Ilargi: The desire for instant gratification has apparently pervaded all aspects of the times we live in, including the collapse of our economies. Once you tell people that such an event is inevitable, they want it to happen as soon as possible, or they lose both their focus and their interest. Warhol's 15 minutes of fame is a thing of the distant past, simply because it's so boringly long.
In the past two years, nothing fundamental about our economies has changed in any structural way, and certainly nothing has improved. The damage has been done, whether you care to look or not. What has changed, though, are appearances. If you look at certain sets of numbers from a certain angle, you could swear the recession was over and recovery is here. However, if you'd step back and take some time and look again from another angle, and another, it’s obvious that no recovery is even remotely near. But most people are not patient enough, or just lack the focus, to take that step back, and take that extra bit of time to observe what happens around them.
All the combined bail-outs and stimulus plans and doctored "official" numbers, when put together, seem to paint a picture of a live pig. And unless you can wipe off the lipstick right here and now, then and there, people will insist that what they are seeing looks an awful lot like a pig. And that is basically all it takes for them. That fills their immediate gratifying needs. It's much easier that way. They reason that if that pig were really dead, as you claim, they would know. Or smell, or something. They are rational creatures (the people, not the pigs), and smart to boot, and they would see through the disguise, and anyway, the folks they voted into office would never risk the wellbeing of their voters by telling them lies about the (non-)existential features of a bacon factory.
Inevitably, this view of the world is most strikingly concentrated around stock markets. Much as they know or feel that the S&P 500 has no necessary direct influence on their own lives, it sure looks to be a handy measure, and most of all it only takes maybe 10 seconds per day to check. Hey, if that pig is really dead, it sure does a good job of looking alive.
And of course it makes sense that people who think they have understood what is happening, through reading The Automatic Earth and/or other sources, become uncertain if what they think they have seen takes (what seems like) a -too- long time to materialize. Even if they can rationally figure that those who hold the power in a given society have both the means and the motive to make things look -much- better and sunnier than they truly are.
And so discussions even here at The Automatic Earth increasingly turn to "the stock markets haven't toppled yet, but you said they would!". Yeah, that pig sure looks ready to party, doesn't it?
Now, we have never been, nor pretended to be, a venue aimed at traders or investors, whatever level their involvement in stocks or other investments may be. And sure, we have been surprised too by the extent to which governments dare go, and their citizens are ready to accept, presenting an image that differs to the upside from what underlying numbers suggest. Risking the bankruptcy of entire nations rather than coming clean and thereby risking your careers, it truly is a spectacle worth observing. And at a rate of $1 trillion per month, the US economy can be made to look like a live hog in the eyes of the majority of the population.
And yes, there are plenty people playing the markets who have money on that, and are cashing in. But that's not why we are here, not for pointing out profit opportunities. There are a zillion other joints for that, and if you look sharp and well, you find they all conveniently contradict each other. In the short run, we're all potential tycoons. In the long run, not so much. Stoneleigh and I started The Automatic Earth not to make you make money, but because we are interested in preventing losses for our readers. Which is not the same thing. And while preventing losses may seem less of a priority these days than a year ago, with rising stock markets and all, it will -again- be the prime consideration for everybody other than professional shorts once the downtrend sets in.
Some people think that the Fed can take all the debt on its sheet (it has some $8 triilion at present) and thereby nullify it, but then the ECB can do it too, presumably, and all other central banks; so where does the debt go?
We seem to run into all sorts of confusion when it comes to the state of the economy, be it global or national. There are people who think that central banks are colluding to make all debts go away (no, I'm not kidding, there are those who really think that) by pumping ever more money (i.e. more debt) into the great beyond.
Then there are those who feel that central banks and Treasury Departments, either just stateside or across the G-20, can issue unlimited amounts of paper and trick investors all over the globe into believing that all the paper is worth what it says it is, and they'll be good for whatever IOU's they issue at whatever yield they'd like to sell them for.
I see people suggesting that the US Congress controls Wall Street, and even the Federal Reserve. Some think that quantitative easing, especially when part of a concerted effort, can go on indefinitely and without limit. There are even those who think that Bernanke, Geithner and Obama are executing successful policies that will benefit the American population, if not mankind as a whole. After all, according to government calculations, the recession has been succesfully battled and is now over. What more do you need to know?
But it all feels way too much like discussing the shade of lipstick on the carcass, or the latest botox inserted into Joan Rivers. And such things do not interest us.
When in doubt, return to the long term basics. If you look beyond and underneath all the very tempting and persuasive make-up, there are two elements of the pig that will always remain the most essential, that decide whether it lives or dies: housing and jobs.
There is no such thing as a US housing market anymore, other than through government-run purchase and guarantee schemes. Fannie Mae and Freddie Mac have some $6 trillion in shaky loans on their books, and the shift away from them and towards the Federal Housing Administration and its finance arm Ginnie Mae has resulted in the FHA dropping way below its already insanely low 2% required reserves level (to 0.59%). These numbers, in all likelihood, represent only the mortgages involved. I for one would like to see what that does add up to in mortgage-backed securities issued. Not that I’m considering holding my breath.
And even with Washington (yes, that would be you) as the only player left in a market that has managed to draw in some 5 million überlosers in 2009 (thanks, Barracks O.), there are scores of stories about towns where only 1 in every 4 or 5 empty properties are ever put up for sale. Madoff got 150 years for his scam. And his didn't run into the trillions.
As for jobs, we've covered the topic more extensively here than should be necessary to make you grasp its reality. The bottom line is that close to 1 million Americans are added to the unemployed contingent every single month, with the most rapidly rising contingent being the most long-term jobless. For whom Congress last week extended bare benefits by 14 weeks. Just lovely. And what are we, and they, going to do then?
A nice contradiction is emerging in the White House. The president apparently will shift his focus to two separate topics: jobs (for which there'll be a December summit) and the federal deficit. That should be good. Both ideas are a year late, if not more. And they are incmpatible. You're not going to create jobs by cutting expenses. Not going to happen. How to sell a paradox?! Stay tuned.
When talking about finance and the economy, the Automatic Earth obviously can't completely ignore what happens with stocks and options and shorts and what have you. But that doesn't mean they are what we focus on. They're nothing but a poor and highly volatile indicator for the situation those people find themselves in who do not participate or "play" in those markets.
The state of our economies, whether US or elsewhere, cannot be determined by looking at daily stock exchange data. For that matter, and as sad as that is, it can't be determined using government data either. We have no choice but to read between the lines of a seemingly endless array of words and pages, and look for the spots where the lipstick and the rest of the make-up start cracking. And crack they do, and crack they will. All pretense does. Which is good, when you think about it. After all, as Leonard Cohen puts it:
There’s a crack, a crack in everything. That’s how the light gets in.
Ilargi: This is not TV. You don't have to be just an observer on a couch, and you shouldn't. You can be, indeed you are, very much a part of it, of this thing called the Automatic Earth. If and when you choose to be, that is.
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U.S. Trade Deficit Increases by 18.2%, Most Since 1999
The trade deficit in the U.S. widened in September by the most in a decade, reflecting rising demand for imported oil and automobiles as the economy rebounded from the worst recession since the 1930s. The gap grew a larger-than-anticipated 18 percent to $36.5 billion, the highest level since January, from a revised $30.8 billion in August, the Commerce Department said today in Washington. Imports surged by the most in 16 years, swamping a gain in exports.
Demand for foreign products may remain elevated in coming months as consumer and business spending improve and companies aim to prevent inventories from collapsing even more. Exports may also rise as expanding economies in Asia and Europe and a weak dollar drive demand for American goods, giving manufacturers such as Dow Chemical Co. a lift. “Sometimes what looks bad on the surface is actually quite good and I think that’s the case this time around,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “Exports are growing strongly and imports are turning up because domestic spending has turned the corner.”
The dollar dropped after the report. One euro cost $1.4875 at 8:50 a.m. in New York, up 0.2 percent from late yesterday. The yen climbed to 89.68, up 0.8 percent. Stock-index futures pointed to a gain at the open. The trade gap was projected to widen to $31.8 billion, from an initially reported $30.7 billion in August, according to the median forecast in a Bloomberg News survey of 77 economists. Deficit projections ranged from $28.6 billion to $34.1 billion.
A collapse in world trade earlier this year brought the gap down to $26.4 billion in May, its lowest level since November 1999, as imports plunged even faster than exports. As commerce begins to pick back up, global leaders agree more needs to be done to strengthen the expansion. U.S. Treasury Secretary Timothy Geithner and other finance ministers at the Asia-Pacific Economic Cooperation forum in Singapore this week reiterated a pledge to maintain stimulus efforts “until a durable recovery in private demand is secured.”
Asia is “leading the world” back to recovery, Geithner told reporters at a joint press briefing with his APEC counterparts. President Barack Obama began a swing through Asia today as world leaders work toward a rebalancing that will make global growth more reliant on spending by Asian consumers and businesses and less dependent on their American counterparts. Imports climbed 5.8 percent, the most since March 1993, to $168.4 billion. The figures reflected a $4.1 billion increase in imported oil as the cost of a barrel of crude climbed to the highest level since October 2008 and volumes also rose.
Purchases of foreign-made autos and parts surged by $1.7 billion to $16.4 billion, due mainly to a $1.3 billion increase in imports from Canada and Mexico as North American vehicle production picked up. Imports from South Korea also climbed. The federal “cash for clunkers” auto trade-in program, which expired in late August, generated momentum in car sales and boosted demand for parts and supplies. Automotive inventory restocking is also boosting demand for foreign-made autos and parts. U.S. sales for South Korea-based Hyundai Motor Co. increased in September for the third month in a row, while Toyota Motor Corp. is boosting production of models such as Corollas and Camry sedans to rebuild its U.S. inventory.
“Our inventories are continuing to recover with a very good pipeline as we move into the fourth quarter,” Robert Carter, Toyota’s North America sales chief, said on a conference call last month. Exports rose 2.9 percent to $132 billion, the most this year, propelled by sales of civilian aircraft, industrial machines and petroleum products. The dollar this month was down 12 percent from a five-year high reached in March against a trade-weighted basket of currencies from it’s biggest trading partners.
China’s economy grew 8.9 percent in the third quarter from the same period in 2008, the best performance in a year. Exports to the Asian nation were the highest since October, even as imports from China also climbed. “The economic outlook for the rest of 2009 appears to be stabilizing, with strong growth in Asia Pacific, especially China, and other emerging geographies,” Andrew Liveris, Dow Chemical’s chief executive officer, said in an Oct. 22 statement.
