-San Bernadino-Ontario, Calif., at 14.3% and Las Vegas at 13.1%. Oklahoma City, at 5.9%, and the Washington, D.C., metro area, at 6.2%, had the lowest unemployment rates among the nation's biggest cities in July.
U.S. Economy Gets Lift From Stimulus
Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades. But there's little agreement about which programs are having the biggest impact. Some economists argue that efforts such as the Federal Reserve's aggressive buying of Treasury debt and mortgage-backed securities, as well as government efforts to shore up banks, are providing a bigger boost than the administration's $787 billion stimulus package.
The U.S. economy is beginning to show signs of improvement, with many economists asserting the worst is past and data pointing to stronger-than-expected growth. On Tuesday, data showed manufacturing grew in August for the first time in more than a year. "There's a method to the madness. We're getting out of this," said Brian Bethune, chief U.S. financial economist at IHS Global Insight.
Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about $60 billion of the $288 billion in promised tax cuts to U.S. households, while about $84 billion of the $499 billion in spending has been paid. About $200 billion has been promised to certain projects, such as infrastructure and energy projects. Economists say the money out the door -- combined with the expectation of additional funds flowing soon -- is fueling growth above where it would have been without any government action.
Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter -- something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus.
For the third quarter, economists at Goldman Sachs & Co. predict the U.S. economy will grow by 3.3%. "Without that extra stimulus, we would be somewhere around zero," said Jan Hatzius, chief U.S. economist for Goldman. Dave Anderson, chief financial officer of Honeywell International Inc., said the stimulus package actually froze business activity at first as firms tried to figure out how they could benefit from the government spending.
The $787 billion package "created actually a slowdown in order activity in terms of the flow that we would normally have anticipated," Mr. Anderson said at a conference sponsored by Morgan Stanley. "We anticipate that that's going to actually pick up in the second half of the year. I think it's not unreasonable to see several hundred million dollars of orders." Opinion, however, remains split about which program has had the biggest impact.
"I don't think the stimulus was necessarily as effective as people claimed it to be or claim it will be," said Joseph LaVorgna, chief U.S. economist with Deutsche Bank Securities Inc. He credits the government's "stress tests" of banks, which helped boost confidence on Wall Street and allow banks to raise capital and resume lending. Economists say other programs are having an impact, including an $8,000 tax credit for first-time home-buyers that has spurred home sales. The cash-for-clunkers program, which provided financial incentives for consumers to trade in older vehicles, did the same for cars.
One big question: Will the boost evaporate once the programs end? Stuart Hoffman, chief U.S. economist for PNC Financial Services Group, said the stimulus package "caused this bit of a concentrated burst [that] probably will exaggerate the pace of economic growth," since some areas, such as auto sales, could fall back to low levels.
Housing's 'Poverty Effect' Fouls Up U.S. Rebound
The loss of some $7 trillion in household wealth is an albatross around the neck of the economy. This dour effect is clipping a robust recovery. Millions who have little or negative home equity are shackled to houses they can’t sell and a debt burden that keeps them from moving ahead. They can’t save, either, although they desperately need to boost their cash reserves.
Not a week goes by when I don’t hear from a friend or neighbor who can’t sell their home or get a decent price for it. They were counting on the proceeds to fund retirement or simply get on with their lives and careers. They weren’t planning to go out and buy boats and big-screen TVs. Most Americans are suffering from the opposite of the wealth effect: a creeping sense of poverty. The loss is about $54,000 per home if you average out the $7 trillion among 130 million U.S. housing units (including rentals), according to an estimate by the economic blog http://www.newobservations.net, based on Federal Reserve data.
Growing unemployment, stagnant wages and diminished home equity are weighing even more on those who may join the ranks of the foreclosed. The delinquency rate on U.S. mortgages -- those falling behind on payments -- reached a record in the first half of the year, according to the Mortgage Bankers Association, a trade group in Washington. The current deleveraging is paring consumer spending as buyers are borrowing less for everything. They don’t feel wealthy either since their retirement funds were clobbered during the last bear market.
Lost home equity not only represented diminished wealth, it hurt confidence in the future. The house poor can’t borrow against their homes because they have tapped out the equity or don’t have enough of a stake to leverage against. Most of them can’t even refinance. That means they won’t be flocking to stores to buy new appliances, financing college educations or saving enough for retirement. Regardless of the recent positive reports on housing and the economy, it’s not surprising that attitudes to traditional wealth creation have changed.
Buying a home is no longer the guaranteed way to save and invest. In a survey by the National Foundation for Credit Counseling, almost half of those polled "no longer believe that the American dream of homeownership was a realistic way of building wealth."
The more alarming trend is that mortgage defaults are rising fastest for those holding prime, fixed-rate loans, the Mortgage Bankers Association says. These aren’t the dodgy subprime mortgages made to people with questionable credit and income histories. These folks were supposed to be the industry’s most creditworthy customers. If unemployment grows and major industries continue to shrink, house poverty will ravage American households. As many as 25 million homeowners may be better off walking away from "underwater" mortgages that exceed home values.
Credit-card bills compound the misery. Anchored with more than $2.5 trillion in total consumer debt, Americans are working through a negative wealth whammy rivaled only by the 1930s. Banks are pinching even more by tightening credit, even to qualified borrowers. While a new U.S. consumer credit protection law that went into effect Aug. 20 will give you 45 days’ notice of a finance charge increase, banks are still free to make terms more restrictive and raise rates sky high.
Being credit-challenged isn’t such a bad thing, though. We have reached a turning point in this crisis that compels people to do some saving and curb unbridled consumption and debt. Credit-averse Americans are building up their cash in vehicles such as government-insured certificates of deposit, money-market funds, and highly rated short-term corporate and municipal bonds. Yet the U.S. government still doesn’t get the big picture and indirectly discourages savings, which can ultimately create a pool of capital for lending, infrastructure improvements and small business lending.
U.S. savings and non-municipal bond interest are still taxed as ordinary income at the highest personal rates. What’s wrong with this policy? You can’t have a healthy economy without a wealth effect. In lieu of easily tapped credit, people won’t spend freely unless they have a cash -- or employment -- cushion. Since we can’t depend on real estate as a prime wealth creator -- especially in an age of deleveraging -- Congress needs to promote tax-free savings and rebuilding home equity if it wants a meaningful economic rebound. Otherwise the poverty effect will continue to foul up the recovery.
Bond vigilantes fret over Japan
Japans's tax revenues have collapsed by 27pc over the last year, leaving it unclear how the incoming Democrats can pay for their blitz on welfare spending without flooding the debt markets. The International Monetary Fund already expects Japan's budget deficit to top 10pc of GDP this year and next. Gross public debt will reach 215pc of GDP in 2009, the highest in the world. "Japan faces a very difficult fiscal situation," said the Fund in its latest country report.
Democrat leader Yukio Hatoyama, who won a landslide victory over the weekend, has pledged that there would be no increase in debt to fund his $180bn boost for child allowances and social policy by 2013, but his advisors are already back-tracking as they examine the dire tax figures. While Japan pulled out of recession in the second quarter, it has barely begun to make up for the 11.7pc contraction of its economy over the preceding year. Industrial production was still down 23pc in July. Exports were down 39pc to the US.
The Great Recession has tipped state finances into a deep crisis. Corporate tax revenues have turned negative as refunds exceed payments from companies facing a collapse in profits. Japan's finance ministry has been able to count on a huge pool of domestic savings and a captive bond market to fund Keynesian spending projects over the years, but policy-makers fear that the debt market may reach saturation. Yields on ten year bonds are currently 1.3pc. "Can these benign conditions be expected to continue in the face of even-larger increases in public debt?" said the IMF.
If yields rise to the OECD level of 3pc to 4pc they would cause Japan's debt to spiral out of control. This is no longer a remote possibility. High Frequency Economics says Mr Hatoyama has won the privilege to preside over "the biggest financial meltdown in history." Japan's $1.5 trillion state pension fund said in April that it would start selling its bonds to cover a $40bn shortfall on its books. Private citizens face the same need. The savings rate has fallen from 14pc to 2pc since 1990. "The IMF said this could put "significant pressure" on bond markets
Japan has become a laboratory for the world's aging crisis. The work-force began contracting in 2005. The country must now rely on diminishing tax revenues to cover a rising burden of pensioners. Albert Edwards, a Japan veteran at Societe General, said deflation would trump concerns about excess borrowing. "Inflation has crashed back into negative territory, falling 2.2pc in July year-on-year. This will happen to the West eventually," he said. Wages have been sliding persistently, though disguised by temporary contracts and cuts in bonuses. Cash earnings were down 7.1pc in June year-on-year. While asset prices touched bottom earlier this decade, they have never fully recovered from their peak in 1990. Tokyo land prices are still down by 75pc.
Michael Taylor from Lombard Street Research said Japan made a strategic error during its Lost Decade by waiting too long to pull the monetary levers. "They failed to boost money supply the way the Fed and the Bank of England are trying to do through quantitative easing. Their fiscal packages led to a massive deterioration in public finances." "IMF studies show that as public debt rises above 60pc of GDP fiscal stimulus loses it effect. People anticipate the consequences: higher taxes, and eventually higher interest rates. The bond vigilantes will always get you in the end," he said.
The Coming Deposit Insurance Bailout
Americans are about to re-learn that bank deposit insurance isn't free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality. We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.
The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they'll have to tap the taxpayers who are the ultimate deposit insurers.
It isn't as if regulators don't understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they'd need another bailout. But this subterfuge can't last. Eighty-four banks have already failed this year, and many more are headed in that direction.
The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.
Meantime, even as it "resolves" and then sells failed banks, the FDIC is also guaranteeing the buyers against losses on tens of billions of acquired assets. This is known in the trade as "loss sharing," which is another form of taxpayer guarantee that taxpayers aren't supposed to know about. Most of the losses won't be realized if the economy recovers. But this too is a price of taxpayers guaranteeing deposits. Even as Treasury and the press corps broadcast that the feds are making money on TARP repayments, these guarantees go largely unnoticed.
FDIC Chairman Sheila Bair continues to say that deposits will be covered up to the $250,000 per account insurance limit, and of course she's right. But we wish she'd force Congress—and the American public—to face up to the reality of what deposit insurance costs. Amid the panic last year, Congress raised the deposit limit from $100,000. While this may have calmed a few nerves—though the worst runs were on money-market funds, not on banks—it also put taxpayers further on the hook. The $250,000 limit was supposed to expire at the end of 2009, but in May Congress extended it through 2013, and no one who understands politics thinks it will return to $100,000. The rising bank losses mean that the FDIC's ratio of funds to deposits is down to 0.22%, far below its obligation under the insurance statute to keep it between 1.15% and 1.50%.
Rather than further soak capital from already weak banks, the FDIC ought to draw down at least $25 billion from its Treasury line of credit. Ms. Bair is going to have to ask for the cash sooner or latter, and she might as well do it before the fund hits zero and we get another round of even mild depositor anxiety. We suppose Congress could raise a faux fuss, but these are the same folks who ordered the FDIC to broaden the insurance limit. They need to face the political consequences of their promises.
China’s Birthday Plans Marred by Pollution, Asset Sale Protests
Chinese workers are taking to the streets to demonstrate against pollution and job losses stemming from state-asset sales, highlighting social tensions weeks before the Communist Party celebrates 60 years of rule on Oct. 1. About 10,000 villagers in Fengwei in southeastern Fujian province clashed on Aug. 31 with 2,000 riot police to protest industrial pollution, taking some local officials hostage, the South China Morning Post reported today, citing witnesses and authorities. In Hunan province, 5,000 coal workers at several mines in the past week struck to demand better treatment as their state-run company sought to privatize, the paper reported.
While China’s gross domestic product has expanded more than 20-fold since the country embarked on economic reforms, that success has come at the cost of widening income disparities and some of the worst pollution in the world. "There is serious concern about stability on the eve of the 60th anniversary," said Cheng Li, an expert on China’s political system at Washington-based Brookings Institution. Still, Li said the protests have been localized, and come amid widespread optimism at the national level about the success of China’s political system, especially given the country’s quick recovery from the effects of the global financial crisis.
