"Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico"
Ilargi: When on any given morning you see consecutive headlines that read
- "US bank lending falls at the fastest rate in history",
- "Lending to British businesses falls at record pace",
- "UK mortgage lending falls to 10-year low ",
- ”Shock as British deficit equals that of Greece" and
- "Britain posts first deficit for January since records began"
is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.
How about we add this one:
- "Fed raises interest rate on emergency loans to banks"
Think perhaps that would switch on the light?
See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect.
And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away.
That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don't.
One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don't know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders' defunct mortgage loans and their own sovereign debt (how's that for a Ponzi scheme?), you will know just how destitute you've become. And it'll be too late to do anything about it. You'll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?
One Too Many Mornings
Down the street the dogs are barkin'
And the day is a-gettin' dark.
As the night comes in a-fallin',
The dogs 'll lose their bark.
An' the silent night will shatter
From the sounds inside my mind,
For I'm one too many mornings
And a thousand miles behind.
From the crossroads of my doorstep,
My eyes they start to fade,
As I turn my head back to the room
Where my love and I have laid.
An' I gaze back to the street,
The sidewalk and the sign,
And I'm one too many mornings
An' a thousand miles behind.
It's a restless hungry feeling
That don't mean no one no good,
When ev'rything I'm a-sayin'
You can say it just as good.
You're right from your side,
I'm right from mine.
We're both just one too many mornings
An' a thousand miles behind.
Ilargi: And an extra one for the weekend:
La porte en arrière
Moi et la belle on avait été-z-au bal
on a passé dans tous les honkytonks
s'en a rev'nu le lendemain matin
le jour était apres se casser
j'ai passé dedans la porte en arriere
l'apres-midi moi j'étais au village
et je m'ai saoulé que je pouvais plus marcher
ils m'ont ramené back a la maison
il y avait de la compagnie, c'était du monde étranger
J'ai passé dedans le porte en arriere
mon vieux pere un soir quand j'arrivais
il a essayé de changer mon idée
j'ai pas écouté, moi j'avais trop la tete dure
"un jour a venir, mon neg', tu vas avoir du regret
t'as passé dedans la porte en arriere"
j'ai eu un tas des amis tant que j'avais de l'argent
asteur j'ai plus d'argent mais ils voulont plus me voir
j'ai été dans le village et moi je m'ai mis dans le tracas
la loi m'a ramassé, moi je suis parti dans la prison
on va passer dedans la porte en arriere
US bank lending falls at fastest rate in history
by Ambrose Evans-Pritchard
Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus. David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said. Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.
The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken. Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.
"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said. Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement.
However, regional Fed "hawks" appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of "monetizing" its deficit in a stealth default on Treasury bonds.
The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks. Fed chair Ben Bernanke first made his name as an expert on the "credit channel" causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time. "The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Mr Ashworth.
Shock as British deficit equals that of Greece
Fears of debt crisis as January tax receipts fall by 9 per cent overall, while public expenditure rises 15 per cent
Britain's public finances are in a worse position than those of Greece, according to the latest figures on government borrowing. The Office for National Statistics said yesterday that January alone saw a net shortfall of £4.3bn, far worse than City forecasts and in a month which has always previously shown a healthy surplus. It puts the UK on track for a deficit of £180bn this year, or 12.8 per cent of GDP, economists said, shading the Greek figure, hitherto the worst in the European Union, of 12.7 per cent.
In the pre-Budget report the Chancellor forecast a deficit of £178bn for the current year. Warnings that the UK could face a Greek-style crisis of confidence have been building for some weeks, and yesterday saw a sell-off of sterling and British government securities, or gilts, on the disappointing news. Jonathan Loynes, chief European economist at Capital Economics commented: "The figures suggest that this year's budget deficit could exceed that of Greece and further underline the need for more decisive action to improve the fiscal position when the economy is strong enough to withstand it. "It is clear that a more credible plan to restore the public finances to health will be required shortly after the general election in order to keep the markets and rating agencies at bay."
January usually shows a healthy surplus, as tax receipts flow in from City bonuses and payments made before the final deadline for self-assessment on 31 January. Last year, for example, revenues exceeded public spending by over £5bn in the month. This year, tax receipts across the board were unusually depressed, reflecting the depth of the recession in the 2008-09 tax year. Depressed earnings in the financial sector and the general weakness of the economy conspired to push receipts down by 9 per cent overall compared with last year; income tax takings slumped by 20 per cent, and corporation gains tax revenues fell by 6 per cent. VAT payments were up a little, after the 17.5 per cent rate was restored on 1 January.
On the other side of the ledger, public spending is still showing double digit increases: 15 per cent up in January, driven higher by the rise in benefits to the unemployed. However, economists also pointed out that the total national debt carried by Britain is still lower than Greece and other so-called PIIGS – Portugal, Italy, Ireland, Greece and Spain, the eurozone's most heavily indebted nations. Although it has been expanding rapidly, UK national debt stands at about 60 per cent of GDP, against more than 100 per cent in most of these other states.
British debt is also much longer term than that of Greece, making re-financing the debt easier. November and December showed relatively good returns, but even so, all economists stressed the need for clarity on how the government will deal with the issue, whoever wins the next election. The Conservative leader, David Cameron, has explicitly likened the UK to Greece and warned that failure to deal with the deficit issue could mean higher interest rates and mortgage bills hundreds of pounds a month larger for millions of householders.
Shadow Chief Secretary to the Treasury, Phillip Hammond, said yesterday: "These appalling figures – showing the first January deficit on record – illustrate the scale of Labour's debt crisis. Every British family faces a bill of £4,800 to pay for Gordon Brown's borrowing so far this financial year alone." Liberal Democrat Treasury spokesman Vincent Cable added that the figures "underline the importance of having a credible plan to tackle the deficit. Simply slashing spending now regardless of the economic circumstances is not only a fruitless labour but a damaging one".
The Treasury say they are sticking to the Chancellor's forecasts. Mr Darling has promised to cut the underlying budget deficit by a half within four years. Pressure on the finances of local government is also set to continue to intensify, as support from Whitehall is squeezed and local economies are hit by the continuing effects of the downturn. One of the areas hardest hit by the recession is the Midlands. Last week Birmingham City Council, the largest local authority in the country, announced 2,000 redundancies and Nottingham £18m in savings, examples of a growing tide of public-sector cuts and job losses.
Lending to British businesses falls at record pace
Lending to British businesses contracted at its fastest ever pace in December, after the flow of funds sharply reversed from November to drop £4.3bn on the month, the Bank of England said on Thursday. The BoE said in its monthly Trends in Lending report that the 8.1pc year-on-year fall in the stock of loans was the biggest decline since the series began in 1999 - news that may sharpen policymakers' concern about the sustainability of Britain's economic recovery. Separate BoE figures for January released at the same time showed monthly M4 money supply growth rose 0.6 percent in January after a 0.9 percent drop in December.
But on an annual basis there was the slowest growth in M4 money supply since February 2000 and the weakest M4 lending rate since December 1994. "Major UK lenders reported that their net lending flows remained weak in January," the Trends in Lending report said. The BoE's Monetary Policy Committee has said it is particularly concerned about a shortage of credit for small and medium-sized businesses. "Supply and demand for credit are pretty muted and likely to stay that way," said Ross Walker, UK economist at Royal Bank of Scotland. "I'm a bit agnostic about these numbers as why on earth would people be leveraging up to the eyeballs at the moment? You wouldn't expect much pick up but the fact that we're not getting it is of concern to Mervyn King and others on the MPC."
Thursday's report said major lenders reported smaller companies were increasing their gross loan repayments to reduce leverage, with funds freed up by postponing investment and tighter inventory management. This de-stocking cycle, however, now seemed to be coming to an end, lenders said. The report also suggested mortgage lending had weakened last month and approvals for mortgages for house purchase had fallen sharply in January - pointing to a poor reading when full BoE consumer credit data is published on March 1.
British house prices have rebounded by around 10pc from lows hit early in 2009, but many economists doubt whether the recovery has much further to go because of a poor labour market and the difficulty buyers face in obtaining mortgage finance. Major UK lenders also reported that net consumer credit flows weakened in January, and that applications for credit cards and personal loans were below year-ago levels and 2009's monthly average. Part of this was due to poor weather in January as well as generally subdued demand, the lenders said.
UK mortgage lending falls to 10-year low
Mortgage lending fell to a 10-year low during January as the housing market suffered a lull following the end of the Government's stamp duty holiday, figures showed. Total mortgage advances dropped by 32 per cent to £9.1 billion during the month, the lowest level since February 2000, according to the Council of Mortgage Lenders (CML). The group said there was typically a fall-off in lending during January, as househunters put moving plans on hold over Christmas. But it said this year's drop was larger than usual, and had been caused by people buying lower-value properties rushing to push through their purchase before the stamp duty holiday ended at the beginning of this year.
The drop in lending comes after the group reported a "surprisingly strong" figure for December, with mortgage advances jumping by 14 per cent during the month, bucking the usual seasonal trend. It attributed the rise to increased demand as people buying properties costing up to £175,000 tried to complete their purchases before the threshold at which stamp duty kicks in returned to £125,000 at the beginning of this year. It said 55 per cent of homes purchased during the month cost less than £175,000, with 10,300 first-time buyers purchasing a property for between £125,000 and £175,000 - 63 per cent more than in November.
The CML warned that the rush by buyers to cash in on the stamp duty holiday in the final months of last year was likely to lead to a drop in activity during the early months of 2010. Paul Samter, a CML economist, said: "We remain in a period of uncertainty for the housing market and economy at large. "The market certainly improved over the second half of last year and started 2010 in better shape than most would have predicted 12 months ago. "More recent developments have been influenced by the end of the stamp duty holiday and are likely to foreshadow a larger than usual seasonal drop-off in activity in the early part of this year."
Brian Murphy, head of lending at Mortgage Advice Bureau, said: "We shouldn't read too much into the January data, which is a result of both seasonal factors and December's stamp duty holiday rush. "Overall, the market is in a far better state, with mortgage availability at a 12-month high. "This time last year the mortgage market was in a coma, but in the past three to four months a lot more products have become available, as lenders once again start fighting for market share." Figures released by the Bank of England also showed a fall in both mortgage lending and the number of loans approved for house purchase during January.
Britain posts first deficit for January since records began
Britain reported its first budget deficit for January since records began as government spending rose and tax receipts fell sharply. The Office for National Statistics said on Thursday that spending by the Government had exceeded its income by £4.3bn. It is first time the Government has had to borrow in a January since records began in 1993. Economists had expected a surplus of around £1bn. The figures reflected the impact of the economic downturn on the UK's finances as tax revenues slumped while spending grew because of measures such as the jobseeker's allowance.
It will renew pressure on the Government to set out plans to ease the burden on public finances, with many predicting a future of tax rises and spending cuts. Andrew Goodwin, senior economic advisor to Ernst & Young Item Club, said: "These are pretty ghastly figures and come as somewhat of a surprise given the smaller overshoots of the past couple of months. "January usually yields a healthy surplus due to receipts from corporation tax and even in the current climate it is surprising to see the government rack up a deficit." The pound fell after the release.
The ONS said spending was £4.4bn higher than in January 2009, while receipts were down £4.2bn. Government receipts stood at £50.5bn as income tax fell 19pc to £19.4bn compared with Janaury last year. VAT income grew 16pc year-on-year after the rate returned to 17.5pc at the end of the Government's temporary move to help the economy. Spending grew to £49.5bn in the month, with layout on social benefits up 3pc at £14bn in January. The UK's net debt hit £848.5bn, which is equivalent to 59.9pc of the country's annual output - the highest proportion for a January since the 1974 financial year.
David Kern, chief economist at the British Chambers of Commerce, said the worse-than-expected January figures further emphasised the dangers facing Britain’s international credit rating. "The deficit this year reinforces the need for credible and specific deficit-cutting measures in next month’s Budget," he said. "As well as explicitly spelling out its medium-term spending plans, it is now necessary for the Government to announce a freeze in the public sector wage bill, and an immediate review into the cost of public sector pensions. This would persuade the markets, and the rating agencies, that the Government is serious about cutting the unsustainable deficit, and enabling the private sector to drive Britain’s recovery."
Sterling hit as UK government borrowing soars
Sterling fell on Thursday as it was revealed that the government was forced to borrow last month as tax receipts fell sharply. Net borrowing was more than £9bn higher in January than a year earlier, as the government faced a deficit of £4.3bn compared with a £5.3bn surplus in January 2009. The Treasury, however, gave reassurances that the government would meet its borrowing targets this year despite the jump in the budget deficit in January, a crucial month for taxation. The deficit was starkly worse than market expectations of a £2.8bn surplus for the month. Economists had been hopeful of a better outcome following two months of smaller-than-expected government borrowing figures. It is the first time a deficit has been reported in January since records began in 1993.
Sterling fell towards the lowest level against the dollar for nine months and was also lower versus the euro which was itself under pressure because of worries about debt levels among southern eurozone countries. The pound fell to a low of $1.5554 against the dollar, within striking distance of $1.5533 reached earlier this month and equal the lowest level since May 2009. It later regained some poise to stand down 0.2 per cent at $1.5641 by mid-morning in New York. Sterling also lost 0.4 per cent to £0.8710 against the euro and dropped 0.6 per cent to Y142.13 against the yen. The yield on 10-year gilts jumped 5 basis points to 4.18 per cent, the highest level for 15 months, reflecting concerns about the deteriorating finances of the UK government.
The Treasury had been worried that this month’s figures could be particularly poor because they include self-assessment income tax receipts and capital gains tax for 2008-09 – which covered four quarters of the recession and included two of the sharpest quarters of contraction in the economy since records began. "These figures keep us on track to meet our pre-Budget report forecast," said a Treasury spokesman. The deficit so far this year is £122bn, compared with a Treasury forecast of £170bn for the full financial year. Excluding the impact of bringing RBS and Lloyds Banking Group on to the government balance sheet and other financial interventions, the deficit is about £130bn, with full-year borrowing expected to be £178bn.
Some economists warned that the figures signalled a fresh downward leg in the public finances. Jonathan Loynes of Capital Economics said they "dashed any hopes that the worsening trend in the public finances might finally be easing a bit". But others said the Treasury was broadly on track to meet its borrowing targets. "There’s still a chance that this financial year’s net borrowing will be below the government’s forecast," said Neville Hill, economist at Credit Suisse. The higher borrowing in January came as tax revenues fell 7.8 per cent to £50.5bn compared with a year earlier as self-assessment income tax returns and capital gains tax sank sharply.
Income tax receipts were down 16 per cent in the month compared with a year earlier, set against a 13.7 per cent decline in receipts in the financial year to date. The government forecast laid out in the pre-Budget report was for a drop of 15 per cent for the year as a whole. "The pre-Budget report predicted a sharp decline in self-assessed capital gains tax and income tax receipts paid this financial year on gains and earnings from 2008-09," the Treasury said. Given that January was the most important month for these receipts, "that fall is evident in today’s figures". Taxes on production, on the other hand, were up 11 per cent as the rise in VAT kicked in last month. January is also one of the biggest months of the year for corporation tax, which was down 6 per cent.
Meanwhile, public spending rose 9.7 per cent in January to £49.5bn amid higher debt interest costs for index linked bonds because inflation had been falling a year ago, but has risen recently. Social benefit costs were lower, but this partly reflected the fact that there was a one-off payment of £60 to pensioners for winter fuel last year but not this year. Vince Cable, the Liberal Democrat’s shadow chancellor, cautioned against a rapid reduction in government spending despite today’s data. "These figures underline the importance of having a credible plan to tackle the deficit and stimulate growth and jobs to strengthen future tax receipts. Simply slashing spending now regardless of the economic circumstances is not only a fruitless labour but a damaging one."
Fed raises interest rate on emergency loans to banks
The Federal Reserve on Thursday took another step toward winding down its expansive efforts to prop up the financial system, raising the interest rate that banks must pay to take out emergency loans. Banks that need emergency funds through the Fed's "discount window" will now have to pay 0.75 percent, not the 0.5 percent they have been paying. But that higher rate probably won't mean higher borrowing costs for ordinary households and businesses, and the move does not represent an effort by the Fed to drain the money supply.