Dow’s factories around the world ran at 78 percent of capacity in the third quarter, an increase of 3 percentage points, because of increased demand in developing markets, including China and Brazil, as well as relatively low North American ingredient costs that led to increased exports. The largest U.S. chemical maker yesterday said cost cuts and rising sales will boost earnings more than analysts estimate. After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit grew to $41.7 billion, the highest since January. The figures suggest the government may revise down their estimate for third-quarter economic growth.
The U.S. is growing again after posting its worst contraction in seven decades. The world’s largest economy expanded at a 3.5 percent annual rate in the third quarter, the best performance in two years. Economists surveyed last month forecast a 3 percent rate of growth this quarter.
China’s Liu Says U.S. Rates Cause Dollar Speculation
The decline of the dollar and decisions in the U.S. not to raise interest rates have caused “huge” speculation in foreign exchange trading and seriously affected global asset prices, said Liu Mingkang, chairman of the China Banking Regulator Commission. “The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.
Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.” His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis. “I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.
Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., said today that low interest rates in the U.S. have spurred a carry trade with some currencies, notably the Australian dollar after recent interest rate increases by that nation’s central bank. “The carry trades will further drive down the dollar’s value and fuel commodity prices,” Zhao said. “The dollar’s depreciation has also caused excessive liquidity in the global market.”
In a currency carry trade, the investor makes money by borrowing in a country with low interest rates, converting the money to a currency where interest rates are higher, and lending the money at that higher rate. The dollar fell against most of its major counterparts as a report showed the euro nations emerged from their worst recession since World War II, encouraging investors to buy higher-yielding assets. The euro advanced for a second week against the dollar and approached its highest level since August 2008 before stalling just short of $1.5050. The dollar dropped for a third week against the yen, falling 0.2 percent to 89.66, from 89.88.
Fed Chairman Ben S. Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. “The dollar’s devaluation has the biggest influence on China among emerging market economies,” China Construction Bank’s Zhao said. “China has huge amount of investments in dollar assets; their safety is threatened.”
President Barack Obama may discuss China’s currency during his visit to Asia after Treasury Secretary Timothy Geithner said the region has shown a commitment to adopting “market- determined” exchange rates. China triggered speculation on Nov. 11 that the yuan may rise when policy makers dropped a pledge from their monetary- policy report to keep the currency “basically” stable. China has kept the yuan at about 6.83 per dollar since July 2008, after a 21 percent gain in the previous three years.
Bank Failure Toll Reaches 123
The Federal Deposit Insurance Corporation [FDIC] closed banks in California and Louisiana on Friday, pushing U.S. bank failures to 123 this year amid continuing fallout from the worst economic crisis since the Great Depression.
- On Friday regulators closed Century Bank, FSB of Sarasota, Florida. It was the 121st FDIC-insured institution to fail in the nation this year. The FDIC, which was named receiver and entered into a purchase and assumption agreement with IBERIABANK of Lafayette, Louisiana, to assume all of the deposits of Century Bank, FSB, said Century Bank had $728 million in assets and $631 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $344 million. The last bank closed in the state of Louisiana was Flagship National Bank, Bradenton, on November 6, 2009.
- IBERIABANK of Lafayette, Louisiana agreed to also assume all of the deposits of Orion Bank of Naples, Florida, which was closed today by the Florida Office of Financial Regulation.
The FDIC said Orion Bank had $2.7 billion in assets and $2.1 billion in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $615 million.
Orion Bank is the 122nd FDIC-insured institution to fail in the nation this year, and the eleventh in Florida.
- Sunwest Bank of Tustin, California, agreed to assume all of the deposits of Pacific Coast National Bank of San Clemente, California. The FDIC said Pacific Coast National Bank had $134.4 million in assets and $130.9 million in deposits. The failure is expected to cost the FDIC deposit insurance fund an estimated $27.4 million. Pacific Coast National Bank is the 123rd bank to fail in the nation this year, and the fifteenth in California. The last FDIC-insured institution closed in the state was United Commercial Bank, San Francisco, on November 6, 2009.
The pace of bank failures has picked up significantly this year, causing a drain to the FDIC’s Deposit Insurance Fund, which turned negative at the end of the third quarter. The agency is expecting bank failures to cost the fund about $100 billion for the next 3-4 years, and has said failures will remain elevated this year and next.
Job Losses Mount, Enduring and Deep
The rise in unemployment that has occurred in the current recession has been hardest on young workers, while having a smaller effect on older workers than previous downturns. Women have been more likely than men to hold on to their jobs. The overall unemployment rate, which reached 10.2 percent on a seasonally adjusted basis last month, remains below the post-World War II peak of 10.8 percent, reached in late 1982. But the proportion of workers who have been out of work for a long time is higher now than it has ever been since the Great Depression.
The persistence of joblessness for so many people — 5.6 million Americans have now been out of work for more than half a year even though they have continued to seek employment — may provide the greatest challenge for the Obama administration if it decides to seek a new economic stimulus program. The short-term unemployment rate — the proportion of the work force that has been jobless for less than 15 weeks — has begun to decline, however, and stood at 4.5 percent in October after peaking at 4.9 percent in May.
That decline is a signal that the recession, which officially began in December 2007, probably has ended. In past recessions since World War II, the National Bureau of Economic Research has always dated the end within two months of the peak in short-term joblessness. Over the last three years — since October 2006 — the overall unemployment rate has risen by 5.8 percentage points. That is the largest such increase since the Great Depression, providing another indication of the rapidity and severity of the current downturn.
Before this cycle, the sharpest 36-month increase since World War II was a 4.9 percentage point rise in the period that ended November 1982. The accompanying charts show the short- and long-term unemployment rates during the three cycles since World War II when the unemployment rate rose above 8 percent, and reflect how different groups of workers fared in each. Each of the charts begins in the month when the broadest measure of employment — the proportion of people over age 16 with jobs — hit a cyclical peak. The first two end when that measure reached a cyclical low, several months after the recession was later deemed to have ended. The final chart runs through October, the latest month available.
With each chart are calculations on the proportion of jobs that were added or lost from the peak through the bottom for differing groups of workers. This cycle has been the worst over all, with the government’s household survey in October finding 7.7 million fewer jobs than in December 2006, when the employment-to-population ratio reached its high for the current cycle. The declines during the two earlier cycles, from November 1973 to June 1975 and from December 1979 to March 1983, were 0.8 percent and 2.0 percent, respectively.
Women have held on to jobs better than men have during this downturn, reflecting a pattern that prevailed during the previous cycles. One major difference is how older workers have fared. The number of jobs held by men over 55 is up 5.6 percent since the cycle began, and the number of jobs held by women of that age has risen by 9.3 percent. There are fewer jobs for workers age 54 to 64 than when the cycle began, but that group has done much better than younger workers. By contrast, younger workers were more likely to hold on to their jobs in the two previous downturns.
It is not clear why that pattern has changed. It is against federal law to discriminate against older workers, but that law was passed in 1967, before either of the previous downturns. It could be that the plunge in real estate and stock prices in 2008 led fewer older workers to decide to retire. The proportion of the work force out of work for more than 15 weeks reached 5.7 percent in October, well above the 4.2 percent figure reached in 1982. That had been the highest such figure since the government began calculating the number in 1948. The proportion that has been out of work for at least 27 weeks — half a year — is now 3.6 percent, also a record.
Krugman Misses the Point about Kurzarbeit
Give him credit for recognizing that a society-wide policy of work-sharing is much more humane and rational than America’s current slash-and-burn labor market devastation. Especially in light of the increased unemployment risk faced by minorities and youth, it would be much better for government to push companies to reduce hours rather than bodies. So far so good.
But this is not the main reason Germany has an institutionalized short-work (that’s the translation of Kurzarbeit) program. The Germans have this strange belief that working builds skill: you go through an apprenticeship, you work with master craftspeople, you learn the subtle ins and outs of the particular firm you are attached to (in German you work “with” and not “for”), and lo and behold you become more productive. The key purpose behind Kurzarbeit is to not lose this accumulation of human capital.
Oddly, Krugman writes, “Now, the usual objection to European-style employment policies is that they’re bad for long-run growth — that protecting jobs and encouraging work-sharing makes companies in expanding sectors less likely to hire and reduces the incentives for workers to move to more productive occupations. And in normal times there’s something to be said for American-style “free to lose” labor markets, in which employers can fire workers at will but also face few barriers to new hiring.....But these aren’t normal times.”
In normal times the US runs a massive trade deficit with Germany, unable to compete in industry after industry on quality-price comparisons. Labor in this country is strictly an expense, not an asset, and therefore quickly shed when sales go down. Note Krugman’s language: it is “occupations”, not workers who are productive. Even our most knowledgeable pundits can’t imagine an economy in which the skill of the average worker is the main competitive advantage, the last resource you would want to shove out the door.
Senator Reid tees up 2010 jobs bill
Senate Democrats will take up a new job-creation bill in the wake of the 10.2 percent unemployment rate, Majority Leader Harry Reid told his colleagues Tuesday. Sen. Ben Cardin (D-Md.) told The Hill that Reid (D-Nev.) made the announcement about a new jobs bill at the Senate Democrats’ weekly lunch. Reid said he was looking at an initiative focused on job creation “and that our caucus will take it up,” Cardin said.
Reid didn’t specify what would be in the bill, but he said that it was going to be “one of the priorities” for the Senate, Cardin added. Cardin said Reid offered no additional specifics, such as timing for a new jobs bill. Sen. Patty Murray (Wash.), a member of Senate Democratic leadership, said that the conference is focused on ways to create jobs but that no decision about legislation has been made. Democrats have had a “number of discussions and everybody is looking at where we can make the biggest difference,” she told The Hill. Reid’s office said it had nothing to add to senators’ remarks on the push for a jobs bill.
Democrats have been rocked by Friday’s unemployment report showing the jobless rate hitting double digits for the first time since the early 1980s. While unemployment was widely expected to hit 10 percent this fall, it was a surprise that it hit that threshold in October, particularly after reports that the nation’s gross domestic product grew 3.5 percent in the most recent quarter. The bad news on jobs came days after Democrats lost gubernatorial elections in Virginia and New Jersey, two states President Barack Obama carried in last fall’s presidential race. Those defeats raised anxieties in a party already nervous about 2010’s midterm elections, when the party that holds the White House typically loses House and Senate seats.
