"View from the Lodge on Mount Toxaway, Sapphire, North Carolina"
Ilargi: "Without growth, we cannot begin the process of restoring fiscal responsibility," said Treasury Secretary Tim Geithner today to the House Budget Committee. And ".... before the federal government can begin attacking soaring deficits and a massive national debt, it needs to increase jobs and ensure economic growth."
That’s just about all you need to know, isn't it? It's the my way or the highway idea, put everything on red and pray for a miracle. There is no way Geithner can be sure that more spending of public funds will actually produce growth, but it's all he can think of (or at least all he talks about). And it’s also of course mighty easy to focus on spending if and when it’s not your own money you’re throwing at the proverbial black hole in the wall.
But illusions persist and the markets are up in the face of today’s what comes close to being the worst series of data on the economy emerging in the press to date. And I’m thinking: what on earth are you guys smoking?
Sheila Bair’s report on the banks is abysmal, lending in the private sector is falling off a cliff while public lending is running up that same cliff, and in that quote above Geithner just told us that there are no plans to quit adding to the debt before spending gives birth to growth in some fictional fairy tale of immaculate financial conception. But it’s beyond foolish not to ask what happens if no such fairy tale ending exists, if only simply because the risk that pervades the entire endeavor is as palpable as it is terrifying.
The taxpayer funds presently spent on the thus far evasive dream of recovery and growth resumption could be spent on programs to soften the blow of possibility number two, where growth never resumes, or doesn’t do so for many years to come. It’s one thing for everyone to want growth, it's quite another to actually get what you wish for.
And if you watch the procedures from a distance, how can you not ask yourself what is wrong with a system in which a bunch of so-called experts acquire the right for a given society to spend many times more per person than what each person earns annually on a notion for which there is no pre-existing evidence that it could even possibly succeed?
It’s as if every single day you hand over the contents of your wallet plus the deed to your home plus the rights to your pension plans, to that smart nephew twice removed who says he's got a sure-fire way to game the house, the table and the dice. Pardon me, but I don't see that as very clever nor as a way toward longer term prosperity, and neither do I see it as a way to organize and legislate a society if you want it to have any chance of survival. It seems to me to be more of an expression of a massive society-wide neuron deficiency than anything else. Or is that a gambling addiction, or is that the same to begin with?
Still, I dare you to elect the politician who says he'll raise your taxes and start you off on a program of austerity rather than vote for his opponent who promises growth and prosperity if only you let him spend your future tax revenues now. Tim Geithner is a doofus, and Ben Bernanke is a douchebag, but they wouldn’t be where they are if you wouldn't let them.
And none of that means that they can deliver anything they promise; it just and only means that you like one prospect better than the other. Well, dream on if you must, but I solemnly promise that you have a whole bunch of nasty surprises coming. And when these surprises arrive, Geithner, Bernanke and Obama will have either entirely vanished from view, or perhaps even step up their public persona a notch to loudly and proudly proclaim that things happened that no-one could have foreseen. And at least if you read this, you know that will be a blatant lie.
US Lending Falls at Epic Pace
U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover. While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.
Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010. FDIC Chairman Sheila Bair said banks are "bumping along the bottom of the credit cycle" and that the number of bank failures in 2010 will likely eclipse the 140 recorded last year.
The struggling U.S. banking industry remains a problem for policy makers eager for banks to lend again. Lawmakers on Capitol Hill and administration officials have pushed banks to lend, particularly in light of the billions in taxpayer aid injected into the financial industry over the past two years. Banking groups and their members counter that they're under pressure from regulators to be more prudent and that demand from struggling consumers and businesses isn't there.
Initiatives such as the Obama administration's $30 billion small-business lending program will rely on banks making loans at a time when many of those same firms are wrestling with a rising tide of commercial real estate problems or being told to add to their reserves by regulators. Some small-business owners say they could expand if they could just get a loan. Nick Sachs, president of Homewatch CareGivers Cincinnati-Metro, says he's been asking banks for a loan of $150,000 to $250,000 since 2008. He says his home-health-care franchise could hire 20 to 30 aides and even one or two office assistants.
After being rejected for a loan by Huntington Bancshares Inc. over a year ago, Mr. Sachs recently re-applied to the Columbus, Ohio, bank. He did so in part because Huntington said in February that it would double its annual small-business lending over the next three years and extend credit to as many as 27,000 more businesses. "My conversation with the banker was identical to the conversations in 2008," Mr. Sachs said. In both cases, Huntington's representative suggested that a loan from the government's Small Business Administration would be the best fit for the company. The banker collected the paperwork for the application, like tax returns and a business plan, Sachs said, but didn't ask many questions about how the company planned to use the funds. "I am very doubtful," he said. "I've been down this road before."
Maureen Brown, a Huntington spokeswoman, said the bank's "turnaround loans" have been well-received. She said the bank doesn't comment on individual loan applicants. Huntington has posted a string of five quarterly losses dating to 2008. The FDIC said that the decline in loan balances in the quarter hit all major categories—from construction to commercial loans and residential mortgages—with the exception of credit card loans.
It remains unclear whether the sharp decline in loans outstanding stems from banks' tightening standards and a fear of lending or from weak demand from potential borrowers spooked by the downturn. Another cause could be banks actively reducing the size of their loan portfolios, creating a natural decline. Most surveys suggest a combination of factors is at play. A January survey by the Federal Reserve of senior loan officers showed banks have slowed their efforts to tighten lending standards, but have not backed off the more stringent loan terms they put in place over the past two years. The same report, however, also showed that demand for loans from businesses and consumers continues to fall.
"Lending has been weak and spending by businesses and consumers has also been weak," FDIC Chief Economist Richard Brown said. Bankers, on the other hand, say creditworthy borrowers are hard to come by. Fifth Third Bancorp recently extended a $3.5 million line of credit to Chicago-based One Hope United after the state of Illinois, beset by a budget crisis, delayed payments to the child-and-family-services provider. Steve Abbey, Fifth Third senior vice president, said One Hope United is a rare exception of a nonprofit borrower that could qualify for credit from Fifth Third because of a cash crunch. Most other nonprofits that need cash right now, "haven't set themselves up to borrow money and pay it back," Mr. Abbey said. "They just need money."
The FDIC's Ms. Bair said officials are eager for banks to make loans in their communities, putting the onus on the bigger institutions to do more small-business lending. "The larger institutions I think need to step up to the plate here too," Ms. Bair said, describing as "significant" the declines in their loan balances and credit lines. One issue complicating banks' ability to lend is the looming problem of troubled commercial-real-estate loans. The FDIC's Mr. Brown said these loans take longer than residential mortgages to go bad, dragging out the hit to a bank's balance sheet.
The FDIC's report revealed that asset-quality indicators for banks continued to deteriorate in the fourth quarter as borrowers continued to fall behind on their loans. Banks wrote down $53 billion in loans in the final three months of last year. The quarterly write-off rate was the highest ever recorded in the 26 years the FDIC has collected the data. A total of $391.3 billion of all loans and leases, or 5.4%, were at least three months past due at the end of 2009. "While the economy is moving ahead banking results tend to lag behind," Mr. Brown said. "The problem loans and the earnings of the industry will improve somewhat after the economy improves."
Almost 10% of FDIC-insured banks "troubled"
Driven by expanding problems with commercial real estate loans, the number of distressed banks in the U.S. rose to 702 in the fourth quarter, marking the highest level in 16 years, according to a report released Tuesday by the Federal Deposit Insurance Corp. That's up from 552 at the end of September and 416 at the end of June. This is the largest number of banks on the FDIC's "problem list" since June 30, 1993.
Based on the result, roughly one in 11 of the approximately 8,000 U.S. banks are on this list, with regulators expecting a significant expansion in the number of failures throughout 2010, boosted in large part by increased losses on commercial real estate sustained by mid-sized and smaller banks. See more on analyst expectations for 2010 bank failures. "This year, the losses are going to be heavily driven by commercial real estate, we've known for some time and we have been projecting that," FDIC Chairwoman Sheila Bair told reporters. "The pace is probably going to pick up this year and for the total year it will exceed where we were last year. Overall, the banking system is challenged but stable, but is performing its credit extension role."
Bair said it takes longer for losses on commercial real estate to work through the system because frequently borrowers may have cash reserves and can continue to make good on payments for a while, even as a downturn expands. "Tenants may be in longer-term leases, but those leases eventually come due and they don't renew or they renew at significantly reduced rental rates," she said. Also Tuesday, the National Association of Realtors on Tuesday reported that it doesn't expect any meaningful recovery in commercial real estate before 2011. A congressional watchdog group reported on Feb. 11 that it over the next few years, a wave of commercial real estate loan failures could threaten the U.S. financial system, and in the worst-case scenario, hundreds of additional community and mid-sized banks could face insolvency.
Banks insured by the FDIC dropped to a total quarterly profit of $914 million in the fourth quarter ended Dec. 31, compared with $2.8 billion in the third quarter. The result, however, was significantly better than the $37.8 billion loss for insured institutions seen during the fourth quarter of 2008, but well below historical norms. Insured deposits reported full-year net income of $12.5 billion. "Consistent with a recovering economy, we saw signs of improvement in industry performance," said Bair. "But as we have said before, recovery in the banking industry tends to lag behind the economy, as the industry works through its problem assets."
According to the FDIC, the value of what are deemed problem assets at institutions stood at $402.8 billion at the end of 2009, compared with $345.9 billion at the end of the third quarter. The FDIC also reported that its Deposit Insurance Fund, used to protect depositors, dropped further into negative territory, reporting a $20.9 billion loss for its fund balance in the fourth quarter, worse than the $8.2 billion loss in the third quarter -- and its lowest number on record.
The agency also collected three years of assessments on banks in advance at the end of 2009, along with banks' fourth-quarter assessments, a total of 13 quarters of assessments, which brought in roughly $46 billion of capital to help dismantle failed institutions. With those funds, the Deposit Insurance Fund's cash resources stood at $66 billion as of Dec. 31. The agency's fund reserves are a positive $23.1 billion, including its contingent loss reserve of $44 billion at the end of December. As institutions take a charge, quarterly on their books, for their pre-payments for the deposit insurance fund, the deposit insurance will recognize corresponding revenue.
Bair said she believes the fund's cash balance should be enough to weather the rest of the economic downturn, adding that the FDIC estimates that much of the losses anticipated by the contingent loss reserve can be attributed to losses expected in commercial real estate. She also pointed out that 95% of the 8,000-plus U.S. banks exceed regulatory standards for being well capitalized. "We don't anticipate needing more special funds for the fund," Bair said. "We'll be in good shape this year."
The FDIC hasn't accessed a temporary $500 billion fund of capital, available to it from the Treasury Department, for the insurance fund. The FDIC estimates that bank failures will cost the agency as much as $100 billion over the five years running through 2013, with the majority of the losses likely to take place in 2009 and 2010. The agency made that estimate in September and as of February it still stands, agency staffers said.