That would be done by raising the federal funds rate, traditionally the Fed's main tool for managing the economy, above its current level near zero, or by raising the rate it pays on bank reserves, now 0.25 percent. But Thursday's step was part of an effort to withdraw the Fed's extraordinary support for the financial system, even as it leaves in place ultra-low interest rates to support the economy more broadly. In 2007 and 2008, the central bank took a string of unconventional steps to try to keep money flowing as banks were suffering a cash crunch and unwilling to lend money to one another.
Now, though the broader economy is still suffering, the financial system has been healing. On Feb. 1, the Fed closed down programs to support short-term business lending and offer emergency loans to investment banks, and it will end purchases to prop up the mortgage market on March 31. "This move is part of the removal of unconventional measures and should not be seen as a signal of a change in the Fed's monetary policy stance," said Bruce Kasman, chief economist at J.P. Morgan Chase.
The Fed also shortened the terms of discount-window emergency loans to banks and said it would wind down the Term Auction Facility, which pumps money into banks, on March 8. The Fed went to considerable lengths to stress that its actions do not indicate an effort to slow down the pace of economic growth. "With these changes, we expect that banks will use private sources for normal funding," turning to the Fed only as a backup source of funding, said Fed Governor Elizabeth Duke in a speech Thursday night. "I'd emphasize that the changes . . . represent further normalization of the Federal Reserve's lending facilities; they do not signal any change in the outlook for monetary policy and are not expected to lead to tighter financial conditions for households and businesses."
Before the financial crisis in 2007, the Fed's discount rate was a full percentage point above the federal funds rate, a gap that indicated the penalty banks had to pay for getting access to emergency funds. As financial markets froze in August 2007, the first major step the Fed took to address the crisis was to narrow the gap between the two rates, a step intended to push money into the financial system. But at that time, the Fed did not cut the federal funds rate because the economy still seemed to be in fine shape.
Now, the situation has reversed. The economy is still weak, and Fed leaders expect unemployment to remain high for some time, so they are keeping the federal funds rate near zero. But the financial crisis has ended, so they want banks and other financial institutions to get back to their normal practices, which includes paying a higher premium for emergency loans. The Fed will probably widen the gap over time, ultimately getting back to a full percentage point spread. The Fed said in a statement that it "will assess over time whether further increases in the spread are appropriate."
Underscoring the continued weakness in the economy, the pace of job losses rose last week, according to new data released Thursday, and wholesale prices spiked. Although most indicators show that the economy continued to expand at the beginning of 2010, the latest readings show undercurrents of both continued weakness in the job market and a rise in fuel prices that could drain Americans' wallets. The producer price index rose a surprising 1.4 percent in January, the Labor Department said, primarily due to higher energy prices. Core inflation, which excludes volatile food and energy prices, rose 0.3 percent, driven by a 1.3 percent rise in pharmaceutical prices.
Economists generally view inflation as little threat in the near future, but that view could change if the latest producer price reading turns into a broader trend of rising prices. Such a situation would put the Fed in a difficult situation. The central bank's leaders have said they intend to leave their target interest rate "extremely low" for an "extended period," but sharply rising prices would limit their ability to follow through on that intention. Still, analysts expect the January rises to reverse in February, based on prices in commodity markets for energy and metals. "Producer prices jumped in January in response to unusual seasonal pressures on crude oil and natural gas prices, pressure that will dissipate in February," said Brian Bethune, chief financial economist at IHS Global Insight.
Also Thursday, the Labor Department said that 473,000 people filed new claims for unemployment insurance benefits last week, up from 442,000 the previous week. That is a worrisome sign that the job market might not be improving at the pace forecasters hope. The February employment situation will remain murky for some time, though, as extreme snowstorms in the Northeast and parts of the South and Midwest could cause a burst of temporary joblessness -- construction workers who weren't able to come to work, for example, or retail clerks whose employer shut down for several days.
Obama unveils $1.5 billion in housing aid
President Barack Obama used a campaign push for Senate Majority Leader Harry Reid Friday to announce a new fund to support homeowners in five states hit hardest by the housing crisis.
Housing was at the center of the financial crisis that threw the economy into deep recession in late 2007. While signs of stabilization are appearing, home foreclosures are still rising in much of the country. Obama said he is designating $1.5 billion from the Troubled Asset Relief Program to fund programs at local housing finance agencies in California, Florida, Nevada, Arizona and Michigan, which have seen home prices decline more than 20 percent from their peaks.
"This fund's going to help out-of-work homeowners avoid preventable foreclosures," Obama told a town hall-style meeting at a school near Las Vegas. "It will help homeowners who owe more than their homes are worth find a way to pay their mortgages that works for both the borrowers and the lenders alike." Nevada is still struggling from the home market crash, and Obama's choice to make the announcement there was no accident. The president is trying to boost Reid, a Nevada Democrat who trails potential Republican opponents by double digits in opinion polls ahead of November elections that could change the balance of power in Congress.
Reid has helped push Obama's agenda to boost the economy, overhaul the U.S. healthcare system and fight climate change, but Republican critics say he has neglected his home state while working on the national stage. After a prolonged boom that began in the late 1990s during which banks loosened lending standards and took on excessive risk, the sector suddenly lost steam and prices deflated abruptly after 2006. While falling values have left many mortgage-holders with homes worth less than the loans on them, soaring unemployment has led to even more mortgage defaults.
There has been some recent positive news, notably a report this week showing that construction starts on new homes hit a six-month high in January. Over the past 12 months through January, housing starts were up 21 percent, a sign that underlying demand was beginning to firm again. A senior Obama administration official said the administration knew many people were still hurting. "We are extremely cognizant of just how difficult the housing situation remains," the official told reporters.
"But (we are) very relieved that we are in a dramatically different place today where we have very significant stabilization in prices across most of the country." The $1.5 billion would be distributed to state agencies based on which states were suffering the most. Money could go to programs to help unemployed homeowners, for example, or borrowers who owe more on their houses than they are worth. The official said the program came on top of the Treasury Department's recent $23 billion program for all 50 state Housing Finance Agencies.
Meredith Whitney: Investors Don't Realize What's About To Hit The Banking Sector
Meredith Whitney spoke with Maria Bartiromo on the floor of the NYSE this evening. She predicts big-cap banks will be down some 15%, because investors still aren't pricing in the risks ahead. Here are some things that will hit the sector:
- Government taking away the punchbowl.
- The end of the re-equitization cycle (all those fees!)
The one bank she likes: Bank of America, because it has plenty of assets to sell.
States must fill $1 trillion pension gap
States may be forced to reduce benefits, raise taxes or slash government services to address a $1 trillion funding shortfall in public sector retirement benefits, according to a new study that warns of even more debilitating costs if immediate action isn't taken. The Pew Center on the States released a survey Thursday of state-administered pension plans, retiree health care and other post-employment benefits in all 50 states that blamed a decade's worth of policy decisions for leaving them shortchanged.
The result for some states will be "high annual costs that come with significant unfunded liabilities, lower bond ratings, less money available for services, higher taxes and the specter of worsening problems in the future," the study said. The cost of the trillion-dollar shortfall, which will be paid over the coming decades, is about $8,800 for each American household. The study did not include many city, county and municipal pension plans, which are thought to have similar underfunding. "We have a significant problem now, but it's a problem that can be solved by taking relatively modest steps," said Susan K. Urahn, the center's managing director. "If they don't do anything, if they wait, eventually they will have an unmanageable crisis on their hands."
As of 2008, states had $2.4 trillion to meet $3.4 trillion in promised pension, health care and other post-retirement benefits, according to the report. The true gap may even be wider, because the study did not account for the full impact of investment losses in late 2008, during the stock market downturn, and because many plans employ multiyear smoothing techniques to lessen the effect of a single year's losses. But more recent stock market returns could help -- on Wednesday, for example, Pennsylvania's $47 billion public school pension plan reported it had earned about 12 percent on investments in the 2009 calendar year.
Pew deemed 16 states solid performers in how they fund pensions, 15 needing improvement and 19 considered to be facing serious concerns. "Meanwhile, more and more baby boomers in state and local government are nearing retirement, and many will live longer than earlier generations -- meaning that if states do not get a handle on the costs of post-employment benefits now, the problem likely will get far worse, with states facing debilitating costs," the study said.
The exploding financial burden could be a bitter pill for taxpayers, many of whom will not be collecting similar pensions or other benefits when they retire, said David Kline with the California Taxpayers' Association. About one in five private sector workers have traditional defined benefit pensions, compared with about 90 percent of public-sector employees -- including some that do not get Social Security. "Taxpayers in the future will be paying for people who worked decades before they may have even lived in the area or begun paying taxes, because the obligation for these benefits is just snowballing," Kline said.
The study graded states on how well they have managed employees' retirement benefits. Florida, Idaho, New York, North Carolina and Wisconsin began the current recession with fully funded pension systems, while eight states have left more than one-third of their pension liability unfunded. Illinois was rated the most troubled pension system during the study period, with a 54 percent funding level and a total liability of more than $54 billion.
In Pennsylvania, a series of decisions by the Legislature and governor have shielded taxpayers from much of the pain for the past decade, but costs of less than $1 billion a year now is projected to climb to about $6 billion annually in the coming three years. The report said policy makers have exacerbated the problem by expanding benefits, relying on overly optimistic assumptions about investment returns and failing to sufficient fund the programs. "Even though the actuaries tell the states what they should be doing, the states feel free to ignore that," said Olivia Mitchell, director of the Pension Research Council at the University of Pennsylvania's Wharton School. "So putting some teeth behind the requirements is really the problem."
Pew calculated a $587 billion national cost for current and future retiree health care and other nonpension retirement benefits, with only about 5 percent of that amount funded as of 2008. The cost of health care and the number of retirees are both on the rise, adding to the pressure on states. The study found that 15 states made some legislative changes to their state-run systems last year, 12 did so in 2008 and 11 in 2007. About a third of states had formal efforts to study potential reforms under way last year. "Pension plans work when they are allowed to work, and part of that dynamic is that sometimes adjustments have to be made," said Keith Brainard, research director with the National Association of State Retirement Administrators. "It's important not to take away decent retirement benefits for some of the few people that have them."
Pew said states should consider changes that have proven to be effective and politically viable. Among them: setting minimum contribution levels that are actuarially sound, sharing some of the investment risk with employees, cutting benefits, increasing the minimum retirement age, making employees pay more into the system and providing more robust oversight and investment rules. Mitchell said many states have constitutional prohibitions against lowering employee pension benefits, but health care programs can more easily be altered.
Jim Rogers on the Euro
Euro’s Unity Bid Hits Fine Print in Greek Debt Drama
The crisis stalking the euro economy began with a footnote. When the European Union predicted in 1997 that Italy’s budget deficit would exceed the threshold to qualify for the single currency, it buried in the fine print the observation that with "additional measures" the Italians could pass. They did, thanks to a one-time tax and a yen-denominated swap. It was an early example of the balance-sheet fiddling deployed since then by countries eager to share the benefits of a $13-trillion market and lower borrowing costs, yet unwilling to cede control over their budgets, wages and welfare systems.
Now Greece, by setting a standard for fiscal creativity, has exposed the flaws in Europe’s hybrid of monetary union and fiscal indiscipline. The crisis risks extending the euro’s 6 percent slide against the dollar this year, its expansion into eastern Europe and its prospects to challenge the dollar as an international reserve currency. Greece’s fiscal tragedy "reveals a lot of things that people didn’t want to look at, such as the lack of economic governance of the euro zone," said Pervenche Beres, a French member of the European Parliament who is sponsoring a resolution calling for tougher financial regulation. "If Greece falls apart, everything would fall apart. Nobody should allow this."
Harvard University’s Martin Feldstein was among economists who have cautioned since the currency debuted in 1999 that divergent economies couldn’t fit under a single roof. The union was led by a Germany that consented to give up its deutsche mark as long as the rest of Europe embraced the German aversion to debt that took hold after two world wars. Instead, each country went its own way: Germany, paced by such manufacturers as Volkswagen AG and Siemens AG, parlayed caps on labor costs and the elimination of exchange-rate risks into economic ascendance. Wolfsburg-based Volkswagen’s European sales rose 16 percent from 2006 to 2008 while domestic sales shrank 3 percent. Siemens, based in Munich, boosted the European share of its revenue to 41 percent in 2009 from 32 percent five years earlier.
German unit labor costs fell from 2004 through 2006 and rose only 2.2 percent in 2008, the year of the latest Eurostat figures. Labor costs jumped 4.3 percent that year in Spain, 3.9 percent in Greece and 3.4 percent in Portugal. The outcome was a skewed European economic map, with imbalances such as Spain’s current-account deficit of 9.6 percent in 2008 set against Luxembourg’s surplus of 5.5 percent. The intra-European mismatch resembles the divergences that sent the Italian lira plunging 40 percent against the mark between 1992 and 1995.
Greece, Spain and Portugal, buoyed by European Central Bank interest rates that never rose above 4.75 percent, rode a debt- fueled housing boom that went bust after Lehman Brothers Holdings Inc.’s collapse unleashed a global financial crisis. The shelter the euro provided Greece began to weaken. The government in Athens paid as little as 8 basis points, or 0.08 percentage point, more than Germany to borrow on Feb. 18, 2005. The gap reached 396 basis points last month and currently stands at 334. While the euro’s newness puts it at a heightened risk for shifting investor sentiment, doomsday scenarios of breakup are unfounded, said Simon Ballard, a credit strategist at Royal Bank of Canada in London. "Joining the euro is like frying an egg: once it’s fried you can’t put it back in the shell," Ballard said.
Investors pushed the euro down to a nine-month low of $1.35 on Feb. 12 as the Greek crisis unfolded. The currency remains above its inaugural level of $1.17 and is still overvalued by 16 percent against the dollar, according to a Bloomberg index of purchasing power parities. The $1.35 low was breached today as the dollar rose to $1.3466 per euro after the Federal Reserve yesterday raised the discount rate charged to banks for direct loans for the first time in more than three years. Signs that Greece was an uneasy fit in the monetary union first emerged in 2004 when the government of Costas Karamanlis disclosed that its socialist predecessor had cheated on its euro-entry exam in 2000. It published phony data claiming the deficit was less than 1 percent of gross domestic product.
EU reaction to news that Greece’s budget had never gotten below the 3 percent ceiling showed how much power remains in national capitals. Greece went unpunished except for being told by the EU to tighten up its bookkeeping. At the same time, proposals to strengthen Eurostat, the bloc’s statistics watchdog, foundered on national opposition. Germany and France helped ease the rules when they forced through the relaxation of the anti-debt "stability pact" in 2005 after three years of deficits above the threshold. Now, the question of who’s in charge looms larger than ever. After a decade of haggling, the EU appointed Herman Van Rompuy of Belgium as its first full-time president last year and enacted a new decision-making framework.
Van Rompuy’s powers are of persuasion only. He has a staff of 12, no sway over the EU’s 123 billion-euro ($165-billion) budget, and no vote on policy decisions, not even in case of a tie. Tensions over who calls the shots -- all 27 leaders, or just the 16 using the euro currency? -- further blur his role. National governments continue to hold the purse strings. When Chancellor Angela Merkel went to Brussels last week to negotiate over a possible bailout for Greece, she was hemmed in by German high-court rulings that bar a further transfer of power to the EU and by a domestic political uproar over helping a country that won’t help itself.
"Not a single euro" of German taxpayer money should go to Greece, Horst Seehofer, head of the Bavarian affiliate of Merkel’s Christian Democrats, told a political rally in the southern city of Passau on Feb. 17. Added to German outrage was the disclosure that New York- based Goldman Sachs Group Inc., Wall Street’s most-profitable securities firm, helped Greece raise $1 billion of off-balance- sheet funding in 2002 through a currency swap that may have masked the deficit’s size. What resulted, at last week’s Greece-dominated summit in Brussels, was an EU pledge for "determined and coordinated action if needed" to prevent a sovereign debt disaster from destabilizing the economy, coupled with silence on what it would do.
As striking workers protested budget cuts in Athens, the EU declaration failed to shore up confidence in Prime Minister George Papandreou’s plan to shave the deficit by 4 percentage points in 2010 from an estimated 12.7 percent last year. Still, it would be a mistake to underestimate the EU’s resolve to aid Greece and prevent the fiscal rot from spreading, said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest mutual fund from Newport Beach, California. "The very strong words that came out of the European community last week are not words that I would bet against," Bosomworth said in a Feb. 15 Bloomberg Television interview. "I don’t think the European Union is going to risk a repeat of Lehman within the monetary union." He declined to say how Pimco was investing.