The effect of the struggling economy has begun to show up in polls, to the detriment of incumbents. Reid himself is one of the GOP’s top targets in the 2010 congressional elections. A Las Vegas Review-Journal poll last month found that Reid had an approval rating of just 32 percent, compared to a 51 percent disapproval rating, and that he trailed Republican candidates in hypothetical match-ups. The newspaper’s May poll had found Reid to have a higher approval rating, 46 percent, than his disapproval rating, 42 percent. The drop in Reid’s standing has accompanied a rise in the state’s unemployment rate, which has gone from less than 6 percent last year to 13.5 percent in October.
Democrats moved a $787 billion stimulus measure earlier this year with little GOP support, and have been hammered by Republicans who say the effort has failed to stem job losses. The White House and Democratic leaders in Congress have said the stimulus has saved or created hundreds of thousands of jobs and that the unemployment rate would be much higher without the stimulus. The White House has resisted calls from the left that another stimulus was necessary.
A new jobs bill would add yet another piece of major legislation onto the Congress’s plate. Democrats are currently trying to finish work on healthcare reform. Afterward, they plan to turn to legislation curbing climate change and overhauling financial regulations. But some Democrats are wary of moving to the global warming bill, and Reid’s signal that he wants to proceed to a jobs bill could suggest the climate measure will have to wait in line.
Cardin said that the climate change bill could serve as the jobs bill by providing incentives for Americans and businesses to invest in green technologies. “We’ve got to figure out a way to get better job growth in America,” Cardin said. “Too many people in my state and around the country can’t find jobs.” Sen. John Thune (R-S.D.) said that GOP members have also been discussing ways to create more jobs but wouldn’t be able to support Democratic efforts similar to the stimulus, which he deemed a “massive expansion of government” that didn’t lead to much job growth.
Obama’s poll ratings have dropped with the economy. A Washington Post/ABC News poll in October showed that Obama was still personally popular but that his handling of the economy had suffered. Most Americans — 57 percent — approved of the overall job he was doing, but just 50 percent approved of his work on the economy. That’s a 10-point slide from his rating on the economy in March, according to the Post/ABC News poll. Congressional Democrats and the White House have sought to boost the economy in recent months without resorting to another stimulus package.
Last week, Obama signed into law a package extending unemployment benefits, a tax credit for first-time homebuyers and tax refunds for businesses struggling during the recession. Lawmakers have also mentioned extensions of healthcare benefits for the unemployed and higher levels of food stamps for low-income Americans. House Democrats have signaled openness to a tax credit for each new hire companies make, but lawmakers have yet to introduce a bill proposing it. Speaker Nancy Pelosi (D-Calif.) has said that passage of a $500 billion, six-year transportation reauthorization bill, funding highway and transit construction projects, could serve as a jobs bill, but the White House and Senate Democrats have only supported extensions of the current transportation bill.
White House offers unemployment summit
Obama to focus on job creation
President Obama will convene a White House summit early next month to explore ways to reverse the soaring unemployment rate -- and there won't be any shortage of ideas. Economists and lawmakers hope that such proposals as tax breaks for companies that add workers, tax cuts for small businesses and more government highway construction will get renewed attention after Obama's call Thursday for new ways to reverse job losses.
But the administration and its allies in Congress are facing another shortage -- time. Economic and political concerns are rising after the unemployment rate hit 10.2% last month, reaching double digits for the first time in 26 years. With congressional midterm elections looming next year and thousands more jobs being lost each week, Washington must act quickly to get new programs in place.
Addressing those worries before departing for Asia on Thursday, Obama said he was open to "any demonstrably good idea" to stimulate job creation. "We all know that there are limits to what government can and should do, even during such difficult times," he said, alluding to the concerns about the soaring budget deficit. "But we have an obligation to consider every additional, responsible step that we can to encourage and accelerate job creation in this country."
Obama said he would gather chief executives, small-business owners, economists, labor leaders and others to discuss ways to create jobs and grow the economy. The move comes as Senate Majority Leader Harry Reid (D-Nev.) told colleagues this week that he planned to push a job-creation bill in the coming weeks, as soon as the Senate finished debating and voting on healthcare legislation. The jobless rate has continued to climb even as gross domestic product, the value of all goods and services produced in the country, is growing robustly again. So reducing the rate is a "critical imperative," Sen. Jack Reed (D-R.I.) said.
"The recovery for the American family is not measured in GDP," he said. "It's measured in jobs." Reed has been pushing legislation to expand work-share programs, which exist in California and 16 other states. The initiatives entice companies to cut workers' hours instead of laying them off, using a percentage of the unemployment benefits the workers would have claimed to make up the difference in wages. It's one of several ideas floating around Washington in recent months to address unemployment directly.
Sen. Russell D. Feingold (D-Wis.) is drafting a bill to provide a job-creation tax credit, based on a proposal by the think tank Economic Policy Institute. Lawmakers from steel-producing states have pressed for accelerated passage of a new multiyear transportation bill to build highways and other projects. And House Republican leaders continue to push for a package of tax cuts, including one that would allow small businesses to deduct up to 20% of their income to free up money to hire workers.
"What we need to do is to lower the price of risk to increase the confidence of those investors and small-business people who are going to be the job creators," said Rep. Eric Cantor of Virginia, a leading House Republican, adding that mandates in the pending Democratic healthcare legislation are alarming business owners. "We also have to address the very real sense that small businesses are very nervous about committing capital right now."
The administration has not publicly discussed any specific job creation initiatives. Obama said last week that he was looking at additional infrastructure spending, tax cuts for business, making more credit available to small businesses and increasing U.S. exports.
He noted Thursday that the economy was improving -- expanding at an annualized rate of 3.5% in the third quarter after a year of contraction -- and that job growth typically does not return immediately. The pace of job losses has slowed considerably since January. And the Labor Department reported Thursday that initial claims for unemployment benefits fell 12,000 to 502,000 last week, the lowest weekly total since January.
"Given the magnitude of the economic turmoil that we've experienced, employers are reluctant to hire," Obama said. "Meanwhile, millions of Americans -- our friends, our neighbors, our family members -- are desperately searching for jobs. This is one of the great challenges that remains in our economy, a challenge that my administration is absolutely determined to meet."
Feingold said he and his colleagues were discussing ways to help create jobs. "We all know that the healthcare bill is before us, but the jobs issue is at least as important," he said. He is advocating a two-year tax credit for businesses that hire new workers or add hours for current employees. Employers told him that such a measure would help "tip the balance" in favor of additional hires, Feingold said. The Economic Policy Institute estimated the credit, which would refund 15% of the cost of new wages next year and 10% in 2011, could create 5.1 million new jobs.
But short-term policies such as that don't address the larger problem. The economy needs to grow at a much higher rate than 3.5% to create the millions of jobs needed to offset the losses suffered during the recession, said Martin Regalia, chief economist for the U.S. Chamber of Commerce. "What everybody is hoping for is some sort of a panacea, and I don't think there's one out there," said Regalia, whose organization is holding its own forum next week on the role of government in creating jobs. "We go back on things like reducing taxes, making the tax system more streamlined and less punitive in terms of the people who save and invest and put capital at risk."
Administration officials and Democratic lawmakers are increasingly concerned as the jobless rate grows as they head into midterm elections next year. Democratic gubernatorial candidates in Virginia and New Jersey were defeated last week amid voters' economic concerns, though Democrats won special House elections in California and New York. "I don't think there's any question the voters are outraged at the seeming lack of concern on the part of the administration and the [Democratic congressional] majority about joblessness," Cantor said.
Congress recently approved additional jobless benefits, particularly for those without jobs in California and other hard-hit states, and extended and expanded a tax credit for the purchase of homes that is often credited for helping to boost the real estate market. Obama made a point of signing the bill Nov. 6 after the Labor Department reported the October unemployment rate.
He summoned Reid and House Speaker Nancy Pelosi (D-San Francisco) to the White House last month to talk about job creation. And last week, Obama presided over a meeting of business leaders and other members of his Economic Recovery Advisory Board to find ways to lower unemployment. House Minority Leader John A. Boehner (R-Ohio) said it was time for "immediate action," not more meetings. "Americans are asking, 'Where are the jobs?' but all they are getting from out-of-touch Washington Democrats is more spending, more debt and, now, more talk," he said.
After spending binge, White House. says it will focus on deficits
President Barack Obama plans to announce in next year's State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning. The president's plan, which the officials said was under discussion before this month’s Democratic election setbacks, represents both a practical and a political calculation by this White House.
On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives. On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits. Even if Obama succeeds - and that’s a big if - it will be tough for many Democrats to sell themselves as deeply concerned about spending after voting for the stimulus, the bailouts, the health care legislation and a plan to address global warming, four enormous government programs.
“Democrats have to reassure voters we are not being reckless,” said a Democratic official involved in the planning. “The White House knows this and that's why we'll be hearing a lot about reducing the deficit early next year. Democrats owned this issue for the past four years and cannot afford to cede it to Republicans now."
White House budget director Peter Orszag said in a statement to POLITICO: “The President strongly believes that as the recovery strengthens and job growth returns, we will have to take the tough steps necessary to return our nation to a fiscally disciplined and sustainable path. We recognize that the projected medium-term deficits are too high, and as part of the FY 2011 budget process, we are committed to bringing them down. Our challenge is to tackle those out-year deficits in a way and at a time that does not choke off economic recovery, and the FY 2011 budget will reflect our best judgment about how to walk that line."
The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes. All presidents promise deficit reduction – and almost always fall short. There is good reason to be skeptical of this White House, too, on its commitment.
For starters, the White House has not dropped plans for an aggressive global warming bill early next year that will be loaded with new spending on green technology and jobs – that would be paid for with tax increases. Democratic lobbyist Steve Elmendorf says the White House focus on deficit reduction could easily kill the cap-and-trade effort. “I think this means cap-and-trade has to go to the backburner,” he said.
Additionally, there is no evidence Democrats are willing to aggressively cut the biggest parts of the budget, such as entitlement programs and defense. Former President Bill Clinton told Senate Democrats at their policy lunch this week that one of the biggest reasons to finish health care is to allow Obama to focus on economic concerns next year – in part with more spending. Sen. Ron Wyden (D-Ore.) said afterward that Clinton had advised getting health care out of the way to “clear the tables and allow the focus to be on jobs and education and infrastructure.” None of that is free.
