"Outside water supply, Washington, D.C. Only source of water supply winter and summer for many houses in slum areas. In some places drainage is so poor that surplus water backs up in huge puddles"
Ilargi: Let's start out with a reminder of the interview Jim Puplava did with Stoneleigh. Here’s the info:
Preparing For and Learning to Survive the Coming Perfect Storm - Part 1:.
Choose your preferred audio format:
RealPlayer WinAmp Windows Media MP3
For a full transcript of the interview, as well as further reading material, go to Jim Puplava interviews Stoneleigh
Then we have a new Stoneleigh interview for you as well, this one recorded yesterday, September 6, 2010, for Radio Ecoshock by Alex Smith in British Columbia.
There is a lighter, better speed version, and a better quality version. The format for both is MP3.
I was going to get into the BLS non-farm payrolls report, but I’ll gladly give way to Stoneleigh's Part 1 of a series on the history of credit, "The Infinite Elasticity of Credit".
One little factoid from the BLS report that I think merits mentioning, since nobody seems to have noticed it, except for our roving reporter and TAE Twitter/Facebook master VK. That is, the report that was allegedly so much better than expected that the markets rose in cheer abandon, also said that an insanely whopping 800,000 Americans were added to the "Not in Labor Force" statistic:
And remember, despite this, unemployment still went up, to 9.6% (U3) and 16.7% (U6). Only in Bizarro World would that lead to rising markets. In the face of trillions of dollars in stimulus, unemployment numbers are virtually the same they were a year ago, and that only by the grace of the fact that more and more Americans fall off the back of the wagon.
Here’s Stoneleigh (who, incidentally, embarks on a long tour of speaking engagements in the US today, check the agenda on the right hand side of this page on a regular basis for up to date information on locations):
"Beautiful credit! The foundation of modern society.Mark Twain (1873), The Gilded Age: A Tale of Today
Who shall say this is not the age of mutual trust, of unlimited reliance on human promises?
That is a peculiar condition of modern society which enables a whole country to instantly recognize point and meaning to the familiar newspaper anecdote, which puts into the speculator in lands and mines this remark:
"I wasn't worth a cent two years ago, and now I owe two million dollars."
Stoneleigh: I wanted to put our current predicament into historical context, and to demonstrate that the situation we find ourselves in is not novel. It differs quantitatively, but not qualitatively, from what has gone before - many times before in fact. Great cycles of expansion and contraction are part of the human condition, and there are patterns of boom and bust that continually repeat themselves, as they are throroughly grounded in human nature.
Collective human optimism and pessimism are extremely powerful drivers, acting over very long time scales. They are powerful enough to drive tremendous cycles of socioeconomic expansion and contraction. As population grows and optimism increases during a long expansion phase, pressure emerges that can only be relieved by increasing the elasticity of the money supply, often in spite of existing rules intended to prevent this very dynamic in the name of maintaining sound money.
As a historical generalization, it can be said that every time the authorities stabilize or control some quantity of money M, either in absolute or volume or growing along a predetermined trend line, in moments of euphoria, more will be produced.Charles Kindleberger, Manias, Panics and Crashes
Or if the definition of money is fixed in terms of particular liquid assets, and the euphoria happens to 'monetize' credit in new ways that are excluded from the definition, the amount of money defined in the old way will not grow, but its velocity will increase [..]
....My contention is the the process is endless: fix any M(i) and the market will create new forms of money in periods of boom to get around the limit and create the necessity to create a new variable M(j).
Stoneleigh: There have been many examples of this process throughout history and it is instructive to look at such periods. For instance, the medieval expansion of the eleventh and twelfth centuries had very much this character.
Sound money was insufficient, hence pressure to expand the money supply in line with what the population wanted to achieve was growing. At first the expansion maintained its connection with underlying real wealth, while still managing to expand the definition (and therefore the supply) of money.
The only major economic problem was the so-called 'money-famine' of the eleventh and twelfth centuries - an event that would occur in most eras of price equilibrium throughout modern history.David Hackett Fischer, The Great Wave: Price Revolutions and the Rhythm of History
The growth of population and prosperity had created demand for a larger circulating medium. With precious metals in short supply, the people of Europe began to use what historian David Herlihy calls 'substitute money' - not barter or commodity money, but liquid assets of high value called 'mobilia', such as silver jewelry, furs, fine textiles and even books.
By the year 1100, the hunger for specie was so great that the cannons of Pistoia's St Zeno Cathedral melted down their great crucifix and used it for money. German princes sold their imperial seals. English nobles exchanged their silver sword mounts, and french bishops converted their golden chalices into cash.
Stoneleigh: Inevitably, however, a transition began from using hard assets to back money toward using credit instruments, thereby resorting to stretching the money supply beyond any kind of natural limit with virtual wealth.