The Brussels communiqué, negotiated by a group led by Merkel and Van Rompuy, also sharpened the dividing line between the euro bloc and the rest of the EU. The leader of the largest EU country using its own currency, U.K. Prime Minister Gordon Brown, wasn’t in the room. "The biggest single cleavage in the EU will increasingly be between those that belong to the euro and those that don’t," said Peter Ludlow, a historian and author of "The Making of the New Europe." That leaves the euro’s further expansion to eastern Europe -- after the EU took in ex-communist countries in 2004 -- a potential casualty of the Greek fallout. Already in 2006, Lithuania felt the collateral damage: it was barred from the euro because of 3.5 percent inflation, the first euro aspirant to be vetoed.
The next test comes with Estonia in April or May. Once a showcase economy with growth peaking at 10 percent in 2006, the EU’s second-highest rate that year, the Baltic nation’s GDP plunged an estimated 13.7 percent in 2009. Its bid to join the euro next year hinges on persuading the EU that the deficit won’t head back up after dipping to an estimated 2.6 percent last year. "It will be more difficult for the potential new members to join," said Esther Law, emerging-markets strategist at Societe Generale SA in London. "I expect them to be more strict with all the criteria and also to be more strict with the statistics."
Germany's Merkel: She's Got the Whole Euro in Her Hands
Angela Merkel has no children of her own, but in the inner circles of her political party she is called Mutti—"Mom." The 55-year-old German chancellor has managed to stay in power since 2005 by governing quietly, cautiously, and pragmatically from the center right of a country that prizes smooth cooperation among big business, big labor, and big government. Although supersmart—she earned a doctorate in physics as a young woman in Communist East Germany—Merkel likes to pose as an ordinary citizen, comparing her economic policies to those of a provincial housewife who simply wants to balance the family budget. She and Germany are well suited to each other.
Now Merkel and Germany face a crisis, originating in dysfunctional Greece. As head of Europe's biggest economy and the country that has ladled out billions to support the European Union, she has emerged as the key player in the drive to save Greece from default, stem the bond market attacks on the euro, and instill fiscal discipline in the euro zone's weakest members. "There's no one else who can really match her power," says Roland Berger, a Merkel adviser and founder of Munich-based Roland Berger Strategy Consultants.
Yet Merkel is also hemmed in by circumstances. To understand this crisis it helps to understand the limits of the European monetary union. From the beginning, financial leaders such as European Central Bank President Jean-Claude Trichet have controlled the single currency but not the national budgets of member nations; the EU, in other words, has tools of monetary policy at its disposal but not fiscal policy. And the 1991 Maastricht Treaty, which tried to impose fiscal sanity by limiting national deficits to 3% of gross domestic product, has been routinely flouted, most egregiously by the Greeks.
Without a clear mechanism for a bailout, Merkel says Germany won't give a single euro to Athens until Greece shows backbone and cuts its budget. German voters approve of this stance: For years they've been enduring painful industrial restructuring as well as cuts in the German welfare state; they're not in a giving mood. Germany Inc. wants Merkel to support a stable euro as well and avoid costly bailouts or loans that could seriously damage confidence in the currency. Says Josef Ackermann, CEO of Deutsche Bank (DB): "The economic and monetary union was set up as a hard currency union, and acceptance of the euro by the German population would be seriously undermined if it were turned into a soft currency."
Germany has fought hard for a credible euro that enjoys global standing. More to the point, letting Greece's woes wreck the euro would hurt German business, which has built much of its strategy around the euro zone. "The euro has helped increase financial stability in Europe," says Jörg Schneider, chief financial officer of Munich Re, the giant reinsurer. "We've had no currency crises like we saw before."
Until now. That's why Merkel, thrifty as she is, may still have to fork out billions in German funds even if Greece manages only halting reforms. She doesn't want to cave in to the Greeks, but she also cannot afford to let the euro get so hammered by further attacks that Spain, Portugal, and Italy—the entire southern flank of the euro zone—slide into fiscal collapse as traders short their bonds the way they did Greece's. Even after the European Union pledged to support Greece, nervous investors are demanding four extra percentage points of yield to hold Greek bonds instead of safer German ones. "I don't think anybody would be extremely worried about Greece for Greece's sake. But we are all extremely worried about Greece for the euro's sake," says Kurt Lauk, president of the economic council of Merkel's party, the Christian Democratic Union.
Not so long ago, another German chancellor, Helmut Kohl, faced a comparable but even costlier challenge: whether and how to bring the dysfunctional economy of the former East Germany, stunted and stunned by four decades of Communist rule, into political and economic union with the West. Kohl's solution—the trillion-dollar takeover called reunification—became the greatest and most controversial crusade of his life. It came to be hated by many West Germans, who resented its inefficiencies and costs, but eventually, fitfully, painfully, it worked. Eastern Germany came back to life; Kohl's vision knitted together East and West. Today, one of the people who embodies Kohl's achievement is the child of East Germany who became his protégé and successor: Angela Merkel.
If Merkel were to try to save southern Europe the way Kohl saved the East, her task would be no less arduous and only somewhat less expensive than his. To relieve the market's fears about Greece and the other fiscally feeble euro zone countries would require the EU to pledge more than $400 billion in potential aid, according to a report by French bank BNP Paribas. Germany would not have to pay all of that, but its share would be bigger than any other country's if such a rescue occurred.
Adding to the strain is a second problem that has received much less attention—the unstable imbalance between rich, export-dependent Germany and the indebted European countries that buy its goods, take its loans, and host its factories. That's not just Greece, but Spain, Portugal, Ireland, and Italy as well. If the intra-European imbalance isn't dealt with, the entire euro zone will be subject to even greater stresses. For Germany, in other words, the status quo that has been so profitable for so long is becoming perilous.
Since World War II, Germans have successfully studied, saved, invested, and sold high-quality goods to the rest of the world. BASF, Bayer, Bosch, Daimler (DAI), Infineon, Miele, Siemens (SI), SAP (SAP), ThyssenKrupp, and Volkswagen are just some of Germany Inc.'s marquee exporters. The Germans have sacrificed plenty to extend their success. When the nation joined the euro zone in 1999, unemployment was over 10% and the country was locked into monetary union at a time when the deutsche mark was overvalued. So Germany boosted productivity and clamped down on wage growth. "In effect they did a devaluation by improving their competitive situation," says André Sapir, a senior fellow at Bruegel, a Brussels-based think tank. Even as the euro strengthened against the dollar and the pound, German exports rose 65% from 2000 to 2008.
The trouble is that Germany's trading partners in the euro zone, which buy 43% of its exports, can't improve their competitiveness against the country by depreciating their currencies, the traditional remedy. In essence, by locking themselves into the euro, Germany's exporters have a currency that works very much in their favor. Greeks and Spaniards want German goods and don't have to pay in devalued drachmas and pesos to get them. The euro provides German companies other advantages as well. Says Frank Asbeck, chief executive of Bonn-based SolarWorld, a major maker of solar products: "We do two-thirds of our business in euro land. The currency makes things easier—no hedging, it's transparent, the business formalities are the same."
If Germany still had its old currency, the deutsche mark would doubtless be stronger than it is now, crimping its competitiveness against other European states. So inside Europe, Germany is in effect working with a currency that is undervalued and thus supercompetitive. That makes the country a lot like China, which has kept its exports cheap by pegging its currency to the dollar against the wishes of the American government. Last year, Germany's surplus on its current account—the broadest measure of goods and services—was 5% of GDP.
But the Greek crisis has exposed a flaw in Germany's business model. Seduced by membership in the euro zone, many of the country's trading partners overborrowed and overspent in the boom times. High inflation made their wages and products less and less competitive, especially against Germany. They can no longer afford to buy all those products without the ability to make some money selling something back to the Germans, or at least generating more exports in general. Their foreign debts—a reflection of the deficits they've been running—have been growing to unsustainable heights. They need more balanced trade. And so does Germany, which would be healthier if its citizens consumed more and relied less on exports for growth. "It's a pathology. The Germans are way too far in surplus," says Gary Herrigel, a University of Chicago political scientist specializing in Germany.
Clearly, something has to give. But what? In a Feb. 17 column in The Financial Times, Harvard University economist Martin Feldstein called for temporarily bringing back the drachma, letting Greece float its currency and set its own debt and interest-rate policies. But that option isn't on the table because it could lead to the breakup of the euro zone and the end of the decades-long movement toward European unification. Most Germans remain committed to being good Europeans, in part as penance for having plunged the Continent into two world wars in the 20th century.
If Germany's trading partners can't depreciate their currencies, they can only regain competitiveness quickly by lowering workers' pay. But that's disastrous for countries like Greece, where workers have taken on big debts, because it means employees have to pay back their loans with shrinking paychecks. The mix of debt and joblessness could trigger a downward spiral of defaults, bankruptcies, and bank failures. That would be lethal for the likes of Greece, and no good for Germany, either, because its companies need viable customers.
The alternative path for Merkel—call it the Kohl road—is bound to be unpopular at home. And its chances of success are far from assured. It would require Germany to ease the pressure on its trading partners by giving them more loans and outright aid while simultaneously buying more of their products to help those countries earn their way back to good health. Of course, Germany has been doling out money to poorer European nations for years, but many economists say it needs to go even further. "For their good fortune, they should share the wealth," says Adam S. Posen, a senior fellow at the Peterson Institute for International Economics in Washington. (Posen is also a member of the Bank of England's rate-setting Monetary Policy Committee and said his remarks are personal opinions, not British policy.)
This prescription raises a question: Can Spain, Greece, and the rest of the southern tier provide the goods and services, from Italian design to Greek island getaways, that Germans want to buy? Can these economies learn to innovate? Spain showed signs of doing so, but something, possibly bubble fever, slowly choked off its dynamism. Change won't come quickly, but if there is no change at all, these imbalances will only get worse. And they will slowly tear the euro zone apart.
Just as Kohl saved the East and then spearheaded the effort to introduce the euro, Merkel could aid the southern European countries now, continuing Kohl's tradition of enlightened self-interest. Geopolitically, Germany cannot be strong if the rest of the Continent is weak, Marko Papic and Peter Zeihan, analysts for Stratfor global consultants, said in a Feb. 8 opinion piece. "The only way for Germany to matter is if Europe as a whole matters," they wrote.
Not surprisingly, Germans resent being asked to open their wallets to Greeks who, in their view, behaved irresponsibly and lived beyond their means. "I know the mentalities of the southern European countries very well, and I know exactly how they think and what concept of the world their thinking is based on. These are incompatible values," says Anton Boerner, head of Germany's BGA wholesale and export federation. "You don't get this into the heads of southern Europe's population."
Boerner may condescend, but he has a point. The Greeks, in particular, brought this mess upon themselves. Nevertheless, helping Greece and other stressed countries keep their economies intact and avoid debt-deflation spirals could be what's required to avoid a Continental meltdown. John Maynard Keynes, the British economist who diagnosed the Great Depression, argued that in a steep downturn, trade deficit countries aren't capable of bearing all the costs of correcting imbalances—trade surplus nations must share the burden. Another student of the Depression, American economic historian Charles P. Kindleberger, argued that free trade depends on an anchor country that's willing to be an importer and lender of last resort in a crisis. In this case, that would be Germany.
Merkel shows few signs of Keynesianism. She's taking a hard line with Greece. As for boldly reshaping Germany so it consumes more imports, that's not in her talking points either. Last October, a month after winning reelection as chancellor, she told a labor convention in Hanover that "Germany's strength lies largely in the fact that the Federal Republic is a center of industry and that it's an export nation." Lest there be any doubt, Merkel added: "All those who now say we've depended too much on exports are undermining our biggest source of prosperity and must be rebuffed."
For Germany to lead Europe out of its slump would require heavier deficit spending to stimulate the country's economy and suck in imports. Merkel's government expects the budget deficit to swell to 5.5% of GDP this year, almost double the 3% ceiling technically required of euro zone members. Although Germany could easily afford a spurt of further stimulus given its rock-solid AAA rating, Merkel has been heading in the other direction, seeking greater fiscal probity. That, too, goes over well with the aging German populace, which is piling up wealth for retirement. The chancellor pushed for last year's constitutional amendment restricting Germany's structural budget deficit to just 0.35% of GDP, which requires her to start shrinking the budget gap in 2011.
In other words, Merkel may have the whole euro zone in her hands, but it's not at all clear she welcomes the responsibility. "Merkel is being forced by events in the Greek crisis," says Fredrik Erixon, director of the European Centre for International Political Economy in Brussels. "In such a situation you can't do medium- or long-term planning. You just try to arrest the source of what's causing unrest in markets."
Merkel's reluctance to stretch Germany's balance sheet so European growth can be propped up may stem in part from her own history. She was born after the Nazi era and "views Europe less emotionally" than her mentor, former Chancellor Kohl, says Gerd Langguth, a Merkel biographer and political scientist at the University of Bonn. Adds Roland Berger: "She's not burdened by history. She's simply pragmatic. She knows what she wants and thinks what she does is in the interests of Germany and Europe. She is a European, yes, but Germany comes first."
Merkel's woman-of-the-people approach is what helped her win a second four-year term as chancellor in September. She and her husband, Joachim Sauer—a quantum chemist at Berlin's Humboldt University—are both in their second marriages after divorces. "Merkel comes across as utterly normal, and the average German can really relate to her," said Carl Graf von Hohenthal, a management adviser at the Brunswick Group and former deputy editor-in-chief of Germany's Die Welt newspaper, who has known her since 1990. "She dresses well but doesn't wear overly expensive clothes." Merkel wheels a shopping cart through her local food store, trailed by her security detail, at least once a month. She even bags her own groceries. "She doesn't smoke, she doesn't drink much—power is her thing," said Friedrich Thelen, former parliamentary editor of the business magazine Wirtschaftswoche and founder of Thelen-Consult, a Berlin-based business advisory group.
If power really is her thing, then Merkel knows that retaining it depends on keeping business happy. And while German taxpayers gripe about bailing out Greece, German companies are more sensitive to the losses they would suffer if Greece and other European nations slipped under. Case in point: Merck KGaA in October said unpaid receivables from Greek hospitals had surpassed 50 million euros, calling the unpaid debts a "very serious situation" that could affect margins in its drugs division. Some of Germany's biggest companies, such as automakers Daimler, BMW, and Volkswagen, or infrastructure equipment maker Siemens, sell their goods all over the world, so their fates aren't tied up in any one region. But the crucial small and midsize manufacturers, the Mittelstand, are very dependent on the health of the European market and want to see it keep growing.
German banks, too, are highly exposed to the risk of rising defaults. Hypo Real Estate Holding, nationalized by the German government during the financial crisis, has a large exposure to the sovereign debt of Portugal, Ireland, Italy, Greece, and Spain. Hypo Real Estate has some $5 billion in Greek public debt alone.
All of these problems are complicated by an unanticipated lapse in the economic recovery of Germany and Europe. In the last three months of 2009, German economic activity was flat and the euro zone grew at an annual rate of just 0.1%. Slow or nil economic growth makes Germans even more reluctant to extend aid to others. If the slowdown is bad for Germany, it's devastating for Greece, which is being asked to cut government spending at the same time that its economy is contracting—the opposite of the Keynesian prescription for recovery.
If Merkel does embrace a bigger role for Germany in the economic recovery of Europe, it will be because she has been persuaded that it's in the long-term interest of Germany to make its export markets healthy and stable again. The first step for Merkel would be to speak out more clearly on Greece. "We're past the point where constructive ambiguity is constructive," says the Peterson Institute's Posen. "It's not like you're going to scare the Greeks into behaving any different." Opponents of aid say that bailing out Greece would encourage future misbehavior by it and others. The solution to that so-called moral hazard is to make the conditions so onerous and the monitoring so intensive that no other country would be tempted by it.