The Wall Street Journal reported Thursday the White House is considering applying some money from the $700 billion financial bailout bill to deficit reduction, and that Cabinet agencies have been asked to submit two budget plans for next year, one that freezes spending at existing levels and one that trims spending by 5 percent. Congress has long history of taking those requests and piling on money for programs it favors. The only way Obama can prevent Congress from imposing its will – a tactic he has been reluctant to do during his presidency – would be to threaten vetoes. And if Obama’s political goal is to minimize tough votes, gutting domestic spending bills could mean fewer projects lawmakers can brag about back home. History shows that that’s often an impossible sale on the Hill.
Kenneth Baer, White House Office of Management and Budget spokesman, said: "You'd have to be a graduate of Hogwarts to know what's in a speech that has not been written, much less outlined, yet. The President and his team are constantly reviewing and assessing policies to create jobs, lay the foundation for long-term economic growth, and put the nation on firm fiscal footing. No decision has been made about what specific policies will be in the FY 2011 budget or any address."
Officials involved in the planning say they're looking for ways to cut spending, reduce the growth in costs in other areas besides health care, and find ways to get Republicans to share the risk. Obama will likely find himself squeezed between economic and political pressures for much of the year. Some White House officials do not want to focus on deficits until it’s clear the economy is in full recovery. It could take another jolt of tax cuts or spending to make that happen, these officials say.
“If we try to reduce the deficit much below what’s been projected, we really run the risk of undercutting the recovery,” said Jim Horney, director of fiscal policy at the Center on Budget and Policy Priorities, a liberal think tank.
But many moderate Democrats are deeply troubled by two recent signs of serious discontent among independent voters. The first was how badly Democrats lost among independent voters in the New Jersey and Virginia gubernatorial races. The second was a Gallup poll released this week that showed Republicans winning the independent vote by 22 points in generic matchups for House and Senate races. That same poll had the parties tied among independents in July.
Most of the competitive House and Senate races are in swing districts in which independent voters are the deciders. “A lot of independents, Democrats and Republicans -- all are concerned about is what are we going to do about this long-term debt,” Obama told ABC’s Jake Tapper Monday. “We've got to show people that we are responsible stewards for their taxpayer dollars and that we're taking some serious steps to at least lay the foundation -- the pathway -- for bringing those deficits down over the next several years.”
State Finance Directors Warn of More Trouble Ahead
Michigan and California are likely to face a fresh round of budget woes when federal stimulus funds used as a fiscal crutch dry up, finance directors for the states said Friday. Short-term budget gaps have battered states as revenues plummeted during the recession. Aided by about $250 billion in funds from the stimulus package expected through the end of next year, states managed to close the gaps this year. But both finance directors, speaking at a Pew Center on the States event in Washington, were pessimistic about their states' futures beyond fiscal 2011.
"We're facing a cliff in 2011 when stimulus dollars run out," said Mitchell Bean, director of the Michigan House Fiscal Agency. "There is not an end in sight, even in recovery." As of July 2009, California's budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps. "I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."
There were no bankruptcy options, and the legislature chose to cut back sharply on education and health care to fill the gap. Mr. Genest already predicts the 2011 shortfall will outpace the projected $7 billion gap. It is a smaller deficit than this year's gap, but the choices will be more difficult because so many cuts have already been made. Mr. Genest estimated that, eventually, 40% of the state's budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state's corrections system. Mr. Bean described a similarly depressing scenario for Michigan, which could end the recession with 25% fewer jobs than in June 2000 and a total of one million job losses. Michigan's unemployment rate in September was 15.3%.
He suggested that strict term limits often lead to political gridlock that prevents large-scale changes, such as overhauling the tax code so it is broad-based with lower tax rates. Mr. Bean said lawmakers will likely have to trim the budget at least 12.5% this year after closing a $2.8 billion gap last year. "Citizens don't quite understand yet the implications of some of the cuts that we've made," Mr. Bean said. "A lot of it has fallen on local governments. I am very concerned that we're going to have a lot of insolvencies in local governments."
America Is An Over-Indebted, Profligate, Spoiled Nation In Decline
You can't borrow your way out of a debt problem. That's the key message from our guest Charles Ortel of Newport Value Partners.
The U.S. and other developed countries have lost the discipline they once had and are now trying to borrow and spend their way out from under the mountains of debt they accumulated in recent years. In the process, they're prolonging the agony and moving closer to defaulting. The U.S., at least, won't actually default, says Ortel, but as our situation worsens, the value of credit default swaps (insurance against default) should rise. So Ortel continues to recommend CDSs to his clients.
5-year credit default swaps on U.S. soverign debt currently trade for about 25 basis points (which means it costs $25K per $10M of notional value). How does that compare to other countries or states?
- Japan = 72 bps
- United Kingdom = 56 bps
- Germany = 21 bps
- California = 177 bps
- New York = 85 bps
And as for the stock market? No good news there. Ortel sees the DOW eventually heading back down to the 5,000-6,000 level, below the lows of earlier this year. What will pull the nation out of this state of decline?
Instead of rewarding government workers with ever larger salary and benefits packages, we should fire whole swaths of them. Instead of borrowing more to spend on "stimulus," we should get out of the way and let the private sector do its thing. In the meantime, about all investors can safely own is gold.
Ilargi: I'm with Yves Smith on this one, who says: “I’m a big Warren fan, but this is a motherhood and pie statement that is unworkable, at least as she is framing it. The idea for having a resolution is that that is presumed to be (as she states) a way to avoid forcing the firms to downsize. This is just incorrect.
There is no way a resolution authority can operate absent massive structural changes in the financial services industry. The firms are too interconnected. The network is the computer. The debt markets are now an integral part of the credit process, which is turn is essential to modern capitalism, and hence cannot be permitted to fail. Why is this so hard to understand? This fantasy plays into the industry’s hands.
I would go one further and more explicit: Warren says that just having the authority to fail firms is enough, as if Too Big To Fail will cease to exist as soon as some law or another is changed. That would do nothing, though, to address systemic risk.
Elizabeth Warren: Need way to unwind troubled firms
The United States needs a credible way to dismantle large troubled financial institutions to squash a belief that some firms will always be rescued, a top U.S. government watchdog said on Friday. "We live in a 'They won't fail' world right now," said Elizabeth Warren, who is in charge of overseeing the U.S. government's $700 billion financial bailout program.
The government is using tens of billions of dollars in taxpayer funds to prop up firms that were considered a risk to the financial system such as insurer AIG and Bank of America. As a result, there is a market perception the government will always step in to prop up large financial firms whose global reach has the potential to destabilize markets.
"I am really pushing hard on the importance of resolution authority," Warren told reporters on the sidelines of a Bloomberg Summit in Washington. "In my view resolution authority is what terminates the implicit guarantee (that the government will always backstop certain firms,)" she said.
There are bills in the U.S. Congress that would give regulators a way to resolve large troubled firms and ensure shareholders and creditors would absorb some of the losses. Some policymakers believe that the government should have the authority to break up firms before they become too large to pose a risk to the economy. Warren said resolution authority would help mitigate this risk.
"If we have a credible way to liquidate them, then the need to break them up is substantially less because they are in effect no longer too big to fail," she told reporters. The chief executive of JPMorgan Chase & Co, the second-biggest U.S. bank by assets, also said there should be a system in place to ensure that the biggest banks could fail.
In an opinion piece in the Washington Post newspaper, Jamie Dimon said regulators deserve authority to manage failures of large financial institutions, including the ability to replace management, sell assets, and wipe out shareholders and even unsecured creditors. He argued against caps on banks' size, saying increased scale can benefit customers, shareholders and the economy by permitting better products to be delivered fast and cheaply.
Separately, Warren praised a Senate financial reform bill that would create a single bank super-regulator and strip the Federal Reserve of its supervisory powers. "There is reason to question the current governance of the Federal Reserve," she said. The bill, unveiled by Senate Banking Chairman Christopher Dodd, also creates a new agency to protect consumers from risky financial products.
Warren, a Harvard Law School professor and early advocate of the consumer protection agency, has long been rumored as the candidate for the top job at such an agency. When asked if she wanted the position, Warren said: "I want there to be a consumer financial protection agency. The last thing I want is it to be about personalities."
Bair calls U.S. bank bailout "not a good thing"
Leading U.S. bank regulator Sheila Bair said on Friday that the government's capital injections into the largest banks was "probably not a good thing." Bair, the chairman of the Federal Deposit Insurance Corp, said the billions of dollars of capital infusions last year had a terrible impact on public perception of the financial industry and government regulators.
"I think at the time it sounded like the right thing to do and, again, it was part of an international effort, but I just see all the problems it's created," Bair said during an interview with PBS NewsHour. "I think we would have tried to dissuade Treasury from making these capital investments." During the height of the financial crisis that had virtually frozen credit markets, the Treasury Department in October 2008 injected $125 billion into the nine largest U.S. banks.
The capital investments were part of the $700 billion Troubled Asset Relief Program, which was originally pitched to Congress as a way to absorb banks' toxic assets but was switched to become largely a capital infusion plan to shore up banks' balance sheets and encourage them to lend. Public outcry followed the investments, which largely came to be referenced as government bailouts. Lawmakers raced to attach more conditions, such as restrictions on compensation, to the capital injections.
"It's had a terrible, terrible impact on public attitudes toward the financial system, toward the regulatory community," Bair said. "It's created all sorts of issues about government ownership of these institutions, what happens if they get in trouble again." Soon after populist anger erupted over the capital injections, banks strove to give back the funds. So far, Treasury has allowed a handful of the largest banks to return the government investments, but other firms such as Bank of America and Citigroup retain large government ownership stakes.
Bair has on occasion locked horns with other regulators and administration officials over the right method to stabilize the financial system. She has advocated a more restrained approach, and is now pushing Congress to crack down on the notion that some firms are "too big to fail."
Bair said during the interview that no one should be held accountable for the government's decision to inject capital into the largest banks, but noted that complications are still lingering. She said the government, as partial owners of some banks, are put in the difficult position of determining how to manage compensation and executive changes at these firms. "I think in retrospect that was probably not a good thing," Bair said.
Policy center director says New York state deficits amount to financial emergency
New York state's huge and growing budget gap requires government to take drastic actions to correct it, said E.J. McMahon, director of the Empire Center for New York State Policy at the Manhattan Institute. McMahon spoke to the Council of Industry, a regional trade group, Friday at the Powelton Club.