The agency may require payment of additional assessments to cover losses to the fund if bank failures expand in greater numbers than the FDIC's currently anticipating. Bair also took issue with larger banks, saying they need to be out lending more. "We'd like to see more of credit extensions, within the framework of prudent risk management, particularly with the larger institutions," she said. "Their declines on loan balances, their cutbacks on credit lines have been significant, and hopefully we'll see some churning of that this year."
Banks Continue To Pull The Rug Out From Under The Economy
Can the economy revive if banks don't start to lend again? Let's hope so. Today the St. Louis Fed released its latest monthly look at commercial and industrial loans at major banks -- a measure that some would say represents the essence of the US banking system. As you can see, this measure is still falling like a knife -- a bad sign for the ongoing health of the economy. (And also not what we were promised when we bailed out the banks.)
Deflation Is Coming and There's Nothing Bernanke Can Do About It
Contrary to popular belief, noted technical analyst Robert Prechter says the extraordinary action taken by the Federal Reserve to bail out the economy will not lead to runaway inflation. "Deflation is gaining the upper hand very, very slowly, but it's happening," Prechter the founder of Elliott Wave International tells Tech Ticker. Of course, as anyone familiar with his work knows, he's been saying this for years. Why should we believe him now?
For the first time since 1982 core inflation fell in January as measured by the consumer price index. Prechter says it's even more noteworthy that it's happening "in the face of this tremendous amount of stimulus...from the government and a real attempt at stimulus from the central bank." Prechter describes the forces of deflation as a "socio-nomic" shift in social mood that will prevent Federal Reserve Chairman from printing too much money. "At some point, the voters - as you can already see from the Tea Parties - are going to start saying we've had enough" with government spending and bailouts. How should you invest in a deflationary environment? We'll get to that in a forthcoming clip.
Bullish a Year Ago, Robert Prechter Now Sees "the Biggest Bubble in History"
In February 2009, Robert Prechter of Elliott Wave International predicted a market rally that would be "sharp and scary for anyone who is short." In recent months, Prechter returned to more familiar territory, declaring here in November the market was in a "topping area." A few weeks ago, the veteran market watcher told the Society of Technical Analysts in London that a "grand, super-cycle top" is at hand, The WSJ reported.
"What has happened is a complete change in psychology from extreme negativity [a year ago] to extreme optimism" heading into the market's recent top in January, Prechter says. Among the many sentiment indicators he watched, Prechter cited the very low levels of cash at mutual funds, which is approaching levels seen near major tops in 1973, 2000 and 2007. "Nobody should be taking risk right now. This is a time to be safe," he says.
But considering U.S. equity funds suffered about $46 billion of outflows from August to December 2009 while bond funds took in about $198 billion, according to ICI, aren't investors already playing it safe -- a bullish contrarian signal? "The individual investor has been more or less abandoning stocks" and buying bond funds, Prechter concedes. "I think that is going from the frying pan into the fire. The bond market is the biggest bubble in the history of the world. " Corporate debt, municipal debt, mortgages and consumer loans will all suffer in the great deflation Prechter believes is already underway, as detailed in his book Conquer the Crash. So is there any way for investors to protect themselves from the carnage?
Junk Debt 'Wall' to Trigger U.S. Defaults, Bank of America Says
A "wall" of junk debt maturing in the next four years will increase the risk of corporate defaults in the U.S., according to Bank of America Merrill Lynch. More than $600 billion of high-yield bonds and loans are due to be repaid between 2012 and 2014, New York-based analysts Oleg Melentyev and Mike Cho wrote in a note to clients. Almost 90 percent of loans outstanding mature in the next five years, compared with an average of 36 percent between 2005 and 2009, according to the report.
"While the wall-shaped schedule of future maturities is nothing new for the high-yield issuer universe, it is more front-loaded today," the analysts said. "This could result in additional default pressures further down the road as issuers deal with a higher concentration of maturities than they what they have been dealing with in the past." The looming payments stem from companies shifting their loans to shorter maturities of three to five years, compared with five to seven years in the past, they said.
Banks stung by $1.7 trillion of writedowns and losses are more reluctant to lend to the neediest borrowers with ratings below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, according to data compiled by Bloomberg. Leveraged loans to U.S. companies shrank 81 percent in 2009 from their peak of $913.5 billion in 2007, the data show. Debt maturities are "a point of particular concern in our view, given that primary loan issuance remains challenged by declining bank lending," the analysts said.
World trade contracted 12 percent in 2009
Global trade contracted by about 12 percent in 2009 but has started to pick up, the head of the World Trade Organization (WTO) said on Wednesday. WTO Director General Pascal Lamy said the Organization had revised its previous estimate of a contraction of about 10 percent in 2009 but gave no forecast for 2010. "World trade has also been a casualty of this (global economic) crisis, contracting ... by about 12 percent in 2009," Lamy said during a visit to Brussels, calling it a huge drop and the sharpest decline since the end of World War Two.
Asked about world trade in 2010, he declined to give any figure but said: "Certainly there is a pick-up. Whether this pick-up is short term ... or whether this is sustainable ... is difficult to say but we certainly are picking up." Lamy told a meeting organized by the European Policy Center think-tank that opening global trade offered a way out of the crisis and that it was "economically imperative" to conclude the Doha round of talks on a new global commerce pact. He caused gloom at the WTO this week by saying there were too many gaps and uncertainties in negotiations to bring in ministers at the end of March to take stock of whether the eight-year-old trade round can be concluded this year.
U.S. New-Home Sales Unexpectedly Fell in January to Record Low
Sales of new homes in the U.S. unexpectedly fell in January to the lowest level on record, a sign that an extension of a government tax credit may not be enough to rekindle demand. Purchases declined 11 percent to an annual pace of 309,000, below the lowest forecast in a Bloomberg News survey of economists, from a 348,000 pace, figures from the Commerce Department showed today in Washington. The median sales price dropped 2.4 percent from January 2009 and the supply of unsold homes increased.
The government’s first-time buyers tax incentive, extended and expanded to include current homeowners, may provide less of a boost to the market as many purchases were pulled forward late last year. Builders also face competition from foreclosed properties that have driven down prices at the same time the economy is having trouble creating jobs. "New-home sales may be at rock-bottom levels, but it looks like the housing correction is not over yet," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. "Everyone who was going to buy for the tax credit has already purchased a new home."
Sales were projected to climb to a 354,000 annual pace from an originally reported 342,000 rate in December, according to the median estimate in a Bloomberg survey of 72 economists. Forecasts ranged from 325,000 to 386,000. Three of the four U.S. regions showed declines in new-home sales last month, led by a 35 percent plunge in the Northeast. Purchases fell 12 percent in the West and 9.5 percent in the South. They rose 2.1 percent in the Midwest.
The median price of a new home in the U.S. decreased to $203,500 in January, the lowest since December 2003, from $208,600 in the same month last year. The supply of homes at the current sales rate increased to 9.1 months’ worth, the highest since May 2009. Housing, the industry that spawned the sub-prime mortgage meltdown and triggered the worst recession in seven decades, appeared to be recovering in 2009 after a three-year decline. Purchases of new homes have declined from an all-time high of 1.39 million reached in July 2005. They have declined 6.1 percent from January 2009.
New-home purchases, which account for about 6 percent of the market, are considered a leading indicator because they are based on contract signings. Sales of previously owned homes, which make up the remainder, are compiled from closings and reflect contracts signed weeks or months earlier. Rising foreclosures are the main threat to a sustained housing recovery. A record 3 million U.S. homes will be repossessed by lenders this year as unemployment and depressed home values leave borrowers unable to make their house payment or sell, according to a RealtyTrac Inc. forecast last month. Last year there were 2.82 million foreclosures, the most since the Irvine, California-based company began compiling data in 2005.
The lack of jobs is another hurdle. Consumer confidence in February fell to its lowest level since April 2009 and a gauge of current conditions declined to the lowest level in 27 years on concerns about the labor market and the economy, the Conference Board reported yesterday. Economists surveyed by Bloomberg at the beginning of this month forecast unemployment this year will average 9.8 percent, just a percentage point below the historic post-war peak of 10.8 percent reached in November 1982.
The end of Federal Reserve purchases of mortgage-backed securities, aimed at keeping borrowing costs low, represents another challenge for the housing industry. The program is scheduled to expire at the end of March. "The housing market took several years to recover, following the downturn of the late 1980s and early 1990s," Robert Toll, chief executive officer of Toll Brothers Inc., said in a statement today. Toll Brothers, the largest U.S. luxury-home builder, said its first-quarter loss narrowed. The Horsham, Pennsylvania-based company’s new orders almost doubled in the three months ended Jan. 31 as the housing market showed signs of stabilizing.
Home purchase loan demand at lowest since 1997
U.S. mortgage applications fell for a third straight week, with demand for home purchase loans sinking to the lowest level in 13 years as inclement weather weighed, data from an industry group showed on Wednesday. A continued drop in demand for purchase loans, a tentative early indicator of home sales, would not bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.
The Mortgage Bankers Association reported an 8.5 percent decline in its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended February 19. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 1.6 percent. The MBA's seasonally adjusted purchase index fell 7.3 percent, the lowest level since May 1997. "As many East Coast markets were digging out from the blizzard last week, purchase applications fell, another indication that housing demand remains relatively weak," Michael Fratantoni, MBA's vice president of research and economics, said in a statement.
"With home prices continuing to drift amid an abundant inventory of homes on the market, potential homebuyers do not see any urgency to lock in purchases," he said. The MBA's seasonally adjusted index of refinancing applications decreased 8.9 percent. The refinance share of mortgage activity decreased to 68.1 percent of total applications from 69.3 percent the previous week. The shares of adjustable-rate mortgages, or ARM, increased to 4.7 percent from 4.4 percent the previous week. A rise in rates may have played a role. Interest rates on mortgages typically play less of a role in home purchase loan demand than in refinancing activity.
The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.03 percent, up 0.09 percentage point from the previous week. That is above the all-time low of 4.61 percent set in the week ended March 27, 2009, but below the year-ago level of 5.07 percent. The survey has been conducted weekly since 1990. "Demand is waning due to rising mortgage rates and the fear that rates will move higher after March 31," said Alan Rosenbaum, president of Guardhill Financial, a New York-based mortgage banker and brokerage company. Mortgage rates are expected to rise when the Federal Reserve stops buying mortgage-related securities at the end of March.
The MBA said fixed 15-year mortgage rates averaged 4.35 percent, up from 4.33 percent the previous week. Rates on one-year ARMs increased to 6.80 percent from 6.67 percent. The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump. More key insight into the state of the housing market will emerge on Wednesday when the U.S. Commerce Department releases January new U.S. single-family home sales data.
Geithner: Spending and fiscal austerity goals are not in conflict
Assessing a tough governmental juggling act, Treasury Secretary Timothy Geithner assured lawmakers Wednesday that stimulus spending to spur the economy now isn't in conflict with a need for longer-term austerity. Geithner told the House Budget Committee that before the federal government can begin attacking soaring deficits and a massive national debt, it needs to increase jobs and ensure economic growth.