Nationwide, the number of so-called mass incidents -- everything from ethnic unrest in Tibet and Xinjiang to strikes and riots -- rose to about 90,000 last year from more than 80,000 in 2007, according to figures from Wang Erping, a scholar at the Chinese Academy of Sciences who studies unrest. Chinese President Hu Jintao and Premier Wen Jiabao have focused on building a "harmonious society" and have tried to address income inequality in their more than six years in power. Local government decisions reflect that sensitivity.
Last month, after workers in central China’s Henan province took a local official hostage during a protest over the sale of a state-owned steel mill, the provincial government decreed that any industrial restructuring had to be evaluated for "risk to social stability" before they could be approved, according to a report in the Aug. 17 Henan Daily. In July, steel workers in northeastern Jilin Province murdered an executive, causing authorities to put off a buyout of their mill.
On Aug. 17, hundreds of villagers in northwest China’s Shaanxi province broke into a lead smelting plant after more than 600 children were found to have excessive amounts of lead in their blood, the official Xinhua News Agency reported. On Aug. 8, villagers in Hunan province rioted after they learned their children had been exposed to excessive levels of lead, the Associated Press reported. Lead poisoning can cause behavioral problems and learning disabilities in children, according to the U.S. Environmental Protection Agency.
China closes doors to European businesses
Doing business in China is getting harder, not easier, according to European businesses, as they laid out almost 600 pages of complaints in a new report. The report, from the European Union Chamber of Commerce in China, covers the whole gamut of the Chinese economy, from industrial chemicals to mobile phones to banking. It paints a troubling picture of the Chinese business landscape, filled with discrimination against foreign companies, arbitrary laws and regulations, and abuses of China's World Trade Organisation obligations.
Although China has repeatedly complained about protectionism in the United States and Europe, the report suggests that China is one of the most protectionist major economies. Joerg Wuttke, the president of the European Chamber, warned that "China needs Europe more than Europe needs China", and pointed out that the EU is a bigger market than the US for China, and exports to European countries make up 7pc of Chinese GDP. According to the World Bank, China ranks 83rd out of 181 countries in its annual assessment of how easy it is to do business. The emerging superpower scored lower than Kenya, Vanuatu and Colombia, but was judged better than Sierra Leone and Belarus.
Now, however, the business climate is getting worse. Mr Wuttke said in many sectors there had been "a slowdown, and in some cases partial reversal, of the reforms of recent years". He noted that there have been a rising number of government interventions and that foreign investment restrictions have also increased. The EU report contains over 500 recommendations on how China could improve the situation, drawn from the 1,400 European companies working in the country. In particular, the report criticises China's joint-venture requirements, which means that foreign companies in some sectors can only own up to 50pc of a company. In the car sector, Chinese companies are able to buy European car makers, but foreign manufacturers in China have to do joint-ventures to operate and are allowed a maximum of two plants.
Meanwhile, foreign companies have been repeatedly barred for bidding from government contracts, even though China pledged that its Pounds400 billion of stimulus cash would be allocated to both local and foreign firms. "Bids by four foreign-invested wind energy companies in Shanghai, Shandong and Tianjin for a Eu5 billion project for 25 sets of wind turbine generators were rejected in the first round," the report notes. The European Chamber says foreign companies are "excluded outright" from China's service sector, and uses Amadeus, a Spanish travel-booking company, as an example. More than seven years since China signed up to the WTO, it has still not granted Amadeus, a computer travel reservation system, the right to issue tickets and reservations to the growing Chinese market.
Meanwhile, China's host of technical regulations and certification procedures "blatantly discriminate" against foreign companies, said Dr Wuttke. The report cites an unnamed company that was the market leader in providing encryption services to Chinese banking, telecoms and public transport firms until the government "suddenly" required a new certification from the Office of Security Commercial Code Administration (OSCCA). "Not one foreign company or foreign-invested Chinese company has to date received OSCCA certification," the report points out.
More problems included a lack of transparency over regulations, little consultation, and an unfair enforcement of rules against foreign companies when Chinese firms are rarely picked up. Dr Wuttke, who has complained in the past that China has not permitted a single major takeover by a foreign company of a domestic firm, also said government decisions were rarely explained. "There was no substantive analysis or evidence supporting the rejection of Coca Cola's merger with Huiyan, which doesn't help dispel suspicions of protectionism," he said.
EU wary on withdrawing fiscal stimuli
European Union finance ministers were set to agree on Wednesday that the EU should not be too hasty in withdrawing fiscal stimuli and other extraordinary measures introduced in response to the worst economic crisis in Europe’s post-1945 history. "The time has not yet come to withdraw from the fiscal stimulus," said Jean-Claude Juncker, chairman of the 16-member group of eurozone finance ministers. "We have to continue this effort in the course of this year and next year. Then we have to agree on an exit strategy." The EU ministers were arriving in Brussels for an informal lunch meeting aimed at preparing the ground for a two-day session of G20 finance ministers on Friday and Saturday in London. High on their agenda was the question of how to organise a gradual, co-ordinated removal of the expansionary measures that the US, the 27-nation EU, China and other countries have implemented to avert a deep global recession.
In Europe the measures include colossal injections of central bank liquidity, extra government spending that has pushed national budget deficits way beyond normal EU limits, and emergency state aid to the financial and car manufacturing sectors. Pressure is strong from countries such as Germany and the Netherlands, with their long tradition of fiscal and monetary self-discipline, to withdraw these measures as soon as it is safe to do so. "We will need to think about exit strategies, because in the end the huge deficits will threaten the euro," said Wouter Bos, the Dutch finance minister.
The ministers are aware, however, that the exit strategies, if not properly co-ordinated, risk turning into a self-defeating exercise. "A generalised rush to exit combining the mopping up of liquidity, interest rate increases, vigorous budgetary adjustment and the withdrawal of government guarantees would be a recipe for a double-dip recession," Jürgen von Hagen and Jean Pisani-Ferry of the Brussels-based Bruegel think-tank wrote in a report this week on Europe’s economic priorities between 2010 and 2015.
Exit is bound to be gradual and because crisis management policies are interdependent, a proper sequencing of normalisation action by governments, the [European] Commission and central banks is essential for success," they said. The EU ministers were also expected to discuss French proposals for capping bankers’ bonuses, ranging from a targeted tax to a legal maximum as a share of profits. France is hoping that a G20 summit of industrialised and emerging countries in Pittsburgh on September 24-25 will produce an agreement on limiting bonuses as strongly worded as a similar G20 accord on tax havens last April.
How the Bailouts Could Have Gone Better
Did they work? With the financial meltdown finally contained and the Year of the Bailout drawing to a close, we can start to make some meaningful assessments about whether hundreds of corporate rescue packages did more harm than good. It's probably fair to say that aggressive government intervention in the economy, starting with the Bear Stearns bailout in March 2008, prevented a deeper collapse and maybe even a depression. But the government also erred on the side of doing too much and propped up some huge, mismanaged companies that would have, and perhaps should have, failed. To gauge the consequences of all the bailouts, I spoke recently with Barry Ritholtz, author of Bailout Nation and CEO of research firm FusionIQ. Excerpts:
Have any of these been good bailouts? I can imagine a bailout done well. Washington Mutual might be the closest example. Once the FDIC identified that bank as insolvent [in September 2008], they effectively came in on Friday night and carried out an orderly reorganization. They fired the board, the common stock ended up worthless, and by Monday morning, they had already sold key assets to JPMorgan Chase. The toxic debt and the shareholders were wiped out, and the bondholders took a big haircut. I don't know if we'd call that a bailout, but it was not a reckless collapse like Lehman Brothers. And it didn't cost the taxpayers anything.
The ideal bailout is not a bailout of reckless financiers. It's like the government equivalent of a hospice for dying companies, involving no taxpayer money and no moral hazard. And the people who behaved recklessly, they get their comeuppance. The most egregious bailout, that's a tossup between Citigroup and AIG. I think AIG was worse just because it involved so much money. And there's no way we're going to see all of that back. It could end up being the greatest theft in history.
Citi is a perennial debacle. They were clearly insolvent. They were too big to fail but also too big to succeed. They had lobbied for the repeal of the Glass-Steagall Act for 10 years before it actually happened. They started in the late '80s, when they realized they were limited in terms of growth and the only way to really grow would be to buy other companies on other side of the investment business. To do that, they needed the repeal of Glass-Steagall. The bailout was the classic example of saving the bank instead of saving the banking system.
What would have been a better way to deal with AIG? There was a simple solution. AIG was basically a AAA-rated, conservatively run insurance company with a hedge fund hidden under its skirts—AIG Financial Products. It looked to them like they were making free money: selling $3 trillion worth of risk and taking 10 basis points [of profit] on it. It was like going to Vegas. If you play in the casinos and you win, then the Nevada Gaming Commission is going to make sure the casino pays. But if you play craps with some guys out in the alley and you win, there's nobody there to make sure they pay. AIG Financial Products was like that craps game in the alley.
We could have done this by cleaving FP from the insurance company. So anybody owed debts by FP would have been dealing with FP alone. And if they didn't get their money back, too bad. You're supposed to lose money when you put it into insolvent companies. You're supposed to suffer pain and agony when you put money into a company that's as corrupt as that AIG hedge fund. Then we could have spun out AIG the insurance company in 30 days, as a stand-alone entity, without FP. Then wind down FP separately. That should have been demonized and pulled out and closed. To throw $185 billion at AIG to save them, the whole thing is pointless. The best thing would have been to just rip the Band-Aid off.
Could the feds have done this in 2008? Or only earlier, before the crisis hit? Yes, we could have done it in September 2008. The problem is there's psychological pain, and we humans always want to put off the pain. I see this all the time in investing. When people buy a stock at 80, they know they're taking a risk, then it falls to 3 and the phone call comes asking, "What should I do?" When you ask what do they want, usually the subtext is, "I want the pain to stop." So to make the pain stop, you just sell the damn thing. That's what we did with AIG. We just wanted the pain to stop.
Wasn't the Fed hamstrung? The Fed was in a position where it couldn't do nothing, but it could have done something more creative. The way I see it, if a company blows itself up the way AIG and Citigroup did, in a capitalist system, you have to take it out back and put it down like Old Yeller. By the way, there was a huge amount of capital in private trusts and partnerships and private investments. Not one of those blew up. When it's a public firm, you can't go after senior executives' personal assets if it collapses. But if it's a private operation, you can. And none of the guys with their own money on the line went belly up.
What would have been a better way to handle Citi? They should have been WaMued: put into receivership. The FDIC fires the board, and stockholders get wiped out. Bondholders get what's left over, given their priority in the capital structure. The government could have said, "We'll see how close we can come to making you whole," but they probably would have been down 30, 40, maybe 50 percent. Then they could have spun out Smith Barney, a nice, profitable brokerage firm. The bank, Citibank, they could have spun that out as a stand-alone, with its $1 trillion in deposits. Pull out the toxic sludge. Another dozen entities within Citigroup either get spun off, if there are buyers, or just shut down. That's what happens to bankrupt companies. They could have done the same with Bank of America. Spin out Merrill Lynch, sell off Countrywide as a mortgage broker, and the senior management and the board—they get jack.
It's conventional wisdom on Wall Street that the government made a mistake in letting Lehman Brothers collapse last September. But some people think the real mistake was rescuing Bear Stearns a few months earlier, since that led Lehman to expect a rescue. Bear Stearns was an organized collapse. They could have just let Bear Stearns go down. JPMorgan supposedly had 40 percent of the $9 trillion in Bear's derivatives exposure, so why not let JPMorgan deal with it? After the Fed saved Bear, Dick Fuld [CEO of Lehman Brothers] sees Warren Buffett come in with a bunch of billions. That's supposedly how much he offered: "A bunch of billions." At a pretty good rate. And Fuld turns him down! He must have been thinking he'd get a better deal from the government. Classic moral hazard! So now it's September, the night before bankruptcy, and Fuld is meeting with the Fed and the Treasury. Boy, would I have liked to be a fly on the wall. You can just imagine Paulson and Bernanke saying, "You turned Buffett down? You made the mistake of turning Warren Buffett down? And now you want money from us?" No wonder they didn't want to bail out Lehman—even if they could have.