Beyond that, Merkel could offer up a vision of a Germany that no longer depends on a business model of extracting its growth from abroad. History tells us that one way or another, Germany is going to have to open its wallet to end this crisis, as it has so often in the past. But simply handing out money won't fix the imbalances that caused the crisis. For years, skeptics in the U.S. and Britain have argued that the euro experiment was doomed to fail. Now even true believers are concerned that something must be done, and soon, to relieve the mounting stresses on the system. "A common currency is right for Europe. It is the ideas behind the euro regime which are rotten and dangerous," German economist Jörg Bibow, who teaches at New York's Skidmore College, wrote last year.
Merkel has built up credibility to burn as a defender of German interests. Germans know their "Mutti" is watching out for them. That puts her in the best position of anyone to tell the German people that the old ways aren't working anymore, and Germany must change. Her former boss had the guts to say that to his people. Will she?
About This Whole Goldman Sachs–Greece Thing
by: Heidi N. Moore
Thiss week, Goldman Sachs won the dubious distinction of being the first thing that has united Europe in the past 50 years, or maybe ever. Politicians in the European Union, including those from Greece, Italy, France, and others, jumped at the chance, in unison, to blame Goldman Sachs for their countries' disastrously mismanaged finances, long-lost derivatives deals, and leaving the toilet seat up that one time.
The Daily Telegraph in London even ran an article claiming that Italians think their country is controlled by Goldman Sachs — an impressive allegation coming from a nation that created the Mafia, and whose top politician, Silvio Berlusconi, also owns most of the television stations. (There are a lot of people and things waiting in line in the "controlling Italy" queue ahead of Goldman Sachs, is what we're saying.)
Still. The discussion of Greece and Goldman Sachs and derivatives is the kind of thing that gives you that sinking feeling of being barely informed and even less interested. So, as a public service, Daily Intel is providing you with a handy guide to the situation, just in case it comes up.
How did this all get started? Greece has been steadily falling deeper in debt for the past decade, because of general irresponsibility but also because of things like paying for the Athens Olympics. Greece also did very little to pay down its debt when times were good. In December, Greece announced it was in the hole to the tune of 30 billion euros, or 12.7 percent of the value of all the goods and services the country produces. The European Union started to freak out almost immediately and demanded that Greece cut pay for all its state workers.
Greece refused. Greece's troubles worried the European Union for several reasons. The biggest one is that if Greece defaulted, the euro would be worth less. According to EU rules, though, default is the only answer, because the consortium can't give any country money to save its own finances. And default is a pretty bad scene: Russia defaulted and nearly brought down the entire world's banking system. Argentina defaulted, and citizens stormed the ATMs.
At the same time, Greece's troubles were imitated and magnified by a whole bunch of other European countries: Portugal, Italy, Ireland, and Spain. Together, these troubled countries are called PIIGs (yes, pronounced PIGS). So the EU is facing a tough choice: break its rules and bail out Greece; or refuse to bail out Greece and then see it go down and the other PIIGs down with it, creating a vast European economic emergency.
So how did Goldman get involved? In 2001, the bank helped Greece structure some complicated deals to help the country manage its debt. Goldman didn't invent the swaps; they were pretty common, and Italy as well as other countries used them, too. In fact, the deals were indirectly blessed by Eurostat, the statistics watchdog of the European Union, which included similar deals in its official handbook, according to Risk Magazine. Essentially, Greece called Goldman to create a way to delay and reduce the heavy interest payments on Greece's debt.
Goldman's solution was to create currency swaps, which are deals in which a country or company will pay its debt in cheaper currency for a while. (The Wall Street Journal has a nice explainer here.) These swaps were completely legal. Greece and the ratings agencies approved Goldman's swaps. The only people who were not fully informed were investors: Greece didn't disclose the swaps in an official prospectus, Bloomberg noted, but that's because they weren't required to. The country did mention the swaps in its budget and told its parliament, though, according to The Wall Street Journal. Right now, scrutiny is pointed at Italy, which did similar swaps.
Wait, 2001? Yes. Greece hasn't done any of these swaps since 2001, and even rejected a proposal to do it in 2009. It's old news. In 2001, the Economist wrote an article about Italy gaming the system with similar swaps, and Risk Magazine wrote the definitive account of the Greek swaps back in 2003. It's fair to say that no one cared for the following seven years — until the current crisis caused Germany's Der Spiegel to do some Googling. Der Spiegel ran an article heavily based on the 2003 Risk article, and that set a number of big publications — including a would-be Goldman Sachs takedown by the Sunday New York Times — off and running to talk about these swaps and Goldman's role in them as the root of all evil. Risk recently ran an amused headline: "Greek woes revive seven-year-old swaps story."
Well, are these swaps evil? To paraphrase Bill Clinton, it depends on what your definition of "is" is. They don't look fabulous now that Greece is on the verge of default because it mismanaged its debt. But the swaps weren't illegal, and Goldman was giving its client — Greece — what it asked for. The bank followed all the rules to do it. True, the swaps weren't disclosed, but you can blame the Maastricht rules for that: No country has to disclose these swaps, and that's partly why they're so popular with politicians and also why you never hear about them in the popular media. The trend recently has been to slap down regulations on stuff that was okay before but looks bad now, and several countries including France have officials looking at these swaps for that reason.
So is this entire thing mostly political? Need you even ask?
Whew! Glad it can't happen here. Don't be so sure. Most countries like to avoid talking about the size of their deficits, and they like to make the deficits look smaller so that they can keep issuing government bonds without paying a lot to borrow the money from investors. Government bonds pay for things like infrastructure, schools, public transportation — and more recently, bailouts. In fact, the entire U.S. bailout of the financial system is funded by a weird government-bond-buying circle that makes it hard to track our debt: The Federal Reserve created the financial-system bailouts, then Treasury issues bonds to pay for the bailouts, and the Fed buys the Treasuries to pay for the bailouts, which, you'll remember, the Fed created.
Then there's Fannie Mae and Freddie Mac, which are wards of the state. The Fed has been the biggest buyer of Fannie Mae and Freddie Mac bonds in order to prop up the housing market; banks, knowing this, spent much of the year buying up Fannie Mae and Freddie Mac bonds to sell back to the government at a higher price, knowing the Fed would pay through the nose if necessary. Almost certainly, the Fed has paid more than it has to for some of these bonds because it is the main buyer in the market.
In addition, Fannie and Freddie keep sinking into debt, but our government has ruled to exclude the two disastrous companies from our national deficit — no small matter when Fannie and Freddie have something like $6.3 trillion in liabilities. Then there's California, whose disastrous finances could bring the entire country down, according to an op-ed in the Los Angeles Times. Recently, Moody's Investor Service warned the U.S. that its vaunted triple-A credit rating might slip. Treasury Secretary Tim Geithner had to assure everyone that America wouldn't lose the valuable rating, which keeps our borrowing costs low. But even he can't be so sure.
Fuel shortage hits Greece amid strikes
Greek drivers queued for gas at the few stations still open Friday as a nearly weeklong customs strike protesting government austerity measures left many pumps running dry, while taxi drivers stayed off the streets in a 24-hour walkout. Customs workers initially walked off the job for three days Tuesday to protest salary freezes and cuts in bonuses and stipends. But on Thursday, their union declared three 48-hour rolling strikes that will keep customs offices shut through next Wednesday, when Greek workers across the country will hold a general strike.
The customs walkout has hampered imports and exports, but the supply of fuel has been the most affected. Many gas stations in Athens had run out of all fuel, while those that were still open were rationing the amount of gas given to each driver, with some imposing a euro20 ($27) limit per customer. Traffic policemen were posted at some gas stations in Athens as cars queued for hundreds of meters (yards). Taxis also held a 24-hour strike Friday, protesting parts of the austerity package that increased fuel tax and will force them to issue receipts.
Greek unions have been opposing the new Socialist government's harsh austerity measures, which were imposed in an effort to pull the country out of its worst debt crisis in decades - one that has seen its deficit swell to a massive 12.7 percent of economic output. European finance ministers warned Athens this week that it would have to impose even tougher budget cuts if its current measures don't manage to reduce the deficit to 8.7 percent this year. Athens has until March 16 to report back to the EU on its progress.
The personal cost of Greece's debt crisis
Markopoulo's dream of prosperity, conjured up by the 2004 Olympic Games, evaporated when Greece entered its first recession in 16 years. This one-time rural backwater east of Athens has gone from Olympic boom-town to economic gloom-town in barely five years. Markopoulo's dream of prosperity, conjured up by the 2004 Olympic Games, evaporated when debt-stricken Greece entered its first recession in 16 years. "In 2004, there was a lot of work," said building contractor Yannis Evangeliou, 55, perched on the second floor of a site he is overseeing, one of the few in activity in the nondescript town of 10,000 souls. "Now people are just sitting around in cafes, they have no jobs," he said. "We don't go out as much. We buy fewer clothes. We're really careful (with money) because we have kids. What else can we do? Stop eating?"
The Games triggered a construction boom in the sun-drenched town, as a new motorway connection to Athens, proximity to Olympic venues and the country's main airport and to crystal-blue waters brought hopes it would become a new hub. But as Greece's debt crisis has amplified the global downturn, people have stopped moving to Markopoulo. Credit has tightened, tourism dried up and construction almost stopped. In her coffee and cheese-pie snack bar near the central square, Vassiliki has cut all prices by 20 per cent, selling the Greeks' favourite ice cold frappe coffee for just 1 euro. Still, customers are scarce. "We do this for people to make it through the crisis," Vassiliki said as few passers-by strolled past empty shops. Like several other residents, she declined to give her full name, either out of small-town caution or because some were migrants.
Greece's €250-billion ($338.9-billion) economy contracted by an estimated 2 per cent last year, less than the average 4-per-cent drop in the euro zone. But the impact has been felt harder since jitters over Greece's ability to repay its debt mountain shook markets. Fear of the crisis has become a self-fulfilling prophecy, residents and shop owners said. "Since they said there was a crisis, people have stopped spending," said 31-year-old waiter Dimitris Christodoulou, serving fish in a restaurant in Porto Rafti port. Conservative New Democracy mayor Fotis Magoulas said even those who could afford to were no longer spending or investing. "People are in shock. It's also psychological," he said. "We are being bombarded with messages that it's very difficult, about the recession, the IMF. People are scared."
Unemployment in Markopoulo has risen to around 10-12 per cent from a mere 3-4 per cent during the Olympics, he said. Hammered for months by markets over sharply deteriorating public finances, the socialist government has announced a series of deficit-cutting measures including fuel, tobacco and real estate tax hikes and a public sector wage freeze. In the streets and cafes of Markopoulo, many residents agreed that time had come for some belt-tightening. Nicoletta Tzobanouli, 35, cramped inside a minuscule kiosk selling sweets and newspapers, made light of adversity. "I always felt squeezed in here so I'm not afraid to be further squeezed," she said. "I agree with the measures, as long as they take us out of the crisis."
Polls show a majority of Greeks back the government's plan, although trade unions have called a general strike on Feb. 24. But many Markopoulo residents say they want quick results and their patience with austerity measures would be limited. "We will accept them for now. Protests look extreme at this point, but in a year or so we may take to the streets," said Andronicos Ioannidis, 62, sitting in his empty photography shop. EU pressure for the austerity plan has angered some who say the best way out of crisis was to restore economic growth. "They are asking for harder and harder measures but this has a time limit. There has to be growth ... you can only kill a cow once but you can milk it forever," said local council opposition leader Nikos Sourbatis. "Now they (EU governments) are trying to kill the cow."
Worryingly for Prime Minister George Papandreou, who faces the prospect of having to impose still tougher measures on his core electorate, Mr. Sourbatis is a member of the governing PASOK socialist party. Even those residents who acknowledge that most of Greece's woes were self-inflicted say pressure from Brussels is driven partly by envy at their easy-going Mediterranean lifestyle, and feel entitled to more European solidarity. "The EU sees how much we've spent all these years, that we had more fun than others and they don't want to give us money," said Mr. Evangeliou, the building contractor. "But they have to support us since we are EU members, they have to help us."
Rumors Heat Up in Europe that Goldman Sachs and John Paulson Are Waging Attacks on Greece
by Kevin Connor
The rumors of a possible partnership by John Paulson and Goldman Sachs in the speculative attacks on Greece, which I first reported on last week, are now heating up in Europe to the point where one French journalist has multiple sources corroborating them. No one can point to hard evidence, just yet, because these are opaque, unregulated markets. But the news is quickly rising above the status of rumor.
The French financial newspaper Les Echos picked up on my post on John Paulson and Greece yesterday. Here is my (rough) translation:There aren’t just suspicions that Goldman Sachs is speculating against the Greek debt through the market for credit default swaps (CDS). After having made $3.7 billion dollars by betting on the subprime market, the hedge fund manager John Paulson has been cited as a partner of Goldman Sachs in the Greek market. According to the activist Kevin Connor, co-director of the think tank the Public Accountability Initiative, based on article in the British and Greek press, Paulson’s funds have taken large/important positions in the Greek debt market through a team of 20-30 traders.
My original post pieced together information from several Greek and British articles which were reporting on Paulson and Greece; these were largely still rumors, though an article in the Greek newspaper To Vima seemed to report the news with more certainty.
But there is now even more evidence that this is, in fact the case, as pieces like the Les Echos article appear to have given a French financial journalist cover to out Goldman and Paulson as the large American bank and hedge fund that are waging the attacks on Greece (h/t Naked Capitalism). A source had told the journalist, Jean Quatremer, that Paulson and Goldman were behind the attacks, but told him not to name names. Now that the rumors are more specific, actually pointing to Paulson and Goldman, he reports that he has multiple corroborating sources.
Here is the translation, from commenter Francois T at Naked Capitalism:On February 6, on this blog, I wrote that Greece was victim of speculative attacks on the part of a large Bank of American business and hedge funds betting on a default in payment of Athens. Until then, we certainly knew that there was speculation, but no one had yet managed to put a name to those who sought to destabilize Greece and the euro area. At that time, my informant had discouraged me to mention names, which was quite frustrating, for you and me. However, since then, market rumors have become more precise and their names, openly cited in the media, even if it is with good reason, very carefully. The Greek Government itself accuses them openly. I can therefore confirm that, according to concurrent sources, Goldman Sachs and speculative Fund managed by John Paulson would be the two main actors of these attacks against Greece and the euro. I have already detailed you in my post from February 6 the speculation mechanism.
More shocking, in this case, is without doubt the role played by Goldman Sachs, whom, at the same time it was advising the Greek Government, secretly took contrary positions against Greece and the euro. This murky behavior is illustrated by the recent case recalled by February 8 Spiegel and the New York Times February 14(1): in 2002, the Bank of American case helped Greece, against remuneration of 300 million dollars in "creative accounting" operation designed to cover up some of its debt (I will come back to this topic in a future column).
There’s more — read the whole translation here or the original here.
If this is true, it is, indeed, shocking that Goldman Sachs is both advising Greece and taking massive short positions against the country, but as I’ve noted before, it is no more shocking than what happened with AIG and the subprime game, which also brought the bank together with John Paulson in a fateful, lucrative, and immensely destructive partnership.
Quatremer also makes the allegation that the speculators may have orchestrated a series of leaks, published in the Financial Times, that suggested Greece had hired Goldman for a private placement of debt — a fairly desperate measure — and China refused to buy. This agitated markets and left the speculators in a much stronger position:Remember also that on 25 January, Greece had managed to sell 5 years notes for an amount of 8 billion euros whereas they were only aiming for 3 billion: demand, however, reached EUR 25 billion! Goldman Sachs was part of the consortium that placed the Greek paper. So far, nothing unusual here. It is then that a curious fact occurs.
After this spectacular success, everyone thinks that the markets are reassured, since they implicitly express that they believed a Greek default is not in the cards. And indeed, there is a lull. However, as soon as Wednesday, another storm hit the markets. An article in the Financial Times, the only paper read by market, operators has indeed just assert that China refused to buy EUR 25 billion of Greek debt, a ‘private placement’ by… Goldman Sachs. What is it? When a Government is concerned that it won’t be able to sell its debt directly to investors, it asks a bank (or consortium of banks) to do so on its behalf. It is a sign of panic. And the fact that Beijing would have declined the offer would be downright alarming. In short, two reasons to flee from Greece markets. The Chinese denied the news, but markets still required Athens a higher risk premium. Those who orchestrated the leaks gained on all fronts: their loan suddenly became more profitable, as well as their CDS, these "insurance" instruments supposed to guard against a default of the borrower (see my post on February 6)
This sort of media manipulation may seem somewhat conspiratorial, but it is perfectly believable in the world of finance (also believable, I suppose, that someone is spreading false rumors about Goldman and Paulson). Information drives market conditions, and by releasing information strategically, “credible” sources (such as powerful investors) can move markets in their preferred direction.