"Without growth, we cannot begin the process of restoring fiscal responsibility," the secretary said in prepared remarks. He offered a forceful endorsement of administration policies, ranging from expanded health care to tougher banking regulations. But Geithner focused his opening comments on the recession relief and job stimulus components of the Obama administration's $3.8 trillion budget for fiscal 2011. Those efforts total nearly $300 billion in proposed spending.
Geithner's testimony came as Obama faces growing pressure to both address stubbornly high unemployment and to confront a rising pool of red ink. But even under Obama's ambitious budget blueprint, unemployment would still be pushing double digits at 9.8 percent and this year's deficit would increase to $1.56 trillion under the administration's accounting. Geithner was sure to encounter sharp questioning, especially from Republicans, over the president's spending plans, his own stewardship of the financial sector, and the state of unemployment despite a massive stimulus package last year.
"My guess is the American people think enough is enough," Rep. Jeb Hensarling, R-Texas, told Geithner. "When they hear more stimulus all they see is more debt." At least one Democrat also weighed in, calling on the administration to do more to expand housing and consumer lending. Rep. Marcy Kaptur, D-Ohio, accused Geithner of making "political choices" in a mortgage assistance program that Treasury has aimed at five states — California, Nevada, Arizona, Florida and Michigan. "Your administration, compared to the last one, is trying," she said. "But you're not hitting the mark."
Geithner pointed to an administration plan to use $30 billion of unused money from the $700 billion Troubled Asset Relief Program to help community banks increase lending to small businesses. In so doing, Geithner conceded that the money should be removed from the unpopular TARP program first to assure bankers they will not face the disclosure and compensation restrictions that financial institutions faced when they accepted bailout funds. "TARP has outlived its basic usefulness because banks are worried about the stigma of coming to TARP, and they're frankly worried about the conditions," Geithner said. He said 600 small banks withdrew their applications for TARP money because they did not want to face the restrictions or the perception that they needed a bailout.
US Federal Debt: Rolling Six-Year Forecasts
by Doug Short
My recent post on federal debt was based on data in the 2011 budget introduced by President Obama on February 1. The main focus was the six-year forecast by the Office of Management and Budget for 2010-2015.
Today's chart examines the pattern of the seven rolling forecasts since the 2005 Bush budget was presented in February 2004. As you can see, 2008 was a pivotal year. In fact, the federal debt from 2000-2008 and the five Bush budget forecasts shown on this chart (2005-2009) deviate only slightly from a linear regression drawn through the debt data and extended to 2015, illustrated here. Despite the war or terror and the cost of wars in Iraq and Afghanistan, federal debt was a relatively simple extrapolation.
The financial crisis that began in 2008 changed everything. Government policies to deal with the crisis have significantly altered the OMB estimates, as the two Obama budgets (2010 and 2011) dramatically illustrate. The 2010 budget (presented February 26, 2009, 11 days before the market low) included a forecast for the fiscal-year-end debt that proved to be 8.3% higher than the 2009 final number, a fact that illustrates the magnitude of uncertainty introduced by the financial crisis. The 2011 six-year forecast has scaled back the numbers for 2010 and 2011, but it closely tracks the later trend of the previous budget.
These federal debt forecasts confirm we what already know — 2008 was a major economic turning point, a metaphoric fork in the road. However, the chart helps us quantify the magnitude of the new direction. The current 2015 forecast of a 19.68 Trillion debt is about 46% higher than the equivalent point (about 13.5 Trillion) on the road not taken.
Source for U.S. federal debt data: Budget of the United States Government. Click on a fiscal year link, and then find the link near the bottom labeled Historical Tables. Table 7.1 presents the federal debt data, including six years of debt estimates.
Nearly 20% of U.S. workers underemployed
Nearly 20 percent of the U.S. workforce lacked adequate employment in January and struggled to make ends meet with reduced resources and bleak job prospects, according to a Gallup poll released on Tuesday. In findings that appear to paint a darker employment picture than official U.S. data, Gallup estimated that about 30 million Americans are underemployed, meaning either jobless or able to find only part-time work. Underemployed people spent 36 percent less on household purchases than their fully employed neighbors in January, while six out of 10 were not hopeful about their chances of finding adequate work in the coming month, the poll said.
Gallup surveyed more than 20,000 U.S. adults from Jan. 2 to 31. The results have a 1 percentage point margin of error. The poll comes at a time when voter anger over the slow economic recovery is running high and President Barack Obama's hopes of boosting employment through government programs have been frustrated by partisan rancor in Congress. The U.S. unemployment rate fell to 9.7 percent in January but remains near record highs. Gallup found that underemployed Americans were more likely to have a favorable view of Obama, with 55 percent approving of his performance as president against 49 percent of the public.
The poll's estimate of U.S. underemployment is higher than official statistics. The Labor Department says 16.5 percent of American workers were without employment or worked part-time for economic reasons in January against Gallup's 19.9 percent. A Labor Department official said the government rate may be lower because it factors out temporary seasonal changes in employment to better reflect the underlying economy.
Dave’s Top 10 Reasons to Fade the Recovery (It’s Not a Business Cycle!)
by David Goldman
This is NOT a business cycle: this is a one-time reversal of twenty years of inflation of the household balance sheet. An aging populationneeds a 10% savings rate (at least) to meet minimum funding requirements for the biggest retirement wave in US history (comparable to Japan’s retirement wave during the “lost decade” of the 1990s). With 17% effective unemployment, many Americans are dis-saving, after a $6 trillion shock to home equity.
9) China won’t collapse, but government efforts to stop overheating by raising reserve requirements make clear that the world’s second-largest economy can’t be the locomotive for world growth.
8. Greece and its prospective rescuers in the European Community are at loggerheads over conditions for EC help. “Greece faces several important challenges in the coming days, including an expected bond auction, a planned general strike on Wednesday, and a visit from European Union officials that began Monday, aimed at pushing the country to take tougher steps to rein in its budget deficit,” WSJ reported today.
7. State fiscal crises continue to worsen. “Doomsday is here for the state of Illinois,” California’s last set of cosmetic measures do little to address a $20 billion deficit, Baltimore has no idea how to close a $120 billion deficit. On top of this year’s $200 billion deficit, states face a trillion-dollar shortfall in pension funds.
5) Regional banks continue to drop like flies, with 702 banks holding assets of $403 billion on the danger list.
4) Bank credit continues to shrink. Total bank credit is still falling at a 5% annual rate, an unprecedented decline:
3) What bank credit is available is funding the US Treasury deficit in the mother of all crowdings-out, replacing commercial loans on banks’ balance sheets:
2) Industrial production has bounced of the bottom, but manufacturing is only 15% of US employment.
And Dave’s top reason to fade the recovery is
1) Employment won’t come back. Today’s consumer confidence number is one more nail in the coffin of exaggerated hopes for a cyclical recovery.
Republicans push Obama to put Fannie, Freddie on budget
A pair of key Republicans on the House Financial Services Committee is pushing the White House to end the long-standing practice of excluding mortgage finance companies Fannie Mae and Freddie Mac from the federal budget. "It is the same sort of financial shell game that has brought governments like Greece to a crisis point. Hiding your debts just leads to a bigger day of financial reckoning down the road," said Representative Spencer Bachus, the top Republican on the panel.
Bachus said he was backing legislation from Representative Scott Garrett, the top Republican on the House Financial Services Subcommittee on Capital Markets, to put the two enterprises on the federal budget. Fannie Mae and Freddie Mac, which play a role in funding three-quarters of all U.S. residential mortgages, came under government control in September 2008 when they received a massive bailout that gave the government a 79.9 percent stake.
Fannie was formed in the late 1930s in the wake of the Great Depression as a government agency and was chartered by Congress in 1968 as a private, shareholder-owned company in order to take it off the federal books. But their congressional charter provided an implicit guarantee from Uncle Sam. As the financial crisis unfolded in 2008, the guarantee was made explicit when then-Treasury Secretary Henry Paulson, a Republican, effectively took control of the firms, though he stopped short of full nationalization by placing them into a "conservatorship" in order to keep the firms off the federal balance sheet.
Just over a year later, on Christmas eve, the Obama administration extended an unlimited credit line to the two companies through the end of 2012. Previously, the credit was capped at $400 billion.
Earlier this month, the White House said it expected Fannie Mae and Freddie Mac's finances to weaken further but did not offer any vision for the future of the two, as analysts had expected. President Barack Obama's budget proposal said Fannie Mae and Freddie Mac will tap a total of $188 billion in government funds by October 2011, up from the $111 billion they have already drawn. That does not count trillions in liabilities for the government-controlled firms.
House Financial Services Committee Chairman Barney Frank has said he wants to see Fannie Mae and Freddie Mac "abolished" in their current form, though he has not specified what that means.
Frank has scheduled a hearing before his panel on the future of the firms, known as government-sponsored enterprises, for March 2 and has invited Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan to attend.
Asked about Bachus' comparison to Greece, Donovan declined to comment directly. On the broader issue of putting Fannie and Freddie on the federal books, Donovan told Reuters it is "putting the cart before the horse to say you will make a decision about what's going to be in the budget before you make decision about what to do with Fannie and Freddie."
The $100 Trillion Problem: Can America Learn From Chile Before It's Too Late?
by Tyler Durden
Jose Pinera provides an Entitlement State 101 lecture, in which Chile's former Labor and Social Security Minister demystifies the U.S.'s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile's entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly "backward" South American country succeeded?
Some insight from Pinera:
"$100 trillion is the present value of what Americans will have one way or another to pay, unless they default on their obligation to their citizens. And that is the future, and I am extremely worried because you are like passengers in the Titanic. You see the Titanic is going toward the iceberg of aging populations but populations the feel entitled to all these huge benefits that the politicans have promised the people, but they have not funded the benefits for the future. So how are you going to pay them? That is the big issue, the big domestic problem facing America."
The problem is the entitlement state. The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax. And because the entitlement state is based on promises for the future, you don't have to pay it today, this is growing, because to win elections politicians offer benefits to people that would be paid to people in the future. So this big hole is not only a problem in America, it's exactly the same problem in Greece today, in Southern Europen, in France, in Germany. The west will go bankrupt unless you reform deeply the entitlement state. You are all prisoners of the Bismark unfunded entitlement system...With the aging of population, the extended life, you have been accumulating these huge liabilities that eventually will bankrupt the government. A huge fiscal crisis is coming to the west unless you face it and confront it directly...You either will have to raise taxes big time in America, or you will have to cut benefits. But it is extremely difficult to do that, in a system in which you have people entitled to all this things.