Goldman Sachs ended up with just about the best deal of all. Not just the $10 billion federal bailout, which it paid back, but all that extra money from the AIG bailout. It's astonishing that Goldman Sachs walked away with what they did. As an AIG counterparty, they got $13 billion from the AIG bailout. That's on top of the $5.9 billion they grabbed on the eve of AIG's collapse. It's just so egregious.
What do you think of the idea that Goldman got special treatment just because Hank Paulson, the t reasury s ecretary under Bush, had been Goldman CEO right before coming to Washington ? I don't know, but it's certainly true that no Wall Street house has more people strewn throughout the Treasury and the Federal Reserve Bank of New York than Goldman. And if AIG had gone through bankruptcy, Goldman would have been $19 billion poorer. Goldman is the only counterparty I know that through the whole thing got bailouts at 100 cents on the dollar. It was an unbelievable transfer of wealth from taxpayers to reckless companies.
What do you think of the auto bailouts? At least those companies had to testify before Congress and present a public plan saying what their problems were and what they needed. Plus, they got put into bankruptcy. That was certainly better than just throwing a trillion dollars at them.
Are we learning the right lessons? The American public is notorious for its short attention span. They were paying attention for a while, but if another celebrity dies or there's an Elvis sighting, forget it.
Rahm Emanuel likes to say that you shouldn't waste a good crisis, but I think we have. I don't understand why the rating agencies haven't been given the Arthur Andersen treatment. Instead, we get this bill about credit card practices that has absolutely nothing to do with what just happened. Once the markets started moving back up again after bottoming out in March, it might have been too late for real reform. The Obama administration dawdled. I don't think they expected as much of a rally as we've had since March. And now the lobbyists for Wall Street have taken over. It's on to the next issue—so now we've got a healthcare reform debate. They should have taken care of the first crying baby before picking up the next one.
Do you think anything good will come out of all this? No. Benjamin Disraeli said, "The one thing we learn from history is that we learn nothing from history." My biggest fear is we revert to business as usual—until the next crisis.
Bailed-out bankers to get options windfall: study
As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday. The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said. "Not only are these executives not hurting very much from the crisis, but they might get big windfalls because of the surge in the value of some of their shares," said Sarah Anderson, lead author of the report, "America's Bailout Barons," the 16th in an annual series on executive excess.
The report -- which highlights executive compensation at such firms as Goldman Sachs Group Inc, JPMorgan Chase & Co, Morgan Stanley, Bank of America Corp and Citigroup Inc -- comes at a time when Wall Street is facing criticism for failing to scale back outsized bonuses after borrowing billions from taxpayers amid last year's financial crisis. Goldman, JPMorgan and Morgan Stanley have paid back the money they borrowed, but Bank of America and Citigroup are still in the U.S. Treasury's program.
It's also the latest in a string of studies showing that despite tough talk by politicians, little has been done by regulators to rein in the bonus culture that many believe contributed to the near-collapse of the financial sector. The report includes eight pages of legislative proposals to address executive pay, but concludes that officials have "not moved forward into law or regulation any measure that would actually deflate the executive pay bubble that has expanded so hugely over the last three decades."
"We see these little flurries of activities in Congress, where it looked like it was going to happen," Anderson said. "Then they would just peter out." The report found that while executives continued to rake in tens of millions of dollars in compensation, 160,000 employees were laid off at the top 20 financial industry firms that received bailouts. The CEOs of those 20 companies were paid, on average, 85 times more than the regulators who direct the Securities and Exchange Commission and the Federal Deposit Insurance Corp, according to the report.
Ilargi: When reading Pam Martens' piece below, how can anyone be surprised they let Madoff rip off people for 16 years?
New Madoff Report Blasts SEC
How did so many regulators get so much wrong?
A new government watchdog report says the Securities and Exchange Commission should have discovered Bernard Madoff's billion-dollar Ponzi scheme. But its true value may be in waking up regulators and lawmakers to existing problems with enforcement before they rewrite America's rules on financial regulation. The executive summary of the report, released Wednesday by the SEC's Inspector General, H. David Kotz, says the agency received "more than ample information … to warrant a thorough and comprehensive examination and/or investigation" of Madoff and his investment securities firm. No SEC personnel had an inappropriate or financial connection with Madoff or his family that may have impeded their work, according to the report. SEC investigators simply fell down on the job.
"His report makes clear that the agency missed numerous opportunities to discover the fraud," said SEC Chairman Mary Schapiro in a statement. "It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors. In June, Madoff was sentenced to 150 years in prison for bilking thousands of people out of some $50 billion between 1992 and 2008. When Madoff's fraud scheme was discovered late last year, critics of the SEC widely accused the agency of being asleep at the switch.
Between June 1992 and December 2008, the agency received at least six complaints "that raised significant red flags concerning Madoff's hedge fund operations and should have led to questions about whether Madoff was actually engaged in trading." Regulators were aware of Madoff's shady investment dealings because of two articles about him that appeared in the press in 2001. Schapiro says the agency is already taking action by bolstering its enforcement procedures and inspection program, and proposing new investor protection rules. But that's little comfort to those who lost millions through Madoff's deceit.
Kotz's report throws cold water at regulators and is likely to goose them to focus once again on financial regulatory reform--the political topic of the last year, which has been largely overshadowed in recent months by health care reform and signs of recovery in the economy. In a statement Thursday, Senate Banking Committee Chairman Christopher Dodd, D-Conn., said the IG report "further reminds us how essential it is that we improve both financial regulation and the competence of the regulator." He added, "We will use this report to learn what went wrong and figure out how best to get things right."
Dodd's committee is expected to hold a hearing on the report next week. In the House of Representatives, the Financial Services Committee will move ahead with regulatory overhaul next month, focusing on consumer protection. SEC officials are meeting this week with their counterparts from the Commodity Futures Trading Commission to discuss how to "harmonize" their rules concerning securities and derivatives. Kotz's full report, some 450 pages long, will likely be released Friday. As Washington prepares to re-regulate America's markets, one hopes they read this first.
Madoff 'Astonished' SEC Failed to Stop Him After 2006 Interview
Bernard Madoff thought regulators had caught him in 2006 and was "astonished" U.S. Securities and Exchange Commission investigators never followed up on information he gave them, the agency’s internal watchdog said. Madoff, 71, told Inspector General H. David Kotz’s office this year that after being questioned in May 2006 and giving his account number at Depository Trust Co., an independent clearing agency, "I thought it was the end game, over. Monday morning they’ll call DTC and this will be over." When that never happened, Madoff was "astonished," according to a summary Kotz issued yesterday. The Ponzi scheme continued for 2 1/2 years.
"This was perhaps the most egregious failure in the enforcement investigation of Madoff," Kotz’s report said. "They never verified Madoff’s purported trading with any independent third parties." By checking with the clearing agency, the SEC would have "immediately realized that Madoff was not trading in anywhere near the volume that he was showing on the customer statements." The Kotz report detailed repeated missed opportunities by the agency after being alerted to Madoff’s Ponzi scheme activities at least six times dating back to 1992. The SEC assigned inexperienced lawyers to the investigation, supervisors denied requests of examiners to expand their review and staff withdrew a request for information from a third party on grounds a review of the data would be "too time-consuming," Kotz said.
The inquiry is the most exhaustive look yet into the SEC’s failure to detect the world’s biggest Ponzi scheme, the $65 billion fraud that spanned decades and burned thousands of investors, including universities, charities and affluent clients. Lawmakers crafting a regulatory overhaul have awaited Kotz’s findings since agency officials rebuffed questions at hearings in January and February, citing the continuing inquiry. "It is a failure that we continue to regret," SEC Chairman Mary Schapiro said in a statement, adding that the agency is overhauling its enforcement and inspection units and reforming how it handles tips.
The SEC case is a "colossal blunder," Representative Paul Kanjorski, a Pennsylvania Democrat and chairman of a subcommittee on capital markets, said in a statement yesterday. Representative Spencer Bachus of Alabama, ranking Republican on the House Financial Services Committee, said the report shows "institutional failure on a grand scale." SEC staff and supervisors "consistently demonstrated they were inexperienced, inept and easily duped," said James Cox, a law professor at Duke University in Durham, North Carolina. "These were to a person, and there were many, individuals who seemed content to punch the clock but not push the investigation in any meaningful way."
While Kotz’s report portrays SEC enforcement staff as inexperienced and naïve, it doesn’t find that senior officials tried to improperly influence or interfere with inquiries. SEC investigators had met Madoff in response to complaints, including a 2006 session where he was asked how he achieved his returns on investment. "Madoff never really answered the question," Kotz wrote. "Madoff claimed his remarkable returns were due to his personal ‘feel’ for when to get in and out of the market."
Because the staff lacked understanding of options trading, "they did not appreciate that Madoff was unable to provide a logical explanation for his incredibly consistent returns," Kotz wrote. "Each member of the enforcement staff accepted as plausible Madoff’s claim that his returns were due to his perfect ‘gut feel.’" Madoff also tried to impress and intimidate SEC examiners. Throughout an examination by the SEC’s Northeast regional office in New York of Madoff’s firm in April 2005, "Madoff would drop the names of high-up people in the SEC," Kotz wrote. Madoff told examiners Christopher Cox was going to be chairman three weeks before Cox was named, and claimed he himself "was on the short list" to be chairman. When examiners sought documents he didn’t want to provide, Madoff became angry, and his "veins were popping out of his neck."
Most work on the investigation by the Northeast office was led by a "staff attorney who recently graduated from law school and only joined the SEC 19 months before she was given the Madoff investigation," Kotz wrote. "She had never previously been the lead staff attorney on any investigation, and had been involved in very few investigations overall. The assignment was also her first real exposure to broker-dealer issues." Enforcement officials failed to "appreciate the significance" of evidence from former money manager Harry Markopolos in 2005 and "almost immediately expressed skepticism and disbelief about the information," Kotz write. "The enforcement staff claimed that Markopolos was not an insider or an investor, and thus, immediately discounted his evidence."
The SEC might have discovered Madoff’s fraud in 1992. The agency received client complaints about Avellino & Bienes, a Fort Lauderdale, Florida-based firm that invested client money with Madoff, and suspected the firm was a Ponzi scheme. The SEC, learning that Madoff controlled the firm’s funds, assembled an "inexperienced" inspection team that conducted a "brief and very limited examination of Madoff," without seeking to determine how Avellino & Bienes repaid customers, Kotz wrote. "The result was a missed opportunity to uncover Madoff’s Ponzi scheme 16 years before Madoff confessed," he said.
Madoff and the SEC's Revolving Door
by Pam Martens
The long-awaited investigative report by the Securities and Exchange Commission’s (SEC) Inspector General on how the SEC bungled multiple investigations of Bernard Madoff is set for release this week. Unfortunately, according to media reports, the long suffering investing public will not receive the report until the SEC itself has had a chance to review it.
The team that produced this report on one of the most long-running and convoluted frauds in the history of Wall Street included Inspector General H. David Kotz who came to the SEC-IG post in December 2007 after five years as Inspector General and Associate General Counsel for the Peace Corps. The Deputy Inspector General, Noelle Frangipane, also came to the SEC from the Peace Corps where she had served as Director of Policy and Public Information.
This lack of Wall Street cronyism by the top two in the Inspector General’s office might have been refreshing to some in Congress and compensated for their not knowing the difference between puts and calls and peaks and troughs and the intricacies of Mr. Madoff’s split-strike conversion strategy (he splits with your money while converting you to a pauper). But the background of the member of the team heading up the Inspector General’s Office of Investigations, J. David Fielder, should have rang serious alarm bells to Congressional investigators.
For the ten years leading up to July 2007, J. David Fielder worked for the SEC as a Senior Counsel in the Division of Enforcement. In February 1999, he moved to the Division of Investment Management, first as Senior Counsel on the Task Force for Adviser Regulation, then as Advisor to the Director. In November 2000, SEC Chairman, Arthur Levitt, appointed Fielder Counsel to the Chairman.