This is typical for the latter stages of a credit expansion, and indicates the coming exhaustion of the upward trend, as it amounts to hollowing out the substance of an economic structure even as the shell continues its superficial expansion. The quality of debt deteriorates under expansionary pressure, even though the quantity of money may superficially appear to be growing only at a limited rate.
Despite these increases, historian Carlo Cipolla observes, "the supply of precious metals proved to be relatively inelastic throughout the whole period, and the growth of demand for silver for monetary purposes exceeded the supply." To solve this problem, a variety of other monetary expedients were adopted. Commodities were used as money in addition to gold and silver. Pepper, for example, became a form of currency in the seaport cities of southern Europe. New credit instruments such as contracts of exchange and bank transfers expanded rapidly.David Hackett Fischer, The Great Wave
As early as the 13th century, innovative practices had been developed to smooth the unpredictable and unreliable cash flows experienced by large institutions and governments.Chris Bowlby, The credit crunch: what can we learn from history?
Much of this ingenuity was driven by the need to circumvent restrictions on charging interest (reflecting the religious disapproval of usury). Examples include the use of forward contracts in the wool market between monasteries in England and Italian merchant societies, where cash loans would be repaid in wool, and the provision of pension schemes by religious institutions.
The heart of the new medieval financial industry was merchant banking, including government finance. In effect, Edward I had an early form of current account with the Ricciardi of Lucca, Italy, that incorporated an extensive overdraft facility.
Edward was able to use this easy access to credit to fund the armies and castles that helped conquer Wales. To meet Edward’s demands, the Ricciardi could raise additional funds from other merchant societies across Europe, in the same way as modern banks turn to the interbank lending markets.
At any one time, most of this capital was committed to various ventures, including loans to governments and private borrowers, as well as investment in goods for trade.Adrian R. Bell, Chris Brooks and Tony Moore, The Credit Crunch of 1294
This was normally profitable, since this money was earning a good return, but it meant that the merchants only retained a small buffer of liquid capital. This was not ordinarily a problem, since most transactions could be carried out through credit, offsetting or balance transfers between merchants.
When actual cash was needed beyond their own reserves, it could be raised from other merchants, either as a loan or by selling assets. For instance, the Ricciardi often acted as brokers raising loans for the king from a cartel of their fellow merchant societies. We can perhaps describe this as an early variant of the ‘Northern Rock’ business model, in that the Ricciardi relied on wholesale or interbank lending to fund their loans to the king.
Stoneleigh: Financial innovation (Ponzi finance) is by no means a modern invention requiring quants with super-computers. It is the driving human impetus towards short-term profit and money-for-nothing that matters. Throughout history, where there was an expansionist drive, people found a way to increase the elasticity of the money supply for short-term gain (at the cost of long-term pain).
Chris Bowlby, The credit crunch: what can we learn from history?
All this demonstrates a precocious ability to price and market financial products. Our research demonstrates that medieval merchants, using abaci and roman numerals, were just as capable of calculating forward prices and interest as modern financiers using mathematical models and computer spreadsheets.
Stoneleigh: Specifically, periods of monetary expansion have proceeded despite rules (of various degrees of stringency) intended to prevent it. The problem is that monetary rules have focused on the traditional money supply, as measured in varying degrees of broadness (ie degrees of removal from underlying real wealth).
They have tended to neglect the vital role of credit, or virtual wealth, in the expansion of the effective money supply relative to available goods and services. Indeed monetarist thinkers continue to do so today, concentrating on conventional money supply measures while regarding private debt as inconsequential.
Neglecting the vital role of ephemeral credit in the composition of the effective money supply in manic times is a major omission, as it is the virtual nature of credit that defines such periods, and its abrupt loss that leads to the severity of the depression conditions that inevitably follow.
Ultimately, great socioeconomic expansions sow the seeds of their own destruction. Being swings of positive feedback, the initial virtuous circle of increasing prosperity that monetary expansion enables becomes a vicious circle, as the consequences of divorcing the money supply from the constraints of reality rapidly become apparent.
Vicious circles begin with a credit crunch, or period of acute illiquidity, as liquidity in a financial system is a reflection of confidence. Without confidence, there is no credit, and without credit there is no price support at anything like the levels achieved during a long expansion. This was as true in medieval times as it is today.
We have identified a ‘credit crunch’ in 1294, which shares remarkable parallels with today’s difficulties – the main cause being a lack of liquidity in the money market. In the 1280s, there had been a glut of easy money as merchant societies managed large sums of clerical taxes raised for the Pope, enabling them to lend money to kings and each other.Chris Bowlby, The credit crunch: what can we learn from history?
In the early 1290s, the Pope called in much of his money and the French king levied a huge tax on the Italian merchants in France. The final straw was the unexpected outbreak of war between England and France in 1294.