America's failed fiscal policy, its corrupt government, its kleptocratic financiers, its unsustainable deficits have all become the butt of jokes of the former developing world. And here we stand, with the market trading up or down 1%, based on which rumor is leaked on any given day about Greece's upcoming €5 billion auction. In this context why even worry about $100 trillion. That amount, as Feynman would appreciate, is not even digestable in Bernanke (the 21st centuiry equivalent of economic, f/k/a scientific) numbers (just yet). Why indeed, when, as Pinera says, the problem is not contained in some building in downtown Washington, it's in all of us. And those are precisely the problems that, at least so far in America, have never gotten any resolution.
New York Sales Tax Receipts In Unprecedented Collapse
It's a good thing Wall Street bonuses rebounded in 2009 because otherwise the State of New York would be totally screwed.
Yesterday the Comptroller released its survey of the state's sales tax receipts -- a proxy for consumer spending that shows a trend opposite to Wall Street.
Counties across New York State, including New York City, saw one of the sharpest declines in sales tax collections on record, according to a report released by State Comptroller Thomas P. DiNapoli. The report, which compares 2009 to 2008 collections, found a 5.9 decrease in collections statewide. Only four counties saw an increase but these numbers were primarily due to administrative and technical adjustments, not better economic performance.
“This is yet another sign that the Great Recession is having a continuing impact on our communities across New York,” said DiNapoli. “These numbers are sobering. Fortunately, many local governments have taken sometimes painful budgetary steps to stave off disaster. It’s a struggle, but all levels of government have to make every taxpayer dime count.”
Among the report’s findings:
- Fifty-three of New York’s 57 counties outside of New York City saw a sales tax decline and many of these counties share sales tax revenues with their municipalities;
- The largest decline occurred in the Lower Hudson Valley, at 8.4 percent;
- In state fiscal year 2009-10, the state’s sales tax base (value of all goods and services subject to the sales tax) shrank by 7.1 percent;
- Among New York’s counties, Westchester saw the steepest drop at 10.3 percent;
- The Mohawk Valley region saw the smallest downturn at 2.5 percent;
- Only Oneida, Chautauqua, Schuyler and Seneca counties saw increases, but this growth was mostly attributable to factors other than economic growth; and
- According to the New York State Association of Counties, most counties prudently budgeted little or no growth in their sales tax revenues for 2010.
A few charts exemplify the trouble the state faced:
And here's a breakdown by notable region:
At the same time, Comptroller DiNapoli warned of a $2 billion budget shortfall for the current year.
Here's How The Greece Could Become A Major Victory For The EU
by Peter Schiff
If the global economy could be described as a three ring circus, then the center ring attraction would definitely be the currency and debt exchanges between the United States and China. But for the past month the world's attention has been distracted by an entertaining sideshow in which Greece and the European Union are jostling over a potential bailout for Greek debt and whether the European Union, and the euro itself, will exist for much longer. I believe the short-term problems in Europe are being overblown and the potential demise of the euro highly exaggerated. For those who can connect the dots however, the drama throws some much needed light on the far more daunting problems unfolding within our own fiscal house.
The scenario that is eliciting the greatest fears is that resentment from the more solvent EU members will prevent a bailout for Greece. If the Greek government then fails to adopt austerity measures that will bring it back in line with EU debt requirements, then an expulsion, or withdrawal, from the Union becomes a possibility. This could set off a domino effect that will bring down larger European political or monetary union. On the other hand, if Greece does receive a bailout, a moral hazard will be created that will encourage other indebted countries (Portugal, Spain, etc.) to press for equal benefits. Both scenarios would destroy confidence in the euro, remove the biggest rival of the U.S. dollar, and give a shot in the arm to the dollar's global status.
However, there is a third more likely alternative that few are considering. My gut is that Greek politicians will find the prospect of being forced out of the union and re-creating their own currency, formerly called the drachma, even more unpalatable then swallowing the bitter pill of fiscal austerity. Even if defying the EU might seem like good politics now for Greek leaders, the risks associated with economic independence could be so daunting that politicians will refuse to roll the dice. Their better political choice would be to talk tough against draconian spending cuts but vote for them anyway. By playing the role of callous bullies, politicians in Berlin, Paris, and Brussels can provide Greek politicians with the political cover necessary for them to make the unpopular decisions. That way Greek politicians could have their cake and eat it too.
The best case for Europe would be a solution that is all stick and no carrot. This would mean that Greece would have to get its fiscal house in order with no help from the EU. However, even a solution that involved some help from Brussels, but still forced real reforms in Athens, would be seen as a positive for the euro.
Rather than being the beginning of the end for the euro, the Greek drama may well become the euro's first major victory. If the EU forces Greek politicians to act more responsibly, the Union will show that it cares about the value of its currency and that it has the political will to keep its members in line.
On the other hand, the negative consequences for the EU, and the euro, of an outright Greek bailout would be devastating. Central to the euro's viability is the limit it places on the ability of member nations to run deficits. The moral hazard associated with a Greek bailout would create a situation that would actually encourage all EU nations to run larger deficits because the costs of doing so would be borne by the more responsible members.
While I still have my doubts about the long-term viability of the euro, I feel that there will be many short-term successes before the experiment ultimately fails. In the meantime, if the euro can survive its current trial, its health could be bad news for the dollar. A battle tested euro, backed by a disciplined union, will have greater credibility as the currency capable of dethroning the dollar. This will eventually refocus attention back on the United States and will highlight the significant distinctions between the two economic powers.
First, while the European Union may have several member nations with fiscal problems, the same situation exists in the U.S. where many of our most populous States are currently navigating similarly dire financial straits. Like Greece, California cannot print money. So if leaders in Sacramento can't find the will to raise taxes or cut spending, absent federal bailouts, default will be their only option.
However, my guess is that the political pressure in the U.S. to bailout State governments, or to avoid the huge cuts in State spending that would be required to avoid default, will be too great to resist. While Germans are vehemently opposed to bailing out Greeks, I do not foresee the same level of opposition on the part of New Yorkers to bailing out Californians, especially since New York will likely need its own bailout in the not too distant future.
This is especially true since most voters will not be asked to pay higher federal taxes to finance State bailouts. We will simply "pay" for State bailouts the same way we "pay" for all the others, we will borrow from abroad or print money.
As a result, none of the States will be forced to make the necessary spending cuts, and many will actually increase spending even faster, even as their tax bases continue to shrink. Those States that may have otherwise acted responsibility will likewise be incentivized to run large deficits themselves to get their fair slice of the bailout pie.
Of course, on a Federal level, there will be no one to force Uncle Sam's hand, because unlike Greece, our government can print money. Since printing money is far more politically popular than cutting spending, raising taxes on the middle class, or honest default, it is the most likely option our leaders will choose.
If these two scenarios unfold, the EU holding the line on Greece and Washington caving to California, creditor nations will be presented with a clear message as to where to hold their currency reserves. The stampede out of the dollar will begin, and the greenback's tenure as the world's reserve currency will enter its final act. Such an outcome would also throw light on the solvency of the United States itself, which has its own debt issues which in many ways are far more daunting than those faced by the European Union. The real tragedy will play out not in Greece, but in America.
Nationwide Strike Paralyzes Greece
Greek police clashed with youths in central Athens Wednesday as tens of thousands of people took to the streets in protest at the Socialist government's austerity measures. The strike has affected transport and public services, with government offices, schools and universities all shut and travel around the capital, Athens, disrupted. Athens International Airport was also closed as air traffic controllers joined the action, with no flights in and out of the country's airports. Train, bus and ferry services were canceled nationwide. Banks are also expected to be affected while state hospitals will operate on skeleton staffing. No newspapers will be published because the journalists' union is taking part too.
"In many industries participation in the strike is 100%. Many banks in the center are closed or are operating with skeleton staff," said Stathis Anestis, spokesman for private sector umbrella union ADEDY. "It shows that the working people are totally against the government's austerity plans. We understand the difficulties in the economy, but the average worker can't give anything more. If the EU wants more measures, the rich and those who evade taxes should pay for it."
A group of about 20 youths broke away from the march and starting throwing Molotov cocktails and heavy objects at police, damaging bus stops in Athens' Syntagma square, where the Greek parliament is located. The youths were chased away by riot police, who used tear gas against the protesters. "We hope that's the end of it," a senior police officer said. "But we stand ready to do our duty and safeguard this peaceful demonstration." Most of the shops in the area where the protest is taking place pulled down their steel shutters, fearing violence would break out. "They ruined my shop twice," said shop owner Apostolos Nikou. "I'm closing down and hope for the best."
Greece is under intense pressure by the European Union and financial markets to narrow its budget deficit, which hit an estimated 12.7% of gross domestic product last year, four times above EU limits. The government has pledged to cut that deficit to 8.7% of GDP this year, and below the EU's 3% cap by 2012. In order to meet those goals, the government has announced a series of spending cuts and tax hikes that it says will produce some €8 billion to €10 billion in savings and additional revenues. So far, those measures include a freeze on civil-service wages, cuts in public-sector entitlements by 10% on average, a fuel tax hike and the closure of dozens of tax loopholes for certain professions—including some civil servants—who now pay less than their fair share in taxes.
"It seems to me there is an all out war against public servants, those who earn the least," said Spyros Papaspyros, president of ADEDY. "We will fight to keep the little we have." "On average 80% of our members are participating in the strike and most public offices are closed," he added. "The government and the EU must understand the the crisis must be paid by the rich, not the average civil servant. We will meet in the next couple of weeks to decide our further action." Greek workers also plan to hold two rallies in central Athens later Wednesday.
Concerns grow over China's sale of US bonds
by Ambrose Evans-Pritchard
Evidence is mounting that Chinese sales of US Treasury bonds over recent months are intended as a warning shot to Washington over escalating political disputes rather than being part of a routine portfolio shift as thought at first. A front-page story in the state’s China Information News said the record $34bn sale of US bonds in December was a "commendable" move. The article was republished by the National Bureau of Statistics, giving it a stronger imprimatur.
It follows a piece last week in China Daily, the Politburo’s voice, citing an official from the Chinese Academy of Sciences praising the move to "slash" holdings of US debt. This was published on the same day that US President Barack Obama received the Dalai Lama at the White House, defying protests from Beijing. "There are ongoing spats between the US and China on so many fronts so you have to assume that this is some sort of implicit threat," said Neil Mellor, a currency expert at the Bank of New York Mellon, who cautioned that it can be hard to read the complex signals from China. "We still think China will have to continue buying US Treasuries by the bucket load. Where else can they invest in a liquid market. The euro has become a tarnished currency," he said.
China’s power is growing so fast that it now feels confident enough to raise the stakes on a string of festering conflicts with the US. It has threatened to impose sanctions on any US firm that takes part in a $6.4bn arms deal for Taiwan agreed by the White House. This is a tougher response that on any previous occasion and raises the spectre of a trade war over Boeing, the key supplier. "Chinese leaders are deploying their reserves to try and pressure the US to stop haranguing China about its currency and trade policies, and to back off from interference in its domestic issues," said professor Eswar Prasad, ex-head of the IMF’s China division.