He charted flat revenues against expected spending if nothing is changed and showed a $20 billion gap looming by 2012-13. McMahon said the state must declare a financial emergency and enact a statutory freeze on public-sector wages for at least three years. State law allows this and enables contracts to be voided, he said. It would save at the rate of $2 billion a year for state, local and school taxpayers. McMahon also called for shutting down the state's pension systems to new entrants and giving them instead a plan similar to one of the alternatives for the State University system, in which a stable amount is contributed by the state and employees can add their own.
He said some parts of the state's Taylor Law, governing labor relations with public employees, should be repealed, including compulsory arbitration for police and fire unions. Other laws should also be targeted for repeal because they're costly, including the rule requiring that on most public work the "prevailing wage" be paid, usually the union scale. State spending should be capped by changing the state constitution, he said, recommending the "tax expenditure limitation" approach exemplified by Colorado.
New York state's fiscal troubles stem from too much reliance on tax revenues generated by the Wall Street financial industry and from a chronic tendency to raise spending even when revenues are collapsing, McMahon said. "They also have more volatile incomes and incomes that crash," he said. The financial sector provides 20 percent of all state tax revenues. The high earners who form the top 1 percent paid 41 percent of New York income tax in 2007, he said. He laid blame on politicians. "It's their failure to stop the growth in spending that is the underlying problem," he said. "New Yorkers are voting with their feet and heading for the exits."
No state is losing population to other states more than New York is, McMahon said. A recent study he did with Wendell Cox of Demographia found the annual net loss of New Yorkers to other states ranged from nearly 250,000 people in 2005 to a low of 126,000 last year. Nearly 60 percent of out-migrants went to Southern states, and 30 percent moved to Connecticut, New Jersey or Pennsylvania. Households moving out are taking wealth with them. They had average incomes 13 percent higher than those moving into New York in the 2006-07 period, the most recent for which data is available. The outflow drained $4.3 billion in taxpayer income from the state, the data said.
Brian Wrye of the Hudson Valley Technology Development Center in Fishkill attended. He asked McMahon whether he thought term limits for public officials would make a difference. "No," McMahon said, pointing to California, which has term limits but also big fiscal troubles. McMahon's prescription is to cut pay of state legislators in half and offer no benefits to scare off careerists. "He summed it up succinctly," Wrye said after the session. "What matters is the will of the people and the backbone of the politicians." Glenn Tanzman, of Tanzco Management Consulting in Poughkeepsie, said of McMahon’s fiscal analysis: "I think the spend side is really what we have to control . When he presented it, I didn't realize it was that much out of control."
Happy Birthday Gramm-Leach-Bliley
Is Ben Bernanke Going To Kill The Stock Market This Monday?
The market had already put together a few up-days in mid-March, but what really got the great v-shaped rally going was the announcement by Ben Bernanke that he would use his power to buy gobs of government and mortgage debt, in an attempt to lower interest rates beyond what he could do merely by cutting.
That's when the dollar began to tank, and ever since then it's been maximum pain for the bears.
The question on everyone's mind is: will Bernanke write the final chapter on Monday, when he delivers a speech in New York.
Morgan Stanley: We continue to believe that the dollar and sterling will remain the main global funding currencies over coming months, until there are signs that either Central Bank is likely to change policy
Several Fed speakers this week have had the opportunity to downplay growing market concerns about inflation expectations with the five-year breakeven inflation rate five years forward making new highs over the past week and gold rising relentlessly even on days when the dollar has performed better.
The yield curve has also continued to steepen, which has typically been associated with concerns about monetary policy being behind the curve and dollar weakness.
Federal Reserve Chairman Bernanke’s New York speech on Monday will perhaps now be key in determining the path of the dollar into year-end; any hawkish hints will likely lead to dollar strength.
Meanwhile, the dollar's threat to the market could be significant, if the greenback moves towards anything near "fair value." This is always a dicey thing to compute with currencies (or with any market), but at least you can get a sense for how extreme the current move has been from this chart (via Morgan Stanley)
This chart, meanwhile, suggest that the Euro is significantly overvalued against several currencies.
Minyanville's Kevin Depew talks to Robert Prechter
Few market commentators have the ability to inspire the range of emotion that Robert Prechter of Elliott Wave International does. The mere mention of his name is enough to generate controversy. Whenever someone mentions stock market "perma-bears" they almost certainly have Prechter among those in mind, a label that I believe widely misses its mark.
Last week Robert Prechter was kind enough to sit down with me for a wide-ranging interview to discuss, among other things, the mechanics of what he believes will be an intensifying economic depression next year, how to prepare for it, the potential for the US dollar to form a major bottom and his Socionomics hypothesis that social mood drives social action as opposed to social action driving social mood.
Click to open in new window
Chanos Condemns ‘Monstrous Idea’ That Banks Love
Famed hedge-fund manager James Chanos in recent speeches has outlined lessons from the financial crisis. A top one: “Accounting matters a lot.” Chanos, who has flagged numerous accounting frauds over the years including the one that ultimately brought down Enron Corp., is concerned investors will quickly forget this and other warnings from the implosion of the financial system. He doesn’t have to worry about banks missing this point. As Congressional debate over financial reform intensifies, banks are committed to ensuring that accounting rules serve their own needs.
Their latest push concerns the possible creation by Congress of a council of regulators charged with overseeing firms whose failure might blow up the financial system. Banks want any such council, consisting primarily of banking regulators, to help determine how accounting rules are set, or have the power to shelve them during a crisis. The result would be more politicized accounting rules and a process that gives Congress a more direct way to influence what companies must tell investors. It would also mean investor interests take a back seat to those of the banking industry.
As Chanos, head of Kynikos Associates Ltd. and one of the most successful short sellers on Wall Street, said in an e-mail, this is “a monstrous idea.” And it isn’t just Chanos, other investors or accounting groups who are opposed. Even the U.S. Chamber of Commerce, not always known as the most investor-friendly organization, has come out against such moves.
How far this proposal gets will depend in part on what happens next week inside the House Financial Services Committee, which is working on its version of regulatory overhaul. Representative Ed Perlmutter, a Democrat from Colorado, has drafted and may propose an amendment that would allow a systemic-risk council to scrap accounting rules the members don’t like, echoing legislation he introduced earlier this year.
Even if banks don’t succeed next week, they will have plenty of other opportunities to get their way. Senate Banking Committee Chairman Christopher Dodd yesterday began circulating what is likely to become his chamber’s version of reform legislation. Any overhaul measures passed by the House and Senate will have to be reconciled by lawmakers. This will involve a lot of horse-trading, providing ample openings for bank lobbyists to keep trying to change the way accounting rules are set. And the American Bankers Association has said that such a change is a priority.
“A systemic-risk oversight council could not possibly do its job if it does not have oversight authority over accounting rulemaking,” ABA President Edward Yingling told Congress last month. That is a radical, and dangerous, departure from our current, admittedly imperfect, system. Corporate accounting standards are currently set by the Financial Accounting Standards Board. Those standards are overseen, and enforced by the Securities and Exchange Commission.
True, Congress can and does meddle in the process. Sometimes it has managed to bend the rules to its liking -- this spring the FASB watered down mark-to-market accounting rules after Congress demanded it do so. Yet a few years ago FASB successfully, and correctly, bucked Congressional opposition to recording employee stock options as an expense that reduces profit.
Giving any council of regulators a greater, and legally enshrined, say over accounting will change the game in a bad way for investors. “Accounting rules will be viewed through the narrow lens of a few large companies from specific industries,” said a letter to Congressional committee leaders from the Council of Institutional Investors, mutual-fund trade group the Investment Company Institute, Center for Audit Quality and Chamber of Commerce.
In other words, big banks and their regulators will rule the roost. The catch is that bank regulators concerned with the safety of the financial system often have different, and conflicting, aims than investors. Sometimes, bank regulators would prefer the market doesn’t know just how bad things are at a bank for fear of causing a run. Yet investors need that information if they are to make informed decisions and avoid unknowingly subsidizing weak banks.
Banks may also see this as a way to head off mark-to- market accounting rules that require them to value assets such as debt securities at market prices. Banks say the use of depressed, and volatile, market prices fuelled the financial crisis Yet many investors believe these rules give a more grounded view of the current worth of a bank’s assets, and potential losses, than estimates that management comes up with. In his presentations on crisis lessons -- given last month at a conference held at the University of Virginia and another at a Yale School of Management Leadership Forum -- Chanos said that “mark-to-market accounting was not the cause of the credit crisis.”
Indeed, mark-to-market rules are often one of the few things that stymie banks and regulators who prefer to delay losses while praying that they go away. The twist here is if banks succeed in muddying accounting rules, investors may end up charging them more for funds. As Chanos said, “Why anyone thinks that’s good public policy is beyond me.” And beyond most folks who think that markets exist to serve investors.
Bush plays economy blame game
Quantitative Easing Has Been A Monetary Failure; Persistent Deflation Means More Fed Intervention Coming Soon
by Tyler Durden
As more and more pundits discuss the spectre of inflation, with gold flying to all time highs which many explain as an inflation hedge, not to mention stock price performance which is extrapolating virtual hyperinflation, the market "truth" as determined by Fed Fund futures and options is, and continues to be, diametrically opposite. In fact, compared to even a month ago, the percentage of market participants who see the probability of the Fed rate as determined by the June 23, 2010 FOMC decision, at 0.5% and/or below is 88.4%, nearly double the 46.2% on October 1. In a little over a month, the inflationists have gone from being a majority to being barely over 10%! Whether this is due to the continued "exceptional" language in the most recent FOMC statement, or due to the continued deflationary deterioration in the economy, is frankly, irrelevant.
Another way to observe just how much credibility Mr. Geithner has with his daily claims of "dollar strength support" is the below chart tracing the convictions of those believing the Fed Fund rate will be at or below the current baseline of 0-25 bps. As one can see the yellow and red line have hit records: virtually nobody believes that even in 6 months the Fed will do anything to increase rates, regardless of how much liquidity they pump into the system, regardless of what happens to M2 and M3, regardless of whether gold or the S&P hits the 2,000 mark (and one or the other very well might).
The most graphic way to visualize this is based on actual Fed Fund futures and options: the below charts demonstrate the path of highest probability determined by actual traded instruments. It is one thing to parade on TV how inflation has gripped the economy and how people should spend, spend, spend or in the worst case speculate, speculate, speculate by buying GE stock that trades with the volatility of a Tasmanian devil on crystal meth.