During the subprime days, Goldman played journalists like a fiddle, suggesting that the subprime sector would recover and making moves to buy lenders at the same time that they were privately making extremely bearish bets on the mortgage sector. These (apparently highly deceptive) professions of faith in the mortgage industry may have helped lower the cost of any protection they bought, essentially helping them find suckers to take the other ends of their bets. I’ll have more on this soon.
Greek MPs lash out at Germany over debt crisis
Greek opposition lawmakers said on Thursday that Germans should pay reparations for their World War Two occupation of Greece before criticising the country over its yawning fiscal deficits. "How does Germany have the cheek to denounce us over our finances when it has still not paid compensation for Greece's war victims?" Margaritis Tzimas, of the main opposition New Democracy party, told parliament. "There are still Greeks weeping for their lost brothers," the conservative lawmaker said during a debate on a bill to clean up the country's discredited statistical service.
Chancellor Angela Merkel's government has so far deflected appeals to promise aid to heavily indebted Greece, despite fears that failure to help Athens could threaten the euro. Merkel's stance is backed by opinion polls showing that a vast majority of Germans oppose a bailout, and Germany's biggest selling daily Bild has lambasted Greece as a nation of lazy cheats who should be "thrown out of the euro on their ear". But Greek lawmakers from three left-wing and conservative opposition parties said Germans had no right to claim the moral high ground.
Six deputies from the small Left Coalition party urged the government to press Berlin over the reparations issue and blamed German banks and politicians for Greece's crisis. "By their statements, German politicians and German financial institutions play a leading role in a wretched game of profiteering at the expense of the Greek people," they said in a written question to the government. Responding to criticism that Greece fiddled its figures to get into the euro in 2001, communist MP Nikos Papaconstantinou asserted that Germany was not above using such tricks itself. "As if we didn't know that Germany inflated the value of its gold reserves to get into the euro," he said.
In 1960, Germany paid Greece about 115 million deutschemarks to compensate victims of Nazi persecution. However, some Greek pressure groups say this did not cover civilian victims of reprisals and a forced occupation loan. Finance Minister George Papaconstantinou refrained from joining the attack on Germany. "We all have our criticism as to how public opinion in one or the other country perceives the Greek problem," he said during the debate. He added that New Democracy, which is allied with Merkel's Christian Democrats in the European People's Party, should have addressed any criticism to Germany while it was in government until last October.
US Postal Service foresees insolvency - unless Congress acts
The U.S. Postal Service could become insolvent if Congress doesn't approve five-day mail delivery and change the way the agency funds its retiree health benefits, according to the agency's top financial official. "We will need [some assistance from Congress] or we will have difficulty paying all of our obligations this year," said Joe Corbett, the Postal Service's chief financial officer. "And going into next year, we might not have enough cash to operate. ... We are dangerously close to running out of cash."
The Postal Service posted a $297 million loss for the first quarter of fiscal 2010, which ended Dec. 31, 2009. Mail volume for that period fell by 8.9 percent. But that was an improvement over the previous quarter, when volume fell by 12.4 percent; and over the first quarter of 2009, when volume dropped 9.3 percent. But the bigger financial picture for the Postal Service remains grim: mail volume has dropped from a peak of 212 billion pieces in 2006 to just 167 billion pieces today. And Corbett said the agency, which has faced multibillion-dollar deficits in the last few years, is running out of ways to cut costs.
Managers have already slashed 28 million work hours in fiscal 2010, and they're on pace to cut 93 million in total this year — the equivalent of roughly 52,000 full-time employees. Those cuts come on top of the 115 million work hours that were cut in 2009. The Postal Service doesn't plan any layoffs; Corbett said those cuts will come through attrition. The largest cuts in the first quarter come from mail processing positions, where work hours are down 14.2 percent compared with 2009, and customer service jobs, where hours are down 12.5 percent. City and rural delivery hours are down 5.8 percent and 4.6 percent, respectively.
To further reduce delivery costs — which account for nearly $30 billion in annual expenses — Corbett said the Postal Service needs Congress to approve a switch to five-day delivery, which could save roughly $3 billion in annual expenses. "If we had full freedom on five-day delivery ... we could save a lot more money and a lot more hours than we are today," Corbett said. "But given the constraints we're operating under, our staffing is where it needs to be. Legislators have generally resisted that switch, though, and President Obama's 2011 budget request calls on the Postal Service to continue six-day delivery. Corbett dismissed that as "template language" — "it's the same language that has been in the appropriations bill each year," he said — but he acknowledged that the White House isn't on board with five-day delivery yet.
Postal managers also hope Congress acts this year to reduce their retiree health care obligations. The Postal Service is required to contribute roughly $5.5 billion this year into a fund for future retiree health care. But the agency can't afford to make that payment — and a recent study from the Postal Service's inspector general said it probably doesn't need to make the payment: The Postal Service will overpay nearly $75 billion into the fund over a 10-year period, according to the study.
Corbett said the agency needs both changes — five-day delivery and a retiree health care change — to pay its bills. What's more, even with a switch to five-day delivery and a substantial change in the retiree health benefits program, the Postal Service still wouldn't be profitable. "Break-even is not the goal. We're going to have $15 billion in debt next year," Corbett said. "We need to start repaying that debt." The Postal Service expects to hit $13.2 billion in debt by the end of this year — and it will likely reach its congressionally imposed $15 billion debt ceiling sometime in fiscal 2011. The interest payments alone on that debt will top $300 million, Corbett said, and could grow if short-term interest rates — currently at historic lows — rise.
Despite the prognosis, Corbett said he was pleased to see the pace of decline slowing in the last quarter. "It's the beginning, we hope, of a trend," Corbett said at a breakfast Wednesday with a small group of reporters. "We're still seeing a decline in mail volumes, but the decline has abated somewhat in the fourth quarter of 2009, and also significantly in the first quarter [of 2010]."
The US battle to pull the props
by Gillian Tett
Could the Obama administration’s plans to curb "proprietary trading" produce a nasty jolt for the US Treasuries market? If Bob Diamond, head of Barclays Capital, is to be believed, there is a risk it might. Last month, Paul Volcker, a key Obama adviser, startled Wall Street by warning that the US government was keen to curb how deposit-taking institutions make proprietary bets. Exactly what Congress will end up defining as "proprietary trading" is still very unclear; so, is the precise list of banks that would be caught within that net.
But groups such as Barclays Capital, are clearly uneasy. After all, as Mr Diamond was at pains to tell regulators in Davos late last month, if the authorities impose a truly sweeping definition of proprietary trading that could discourage them from acting as market makers in sectors such as US Treasuries. And that, in turn, might make it harder for the US government to sell all its government bonds to global investors. Or so Barclays claims. "The US has about $8 trillion of debt outstanding and $4 trillion is coming due in the next few months," Mr Diamond warned. "There is a real need for banks like Barclays to be providing liquidity."
It is a canny political pitch. One of the most remarkable consequences of Barclays decision to buy the American operations of Lehman Brothers is that the "British" bank has become one of the largest players in the US government bond market. It is now dawning on US politicians how far the US government is exposed to "roll-over risk" – and how it can ill afford a glitch in debt sales. With the average maturity of US debt now having slumped to just 50 months, due to a flood of short-term issuance, Washington will need to keep flogging debt at top speed in the coming years – and will thus need all the market-making it can get. I would bet, in other words, that there is little chance that "proprietary trading" will ever be defined within the Volcker plan as something which could curb market making. The administration has almost said as much, seeking to calm Wall Street with comments that market making will be exempt from any clamp down.
But as the political jostling – and lobbying gathers place - the more important sector to watch might yet be the securitisation world. To most non-bankers, the word "proprietary trading" conjures up images of sharp-fanged bankers or hedge funds darting between assets, eager to make a quick buck. However, in practice the big concerns of global regulators may lie elsewhere. After all, what blew the really big holes in the balance sheet of banks such as Citi, Merrill Lynch and UBS back in 2007 and 2008 was the fact that these banks had all taken huge quantities of so-called "super senior collateralised debt obligations" (or supposedly safe mortgage assets) onto their trading books. While those trading books were supposed to be used for short-term deals (including "proprietary activity"), in practice those CDO assets were held for a long time, using the bank’s own capital.
This move was driven partly by necessity (the banks could not flog the super-senior assets anywhere else). However, another crucial issue was that Basel capital rules allowed banks to hold these items in their "trading book" with virtually no reserves, whereas provisions would have been demanded had these instruments been placed in the normal banking book. So, in light of that, international regulators linked to the Basel committees are eager to dramatically tighten trading book rules, to force banks to hold more capital. And this might yet give a new twist to Volcker’s plans. Most notably, if the Obama threat to clamp-down on "proprietary trading" can be redefined as an attack on the abuse of the "trading book", then groups such as the Basel committee will almost certainly lend their support. And if the debate does then move into that redefinition of "proprietary trading" then the banks will find it hard to fight back.
That will undoubtedly please some US politicians. However, there is one catch. One key reason why credit was so cheap in the early years of this decade was that banks were pumping out CDOs. And a central factor behind that was that it was cheap – and easy – to produce CDOs when banks kept burying the super-senior debt on their own books, or with entities such as AIG. However, if the trading book rules are radically reformed, some of the economic incentives behind that CDO trade fall apart. That does not necessarily kill securitisation debt: some "real" buyers will keep buying this stuff, at a price. But it will make it harder for banks to pump out credit so cheaply. That would be no bad thing. After all, the noughties’ credit bubble was indeed crazy. But I would hazard a bet that very few American politicians have fully realised all the potential unintended consequences of a ban on "proprietary trading", however it is defined. Stand by for plenty more political arguments around the Volcker plan; and for more lobbying from Barclays – and others.
BofA’s New Settlement With SEC Smells Even Worse
by Jonathan Weil
Here’s hoping Jed Rakoff hasn’t lost his nerve. The U.S. district judge from Manhattan became a folk hero for investors when he said no to a cozy settlement last year between the Securities and Exchange Commission and Bank of America Corp. He’ll get another chance this week, when he is scheduled to rule on the agency’s latest try at a deal. Last go around, the SEC proposed that Bank of America pay a $33 million fine for failing to disclose that it had authorized as much as $5.8 billion of bonuses for Merrill Lynch & Co. employees before shareholders voted in December 2008 to approve its purchase of Merrill. Now the commission wants Bank of America to pay a $150 million fine for the same purported violations, plus some additional allegations the agency has thrown into the mix. Rakoff should tell the SEC to get lost.
Once again, the agency is saying it can’t find a single person who should be held liable for these alleged misdeeds. It’s as if the corporate person broke the rules, while the living, breathing people in charge of running Bank of America and Merrill had nothing to do with it. That shouldn’t fly today anymore than it did last September when Rakoff issued his first ruling, in which he said the initial settlement proposal was "neither fair, nor reasonable, nor adequate." It’s when you dig through the weeds of the allegations that the absurdity of the commission’s case comes through.
The rules that the SEC says Bank of America violated are known as 14a-3 and 14a-9. The first specifies the information that must be furnished to shareholders in a proxy statement. The second one prohibits false or misleading statements in proxies, as well as omissions of material facts. The SEC says Bank of America violated both by failing to reveal the Merrill bonuses. Additionally, the agency says the company violated 14a-9 by failing to disclose billions of dollars of losses that Merrill sustained in October and November 2008, before shareholders voted.
Here’s the rub. To prove violations of those rules, as the commission and the courts have said many times, all that the SEC would have to show is negligence, which is a fairly low hurdle to clear. It wouldn’t matter if a defendant acted in good faith, or if the lack of disclosure was unintentional. It would be just about impossible to believe that Bank of America violated these rules through its own negligence without also concluding that at least one of the bank’s bosses acted negligently, too. Yet, going solely on the SEC’s allegations, that supposedly is what happened. It’s enough to make you wonder whom the commission is trying to protect, or whether the agency’s lawyers are too chicken to sue people who might demand a trial.
If the SEC can’t or won’t make a case against any of the executives or board members who were in charge at the time, then it doesn’t make sense for the agency to be suing the company itself, let alone fining it $150 million. It’s not as if the SEC’s enforcement division never files claims against individual officers and directors for violating these particular rules. I found dozens of such complaints when I searched the commission’s Web site, including one settled in 2005 against Tyson Foods Inc.’s former senior chairman, Don Tyson.
The SEC has tried to win Rakoff over by proposing a bunch of thumb-sucker corporate-governance requirements for Bank of America, including heightened independence rules for members of its board’s compensation committee. Additionally, to ease the stench of the $150 million fine -- which punishes shareholders for management’s offense of misleading them -- the SEC plans to sink the money into a separate fund and redistribute it to those Bank of America stockholders who were harmed. That’s window-dressing for a deal in which the SEC has shrunk from its duty to enforce the rules against the people who break them, assuming the agency is correct in saying they were broken.
Meanwhile, New York Attorney General Andrew Cuomo’s office has filed a lawsuit contending that Bank of America acted fraudulently -- not merely negligently -- and that its former chief executive officer, Ken Lewis, and former chief financial officer, Joe Price, did, too. (The defendants deny the claims.) Maybe when that suit is over we’ll have some better idea of what actually transpired here. At least Cuomo’s allegations have the semblance of being logically consistent. The SEC’s case is anything but. That alone should be reason enough for Rakoff to deny the commission’s wishes. The burning question is whether he’ll have the guts to do it twice.
The Federal Reserve's Exit Strategy: Unlegislated Bailout of Fannie and Freddie by John Hussman
"In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting standards for transfers of financial assets (SFAS 166) and an amendment to the accounting standards on consolidation of variable interest entities (SFAS 167). Both amendments are effective and will be applied prospectively by the company on January 1, 2010 … Under these accounting standards, the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of September 30, 2009… While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth."
- Freddie Mac, September 30, 2009 Quarterly 10Q Report
"We do not expect to operate profitably in the foreseeable future"
- Fannie Mae, September 30, 2009 Quarterly 10Q Report
"At the time the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship in September 2008, Treasury established Preferred Stock Purchase Agreements (PSPAs) to ensure that each firm maintained a positive net worth. Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years."
Treasury Update on Status of Support for Housing Programs, December 24, 2009
"All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities."
- Federal Reserve Chairman Ben Bernanke, "Federal Reserve's Exit Strategy"
Testimony to House Financial Services Committee, February 10, 2010
Let's put two and two together here. Fannie Mae and Freddie Mac are already insolvent, and face "significant negative impact" on their net worth resulting from the required consolidation of "off balance sheet" loans into their financial reporting, which will take effect in financial statements for periods beginning January 1, 2010. Over 60% of the U.S. foreclosure market now falls under the umbrella of these two entities.
Under the Housing and Economic Recovery Act of 2008 (HERA), Congress authorized the Treasury to provide sufficient funding to insure up to $300 billion dollars of original principal. Yet in a move that was clearly no part of Congressional intent, the Treasury has announced that it will allow this commitment to "increase as necessary to accommodate any cumulative reduction in net worth over the next three years." Coincident with this, the Federal Reserve has accumulated nearly $1.5 trillion of Fannie Mae and Freddie Mac securities (MBS and agency debt), which is has no plan to liquidate other than lip service. Rather, it is allowing these securities to run off through maturity and pre-payment. Of course, the funds to pay off those maturing securities will largely come from the Treasury. Meanwhile, Bernanke has made it clear that the most important tool of the Fed during the interim will not be liquidation of these securities, but instead the payment of interest on bank reserves.
If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.
Below is a chart of the composition of the Federal Reserve's balance sheet, in billions of dollars. Against these assets, the Fed creates currency and bank reserves, which comprise the "monetary base." Clearly, the volume of Fed-supplied stabilization funding in the system is still enormous. As James Hamilton has observed, "it seems not coincidental that, when you look at the total of all the assets the Fed is holding, the expansion of MBS purchases exactly offsets the declines from phasing out the short-term lending facilities. As a result of the MBS and agency purchases, the total assets of the Federal Reserve today exceed the total reached at the peak level of activity for the lending facilities in December 2008."
