Neil Power, 10 years old. Said "turns stockings in Rome Hosiery Mill." A shy, pathetic figure, "Hain't been to school much", Rome, Georgia
Ilargi: Wait, let me start with the money quote of the day, Jim Rogers interviewed at CNBC Asia:
Q: "If you were the US administration, would you label China a currency manipulator?"
A: "If I were the US administration, I would resign ..."
Ilargi: Well, this one might turn out a bit long, but please bear with me. There’s a story to tell here, or several indeed. I extracted a number of bullet points from a New York Times article on Obama's new housing aid plan. Read through them, please, and I’ll see you at the end.
- [..] the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.
- About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak. Many of these loans have been bundled together and sold to investors.
- Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.
- One administration official cautioned that the investors might not be willing to volunteer any loans from borrowers that seemed solvent. That could set up a battle between borrowers and investors. This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.
- The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater.
- Another major element of the program, according to several people who described it, will be to encourage lenders to write down the value of loans for borrowers in modification programs. Until now, the government’s modification efforts have focused on lowering interest rates.
- Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself, for reasons that are unclear. The number of modifications that included principal reduction fell by half.
- Another element of the White House’s housing program will require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months. An administration official declined to speak on the record about the new programs but said they would "better assist responsible homeowners who have been affected by the economic crisis through no fault of their own."
- The new initiatives would expand the government’s current mortgage modification plan, announced a year ago with great fanfare. It has resulted in fewer than 200,000 people getting permanent new loans. As many as seven million borrowers are seriously delinquent on their loans and at risk of foreclosure. While fewer people are beginning default, the number of borrowers who are seriously distressed is rising.
- "The government is seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value, which is the only viable path to real housing stability," said one person who was briefed on the government’s plans.
- The number of foreclosures in the fourth quarter rose 9 percent, to 128,859. An additional 38,000 owners disposed of their homes in short sales, where the lender agreed to accept less than it was owed. A person briefed on the new plan said the number of underwater borrowers who qualified for the plan could be in the millions.
- The administration recognizes that some people’s finances have deteriorated so far that they are beyond help, the person said. People in that situation simply cannot afford the houses they are living in, the person said, even if the mortgages were reduced.
- "All these programs are geared toward people for whom it makes sense, for whom it’s workable when all is said and done," the person said. "Some people are too far gone."
Right, okay, after having read that, what do you think? How good an idea is this? And maybe forget for a moment that all of Obama's housing rescue plans thus far have been unmitigated disasters.
Now, those of you who know me are aware that I think all these plans are calamitous by default, at least in the present situation. The reason for that is that I am convinced US home prices have a whole lot more to fall. Where Mike Panzner this week talked about another 15% downside, and real estate broker Michael David White goes a bit further, I say prices will go down over 50% from present values, and even that's just a beginning. At times it seems that the only other person on the planet who understands why is my partner in crime at The Automatic Earth, Stoneleigh.
Still, whether you agree or not, it seems obvious that in the case of new policy initiatives such as this, you'd want to see what happens to the plan if prices actually do drop as much as either Panzner, White, or Case/Shiller, or myself, ranging from 15% to 50%, indicate.
And you know what? This is another plan that has no answer to such a perfectly legitimate question. Another plan borne out of the excruciating arrogance that says no Plan B is needed. That attitude typifies this administration, and indeed (US) politics in general. "We are in full control, don't worry, go to sleep".
But if prices keep falling, even if only by 15%, what are we looking at? Look at this sentence:
"The government is seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value".
Here's guessing that means homeowners who've seen the realistic value of their property fall by X%, will be required, if they choose to be part of the plan and are deemed to qualify, to sign into a new loan that takes the present value of their property and/or augments the number of years the loan will have to be paid off in. Which may sound nice at face value, but what if there is another 15% price fall, or another 25%? Then, obviously, the whole circus will have to begin all over again.
Meanwhile, the new loans will no longer be non-recourse, so if people default anyway, they're now responsible for the loan with all of their assets, not just the home. Moreover, another huge glut of debt will have been transferred from the banks to the public. And to add insult to injury, the mortgage backed securities everyone's municipality, pension fund and let's not forget the central bank, are heavily invested in, draw ever closer to the economic black hole's event horizon.
In other words, the only parties that are actually helped by plans such as these are the banks. I would be tempted to say that as soon as you see an initiative like this announced, get out of your underwater home as fast as you can. You don’t want to lose your right to walk away just for a few basis points less in monthly payments. It's a trap, set for you by your own government, willingly or not. Ask yourself what would happen if prices keep dropping. At what point would you be in trouble again?
Think about this: nearly all new mortgages are now guaranteed fully by the government (or they would never be written) through Fannie Mae, Freddie Mac, Ginnie Mae, the FHLB, a few minor governmental players, and, as you can see in the article above, the FHA in its role as a new major player (The FHA is still today handing out mortgages with a 3.5% downpayment. If anything defines subprime, it must be that.). Moreover, The Federal Reserve has bought $1.2 trillion in mortgage backed securities over the past year or so, and is set to stop doing so in about one week.
It's all government, the entire US real estate market, and that government gets its funding from you.
This sort of scheme is necessarily short lived. Ben Bernanke this week talked about shedding $1 trillion off the Fed's $2+ trillion balance sheet. It already has effectively stopped buying MBS. People wishfully talk about the private sector coming in to scoop up all the real estate related paper, but there's no proof that is even likely to happen.
What's much more plausible, in case the private sector doesn't step in (and why would they, if they haven't already), is that mortgage rates will rise fast and furious, and simultaneously home prices will start dropping seriously. The US housing market has been kept -barely- standing only and solely by the government's willingness to buy anything and everything related to that market. This week, that government has already experienced trouble selling its bonds, the only means by which it can extend programs to keep you in your homes.
As the Wall Street Journal reports today:
A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market.
Need I say more? The administration may have brave faces, a boost from the health-care victory (Pyrrhus as it is), and no Plan B to start with anyway, but they have no way to respond to an additional 15-25-50% drop in US home prices.
And that by the way, of course, is why there is no Plan B. It’s all or nothing. Such a drop would put a majority of home "owners" underwater, it would spell absolute and imminent disaster for the banking system, it would settle the Federal Reserve (which when it comes to losses means you) with gigantic losses, it would ruin many municipal funds and pension funds, it would lead to severe tension with China and other foreign investors, and you know what else? It's inevitable.
US homes are grossly overvalued. Look at unemployment numbers. Look at foreclosures. look at the pathetic failure of the present predecessor, the Home Affordable Modification Program. Prices will and must come down. A lot.
If you're eligible for a spot on the "new losers" program, I would advise you to get out as fast as you can. Don’t give up your right to walk away, which you will if you sign on. Or at least, if you're really fond of your home, ask whoever’s going through the process with you what would happen if prices came down another 10%, or 20%, what that would effectively mean for the papers you’re about to sign. If they say something in the vein of : "Trust me, that will never happen", run. Just. simply. Run. The government has no solution to the issue of overvalued housing, and they know it. They're trying to postpone the inevitable by locking you into payments you won’t be able to afford, on a home that will keep on losing value.
A whole lot more people are too far gone than are willing to admit they are. I would suggest looking at your numbers, subtracting another 25% from the "value" of your home, and see where that gets you.Just for starters. If that picture looks too bleak to you, walk, run, hide. Rent a nice spot for the time being. It may not feel as nice for now, but it's likely to save you a whole lot of pesos and headaches and heartaches going forward. The government, even if it would want to (which is debatable given its ties to Wall Street), can’t keep you in your home if prices go down even just 20% from here. The whole plan depends on prices stabilizing, at a level way higher than they were before the cheap money boom.
That’s a gamble at best. Don’t turn your family's future into a shot a the crap table. The odds are definitely not in your favor.
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US unemployment benefits set to expire April 5
Unemployment benefits are set to expire for at least a week on April 5, as Congress plans to break for two weeks without agreeing on an extension of the program. Last week, the House approved a $9 billion measure containing one-month extensions of unemployment insurance, COBRA health benefits and federal flood insurance. Senate Democrats hoped to have their chamber approve the same bill Thursday. But Republicans refused, complaining that the bill is not offset with spending cuts elsewhere.
They said the same thing in early March, when Sen. Jim Bunning (R-Ky.) brought the chamber to a halt for five days over another extension that wasn't offset. Senate Democrats and Republicans spent hours negotiating among themselves and with each other to find a compromise. Senate Majority Leader Harry M. Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) discussed the possibility of a one- or two-week extension of benefits that would be fully paid for, but Speaker Nancy Pelosi (D-Calif.) was opposed to the idea, according to two Senate aides.
As a result, the House and Senate will leave town without further action. COBRA and flood insurance will expire March 30, and unemployment benefits will expire April 5. The Senate will return to session April 12. "This will be our first item of business when we come back," said Reid spokesman Jim Manley, who added that the programs in question would be extended retroactively to make up for the time they were expired.
The Senate GOP's refusal to agree to the House's version of the bill was led by Sen. Tom Coburn (R-Okla.), who objected to bringing up the bill. Coburn said that by adding to the federal deficit, we are "stealing future opportunity from our children." But Democrats -- emboldened by the public relations victory they believe they won during Bunning's stand -- laid blame for the impasse at the feet of Coburn and his fellow Republicans. "It is our hope Republicans will realize the damage they are causing and stop standing in the way of this much-needed assistance for out-of-work Americans," Reid said.
U.S. Plans Big Expansion in Effort to Aid Homeowners
The Obama administration on Friday will announce broad new initiatives to help troubled homeowners, potentially refinancing several million of them into fresh government-backed mortgages with lower payments. Another element of the new program is meant to temporarily reduce the payments of borrowers who are unemployed and seeking a job. Additionally, the government will encourage lenders to write down the value of loans held by borrowers in modification programs.
The escalation in aid comes as the administration is under rising pressure from Congress to resolve the foreclosure crisis, which is straining the economy and putting millions of Americans at risk of losing their homes. But the new initiatives could well spur protests among those who have kept up their payments and are not in trouble. The administration’s earlier efforts to stem foreclosures have largely been directed at borrowers who were experiencing financial hardship. But the biggest new initiative, which is also likely to be the most controversial, will involve the government, through the Federal Housing Administration, refinancing loans for borrowers who simply owe more than their houses are worth.
About 11 million households, or a fifth of those with mortgages, are in this position, known as being underwater. Some of these borrowers refinanced their houses during the boom and took cash out, leaving them vulnerable when prices declined. Others simply had the misfortune to buy at the peak. Many of these loans have been bundled together and sold to investors. Under the new program, the investors would have to swallow losses, but would probably be assured of getting more in the long run than if the borrowers went into foreclosure. The F.H.A. would insure the new loans against the risk of default. The borrower would once again have a reason to make payments instead of walking away from a property.
Many details of the administration’s plan remained unclear Thursday night, including the precise scope of the new program and the number of homeowners who might be likely to qualify. One administration official cautioned that the investors might not be willing to volunteer any loans from borrowers that seemed solvent. That could set up a battle between borrowers and investors. This much was clear, however: the plan, if successful, could put taxpayers at increased risk. If many additional borrowers move into F.H.A. loans, a renewed downturn in the housing market could send that government agency into the red.