The rate probability determined by the futures spot curve a year from now suggests a Fed fund rate of about 0.65% (yellow line). The most likely path probability (thick red line) ends at about 0.75% a year from today. The Fed is certain to do nothing to the rate until June of next year.
Yet even expectations may not be reflecting reality, when reality is massaged and doctored courtesy of factually plain wrong or "adjusted" economic releases by the government. The reason why even micro-inflationists may be wrong is that if one takes the Taylor Rule and extrapolates into the future, based on realistic assumptions, the outcome is quite shocking.
The chart below demonstrates what the implied Fed Fund rate should be today based on the Taylor Rule: a whopping -6.15%! In other words, due to the Fed's inability to charge people money to hold monetary assets (negative rates), QE is expected to inflate assets to the point where the deteriorating economic data drowns out the implied negative number. In practice, the Taylor result means that the economy is still bogged down in a deep deflationary slump. One side effect: look for Excess Reserves to keep rising so long as the direct threat of deflation not wiping out trillions of bad debts at bank balance sheets, persists. Another side effect: look for the Fed's "assets" to start growing exponentially quite soon as the deflationary threat truly takes hold.
What few people realize and what is most troubling, is that despite the Fed's QE program, the current Taylor implied Fed Fund Rate of -6.15% is in fact lower than what it was in January 2009: as we discussed at the time, the Taylor implied rate then was a deja vuish -6%. And this was just as Ben Bernanke was finalizing the $1.7 trillion Quantitative Easing inflation/liquification program. It stands to reason that Quantitative Easing has been not only a failure, but has resulted in a monetary environment that is actually worse than it was at the peak of the crisis. That's what central planning intervention will do an otherwise efficient economy.
So what happens if we project into the future? There is no sense in trusting the government to provide objective data: recall that recently the BLS itself stated that it was going to reduce payroll data by over 800 thousand. As a result we perform a hypothetical extrapolation into the future, using David Rosenberg's estimate of a baseline 13% unemployment into 2010. While the number is likely aggressive (yet real unemployment is materially worse: plugging the U-6 number of 17.5% into the Talor equation and you get a ridiculous, and hopefully, unrealistic deflationary number), we believe we are too generous with CPI estimates, which will likely continue being persistently low for a long time, especially with such government subsidy packages as Cash For Clunkers. As a result we get a Taylor implied rate of -4.2% by October 2010.
All this means is that Bernanke is very likely about to unleash Quantitative Easing 2: If the $1.7 trillion already thrown at the problem has not fixed it, you can bet that the Chairman will not stop here. Furthermore, as the Fed has the best perspective on the economy, which is certainly far worse than is represented, the Fed has to act fast before things escalate even more out of control. Which is why Zero Hedge is willing to wager that not only will the agency/MBS program not expire in March as it is supposed to, but that a parallel QE process will likely begin very shortly.
The end result of all these actions, of course, is that the value of the dollar is about to plummet: when Bernanke announces that not only will he not end QE but that he will launch another version of the program, expect the dollar to take off on its one way path to $2 = €1. And when that happens, look for global trade to cease completely. In its quest to continue bailing out the banking system and rolling the trillions of toxic loans it refuses to accept are worthless (for if it did, equity values in the banking system would go, to zero immediately), the Fed will promptly resume destroying not only the US middle class, but the entire system of global trade built through many years of globalization. Look for America to end up in an insulated liquidity bubble in a few short years, trading exclusively with its vassal master: the People's Republic of China.
Muni Market Absorbs $8.4 Billion in One Week
U.S. state and local governments sold $8.4 billion of bonds this week, revised data compiled by Bloomberg show, as investor demand allowed Connecticut and a California agency to expand their offerings. The number of new issues fell from $10.7 billion last week as bond markets closed Wednesday for Veterans’ Day, Bloomberg data show. Yields on top-rated 30-year general obligation bonds tracked by Municipal Market Advisors of Concord, Massachusetts, were little changed, slipping by 0.01 percentage point to 5.02 from a week earlier. The daily index is 28 basis points higher than the year’s low reached Oct. 1 after a rally in prices.
“Over the last couple of weeks, they’ve been pushed up, but if you look at it in the totality of the year, we’ve had a big rally,” said Michael Walls, who oversees $540 million in high-yield municipal bonds for Waddell & Reed Financial Inc. in Overland Park, Kansas. “There has been some profit taking.” Municipal bonds soared this year as investors poured money into tax-exempt mutual funds, pushing down the yields that local governments needed to offer to raise money. While prices have slipped since September, municipal bonds still have 13 percent return for the year, marking the best performance since a 17 percent gain during all of 2000, according to Merrill Lynch & Co. indexes.
Connecticut officials, after getting $355 million of bond orders from small buyers led by state residents, expanded the size of its offering this week to forgo a planned second sale of its so-called economic recovery notes. After initially offering $600 million, the state sold $1.08 billion, raising funds to replenish cash used to close last year’s budget deficit and finance school construction projects. “Investors’ reaction to our sale was more than we had expected,” Connecticut Treasurer Denise Nappier said in a release today. “In just one transaction, we were able to negotiate very attractive pricing and, as a result, take advantage of economies of scale.”
A public authority in California sold $1.9 billion of bonds on behalf of local governments whose property tax revenue was tapped to help the state close its budget deficit. The debt, maturing in 2013, is backed by California’s requirement to repay the money, giving the securities the same credit rating as the state government, the lowest among its peers. The sale added to a flood of borrowing by California, with almost $12.5 billion of long-term debt tied to the state issued since Oct. 5. The bonds sold this week by the California Statewide Communities Development Authority yielded 4 percent, compared with a yield of 3 percent the agency estimated last week.
“New issues have been priced cheaper than they have in the past and thus have been well received,” Walls said. The California Statewide Communities Development Authority’s 5 percent securities due in June 2013 rose to about 104.5 cents on the dollar today to yield 3.64 percent, 36 basis points less than at issue, data reported to the Municipal Securities Rulemaking Board show.
FDIC Moves Forward With $45 Billion Plan To Refill Fund
The Federal Deposit Insurance Corp. moved Thursday to refill its fund protecting consumers' deposits, finalizing a plan to raise $45 billion by having banks prepay three years of premiums. The agency's five-member board gave final approval to a multi-step program that will require U.S. banks to prepay their quarterly assessments for 2010 through 2012 when they pay their fourth-quarter premiums at the end of 2009. Additionally, banks will face a three-basis-point increase in their premium rates beginning in 2011.
The move comes in response to the rising number of bank failures, which hit 120 for the year last Friday and are at levels not seen since the savings-and-loan crisis. The FDIC currently estimates that the cost of bank failures will reach $100 billion from 2009 through 2013, an estimate that has repeatedly been revised upward. Those failures have put a strain on the FDIC's deposit insurance fund. Agency staff said Thursday that its liquidity needs would outpace its assets on hand beginning in the first quarter of 2010 without changes to the premium plan, and that through 2011 "liquidity needs could significantly exceed liquid assets on hand."
That does not mean the FDIC doesn't have cash available; the agency had roughly $22 billion in liquid assets as of June 30, though subsequent failures have reduced that figure. Staff did make some changes to the rule that was introduced in late September. The FDIC will repay banks any unused premiums beginning in June 2013, rather than December 2014 as originally proposed, and eased the process for banks requesting an exemption from the prepayment plan.
FDIC officials said the plan would allow it to replenish its liquidity without being too onerous on the banking industry during a time of weakness. An alternative would have been to assess a second special fee on the industry--$5.6 billion was already collected earlier this year--but that plan was abandoned because of the potential negative effect on banks. Banking industry groups lauded the FDIC's decision. "It strikes the right balance between making sure the FDIC has the cash necessary to meet its obligations and not unduly impairing banks' ability to meet their obligations to their communities," said James Chessen, chief economist for the American Bankers Association.
Citigroup, JPMorgan, Wells Fargo End Extra Checking Insurance
Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. will stop insuring checking accounts in the U.S. above the standard $250,000 limit, a year after the government set up the program to ease fears of deposit runs. The banks will exit the Federal Deposit Insurance Corp.’s Transaction Account Guarantee Program on Dec. 31, spokesmen for the three companies said today. The program was among emergency measures created in October 2008 to shore up confidence in the banking system and avert a collapse of financial markets. Bank of America Corp. had said Oct. 16 it would opt out.
In August, the FDIC said it would increase fees for banks that stay in the TAG program past Dec. 31. U.S. officials are trying to wean banks off bailout programs and guarantees that were intended to be temporary. Banks may declare plans to exit partly because staying in would signal weakness, Standard & Poor’s analyst Tanya Azarchs said. “It’ll be construed as a sign of being worried about something,” Azarchs said.
The checking-account insurance program is set to end on June 30, 2010, and the FDIC ended its guarantees of bank bonds on Oct. 31. New York-based Citigroup, the third-biggest U.S. bank by assets, was the leading user of that program, selling $65 billion of FDIC-backed debt over the past year. It accepted a $45 billion bailout last year. “As the economic environment normalizes, and with Citi now one of the best-capitalized financial institutions in the world with a deliberately liquid and flexible balance sheet, certain temporary programs have served their intended purpose,” Citigroup spokesman Alex Samuelson said. He declined to say how much the bank will save in fees.
Citigroup plans to notify corporate customers this week and next, Samuelson said. Visitors to the branches will see posters and other signs explaining the change, he said. The bank posted a notice on its Citibank Online sign-on site. The TAG program covers non-interest-bearing accounts, such as checking, when balances exceed the $250,000 cap available for standard deposit insurance. About 7,100 banks signed up, and about $700 billion of deposits were covered that otherwise wouldn’t have qualified for insurance, according to the FDIC.
Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by assets, disclosed plans to opt out of the program in October. Christine Holevas, a spokeswoman for No. 2 JPMorgan, said in an e-mail today that the New York-based lender will opt out. San Francisco-based Wells Fargo, the fourth- biggest bank, also will exit, spokeswoman Richele Messick wrote in an e-mail. U.S. Bancorp, based in Minneapolis, and New York-based Bank of New York Mellon Corp. said Nov. 2 they would opt out as of Dec. 31.