Stephen Jen from BlueGold Capital said Chine is probably moving out of bonds from many countries as it prepares for a likely 5pc revaluation of its currency in coming weeks. Other assets might prove better protection against an immediate loss on holdings Use of China’s $2.4 trillion reserves to challenge US foreign policy is fraught with problems, not least because any damage to America will recoils immediately against China – which depends on the US market for its mercantilist growth strategy.
Beijing cannot stop accumulating dollars unless it is willing to let the yuan ride, eroding the margins of its export industry. Some reserves can be parked in gold or even copper, but liquid commodity markets are not big enough to absorb the scale of Chinese surpluses. China and America are locked together by fate. Any petulant action by either side involves a degree of `mutual assured destruction’. But sometimes in politics – as in life – emotion flies out of control.
China Tells Banks to Restrict Loans to Local Governments
China’s banking regulator has told commercial lenders to restrict new lending to the financing arms of local governments, a measure designed to pre-empt potential overheating in the country’s booming economy. Hong Kong, meanwhile, announced plans to increase taxes on luxury-home purchases, an effort to cool red-hot property markets. A flood of lending by China’s state-owned banks, combined with a giant government spending program, helped mainland China stave off the worst of the global economic crisis and expand its gross domestic product by 8.7 percent last year.
The credit binge had the side effect, however, of setting off a surge in property prices, as much of the readily available cash flowed into the stock markets and property. Land prices in mainland China, for example, doubled in 2009 on a nationwide basis, according to economists at Standard Chartered in Shanghai. That has brought worries about a property bubble and concerns that some of the loans might ultimately go sour. Economists are also increasingly worried that the overall economy may be overheating.
Some believe China’s gross domestic product could grow by as much as 10 percent this year, particularly if exports continue to rally, as they have in recent months. The reaction by the authorities has been to rein in the pace of growth in loans in recent months. In January, Liu Mingkang, chairman of the China Banking Regulatory Commission, said he expected the nation’s banks to extend credits totaling about 7.5 trillion renminbi, or $1.1 trillion — more than one-fifth lower than the record 9.6 trillion renminbi doled out last year.
On Wednesday, the state-run Shanghai Securities News reported that lenders had been told to limit credit to local governments and reject projects that lacked adequate capital, according to The Associated Press. Twice this year, the Chinese central bank has raised the amount that banks had to set aside as a reserve against failed loans. Analysts widely expect further increases in the so-called reserve requirement ratio, which effectively reduces the amount of loans that lenders can make, in coming months. Other Chinese measures aimed specifically at cooling the property market include higher down-payment ratios for second mortgages and land purchases.
Likewise, the Hong Kong government raised stamp duties on purchases of luxury flats Wednesday and announced plans to increase the supply of housing in a bid to cool the property market. The city’s overall economy is expanding less dramatically than that in mainland China — the government projected G.D.P. growth of 4 to 5 percent for 2010 — but local property prices have soared in Hong Kong, too, since late last year. Jing Ulrich, the managing director and chairwoman of China equities and commodities at J.P. Morgan in Hong Kong, said she expected the recent measures announced in mainland China to prevent property prices there from rising much more this year.
Overall transaction volumes, however, will probably fall by 20 percent, Ms. Ulrich said, as the buying frenzy last year met much of the demand, and buyers will now remain on the sidelines. But, she said, corporate savings are at a record high, thanks to the lending binge last year, meaning that the government-induced slowdown in lending will not bring an outright credit crunch in China. And the high level of household savings means that higher down-payment requirements, for example, will "not kill the market," as they might do in countries like the United States, where household savings are much lower, Ms. Ulrich said.
Stephen Green at Standard Chartered in Shanghai wrote in a note Tuesday, "China’s stimulus measures were more akin to a blunderbuss than a sniper’s bullet; everything that could be done, was done." China is now moving to moderate the various stimulus measures it has introduced, he wrote.
Harvard's Rogoff Says 'Horrible' China Crisis May Trigger Regional Slump
China’s economic growth will plunge to as low as 2 percent following the collapse of a "debt- fueled bubble" within 10 years, sparking a regional recession, according to Harvard University Professor Kenneth Rogoff. "You’re not going to go a decade without having a bump in the business cycle," Rogoff, former chief economist at the International Monetary Fund, said in an interview in Tokyo yesterday. "We would learn just how important China is when that happens. It would cause a recession everywhere surrounding" the country, including Japan and South Korea, and be "horrible" for Latin American commodity exporters, he said.
China, set to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession. "Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy," said Rogoff, who in 2008 predicted the failure of big American banks. In 2008, China cut interest rates, started rolling out a 4 trillion yuan ($586 billion) spending package and scrapped quotas limiting lending by banks to counter slumping exports.
While Rogoff said he isn’t sure what will cause China’s bubble to pop, he said land is "the best bet" as it is "the most common source" of crises. Real estate values in Shanghai and Beijing have "taken a departure from reality," said the economist, co-author of "This Time is Different," a 2009 book that charts the history of financial calamities in 66 countries. A collapse would depress output gains to 2 to 3 percent, a "very painful" period which would persist for about a year and a half, Rogoff said. The slowdown won’t lead to a Japan- like "lost decade," he added. In a speech earlier yesterday, he said China will do "very well this century."
China, the world’s fastest-growing major economy, expanded 10.7 percent from a year earlier last quarter. The World Bank forecasts a 9 percent expansion in 2010. China may provide more than a third of global growth in this year, according to Nomura Holdings Inc., Japan’s biggest broker. The country’s policy makers aim for a minimum of 8 percent growth annually to create jobs and avoid social unrest. The global financial crisis left 20 million Chinese migrant laborers unemployed and more than 7 million college graduates seeking work by March last year. In February 2009, a clash between police and about 1,000 protesting workers from a textile factory in Sichuan province injured six demonstrators, rights group Chinese Human Rights Defenders reported.
World exporters are increasingly relying on China as consumers in the U.S. and Europe retrench. Honda Motor Co. and Nissan Motor Co. are adding capacity in China, which last year overtook the U.S. as the biggest car market. Rio Tinto Group’s sales to China overtook those to North America and Europe in 2009, reaching 24.3 percent of the total from 18.8 percent a year earlier, the mining company said this month. Chinese policy makers are trying to cool lending that helped property prices in 70 cities climb at the fastest pace in 21 months in January. The government aims to reduce new loans to 7.5 trillion yuan this year from a record 9.59 trillion yuan in 2009. The People’s Bank of China raised the proportion of deposits that lenders must set aside as reserves twice this year to cool the economy.
"If there’s a this-time-is-different story in the world right now, it’s China," Rogoff said in the speech at a forum hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. People say China "won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor, blah blah," he added. "I say of course China will have a financial crisis one day."
Harvard’s Rogoff Sees Sovereign Defaults, 'Painful' Austerity
Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks. Following banking crises, "we usually see a bunch of sovereign defaults, say in a few years," Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. "I predict we will again."
The U.S. is likely to tighten monetary policy before cutting government spending, sending "shockwaves" through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger "very painful" tax increases and spending cuts, he said. Global scrutiny of sovereign debt has risen after budget shortfalls of countries including Greece swelled in the wake of the worst global financial meltdown since the 1930s. The U.S. is facing an unprecedented $1.6 trillion budget deficit in the year ending Sept. 30, the government has forecast.
"Most countries have reached a point where it would be much wiser to phase out fiscal stimulus," said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better "to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation." Rogoff, 56, said he expects Greece will eventually be bailed out by the IMF rather than the European Union. Greece will probably announce an austerity program "in a few weeks" that will prompt the EU to provide a bridge loan which won’t be enough to save the country in the long run, he said. "It’s like two people getting married and saying therefore they’re living happily ever after," said Rogoff. "I don’t think Europe’s going to succeed."
Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S., he said. The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.’s will reach 94.1 percent and Japan’s will spiral to 204.3 percent. "In rich countries -- Germany, the United States and maybe Japan -- we are going to see slow growth. They will tighten their belts when the problem hits with interest rates," Rogoff said at the forum, which was hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. Japanese fiscal policy is "out of control," he said.
So far concerns about the euro zone’s ability to withstand the deteriorating finances of its member nations have outweighed the U.S.’s deficit woes, propping up the dollar. "The more they suck in Greece, the lower the euro goes, because it’s not a viable plan," Rogoff said. "Clearly the dollar is going to go down against the emerging markets -- there’s going to be concern about inflation and the debt." The dollar has surged more than 9 percent against the euro in the past three months. Ten-year Treasuries yielded 3.72 percent as of 10:16 a.m. in New York. The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said.
"The U.S. is in a state of paralysis in its fiscal policy," he said. "Monetary policy will tighten first, and I don’t think it’s the right mix." The Federal Reserve last week raised the discount rate charged to banks for direct loans, and plans to end its $1.25 trillion purchases of mortgage-backed securities in March. President Barack Obama’s administration is proposing a $3.8 trillion budget for fiscal 2011 to spur the recovery. "When they start tightening monetary policy even a little bit, it’s going to send shockwaves through the system," Rogoff said.
In an interview a month before Lehman Brothers Holdings Inc. went bankrupt in 2008, Rogoff said "the worst is yet to come in the U.S." and predicted the collapse of "major" investment banks. His 2009 book "This Time Is Different," co- written with Carmen M. Reinhart, charts the history of financial crises in 66 countries. "We almost always have sovereign risk crises in the wake of an international banking crisis, usually in a few years, and that’s happening," he said. "Greece is just the beginning." Greece’s debt totaled 298.5 billion euros ($405 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.
The cost of protecting Greek bonds from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December. "Greece just highlights that one of those risks is sovereign default," said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. Still, "it doesn’t justify the situation where we’re all in a panic and are going back to cash in the post-Lehman shock."
Death of U.S. capitalism: The final 10 scenes
by Paul B. Farrell
Good news, Americans are "downbeat about today. Upbeat about tomorrow," says the latest USA Today/Gallup Poll. "Americans feel battered by hard times, record home foreclosures, stubbornly high unemployment rates and war." And yes, we are "fed up with Washington and convinced more than 3 to 1 that the nation is heading in the wrong direction," yet there's "confidence that there will be better times ahead, that the classic American dream endures and hasn't been extinguished. It's not even at its low ebb." Why? Because we're in denial!
Do Main Street's 95 million investors know something Warren Buffett's long-time partner, Charlie Munger, doesn't know? Munger is warning us "It's Over" for America. Yes, "o-v-e-r," America's in decline, at the end-of-days, coming to "financial ruin," says Munger. Optimism has always been the enduring spirit that made us a great nation, brought us back from overwhelming challenges and impossible odds -- WW II, the Civil War, the 1776 Revolution. Yes, that spirit still burns in our soul, says the poll.
But we also know, as we said earlier in "The Death of the Soul of Capitalism," that over the long-term, through many centuries, historians give nations an average of about 200 years before they burn out. Why? Because the "blind optimism" that makes a nation great in the early years of its rise to power and glory becomes, paradoxically, its worst enemy in the end-days. Their arrogance traps them in a self-sabotaging cycle that weakens their resolve, makes them vulnerable to new, unpredictable challenges, ultimately destroying them from within. That happens over and over throughout history, even as their optimistic brains tell them they're still the greatest.