The F.H.A. has already expanded its mortgage-guarantee program substantially in the last three years as the housing crisis deepened. It now insures more than six million borrowers, many of whom made minimal down payments and are now underwater. Sources said the agency would use $14 billion in funds from the Troubled Asset Relief Program, some of which it could dangle in front of financial institutions as incentives to participate.
Another major element of the program, according to several people who described it, will be to encourage lenders to write down the value of loans for borrowers in modification programs. Until now, the government’s modification efforts have focused on lowering interest rates. Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself, for reasons that are unclear. The number of modifications that included principal reduction fell by half.
Bank of America, the country’s biggest bank, announced this week that it would forgive principal balances over a period of years on an initial 45,000 troubled loans. Another element of the White House’s housing program will require lenders to offer unemployed borrowers a reduction in their payments for a minimum of three months. An administration official declined to speak on the record about the new programs but said they would "better assist responsible homeowners who have been affected by the economic crisis through no fault of their own."
The new initiatives would expand the government’s current mortgage modification plan, announced a year ago with great fanfare. It has resulted in fewer than 200,000 people getting permanent new loans. As many as seven million borrowers are seriously delinquent on their loans and at risk of foreclosure. While fewer people are beginning default, the number of borrowers who are seriously distressed is rising. In the fourth quarter, the number of households at least 90 days past due on their mortgages swelled by 270,000, according to a report issued Thursday by the comptroller of the currency and the Office of Thrift Supervision.
"The government is seeking to persuade people to stay in their homes by aligning the mortgage debt with the asset value, which is the only viable path to real housing stability," said one person who was briefed on the government’s plans. The number of foreclosures in the fourth quarter rose 9 percent, to 128,859. An additional 38,000 owners disposed of their homes in short sales, where the lender agreed to accept less than it was owed. A person briefed on the new plan said the number of underwater borrowers who qualified for the plan could be in the millions. The government is not planning to solicit loans for the program, stressing that it is voluntary.
The administration recognizes that some people’s finances have deteriorated so far that they are beyond help, the person said. People in that situation simply cannot afford the houses they are living in, the person said, even if the mortgages were reduced. "All these programs are geared toward people for whom it makes sense, for whom it’s workable when all is said and done," the person said. "Some people are too far gone."
Inspector General Slams Obama Foreclosure-Prevention Drive
A government watchdog agency criticized the Obama administration's $50 billion campaign to avert foreclosures by reducing mortgage payments for millions of distressed borrowers. A report by the inspector general of the federal Troubled Asset Relief Program, or TARP, said results of the loan-modification program so far have been disappointing. The report, released Tuesday evening, also said that the U.S. Treasury has failed to measure results properly for the Home Affordable Modification Program, known as HAMP, and that it may merely delay foreclosures in too many cases.
When President Obama launched HAMP in early 2009, the government said it would help as many as three million to four million homeowners avoid foreclosure. So far, however, about 169,000 households have successfully completed trial periods and been given long-term payment relief. The report quoted a Treasury official as estimating that HAMP will produce 1.5 million to 2 million modifications over the program's planned four-year term. That compares with about eight million households currently behind on their mortgage payments or in the foreclosure process.
Yet the Treasury has said the program is on track to reach the initial goal because more than a million people have been offered trial loan modifications. Measuring the number of offers made is "not particularly meaningful," the report said, and the Treasury should instead focus on assessing HAMP by the number of people who are able to keep their homes long term. HAMP results have fallen short of expectations partly because the Treasury has had to revise its guidelines to lenders repeatedly, "causing confusion and delay," the report said. For instance, the Treasury initially pushed lenders to put borrowers into trial modifications without first verifying their incomes and other financial information. Many of the borrowers later were found not to be eligible. Now the Treasury is requiring lenders to verify financial information before starting trials.
The report also said HAMP leaves borrowers vulnerable to defaulting again because many of them remain overly indebted even after their home-loan payments are reduced. HAMP is designed to cut payments for the mortgage, property taxes, insurance and homeowners association or condo fees to 31% of pretax income. But many of the eligible households have huge amounts of credit card and other debts. Even after loan modifications, the median ratio of monthly debt payments to pretax income is 60%.
If HAMP "merely delays foreclosures rather than preventing them, the program will be of questionable value," the report said. Under HAMP, lenders get federal subsidies if they modify loans. That is done by cutting the interest rate to as low as 2%. In addition, lenders sometimes extend the term of the loan to 40 years. If those steps don't reduce the payment enough, lenders are supposed to defer principal payments.
Debt Fears Send Treasury Rates Higher
Unease at Deficit Hurts Demand for Treasurys; Mortgage Costs on the Rise
A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market. For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit. This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.
The poor demand, especially from foreign investors, sent the bonds' prices sharply lower and yields higher. It lifted the yield on the 10-year note to 3.9%—its highest since last June, and approaching the psychologically important 4% mark. That mark has been pierced only briefly since the financial crisis in 2008. Investors' response marked a big shift from auctions in recent months in which major foreign buyers, such as central banks, had snapped up Treasurys. It could spell trouble for the U.S. housing market; the rates on many mortgages are linked to the yield on the 10-year note.
The move up in its yield coincides with the impending end of the Federal Reserve's program to support the mortgage market. The Fed has bought $1.25 trillion of mortgage-backed securities, bolstering their prices and thus holding down their yields. In the past two days, mortgage rates have also ticked up. The average 30-year mortgage rate rose to 5.13% on Thursday from 5.06% on Monday, according to HSH Associates in Pompton Plains, New Jersey.
Concerns about the U.S. budget deficit are beginning to hurt the Treasury market, says Steve Rodosky, head of Treasury and derivatives trading at bond giant Pacific Investment Management Co. He says he is increasingly worried about the U.S. fiscal outlook. "The government needs to take real action rather than pay lip service" to addressing the fiscal problems. In all, the U.S. government is expected to sell $1.6 trillion in debt this year, including the $118 billion sold this week.
There are some temporary factors behind the lackluster demand for this week's Treasury offerings, such as a reluctance by Japanese investors to make new investments ahead of their fiscal year-end March 31. While this could be just "noise" in the markets, "I think it involves a greater, long-term concern about deficits in the U.S. last 10 or 20 years, about Social Security being in a deficit," said Brian Fabbri, chief economist North America at BNP Paribas. "And all of the concerns about the U.S. have been heightened by concerns about Greece." The jitters in Treasurys haven't spread to other markets. Stocks remain near 18-month highs. The Dow Jones Industrial Average came within 45 points of the 11000 mark on Thursday before falling back. It closed up 5.06 points at 10841.21.
Bruce Bittles, a strategist at R.W. Baird & Co., said he remains bullish on stocks for now. But he said if the yield on 10-year Treasurys creeps above 4%, that would be an important signal to start dialing back his clients' stock holdings. "In a debt-based economy like we have in the U.S., it doesn't take much of a hit from bond yields to cause some real pain," by raising costs to finance economic activity, Mr. Bittles said. The dollar has rallied, even as Treasurys have sold off. Usually, concerns about budget deficits send a currency lower. But investors appear to be betting on better prospects for a recovery in the U.S. than in Europe.
Adding to the focus on the Treasury market's woes this week has been an unusual development in an important, but usually ignored, market: interest-rate swaps. These common derivatives entail contracts that typically involve trading one stream of interest income for another. And in the past week, investors are being paid more to own U.S. Treasurys than U.S. corporate bonds. This development "is causing a lot of people to start scratching their heads, trying to understand what's going on," said BNP's Mr. Fabbri. One explanation, he said, may be investors are more comfortable with the risks of owning bonds backed by U.S. corporations than the government. The big question is whether this fall in demand for Treasurys, and spurt in their yields, will prove temporary or is the start of a trend.
For the most part, investors have taken at face value statements from Federal Reserve officials, including Chairman Ben Bernanke on Thursday, that the Fed isn't about to start raising the short-term rate it controls. But a growing number of investors expect at its next policy-making meeting in late April, the Fed may step back from its pledge to keep short-term rates low for an "extended period." Longer-term interest rates aren't set by the Fed but move on their own, in response to supply and demand. And some argue that the bond market has been too confident about these longer-term rates remaining low—at a time when the economy is slowly improving and the government is running huge budget deficits.
JPMorgan, Lehman, UBS Named as Conspirators in Muni Bid-Rigging
JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case. A government list of previously unidentified "co- conspirators" contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.
The papers were filed by attorneys for a former employee of CDR Financial Products Inc., an advisory firm indicted in October. The attorneys, as part of their legal filing, identified the roster as being provided by the government. The document is labeled "list of co-conspirators." None of the firms or individuals named on the list has been charged with wrongdoing. The court records mark the first time these companies have been identified as co-conspirators. They provide the broadest look yet at alleged collusion in the $2.8 trillion municipal securities market that the government says delivered profits to Wall Street at taxpayers’ expense.
"If the government is saying they are co-conspirators, the government believes they have sufficient evidence that they can show they were part of the conspiracy," said Richard Donovan, a partner at New York-based law firm Kelley Drye & Warren LLP and co-chair of its antitrust practice. Donovan isn’t involved in the case. The government’s case centers on investments known as guaranteed investment contracts that cities, states and school districts buy with the money they receive through municipal bond sales. Some $400 billion of municipal bonds are issued each year, and localities use the contracts to earn a return on some of the money until they need it for construction or other projects.
The Internal Revenue Service sometimes collects earnings on those investments and requires that they be awarded by competitive bidding to ensure that governments receive a fair return. The government charges that CDR ran sham auctions that allowed the banks to pay below-market interest rates to local governments. CDR, a Los Angeles-based local-government adviser, was indicted in October along with David Rubin, Zevi Wolmark and Evan Zarefsky, three current or former executives. The company and the three men have denied wrongdoing. Since last month, three former CDR employees who weren’t charged in the initial indictment have pleaded guilty and agreed to cooperate with the Justice Department.
In a court filing yesterday, defense lawyers said they "inadvertently" included the names of individual and company co-conspirators in a motion asking the court to compel the government to provide more specific evidence of the alleged misconduct. They asked the court to strike the entire exhibit in which the list appears. U.S. District Judge Victor Marrero granted the request. The government’s probe became public in 2006 when federal investigators raided CDR and two competitors and issued subpoenas to more than a dozen firms. The "co-conspirators" on the list released in court this week also included Wachovia Corp.
The indictments released in October didn’t identify any of the sellers of the investment contracts involved in the alleged conspiracy. They were identified only as Provider A and Provider B. They paid kickbacks to CDR after winning investment deals brokered by the firm, according to the indictments. The firms did this by paying sham fees tied to financial transactions entered into with other companies, prosecutors said. Kickbacks were paid from 2001 to 2005, ranging from $4,500 to $475,000 each, according to the Justice Department.
According to the list contained in the court filing this week, the investment contracts involved were created by units of GE and divisions of Financial Security Assurance Holdings Ltd., a bond insurer formerly part of Brussels-based lender Dexia SA. The kickbacks were paid out of fees generated by transactions entered into with two financial institutions that weren’t identified in the October court filing. The March 24 list filed by the defense named the two firms as UBS and Royal Bank of Canada.