How will the Fed "unwind" this position? Given the additional information of the past few weeks, we can update the steps that I suggested in A Blueprint for Financial Reform
How to spend (up to) $1.5 trillion without Congressional approval (updated)
Step 1: Federal Reserve purchases $1.5 trillion in Fannie Mae and Freddie Mac securities, creating $1.5 trillion of monetary base to pay for these purchases.
Step 2: U.S. Treasury quietly announces unlimited 3-year support for Fannie Mae and Freddie Mac on December 24, 2009, indicating that it is acting under the authority of a 2008 law (HERA) that was originally written to insure a maximum of $300 billion in total mortgage principal (not losses, but principal).
Step 3: Fed Chairman Ben Bernanke testifies to the House Financial Services Committee on February 10, 2010 that "I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities." During the interim, the Federal Reserve indicates that it expects to limit the extent to which banks lend out the base money created in Step 1, through a policy of paying interest on bank reserve balances.
Step 4: On February 11, 2010, with Treasury backing in place, Fannie Mae and Freddie Mac (whose delinquency rates have more than doubled over the past year) announce the purchase of $200 billion in delinquent mortgages that they had previously guaranteed. The entire remaining principal balance will be paid to investors at face value. This action provides a glimpse into the future: Fannie and Freddie take bad mortgages onto their balance sheets, extinguish the MBS securities at face value, and rely on Treasury funding to fill the gap.
Step 5: In the next few years, the U.S. Treasury can be expected to issue up to $1.5 trillion in new Treasury debt to the public, taking in much of the $1.5 trillion in base money created by the Fed in Step 1.
Step 6: Proceeds (base money) received from new Treasury debt issuance are periodically transferred to Fannie Mae and Freddie Mac in order to cover cumulative balance sheet losses.
Step 7: Over a period of years, Fannie Mae and Freddie Mac use the proceeds to redeem mortgage securities held by the Fed, thus reversing the Fed's transactions in Step 1, without the need for liquidation or any other "unwinding" transactions. If the MBS securities extinguished in Step 4 are not directly held by the Fed, the Fed can be expected to simultaneously sell an equivalent amount of its own holdings out to the public, so that the publicly held stock of MBS remains constant. In any event, the base money created by the Fed ultimately comes back to the Fed, and the mortgage securities purchased by the Fed disappear, by burdening the American public with a new, equivalent obligation in the form of U.S. government debt.
Outcome: The Federal Reserve closes its positions in Fannie Mae and Freddie Mac securities, the quantity of outstanding Fannie Mae and Freddie Mac liabilities declines by as much as $1.5 trillion, thus allowing their remaining assets repay the remaining liabilities despite insolvency, and the outstanding quantity of U.S. Treasury debt expands by as much as $1.5 trillion in order to protect the lenders, while ordinary Americans continue to lose their homes and jobs.
This would all be really clever if it weren't so insidious.
On Bloomberg television last week, James B. Lockhart III, the former head of the Federal Housing Finance Agency (Fannie and Freddie's regulator) commented on the bailout funds already provided to Fannie and Freddie, saying "Most of that money will never be seen again. They were just allowed to leverage themselves so dramatically."
Stripping away the disguise of derivatives
by Satyajit Das
Reaction to revelations that Greece used derivatives to disguise its true level of borrowing is reminiscent of Captain Renault (played by Claude Rains) in Casablanca: "I am shocked, shocked to find that gambling is going on in here." Use of derivatives to disguise debt and arbitrage regulations and accounting rules is not new. In the 1990s Japanese companies and investors pioneered the use of derivatives to hide losses – a practice called "tobashi" – "to make fly away". Derivatives, such as interest rate and currency swaps, are used to alter the interest rates and currency of the cash flows on existing assets or liabilities.
Transactions entail exchanges of one stream of payments for another. At the commencement of the transaction, if the contract is priced at current market rates, then the current (present) value of the two sets of cash flows should be equal (ignoring any profit). The contract has "zero" value – in effect, no payment is required between the parties. Using artificial "off-market" interest or currency rates, it is possible to create differences in value between payments and receipts. If the value of future payments is higher than future receipts, then one party receives an upfront payment reflecting the now positive value of the contract. In effect, the participant receives a payment today that is repaid by the higher-than-market payments in the future. Any number of strategies involving combinations of different derivatives can achieve this effect.
Greece may be merely following the precedent of another Club Med member. In 2001 academic Gustavo Piga identified Italy’s use of derivatives to provide window dressing to meet its obligations under the European Union’s Maastricht treaty. In December 1996 Italy used a currency swap against an existing Y200bn bond to lock in profits from the depreciation of the yen. Italy set the exchange rate for the swap at off-market rates – at the May 1995 level rather than the current rate.
Under the swap, Italy paid a rate of dollar Libor minus 16.77 per cent reflecting the large foreign exchange gain for the counterparty. Given Libor rates of 5 per cent, the interest rate paid by Italy was negative. The swap was really a loan where Italy had accepted an unfavourable exchange rate and received cash in return. The payments were used to reduce Italy’s deficit, helping it meet the budget deficit targets of less than 3 per cent of GDP.
The Greek transactions are believed to be similar cross-currency swaps linked to the country’s foreign currency debt, structured with off-market rates. Analysts suggest that the cash received from the transactions may have reduced Greece’s debt/GDP ratio from 107 per cent in 2001 to 104.9 per cent in 2002 and lowered interest payments from 7.4 per cent in 2001 to 6.4 per cent in 2002. Securitisation, non-consolidated borrowers, private-public financing arrangements supported indirectly by the state and leasing of assets can also be used to disguise levels of debt. Although no illegality is involved, the arrangements raise important questions about public finances and financial products.
The episodes also raise questions of the skills of regulators and reporting agencies in understanding and dealing with complex financial structures. They highlight inadequacies of public accounting. Reported debt statistics fail to provide adequate information of the level of borrowing, the real cost of debt and future repayment commitments. Under international standards applicable to corporations, such an off-market swap would have had to be accounted for on a mark-to-market requiring greater disclosure, especially the large negative market value (representing future payment obligations) as a future liability.
Such arrangements provide funding for the sovereign borrower at significantly higher cost than traditional debt. The true cost to the borrower and profit to the counterparty is also not known, because of the absence of any requirement for detailed disclosure in derivative transactions. Derivative professionals argue that the instruments are used to hedge and manage risk. While they do play this role, derivatives are now used extensively to circumvent investment restrictions, accounting rules, securities and tax legislation.
Current proposals to regulate derivatives do not focus on this issue. The policy case for permitting such applications is not clear. As the so-called Greek Job highlights, simple borrowing and lending can be readily disguised using derivatives, exacerbating risks and reducing market transparency. Regulators need to heed the warning of the 17th-century French author Francois de La Rochefoucauld: "We are so accustomed to disguise ourselves to others that in the end we become disguised to ourselves."
Satyajit Das is the author of the recently released "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives"
Top Earners Averaged $345 Million in 2007, IRS Says
The 400 highest-earning U.S. households reported an average of $345 million in income in 2007, up 31 percent from a year earlier, IRS statistics show. The average tax rate for the households fell to the lowest in almost 20 years. The figures for 2007, the last year of an economic expansion, show that the average income reported by the top 400 earners more than doubled from $131.1 million in 2001. That year, Congress adopted tax cuts urged by then-President George W. Bush that Democrats say disproportionately benefit the wealthy.
Each household in the top 400 of earners paid an average tax rate of 16.6 percent, the lowest since the agency began tracking the data in 1992, the Internal Revenue Service statistics show. The top 400 paid $23 billion in taxes in 2007, up from $18 billion a year earlier, and a bigger amount than any year since 1992. Their average effective tax rate was about half the 29.4 percent in 1993, the first year of President Bill Clinton’s administration, when taxes were increased. The top 400 earners reported an average of $46 million of income that year.
The statistics underscore "two long-term trends: that income at the very top has exploded and their taxes have been cut dramatically," said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, a Washington-based research group that supports increasing taxes on high-income individuals. The top 400 earners received a total $138 billion in 2007, up from $105.3 billion a year earlier. On an inflation-adjusted basis, their average income grew almost fivefold since 1992, the data show. The data doesn’t disclose the identities of the top 400 taxpayers, and the people on the list change from year to year as their incomes rise and fall. Some 6,400 households have been included in the top 400 since the IRS began tracking their incomes 16 years ago.
The data may provide ammunition for President Barack Obama and Democrats led by House Speaker Nancy Pelosi of California who say they intend to increase the capital gains tax rate to 20 percent and let tax rates for the highest earners increase in 2011 to 36 and 39.6 percent from 33 and 35 percent now, respectively.
Almost three-quarters of the highest earners’ income was in capital gains and dividends taxed at a 15 percent rate set as part of Bush-backed tax cuts in 2003, the statistics show. Of the 400 earners, 289 paid a total effective federal tax rate of 20 percent or less in 2007, the last year for which figures were available, the data show. Bill Ahern, director of policy and communications for the Tax Foundation, a Washington-based research group that advocates lower taxes, said the 2007 data doesn’t reflect the current economic circumstances. "In a good year like 2007, it’s not surprising to see that the owners and managers of the nation’s largest firms made a fortune," Ahern said. "Notice that two-thirds of their 2007 income was in capital gains, which have dropped like a rock since then."
The data were previously reported by Tax.com, a blog run by Virginia publisher Tax Analysts. A household had to earn at least $143 million in 2007 to be included on the top 400 list, according to the IRS. At 16.6 percent, the top 400 earners pay a lower actual individual income tax rate than the rest of the top 1 percent of earners, according to a Congressional Budget Office study of effective tax rates in 2004 and 2005. The top 1 percent at that time -- those who made more than $1.3 million -- paid an average of 19.7 percent of their income in federal income taxes.
The 16.6 percent effective tax rate for the top 1 percent is higher than actual taxes paid by middle-income families, that CBO report showed. The middle 20 percent of earners -- those making between $58,000 and $84,500 -- paid on average 3 percent of their income in income taxes. When the effect of Social Security payroll taxes are counted, the tax burden on middle-income families increased to 12.5 percent, according to the CBO. Social Security taxes are collected on only the first $106,800 of income.
Unemployment: It All Depends on Whose Ox Is Being Gored
A study done by Northeastern University's Center for Labor Studies broke the unemployment rate down by income. Unemployment among those making $150,000 a year was only 3% in Q4 2009. What unemployment problem, right? The unemployment rate for those in the middle income range was 9%, about average for the nation. But here’s the kicker. The unemployment rate for those in the bottom 10 percent of income came in at a whopping 31%.
With only 3% unemployed at the top end, should we be surprised to see the infrastructure repair program ("Let’s Rebuild America") of the Obama Administration never got off the ground. Wall Street and Larry Summer didn’t like it. No one polled or asked those in the bottom 10% and they didn’t bother to tell us. Or, what about Obama’s $33 billion bone toss to the unemployed, paying that sum to all employers for hiring and pay raise incentives – mere cosmetic tokenism so the Administration can look like it’s is doing something when it isn’t. As Summers candidly explained, we will just have to wait for the economy to pick up before unemployment drops.
What if by some numerical fluke, the situation were reversed so that those making $150k or better a year had the 31% unemployment figure and the bottom 10% came in at 3% unemployed? Would Washington’s attitude and actions be the same? You can safely bet the farm not. We would have programs coming out of our ears. Arianna Huffington describes what the situation would be very well:If one-third of television news producers, pundits, bankers, and lobbyists were unemployed, would the measures being proposed by the White House and Congress still be this pathetic? Of course not -- the sense of national emergency would be so great you'd practically be hearing air raid sirens howling.
So tell me. Do we have a government of the people by the people and for the people? Or do we have a government of the wealthy by the wealthy and for the wealthy? No guessing here. In fact, if we want to keep the percentages equal in this analysis for the top and the bottom, unemployment in the top 10% came in at a staggering 1.6%! Staggering, because it is so small a figure! This is better by far than full employment for that group. As the authors of the Report noted:These stark findings clearly reveal the economics costs of underemployment in the current U.S. economy are disproportionately born by workers at the lower end of the income distribution. . . Thus underemployment contributes in an important way to the high and rising degree of income inequality in the U.S. . . There was no labor market recession for the nation’s affluent.
Again, we are not seeing "trickle down" economics working. It is more like trickle up economics, where the lower classes are losing income to the upper classes. But we know that and I have written on it before, at length here. It is part of economics' dirty little secret everyone is trying to ignore. This report really comes as no surprise at all. We should be ashamed of ourselves. Our government, with its professed ideals, is fast becoming a bad joke, at the expense of too many and a rapidly growing number of people.
Wall Street Oligarchs Eying Social Security
by Paul Craig Roberts
Hank Paulson, the Gold Sachs bankster/U.S. Treasury Secretary, who deregulated the financial system, caused a world crisis that wrecked the prospects of foreign banks and governments, caused millions of Americans to lose retirement savings, homes, and jobs, and left taxpayers burdened with multi-trillions of dollars of new U.S. debt, is still not in jail. He is writing in the New York Times urging that the mess he caused be fixed by taking away from working Americans the Social Security and Medicare for which they have paid in earmarked taxes all their working lives.
Wall Street's approach to the poor has always been to drive them deeper into the ground. As there is no money to be made from the poor, Wall Street fleeces them by yanking away their entitlements. It has always been thus. During the Reagan administration, Wall Street decided to boost the values of its bond and stock portfolios by using Social Security revenues to lower budget deficits. Wall Street figured that lower deficits would mean lower interest rates and higher bond and stock prices.
Two Wall Street henchmen, Alan Greenspan and David Stockman, set up the Social Security raid in this way: The Carter administration had put Social Security in the black for the foreseeable future by establishing a schedule for future Social Security payroll tax increases. Greenspan and Stockman conspired to phase in the payroll tax increases earlier than were needed in order to gain surplus Social Security revenues that could be used to finance other government spending, thus reducing the budget deficit.
They sold it to President Reagan as "putting Social Security on a sound basis." Along the way Americans were told that the surplus revenues were going into a special Social Security trust fund at the U.S. Treasury. But what is in the fund is Treasury IOUs for the spent revenues. When the "trust funds" are needed to pay Social Security benefits, the Treasury will have to sell more debt in order to redeem the IOUs. Social Security was mugged again during the Clinton administration when the Boskin Commission jimmied the Consumer Price Index in order to reduce the inflation adjustments that Social Security recipients receive, thus diverting money from Social Security retirees to other uses.
We constantly hear from Wall Street gangsters and from Republicans and an occasional Democrat that Social Security and Medicare are a form of welfare that we can't afford, an "unfunded liability." This is a lie. Social Security is funded with an earmarked tax. People pay for Social Security and Medicare all their working lives. It is a pay-as-you-go system in which the taxes paid by those working fund those who are retired.
Currently these systems are not in deficit. The problem is that government is using earmarked revenues for other purposes. Indeed, since the 1980s Social Security revenues have been used to fund general government. Today Social Security revenues are being used to fund trillion dollar bailouts for Wall Street and to fund the Bush/Obama wars of aggression against Muslims. Having diverted Social Security revenues to war and Wall Street, Paulson says there is no alternative but to take the promised benefits away from those who have paid for them.
Republicans have extraordinary animosity toward the poor. In an effort to talk retirees out of their support systems, Republicans frequently describe Social Security as a Ponzi scheme and "unsustainable." They ought to know. The phony trust fund, that they set up to hide the fact that Wall Street and the Pentagon are running off with Social Security revenues, is a Ponzi scheme. Social Security itself has been with us since the 1930s and has yet to wreck our lives and budget. But it only took Hank Paulson's derivative Ponzi scheme and its bailout a few years to inflict irreparable damage on our lives and budget.
Years ago with stagflation defeated and a rising stock market, I favored privatizing Social Security as a way of creating a funded retirement system and producing greater savings and larger incomes for retirees. At that time Wall Street was interested, not for my reasons, but in order to collect the fees from managing the funds. Had Social Security been privatized, I doubt that Wall Street would have been permitted to deregulate the financial system. Too much would have been at stake. After the latest crisis brought on by Wall Street's dishonesty and greed, trusting Wall Street to manage anyone's old age pension requires a leap of faith that no intelligent person can make.