In July 2007, Mr. Fielder was invited to join the corporate law firm, Haynes and Boone LLP, as a partner. In other words, Mr. Fielder’s government issue rolodex filled with the names, home numbers and email addresses of his colleagues at the SEC along with the investigatory matters in his head is deemed fungible currency among corporate law firms and can be freely exchanged for partner status, instantaneously moving one from the lowly wages and attendant lifestyle of public servant to the rarefied bracket and luxuriant trappings of corporate law firm partner.
But what happened next is where things get interesting. In March 2009, just as the SEC Inspector General was hot in pursuit of Madoff aiders and abettors, Mr. Fielder gave up his lucrative partner status at Haynes and Boone to accept the lowly post of Assistant Inspector General of Investigations, working under a boss from the Peace Corps. In other words, he gave up big bucks for a demotion at the SEC.
What Mr. Fielder did might not raise alarm bells were it not happening on a regular basis throughout the corridors of Washington and Wall Street. To understand the implications, this maneuver deserves an appropriate name. A revolving door is assumed to mean one gets all the right connections as a public servant and cashes them in to the highest bidder in private industry. That concept doesn’t typically entertain the door revolving back to public servant status. On Wall Street, they call a maneuver like that a round trip: you buy 100 shares and eventually sell the same 100 shares.
You end up back where you started: a round trip. Just how many lawyer round trippers are involved in the Madoff investigation? Enough to raise a strong stench of circular corruption. Linda Chatman Thomsen left the SEC in February and has now returned to the corporate law firm that represents many of the largest Wall Street firms, Davis Polk & Wardwell LLP. Ms. Thomsen, who served as head of Enforcement at the SEC, also achieved partner status in this round trip. Ms. Thomsen is married to Steuart Hill Thomsen, a partner in the law firm, Sutherland Asbill & Brennan LLP, which brags as follows in its brochure: "Many of our financial services attorneys have worked in the federal government, including regulatory agencies such as the SEC, FINRA and the Department of Justice." Mr. Thomsen represents "many in the financial services industry" including "securities fraud cases."
Linda Thomsen’s February 4, 2009 appearance before the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises left Chairman Paul E. Kanjorski (D-PA) and Committee Member Gary Ackerman (D-NY) smoldering over her smug attitude and refusal to answer questions. Congressman Ackerman erupted at one point, telling Ms. Thomsen and her colleagues: "You have single handedly diffused the American public of any sense of confidence in our financial markets if you are the watchdogs…"
Congressmen Kanjorski and Ackerman’s outrage was set off by earlier testimony that day from whistleblower Harry Markopolos who presented the multi year, documented complaints he had filed with the SEC advising that the Madoff operation was a giant Ponzi scheme, without any serious action on the part of the SEC. Markopolos said the agency "roars like a mouse, bites like a flea" and "when an entire industry you were supposed to be regulating disappears due to unregulated, unchecked greed, then you are both a captive regulator and a failed regulator…."
On May 14, 2009, Wayne Jett, Managing Principal and Chief Economist of Classical Capital LLC summed up Ms. Thomsen’s more recent SEC tenure as follows in a published letter to the SEC:"As SEC's director of enforcement, Thomsen presided over the firing of her investigating attorney, Gary Aguirre, in 2005 shortly after Aguirre disclosed to Paul Berger, Thomsen's immediate subordinate, evidence of insider trading by a hedge fund. Berger learned that Aguirre's evidence pointed to Wall Street player John Mack [the head of Morgan Stanley] as the "tipper" in insider trading by Pequot Capital, a major hedge fund. Berger fired Aguirre and closed the investigation of Pequot…
After a statute of limitations expired foreclosing further action against Mack, Berger resigned from the SEC to accept a position with a major Wall Street law firm -- the same law firm which had contacted the SEC on behalf of investment bank Morgan Stanley to inquire whether Mack was exposed to any pending investigation. Berger pursued his new position as he exercised authority in the Pequot investigation and in the inquiry by Morgan Stanley.
Two Senate committees investigated Aguirre's firing and a joint minority report found appearances of impropriety. The report was followed by resignations of the SEC's inspector general, chief economist and three commissioners. A new SEC inspector general investigated and recommended disciplinary action against Thomsen for her conduct in the Pequot/Mack/Aguirre matter. But the Enforcement staff issued its own press release denying misfeasance. Commissioners voted to take no action against Thomsen despite the inspector general's report, and laudatory comments followed her eventual resignation.
In other words, if you’re only a domestic diva like Martha Stewart, SEC round trippers may see fit to throw you to the wolves. If you’re a major Wall Street firm generating tens of millions in billable hours to round trippers and their legal colleagues, you may get a gift-wrapped get out of jail free card.
This isn’t just my suspicion. U.S. District Court Judge Jed Rakoff smelled something fishy in the August 3rd deal the SEC cooked up with Bank of America. The Judge refused to approve what he perceived as a measly SEC settlement of $33 million in a lawsuit over Bank of America withholding from investors information that it had approved of Merrill Lynch paying out billions of dollars in bonuses as part of its rescue acquisition of the firm. (Both firms required life support from the public purse known as TARP.)
Bloomberg News quotes Judge Rakoff as follows: "I would be less than candid if I didn’t express my continued misgivings about this settlement at this stage…When this settlement first came to me, it seemed to me to be lacking, for lack of a better word, in transparency. I did not know much about the facts from the complaint. I did not know much, or really anything, about the basis for the settlement."
That was the same view held by the Congressional questioners in the Madoff matter at the February 4, 2009 dust up with top SEC officials. After many rounds of pointed questions produced unresponsive answers, round tripper Andrew Vollmer, then Acting General Counsel of the SEC, explained why. He and his fellow SEC panelists were claiming executive privilege. This position elicited the following outburst from Congressman Ackerman: "Your value to us is useless…Our economy is in crisis, Mr. Vollmer. We thought the enemy was Mr. Madoff. I think it’s you…you were the shield…You come here and fumble through make believe answers that you concoct and attribute it to executive privilege…."
On April 2, 2009, another of Wall Street’s favorite law firms, WilmerHale, announced that Andrew Vollmer would be returning to the firm as a partner. According to the press release, before joining the SEC, Vollmer was a vice-chair of WilmerHale’s Securities Department. The idea that highly paid corporate lawyers have an insatiable altruistic bent to periodically serve as low wage staffers at the SEC is worthy of its own Congressional hearing. Any serious reading of the facts will likely prove these lawyers are going to protect that big Wall Street firm that represents their next big pay day and fast track to partnership.
And just what does the Madoff fraud have to do with the big firms on Wall Street? The multi billion dollar proceeds of the fraud were wired in and out of JPMorgan Chase where Madoff maintained his firm’s account. Also, Madoff partnered with Citigroup’s Smith Barney, Morgan Stanley, Merrill Lynch and Goldman Sachs to compete head on with the New York Stock Exchange in a venture called Primex Trading as reported here at CounterPunch on January 15, 2009.
So You Just Squandered Billions . . . Take Another Whack at It
You've probably never heard of Jay Levine, Chris Ricciardi, John Costas or Stanford Kurland, but they are charter members of Wall Street's Mulligan Club. Back during the heyday of the credit bubble, they were the financiers who earned huge bonuses for creating, trading and investing other people's money in those complex securities that resulted in trillions of dollars in losses and brought global financial markets to their knees. And now they're out there again hustling for investors and hoping to make another score buying and trading the same securities. Like golfers who treat themselves to a second drive after hooking the first one deep into the woods, these guys play on without apology or penalty. The maddening thing is that they're getting away with it and nobody seems to care.
Consider the case of Jay Levine, once the co-chief-executive of RBS Greenwich Capital, the American investment banking arm of the Royal Bank of Scotland. Under Levine's direction, RBS Greenwich went from the bottom of the "league tables" in terms of issuance of asset-backed securities to a perch near the top -- right up there, one industry publication wrote at the time, with Bear Stearns and Lehman Brothers as one of the "best mortgage-backed houses" in the business.
At the height of the mortgage frenzy, Levine's group generated more than $350 million in profit annually for RBS and Levine was reportedly RBS's highest paid employee, earning more than $60 million during the three years before his departure at the end of 2007. Now, two years later, RBS is a financial ward of the British government, which has had to put in more than $30 billion to keep it from collapsing. RBS's biggest mistake was an ill-timed and overpriced purchase of a Dutch bank, but there were also tens of billions of dollars in U.S. credit losses, many of them attributable to RBS Greenwich.
Levine, meanwhile, left RBS at the end of 2007 to take the top job at Capmark Financial Group, a spinoff of GMAC that had become one of the country's biggest commercial real estate lenders. Since then, of course, things have only gone from bad to worse in the world of commercial real estate finance, forcing Capmark to post more than $2 billion in operating losses before it stopped filing public reports this spring. Its biggest shareholder, the buyout firm KKR, has now written off its entire investment in the company. Levine volunteered to reduce his base salary from $5 million to $4 million.
But don't shed too many tears for Jay. Even while remaining at Capmark, he's reassembled some of the old team from RBS Greenwich at a new firm, CRT Capital Group, a small trading house in Stamford, Conn., that he bought in July with former RBS Greenwich co-chief-executive Ben Carpenter and Ron Kripalani, who once headed the capital markets group at none other than Countrywide Financial. In a statement announcing the purchase, the new managers suggested that with so much of Wall Street operating under government-imposed pay caps, it was a perfect time to lure away the industry's "best producers."
Then there is Chris Ricciardi. In the world of finance, nothing has proven more toxic than collateralized debt obligations, or CDOs, and no one did more to expand their reach than Ricciardi. He pioneered them at Credit Suisse First Boston, then was lured away to Merrill Lynch, where he expanded the CDO business from less than $4 billion in new issues underwritten in 2003 to $28 billion in just the first half of 2007. That's when the music stopped and the venerable brokerage house found itself with $41 billion in CDOs and nobody to buy them. By then, however, Ricciardi had already left Merrill and an $8 million-a-year pay package for what looked to be even better opportunities at Cohen & Co., a big Merrill client. Under Ricciardi as chief executive, it became a big CDO issuer in its own right, pumping out $25 billion of the stuff before the market collapsed.
Cohen & Co. is still limping along, but the publicly traded real estate investment trust that it manages -- and with which it merged -- now trades as a penny stock after its holdings lost more than $5 billion in value. Last month, its auditors cited material weaknesses in the company's internal controls. There was a time when Swiss banks were known as much for their conservative investment strategy as for their secrecy and discretion. But that was before John Costas showed UBS how to turn its small American investment bank into one of the five biggest on Wall Street, and the source of nearly half of its profits.
Then, UBS asked Costas to open a hedge fund with $3 billion of the bank's capital, $1.1 billion raised from the outside and lots of borrowed funds. And, indeed, over the next two years, the hedge fund, Dillon Read Capital Management, bragged of gains of $2.5 billion, even after paying generous bonuses to Costas and his team. But when the market turned in the spring of 2007, UBS found itself hip-deep in soured U.S. real estate investments. UBS rushed to close Dillon Read and took its assets onto its own books. But when the dust finally settled, UBS was forced to recognize $37 billion in credit losses and write-downs, including $3 billion directly attributed to Dillon Read.
Costas, however, seems to have landed on his feet at 623 Fifth Ave., where he and a few partners used their bubble earnings to open the PrinceRidge Group, which provides trading and investment banking services to institutional investors. Company officials say their aim is to fill the vacuum left by the disappearances of Lehman, Bear Stearns and Merrill.
And then there is Stanford Kurland, who helped turn Countrywide Financial into the biggest mortgage lender in the United States, rising to chief operating officer and heir apparent to founder Angelo Mozilo. Kurland helped to create the growth-oriented culture at Countrywide and oversaw the introduction of new loan products that would later land the company in trouble. In late 2006, Kurland was forced out, reportedly in a dispute with Mozilo over succession and declining lending standards.