Dexia completed the sale of FSA’s bond-insurance business in July to Assured Guaranty Ltd. of Hamilton, Bermuda, while retaining its outstanding investment contracts. FSA, based in New York, was the biggest insurer of U.S. municipal bonds in 2007 and 2008. Telephone messages left at Dexia’s media-relations offices in Paris and Brussels after business hours weren’t immediately returned. "We have no comment," said Betsy Castenir, a spokeswoman for Assured Guaranty in New York, in an e-mail response. "Dexia has responsibility for the liabilities of the Financial Products business."
Whistleblower Exposes JP Morgan's Silver Manipulation Scheme
by Tyler Durden
Earlier today the CFTC held a sham hearing in which, among other thing, the organization discussed position limits in PM speculation, because, you know, it's the mom and pop speculators that destroy the precious metal market (not JP Morgan or the New York Fed mind you). The hearing could not have come at a more opportune time. GATA has just broken a major story, in which a London metals trader-slash-whistleblower exposes JP Morgan's silver price suppression/manipulation scheme.
At this point none of this should be at all shocking, and the only thing that matters is when CFTC's ex-Goldmanite Gary Gensler will be fired for allowing hundreds of billions of dollars to be sucked out of the PM market on behalf of such major market manipulating entities as JP Morgan and the New York Federal Reserve, for whom it transacts. Don't worry - the answer to that rhetorical question is "never", as it is the administration's goal to make all the millionaires among the bulge bracket firms billionaires, via legalized theft from honest investors. Furthermore, if indeed the CFTC is complicit in these manipulative events, as GATA suggest, we hope our objective mainstream media readers enjoin GATA in seeking justice for this criminal breach of proper regulatory enforcement.From GATA:
Additional Statement by Bill Murphy, Chairman Gold Anti-Trust Action Committee to the U.S. Commodity Futures Trading Commission
Washington, D.C., March 25, 2010
On March 23, 2010, GATA Director Adrian Douglas was contacted by a whistleblower by the name of Andrew Maguire. Maguire is a metals trader in London. He has been told first-hand by traders working for JPMorganChase that JPMorganChase manipulates the precious metals markets, and they have bragged to how they make money doing so.
In November 2009 Maguire contacted the CFTC enforcement division to report this criminal activity. He described in detail the way JPMorgan Chase signals to the market its intention to take down the precious metals. Traders recognize these signals and make money shorting the metals alongside JPM. Maguire explained how there are routine market manipulations at the time of option expiry, non-farm payroll data releases, and COMEX contract rollover, as well as ad-hoc events.
On February 3 Maguire gave two days' warning by e-mail to Eliud Ramirez, a senior investigator for the CFTC's Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5. On February 5, as market events played out exactly as predicted, further e-mails were sent to Ramirez while the manipulation was in progress. It would not be possible to predict such a market move unless the market was manipulated.
In an e-mail on February 5 Maguire wrote: "It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC's allowing by your own definition an illegal concentrated and manipulative position to continue."
Expiry of the COMEX April call options is tomorrow, March 26. There was large open interest in strikes from $1,100 to $1,150 in gold. As always happens month after month, HSBC and JPM sell short in large quantities to overwhelm all bids and make unsuspecting option holders lose their money. As predicted by GATA, the manipulation started on March 19, when gold was trading at $1,126. Last night it traded at $1,085.
This is how much the gold cartel fears the CFTC's enforcement division. They thumb their noses at you because in more than a decade of complaints and 18 months of a silver market manipulation investigation nothing has been done to stop them. And this is why JPM's cocky and arrogant traders in London are able to brag that they manipulate the market. This is an outrage and we are making available to the press the e-mails from Maguire wherein he warns of a manipulative event.
Additionally Maguire informed us that he has tape recordings of his telephone communications with the CFTC, which we are taking the appropriate legal steps to acquire.
Senator Kaufman: Which Part Of 'Too Big To Fail' Do You Not Understand?
by Simon Johnson
When a company wants to fend off a hostile takeover, its board may seek to put in place so-called "poison pill" defenses - i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.
Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.
To understand this more clearly you can,
The Citigroup situation is simple. They would like to downsize slightly, and are under some pressure to do so. It is hard to sell assets at a decent price in this environment, so why don't they just spin off companies - e.g., quickly create five companies in which each original shareholder gets a commensurate stake?
The answer is that Citi's debt is generally cross-guaranteed across various parts of the company. US and foreign creditors have a claim on the whole thing, more or less (including the international parts), and you can't break it apart without upsetting them. The cross-border dimensions make everything that much more knotty.
Senator Kaufman explains what this means - essentially the "resolution authority" proposed in the Dodd legislation is meaningless. How would any administration put a huge bank into any kind of "resolution" (a FDIC-type bank closure, scaled up to big banks) when it knows that doing so would trigger default across all the complex pieces of this multinational empire?
You could do it if you are willing to accept the costs - and if you understand there are big drawbacks to providing an unconditional bailout of the 2009 variety. But will a future administration be willing to take that decision? The Obama administration was not - and big finance will only become bigger and more complex as we move forward.
If you look into the eyes of the decision-makers from spring 2009, they honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession. You can argue about their true motivation all you want; this is irrelevant. The point is that the structures in place last year remain unchanged today. If a megabank shut-down under pressure was impossible for our policymakers last year, how exactly will the situation change after the Dodd bill passes - remembering that our current policymakers or a close facsimile will run this country for the indefinite future?
Senator Kaufman is strong too what this all means. By all accounts, this Senator is not a person who came to the boom-bust-bailout debate with strong preconceived notions, just someone who has listened carefully to the arguments on all sides. And, unlike most politicians, this Senator does not need to raise money.
Banks that are "too big to fail" are simply too big. Making them smaller may not be sufficient to prevent major crises in the future - Senator Kaufman sensibly also supports a long list of related reforms, including for derivatives markets (see his other speeches on this topic: first, second) - but rolling back our biggest and most dangerous banks certainly is necessary. And there is simply no evidence that banks on today's modern scale convey any benefits to society.
Massive banks cannot be controlled, at least not in the US context; we are not Canada. "Smart regulation" in this context is an oxymoron. Our regulators have been captured by the ideology of finance for 20 years; the big banks industry are not about to let them out on parole now.
For a long while, the Obama administration insisted that size caps for banks were not on the table. Then, in January, the president himself announced the Volcker Rules - which include a size cap for banks. We've argued this cap should be even tighter - big banks can get smaller in an orderly fashion and regulators can help - but still any cap would be a step in the right direction.
Yet there is no size cap in Senator Dodd's bill.
Given that this White House has shown it can achieve considerable things, when it applies itself, why not pursue the Volcker Rules in full?
The White House is clearly not afraid of the business lobby - Deputy Secretary Neal Wolin took on the Chamber of Commerce this week regarding the Consumer Protection Agency for Financial Products; his tone was strong and his arguments were telling.
Yet the White House, Senator Dodd, and perhaps even Barney Frank are all stuck on one issue - they can't contemplate making our biggest banks smaller (or even limiting their size).
It's as if a very clever political poisoned pill has been put into place. If you act against the big banks they will .... What exactly? Threaten to prolong the recession? Help your opponents get elected? Run ads against everything you believe in?
Whatever the reason, write it down and think about it. How do you feel about a small set of big financial firms having this kind of power? How is that good for the rest of the business community, let alone regular citizens and our democracy?
This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage. Or they can just call up Senator Kaufman.
Sen. Kaufman: Bring Back Glass-Steagall, Break Up 'Too Big to Fail' Banks
With health-care reform presumably a done deal, Congress is now turning its attention to Wall Street reform. Senate Banking Chair Christopher Dodd's financial reform bill has "an excellent chance to pass," according to Delaware Senator Ted Kaufman, who was appointed to fill Joe Biden's term after the 2008 election. "I just cannot believe after what happened to this country that we're not going to do something about...regulating Wall Street and getting things back under control. I find it hard to believe people will vote against a bill to do what we have to do."
But that's not to say Sen. Kaufman is enamored with all aspects of the bill. Most notably, Sen. Kaufman is critical of how the bill deals - or doesn't deal - with the issue of 'too big to fail.' "Putting our hopes in a resolution authority is an illusion," he said last week; Sen. Kaufman reiterates and expands up that view in the accompanying video. "I have some concerns about the 'too big to fail' section, I really do," he says. "I think we have to have something to separate the commercial banks and the investment banks: We should go back to [Glass-Steagall]."
Sen. Kaufman believes commercial and investment banking should be separated, so that the government-insured deposits of ordinary Americans can't be used to backstop the riskier aspects of investment banking. He also expressed concern about concentration among the nation's biggest banks, which have gotten even bigger since the 2008 crisis, citing the following:
- The top 6 American banks have assets equal to 63% of U.S. GDP. "We've got to deal with 'too big to fail,'" he says.
- The top 5 American banks are engaged in over 80% of all over-the-counter derivatives trades. "We never designed commercial banks to be involved in anything like OTC derivatives," he says. "We should get them out of that business."
On a related note, Sen. Kaufman says "it's time" for Goldman Sachs and Morgan Stanley "to go back to being investment banks." (In September 2008, the Fed granted the two firms commercial bank status so they could access the Fed's discount window and other facilities put in place to prevent more financial failures during the heart of the crisis.) Reinstating Glass-Steagall doesn't seem to have much support in Congress, which seems to have dragged its feet on the issue of financial reform generally.
Sen. Kaufman attributed the lag to the "extraordinary complexity" of Wall Street and the fact health-care reform and the economic recovery have dominated Senators' attention for the past year-plus. "My hope is as my colleagues begin to focus on this situation they will see the wisdom of doing something serious about [separating] banks and investment banks," he says.
Regulators, Mount Up
Going into this week, the Obama Treasury department had an extensively choreographed plan for closing the deal on financial reform. On Monday, Secretary Tim Geithner would deliver a sharply-worded speech at the American Enterprise Institute, making the case for why conservatives should support real reform. (Geithner had been itching to give the speech for weeks but had been waiting for an opening.) The same day, Treasury would dispatch a team of financial wonks to help Chris Dodd shepherd a bill through his Senate Banking Committee. Then, on Wednesday, Deputy Secretary Neal Wolin would deliver another fiery speech, this one at the U.S. Chamber of Commerce. On and on it would go, Treasury reckoned, until this painstaking mix of inside game and outside pressure gradually nudged the bill over the finish line.
That was the plan, in any case. But on the way back from Geithner’s AEI speech, a member of the secretary’s entourage got an email from Treasury’s Hill contingent. "It’s done," the email said. "They just voted on it. We’re going to the W for drinks." To the shock of everyone in the car, the Republicans had withdrawn hundreds of proposed amendments and allowed Dodd to move the bill on an anti-climactic, party-line vote. "The whole team was at the bar by 6:30," says one administration official.