Banks have complained about the cost of the guarantees, Azarchs said. In Citigroup’s case, the extra insurance might be unnecessary because most corporate customers believe the government won’t let the bank fail, she said. “The environment around them has improved a lot, and people generally feel that the government ownership provides a lot of comfort,” Azarchs said. “It is simply an economic cost-benefit analysis, as to whether they think they’re getting enough value for the price that the guarantee carries.”
In November 2008, following a run that forced Wachovia Corp. to seek a rescue, Citigroup had to seek $20 billion of bailout funds, on top of $25 billion received the previous month from the Troubled Asset Relief Program. Both regulators and Citigroup officials worried at the time that the bank might run short of funds needed to pay obligations and meet expected withdrawals, according to a Nov. 6 report by the Congressional Oversight Panel. Citigroup has raised $93 billion of capital since late 2007, including government funds. It has almost doubled its cash to $244.2 billion, the biggest such stockpile of any U.S. bank.
Patchy Euro-Zone Recovery Reflects Imbalances
European economies are showing a two-speed recovery from the 2008-2009 economic recession, with industrial countries in the region's economic core setting the pace. Fresh data released Friday showed Germany and France posting their second quarter of economic expansion in the third quarter. And Italy experienced its first quarterly growth in gross domestic product since the downturn began. But Greece, Finland and Spain were still contracting. The new European Union members in the Baltics and along the trading bloc's periphery also remained mired in recession, having been hit hardest by recent financial crisis.
Data released by the Eurostat statistics office, the 27-country EU economy expanded by 0.2% in the quarter from the previous period. The smaller grouping of 16 countries sharing the euro currency rose by a faster 0.4% rate. The recovery followed a year of massive fiscal and monetary stimulus programs by governments and central banks to turn around the region's worst recession in 60 years. But the emerging recovery is patchy, traceable to national differences ranging from fiscal policies to industry profiles. It also could suffer a relapse if rising unemployment chills a nascent rebound in consumer spending, as government officials have warned.
"The bad times are over but the good times have not started, yet," said ING economist Carsten Brzeski. In the euro zone, Germany's export-oriented economy is benefiting from the resurgence in global demand, a trend also helping French and Italian industry. Spain is held back by a 19% unemployment rate after its housing market collapsed a year ago. Greece extended its economic contraction in the third quarter, and at a time when the government is under EU pressure to dramatically throttle back spending to reduce budget deficits.
The two-track recovery in Europe poses challenges for the European Central Bank, which already is beginning to consider the timing and pace of withdrawing monetary stimulus that had supported the euro-zone economy and banking system over the past year. "The European Central Bank faces the major challenge of balancing a return to growth in the stronger, large euro-zone economies with ongoing weakness in economies like Spain, Greece and Ireland," said Charles Davis, senior economist for the Centre for Economics and Business Research Ltd. in London.
Among the other EU countries, available third-quarter GDP data shows less promise. The U.K. economy contracted 0.4% -- a reflection of how dependent it is on financial services, which were hit particularly hard. And U.K. officials are warning of a slow and gradual comeback. "From a U.K. perspective, today's figures do not make pleasant reading," said Mr. Davis. "According to the data only Cyprus, Estonia, Hungary and Romania suffered larger quarterly contractions in GDP than the U.K. in the third quarter."
For the EU as a whole, economists had expected a stronger outcome for the last period given large production gains in industrial nations such as Germany and Italy. "This GDP growth [is] entirely a windfall from a policy-induced spurt of activity in the auto sector," said Carl Weinberg, chief European economist for high frequency economics. Euro-zone GDP could even contract again in the final three months of the year as car subsidies are phased out, he said. The ravages of the global downturn were still vivid in the third-quarter data.
Both Italian and German GDP were down by more from a year earlier -- 5.9% and 5.8% respectively -- than the 4.8% yearly contraction for the euro zone as a whole. Both countries have run tighter fiscal policies than their peers in the currency union this year. The broad absence of positive news about domestic demand supports the view that the euro-zone economy is far from healed. Sluggish household demand and business investment makes Europe vulnerable to a slowdown in the global recovery, said Aurelio Maccario, chief euro-zone economist for UniCredit. "It's not easy to see what could trigger a sustainable upswing," he said.
Morgan Stanley’s Roach Says Yuan Concern 'Overblown'
Concerns over China’s currency policy are “seriously overblown” and critics should let the country decide how it wants to manage the yuan to ensure growth, Morgan Stanley Asia Chairman Stephen Roach said. The world’s third-largest economy is still dependent on exports for its recovery and a “sharp appreciation” in the yuan would jeopardize the rebound, Roach said in an interview in Singapore today. The government will probably maintain stimulus measures until threats to rising unemployment and social stability have faded, he said.
Pressure is rising on China to abandon the currency’s fix to the dollar that policy makers implemented in July 2008. Analysts say a stronger yuan would help shift China’s economy toward domestic demand and away from a reliance on exports. “The desire on the part of Chinese authorities to maintain a relatively stable anchor is a very important aspect of China’s own stability in this post-crisis climate,” Roach said. “The world should turn its attention elsewhere and let China really figure out the right currency policy for its sustainable growth.”
Roach said at a business summit in Singapore today that recent trade tension between the U.S. and China “needs to be addressed immediately,” speaking a day before President Barack Obama arrives in Shanghai. China’s economic rebalancing will put upward pressure on the yuan, though a currency adjustment isn’t a prerequisite for the changes to take place, International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday. He added that the nation had the “right way” of addressing the global crisis and reorienting its economy.
China has no plans to alter its policy of step-by-step changes in the value of its currency, Assistant Finance Minister Zhu Guangyao said in Singapore Nov. 12. It has maintained the yuan’s value at around 6.83 against the dollar since July 2008. Gross domestic product expanded 8.9 percent in the third quarter from a year earlier, boosted by a 4 trillion yuan ($585 billion) stimulus package and record lending. China may introduce another fiscal stimulus package in mid- 2010 as the effects of the current plan taper off, Roach said. In the longer term, the nation will reduce its reliance on exports, he said.
“You’re going to see a new China -- a China that rises to the challenge imparted by this crisis,” Roach said at the business conference. The financial turmoil and global recession have been a “wake-up call” for the region, he added -- proving that Asian economies can “no longer depend on the vigor of the American consumer.”
Virtuous Bankers? Really!?!
The Great Vampire Squid has gotten religion. In an interview with The Sunday Times of London, the cocky chief of Goldman Sachs said he understands that a lot of people are “mad and bent out of shape” at blood-sucking banks. “I know I could slit my wrists and people would cheer,” Lloyd Blankfein, the C.E.O., told the reporter John Arlidge.
But the little people who are boiling simply don’t understand. And Rolling Stone’s Matt Taibbi, who unforgettably labeled Goldman “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” doesn’t understand. Banks, Blankfein explained, are really serving the greater good. “We help companies to grow by helping them to raise capital,” he said. “Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle. We have a social purpose.”
When Arlidge asked whether it’s possible to make too much money, whether Goldman will ignore the people howling at the moon with rage and go on raking it in, getting richer than God, Blankfein grinned impishly and said he was “doing God’s work.” Whether he knows it, he’s referring back to The Protestant Ethic and The Spirit of Capitalism — except, of course, the Calvinists would have been outraged by the banks’ vicious — not virtuous — cycle of greed and concupiscence.
Blankfein’s trickle-down catechism isn’t working. Now we have two economies. We have recovering banks while we have 10-plus percent unemployment and 17.5 percent underemployment. The gross thing about the Wall Street of the last decade is how much its success was not shared with society. Goldmine Sachs, as it’s known, is out for Goldmine Sachs. As many Americans continue to struggle, Goldman, Morgan Stanley and JPMorgan Chase, banks that took government bailout money after throwing the entire world into crisis, have said they will dish out $30 billion in bonuses — up 60 percent from last year.
The saying used to be, whatever happens, the lawyers win. Now, it’s whatever happens, the bankers win. Under pressure from regulators, who were trying to ensure that long-term performance was rewarded, the banks agreed to award more in stock, deferring cash payments. But as The Times reported this week, the Goldman executives who got stock options instead of bonuses last year, at market lows, got a windfall — so it had nothing to do with bank employees’ performance.
“The company gave its general counsel, for example, 104,868 stock options and 14,117 shares in December, when the bank’s stock was around $78,” Louise Story wrote for The Times. “Now the bank’s shares have more than doubled in value, making that stock and option award worth nearly $12 million.” As one former Goldman banker told Arlidge, the culture there is “completely money-obsessed. ... There’s always room — need — for more. If you are not getting a bigger house or a bigger boat, you’re falling behind. It’s an addiction.”
It’s an addiction that Washington has done little to quell. President Obama has not been strong on the issue, and Timothy Geithner coddles the wanton bankers whenever they freak out that they might not be able to put in their new pools next summer. The bankers try to dismiss calls for regulation as populist ravings, but the insane inequity of it cannot be dismissed. No sooner had the Senate Banking Committee Chairman Chris Dodd announced his plan to overhaul financial regulation Tuesday than compensation experts declared it toothless.
The banks and their lobbyists wheedled concession after concession out of Washington and knocked down proposed inhibition after inhibition. Now the banks are laughing all the way to the bank. “Saturday Night Live” was tougher on Goldman Sachs than the government, giving the firm flak about commandeering 200 doses of the swine flu vaccine — the same amount as Lenox Hill Hospital got — while so many at-risk Americans wait.
“Can you not read how mad people are at you?” demanded Amy Poehler. “When most people saw the headline ‘Goldman Sachs Gets Swine Flu Vaccine’ they were superhappy until they saw the word ‘vaccine.’ ” Seth Meyers chimed in: “Also, Centers for Disease Control, you sent the vaccine to Wall Street before schools and hospitals? Really!?! Were you worried the swine flu might spread to the Hamptons and St. Barts? These are the least contagious people in the world. They don’t even touch their own car-door handles.” And as far as doing God’s work, I think the bankers who took government money and then gave out obscene bonuses are the same self-interested sorts Jesus threw out of the temple.
Ukraine credit rating sinks; state firm seeks debt help
Fitch cut Ukraine's credit rating on Thursday and said a delay in IMF funding coupled with a huge budget gap would lead to more instability, a warning underscored by another state firm seeking to restructure its debts. Ukraine is in the grip of a deep economic recession which has been made worse by political rivalry, intensified in the run up to a January presidential election, that has derailed Kiev's co-operation with the International Monetary Fund.