Not long after a failed Countrywide was forced into the arms of Bank of America, however, Kurland was back in action. Starting with some of the $140 million he had earned from Countrywide stock sales, he earlier this year put together a $600 million war chest and began buying up mortgages and securities backed by mortgages that were just like the ones he used to write back at Countrywide. And at the end of July, Kurland raised an additional $300 million from an initial public offering for his PennyMac Mortgage Investment Trust.
I contacted Kurland, Costas, Ricciardi and Levine, along with a number of other, less prominent members of the Mulligan Club, to talk about their attempts to cash in on the crisis they helped to cause. Some declined to talk, while others spoke only on the condition that they wouldn't be quoted. The message that came through in those conversations, and in comments made to other news outlets, was remarkably consistent:
The bad stuff happened after I left. . . . The losses that occurred on my watch were more than offset by our profits during the boom. . . . I saw it coming and sold off most of it before the crash. . . . Our securities performed better than most.
There is probably some truth to these excuses, but taken as a whole, they are really nothing more than a cop-out. It's hard to believe that large organizations could really go from being smart and honest one day to being stupid and deceitful a year later. Nor is it credible that the money they earned during the good years was the result of individual brilliance while the money lost in the bad years was the result of uncontrollable market forces. It is also a peculiar moral code that says it is okay to traffic in crappy securities, just as long as you don't get stuck with them in your own portfolio when the market finally craters.
What's most curious, however, is why anyone would want to invest new money with people whose record is so tarnished. And then the answer hits you right between the eyes: The money isn't coming from savvy outsiders; it's coming from other members of the Mulligan Club -- members who are lucky enough to still have money to manage, and clever enough to know that some day they, too, might be looking for a second swing at the ball.
Worst of slump yet to come, says economist
Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system. Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.
With the British and world economies languishing in the worst recession since the Great Depression and with once-mighty banks reliant on government life support, she could be forgiven for being a little smug. Not a bit of it: "No, being Cassandra is not something I wish for. I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now." She is dismayed that politicians have failed to seize the opportunity that the crisis has given them to embark on tough reform of the banking system. Stock markets have rebounded and house prices have stopped falling, but Ms Pettifor fears that politicians and households have started to relax prematurely.
"The economy is no longer in freefall and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system." She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. "He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed."
Ms Pettifor, executive director of Advocacy International, which advises countries on debt management, made her name spearheading the Jubilee 2000 campaign to cancel the debts owed by the poorest countries. She believes that there are only three solutions to Britain’s woes: write off these debts as unpayable; convert the debt into equity; or use the benefits system to raise people’s incomes so that they can meet their debts. She is baffled that the Government has used billions of pounds of public money to rescue the banks without insisting on any change in behaviour.
She highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive. Instead, public money should be used to bail out households and businesses threatened by bankruptcy. "The banks are not using the money productively, yet what we need is for the Government to spend more productively," she says. "But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression."
Ms Pettifor, who is a fellow at the New Economics Foundation, a left-leaning think-tank, believes that it is not too late for politicians, regulators and even bankers themselves to embrace reforms that will prevent another cycle of boom and bust. She believes that a culture of easy but expensive credit, which she blames for the accumulation of unaffordable debts over the last two decades, should be replaced with a model of "tight but cheap credit". "Orthodox economists talk about cheap money being the cause of the crash. But it was not cheap — subprime homeowners were paying 19 per cent interest. It was easy money that was the cause." This, in turn, led to the massive inflation in property prices — house prices trebled between 1997 and 2007. "We over-borrowed against these inflated prices. The rollicking times were rollicking and now we are getting a bollocking."
She was baffled by a recent letter to the Queen — from other leading UK economists — after she reputedly asked why nobody had seen the crisis coming. With a voice bordering on incredulity, she reads out a passage where the letter-writers say "inflation remained low and created no warning sign of an economy that was overheating". "What about asset price inflation? We repressed prices and wages but turned a blind eye to assets," she says, adding that central bankers must monitor asset prices in the same way that they track high street costs.
But how do we achieve cheap but tight credit? In terms of tighter lending standards, it means an enhanced role for bank managers. "When I and my partner took out a mortgage in 1970s we had to see the bank manager, who went through our finances with a fine-tooth comb," she recalls. "That’s all you need — more bank managers making an assessment of risk." Since she believes that high interest rates were a key cause of the crash, she says that low interest rates for loans are essential. Her prescription for achieving cheap credit is more radical — nationalise the setting of the London Interbank Offered Rate (Libor), which tracks the rates at which the largest banks are borrowing money from each other and is used to set mortgage and business loan rates.
She says that government intervention to keep real rates at a level at which businesses can make a profit would help to stem the rise in insolvencies that, in turn, leads to people losing their jobs and their homes. This taps into Ms Pettifor’s long-standing worry over the "financialisation" of the economy that has allowed banks to become the "masters, not the servants" of industry at the expense of genuine entrepreneurial activity. Future lending should be directed towards sustainable home ownership and business activity, rather than speculation.
At times her model comes close to a form of Sharia, the Muslim financial code that forbids the earning of interest. Indeed, in her 2006 book, Ms Pettifor urged society to return to the traditional religious approaches to usury as a way of curbing the excesses of capital market speculation. The final element of her vision is a "green new deal" to create economic growth and the jobs needed to fill the "crater" of lost employment and output caused by the crash.
Ms Pettifor would take a leaf out of the Bank of England’s book on quantitative easing but would direct new money to the Government to support green projects.
Private banks could lend to the Government at low interest rates for the same effect. "The fact is that when the Government spends, the private sector is the biggest beneficiary. If the Government announces a home insulation programme, it will be the construction industry that will do it," Ms Pettifor says. Her forecasts of a crash have been proved right, but will her latest warnings receive a better hearing? She admits that none of the three main political parties is likely to adopt her policy prescriptions. "There is a weakness in being too far ahead of the game."
For Commercial Real Estate, Hard Times Have Just Begun
As the commercial real estate market heated up earlier in the decade and lenders competed feverishly to issue ever-riskier mortgages, hundreds of bankers, investors, lawyers, brokers, appraisers, accountants and analysts flocked to an investors’ conference in Florida each January to celebrate their good fortune with lavish beach parties featuring bikini-clad models and popular entertainers.
But in what a Prudential Real Estate Investors report described as "a move of near-perfect symbolism," the conference sponsor, the Commercial Mortgage Securities Association, recently announced that next year’s event would be relocated from South Beach to Washington, where the industry has been lobbying strenuously for federal assistance. These days, the people who buy and sell office buildings, shopping centers, warehouses, apartment buildings and hotels are hardly in a festive mood, despite some recent encouraging signs relating to the job and housing markets and a recent increase in sales of small office buildings.
Even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s. "It will prop up a few deals, but you can’t stop the wave that’s coming," said Peter Hauspurg, the chief executive of Eastern Consolidated, a New York brokerage firm.
The distress is still in its early stages, analysts said. "We are between the first and second inning," said Richard Parkus, who directs research on commercial mortgage-backed securities for Deutsche Bank. "We’re going to have to get through a very difficult period." Mr. Parkus said that vacancy declines and rent increases already mirrored what happened in the 1990s, and until new jobs were created, generating an increase in demand for commercial space and more retail spending, this was not likely to be reversed.
Building values have declined by as much as 50 percent around the country, and even more in Manhattan, where prices soared the highest. As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards, he said. Fitch Ratings recently reported that $36.1 billion in securitized loans — mortgages pooled, sliced into different categories of risk and sold to investors — have been transferred so far this year to a "special servicer," an agency that handles troubled loans.
Such a transfer is prompted by a bankruptcy, a 60-day delinquency or the prospect of an imminent default. In all, some 3,100 loans representing $49.1 billion, or 6.1 percent of the total, are currently in special servicing, an amount that could grow to nearly $100 billion by the end of the year, Fitch said. But the damage is expected to be even greater for banks, which are holding $1.3 trillion in commercial mortgages (including apartment buildings) and $535.8 billion in construction and development loans, said Sam Chandan, the president of Real Estate Economics, a New York research company. About $393 million worth of mortgages are scheduled to mature by the end of next year alone, and an estimated $39 million more were due to expire this year but have been extended, he said.
By midyear, Real Capital Analytics, a New York research company, had identified $124 billion worth of distressed property. Less than 10 percent of the distress had been resolved through loan modifications or sales. The downturn in commercial real estate is already having repercussions for local governments. New York City’s general fund, to cite an example, collected $2.1 billion from transfer and mortgage recording taxes at the peak of the market in the 2007 fiscal year, according to Frank Braconi, chief economist for the comptroller’s office. This fiscal year, it is expected to receive only $767 million, he said.
In New York, with its concentration of tall office towers, commercial mortgage-backed securities play a bigger role than they do elsewhere. The brokerage firm CB Richard Ellis estimates that about half the transactions in recent years involved securitized financing. The mechanism set up to manage problems with the underlying mortgages is being put to the test for the first time. Some longtime real estate investors who profited from the ready access to mortgages made possible by securitization now complain that the system is impersonal and rigid. Instead of negotiating directly with a lender sitting across a table, Norman Sturner, a partner at Murray Hill Properties, a New York real estate company, said he had been forced to deal by telephone with "a third party sitting out in the Midwest" who seemed indifferent to his problems.
Since the master servicer, which handles the routine servicing of the loan, has no authority to restructure it, the landlord has no way to tackle anticipated problems before it comes into the hands of a special servicer and is already in trouble. "What’s going to happen when billions of dollars can’t be repaid?" said Mr. Sturner, who owns and operates five million square feet of office and apartment buildings.
Mr. Sturner, a 39-year industry veteran who bought aggressively during the real estate boom, would not comment on any specific loans. But a Manhattan real estate executive, who declined to be identified commenting on another’s business dealings, said that Mr. Sturner recently stopped paying his mortgage on One Park Avenue, a 20-story Art Deco building between 32nd and 33rd Streets, which he bought for $550 million in 2007, so that he could have the loan transferred to a special servicer.
Last year, one tenant, the Segal Company, a company specializing in employee benefits, said it would move at the end of this year to West 34th Street, leaving three floors at One Park Avenue vacant when new tenants are hard to come by and rents have fallen significantly. Fitch downgraded the securities backed by this loan in August. The rising incidence of delinquencies and defaults has cast a spotlight on the special servicers, who are chosen by the investors who hold the riskiest bonds, and, in most cases, are part of the same firm. Six companies control 85 percent of the business, according to Fitch.
One source of conflict is that pension funds, endowments and other institutional investors with the most protected securities are often eager to liquidate their positions as quickly as possible, and those with the riskier portions resist taking an immediate loss. Patrick C. Sargent, the president of the Commercial Mortgage Securities Association, said that despite an apparent conflict of interest, the servicers are accountable to all classes of bondholders and are required to maximize the proceeds for the investment as a whole. Falling short can lead to a lawsuit or a ratings downgrade. "They are in a fishbowl," he said. "They are going to be watched."
Critics say the special servicers are overwhelmed by the current workload. "The people we are dealing with are swamped beyond any measure," said Paul M. Fried, a managing director of Traxi, a New York consulting company, who is advising borrowers with securitized loans. But one executive at a special servicer whose employer would not allow his or his company’s name to be used said that his firm had tripled its staff in the last two years, and that other companies were also hiring asset managers. Despite the criticism, Stephanie Petosa, a managing director at Fitch, which rates special servicers, said they were equipped to handle the workload. "I think they are moving at a reasonable pace, given the current environment," she said.
After the Clunker Party, an Auto Sales Hangover
U.S. government rebates helped Ford, Honda, Hyundai, and others post dramatic gains. But some of those car sales were pulled from coming months. Cash for clunkers did its job in August, pushing car sales to levels not seen since last year. But the boom from the U.S. government's program has already worn off for automakers. Car companies said on Sept. 1 that their August sales soared to an annualized selling rate of about 14 million, thanks to the government's clunkers program, which gave $3,500 to $4,500 to consumers trading in an old gas guzzler for something more efficient.
The accelerated sales rate was a boon for carmakers, especially Ford (F), Toyota (TM), Honda (HMC), and Hyundai. But the industry appears to be giving those gains back as the annualized rate has fallen to 8 million vehicles since Aug. 25, when the program stopped. "August was the best month of the year, but it's possible that it could be followed by the worst month this year," says Jeremy Anwyl, chief executive officer of Edmunds.com.