Geithner and his troops were hardly the only ones pleasantly surprised at the way the ground had shifted. Pretty much no one who follows the regulatory reform issue can quite believe the sudden change. In the span of a few days, reform has evolved from one of those debates newspaper editorialists have among themselves to Washington’s NEXT BIG PUSH. Clearly much of this derives from the parties’ changing fortunes, as Democrats bask in the glory of their health care victory and Republicans suddenly lack self-esteem. Indeed, try to recall the last time a GOP senator lacerated his party for blowing a chance at bipartisanship, as Tennessee Senator Bob Corker did on reg reform this week, and you begin to understand how far we’ve come.
The key shift is arguably the one that’s taken place at the White House. Prior to late last week, it wasn’t entirely clear whether the White House actually wanted a bill this year, or whether it simply wanted to bloody Republicans over their opposition to reform. But, as health care began to look like a fait accompli, the White House seemed to subtly change its posture. One administration official says it wasn’t so much that the White House was ambivalent, as that it was massively preoccupied with health care--and that it wasn’t sure until recently that a solid bill was achievable. "We didn’t want to do the thing … where you cut a deal here and there with every special interest available," says the official. Whatever the case, the shift was as palpable as it was significant: Another official was impressed that the president delivered a radio address about reforming Wall Street last Saturday, the day before the most historic health care vote in 45 years.
The Dodd bill would, among other things, set up a process for dismantling failed megabanks so they don’t end up on the government dole; give the Fed new powers to regulate institutions that could bring down the entire financial system; set up a new consumer financial protection agency within the Fed; make the trading of derivatives (the financial instrument that blew up AIG) safer and more transparent; and change the way the New York Fed president, the system’s chief Wall Street overseer, is appointed. (The bank’s board, which features several Wall Street executives, currently enjoys the power to hire and fire its president; Dodd wants the New York Fed president to be a White House appointee.)
The bill differs in certain respects from the version the House passed in December—one difference is the New York Fed provision, which the House bill lacks. But, on Wednesday, Obama told Dodd and his House counterpart, Barney Frank, that he could more or less live with either version, according to an official knowledgeable about the meeting. (Though he stressed that he’d like to combine the toughest elements of both, as with an exemption from derivatives regulation for non-financial companies, which is stricter in Dodd’s bill.) Mostly, he just encouraged them to press ahead, emphasizing the win-win dynamic at work. If Republicans dig in, the president argued, that’s a fight he’d welcome. (Administration officials have seen polling suggesting the public will assume Republicans are carrying Wall Street’s water, regardless of their arguments.) And if Republicans want to join in the effort to rein in Wall Street—well, no one at the White House would turn down a big, bipartisan victory.
On Wednesday afternoon, Commodity Futures Trading Commission Chairman Gary Gensler appeared at the Chamber of Commerce conference not long after Wolin. Gensler has made a name for himself this last year as one of the most aggressive advocates of regulation in Washington. He delivered a typically forceful speech on derivatives, calling on the Chamber to fight for the interests of all 3 million of its members, not just the big financial institutions that seem to dominate the organization at times. On his way out, Gensler ran into the Chamber’s always-dapper president, Tom Donohue, and couldn’t resist cracking a joke—complimenting him for scheduling the conference for the week health care reform passed. Donohue just smiled dyspeptically.
Of all the groups who’ve been caught off guard by the latest twist in the reg-reform saga, none has been more so than the banks and their Washington representatives. The big banks have been resigned to some sort of comprehensive reform for months now, but planned to make a stand on particular issues, like the consumer protection agency (which JP Morgan Chase has led the charge against), and the so-called Volcker Rule restricting government-backed banks from making speculative bets. (Goldman has taken the lead on this front. The smaller banks were up in arms about the possibility of a string of new regulatory mandates. And all were operating under the assumption that they had a lot more time to make their case. One administration official who’s seen internal emails from a leading Wall Street lobbying group told me flatly, "They’re not ready for this to be now."
Before health care reform passed, according to this official’s reading of the emails, the banks had assumed they could rally a group of Democrats to block any measure they deemed excessive—the kind of thing that used to pass for bipartisanship in Washington. Since health care, says the official, "Democrats are seeing the value in holding together," and so the banks are scrambling to produce a far-inferior plan B: holding the line with all 41 Senate Republicans. The problem, of course, is that a reform counteroffensive composed entirely of Republicans looks suspiciously like the party is doing Wall Street’s bidding—precisely what the banks and the GOP want to avoid.
The fundamentals look pretty good for the reformers, in other words. Still, Democratic officials are guarding against overconfidence. If nothing else, there’s a concern that the banks could make inroads on some of the bill’s more arcane provisions—the details unlikely to gin up public outrage but which are fundamental to reforming the financial system. "The consumer agency, the Volcker rule, too big to fail, to some extent the Fed stuff—they’re the meat of it. Derivatives--there’s not going to be a lot of showy big floor fights on that," says one anxious Senate staffer.
And so the administration is keeping the pressure on. Wolin’s speech at the Chamber was positively blistering—accusing the organization of launching "a lavish, aggressive and misleading campaign to defeat the proposed [consumer] agency." And Obama, perhaps having learned the lesson of health care reform, has urged Dodd and Frank not to dither. "With a two week recess coming--notwithstanding the acknowledgment that something’s going to happen here by Republicans on the committee--we want to continue to build momentum," says one official. It looks like this bill is headed across the finish line with more than just a nudge.
Bernanke says Fed is receptive to selling security holdings
The Federal Reserve is open to selling some of the securities now on its books as part of its withdrawal from its unconventional efforts to prop up the economy, Chairman Ben S. Bernanke said Thursday, in a change of tone on how the Fed will execute its exit strategy from crisis-era interventions.
Over the past 15 months, with the Fed's short-term interest rate target near zero and the economy in horrible shape, the central bank bought more than $1.7 trillion in long-term assets to push rates down further. The purchases of those assets -- including mortgage-backed securities, debt in companies like Fannie Mae and Freddie Mac, and long-term Treasury bonds -- helped swell the Fed's balance sheet from about $800 billion before the crisis to $2.3 trillion last week.
Bernanke, testifying Thursday before the House Financial Services Committee, said that "if necessary," the Fed "has the option of redeeming or selling securities" bought during the crisis. In written testimony to the same committee on Feb. 10, he was more ambiguous, stating that he did not "anticipate that the Federal Reserve will sell any of its security holdings in the near term," at least until after the Fed had begun raising interest rates and the economy had clearly begun a sustainable recovery.
Similarly, Bernanke said Thursday that "restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies." Six weeks earlier, he said only that the Fed "may also choose to sell securities in the future when the economic recovery is sufficiently advanced." Some members of the Fed's policymaking group, the Federal Open Market Committee, have been pushing to sell off the assets relatively quickly, both to prevent a burst of inflation down the road and to avoid a situation in which the Fed is essentially subsidizing one type of borrowing -- home mortgages -- but not others.
"We can always sell assets," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview last week. "I think we need to be open to that. In the long run, the Fed needs to get back to a balance sheet . . . that looks like all Treasurys, and is at a much smaller level. . . . Ultimately we have to shrink the balance sheet." But Bernanke and other policymakers have been reluctant to sell assets, for fear that doing so would drive up long-term interest rates, stifling economic recovery.
In his testimony, Bernanke continued to make clear that no sales of assets are imminent. Nonetheless, since February, economic data have been generally solid, suggesting that the recovery is on track. Just Thursday, the Labor Department said that there were 442,000 new claims for unemployment insurance benefits last week, down 14,000 from the previous week. And forecasters expect healthy job growth to be reported for March. Also, the Fed's program to buy $1.25 trillion in mortgage-backed securities is now coming to an end -- it expires March 31. The end of that program has occurred without any rise in mortgage rates, suggesting that the securities markets are now functioning well. That has helped instill confidence that the mortgage market could remain stable even if the Fed were to start selling the securities down the road.
Bernanke Says U.S. Fiscal Outlook 'Somewhat Dark'
Federal Reserve Chairman Ben S. Bernanke told lawmakers today that the U.S. government’s budget outlook is "somewhat dark" and Congress needs to agree on a plan to reduce the deficit. He spoke in response to a question about the budget impact of the health-care overhaul signed into law this week by President Barack Obama. Bernanke declined to discuss the effect of the health measure, saying he didn’t want to "second guess" the Congressional Budget Office.
"Clearly everyone agrees that the overall fiscal outlook for the government is somewhat dark over the medium term, and it would be very useful if there could be a bipartisan, concerted effort to explain, demonstrate and decide how the government is going to achieve a more sustainable fiscal trajectory," he said during testimony today to the House Financial Services Committee.
The budget deficit reached a record $1.4 trillion for the fiscal year that ended Sept. 30 amid falling tax revenue from the recession, a bailout of the banking and auto industries, and the $787 billion economic stimulus package. The Obama administration expects the shortfall to widen to $1.5 trillion this year. Bernanke said the deficit was caused in part by the recession, and that there’s no need to close it immediately. "There’s a reason for the big deficit and I do not think it is desirable or possible to get rid of it in the next year or two," Bernanke said. "Down the road, when the economy operates more normally, if we could convince creditors that we will have a more sustainable situation, that will improve interest rates today and support the growth process today."
Bernanke said the deficit might affect monetary policy if it causes investors to lose confidence in the government’s ability to achieve fiscal balance. "Interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government," and "high interest rates tend to slow the economy," he said. The Congressional Budget office estimates that the health- care package will cost $940 billion over 10 years and cover 32 million uninsured Americans. That’s more than made up for with a new tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal deficit, the CBO said.
Europe agrees IMF-EU rescue for Greece
by Ambrose Evans-Pritchard
After weeks of discord, Europe's leaders have agreed to an emergency facility for Greece backed by the International Monetary Fund and bilateral loans from eurozone states. The accord was vague on figures and aid can be invoked only as a "last resort" if Greece is shut out of the capital markets. Since Greece is already paying an untenable debt premium, the wording once again leaves it unclear what exactly has been settled.
Angela Merkel, the German Chancellor, and Jan Peter Balkenende, the Dutch premier, leaders of the two key creditor states, imposed their demand that the IMF must be central to any rescue. While the Eurogroup is to play a "co-ordinating" role, Germany and Holland will retain a veto over use of the facility. Greece said it was "satisfied" by the terms. The accord masks a bitter struggle between Germany and a French-led bloc over the future shape of Europe. For all the rhetoric, Berlin has refused to cross the Rubicon towards an EU fiscal union, shattering long-held assumptions about the inevitable march of the EU project. By bringing in the IMF, it ensures that each sovereign state remains responsible for its own debts.
A host of questions remain unanswered, not least whether the IMF's board will disburse funds without retaining control over austerity plans, or whether it will accept EU conditions at all. The IMF usually imposes devaluations and steers monetary policy. When public debt is already too high – as it may be in Greece at 125pc of GDP this year – the Fund can engineer a controlled default. Jean-Claude Trichet, head of the European Central Bank, said it was a "very, very bad idea" to let the IMF into the eurozone, a foretaste of how hard it will be for the Fund to work with EU bodies. The euro fell below $1.33 against the dollar on Mr Trichet's comments. Investors have learned in any case to treat EU summit headlines with a pinch of salt. A string of rescues over the past six weeks proved little more than bluff.