Wall Street has got away with its raid on the public treasury. Now, pockets full, it wants to pay for the heist by curtailing Social Security and Medicare. Having deprived the working population of homes, jobs, and health care, Wall Street is now after the elderly's old age security. Social Security, formerly an untouchable "third rail of politics," is now "unsustainable," while the real unsustainables—a pre-1929 unregulated financial system and open-ended multi-trillion dollar Global War Against Terror—are the new untouchables.
This transformation signals the complete capture of American democracy by an oligarchy of special interests.
The Long-Term Employment Bust
by David P. Goldman
High levels of unemployment may last indefinitely. A number of economists (including this writer) have been warning about permanent joblessness, and the idea is now seeping into popular magazines.
More than 8 million American jobs were lost since 2007, based on the most recent revision of the overall job count of U.S. establishments. But that is not the worst of it, because the establishment survey fails to capture smaller businesses and the self-employed. By the Bureau of Labor Statistics’ broadest measure of unemployment, including the forced part-time workers and so-called discouraged workers, the unemployment rate rose to 17 percent from 8 percent before the recession. That is 9 percentage points, corresponding to slightly over 12 million adults. A website called Shadow Government Statistics includes "long-term discouraged" workers defined out of the labor force by the BLS, but that alternative measure has tracked the BLS broad measure quite closely in the past few years.
There are several reasons to believe that most of these jobs never will come back. That is a less contentious statement than it might appear, because the jobs lost in the recessions since 1981 never came back. Some sectors, notably manufacturing, continued to shrink, and other sectors, such as heath care and retail, replaced them. The difference in 2010 is that it is not apparent where new jobs will come from.
There was no recovery in manufacturing jobs after the last recession, for instance. The total fell from 17.263 million in 2000 to 16.441 in 2001—and continued to fall every year through 2009.
Manufacturing Employment, 1998–2009 (1000’s)
At just 12 million, manufacturing employment is such a small portion of the 138 million employed Americans that any likely change would have a negligible impact on overall employment levels.
What replaced the lost manufacturing jobs? The sectors showing the largest increase in employment since 1993 (the end of the "employment recession" of the early 1990s) are shown in the table below, along with the change in employment since 2007:
The largest contributor to employment growth turns out to be professional services. This includes everything from real estate to accounting to law. We observe that construction gained about as many jobs (2.851 million) between 1993 and 2007 as manufacturing lost (2.895 million)—if off-the-books labor were counted, the number would be much higher. The "professional services" category was buoyed by the real-estate boom. That is why it lost almost as many jobs (1.155 million) as construction (1.396 million) after 2007.
In fact, of the sectors contributing most to employment growth during the long employment boom of 1993–2007, only education, health, and government (which partially overlap) sustained employment increases between 2007 and 2009. It is reasonable to expect that the aging U.S. population will require more health services going forward, but hiring is likely to be incremental at best. Government spending under the Obama stimulus plan helped postpone layoffs at the state and local level, but is unlikely to create many new jobs.
The construction boom is over for a generation or more. Residential housing is vastly overbuilt. As I wrote earlier this year:In 1973, the United States had 36 million housing units with three or more bedrooms, not many more than the number of two-parent families with children—which means that the supply of family homes was roughly in line with the number of families. By 2005, the number of housing units with three or more bedrooms had doubled to 72 million, though America had the same number of two-parent families with children.
From other cross-sections of the data we see that the job losses have hit hardest the blue-collar working class, but also they've hit the upwardly mobile with some college training:
Workers with a B.A. degree or greater show a relatively low unemployment rate, although these numbers do not take into account long-term unemployed.
Given the inability of manufacturing industry to absorb many workers, and the poor likelihood that construction will do so, it is not clear where, or if ever, a large part of the American blue-collar labor force will work again. The semi-trained white collar labor force with an associate degree or a couple of years of college found ready work in the services expansion associated with the real-estate boom, but it is not clear what will happen to them now.
In previous recoveries, virtually all net new job creation came from new businesses. Most new businesses, to be sure, are small businesses, although the ones that created the most jobs were startups that grew very quickly. The most common estimate is that new business accounts for about two-thirds of net job creation.
During the 1980s, cellular phones, cable television, and other new technologies were an important source of new job growth. During the 1990s, the tech boom funded tens of thousands of startups, and, during the 2000s, the real-estate boom. Every deadbeat could get a job in the 1980s installing cable televisions, and every starving artist became a real-estate agent during the 2000s.
For the past fifteen years, the American economy has been geared to invest inflows of foreign capital in the household balance sheet, using the proceeds to import goods from the countries who lent us the money. That came to a bad end in 2007. All the employment associated with investing foreign savings and spending the proceeds—real-estate sales, mortgage banking, retail trade, and so forth—is no longer required. With a rapidly aging population, America will see less residential investment and more savings. America should be investing in high-value-added manufacturing and exporting. That would help America’s balance sheet, but it won’t do much for aging, semi-skilled workers who are too old to learn a completely new trade. Nor, as noted, will manufacturing in the best of cases create many new jobs.
There is some analogy to the Great Depression in the present situation. Between 1918 and 1939, American agriculture was in permanent decline, because the end of the First World War reduced demand for American exports, and because the substitution of the tractor for draught animals freed up an enormous amount of land set aside for animal feed. There was nothing to be done but to get the farmers off the land into other occupations, and that was not accomplished until the Second World War.
Americans, in short, have grown old in bad habits, and there is no way to avoid substantial and prolonged pain. The proposals that Reuven Brenner and I have offered in recent issues of First Things—a shift in the tax system to place the burden on consumption while exempting investment income—will help in the medium term, but certainly will not help some labor-intensive service industries (e.g., gaming) in the short run.
The temptation will be to emulate Britain after World War II, that is, to have the government provide jobs. If we do that, we will end up looking like Britain: permanently unemployed and permanently economically irrelevant. The difficulty is that no economic policy can prevent a very painful adjustment.
The Human Recession: Selling Food Stamps for Kid's Shoes
Unable to find jobs, kicked off welfare, women in Connecticut are forced to sell food assistance to buy basic necessities.
Since she was 16, Eva Hernández has worked a string of low-wage jobs. She’s prepared chicken at KFC, run the register at Dunkin Donuts, packed and sealed boxes at a produce company, and held other similar jobs in Hartford, Connecticut, where she was born and raised. These jobs haven’t paid enough for Eva, now 28, to support herself and her two young daughters. So for almost three years in the last decade, she’s relied on welfare to supplement her income. Most of the time, though, she’s simply found another low-wage job, a task that in this economy is proving almost impossible.
In March 2009, in the midst of the worst job crisis in at least a generation, Eva opened the last welfare check she will ever receive. She is one of a growing number of people in the United States who can’t find work in this recession but don’t qualify for government cash assistance, no matter how poor they are or how bad the economy gets. Without the help of welfare, Eva doesn’t have enough money left at the end of each month to feed her daughters full meals. It is the first time in her life, she said, that she hasn’t had enough money for food. Now, with no other source of income, Eva breaks the law, selling her food stamps to pay for the rent, phone bill, detergent and tampons.
On the first day of each month, when her food stamps arrive, she walks to the convenience store up the street, buys food for her family with her food stamp card and uses it to pay off the debt she accumulated the previous month after she ran out of money. She then trades in the remaining balance for cash. Although the bodega is more expensive than larger chain grocery stores nearby, she’s locked into shopping here because places like Wal-Mart won’t let her keep a tab—or exchange her food stamps for desperately needed cash.
About 6 million people receiving food stamps report they have no other income, according to an analysis of government data collected by the New York Times. Nine other women interviewed across Hartford said that they, too, have had to trade their food stamps to make up for the lack of work or income assistance. Service providers in Hartford, including the director of a food assistance organization and a case manager at a social service organization, confirmed the practice. When Congress overhauled welfare in 1996, it created the Temporary Aid to Needy Families (TANF) program that placed time limits on aid and made cash assistance contingent on finding a job.
Connecticut adopted the shortest time limit in the country—just 21 months—and nationwide the number of families on TANF dropped from 4.8 million before welfare overhaul to about 1.7 million families in 2008.Most people who left the rolls were pushed into insecure and low-wage work. At the time in 1996, there was no national debate about what would happen to families if an economic crisis struck. Now, with a national recession that many analysts recognize as a depression in poor communities of color, even those low-wage jobs are few and far between, and the crisis that’s hit middle-class Americans hard has left families like Eva’s teetering one small step away from a tumble to homelessness and despair.
What follows is Eva’s story. It’s a life in the economic recession without work or income assistance. Her name and those of her family members have been changed because of fears that they would lose their food stamp assistance if known. This is an account of a typical month in her life, pieced together based on multiple visits with her and her family over a three-month period this winter.
Week One: Selling Food Stamps for ShoesThe air was cold and damp on a gray January afternoon. It had rained a lot this winter, and the sidewalk was covered in wet, decaying leaves from the fall, the curb lined with pieces of trash, a broken Hennessy bottle, a discarded sock. Eva, a short Puerto Rican woman with round, tired eyes, walked with her 5-year-old daughter, Emily, the quarter mile from the elementary school to their apartment. Emily skipped a couple paces ahead of her and then turned around to wait for her mother.
Dressed in a New York Yankees jacket and a matching winter hat, Eva took Emily’s hand and gestured across the street with her chin to a small convenience store in the corner of a yellow–paneled, two-story house. "That’s my store. They help me out," she said. It’s here that Eva performs her monthly ritual: buying food and then trading her remaining food stamps. The store itself is a tight room and a gathering spot. During one trip, two men, their faces creased with the deep lines of their age, were tilting their necks to watch the Mexican telenovelas playing on the dusty television screen perched above a soda case. A teenage boy was peering into the soda case, while behind a candy-lined sheet of plexiglass, a woman in her late 20s sat at the register and painted her fingernails red.
On the first of the month, Eva walks around the corner and through these doors. She has $526 in food stamps, now called SNAP (Supplementary Nutrition Assistance Program), which she receives in the form of monthly deposits on her EBT debit card. At the store, Eva first pays off her debt, which she racks up each month once her money is gone and she still needs a few cans of food or bottles of milk. The attendant logs the purchase in a ruled notebook to be tallied at the start of the next month. Some months Eva owes close to $100 when she arrives with a newly filled food stamp card. She’s been lodged in this cycle since she lost cash assistance almost a year ago, and now she relies on the store to let her keep living in the red.
After settling her tab, Eva starts shopping. She gathers stacks of canned soups and beans, rice, milk and a couple cartons of eggs, which she supplements with fruit and vegetables, frozen chicken and sometimes pork from another, larger store near by. Her daughter Emily loves carrots, so she buys lots of those, and her 12-year-old, Janisa, asks for frenchfries, so she buys the frozen kind—cheaper than the ones from McDonalds. Eva piles paper towels and soap, detergent, tampons and aspirin onto the counter. She has to buy lotion for Emily’s face, which Eva says gets so dry it starts to hurt the girl. When she’s gathered all these items, she hands the clerk her food stamp card.
The attendant rings her up for the food, swiping the full amount into the machine. Then she charges Eva separately for toiletries and other non-food items. For these, the store charges Eva a dollar on her card for every 70 cents she buys. Even though it’s illegal to exchange food stamps for anything but food, Eva feels she has no other choice. "There are no jobs, and the only thing you get is your kids’ food. That’s it," said Eva, in a characteristically soft voice, adding, "The meds from the store does not get covered. If we need shampoo, we have to sell stamps." The store profits on the exchange with Eva, getting the whole amount reimbursed from the state. Last year, a convenience store owner in New Britain, Connecticut was sentenced to four months in jail and fined close to $60,000 for this kind of food stamp fraud.
After she buys the food and toiletries, Eva exchanges whatever remains on her card for cash. Usually that’s about $150 or $200, but at a rate of 70 cents on the dollar she’s left with around $105 to $140 in cash for the month. Although her mother receives $674 in monthly Social Security payments, Eva said all of that goes to rent, bills and her mother’s costly medicines. Her mother has subsisted on the nutritional drink Ensure since cancer attacked the sick woman’s stomach, making it hard for her to eat solid food. Ensure can cost as much as a few hundred dollars a month.
Oftentimes, it is Eva who helps her mother pay down the light, gas and phone bills (the phone was cut off for two months last year) and the $100 a month in rent for their Section 8 subsidized apartment. This month, after saving for a while, Eva was finally able to buy Emily a new pair of sneakers. Her daughter’s toes were pushing out of the ends of the last pair, which she’d had for more than a year A week after she had gotten the sneakers, Emily was still excitedly jumping around their living room in her new pink high tops. Eva still needed shoes for Janisa, but those would have to wait. "Next month, I have to buy them socks," Eva said. Pointing at Emily’s feet as she sat at the table in their kitchen, she added: "Look at her socks. They all have holes in them."
Numerous service providers in Hartford—including the director of a food assistance organization contracted by the state to help administer the food stamp program, two community organizers and a case manager at a social service organization in Hartford—confirmed that many parents sell food stamps as a regular part of surviving without work or cash assistance. None of them would speak on the record out of fear that exposing the practice could lead to a crackdown on one the few remaining means poor women have to get assistance from the state in caring for their children. An outreach specialist at a local nonprofit health and social service agency said: "There are a lot of people suffering because they don’t have money to pay rent and they can’t get cash." She, too, said that many of these women find a way to make cash out of food stamps. "How you going to wash your clothes if you don’t have any soap?"
According to the U.S. Department of Agriculture, the number of Americans receiving food assistance reached 38 million last year—the highest number since the program began in 1962. As of late November 2009, one in eight Americans and one in four children are using food stamps, and the program rate is growing at 20,000 people a day. In Hartford, half of those receiving food stamps are Latinos and a third are Black. For many families like Eva’s, the descent into economic despair has been coming since before this recession. Connecticut’s TANF program has gone from serving about 55,000 families in 1996 with cash assistance to about 18,000 families at the start of 2008, months before the financial crisis hit Wall Street.
The impact of the overhaul of welfare, and specifically the time limits, has disproportionately affected women of color like Eva. Blacks, Latinas and Asians nationwide are about two times more likely than whites to have been pushed off cash assistance as a result of time limits, rather than for another reason, according to a Colorlines analysis of 2008 data from the US Department of Health and Human Services. Because women-led families make up 90 percent of TANF cases that have been closed, women of color like Eva are now more likely to be living without access to any cash assistance.
For many people then, food stamps are all they have. The surge in food stamps has impacted local economic landscapes, as some businesses are now thriving off the increased participation in program. Owners and employees in four Hartford convenience stores said that business has actually increased as more people use food stamp cards. "There’s a lot more cash on the streets now. More people have food stamps, and we’re doing better now than before," said the attendant at the bodega where Eva shops. The attendant had worked there for more than two years.
In addition to the rising numbers of people using food stamps, many of them are buying more of their family’s groceries at small local bodegas rather than going to less costly larger grocery stores that can be both hard to get to from poor communities and harder to deal with when using food stamps. "More people are buying everything for their families here," the attendant said, adding that she estimated half of the customers who buy food at the store use food stamps.
A few blocks away, at a recently reopened convenience store, the new owner said that he was suffering because the state had not yet supplied him with the machine needed to accept food stamp cards. "People are starting to go to other stores," he said. He estimated that business was down by at least a third without the ability to accept food stamps. Back at Eva’s store, when asked if part of the store’s rising profits came from the markup on non-food items and cash exchanges, the attendant denied the practice. "That’s illegal. Nobody’s going to tell you they do that. It’s illegal. You’re not gonna get that out of anybody." Smiling slightly, she asked: "Is there anything else I can do for you?" and continued painting her nails.
Week Two: Not Finding Any Work at All Under the dimming sky, bundled in a winter jacket and a cotton hat, Eva trailed after her 5-year-old daughter and into her ground-level apartment in a three-story brick house on the South end of Hartford. Around the corner, two houses stood empty, their windows framed by char from fires. Since dropping her daughter at school that morning, Eva had walked the streets, sifting the city for work. She’d made a couple more stops after picking up the girl at the end of the long day. Now, Emily scampered ahead of Eva into the kitchen, squirmed out of her jacket, tossed it onto a metal chair at the kitchen table and disappeared into her bedroom to find her 12-year-old sister, who’d been home from school for almost two hours.