The clunkers program was especially helpful to Hyundai, whose sales soared 47% for the month, according to Autodata. Ford saw its sales increase 17%, Toyota was up 10.5%, Honda 10%, Mazda 12%, and Kia posted a dramatic 60% rise. General Motors and Chrysler both saw sales declines. But GM's 20% decline was partly due to a rough comparison with August 2008; that year-earlier month marked GM's 100th anniversary and the company offered employee pricing and a truck-blowout sale, noted Mark LaNeve, GM's vice-president for North American sales. Overall, GM considered August 2009 a success; it had just exited bankruptcy court a month earlier and yet managed to hold its market share at 19.4% while cutting incentives by $500 a vehicle, to $3,200 per car, LaNeve said.
But like other carmakers, GM saw sales trail off after the clunkers program ended. And it appears that the rebates sucked some sales out of September as well. Michael DiGiovanni, GM's executive director of global market and industry analysis, says that he thinks about 200,000 of the 700,000 cars sold under the clunkers program were pulled ahead from future months. Thanks to the clunkers rebates, Ford was able to drop its incentive spending in August by $451 per car, and the total that the company spent per vehicle on incentives dropped below $3,000 for the first time in at least two years.
That's about $1,800 less than its incentive spending a year earlier. Ford executives say their cars are fetching better prices, which should bode well for third-quarter earnings. Two of Ford's offerings—the Focus and the Escape—were among the top-selling vehicles under the clunkers program. Sales of the Focus rose 56%, while those of the Escape crossover climbed 49%. Ford economists estimated that without the clunkers program the industry would have seen a 10.5 million annualized selling rate in August. That's historically very weak, but better than the first half, when cars sold at an annualized pace of around 10 million. That indicates the economy may be starting to come back, albeit slowly. Chrysler sales were off 15%, at least in part because the company had no inventory. Chrysler announced that it would match the government's clunker cash with deals of its own.
But that cleared out passenger cars that qualified for the government program and left the company with little to sell as the program wore on. Many carmakers are now in the same bind, Anwyl says, if not to the degree that Chrysler is. He says that with inventories so low, dealers won't want to negotiate as much on price. Automakers have also cut back on rebates, pushing car prices up until inventories are replenished in the next four to six weeks. Prices are up $500 to $1,000 a car, which will slow sales and add to the hangover from the clunker program. Looking ahead, sales should slowly rebound, with analysts predicting that they will hit an annualized rate of 10.5 million in the fourth quarter and pick up slowly but steadily next year.
Long-term unemployment soars
This recession, already the longest and deepest economic downturn since the Great Depression, continued through July with the eighteenth consecutive month of job losses. This report on the labor market covers the Great Recession from its official start in December 2007 through July 2009. In order to see how this recession stacks up against previous post-war recessions, we compare labor market indicators at the start of recessions to their values 19 months later. This document will be updated in mid September to reflect new August data.
While the current unemployment rate—9.4% in July—is not at an historical high, it has increased much more rapidly during this recession than in other post-war recessions. Table 1 shows the unemployment rate at the start of each recession over the last 50 years along with the unemployment rate 19 months later. The unemployment rate increased 4.5 percentage points in the first 19 months of the current recession, a far steeper increase than any of the previous recessions. In particular, in the nineteen months after the beginning of the deep recession of 1981/1982, the unemployment rate increased only 3.2 percentage points. In other words, while the unemployment rate was higher during the early 1980s than it is today, it was also much higher going into the recession. U.S. workers in the early 1980s saw a smaller increase in unemployment than what workers are experiencing today. Figure A shows this graphically; the unemployment rate at the onset of the current recession was at a lower level lower than both the 1981 and 1990 recessions. But it has increased much more dramatically than other modern recessions.
Table 2 shows total nonfarm employment at the start of each recession over the last 50 years along with employment 19 months later. Employment has decreased much more during this recession—4.8%—than in prior recessions. In particular, during the first nineteen months of the recession of 1981/1982, employment declined by only 2.9%. Figure B shows this graphically; employment loss during the first eight months of this recession was relatively mild compared to previous recessions but then it fell off a cliff and now far surpasses the employment loss of the early 1980s.
Furthermore, while the labor market has shed 6.7 million jobs since the start of the recession, it is important to keep in mind that in those 19 months, the population has continued to grow. Just to keep up with population growth, the economy must add approximately 127,000 jobs every month, which means almost 2 and a half million jobs, should have been added over this period. In other words, the economy is now 9.1 million jobs below what is needed to maintain pre-recession employment levels. See Figure C.
Total hours worked in the economy is a more comprehensive measure of labor market weakness than employment because it captures both job loss and reductions in hours for workers who keep their jobs. Table 3 shows an index of aggregate weekly hours of production and nonsupervisory workers on private nonfarm payrolls at the start of each recession over the last forty years along with its value 19 months later. Again, aggregate hours during the current recession are falling at a faster rate than in previous recessions; over the course of this recession, aggregate hours have fallen 8.8%, whereas in the first 19 months of the recession of 1981/1982, aggregate hours fell by 6.2%
Underemployment is a more comprehensive measure of labor market slack that includes not just the unemployed, but also “involuntarily” part-time workers (workers who want full-time work but can’t get the hours) and marginally-attached workers (jobless workers who want a job but are not actively seeking work and are therefore not counted as officially unemployed). Underemployment data as currently measured are only available since the mid-1990s, so it is not possible to compare the current recession to the recession of 1981 on this measure. Table 4 shows underemployment over the current recession. In particular, the number of involuntarily part-time workers has increased by approximately 90%, from 4.6 million to 8.8 million. Over this time, the underemployment rate has increased from 8.7% to 16.3%, so that now nearly 26 million people—one out of every six US workers—are either unemployed or underemployed. Figure D shows the components of underemployment over the course of the recession.
In July, nearly one in three of our nation’s jobless (32.5%) had been unemployed for more than six months. One of the reasons jobless workers are getting stuck in unemployment for long periods is the dramatic reduction in job openings since the start of the recession. There were 4.4 million job openings in December 2007 but only 2.6 million job openings in June 2009 (the latest data available). In June, there were nearly 14.5 million unemployed workers, which translates to almost six unemployed workers per job opening. By comparison, at the start of the recession, there were 1.7 unemployed workers per job opening, less than a third of the current figure.
Table 5 compares unemployment for various demographic subgroups over the recession of 1981/1982 and over the current recession. In most categories, the increase in unemployment over the current recession has been steeper. A key factor to note is that while unemployment rates and increases are much larger in all recessions for workers with lower levels of schooling and for blue-collar workers, the current recession has seen bigger increases in unemployment among white collar and college-educated workers than earlier recessions. The depth and severity of this recession means that workers who have historically been relatively sheltered from economic downturns are also experiencing adverse labor market outcomes. College-educated workers have seen their unemployment rate more than double over this recession, while in the first 19 months of the recession of 1981/1982, unemployment for people with a college degree increased by only eight-tenths of a percentage point.
The Failure Caucus
Who wants the economy to fail again? These guys.
Most Americans have a lot riding on the success of the government's efforts to pull the U.S. economy out of its ditch: individual investors, bankers, Federal Reserve Chairman Ben Bernanke, Democratic politicians, and taxpayers. A somewhat smaller group has a lot riding on the failure of these efforts. I'm not simply talking about investors who are betting against the markets and who believe the recent stock-market rally is overdone. I'm talking about the Failure Caucus, a group spanning the political spectrum that has invested reputations, egos, and, in some instances, their political futures on the notion that we're in for several more years of economic trauma.
The Failure Caucus has several divisions.
Vindicated bears A small group of analysts, economists, and journalists accurately predicted the financial apocalypse of 2008. As a result, their reputations have justly been enhanced. The vindicated bears are generally suspicious of the recent turnaround efforts, because they believe that the excesses that caused the problems have yet to be worked off. (I sympathize with many of these folks and consider myself something of an intellectual fellow-traveler.) Peter Schiff, a libertarian money manager who warned of a debt apocalypse, sees much more pain in the future. After all, he says, the rescue—cheap money and government spending—is simply trying to reinflate the original bubble. Nouriel Roubini, who has been dubbed Dr. Doom, believes that we could be in for a double-dip, W-style recession for similar reasons. But at a certain point, negativity can become shtick. And forecasting is extremely difficult. Just because somebody was right in late 2007 doesn't mean he'll be right in 2009.
Economic forecasters As I've noted in the past, professional economic forecasters are often wrong at inflection points. When the economy is about to pitch into recession, they forecast growth. When it's about to bottom, they forecast continued contraction. When it's about to shift into higher gear, they see continued idling. Why? Forecasters frequently fall victim to primacy bias: They tend to extrapolate recent trends into the future. That, combined with a suspicion among modern-day economists about Keynesian-style stimulus, has translated into a general sense of pessimism. As recently as May, the professional forecasters surveyed by the Philadelphia Fed predicted the economy would grow at a 0.4 percent annual rate in the third quarter. According to Macroeconomic Advisers, that's likely to be low by a factor of eight! In their most recent projection, the same forecasters upgraded their forecast. They said the economy would grow at a 2.3 percent annual rate in the second half of 2009. Better, but still probably behind the curve.
A surprising number of analysts—the Wall Street Journal op-ed page, my NEWSWEEK colleague George Will, Tories, supply-siders; you know the type—insist on viewing economic and market performance through the lens of politics. Democrats, they know, are bad for markets and the economy, while Republicans are good for both—evidence be damned. They don't need any stinking data to tell them the rescue efforts are going to end in disaster.These are folks who believe that the stock market fell in February and March because it hated Barack Obama (and has rallied since then because he's become less popular)*; who believe that the New Deal prolonged the Depression; and who act as if the last 16 years of fiscal, monetary, and economic history didn't take place.
In their view, fiscal stimulus can't work because it's done by the government and the Fed's expansionary efforts must, at all times, always be inflationary. Ergo, we're doomed. (This was the substance of the Paul Krugman-Niall Ferguson feud.) What's both impressive and annoying about these folks is their inability to process information that runs counter to their bedrock beliefs. When data comes in that suggests otherwise, they ignore it or declare victory. Niall Ferguson recently told the Times of London that he "won the argument" he and Krugman had about "the future path of long-term interest rates." (As this chart of the 10-year treasury note over the past two years shows, he's done no such thing.)
This crowd is downright hostile to the optimists. I spent some time on the phone this morning with Michael Darda, an economist at MKM Partners. Darda is no squish. He used to write a lot for the National Review. But when he tells conservative audiences he's expecting the economy to grow at a 4 percent annual rate through the end of 2010, the reaction is frequently disbelief. Darda bases his conclusions largely on his reading of leading indicators, credit markets, and past performance in the wake of recessions—not on who controls the White House. Yes, taxes are likely to rise in 2011, and the Fed will have to tighten monetary policy. But that's no reason to be bearish now, he argues. "The real risk is in being too negative."
That risk is highest for the political division of the Failure Caucus. The conventional wisdom on the right holds that President Obama and his Democratic allies in Congress are setting themselves up for a big fall through their overreaching. But I'd argue that it's the Republican Party, which was always on the side of greater growth, higher stock prices, and more wealth, that has painted itself into a corner. Many Republicans opposed the initial bailouts because they were conducted by an unpopular Republican president in conjunction with a Democratic Congress. (In Todd Purdum's Vanity Fair article , former Treasury Secretary Henry Paulson conspicuously praises congressional Democrats and conspicuously says little about congressional Republicans.)
Then they doubled down with virtually uniform opposition to the Obama stimulus bill, which had been watered down to attract Republican votes. In order for Republicans to be vindicated politically, the bailouts and the stimulus—and the economy at large—must fail. Thus considered, every positive data point, every sign of stabilization in the housing market, every rise in the S&P 500, every TARP repayment, is something of a rebuke. As the clouds part, the historic party of economic sunshine is in the strange position of praying for rain.