So for a moment, please set aside your "optimism," listen to our translation of Munger's drama as a 10-scene crime-thriller about America on the "road to ruin."
Plot notes: Warning, America is on a 'road to financial ruin'
Turns out that like Buffett, whose tales we detailed earlier, Munger's a good storyteller. His parable, "Basically It's Over: A parable about how one nation came to financial ruin," appeared in Slate magazine. Clearly he's warning about the end of capitalism, the end of democracy, the coming end of America. In his parable Munger calls America "Basicland ... rich in all nature's bounty." In our recasting it as a drama, we'll use "America" rather than "Basicland" in the narrative to drive home the full impact of Munger's powerful message.
Scene 1: Power and wealth create false sense of invincibility
Significantly, Munger says 2012 is the turning point, a signal, the moment setting up the final crisis scene. We've often made a similar timing prediction, one tied to the 2012 election, and a reminder of the warning made by Jared Diamond in "Collapse: How Societies Choose to Fail or Succeed." In the late stages of a nation's cycle: A crisis hits. Everyone, leaders and citizens, act surprised. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power." Just 20 short years to ruin?
Munger warns: "Even a country as cautious, sound, and generous as America could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of America had created a peculiar outcome: As their affluence and leisure time grew, America's citizens more and more whiled away their time in the excitement of casino gambling." Yes, Main Street "feels battered" while Wall Street gambling casinos generate billions.
Scene 2: Greed consumes America: Gambling replaces real work
In Munger's brilliant parable "the winnings of the casinos eventually amounted to 25% of America's GDP, while 22% of all employee earnings in America were paid to persons employed by the casinos" and "many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called financial derivatives." Yes, the same derivative bets Buffett targeted when he warned against "financial weapons of mass destruction."
Scene 3: Wall Street's casinos prosper as Main Street suffers
Munger's also not talking about just the million or so gamblers working in Wall Street's "too political to fail" casino-banks. No, "gamblers" are also among Main Street America's 95 million average investors, though most of the high rollers are the slick pros on casino payrolls where "most casino revenue now came from bets on security prices under a system used in the 1920s." Think of Goldman's trading operation that often makes $100 million profits daily, while America has close to 20% underemployed.
Scene 4: America's side-bet debt to foreign casinos skyrockets
Now comes the crucial turning point in Munger's crime-thriller: "Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts ... They feared big trouble if the gambling-addicted citizens of America were suddenly faced with hardship." They were right.
Scene 5: Nations in denial rarely prepare for disasters in advance
"Then came the twin shocks," a plot twist borrowed from "Avatar," "Wall-E" and Al Gore, the kind of shocks that most "optimists" (especially those hell-bent on voting Obama and the liberals out of office by 2012) always deny. So, "hydrocarbon prices rose to new highs." Munger must mean a twist like oil hitting a scene-stealing $1,000 a barrel.
Scene 6: In the later stages, get-rich-quick beats real work
America seeks the advice of the "Good Father," a tall ex-Fed chairman who suggests "America change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees -- and former casino patrons -- to produce and sell items that foreigners were willing to buy." Never happen: Not as long as Wall Street's gamblers can make more in a year trading derivatives than most Americans make in a lifetime. Why "work?"
Scene 7: Wall Street CEOs, economists, lobbyists love gambling
Sounds great, many approved, "but others, including many of America's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market -- even wild growth in casino gambling -- is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when America would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008."
Scene 8: Wall Street gamblers love Reaganomics, hate change
Though Munger and his partner got rich in this bizarre parable, his plot turns dark as America's "investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father." Wall Street "came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve" by leaving today's free market gambling casino operations untouched, so it could quickly return to pre-2008 "greed is very good" reality.
Scene 9: Main Street investors join Wall Street's 'Happy Conspiracy'
The endgame now unfolds rapidly. Munger warns that America's investors, workers and citizens have become so jaded they merge with Wall Street's self-sabotaging conspiracy: "Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district." They "saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers."
Scene 10: Politicians love Wall Street's derivative casino: Game over!
The 86-year-old Munger is himself a metaphor for America's version of the classic historical cycle: He was an optimist as he and Warren built their $267 billion company over four decades. But sadly, his parable, his vision of America's future, has no optimistic finale. Rather it's reminiscent of Diamond's "Collapse," Bogle's "Battle for the Soul of Capitalism," and so many other recent reminders about how America just went over a cliff and how Wall Street's casino-banks will soon drive us off a bigger cliff into the Great Depression II by 2012.
Munger's parable is more than a Hollywood suspense-thriller, it's another example of the classic historical life-cycle of a nation. In the final scenes "politicians ignored the Good Father one more time," the casino-banks returned to gambling in derivative "securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. America is now under new management, using a new governmental system. It also has a new nickname: Sorrowland."
Epilogue: Your moral dilemma: a no-win scenario or historical destiny?
Do we really have a choice? Ask yourself, what's ahead after 2012? Can you see beyond a destructive campaign: Obama at war with Palin and the "Tea Party of No?" What are the long-term prospects of our "civilization." Do you share Munger's dark vision? Or does the USA Today/Gallup Poll tell you guys like Munger, Buffett and Volker do "lack any understanding of important and eternal causes of human progress that the bankers are trying to serve" with their gambling casinos. "Optimists" in those polls are just politicians, bankers and citizens like you, in denial, can't hear the warnings. So we get no changes, no action, no preparations because at this stage in the long-term historical cycle, optimism has turned into our worse enemy, wishful-thinking.
Solution? Get into action, let's launch the "Second American Revolution." Got any constructive, optimistic strategies? Share them.
European banks face showdown over €1 trillion of debt
by Ambrose Evans-Pritchard
European banks need to roll over €1 trillion (£877bn) of debt over the next two years at a much higher cost and in direct competition with hungry sovereign states, according to a report by Morgan Stanley. The bank has advised clients to prepare for chillier times as monetary tightening begins in the US and China, causing major spill-over effects in Europe. Roughly €560bn of EU bank debt matures in 2010 and €540bn in 2011. The banks will have to roll over loans at a time when unprecedented bond issuance by governments worldwide risks saturating the debt markets. European states alone must raise €1.6 trillion this year.
"The scale of such issuance could raise a significant 'crowding out' issue, whereby government bonds suck up the vast majority of capital," said Graham Secker, Morgan Stanley's equity strategist. "The debt burden that prompted the financial crisis has not fallen; rather, we are witnessing a dramatic transfer of private-sector debt on to the public sector. The most important macro-theme for the next few years will be how easily countries can service and pay down these deficits. Greece may well prove to be a taste of things to come."
Lenders will have to cope with a blizzard of problems as new Basel rules on bank capital ratios force some to retrench. State guarantees are coming to an end, which entails a jump of 40 basis points in average interest costs. They must wean themselves off short-term funding as emergency windows close, switching to longer maturities at higher cost. Worries about Europe's second-tier banks help explain why Berlin is warming to plans for a €25bn rescue for Greece. Germany's regulator BaFin has warned that €522bn of German bank exposure to state bonds in Portugal, Italy, Ireland, Greece and Spain may pose a systemic risk if contagion causes "collective difficulties of the PIIGS states".
A BaFin note obtained by Der Spiegel said Greece could be the trigger for a "downward spiral in these countries, as in the case of Argentina", leading to "violent market disruptions". Citigroup said Europe's 24 largest banks must raise €720bn over the next three years, in a world where investors want a higher return for risk. "This could eventually drive up funding costs meaningfully," it said. It said a mix of higher credit spreads, rising rates, and Basel III rules could "eat up" 10pc of bank earnings. While most lenders can cope, it will dampen economic recovery. Morgan Stanley said the benchmark cost of capital – known as the 'risk-free rate' – is rising because governments themselves are becoming a riskier bet, with ripple effects through the entire economic system.
Investors should be cautious about corporate bonds, sectors such as transport, media and telecoms with high net debt to equity ratios and certain countries. The net debt to equity of the corporate sector is 189pc in Portugal, 141pc in Spain, 85pc in Italy, and 82pc in Greece, compared to 46pc for Germany, 39pc for Britain and 26pc for Sweden. Morgan Stanley expects equities to prosper, but not until the current "growth scare" is digested by the markets. "The current correction phase in equities is not over: there may be rallies but we recommend selling into strength."
Marc Faber warns of partial US debt default
2009 Wall Street bonuses up 17 percent to $20.3 billion
Wall Street paid out $20.3 billion of bonuses in 2009, up 17 percent from a year earlier, New York State's comptroller said, as the financial industry recovered fitfully from a near meltdown. Speaking on CNBC television, Comptroller Thomas DiNapoli said profit for all of Wall Street could top $55 billion for 2009, when the economy began to stabilize and as lenders raced to repay federal bailout money they had come to view as a stigma. Average taxable bonuses on Wall Street rose to $123,850 in 2009, he said. Compensation at Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley, three of New York's biggest banks, rose 31 percent, DiNapoli said.
The comptroller's annual report on Wall Street pay is closely watched not only by Wall Street but also by politicians eager to rein in runaway pay in a still-weakened economy where unemployment remains high and tax revenue remains depressed. While bonuses are well below the level set in 2007 and are now more closely tied to company performance, DiNapoli acknowledged that many might consider them outsized given the lingering problems in the economy. "It's still a bitter pill for many people," he said.
German Budget Deficit Hits 3.3 Percent of GDP
Germany's budget deficit grew more than expected in 2009 as a result of the economic crisis and reached 3.3 percent of GDP, exceeding the euro zone limit of 3 percent. The economy may contract again in the first quarter due to the harsh winter, but the falling euro is brightening the outlook for export industries. Germany's budget deficit for 2009 has been revised up to 3.3 percent of GDP from a previous estimate of 3.2 percent, and the economy didn't grow at all in the fourth quarter, Germany's Federal Statistics Office announced on Wednesday.
The deficit is above the 3 percent limit set by the Maastricht Treaty on European monetary union and was driven up by the economic crisis and the government's stimulus packages totalling €50 billion ($68 billion), which were launched last year. In 2008, Germany balanced its budget with a 0.0 percent deficit. Last year was the first time Germany exceeded the EU deficit limit since 2005. The Bundesbank, Germany's central bank, projects that the deficit may rise to 5 percent in 2010 due to higher public spending as a result of increasing unemployment, and continued weak economic growth. The German Finance Ministry is even predicting a deficit ratio of 5.5 percent this year, but plans to push it back down below 3 percent by 2013.
But Germany is still doing significantly better than other euro member states. Greece reported a 2009 deficit of 12.7 percent, followed by Ireland and Spain with more than 10 percent. Concern over Greece's creditworthiness has led to a sharp depreciation of the euro in recent weeks. Germany suffered its worst economic slump since World War II last year but managed to exit recession -- classified as two consecutive quarters of GDP contraction -- in the second quarter of last year. However, the tentative recovery ground to a halt in the final quarter of 2009. The statistics office on Wednesday confirmed preliminary figures which showed that real fourth-quarter GDP, adjusted for seasonal and calendar factors, was unchanged from the previous quarter, and down by a calendar-adjusted 2.4 percent from the year-earlier period.