Prime Minister Yulia Tymoshenko has already warned a delay in the IMF's release of $3.8 billion this month would make life "extremely difficult" for Ukraine and other ministers have said Kiev's ability to make timely payments for Russian gas could be affected. Such warnings unnerve European leaders who want to avoid another energy row between Kiev and Moscow during the winter similar to January when Russia cut gas supplies, including those intended to transit Ukraine, and left hundreds of thousands in the cold.
Tymoshenko blames the IMF delay on President Viktor Yushchenko, a bitter rival in the election, because he approved a minimum wage rise that the fund opposed. He accuses her of driving the country to ruin through populist policies funded by borrowed billions. Fitch estimated this year's budget gap would balloon to 11 percent of gross domestic product -- including government aid given to state energy company Naftogaz which purchases the gas from Russia. The IMF funds would have helped cover that gap.
But now, "Fitch sees an elevated risk that Ukraine could resort more heavily to monetary financing via central bank providing liquidity to banks -- effectively printing money. "This would in turn risk undermining the fragile confidence in the currency and the banking system, and/or a rapid loss of foreign exchange reserves." Fitch spelled out the dire figures behind its 'Negative' outlook for its B- rating: the national currency, the hryvnia, has fallen 60 percent in a year; GDP contracted more than 18 percent in the second quarter compared with a year ago; and bad loans amount to 30 percent of all lending.
State railway company Ukrzalyznitsya has approached its creditors to restructure its dollar loan just a week after Naftogaz, often at the centre of the gas rows with Russia, managed to change the terms of its foreign debts. Acting Finance Minister Ihor Umansky said on Thursday the firm failed to repay $118 million of the $550 million syndicated loan that had been organised by Barclays.
The railway company "should have paid $110 million of the debt and $8 million in coupon payments," Umansky told reporters. "Ukrzalyznitsya has made some proposals to the holders of the debt, which was organised by Barclays." The loan was organised in July 2007 and matures next year, according to Thomson Reuters Loan Pricing Corp data. It had a 2-year grace period, which would have run out this summer.
Umansky said the size of the loan was $440 million after the company made some of the principal payments. Ukrzalyznitsya itself was not immediately available for comment. Analysts believe the debt did not have a state guarantee. The government did not guarantee Naftogaz' $500 million Eurobond, whose looming maturity at the end of September sparked the company's restructuring talks.
But some worry this loan has clauses that would force the company to repay other debts in the event of a default, including a $700 million loan that may have a state guarantee. Naftogaz finally issued a $1.595 billion 5-year Eurobond with a sovereign guarantee in exchange for its earlier Eurobond and three bilateral loans.
Minsky to Bernanke: "Size Matters!"
Size matters. And it particularly matters when the size of the financial system grossly exceeds the productive capacity of the underlying economy. Then problems arise. Surplus capital flows into paper assets triggering a boom. Then speculators pile in driving asset prices higher. Margins grow, debts balloon, and bubbles emerge. The frenzy finally ends when the debts can no longer be serviced and the bubble begins to unwind, sometimes violently. As gas escapes; credit tightens, businesses are forced to cut back, asset prices plunge and unemployment soars. Deflation spreads to every sector. Eventually, the government steps in to rescue the financial system while the broader economy slumps into a coma.
The crisis that started two years ago, followed this same pattern. A meltdown in subprime mortgages sent the dominoes tumbling; the secondary market collapsed, and stock markets went into freefall. When Lehman Bros flopped, a sharp correction turned into a full-blown panic. Lehman tipped-off investors that that the entire multi-trillion dollar market for securitized loans was built on sand. Without price discovery, via conventional market transactions, no one knew what mortgage-backed securities (MBS) and other exotic debt-instruments were really worth. That sparked a global sell-off. Markets crashed. For a while, it looked like the whole system might collapse.
The Fed's emergency intervention pulled the system back from the brink, but at great cost. Even now, the true value of the so-called toxic assets remains unknown. The Fed and Treasury have derailed attempts to create a public auction facility--like the Resolution Trust Corporation (RTC)--where prices can be determined and assets can be sold. Billions in toxic waste now clog the Fed's balance sheet. Ultimately, the losses will be passed on to the taxpayer.
Now that the economy is no longer on steroids, the financial system needs to be downsized. The housing/equities bubble was generated by over-consumption that required high levels of debt-spending. That model requires cheap money and easy access to credit, conditions no longer exist. The economy has reset at a lower level of economic activity, so changes need to be made. The financial system needs to shrink.
The problem is, the Fed's "lending facilities" have removed any incentive for financial institutions to deleverage. Asset prices are propped up by low interest, rotating loans on dodgy collateral. While household's have suffered humongous losses (of nearly $14 trillion) in home equity and retirement savings; the financial behemoths have muddled through largely unscathed. The Fed handed Wall Street a golden parachute while ordinary working stiffs were kicked to the curb. That's why household spending has plunged while the big brokerage houses are gearing up. Here's an excerpt from an article by former Morgan Stanley analyst Andy Xie which explains what's really going on:
"First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding." (Andy Xie, "Why One Good Bubble Deserves Another", Caijing.com)
See? The financial Goliaths are still leveraged to their eyeballs.
Fed chair Ben Bernanke has bent-over-backwards to preserve the system in its present form. That's why the lending facilities should be viewed with a degree of skepticism. They weren't set up merely to rescue the system from disaster, but to keep asset prices artificially high so institutions could continue to maximize profits via risky investments. And, it's worked, too. The S&P 500 is up over 60 percent since March 9. Still, even though Bernanke has succeeded in resuscitating the flagging financial sector, investors remain pessimistic. According to Bloomberg News:
"An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.
Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.
“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis." (Bloomberg News)
Few people seem to believe in the much-ballyhooed economic recovery. And even though the media triumphantly announced the "end of the recession" last week (when GDP came in at 3.5 percent) a closer look at the data, leaves room for doubt. Goldman Sachs analysts put it like this:
"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter." ( http://www.zerohedge.com/article/hedging-their-bets )
Positive growth is an illusion created by government spending. In fact, the economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn't be confused with a real recovery.
Bernanke is a scholar of the Great Depression. He is familiar with Hyman Minsky and Minsky's "Financial Instability Hypothesis" (FIH), which states that, "A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."
Boston Globe Correspondent, Stephen Mihm, summarized Minsky's theory in his article "When Capitalism Fails":
"In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.
Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers.
The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system." (When Capitailsm Fails, Stephen Mihn, Boston Globe)
Stability leads to instability. By zeroing in on capitalism's genetic flaws, Minsky countered the prevailing orthodoxy that markets are fundamentally efficient and rational. He not only showed that capitalism was inherently crisis-prone, but also, that it was most vulnerable during those periods which seemed to be most stable. (like during Greenspan's "Great Moderation") Stability invites speculation and risk-taking. Investors are buoyed by market euphoria and fat returns; borrowing to purchase dodgy equities turns into a mania which distorts prices and leads to massive credit bubbles. Eventually, the foundation cracks and debts cannot be rolled over. Then markets tumble.
The point is, Bernanke knows that a bloated financial system poses unnecessary risks to the economy; just as he knows he should wind-down existing lending programs (which just encourage more speculation) and focus on rebuilding household balance sheets. The only way to put the economy back on a solid foundation is by helping struggling workers get back on their feet so they can create more demand. The objective should be full employment and broad, sustained wage growth, which is precisely what Minsky's recommended.
Stephen Mihm again: "The government - or what Minsky liked to call 'Big Government' - should become the 'employer of last resort,' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder." ("Why Capitalism Fails, by Stephen Mihm, Boston Globe)
Minsky's analysis not only sheds light on the causes of the current crisis, but also provides a practical way to fix the system. Too bad Bernanke's not paying attention.
Gordon Brown to apologise for Britain's 'shameful' child migration policies
Britain is to join Australia in issuing an official apology for the "shameful" export of tens of thousands of children to Commonwealth countries with the promise of a better life, only for many of them to end up abused and neglected. In what Ed Balls, the children secretary, described as "stain on our society" the child migrant programmes saw poor, orphaned and illegitimate children sent to Australia, Canada and other former colonies until as recently as the late 1960s, often without the knowledge of their families.
Many ended up in institutions, many suffered abuse and neglect and many others were used as "slave labour" on farms. Now after years of campaigning from pressure groups, Gordon Brown has agreed to meet with representatives of the surviving children before making a formal apology next year. Mr Balls said the apology would be "symbolically very important". "I think it is important that we say to the children who are now adults and older people and to their offspring that this is something that we look back on in shame," he said. "It would never happen today. But I think it is right that as a society when we look back and see things which we now know were morally wrong, that we are willing to say we're sorry."
The government has estimated that a total of 150,000 British children may have been shipped abroad under a variety of programs that operated between the early 19th century and 1967. A 2001 Australian report said that between 6,000 and 30,000 children from Britain and Malta, often taken from unmarried mothers or impoverished families, were sent alone to Australia as migrants during the 20th century. Some of the children were told, wrongly, that they were orphans. The migration was intended to stop the children being a burden on the British state while supplying the receiving countries with potential workers.
A 1998 British parliamentary inquiry noted that "a further motive was racist: the importation of 'good white stock' was seen as a desirable policy objective in the developing British Colonies". Mr Balls said that while an apology would not "take away the suffering" it was important to the victims to admit it was wrong and to make sure lessons are learnt. He said the government was talking to the victims' organisation to work out how to frame the apology. "These were children who were shipped out of the country, often without their parents even knowing, went on to be labourers thousands and thousands of miles away, suffered physical and sometimes sexual abuse as well and it was something that was sanctioned by government and that is no way to treat children," he said,
"I think there have been discussions going on for some months about how to do this but to be honest it’s a matter of shame for our country and countries around the world that this terrible policy happened for so many years and decades and was actually government policy." The issue of the UK child migrants was investigated in 1998 by the Commons health select committee, a process which led to the Department of Health drawing up guidance for families to trace those sent away. Kevin Barron, the chairman, said Mr Brown wrote to him over the weekend to confirm he would issue an apology in the new year.
The Prime Minister told him "the time is now right" for the UK government to apologise for the "misguided policies" of previous governments. However some survivors felt the apology was too little too late. Harold Haig, the secretary of the International Child Migrants Association, said he was appalled that the Australian apology has come before any British apology. "Gordon Brown should hang his head in shame," he said. "He is allowing the country that we were deported to to apologise before the country where we were born. It is an absolute disgrace. He should hang his head in shame."