Before all the members of the Failure Caucus start flaming me as a naive idiot, let me stipulate that there's plenty to be pessimistic about, even with the strong turn in the markets. The recession may be over, but we must still grapple with significant structural problems—a poor labor market, more credit losses tied to commercial real estate, huge chunks of the bailout spending that won't be recouped. But the flow of news isn't uniformly bad, as it was a year ago. And it has to enter our minds—and the debate—that the combination of extraordinary fiscal and monetary efforts, combined with the private sector's natural healing process, may produce growth. There's a chance that it might all fall apart again. But there's a chance—an increasingly likely one, I believe—that it'll all work.
UK banks 'hoarding credit' as lending falls a record £8.4 billion
Lending to business fell by a record £8.4bn in July as banks continued to hoard credit for fear of rising bad debts, jeopardising hopes of a swift economic recovery. According to Bank of England data published on Tuesday, loans to "private non-financial corporations" fell 1.7pc in July – the single biggest monthly fall since records began in 1997. Lending was down 2.9pc year on year. Economists drew attention to the spike in bad debts to explain the ongoing credit famine, which has persisted despite the Bank's decision to pump an unprecedented £175bn into the economy to stimulate lending.
Vicky Redwood, UK economist at Capital Economics, noted Bank figures that showed a £365m, or 40pc, increase in write-offs on conventional corporate debt and £250m rise in write-offs on unsecured lending in the second quarter. "While the biggest losses on 'toxic' assets may be behind us, recession-related losses on conventional loans are only just starting to come through," she said. "These losses are likely to erode much of the capital that banks have raised. Accordingly, it is understandable that banks are being cautious about lending more, even though their funding costs have fallen."
Banks continued to deflect criticism by insisting that lending has fallen because businesses are repaying debt in an attempt to clean up their balance sheets. However, Howard Archer, chief UK and European economist at Global Insight, said the sharp fall in the July figures "suggests that banks are still reticent in their lending to companies". The Engineering Employers Federation has reported that manufacturers are still struggling to get credit. Phillip Hammond, shadow chief secretary to the Treasury said: "Despite Gordon Brown's repeated statements about 'real help now', we learn that lending to business is contracting at its worst rate on record. It is now clear that the Government has completely failed to take effective action on this crucial issue."
Vince Cable, Liberal Democrat Treasury spokesman, added: "It is becoming clear that the Bank's attempts to boost lending are only having a limited impact as banks continue to hoard money. If firms are unable to access credit it is likely we will see even more companies going under, deepening the recession and driving up unemployment." Businesses were offered some respite by Lloyds Banking Group, which confirmed it has used the Government's working capital guarantee scheme for £3.45bn. The arrangement, which will see the state absorb half of any losses on the loan portfolio, frees up capital to help Lloyds hit its Government-stipulated £11bn business lending target.
There was some good news for homeowners in the Bank data, as mortgage approvals rose to the highest level in 15 months. Lenders granted 50,123 home loans in July against 47,891 in June, though the figure compares with a 10-year average before 2007 of 104,000 approvals a month. Building societies, however, continued to struggle. According to figures from the Building Societies Association (BSA), savers withdrew £912m from in July and lenders removed £577m of credit from the housing market. Adrian Coles, BSA director-general, said: "The BSA expects the mortgage market to remain subdued over the remainder of 2009. This is primarily because of the difficulties all lenders face in raising funds. We warned in March that the flow of funds into the mortgage market would be restricted as savings inflows decline as a result of very low interest rates."
For more hard-pressed Americans, a campsite is home
A gravelly campground off Interstate 40 in central Tennessee is a last refuge for a hodgepodge of Americans: Here you can get a $275-a-month camping spot with a 30-amp electric outlet and a scratchy Wi-Fi signal emanating from "the bathhouse" down the lane. "It’s my permanent home – for now," says Terry Lee Ballard, who says he runs a small record label from his "tent condo," which is replete with "redneck engineering" such as a tent-flap air-conditioning unit.
As cities from Sacramento, Calif., to Tampa, Fla., debate the merits of tent cities to house newly homeless people (many of them young families), this recession is starting to yield scenes that evoke the Great Depression, especially at places like Timberline Campground in Lebanon, Tenn. Living in well-worn campers and tent compounds overstretched with 20-foot-long tarps, 85 percent of residents here are permanent, a good chunk of them "economic refugees." It’s an increasingly familiar scene across the country as campgrounds, RV parks, national parks, and city-owned pockets become inundated with permanent campers, and as entire tent cities spring up and expand, with some hinting at permanence by voting on village bylaws.
"It’s not quite Hoovervilles, but it’s getting there," says Leonard Heumann, a housing policy professor at the University of Illinois at Urbana-Champaign, referencing the massive tent cities and shantytowns erected during the Great Depression. But the great outdoors is not a last resort just for the cash-strapped: Wal-Mart tent sales are up 36 percent over last year, and campgrounds are reporting a surge in requests for primitive campsites as Americans forgo beach condos to find their inner Thoreau.
At a time of downscaled dreams, it’s a harbinger of how closely many Americans are walking the knife-edge between a roof and a tent flap. But for many, like Tammy Renault, who lives in a tent with a husband and four kids, there’s virtue to be found even in a muddy tent floor. "This tells you what you’re made of," says Ms. Renault, a devout Christian whose faith has been steeled, not diminished, by her family’s crisis. Her story is a snapshot of the American edge: After the family moved to Tennessee, her husband Troy’s contracting business failed. The choice soon became paying the rent or the electric bill. They set up camp here nearly four months ago. The first week of August, three of the four kids started school, with one of them, Ty, waiting at the front of the campground for the school bus.
The National Alliance to Prevent Homelessness (NAPH) estimates that this recession will create 1.5 million new homeless – nearly double the current number. Half of those people will exist outside the shelter system – in cars, tents, campers, or sleeping bags under highway overpasses. With the jobless rate at a 30-year high and a foreclosure wave still sweeping the nation, wait lists for shelters are expanding and laid-off Americans are looking for other options. The rise in long-term tenting and camping is a sign that people’s options are running out, says Nan Roman, president of NAPH. "When people have choices, they don’t [move] into tent cities," says Ms. Roman. "They’re very understandably looking for hope and they’re seeking virtue in it, but I think we can do better to help people achieve their potential than tents."
But in places like Sacramento and Champaign, Ill., that’s exactly the debate. In March, Sac?ra?mento closed a large tent city, even as officials in the Tampa-St. Petersburg area face a proposal to set aside city land for a major homeless tenting area. A group in Champaign is lobbying the city to put up a 60-tent facility. In early August, advocates fought in court to keep open two tent cities – Camp Runamuck II and Hope City – in Rhode Island, but their effort failed. Campers now have an early September deadline to pull up stakes. States are also responding. Alabama recently opened its two largest state campgrounds to permanent campers, partly in response to the poor economy.
While many seem to find romance and even liberation in paring life down to the barest necessities, the prospect of muddy campgrounds, inclement weather, and sparse toilet facilities is, in fact, disheartening, especially to families who are enduring it against their will, says Mr. Heumann. "There’s all kinds of good or bad solutions that people and families are working on," he says. "But the question for a lot of Americans is whether you’d like to go back to a permanent nomadic style of life. I’m afraid we’d just slip further behind the median lifestyle, and our skills to get along would atrophy."
Survival skills, at least, are sharpening at Timberline. Kathy Newton, a veteran, couldn’t raise $500 for a deposit on an apartment so instead moved to an expanding compound at Site 34 at Timberline. At least, she claims, her health has improved by living outside. But campground life, she says, is not for everyone: She offered her homeless son a spot on an inflatable mattress with 400-threadcount sheets, but he left one morning without saying goodbye to couch-surf at the homes of friends. "You quickly realize what you don’t need in life," says Ms. Newton. "This is more home to me than living in the squalor of a motel efficiency [unit] looking at a parking lot all day."
The sense of community extends even to management at Timberline. Campground manager Tammy Page says she is letting those who can’t afford the monthly rent stay on. Six months ago, she created a food bank that’s now well stocked after a newspaper article brought attention to the Timberline campers’ plight. Near the front desk is a table full of free school supplies, including scissors and pencils. There’s a laundry facility, clean showers, a pool, and a few weeks ago an Elvis impersonator stopped by the "clubhouse" to entertain the kids. "Yes, it’s hard times, but they’re having fun while it’s going on," says Ms. Page.
The stimulus bill that Congress approved in February allotted $1.5 billion in Housing and Urban Development grants to help people on the financial edge stay in their apartments or to pay for deposits and last month’s rent for people looking to get into a permanent house. New York, Chicago, and Los Angeles alone could chew through those funds, leaving scraps for the rest of the country, says Heumann.
Laurie Bowen could use $300 of that $1.5 billion right now for a down payment on an apartment. "It’s just not right," she says, for her daughter to be raising two boys, Glenn and Damiyan, in a rickety trailer with a broken sliding door, and all of them sleeping in the same bed. Yes, it’s an improvement from when the extended family arrived here last year after being evicted from a rental house, to stay in a five-man tent for four months. A campground caretaker said if they’d pay him $100 for 10 months they could have the "silver bullet" camper he was using for storage, a home they’ve now decorated with lush flowers, tomatoes, and even an apple tree planted in an old pickle barrel.
Their attempt now to slingshot at least their daughter – who works nights at the Dollar General – and her two small boys into an apartment shows how narrow the margins are between a life in the burbs and a permanent camp in the woods. When summer ends, the plant nursery industry will contract, putting Ms. Bowen’s husband’s new job in jeopardy. Her campground season isn’t described by the earth’s position around the sun, but by the slow turn of a poor national economy. "Layoff season is coming again," she says.
Food Aid Grows in California's Agricultural Heart
The combined punch of drought, water restrictions and recession has created an ironic situation in California's Central Valley: Officials are handing out tons of food in the heart of one of the nation's most productive agricultural regions. At a dusty flea market in this Fresno County town last week, more than 800 people -- many farmworkers -- lined up for two weeks' supply of cereal, rice, canned tomatoes and other basics. They waited in 99-degree heat as the food was distributed from 6 a.m. until late afternoon. "We either have money for gas and medicine, or food -- not both," Helen Hernandez, a 51-year-old mother of four, said after collecting a pallet of food from the relief drive.
Ms. Hernandez said her husband, David, 49, has been out of work since losing his $1,200-a-month job at a tomato-packing house last year. For the 12-month period ended June 30, the Fresno Community Food Bank distributed a record 14.5 million pounds of food to residents of a three-county area -- double the previous year. So many people mobbed one food-distribution center two weeks ago that some who had waited in triple-digit heat for hours were turned away empty-handed after the food ran out. Unemployment in the counties in July ranged from 13.9% to 15%, compared with 11.9% for California as a whole, state officials say.
"There's never been this kind of need in the Central Valley, ever," said Dana Wilkie, chief executive of the Fresno food bank. "In some communities, we're serving 80% of the residents." The Central Valley, a 400-mile-long, 18-county inland area that relies heavily on agriculture, has suffered in the recession amid low demand for products like milk and almonds as well as a collapse in its once-booming housing market. At the same time, the region is grappling with drought and federal environmental rulings that have reduced water shipments to local farmers to as little as 10% of their normal allotments.
Some farmers have sidelined much of their acreage, throwing packers and field pickers out of work. In the Westlands Irrigation District, which serves about 700 farmers in the western part of the valley, more than 260,000 of the 600,000 acres that are typically home to tomatoes, lettuce and other crops have been taken out of production this year, officials say. In all, farmers in the valley stand to lose between $1.2 billion and $1.6 billion in revenue this year, with 60,000 to 80,000 people thrown out of work, projects a study by the University of California, Davis. "This is the worst I've ever seen it in the valley," said John Harris, chairman and chief executive of Harris Farms in Coalinga, Calif., which is farming about 4,500 acres compared with a normal total of about 14,000.
In June, Gov. Arnold Schwarzenegger proclaimed a state of emergency for nine Central Valley counties and asked President Barack Obama to declare Fresno County a federal disaster area. The designation was intended, in part, to help finance food shipments to the county. But officials at the Federal Emergency Management Agency rejected the request, saying state and local entities had adequate resources. Mr. Schwarzenegger last week appealed the denial, which FEMA officials say they are reviewing. In the meantime, Mr. Schwarzenegger's office allotted about $4 million for five weeks' worth of food shipments, which began about a month ago.