Wednesday's data followed bad news on Tuesday of a decline in the country's main leading economic indicator, the Ifo business climate index, which dropped for the first time in almost a year in February. That indicates Europe's largest economy may fall back into contraction in the first quarter of 2010, economists said. The Ifo index, released by the Munich-based Ifo institute, is based on a monthly survey of some 7,000 firms. It fell to 95.2 in February from 95.8 in January. Ifo said the decline was largely due to poor sentiment in the retail sector, possibly as a result of the unusually harsh winter weather.
The gloomy retail outlook was confirmed on Wednesday with the release of the closely-watched GfK consumer sentiment index which showed consumer confidence stagnating amid worries over the economic outlook as well as the possible impact of Greece's debt crisis on Europe. ''Public discussion of the precarious budgetary situation of Greece and some other European countries is also unsettling consumers, as they fear negative effects on Germany's economic development,'' the GfK market research group said. But it's not all doom and gloom. The depreciating euro is good for German industry because it makes exports cheaper outside the euro area. Economists said that, in the coming months, the economy may make up the ground it lost over the winter.
Europe at risk of double-dip recession
by Ambrose Evans=Pritchard
A blizzard of bad data from France, Germany, and Italy have raised concerns that Europe's fragile recovery is stalling already, with mounting risks of a double-dip recession this year. French household spending dropped 2.7pc in January, led by a 19pc collapse in car sales following the end of France's scrappage scheme. Germany's IFO business confidence index dropped for the first time since the depths of the crisis in December 2008, partly due to bad weather. Confidence relapsed in Italy.
Mervyn King, the Bank of England's Governor, said Europe's rebound "appears to have stalled" , posing fresh risks for Britain as well. "My particular concerns at present derive from the state of the world economy and our largest trading partner, the euro area," he said. Mr King said surplus countries around the world are not stimulating enough to offset belt-tightening by deficit states such as the UK, US and Spain, citing the eurozone as a "microcosm" of the problem. "I was struck by the mood at the G7 meeting in Canada, where several of the major economies around the world said quite openly that they were relying on external demand growth to generate growth in their economy. That can't be true of everybody," he said.
The eurozone grew by just 0.1pc in the last quarter of 2009 as government stimulus wound down. Germany was flat; Italy contracted again; Spain and Greece were still in recession. Outside EMU, the Czech, Hungarian and Romanian economies all shrank. "We're treading a precarious path: things will have to go well in the rest of the world for Europe to avoid a double-dip recession," said Julian Callow from Barclays Capital. "Banks are facing bad loans and tougher Basel III rules. We've seen the deindustrialisation of Europe's core caused by the strong euro, which has helped Chinese exports penetrate the market. Unless the risks of debt deflation are mitigated, the European Central Bank may have to start buying assets."
Gabriel Stein from Lombard Street Research said Euroland is reaping the bitter fruit of tight fiscal and monetary policy, and the over-strong euro. "It is extraordinary for the ECB to stand back and do nothing as the (M3) money supply contracts. They have done almost no quantitative easing and seem paralysed by splits. This is as bad as any policy error since World War Two," he said. Falling prices in France and even Italy last month suggest that deflation may yet prove a threat. "Germany is exporting deflation to the rest of the eurozone," he said.
Greenspan Says Crisis ‘By Far’ Worst, Recovery Uneven
Former Federal Reserve Chairman Alan Greenspan said the financial crisis was "by far" the worst in history and called the recovery from the global recession "extremely unbalanced." The world economy has undergone "by far the greatest financial crisis globally ever," Greenspan said today in a speech to the Credit Union National Association’s Governmental Affairs Conference in Washington. Greenspan said that while the economy was in worse shape in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s because "never had short-term credit literally withdrawn."
Greenspan said that the gross domestic product may recover to the level of previous peaks earlier this year, even though traditional drivers of growth such as housing starts and motor vehicles were "dead in the water." He also said small businesses show few signs of improving because lenders are struggling with commercial real estate mortgages. The "extremely unbalanced recovery" is being led by high- income consumers and large businesses that are benefiting from a recovery in stock prices, he said. The Standard & Poor’s 500 Index fell 1.3 percent to 1,096.01 at 1:27 p.m. in New York. That level is 62 percent higher than the closing value of 676.53 on March 9, 2009, the lowest level since the financial crisis began.
Greenspan said that the financial system is "not yet to the point where the capital positions of the largest banks is built up to where they’re freely lending." Earlier this month, the Fed’s survey of senior loan officers said that banks continued to tighten terms of loans in the fourth quarter of 2009. Greenspan also said "fiscal affairs are threatening this outlook" for recovery, as Congress and the White House face difficulty raising taxes or cutting spending. He said that every day he checks the interest rate on 10-year Treasury notes and 30-year Treasury bonds, calling them the "critical Achilles Heel."
The financial crisis was caused by a "fundamental misjudgment in the marketplace," Greenspan said. Greenspan defended markets, because other forms of economic organization are worse. Greenspan said he wants the subprime mortgage market to return. "I hope we can find a way of resurrecting the subprime market," because it was working well until those mortgages were widely securitized, he said.
The deathbed of Keynesian economics
The UK has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance. So it may be fitting that the UK will also become the deathbed of Keynesian economics. Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalised almost half the banking industry.
Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy. The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked "bankruptcy imminent." At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.
The public debate about the state of the British economy was enlivened last week by a brawl between economists. On February 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.
That brought a stinging response from the Keynesians, who are urging the UK to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a "a sharp shock" now "would be positively dangerous". So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere. The UK has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.
And just as the Keynesians were wrong three decades ago, they are wrong now. The UK has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 per cent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 per cent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.
Just about everything possible has been done to encourage consumption. The results have been miserable. Retail sales excluding gasoline in January fell 1.2 per cent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on UK government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 per cent.
In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices. The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger. It is the argument quacks always push: if the medicine isn’t working, increase the dosage.
And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value. Stimulating the economy isn’t working. In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the UK imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.
Recipe for recovery
What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment. And yet the real lesson of the UK in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more. In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.
Hiring Freezes Hamper Weatherization Plan
President Obama’s plan to create jobs and rein in energy costs through a steep increase in money for weatherizing the homes of low-income Americans has so far borne little fruit, with many of the biggest states meeting less than 2 percent of their three-year goals to date, the Department of Energy’s inspector general said in a reportTuesday. The inspector general, Gregory H. Friedman, called the lack of progress "alarming." Far into the nation’s winter heating season, the program for the most part has neither saved energy nor put people to work, Mr. Friedman wrote.
"The job creation impact of what was considered to be one of the department’s most ‘shovel ready’ projects has not materialized," the report said. The assessment, issued a year after the weatherization program was created under the fiscal Recovery Act, comes as Congress moves toward passing a second bill to stimulate employment. Republicans and Democrats have been arguing over whether that second bill will add enough jobs in time to help revive the economy.
Responding to the report, Cathy Zoi, the Energy Department’s assistant secretary for energy efficiency and renewable energy, acknowledged Tuesday that the weatherization program could have gotten off to a faster start but said that it was gaining momentum quickly. "Since September 2009, we have tripled the pace of Recovery Act-funded home weatherization," Ms. Zoi said in a statement. She added that the department was bolstering federal oversight of the program to ensure that the states continued to strengthen their efforts.
Most of the weatherization projects involve improving insulation and replacing leaky windows and doors in the homes of low-income residents. Under the 2009 Recovery Act, $5 billion was allotted for weatherproofing apartments and houses over three years, up from $450 million in the previous fiscal year. States were authorized to spend up to 50 percent of the money they received by the end of December, the report said. Yet the report said action was hobbled by bureaucratic delays and by the recession itself, as spending cuts resulting from the economic downturn forced states to trim personnel expenses.
Many states either furloughed the state employees who would administer such programs or instituted hiring freezes that prevented state offices from processing additional work — even though the federal government would have paid the additional salaries, the report found. Another stumbling block was a decision by Congress to require contractors on the weatherization jobs to pay prevailing wages, the report said. To determine what those salary levels were, the Labor Department undertook a survey.
In the meantime, the Energy Department instructed states to go ahead and put people to work and to keep records so the federal government could make retroactive payments if necessary. But most states did not begin hiring until the wage question was resolved last fall, the report said. As a result, as of mid-February, one year into the stimulus plan, less than 8 percent of the money had been disbursed, the inspector general said. The pace of actual weatherizations was also dismal, the report said. New York State, for example, had a goal of weatherizing 45,400 units over three years, but by December had finished only 280, a completion rate of 0.62 percent, the report found. One reason, it said, was a hiring freeze in New York City.
Progress in Pennsylvania, which weatherized 1.28 percent of the houses and apartments it had intended to, was slowed by a deadlock over the state budget, the report said. Illinois wanted to hire 21 workers to oversee work on nearly 27,000 homes; it hired none because of a spending freeze, and completed only 331 homes, or 1.23 percent of its three-year target. But some state officials said that the numbers did not reflect current progress.
Gordon Anderson, a spokesman for the Texas Department of Housing and Community Affairs, which administers the weatherization program there, said that as of Tuesday, the state had carried out 1,057 weatherizations under the federal program and that it expected another 459 to be completed by the end of next week. Mr. Anderson cited logistical complications for the slow start-up. "We went from a budget of $13 million for weatherizations to $327 million," he said, "so we needed to get a serious plan in place to assure that our agency and all our contractors had the inadequate capacity to administer the funds."
Officials in other states also emphasized that the program required some time to put in place properly. Many said the number of houses they were weatherizing with the recovery money was now rising sharply. Jim Plastiras, a spokesman for the New York State Division of Housing and Community Renewal, said that action had been delayed by the confusion over wages, which was not resolved until October, but that efforts were now gathering steam. The state now has 17,400 homes in progress, Mr. Plastiras said. The government commissioned the inspector general’s report to ensure that forceful safeguards were in place to ensure that the $5 billion achieved its purpose of creating jobs, improving the quality of life in low-income households and reducing the waste of energy.
Study: Costly Health Care Not Necessarily Best
ROBERT SIEGEL, host: Does paying less for hospital care mean that you get lower quality care? Well, according to a new study in the archives of internal medicine the answer is not necessarily. Dr. Lena Chen is a clinical lecturer at the University of Michigan Health System in Ann Arbor. She was the lead author of that study and she joins us now from member station WUOM. Dr. Chen, welcome to the program.
Dr. LENA CHEN (Clinical Lecturer, University of Michigan Health System): Hi.
SIEGEL: Your study examines the records of care for congestive heart failure patients - all of them Medicare patients - in more than 3,000 hospitals. Tell us what you found.