The package is to be about €22bn (£20bn) with a "substantial " share from the IMF and a "majority" from Eurogroup states, at stiff interest rates. This barely tides Greece through to the end of the May. It cannot be triggered until Greece faces default. The ECB says this risks delaying until the fire is out of hand. The concern in the markets is that Greece will need more support before long if austerity measures cause a deeper slump this year than the 0.8pc contraction forecast by Athens. Deutsche Bank expects the Greek economy to shrink 4pc this year. This would play havoc with public finances, perhaps tipping the country into a self-feeding slide.
"There are huge risks in this new adventure," said Jacques Cailloux, Europe economist at RBS. "We think the first stage will be cash on the table and that will be enough to calm things down until next year. This is a last chance for Greece. If it goes wrong there may have to be talk later of debt restructuring, since there will be extreme opposition from Germany for any more aid."
China is watching nervously, increasingly worried about the large chunk of its $2.4 trillion (£1.6 trillion) of foreign reserves held in eurozone bonds. "Greece is only one case, but it's only a tip of the iceberg," said Zhu Min, the vice-governor of China's central bank. "The main concern today obviously is Spain and Italy." Zhu Min said it is unlikely that Greece will default, but real concern is the deeper structural problem with the way the euro is run. "We don't see decisive action that tells the market, 'We can solve it, we can close it,' so the market is very volatile," he said. Beijing has repeatedly questioned the safety of dollar assets. This is the first time it has questioned the euro in such terms.
"China is really the big story of the day for Europe," said Simon Derrick, currency chief at the Bank of New York Mellon. "Nobody at China's central bank gives a speech like this without clearance from the highest level. They are saying, 'We have a lot of money invested in your debt and we think it is time for you to get your house in order'," he said.
Jim Rogers: Greece bail-out does more harm than good
Greek Debt Head Says EU Deal ‘Wipes Out’ Default Risk
The European Union accord on financial aid for Greece removes the risk of the nation failing to repay bond investors, the country’s debt-agency chief said. "The Brussels agreement wipes out the risk of default, the refinancing risk and raises the credibility of the government’s austerity plan," Petros Christodoulou, head of the Athens-based Greek debt agency, said today in an e-mailed response to questions. "This should tighten the spreads materially starting from the short end."
Greek two-year government notes extended gains and the extra yield investors demand to hold the securities instead of similar-maturity German debt, the region’s benchmark, declined. European leaders yesterday endorsed a French and German proposal for a mix of International Monetary Fund and bilateral loans at market interest rates, while expressing confidence that Greece won’t need outside help. "This is good news for Greece and it should help if the country decides to come to the market in coming weeks," said Wilson Chin, a fixed-income strategist at ING Groep NV in Amsterdam. "We don’t know what they plan to do next. From the cost perspective, shorter-dated Greek bonds, anything shorter than 10 years, are looking attractive."
Greece has about 8.2 billion euros of debt due on April 20, with another 3.9 billion euros of bills maturing next month, according to data compiled by Bloomberg. There is also 8.5 billion euros of bonds scheduled for repayment on May 19. Christodoulou declined to offer specifics on future Greek bond sales. The country raised 8 billion euros ($11 billion) from selling a five-year note in January and 5 billion euros from a 10-year bond offering in March, both through banks to ensure demand.
The yield premium, or spread, that investors demand for holding two-year Greek notes instead of equivalent-maturity German debt fell 28 basis points today to 338 basis points. The spread was 412 basis points a week ago. Short-dated Greek debt outperformed longer-dated maturities. The yield on the two-year note tumbled 27 basis points to 4.56 percent, the five-year note yield slid 15 basis points to 5.55 percent and the 10-year yield fell 7 basis points to 6.23 percent.
The country may ultimately get aid from the IMF worth about 20 billion euros over 18 months, Goldman Sachs Group Inc. said in a report yesterday. The French newspaper Le Figaro reported yesterday that assistance would total 22 billion euros, citing German officials. The cost of insuring against a Greek default fell 11 basis points today to 300 basis points, according to CMA DataVision prices.
Chinese Banker Faults Greece Efforts
Zhu Min says crisis needs decisive action to show it can be solved; tells conference China should import more goods
A senior Chinese central bank official criticized the handling of the Greek debt crisis, highlighting global concern about the situation in Europe. Speaking at a conference in Hong Kong, Zhu Min, deputy governor of the People’s Bank of China, also said China "should and could" import more goods to keep its trade surplus small. And he noted that the central bank’s efforts to tighten monetary policy were having their intended effect, even without China having to raise interest rates. "I don’t think Greece will go bankrupt because it’s still relatively small," said Mr. Zhu. "But we don’t see decisive actions to tell the market we can solve it." Mr. Zhu’s comments punished the euro early in the day and came before news that euro-zone leaders had agreed to a deal to back a joint EU-International Monetary Fund bailout for Greece.
The euro sank to a 10-month low against the dollar after European Central Bank President Jean-Claude Trichet threw cold water on hopes for a solution to the issues of sovereign debt that plague the euro zone. Mr. Zhu called Greece "just one case," but also the "tip of the iceberg," and warned that fiscal problems could spread to Spain and Italy. High levels of debt throughout the developed world, he said, would keep growth low for several years. "The U.K. is weak. America itself is weak, because in a two- to four-year horizon, U.S. debt will climb to 110% [of GDP] and stay there for a while," he said.
"The governments tried to put every burden from the financial sector onto their own children. Now they find nobody can save them," he added, referring to the large amounts of government debt issued to fund bank bailouts and stimulus programs in the West during the crisis. Mr. Zhu’s comments about Greece are seen as important because China, as the world’s largest holder of foreign-exchange reserves, is a major investor in the euro. The comments come a day after Fitch Ratings downgraded Portugal. They also confirm concern in the market that debt strains in the currency bloc could sap some support that the euro has enjoyed as a key component of official reserves over the past 10 years. "This is a good indication of how rapidly fundamental concerns are growing about the euro zone," said Simon Derrick, a senior currencies analyst at the Bank of New York Mellon in London.
China has about $2.4 trillion in foreign reserves overall, though it doesn’t reveal how much of that is in euro-denominated assets. IMF data show that emerging markets as a whole hold about one-third of their reserves in euros. China’s share may be smaller, but euros are still widely assumed to make up a significant part of the total. A veteran of Bank of China Ltd., Mr. Zhu joined the Chinese central bank last year. In February, he was appointed special adviser to IMF Managing Director Dominique Strauss-Kahn.
Jim Rogers: Yuan Will Surge Over Time
Money quote:"If you were the US administration, would you label China a currency manipulator?"
"If I were the US administration, I would resign, first of all..."
China Officials Wrestle Publicly Over Currency
Signs are emerging of conflicting views among China’s leaders over whether to allow the country’s currency to rise against the dollar. The conflict, which has broken into rare public view, seems to be mainly between China’s central bank and its Commerce Ministry. But how it is eventually resolved could decide the course of trade tensions between China and the United States.
Many experts contend China deliberately undervalues its currency, the renminbi, making Chinese exports more competitive on global markets and creating jobs in China at the expense of employment elsewhere. The current drama began on March 6 when the governor of China’s central bank stunned analysts by saying that the bank’s policy of keeping the renminbi at a constant exchange rate against the dollar was a "special" response to the global financial crisis. The new description suggested to many economists that the current value of the renminbi was temporary and that the central banker, Zhou Xiaochuan, was preparing the Chinese public for a stronger renminbi.
But other Chinese officials, particularly at the Commerce Ministry, have fought back in the last two weeks, stoking nationalism and anti-American sentiment by loudly declaring that China would not be told what to do by the United States. "It seems like they are talking from different perspectives," said Li Wei, the director of the American studies department at the Chinese Academy of International Trade and Economic Cooperation, speaking of the Chinese officials. He added that he supported the Chinese government’s overall stance of resisting American pressure.
The debate is far from academic. In the coming weeks, the Obama administration faces a series of politically charged deadlines set by Congress to decide whether to continue negotiating with China over currency and trade issues or to take a more confrontational stance and name China a currency manipulator. If the administration labels China a currency manipulator, it would face further Congressional pressure to impose punitive tariffs on many Chinese goods. So far, the media-wise Commerce Ministry is trouncing the normally secretive central bank.
Every few days, senior Commerce Ministry officials have spoken out, warning that pressure to let the renminbi rise is "irrational." The ministry is close to exporters, who are still upset that shipments fell early last year for the first time since China began opening trade in the late 1970s. China’s overall trade surplus was $198.1 billion last year, down from $297.4 billion the year before as global trade shrank during the financial crisis. The ministry has even taken its campaign to Washington, with Zhong Shan, the deputy minister, giving a speech at the United States Chamber of Commerce on Wednesday morning and telling reporters at the Chinese Embassy on Wednesday afternoon that American pressure for a stronger renminbi "is unacceptable to China."
These comments have raised a surge of anti-American sentiment in Internet chat rooms and prompted daily headlines on the front pages of Chinese newspapers that China must not "back down." Borrowing a page from the playbook of some of the most sophisticated Western crisis management consultants, the ministry even sent to reporters last week the private cellphone numbers of eight Chinese academic experts on Sino-American trade relations. But unlike the Western consultants, the ministry did not ask or warn the academics before giving out their phone numbers. Some Chinese economists gingerly suggested in the past year that China could find better uses for the hundreds of billions of dollars it spends buying United States Treasuries and other foreign securities to keep the renminbi from rising against the dollar.
That investment in overseas bonds was equal to nearly a tenth of China’s entire economic output last year, even though Treasuries have a return of only 0.13 to 4.76 percent currently. If the renminbi does appreciate eventually, the value of China’s vast foreign reserves will plunge in renminbi terms — a loss for which the central bank would likely be blamed. Maintaining the current level of the renminbi also means the central bank cannot easily push up interest rates — a move countries normally use to battle inflation. That may be necessary in China. The economy here is doing so well and China international competitiveness is so strong that inflation is starting to appear. Exporters have more orders than they can fill — although imports have been rising even faster as Chinese companies have stockpiled commodities as a hedge against inflation.
Export-oriented provinces in coastal China raised their minimum wages by 20 percent last week in a desperate bid to attract more workers from China’s increasingly prosperous interior to run factory assembly lines. These problems have made the central bank unenthusiastic about selling renminbi and buying foreign bonds so as to hold down the value of the currency, people close to the central bank said. But the bank has been reluctant to make its case in public, consistently rebuffing requests for interviews, and now may have missed its chance as the increasingly free Chinese business press has embraced the weak renminbi as a nationalistic symbol of Chinese sovereignty.
In many policy discussions between the United States and China over the past two decades, the Chinese government has seemed to maintain a laserlike focus. American officials in a succession of administrations and Congresses have been more like flashlights pointing in different directions at night. But in the current debate, American officials have been tightly disciplined — the Treasury, Commerce Department and Office of the United States Trade Representative have said little. Chinese officials, on the other hand, have been vocal and less consistent.
In the United States, the Treasury — and often only the Treasury secretary himself — comments on the dollar. That has helped limit sudden fluctuations in the dollar’s value in currency markets. But China has no such policy limiting which agencies or individuals can publicly address currency issues. For decades, currency policy has been the purview of the central bank, but the central bank is a politically weak institution. The People’s Bank of China is simply one of many economic policy ministries and even lacks independent authority over monetary policy, unlike the Federal Reserve.