Eva hung her jacket on the arm of one of the three haggard and mismatched couches in the living room. The heavy, yellow rug under her feet was stained from years of use and held down by pieces of duct tape on the corners. On the far wall, a desultory paint-by-numbers mural of the Greek acropolis was half painted. It had been started over a decade ago by the landlord and never finished. On the other wall hung paintings of Jesus and old sepia portraits of Eva’s grandmother, among others, shot decades ago in Puerto Rico.
The smell of coffee wafted from the kitchen where Eva’s mother, Elsa, stood waiting for the pot to brew. Elsa’s hair was thin and short from chemotherapy, and medical tape still stuck to her bony wrists. Her friend Carmen Cordero sat in the kitchen as Elsa spoke quietly in Spanish about a doctor’s appointment Eva had taken her to the day before. "I’m just waiting now," she said. "I’m praying it’s gone." Eva sat down at the table as Elsa placed a cup of coffee rich with cream and five spoons of sugar on the table for Carmen and then served a plate of cookies. Such treats are only offered for the first part of the month when the family still has some income.
Janisa, a tall girl with two thick braids, hurried out of her bedroom, not acknowledging anyone in the kitchen. Elsa smiled and rolled her eyes as the girl disappeared into the living room, where she’d left her school bag. "She’s 12 going on something," said Carmen, smiling and drinking her coffee. "She’s going to be a handful."
Eva rested her head on her palm, her gaze wandering out the window at the empty concrete driveway between her house and the one next door. "It was a long day," she said. "It gets so cold, and I got to keep looking. I had to walk to Wendy’s and Burger King. It’s 45 minutes away." Cordero, who has long been a welfare rights activist and now organizes with the community group Vecinos Unidos, painted a bleak picture. "There’s no jobs out there now. Nobody’s had work for a few years now. People need a base. They need a safety net. They need continued support. Women have to make horrible choices when they lose cash."
Janisa came back through the kitchen as Cordero raised her voice close to a yell and said: "What are people supposed to do?" "They sell on the street," the 12-year-old piped in. The women looked at each other and laughed uncomfortably. Eva hoped she would find a job this month before her debt at the convenience store started to pile up again and before the eggs and meat ran out. On this particular night, there was still chicken in the freezer, and the carrots she’d bought the week before were still good. A manager at an Au Bon Pain in the mall where she worked years earlier had told Eva that he’d call her if there were any openings. She didn’t expect a call.
People like Eva are not getting many callbacks at all these days. New York Times columnist Bob Herbert recently brought national attention to a report by the Center for Labor Market Studies at Northeastern University in Boston showing that at the end of 2009, households earning less than $12,500 a year faced catastrophic unemployment rates—almost 31 percent. In stark contrast, households with incomes of $150,000 or more faced an unemployment rate of just 3.2 percent.
Eva and her mother do not talk much about what would happen if Elsa did not survive the cancer, but the unspoken sits thickly between them. If Elsa dies, Eva will be left with close to nothing: her mother’s contribution to bills and rent would evaporate if her $674 monthly Social Security check stopped coming. It’s also her mother’s name on the Section 8 housing voucher. Unless Eva can get her name on the voucher in time, homelessness is the next stop for her and her daughters. Rent at market rate would be about $900; they now pay $100. Jane McNichol, executive director of the Legal Assistance Resource Center of Connecticut, said that getting Section 8 is "sort of like winning the lottery," with waiting lists often five to seven years long simply to become eligible. "I need a job, I really need one," said Eva. "Anything."
Eva has never had a lot, but times were not always this hard. Her family is like many in Hartford. In the years around World War II, Puerto Ricans and Southern Blacks migrated to Hartford and other New England cities to work in the bustling manufacturing sector or in the nearby tobacco fields. Her father, who died a decade ago, worked in highway construction and then in unionized jobs in Hartford’s factories. Her mother was 13 when she left the rural southern coast of Puerto Rico and came to Hartford in the mid-60s to labor in the tobacco fields and the long wooden barns where workers sewed the leaves together and dried them to be shipped off and used to wrap cigars.
In the decades that followed, the manufacturing jobs left; the people stayed. The old brick structures scattered around the city are now abandoned or used as office buildings. Hartford is now majority people of color—more than 40 percent are Latino, mostly Puerto Rican, and close to 30 percent are Black. It is also one of the country’s poorest municipalities, nestled in the middle of the second-wealthiest state.
Eva herself has worked half a dozen jobs for almost a decade now, mostly in the food service industry. She began with a part-time summer job at KFC while she was in high school. But having never learned to read because of a learning disability, she dropped out of tenth grade, after her older daughter was born. A new mom, she realized she couldn’t make ends meet with her low wages, and in 1999 she applied for cash assistance. She said the state’s welfare-to-work program, Jobs First, pushed her into classes that taught her how to dress for a job, though figuring out what to wear to work, she said, was not her problem. No boss had ever told her to change what she had on. "They don’t actually help you find a job," she said. "They don’t get you work." Eva said the jobs she’s found have all been through connections. "If you don’t know someone, you don’t get a job."
Eva knew people, and she got a job at a movie theater. What she really wanted though—then and now—was her GED. But welfare-to-work programs have ignored the need for access to education. When Congress reauthorized the cash assistance program in 2005, for example, four-year college education was deemed outside of the realm of appropriate and sanctioned job training. Eva was pushed off the welfare rolls in 2001 while working at the movie theater. "Most of those who reached their time limits were working when they were cut off," said Diana Spatz of Lifetime, a women’s economic empowerment organization based in California. "In other words, they were working jobs that paid them so little that they were still eligible for some cash assistance."
With her mother’s Section 8 voucher and a less punishing economy before 2008, Eva struggled to keep her family afloat with low-wage jobs. For two years, she packed and sealed boxes at a wholesale produce company close to her house. The wages were low—just $8.50 an hour—and she worked grueling hours. "I started at five in the morning, and you could leave at like three or do overtime." But the job allowed her to scrape by, since she could stay with her mother and didn’t have to pay market-rate rent. The job also worked for her, she said, because it didn’t require her to read. Eva’s story is not atypical. According to Tracy Walker, director of programs at the Connecticut Council of Family Service Agencies, which administers part of the state’s TANF program, even when welfare recipients leave the rolls and find work, "we’ve been most successful at making more working poor."
After two years at the wholesale company, Eva woke up one morning to find that her younger daughter had a high fever and her asthma had flared up. Eva called into work and rushed to the hospital early that morning "just to make sure she was okay." When she got to the job in the afternoon after dropping the girl at home with her mother, tired from a long day in the emergency room, Eva found that she was being fired. According to Human Impact Partners, a national policy organization that advocates for paid sick days laws, low-income workers are less likely than other employees to get paid family sick leave, with 70 percent not getting paid sick leave even for themselves. The Connecticut state legislature has now twice voted down a paid sick leave bill.
Eva’s last job in 2008 was at a small Dunkin Donuts in a strip mall in West Hartford. Most of the workers there are young Latinos and Blacks who travel from far away to get there. It took Eva more than an hour to get to work, taking one bus into downtown Hartford and then another one back out to the mall. Already tired when she arrived, she’d spend the day behind the register and then scrubbing the floors, cleaning the toilets, taking out the trash. By the end of her shifts, her back hurt from leaning over and lifting.
Sometimes, she’d be scheduled for shifts early in the morning or late at night. Because of the long commute and the sporadic bus service, she said she got yelled at almost daily for being late or having to rush out the door to catch the bus home. "If you missed the bus, you’d have to walk about five miles." After four months, tired of getting yelled at every day and of the sore back, she quit. The move left her ineligible to collect unemployment benefits.
Not long after, Eva’s mother was diagnosed with stomach cancer. Eva wanted to help her mother through the chemotherapy, to take her to and from her appointments, so she applied for two six-month extensions of cash assistance. This gave her another year of help. But last March, the extended assistance came to an end. Although she’s in the same situation, her caseworker has told her she would not be granted any more assistance. She’s reached the end of welfare. Eva’s been looking for a job since then. She knows that having her daughter in tow when she shows up to ask for applications hurts her chances of getting hired. She watches the judging eye of employers when she arrives at a workplace with the girl, but, with her mother’s health declining, she has nowhere to leave her daughter.
Week Three: Almost Nothing Left, Not Even CerealThis winter, Eva went back one more time to the Department of Social Services to see if there was anything there for her. She was hoping for another extension. She’d been without cash assistance for eight months and was still unemployed. The extension was denied again. Eva said she thinks that a different caseworker might have treated her differently. "I know that they could help me out," Eva said, "but they’re just acting like they can’t." According to Carmen Cordero, who accompanied Eva to the appointment, the caseworker told Eva: "Everybody’s moms die eventually" and "having your mom sick with those problems is not a reason for an extension." Very few people are granted more than two extensions, and Eva has now given up trying.
She hates going to the DSS office. "They look at us like we are stupid, like we are dumb, like we are lazy, like we don’t want to do nothing for our living," she said. And she hates the questions they ask about her children’s father, who Eva wants nothing to do with, and about why she hasn’t found a job. In January, the office was filled mostly with women like Eva—about 100 of them—trying to get benefits turned on, turned back on, figure out why they’ve been cut off. Parents, mostly Latina and Black women, some with children, sat in chairs set up in long school-classroom-style rows. Some men were there too, applying for food stamps and Medicaid for their families. In Hartford, 55 percent of those receiving TANF are Latino and 33 percent are Black.
Every few minutes, a middle-aged woman opened a door to a back room filled with rows of cubicles and in a voice that sounded almost digital, called the next name in queue. Those waiting to set up an appointment lined up to talk to workers stationed at booths behind a sheet of thick glass. One large, middle-aged woman with a cane sat in a chair she’d pulled into the line. When the line moved forward, she lifted herself up with her cane and moved the chair ahead. A younger woman with a baby stood behind her. She had recently moved to Hartford from New York, hoping life here would be easier. The woman in the chair laughed and shook her head.
In the first row of chairs, a short, round-faced Black woman who called herself Angelika and said she was 41 years old waited for her appointment. She had long ago timed out of cash assistance and had gone through periods of homelessness with her kids. When asked what she did to survive and support her children, Angelika lit up as if she’d been waiting to be asked. She’d been trading her food stamps for years, she said. "If I need toilet paper, pads, Tylenol, we sell food stamps. Everybody does." As she told her story, a woman next to her piped in to say she’d done the same. Nine women who’d already timed out of the cash assistance program were interviewed in the Social Services office and in the living rooms of community organizers. They all had to use food stamps in illegal ways to get by. The practice is one of the few remaining ways these women have to get cash.
For Eva, though, trading food stamps is new, something she wishes she didn’t have to do and did not do until she found herself without any income at all. At Eva’s house, the day was coming to an end. Both of her daughters were home from school, though the 12-year-old had come home late and went straight to her room. On the walk home from school, as they had passed Eva’s bodega, her younger daughter looked at her mother and asked her for a bag of chips. "No baby. Not today," Eva responded. "But I want some," the girl protested. Eva did not have any spare cash left. When they got home, the girl said she was hungry, and Eva asked her if she wanted soup. The girl said she didn’t.
"What do you want?" Eva asked. "I want cereal," her daughter said. "We don’t have any, but how about a kiss?" Her daughter smiled, and Eva gave her a kiss on the cheek.
Before heating a can of soup, Eva sent Emily to her room to change. She couldn’t afford for her daughter to stain her school clothes while eating since she’d run out of detergent for the month. She is embarrassed that her kids sometimes appear ragged and dirty, and they said they look different than the other kids in the school. Last month, when she had to take her older daughter to the hospital, she worried that the doctors would think she was a bad parent because Janisa’s shoes were old and worn. When she had picked up Emily from school earlier, Eva had looked into a room near the elementary school’s front door. Inside, a couple of parents were picking through large garbage bags filled with clothes. It’s a clothing drive the school started.
Eva doesn’t get clothes from the drive, though. "They look at you like you’re low," she said about the people who run the clothing bank. She worries that if school officials know how hard things are for her family, they might call the Department of Children and Families, the office that runs foster care. That morning, Eva had dropped a form off with the school nurse to show that all her daughter’s vaccinations were up-to-date. "If you don’t take these forms," she said, "they fast gonna call DCF ‘cause they think you don’t take your kids to the hospital." For the same reason, worried about losing kids to foster care, Eva hates going to the food bank near her house to get food, even as the administrators say they’ve never seen this many people come through their doors, including many who’ve never needed help before.
Week Four: "I don’t need this life." At the end of January, Eva woke up before seven and rushed Janisa out the door to school. She woke Emily and fed her a hot dog from the freezer for breakfast. She tried to put cream on Emily’s face, pressing the tube’s opening hard against her hand to get the last of the cream out. Emily turned her face in protest, but Eva told her it would make her look special, and she rubbed the cream on her daughter’s cheeks. When she dropped Emily off at school and got back home, her mother was in the bathroom throwing up blood. "I’ve never seen her do this before," said Eva as she helped her mother out of the bathroom. "This is new."
She helped her mother dress, handing Elsa a light brown wig that she wears when she leaves the house. Elsa walked slowly, resting against a wall as Eva guided her out the door. A man picking bottles out of their trashcan on the street looked up at them and then started looking through the bin again.
In the emergency room, as doctors and nurses rushed past, Eva and her mother waited for two hours, surrounded by half a dozen other families. Elsa sat in a wheel chair between rows of plastic upholstered chairs, her head leaning back, unsupported by her neck and coming in and out of coherence. Trying to turn her head to Eva, Elsa asked where her granddaughter was. "She’s at school, mommy," said Eva. Elsa turned her head back around. "She’s not right in the head right now," Eva sighed.
In the waiting room, Eva watched on the TV screen as pundits talked about Washington politics. "They gonna help the people who don’t need it and not the ones that do," she said. "I hate people like that, because they don’t see what people are going through." Eva’s sister arrived at the hospital, and when their mother was admitted Eva left to pick up Emily. This wasn’t the first time she’d had to leave her mother in the hospital. As she stepped out from under the ambulance overhang, rain fell lightly on her head. She looked up. "I don’t need this. I don’t need this life," she said and walked home, carrying a plastic bag of her mother’s dirty clothes.
Back in her living room, Eva said, "When I think, I get stressed. So I try not to think, and if I do, I try to ignore everyone and stay in my own little world. You gotta pretend you have it all." This week, there were no cookies or sugary coffee to serve a visitor. The refrigerator was mostly emptied, and Eva still hadn’t found work. Twice Eva has walked early in the morning to a temporary work center near her house. Once, a few months ago, she was given a four-hour shift loading carpets into a truck. She was the only woman on the crew. By the end of the day, her back hurt, and she had trouble moving.
At 4:30 a.m. on a bitter cold morning the same week her mother went to the hospital, three men sat half asleep, heads resting on their knees, outside the center. Hoping to beat the crowds, they had been there since 3:30 a.m. When the doors opened at 5:30, about 25 men and two women were gathered at the barren building, smoking cigarettes outside the front door or waiting in plastic chairs inside. Some would wait all day and go home without work, like Eva had. A middle-aged Black man in work boots stood on the step smoking a cigarette. "The majority of us been coming here for two years," he said. "We been out of work since then. More people been losing their regular [jobs]." Sitting on her couch waiting for Janisa to come home from school, Eva lamented: "If you want money, you have to do a man’s job." And yet she doesn’t come here for work anymore; the work is too hard on the body, she said.
Her 5-year-old walked over to the couch and sat down next to her. "I was good in school today," said Emily. "But my teacher drive me crazy." "Why?" asked Eva. "’Cause she tell me to go to sit at my desk." Eva smiled. "Well, that’s where you’re supposed to be, baby." Emily giggled and started telling her mother about her day, about the book she read in the library and about a boy in her class. Eva wants something different for her children. "I want them to have a good life," she said. "A better life than this. But right now, I am alone with just me, my girls and my mom. I live for my daughters," Eva added. "I live for them and for my mom. Everything I do is for them."
A week later, her mother was released and back home, still weak but no longer vomiting blood. They’re waiting for word from the doctor, to hear if Elsa’s cancer is back. It’s the end of the month, so Eva picks up some cans of food from the store and puts them on her tab. Sometimes, her older brothers bring by a little food. But there’s almost nothing left now. There are still a few days left in the month, and her tab at the convenience store is already $90. She’ll pay that next week.
Quants: Wall Street’s alchemists
For your weekend viewing: Very well-made 50 min Dutch doc on quants and their influence on modern finance. 99% in English.