Dr. CHEN: Well, we found that the cost of caring for a patient does not necessarily correlate with the quality of care delivered. So, for same conditions such as congestive heart failure, higher-cost hospitals provided higher quality care. But for other conditions such as pneumonia, the converse was true.
SIEGEL: You mean, that actually lower cost hospitals for some conditions in the end provided better care than higher cost hospitals.
Dr. CHEN: Yes. Although the differences were very small in terms of quality differences between the high and the low cost hospitals.
SIEGEL: Some of the ranges in price for treating the same ailment are pretty stunning here. For example, for congestive heart failure, you have a range of what was the cheapest and what was the most expensive?
Dr. CHEN: For congestive heart failure, the cheapest was $1,522, and the highest was $18,927.
SIEGEL: Eighteen thousand?
Dr. CHEN: Yes, it's definitely a huge range and we'd like to understand why there is such a range between hospitals.
SIEGEL: But what's driving that difference? Is it how many days you spend in the hospital? Is it how many people are checking up on you, medication, what's doing it?
Dr. CHEN: In part, it is probably the length of stay so - we found that the higher cost hospitals did have longer length of stay meaning the patient was in the hospital for a longer period of time. But beyond that we were unable to identify the specific reasons why high-cost hospitals cost more. Some of the reasons could be what you mention, such as different testing patterns.
SIEGEL: Does part of the country figure in it? I mean, are there just places where medical care is much more expensive because of, you know, real estate or utilities cost for the hospital?
Dr. CHEN: We did try to factor in the wages of a particular area. So, for example, a hospital in New York City versus a hospital in a small town, their wages might be slightly different. So, we adjusted for that in our in defining what was a high-cost hospital.
SIEGEL: But the range that you just cited to us for the cost of congestive heart failure, I mean, you'd have to find the highest labor market in the world versus a very, very cheap one to account for that.
Dr. CHEN: That's true. Definitely, it's in part driven by what the hospital does. But we don't have an answer as to what that is. Some of it may also be driven by differences in patients seen by different hospitals. We did try to adjust for that. But there maybe some residual differences that we could not account for.
SIEGEL: When we say that the outcomes at hospitals that cost less, that charge less are no different or essentially no different than at the more expensive ones per hundred patients, I mean, how many more have a really bad outcome at the loser in that comparison?
Dr. CHEN: Yeah, I mean the mortality rates for congestive heart failure in the lowest cost hospital was 10.8 percent and in the highest-cost hospital it was 9.8 percent.
SIEGEL: So you're saying the ranges, whether 10 people or 11 people did not make it through treatment - which does sound pretty small - and the range of cost can be what you described as eight or nine fold in terms of cost?
Dr. CHEN: Right, there's a much bigger difference in dollars.
SIEGEL: So, if people are prone to think that, you know, some hospital must be good because people pay a lot to go there and be treated, that would be misguided, and to think that because that hospital is cheap doesn't mean you're going to some low-rent medical facility.
Dr. CHEN: That is true. And I think that when you're going to a hospital, if you have the luxury of looking at the cost that it would be important to look at their quality measures as well, not just cost as a predictor of the type of care you're going to get.
Green Revolution in India Wilts as Fertilizer Subsidies Backfire
India's Green Revolution is withering. In the 1970s, India dramatically increased food production, finally allowing this giant country to feed itself. But government efforts to continue that miracle by encouraging farmers to use fertilizers have backfired, forcing the country to expand its reliance on imported food. India has been providing farmers with heavily subsidized fertilizer for more than three decades. The overuse of one type—urea—is so degrading the soil that yields on some crops are falling and import levels are rising. So are food prices, which jumped 19% last year. The country now produces less rice per hectare than its far poorer neighbors: Pakistan, Sri Lanka and Bangladesh.
Agriculture's decline is emerging as one of the hottest political issues in the world's biggest democracy. On Thursday, Prime Minister Manmohan Singh's cabinet announced that India would adopt a new subsidy program in April, hoping to replenish the soil by giving farmers incentives to use a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it. The setback of the Green Revolution matters enormously to India's future. The country of 1.2 billion has positioned itself as a driver of global growth and as a significant commercial power in coming decades.
India likely will struggle to get there, and to return to the heady days of 9% economic growth, unless it figures out how to reinvigorate its agricultural sector, on which the majority of its citizens still rely for a living. Agriculture has lagged behind other industries such as manufacturing and services, posting less than 2% growth in the latest reports on gross domestic product. And double-digit food inflation and declining yields spell less money in the pockets of rural Indians. India spends almost twice as much on food imports today as it did in 2002, according to the Ministry of Agriculture. Wheat imports hit 1.7 million tons in 2008, up from about 1,300 tons in 2002. Food prices rose 19% last year.
To be sure, there are bright spots. Indian officials say the country may produce a record wheat harvest this year because of good weather conditions, unless rain or hail appear. The wheat harvest last year was better than expected, making some hopeful that the importing trend will be reversed. Behind the worsening picture is the government's agricultural policy. In an effort to boost food production, win farmer votes and encourage the domestic fertilizer industry, the government has increased its subsidy of urea over the years, and now pays about half of the domestic industry's cost of production.
Mr. Singh's government, recognizing the policy failure, announced a year ago that it intended to drop the existing subsidy system in favor of a new plan. But allowing urea's price to increase significantly would almost certainly trigger protests in rural India, which contains 70% of the electorate, political observers say. The ministers of fertilizers and agriculture each declined requests for interviews. "This is politically very difficult," says U.S. Awasti, managing director of the Indian Farmers Fertilizer Cooperative Ltd. and an informal adviser to government officials on the issue. The cooperative of 50 million farmers is the largest fertilizer producer in the country.
Farmers spread the rice-size urea granules by hand or from tractors. They pay so little for it that in some areas they use many times the amount recommended by scientists, throwing off the chemistry of the soil, according to multiple studies by Indian agricultural experts. Like humans, plants need balanced diets to thrive. Too much urea oversaturates plants with nitrogen without replenishing other nutrients that are vitally important, including phosphorus, potassium, sulfur, magnesium and calcium. The government has subsidized other fertilizers besides urea. In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.
As the soil's fertility has declined, farmers under pressure to increase output have spread even more urea on their land. Kamaljit Singh is a 55-year-old farmer in the town of Marauli Kalan in the state of Punjab, the breadbasket of India. He says farmers feel stuck. "The soil health is deteriorating, but we don't know how to make it better," he says. "As the fertility of the soil is declining, more fertilizer is required." Increased demand and the soaring price of hydrocarbons, the main ingredient of many fertilizers, have taken India's annual subsidy bill to more than $20 billion last year, from about $640 million in 1976. "The only way for agricultural yields to rise again is for the government to give farmers the incentives and the products to provide balanced nutrition to their crops," says Bimal Goculdas, chief executive officer of Dharamsi Morarji Chemical Co., one of the oldest fertilizer firms in India.
Agriculture experts say the country can't afford to wait. "There are big problems for the future of food production in India if these problems are not addressed now," says Reyes Tirado, an agricultural scientist and researcher for Greenpeace Research Laboratories, an arm of advocacy group Greenpeace International. Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients. Ultimately, the government plans to pay the subsidy directly to farmers, who will be able to buy products of their choice, including but not limited to urea. Mr. Singh's government, however, said it would continue to subsidize urea, although it would set the price 10% higher.
Mr. Awasti, the fertilizer cooperative head, says the continuing urea subsidy means that farmers likely will still use too much of it. "The government is opting, as with any very difficult change, to adopt it in phases," he says. He says he believes that the urea subsidy will be dropped altogether in a year. In the early years after India gained independence in 1947, the country couldn't even dream of feeding its population. Importing food wasn't possible because India lacked the cash to pay. India relied on food donated by the U.S. government.
In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities. Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter. Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.
The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment. Fertilizer manufacturing companies sprang up around the country. Nagarjuna Fertilizers & Chemicals Ltd. became one of the most profitable publicly listed companies in India. In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.
"The business interests lobbied and the business interests prevailed," says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea. "That's when the imbalanced use of fertilizers began," says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India. With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.
In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show. "This type of ratio is a disaster," Mr. Gulati says. "It is keeping India from reaching the production levels that the hybrid seeds have the power to yield." Producers of phosphorus-based fertilizers struggled. The government reintroduced a small subsidy on phosphorus fertilizers, but at times it didn't cover the difference between the government-set price and the actual cost of production. Dharamsi Morarji, one of the oldest fertilizer companies in India, closed some plants.
With scant domestic supply, India had to import seven million tons of phosphorus-based fertilizers last year, according to a senior official at the Ministry of Chemicals and Fertilizers. Twenty-one percent of the urea, 67% of the phosphorus-based fertilizers and 100% of the potash-rich fertilizers sold in India in the fiscal year ended March 2009 were imported, according to a report this month from Fitch Ratings. In the northern state of Punjab, Bhupinder Singh, a turbaned, gray-bearded 55-year-old farmer, stood barefoot in his wheat field in December and pointed to the corner where he had just spread a 110-pound bag of urea. "Without the urea, my crop looks sick," he said, picking up a few stalks of the young wheat crop and twirling them in his fingers. "The soil is getting weaker and weaker over the last 10 to 15 years. We need more and more urea to get the same yield."
Mr. Singh farms 10 acres in Sohian, a town about 25 miles from the industrial city of Ludhiana. He said his yields of rice have fallen to three tons per acre, from 3.3 tons five years ago. By using twice as much urea, he's been able to squeeze a little higher yield of wheat from the soil—two tons per acre, versus 1.7 tons five years ago. He said both the wheat and rice harvests should be bigger, considering that he's using so much more urea today than he did five years ago. Adding urea doesn't have the effect it did in the past, he said, but it's so cheap that it's better than adding nothing at all.
Land needs to be watered more when fertilizer is used, and Mr. Singh worries about the water table under his land. When his parents dug the first well here in 1960, the water table lay 5 feet below the ground, he says. He recently had the same well dug to 55 feet to get enough water. "The future is not good here," he said, shaking his head. Balvir Singh, an agriculture development officer for Punjab state, says it is as if farmers have become addicted to urea. "One farmer sees another's field looking greener, so he adds more urea," he says. "A farmer will become bankrupt, but he will not stop using urea."
The fertilizer industry, which had lobbied to retain subsidies back in 1991, now sees them as a problem. That's because the government, trying to rein in spending, has been squeezing the reimbursement promised to fertilizer companies. The subsidy theoretically gives companies a 12% profit margin. Today, in part because of the way the government calculates the subsidy, it offers the average company a 3% margin, according to K. Rahul Raju, joint managing director of Nagarjuna Fertilizers & Chemicals, and Mr. Awasti, the fertilizer cooperative head. Farmers in Punjab are increasingly glum. "Farming is in shambles," said Kamaljit Singh, standing with fellow farmers in the courtyard of the village agriculture cooperative. "If we have to support our growing families and our increasing population on this land, we must get higher yields. Otherwise our families and our nation will suffer."