Commerce Ministry officials say that they are following a broader trend in the Chinese government of greater responsiveness to the public. "Our ministry is doing a good job to be more open and more transparent — there is even an office in our ministry responsible for publicizing our policies," said Chen Rongkai, the ministry’s division director for press.
China: Sale of residential land temporarily halted
The Ministry of Land and Resources has ordered a temporary ban on the sale of land for housing in a renewed measure to ease soaring real estate prices. Yun Xiaosu, vice-minister of land and resources, said local authorities should not sell land for residential purposes until this year's housing land supply plan is released in early April. "Residential land supply will increase and low-income housing projects will top local governments' agendas," Yun said during a video-conference on Monday.
In his government work report early this month, Premier Wen Jiabao said China will build 3 million housing units for low-income families and renovate 2.8 million shanty units with a total of 63.2 billion yuan ($9.25 billion) allocated this year, a year-on-year increase of about 15 percent. "The low-income houses and shanty units must be included in this year's land supply, while large-sized housing projects must be controlled in big cities," Yun said. He emphasized that land used for low-income housing, for rebuilding shanty areas and for self-occupied small- or medium-sized houses must account for more than 70 percent of the overall supply this year. "The ministry encourages local governments in second and third tier cities to explore new policies and measures to curb the escalating housing prices," Yun said.
On March 11, the Ministry of Land and Resources issued a directive ordering developers to take a 50 percent down payment on all land put up for auction within one month of signing the contract, or they will lose the land along with their deposit. Shortly after the directive, the State-owned Assets Supervision and Administration Commission of the State Council ordered 78 central State-owned enterprises to quit the housing market on March 18. Only China Ocean Shipping Company, China's largest group in modern logistics, said it will quit the sector within six months. On Monday, the administration said that the 78 companies must work out their quitting plans within 15 days.
Since March, a five-month campaign across the country is under way to crack down on illegal land use and land hoarding. Cao Jianhai, director of the investment and market research office in the Institute of Industrial Economics of Chinese Academy of Social Sciences, said the soaring prices cannot be controlled unless the ministry makes clear the percentage of low-income houses among the overall supply.
"The ministry only guarantees 70 percent of the overall supply will be used for low-income housing, rebuilding shanty areas and self-occupied small- or medium-sized houses, but doesn't elaborate the percentage of low-income houses," Cao said. "The government is trying to ignore the key point for its own profits," he added. Land transfer fees are a major part of the local governments' annual revenues. Xie Xuren, minister of finance, said on March 6 that land transfer fees across the country reached about 1,424 billion yuan in 2009, a year-on-year increase of nearly 27 percent.
Will Crisis Oust Britain From the EU?
by Ron Fraser
Forty years ago, amid great industrial upheaval and economic stagnation, Britain was branded as "the sick man of Europe." Margaret Thatcher rose to the occasion, stared down Britain’s militant labor unions, privatized languishing state-run services and rescued the nation from crisis. There simply is no 21st-century Thatcher to come to Britain’s aid amid a far greater crisis facing the nation today.
Britain risks overtaking Greece as the sickest economy in the EU. Yet it is faced with a greater problem than Greece. Greece, as a member of the eurozone, does have a lender of last resort with which to plead its case for a bailout: the European Central Bank. Britain, which refused membership of the euroclub in order to maintain its own pound sterling currency, can hardly seek favor with the Eurobank in times of crisis. It would probably have to turn to the International Monetary Fund, like the Third World nations that usually receive imf largesse. This would result in a tremendous loss of national prestige—that is, assuming embattled Britain has any remaining prestige to lose.
Writing for the Telegraph, Ambrose-Evans Pritchard mused, "The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray. While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the oecd [Organization for Economic Cooperation and Development] rich club—and perhaps the world—at 13 percent of gdp. "I have a very nasty feeling that markets are about to pounce on Britain. … A disorderly fall in sterling at this stage (i.e. collapse) could prove as traumatic as default" (February 15). A few days later, the Telegraph reported, "Britain’s public finances may end this year in a worse state than those of Greece, economists warned yesterday, raising serious fears over the economic stability of the country" (February 19).
Emphasizing the problem, the annual January surge in tax receipts that normally boost the British Treasury did not occur. Instead, for the first time in 17 years, public finances plunged into the red in the first month of the year. Official figures showed that the government actually borrowed £4.3 billion in January to keep the nation afloat. "The Office for National Statistics said the government had never before had to borrow cash in January, adding that the shortfall meant it had now borrowed £122 billion so far this financial year, equivalent to around £2,000 for every man, woman and child in the country" (ibid.).
The cost of such borrowing is proving more expensive to Britain than the cost of loans to the ailing Spanish and Italians. Added to this is the huge exposure of British banks to those EU nations presently in the greatest economic difficulty, the so-called Club Med, or pigs nations—Portugal, Italy, Greece and Spain. A consequence of all this, which just adds to Britain’s financial and economic woes, is that the market is not buying British bonds. Then there’s the bad news from the real-estate market, indicating that mortgage lending fell by 32 percent in January. This all adds up to one sorry mess for Britain. It is not only that Britain risks the loss of its triple-A credit rating. Leading academics, economists and businessmen have warned that "without action on the public finances, Britain could face a crippling fiscal crisis" (ibid.).
Over the past 20 years, Britain has increasingly sold off not only crucial businesses but also numerous strategic assets. It has even yielded up the administration of some of its counties to foreign entities. Yet, despite retaining its beloved but battered pound sterling, Britain long ago began signing over its national sovereignty to the European Union. That action was consummated with the government signing the European constitution, thus virtually making Britain an EU vassal state subject to the whim of Brussels/Berlin.
Herbert Armstrong prophesied long ago that Britain would either opt out or be kicked out of the European Union. The day of that occurring may be closer than we think. If Berlin is prepared to play hardball with a fellow European nation like Greece when it is in a tough spot, what do you really think, based on the lessons of history alone, it might do to the offshore islands of Britain if faced with a similar situation there? Britain has placed its economy in a tenuous situation by allowing not only many of its top brand names to be taken over by EU member nations, in particular Germany, but too many of its strategic assets—and too much of its national debt, also.
London faces battle to stop trading shift to eurozone
by Gillian Tett
This month in Paris, some bond market brainstorming is coming to a head. On the prompting of Christine Lagarde, the telegenic French finance minister, senior bankers and regulators are finalising plans to launch Europe’s first electronic platform to trade corporate bonds – initially just for French companies, but later for non-French?entities too. So far, so technical; or so many non-bankers might conclude. But think again. Right now, it is far from clear whether this platform will ever get real scale; indeed, most Anglo-Saxon bankers scornfully assume that it will not. But Lagarde’s move is just one hint of a much wider political and financial trend. And it is one that bankers (and politicians) in the Anglo-Saxon world would be very foolish to ignore, not least because it could affect the future of the City of London.
The issue at stake revolves around where trading in euro-denominated products takes place. During the past decade, or since the euro was launched, the leaders of France and Germany have accepted the situation that most trading in euro-denominated bonds and derivatives has occurred in London – outside the eurozone. For while continental European leaders disliked this state of affairs, it seemed hard to shift, given London’s advantages as a financial centre in terms of infrastructure, financial skills and tax. However, the credit crisis has left some continental leaders hoping that this could change. One reason is that the Anglo-Saxon vision of financial capitalism looks increasingly tarnished. Another is that London’s tax advantage is being eroded. Just look, for example, at the details of what was unveiled in this week’s UK budget.
Moreover – and perhaps most important of all – the crisis has prompted regulators to scramble to reshape parts of the financial markets, in the name of transparency and reducing risk. And as that "reshaping" task gathers pace, the French and Germans are fighting to ensure that more key infrastructure is placed inside – not outside – the eurozone, in a manner that could suck business there too. The French bond trading platform is one sign of that. Another battle ground is the debate about clearing houses. Western regulators are now pressing the financial industry to create clearing houses for over-the-counter derivatives products, and in theory it would make most sense to have just one or two of these in each asset class, tucked in financial centres such as London and New York (since that is where trading occurs.)
But the ECB has already indicated that it wants regulatory oversight for any clearing houses that primarily handle eurozone products (and for which it might be asked to act as a back-stop). That strengthens French and German demands to have a clearing house sit in the eurozone, not London. And the French are so determined to create a Paris-based clearing house for credit derivatives that they have "urged" their banks to clear with a Paris-based group, rather than any others. Then, there is the explosive matter of data warehouses. In recent weeks, a fight has erupted round New York’s Depository Trust & Clearing Corporation, because other regulators have been asking for detailed data that the DTCC collects on credit derivatives – data the DTCC was reluctant to provide as it had promised to protect banks’ privacy.
That has now been partly resolved: this week the DTCC promised to give other regulators access to this data (including on issues such as Greek sovereign credit default swaps). However, the tussle has left some continental European officials profoundly irritated, and determined to ensure that some trade depositories are built in the eurozone in the future. Simply placing these in London, in other words, is no longer enough. Now, as I noted above, there is no guarantee that all of this jostling will pull more eurozone business across the Channel. After all, London has a formidably strong position in, say, OTC derivatives trading or debt placement; so much so that the mooted Paris-based bond platform may never fly.
But the City of London cannot afford to be complacent. Most British politicians and officials are bad at engaging with European institutions, and somewhat embarrassed about fighting for the nation, let alone the City. But the French financial establishment, by contrast, is highly disciplined (if not dirigiste) and has no qualms about protecting the national interest. It also understands the importance of fighting in the financial weeds, be that the halls of Brussels or the darker reaches of derivatives clearing houses. So stand by for plenty more subtle tussles about infrastructure. I, for one, will not be at all surprised if some of the trading in euro-denominated products starts to slip quietly out of London to the eurozone in coming years; albeit without most British politicians even noticing, until it is too late.
Portugal's Financial Troubles Put More Pressure on EU Leaders
The European Union was already having difficulty deciding what to do about Greece's financial difficulties. Now, Lisbon is threatening to become the next Athens. Fitch on Wednesday downgraded Portugal's credit rating, sending the euro tumbling. With the European Union at odds over whether and how to help Greece, confidence in the Continent's common currency has already plunged low enough in recent weeks. But on Wednesday, the euro took another hit. Amid concerns of high sovereign debt and forecasts of slower than expected growth, the ratings agency Fitch downgraded Portugal on Wednesday one notch to AA-. The euro immediately tumbled to a 10-month low against the dollar.
The move was hardly unexpected. Portugal has a projected 2010 budget deficit of 8 percent of gross domestic product, almost three times the limit allowed by euro zone rules. Since the beginning of the year, the country has been often mentioned in connection with the Greek crisis, often as part of the unflattering acronym PIIGS -- a reference to those euro zone countries facing particularly high financial hurdles, Portugal, Italy, Ireland, Greece and Spain. Still, Wednesday's move by Fitch injected yet more uncertainty ahead of the European Union summit in Brussels on Thursday and Friday. Whereas many of the 16 members of the euro zone have said they prefer a European solution to the current euro crisis, German Chancellor Angela Merkel has insisted that, if Greece ends up needing additional financial backing, it should be provided in conjuction with the International Monetary Fund (IMF). French President Nicolas Sarkozy reportedly agrees with her.