At the recent food distribution in Selma, 46-year-old Leticia Reyes waited to load food in her car. Laid off a few weeks ago from her $1,200-a-month job at a fruit-packing plant, the mother of four said the family is left to pay its $600 monthly rent and other bills on her husband's $900-a-month pay as an auto mechanic and her $600 in monthly unemployment benefits. "We're really struggling, so this food helps a lot," said Mrs. Reyes.
U.S. Food-Stamp Recipients Reach Record 35.1 Million
A record 35.1 million people received food stamps in June as unemployment reached a 26-year high, according to the U.S. Department of Agriculture. The 22 percent increase from a year earlier marked the seventh straight month of record participation in the Supplemental Nutrition Assistance Program. The monthly total was 2.1 percent higher than May, the USDA said today in a statement on its Web site. Spending on benefits also reached a monthly record at $4.68 billion, 1.7 percent more May.
The government has boosted food aid in response to a jobless rate that reached 9.5 percent in June, the highest since 1983, before dropping to 9.4 percent in July. The Labor Department will release its jobs report for August on Sept. 4. Economists surveyed by Bloomberg News project the rate to return to 9.5 percent. Unemployment alone isn’t driving the growth, "it’s also the low wages" earned by people working fewer hours or whose pay has been cut, said Jim Weill, president of the Food Research and Action Center, a Washington, D.C.-based anti- hunger organization. "Even if unemployment stabilizes, we’ll see growth in caseloads for the next several months."
Utah had the biggest increase in food-stamp participation, surging 46 percent from a year earlier, followed by Nevada and the state of Washington at 45 percent, according to the report. Every state posted a gain from a year earlier and from May. Texas had the most recipients at 2.94 million, followed by California with 2.8 million and New York with 2.43 million, the USDA said.
The average monthly benefit for an individual fell 0.4 percent to $133.12 from June’s record to the lowest level since March, according to the USDA. For a household of four the amount fell 0.5 percent to $293.82. Benefits were raised in April because of funding provided in the $787 billion stimulus bill Congress passed in February. About 35 million people are expected to receive food stamps each month in the year that begins Oct. 1, according to the budget that President Barack Obama sent to Congress in May.
World Bank chief says China stimulus should continue
World Bank president Robert Zoellick said Wednesday it was too soon for China to roll back its massive stimulus measures as the world's third largest economy could yet falter on the road to recovery. Zoellick, in Beijing this week for talks with Chinese leaders, said he was not worried about inflation as it was more important to keep the economic revival on track. "China's actions have helped to prevent the global crisis from getting worse and I agree with its leaders that it's too early to roll back fiscal and monetary measures," Zoellick told a news conference. "The recovery might be here but it could falter."
Zoellick said he now expected China's economy to grow by nearly eight percent in 2009 -- a figure which he noted was higher than the World Bank's official forecast of 7.2 percent. Strong growth in the Chinese economy had contributed to the early signs of a global recovery, Zoellick said. "With growth in China now projected at close to eight percent for 2009 as a whole, and signs of stabilisation in many other economies in Asia and around the world, the chances of a truly global recovery have increased measurably." Zoellick, who met Premier Wen Jiabao on Tuesday, said China recognised there were still "large uncertainties" facing the country and that it was important to "maintain the monetary and fiscal stance", not "shift to exit strategies".
Wen told Zoellick during the meeting that China would continue to pursue a proactive fiscal policy and a moderately loose monetary policy, according to state media. China last year unveiled an unprecedented four-trillion-yuan (580 billion dollars) stimulus package aimed at boosting domestic demand as exports plunged. Zoellick arrived in China on Monday for a visit focused on global recovery from the financial crisis and the Chinese economy. He met officials from China Investment Corporation, the country's 200-billion-dollar sovereign wealth fund, to discuss the idea of joining an asset management company which the World Bank hopes will become a different model for its financial mediation efforts.
"As opposed to... raising debt or making loans and equity investments, we would intermediate as an asset management corporation," Zoellick said. "CIC has expressed interest in this as a commercial investment vehicle but no decision has been made on their part." In addition to his meetings in Beijing, Zoellick was due to visit World Bank-supported projects in eastern Anhui province.
China, World Bank Discuss Investments in Africa
World Bank President Robert Zoellick said he is talking to Chinese government officials about cooperating on investments in Africa, which he said could help boost the continent's future growth. Mr. Zoellick told reporters Wednesday during a visit to the Chinese capital that China Investment Corp., the nation's sovereign wealth fund, has expressed interest in investing in the World Bank's recently-launched asset management company, which will channel private-sector funds into investments in places like sub-Saharan Africa and Latin America.
"CIC expressed interest in this as a commercial investment vehicle, but obviously there is no decision yet on their part," he said. Other sovereign wealth funds and pension funds are also interested in the new outfit, he said, which was launched earlier this year to manage $4 billion in funds. "I hope we will be able to bring to completion (this matter) later this fall." China has ramped up its economic relationship with Africa in recent years, building many major infrastructure projects and offering governments cheap financing in exchange for access to natural resources.
Mr. Zoellick said he and other World Bank officials are hopeful that Chinese companies will start investing in manufacturing in Africa as well. He said he had on this trip also talked with China's Ministry of Commerce about potential cooperation on industrial zones in Africa. "There's a lot of opportunity for the Bank to work with China and other investors in Africa," he said. Stepping up investment in Africa and other developing countries would lay the foundation for more future growth, he argued. That would be good for a global economy that has been weakened by the retreat of U.S. consumer spending.
"We need to work toward a future where Africa is also a pole of growth," Mr. Zoellick said. "You can't just rely on the U.S. consumer." China is a good example of that trend because its recovery has helped strengthen confidence around the world, he said. Mr. Zoellick expects China's economy to grow around 8% this year, an outlook that is slightly more bullish than the World Bank's official forecast for 7.2% growth for all of 2009. China's economy grew 7.1% in the first half of the year. Mr. Zoellick began his visit to China on Monday, and has been meeting senior Chinese leaders and ministers during his stay. He will also visit Anhui province to look at World Bank-supported projects before concluding his trip Friday.
Ilargi: Citi says the Aussie’s southbound, Goldman disagrees. Good luck making money on that one, guys!
Goldman Sachs Raises Australian Dollar Forecast After GDP Gain
Goldman Sachs Group Inc. raised its forecast for Australia’s dollar against the greenback after a report showed the nation’s economic expansion unexpectedly accelerated in the second quarter. The currency known as the Aussie will appreciate to 87 U.S. cents in three months, compared with a previous forecast of 82, according to Dominic Wilson, senior global economist at Goldman Sachs in New York. The Australian dollar rose today against all of the 16-most traded currencies tracked by Bloomberg, advancing 0.8 percent to 83.24 U.S. cents on the economic data. "Overnight activity was dominated by the Australian second-quarter report," wrote Wilson in a research note, adding that the Reserve Bank will increase the 3 percent target lending rate by a half-percentage point in November.
Goldman Sachs raised its estimate for New Zealand’s dollar to 71 U.S. cents in three months, compared with the previous estimate of 60 cents. The currency known as the kiwi decreased 0.5 percent to 67.18 today. Australia’s gross domestic product increased 0.6 percent in the second quarter from the previous three months, when it grew 0.4 percent, the Bureau of Statistics said. It was the biggest gain in more than a year. The median forecast of 20 economists surveyed by Bloomberg News was for a 0.2 percent expansion.
Aussie May Weaken to 4-Month Low Versus Yen: Citigroup
Australia’s dollar may trade below 70 yen for the first time since April amid an increase in currency swings, according to Citigroup Inc. technical analysts. Volatility on three-month Australian dollar-yen options may be "on the cusp of a surge" after recording an "almost perfect" 76.4 percent so-called Fibonacci retracement from its October peak, Citigroup analysts Tom Fitzpatrick and Shyam Devani, based in New York and London, respectively, wrote in a report to clients today. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.
Investors should sell the Australian dollar, nicknamed the Aussie, against the yen with "a belief that a move toward and possibly below 70 is still on the cards," the analysts wrote. The trade should be ended if the currency strengthens to 78.85 yen, they said. The Australian dollar hasn’t bought less than 70 yen since April 29. It climbed 0.3 percent to 77.01 yen as of 4:22 p.m. today in London, pushing its gain since then to 8.5 percent.
Great Barrier Reef Said to Face Catastrophic Damage
Catastrophic damage to the Great Barrier Reef, the world’s most extensive bank of coral and a magnet for skin divers, may be unavoidable if global warming continues unchecked, Australian officials said. Concerned that their national treasure will become part of a wider destruction of the earth’s marine habitats, Queensland state Premier Anna Bligh said today that warming is hurting reefs and that urgent action is needed to reduce run-off of nutrients and chemicals from farms that poses a second threat. "Improving the quality of water flowing into the reef is one of the most important things we can do to help the reef withstand the impacts of climate change," Bligh told journalists today in Brisbane.
The bleaching of coral, warmer water and more acidic oceans triggered when industrial carbon dioxide dissolves in sea water all contribute to the destruction marine habitats globally. Australian officials commented following forecasts made today by the Great Barrier Reef Marine Park Authority. Reefs are worth about $30 billion a year to the global economy through tourism, fisheries and coastal protection, according to a United Nations-supervised study. The Great Barrier Reef stretches along 2,000 kilometers (1,200 miles) of Australia’s northeastern coast and is one of the most diverse ecosystems on the planet. The shoal of coral is currently "healthy and well-managed," Australian Environment Minister Peter Garrett said today.
Two days ago Achim Steiner, executive director of the UN’s environment program, warned of rapidly emerging threats to the marine environment worldwide. He pointed to the "emergence of ‘dead zones’ and the impacts of climate change including acidification." The Queensland and Australian governments plan to cut in half the amount of nutrients and pesticides entering water catchment areas for the reef by 2013. Improving water quality and further research into the effects of fishing are among initiatives that will give the reef the best chance of adapting to the "serious threats" ahead, the report said. An estimated 6.6 million metric tons of sediment, 16,600 tons of nitrogen and 4,180 tons of phosphorous reached the waters of the reef in 2007, concentrations high enough to cause environmental harm, according to the government.
Under the government plan, 80 percent of agricultural businesses growing sugarcane and cotton as well as dairy farms will have improved soil, nutrient and chemical management practices by 2013. The coral system, which at 348,000 square kilometers is bigger than Italy, contributes about $A5.4 ($4.5) billion to the Australian economy through tourism, fishing and other industries and supports more than 50,000 jobs, according to the government. Scientists also point out that the reef is under threat from sea levels rising, storms and cyclones becoming more destructive.
The Great Barrier Reef is home to an estimated 1,500 species of fish and more than 360 species of hard coral, according to the Department of the Environment. Its seagrass beds are an important feeding ground for the dugong, a vulnerable mammal species, and the reef contains nesting grounds for the endangered loggerhead turtle. Growth of coral on the reef is declining more than at any time in four centuries, the Australian Institute of Marine Science in Townsville, Queensland reported in January. The fate of corals is crucial to the livelihoods of millions of coastal dwellers around the world.
Coral reefs provide $170 billion worth of ecosystem services each year, said Pavan Sukhdev, a consultant on leave from Deutsche Bank AG who released a report in Berlin today on the economic value of ecosystems. Reefs protect coast lines and nourish fish nurseries worldwide, he said. The study, led by Sukhdev, highlighted the "emergency" to save coral reefs, which began bleaching years ago as the concentration of carbon dioxide rose in the atmosphere, making oceans more acidic. "There is a real question mark against the survival of coral reefs worldwide and their natural treasure troves," he said.
Prime Minister Kevin Rudd has proposed reducing Australia’s greenhouse-gas emissions by 25 percent from 2000 levels in the next decade provided an international accord stabilizes carbon- gas levels. Government legislation to introduce a carbon trading system similar to one used in Europe was voted down by the Senate last month.