Even on Thursday the rift was still open for all to see. Arriving in Brussels for the start of the summit, Spanish Prime Minister Jose Luis Rodriguez Zapatero, who currently holds the rotating EU presidency, said "we are working on a European solution for Greece." But Merkel, speaking to the German parliament before heading off to Brussels, once again said that she preferred involving the IMF. "A good European is not necessarily one who provides instant aid," she said. "The euro area has lost some credibility ... and the communication cacophony around the whole negotiation process contributed to it," Jacques Cailloux, an analyst at the Royal Bank of Scotland, told the French news agency AFP.
Portugal on Thursday is moving quickly to shore up confidence in the country's finances. Prime Minister Jose Socrates plans to push an austerity package through parliament aimed at cutting spending and reducing the state deficit. The opposition, however, is unlikely to remain quiet. The package includes hefty tax increases and has been slammed by both the opposition and the media. More concerning than the potential domestic trouble in Portugal, however, is the fact that Fitch's downgrading of the country may indicate that the euro's problems are now spreading outside of Greece. "I think this is just the beginning of a long process of downgrading a number of major governments until they put their debt in order," said Rick Meckler, president of the investment firm LibertyView Capital Management in New York.
With Spain, Ireland and Italy all accruing serious mountains of debt, he may be right. Whether the European Union is able to come up with a mechanism to assist euro zone countries that run into trouble, however, remains to be seen. Despite pleading from across the Continent, Merkel has continued to insist that the Greek problem is not an item on the agenda of this week's summit. It was, however, a major focus of her Thursday speech. In a clear message to Greece and other indebted European countries, she said: "We must put an end to trickery."
Portugal to wield axe after downgrade
Portugal's parliament will vote today on a four-year austerity programme after international confidence in the nation's public finances was shaken by a downgrade of its sovereign debt rating. The move by Fitch ratings agency could increase pressure for a eurozone deal on financial assistance for Greece, amid fears that the debt crisis could spread to other southern European countries. Fernando Teixeira dos Santos, Portugal's finance minister, called on opposition parties yesterday to send an "unequivocal signal" that the minority government's plan to cut a soaring budget deficit had cross-party support.
His appeal came as Fitch cut its rating for Portugal's long-term debt by one notch from AA to AA-, citing concern over the potential impact of the global crisis on economic growth and government debt. The downgrade placed Portugal at the same level as Ireland, Italy and Cyprus in terms of its sovereign debt rating - two notches above Greece, which has a Fitch rating of BBB+. Fitch said its decision reflected "significant budgetary underperformance" in 2009, when the country's budget deficit soared to a record high of 9.3 per cent of gross domestic product - up from 2.7 per cent the year before.
Douglas Renwick, a Fitch associate director, said this was "a sizeable fiscal shock" that had combined with economic and structural weaknesses to reduce Portugal's creditworthiness. He said the stability and growth programme that Lisbon will shortly submit to the European Commission was "broadly credible". But he added that it was based on estimated growth figures for 2012 and 2013 that could lead to "disappointment" and "underperformance". International analysts have also called into question deficit-reduction programmes in Greece and Spain for being based on what they see as over-optimistic growth forecasts. However, Mr Teixeira dos Santos said he saw no need for extra austerity measures in response to the ratings downgrade.
Today's vote has been described by opposition leaders as equivalent to a vote of confidence in the minority government. The plan is expected to be approved with the abstention of parties to the right of the governing Socialists. The programme aims to lower the deficit to 2.8 per cent of GDP in 2013, a cut pf about €9bn, from €14bn to approximately €5bn ($6.7bn, £4.5bn). Measures include a public sector wage freeze, military spending cuts and tax rises. Under the plan, the economy, which contracted by 2.7 per cent last year, is projected to make a gradual recovery to reach growth of 1.7 per cent in 2013. Unemployment, currently at 10.5 per cent, is forecast to remain above 9 per cent.
OECD warns Germany over exports
Germany has received a fresh warning that it should move away from relying on exports to power growth. Greater efforts were needed to increase flexibility in the country’s domestic economy and increase its attractiveness as an investment destination, the Paris-based Organisation for Economic Cooperation and Development concluded in its latest report on Germany. The challenges "were to ensure the continued high performance of the export sector and broaden this performance to the other sectors of the economy," the OECD said.
Germany’s lopsided economic recovery, led by foreign demand for its manufactured products, has triggered a debate across Europe on whether its focus on competitiveness is stifling prospects in other eurozone countries. Christine Lagarde, France’s finance minister, asked in an interview with the Financial Times whether countries such as Germany with large trade surpluses could not "do a little something". But the OECD report’s authors put the emphasis on market liberalisation measures, rather than government attempts to stimulate growth through fiscal or wage policy. "Improving economic dynamism and increasing the attractiveness of Germany as a location for investment through structural reforms" would help reduce the imbalances between Germany and other economies, the report said.
German policymakers have fiercely resisted the idea that the country should surrender its advantages. Rainer Brüderle, economics minister, said its export success was the result of "the actions of companies, workers and consumers in a free competition." But he added: "We cannot rest on our successes and welcome the call from the OECD to strengthen the economy by pushing ahead with reform policies." The OECD said Germany remained more heavily regulated than other industrialised countries. It recommended using tax incentives to boost research and development, and liberalising professional trades. Immigration rules should also be changed to make Germany more attractive for skilled workers. "While Germany is an important source of high-skilled migrants to countries such as the US, it does not attract a sufficiently high number of high-skilled foreigners," the report warned.
Last year, German consumer spending rose slightly – in spite of a 5 per cent contraction in gross domestic product – thanks to government subsidies for short-time working that prevented unemployment rising faster and to "cash-for-clunker" pay-outs for new car purchases. But the phasing out of such measures would hit growth this year, when consumer spending was expected to fall by 1.4 per cent, the OECD warned. Instead, growth this year would continue to be driven "mainly by developments in world trade as demand for capital goods picks up," the report forecast. GDP would rise by 1.1 per cent this year and 1.9 per cent in 2011.
Paul Krugman's Arguments Are So Nonsensical, He Should Give His Nobel Prize Back
by Peter Schiff
In his latest weekly New York Times column, Nobel Prize-winning economist Paul Krugman put forward arguments that were so nonsensical that the award committee should ask for its medal back.
Recent rhetoric from Washington has put the economic relationship between the U.S. and China squarely on the front burner, and Krugman is demanding that we crank up the flame. This week 130 members of Congress sent a letter to Treasury Secretary Timothy Geithner demanding that the Obama administration designate China as a "currency manipulator". Following that, a bipartisan group of senators introduced a bill that looks to force the Obama administration's hand. For its own part, Beijing invites criticism by continuing to deny its utterly obvious currency agenda.
As these tensions escalate, most economists urge Washington to tread lightly because of the negative fallout for America if China were to begin selling its enormous cache of U.S. Treasury bonds. Krugman pushes back, asserting that the U.S. risks little by playing hardball, and that China has more to lose. He asserts that a Chinese decision to end its purchases of U.S. Treasury debt would make only a marginal impact on long-term interest rates. Did you hear that Stockholm?
According to Krugman, our secret weapon of economic invincibility is the Fed's ability to print dollars endlessly. If China were to foolishly decide to attack us by selling our debt, the Fed could simply step in and buy the excess with newly printed greenbacks. (In other words, Krugman sees no difference between funding the debt and monetizing it. See my latest video blog on the subject.). For Krugman, China would gain little from such an attack, but would lose the ability to export to its best customer and suffer severe losses in the value of its dollar holdings. Krugman's worldview is reassuring - but it has absolutely nothing to do with reality.
There is a huge difference between selling your debt to another and "selling" it to yourself. When China buys our debt, it uses its own savings. In order to purchase a trillion dollars of U.S. Treasuries, the Fed would have to expand our money supply by a corresponding amount. Even Krugman acknowledges that this would cause the dollar to lose value; however, he feels that a weaker dollar is good for America and bad for China.
Krugman does not believe that a tanking dollar will translate into higher interest rates or higher consumer prices at home. No matter how many dollars the Fed creates, or how much value those dollars lose relative to other currencies, he is confident that as long as unemployment remains high, rates will stay low and inflation will remain under control. This is absurd.
If the dollar were to nosedive, the Fed would normally look to protect the currency by raising interest rates, thereby increasing foreign demand for the currency. But with an economy currently on crutches, the Fed will ignore a weakening dollar and continue to try to boost employment with near-zero rates.
But keeping the Fed Funds rate low only holds rates down for U.S. government debt. If the dollar weakens substantially, other rates offered to other borrowers will rise as investors demand greater returns to compensate for inflation. To keep rates low for homeowners, credit card borrowers, corporations, municipalities, and state governments, the Fed would be forced to buy, or guarantee, all forms of dollar-denominated debt. The Fed would become the lender of only resort.
Once the Fed shows that its commitment to low rates is limitless (the value of the dollar be damned), private creditors will quit the game. Even average Americans would hit the Fed's bid. It would be a race for the exits, with no one wanting to be left holding a bag of worthless paper dollars.
Most economists, Krugman included, see cheap money as a panacea for all ills. And while it's true that a falling dollar, by lowering the real value of U.S. wages, would help make U.S. goods more competitive, it would also lead to skyrocketing consumer prices, rapidly rising interest rates, and a collapse in American living standards. Make no mistake: this is the end game of Krugman's "get tough on China" policy.
This apocalyptic scenario can only be avoided if Washington jealously guards the status quo, avoiding confrontation with China at all costs. Yet, even that is an outcome that no one can rationally expect. Given exploding U.S. government deficits and the inability of U.S. citizens and corporations to repair their balance sheets, the United States faces financing needs that even China's gargantuan savings stockpile will be unable to cover.
Krugman is right about one thing - China's currency peg is destabilizing the global economy and must end. But he fails utterly to understand the implications for the U.S. and China. If China were to reverse its role in the U.S. Treasury market, both economies would be destabilized in the short-term. But in the medium- and long-term, China would clearly emerge as the winner.
Absent Treasury-bond purchases, the value of the Chinese currency would rise sharply, causing goods prices to tumble in China. This long-delayed increase in purchasing power for everyday Chinese will unleash pent-up demand in what is already the largest middle class in the world. Chinese factories would retool in order to produce goods for their own citizens to consume. In RMB terms, commodity prices would plunge, making it easier for China to produce all kinds of stuff, such as automobiles, while also making it cheaper for the Chinese to buy gas. Millions will trade in bikes for cars, and Chinese oil imports will swell.
The opposite would occur in America, where an artificial, consumer-based economy, supported by Chinese lending, will come tumbling down. Without the ability to import cheap goods from overseas, Americans will pay more and get less. While gas and food become cheaper for the Chinese, they will simultaneously become much more expensive for Americans - so too will automobiles, consumer electronics, furniture, and just about every other product we want or need (even those few we still make ourselves).
Washington's best option is to recognize that the current relationship is unsustainable and to plan, as best as possible, for a more viable future. We Americans also must be honest with ourselves and recognize that we have been living beyond our means and that our lifestyle has been largely financed by austerity in China. We must conceive of a plan that weans us from this dependence without provoking China to pull the rug out from under us before we have a firm footing. To construct a policy around Krugman's ridiculous assumption that we benefit China more than they benefit us is to invite catastrophe on an unimaginable scale.
by James K. Galbraith
In 66 pages, Mr. Greenspan fails to use the word "responsibility" even once. The word "blame" does not appear. The word "mistake" occurs once; financial firms made them. The word "failure" appears 14 times. None of them are self-referential. To have expected the phrase "mea culpa" would of course be asking too much. I agree with the Chairman on two points. The first is his defense of the Federal Reserve against the charge of having violated the Taylor Rule. One of the few things more insufferable than this paper is that formula. Mr. Greenspan effectively rebuts the idea that low interest rates per se caused the crisis. The second good point lies against the "global savings glut" argument. As Mr. Greenspan says, "The main problem with that explanation is that there is no actual evidence of a global savings glut."
In view of this statement, Dr. Sawhill's remark that the Chairman "lays most of the blame on a glut of global saving" seems odd. Well, the phrase quoted occurs on page 43. Perhaps Dr. Sawhill didn't read that far. The remaining noteworthy parts of this paper are substantially a meditation on two themes. The first consists of whatever reminders one can find that Chairman Greenspan really did foresee the crisis. He goes all the way back to his 1996 comment about irrational exuberance! On the housing bubble, he writes that "almost all market participants of my acquaintance were aware of the growing risks." He quotes himself in the quiet sanctuary of the FOMC in 2002, that the "extraordinary housing boom... financed by very large increases in mortgage debt... cannot continue indefinitely."
So he did know. He wasn't the innocent he made himself out to be, in October 2008, before Congress, when he said he was in a state of "shocked disbelief."
Did he tell the public? Did he get up on his incomparable soapbox? Did he warn against the dangers of option ARMS with teaser rates? He did not. On the contrary: he went on record encouraging their use.
The second main theme is that nothing could have been done. The whole thing started with the fall of the Soviet Union. It was global. It was a "hundred year flood." "The aftermath of the Lehman crisis traced out a startlingly larger negative tail than most anybody had earlier imagined." And even if they had tried, they would have done more harm than good:
"The complexity of our financial system in operation spawns, in any given week, many alleged pending crises that, in the event, never happen and innumerable allegations of financial misconduct. To examine each such possibility in the level of detail necessary to reach meaningful conclusions would require an examination force many multiples larger than those now in place in any of our banking regulatory agencies. Arguably, at such levels of examination, bank lending, and its necessary risk taking, would be impeded."
I'm sorry, but that's garbage, in one word. The most telling omission in this paper is that the word "fraud" does not appear. But the world knows that the collapse of the financial system had, at its core, the largest financial fraud of all time. That fraud was in the origination, the rating, the underwriting and the issuance of credit default swaps against sub-prime mortgages issued largely by private originators and securitized by the largest banks.
The FBI knew this in 2004, when it warned in public of an "epidemic of mortgage fraud." When Fitch Ratings in 2007 undertook a small sample survey of "high CLTV, stated documentation loans" here's what they found: "The result of the analysis was disconcerting at best, as there was the appearance of fraud or misrepresentation in almost every file." But Mr. Greenspan will not say the word aloud.
The Federal Reserve is a regulator. Alan Greenspan was the chief regulator for 18 years. He failed spectacularly. So did his colleagues, at the Office of Thrift Supervision and elsewhere. These facts are not obscured here. They are ignored. I suppose the First Amendment applies to former Federal Reserve Chairmen attempting to cover their tracks. I wish it didn't. At the very least, as a constitutional compromise, there might be a word limit.
Apartment rents cheaper than stays in homeless shelters
Cities, states and the federal government pay more to provide the homeless with short-term shelter and services than what it would cost to rent permanent housing, the U.S. government reports. A study of 9,000 families and individuals being released today by the Department of Housing and Urban Development finds that costs to house the newly homeless vary widely, depending on the type of shelter and social services provided by the six cities in the report. Emergency shelter for families was the most costly. In Washington, D.C., the average bill for a month in an emergency shelter ranges from $2,500 to $3,700. In Houston, the average is $1,391.
Many communities probably don't know that they are spending as much "to maintain a cot in a gymnasium with 100 other cots" as it would cost to rent an efficiency apartment, says Dennis Culhane, a University of Pennsylvania professor who studies housing policies. "We are paying for a form of housing that is largely substandard, and we are paying as much, if not more, than standard conventional housing." He says the report bolsters a move by the Obama administration to focus on helping the homeless get permanent housing. The federal stimulus act last year set aside $1.5 billion to prevent homelessness by helping people pay rent, utility bills, moving costs or security deposits.
Nationwide, 1.6 million homeless people received shelter in 2008, according to government figures. The new study does not look at the cost-effectiveness or quality of the programs. Costs to shelter first-time homeless people varied based on the type of shelter and other services provided, how long they stayed and overhead. Shelters may offer drug and alcohol treatment, mental health care, family counseling and help obtaining government benefits. Mark Johnston, deputy assistant secretary of HUD, says the report should prompt communities to lower costs by targeting people with only the services they need and to improve aid for those who repeatedly become homeless.
"We saw higher costs and longer lengths of stay than expected," he says. The longest average stay for individuals was 73 days in Des Moines. The longest average stay for families was 309 days in Washington. "We do not want people to languish in emergency shelter," Johnston says. Neil Donovan of the National Coalition for the Homeless says the report is limited because it covered 2004 through 2006. It doesn't include families who became homeless in the recession. "A lot of things have become very different in the last couple of years," he says. "If it's used to a greater degree than a conversation starter, it will be used to a greater degree than it's worth."
HOUSING THE HOMELESS
A study by the Department of Housing and Urban Development finds that the average monthly cost to house the homeless varies widely.
Massive Job Cuts Projected For NYC
Mayor Says If Albany Slices City Aid, As Many As 19,000 Will Be Laid Off; 3,100 Less Cops, 1,000 Less Firefighters
It's a game of high-stakes chicken -- with thousands of New York City jobs on the line. Mayor Michael Bloomberg released a doomsday scenario Tuesday, saying if Albany goes through with cuts to city aid he will be forced to make massive layoffs -- possibly the worst in decades. It's a grim equation for a grim time. Bloomberg said that Albany's threatened cut of $1.3 billion in state aid equals the elimination of 19,000 jobs. "We believe that we have hit the point where further cuts mean cuts to personnel," Deputy Mayor Edward Skyler said. And they are serious cuts. Without more money from Albany this is what the budget axe will do to the workforce:
- 3,150 fewer cops
- 1,000 fewer firefighters, which means the closure of 42 engine companies
- 8,500 fewer teachers in the classrooms
- The elimination of 900 sanitation workers assigned to various street cleaning duties
- 500 fewer parks workers
- 500 fewer people in the transportation department
- 400 fewer librarians
"The Senate yesterday put out a budget that cut our revenue sharing by $400 (million) to $500 hundred million, cut education spending by $500 million. We don't know what the Assembly is going to propose, but it does not appear the city will weather the Albany budget without having a significant impact," Skyler said. It's a terrifying situation for people living and working in the city. "I think it's a horrible thing. I think at a time like this they should be adding employees not firing people," said Morshed Haque of Sunnyside.
"I think these cuts are in the wrong place, basically. I think they have to increase taxes in certain areas and they have to look at cuts in different places than human services," added Charles Bayor of Chelsea. When asked if he's worried that he might lose your job, food stamp worker Joel Meisner said, "Yes, because I'm an office associate and I heard it's possible office associate people are getting laid off by the end of May or June."
Added Susan Meisner of the Department of Design and Construction: "Being a city worker I feel terrible about it. I think the cuts could come elsewhere." So now the ball is in Albany's court, but given what's happening there there's no telling just how much pain lawmakers will inflict on the city. Commissioners are being given until April 7 to come up with specific plans for the cuts. But since this is the eighth time in two years they've had to cut, job losses are all but certain.
U.K. Business Investment Falls to Decade Low
U.K. business investment fell to its lowest level in almost a decade in the fourth quarter, official data showed Friday, indicating that firms have little confidence in the economic outlook even as the country emerges from recession. While the figures raise doubts about the strength of the recovery, they were raised from a preliminary estimate and may fuel some hope that fourth-quarter economic growth was stronger than the current estimate of 0.3%. Business investment totaled £27.3 billion ($40.45 billion) in the final three months of 2009—the lowest level since the first quarter of 2000, the Office for National Statistics said. The total is 4.3% lower than the previous quarter and 24% weaker than a year earlier.
That is a deterioration from the three months to the end of September, when investment fell 0.6% on a quarter-to-quarter basis and 19.9% on the year. But the revised data were an improvement on the preliminary reading for the fourth quarter, which showed investment fell 5.8% on the quarter and 24.1% on the year. Business investment totaled £117.2 billion last year, down from £145.3 billion in 2008 and the lowest annual total since 2004.
Howard Archer, chief U.K. and European economist at IHS Global Insight, said the worst of the contraction in investment should now be over, but concerns about the recovery meant it was unlikely to bounce back strongly. "The sharp overall decline in business investment suffered so far may well have already had serious damaging repercussions for the economy's potential output, not only through capacity being lost but also through companies not investing in the latest, most efficient technology and processes," he said in a note.
The breakdown of the data showed business investment in manufacturing totaled £2.4 billion—the weakest quarter since comparable records began in 1994. Investment in nonmanufacturing slumped to its lowest level since the third quarter of 2003. Business investment in construction, one of the sectors that was worst hit by the credit crunch, slumped to £438 million—the weakest level since the third quarter of 1998. The U.K. economy grew for the first time in six quarters in the final three months of 2009, but gross domestic product still fell 5.0% for the year as a whole. The government has predicted the economy will grow between 1.0% and 1.5% this year and 3.0% to 3.5% in 2011.
UK energy demand must fall 25%
Britain's energy demand will need to fall by as much as 25pc by 2050, according to a report published by the Government yesterday. The UK has committed to cut greenhouse gas emissions in the UK by 80pc by 2050 and yesterday the Treasury and the Department for Energy & Climate Change unveiled a report entitled Energy Market Assessment, outlining how the market will need to change to help "de-carbonise" the economy and enhance energy security. Published within the assessment is a "road map analysis" of how the country can achieve the target of an 80pc reduction in emissions. This analysis suggests that "ambitious energy demand reduction" is required.
"Based on the analysis to date, total UK energy demand in 2050 will need to fall significantly (potentially by as much as 25pc lower relative to 2007 levels)," according to the report. The report went on to say that "reduction in emissions from agriculture, waste, industrial processes and international transport" will also be necessary by 2050. Low-carbon electricity will provide a very large proportion of the UK's future low-carbon energy, said the report.
A DECC spokesman said the UK had already cut its emissions by 21pc relative to 1991 levels. He added that central to the efforts to see the UK consume less energy by 2050 was helping people and businesses to understand how much power they are using. "It is about helping people to realise they don't need to use as much. For example, smart meters installed in every home will enable people to see in real time and real money how much gas they are using," he said.
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