Edward I called on his bankers to raise the money needed to fund his armies. Unfortunately for the Ricciardi, they were unprepared for this eventuality as their assets were tied up in loans and trade. In normal times, the Ricciardi would have sought to raise short-term loans from their fellow merchants but in 1294, like today, the wholesale money markets were frozen.
Worse still, the Anglo-French war had cut communications between England and Italy, undermining the merchants’ ability to transfer credit or update their account books. The resultant uncertainty, combined with the fear that Edward would default on his debts, meant that merchant societies were unwilling to lend to each other.
Stoneleigh: This event was merely the first crunch point of a long series of bank failures of the major Italian banks that had been at the centre of European finance.
In the late thirteenth century, a major crisis led to the disruption of credit and banking in the western world. The great Italian banks dangerously overextended themselves by lending heavily to monarchs and private borrowers. These loans were highly lucrative - for a time. They brought prosperity to the north of Italy, and especially to the city of Siena, which in the words of one leading historian was "for 75 years the main banking centre for Europe."David Hackett Fischer, The Great Wave
In the year 1298, Siena's banking boom came suddenly to an end, with the failure of its greatest bank, the Gran Tavola of the Buonsignori. This was a world bank, with agents throughout Europe and the Mediterranean basin. Among its borrowers were great merchants, cities, nobles, kings and even the Pope himself. Increasing numbers of these loans went sour. In the year 1298, a banking panic began in Siena.
The big Florentine banks made foreign loans to the kings of England and Naples. This was a dangerous business. Once it had begun, the loans grew inexorably larger. The banks could not call them in for fear of default or confiscation. The results were inexorable.
Early in the 14th century, Florentine banks began to fail.
Stoneleigh: This period of bank failures marked the end of the long expansion of the eleventh and twelfth centuries, and the beginning of a long period of unstable contraction that historian Barbara Tuchman has referred to as "the disastrous fourteenth century" in her book of the same name. A series of calamities befell the population of Europe, the impact of which was magnified by the negative and suspicious mindset characteristic of contractionary periods.
In such times people are much less inclined to maintain a constructive mindset or to behave in a cooperative manner, which aggravates the effects on the population of poverty, hunger and disease. As this was a time of persistent crop failures and the Black Death, the impact would have been considerable in any case.
With the population falling, and collective psychology no longer supportive of economic expansion, the pressure to increase the money supply disappeared. Credit evaporated, the remaining money supply contracted substantially, and prices fell.
Money began to disappear. Europe's stock of silver and gold contracted sharply during the late 14th century.David Hackett Fischer, The Great Wave
After 1390, a severe money famine developed. In France, the low point was reached during the year 1402, when the minting of money virtually came to an end....This money famine was part of a deep economic depression that continued to the end of the 14th century.
The decline of population and scarcity of money had a powerful effect on European prices.....Houses and estates fell empty; rents and land values declined roughly in proportion to the loss of population......Prices surged and declined in great swings. The rural population shrank, arable lands began to be abandoned, and peasants grew poorer.
Stoneleigh: The parallels between the medieval credit crunch and our current predicament are considerable. In both cases the money supply increased in response to the expansionist pressure of unbridled optimism. In both cases the expansion proceeded to the point where a substantial over-hang of credit had been created - a quantity sufficient to generate systemic risk that was not recognized at the time. In the fourteenth century, that risk was realized, as it will be again in the 21st century.
The reactions of bankers to both medieval and modern credit crunches are strikingly similar. In 1294, the Ricciardi said that "it seems that money has disappeared". Seven centuries later, in September 2008, a senior banker lamented in The Times that "there is no capital left in the world".Chris Bowlby, The credit crunch: what can we learn from history?
Stoneleigh: Keynes described the collective psychology of banking well in 1931:
A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.John Maynard Keynes (1931), The Consequences to the Banks of the Collapse of Money Values
Part II of this article will focus on our modern credit expansion and the credit crunch that is developing as a result. We will look at the work of those who have contributed most to an understanding of the processes involved, and whose work has not received nearly enough attention in modern discourse.
Davidowitz Says The Consumer is "Totally Wrecked", 'Worst to Come' for U.S. Retail Sales
"The consumer is totally wrecked and that’s why there’s no way this economy’s coming back, because the consumer is 70 percent of the U.S. economy[..]
The consumer is out of money. They’re wrecked. They have no jobs. We’ve got 18-and-a-half percent unemployment and underemployment. The consumer’s debt is 120 percent of disposable income. [..] The consumer's wrecked."
By far, the worst is yet to come. The administration is dysfunctional, incompetent and on a lunatic fringe. Everything they're doing is wrong. It’s all going to be worse.
More than 400 US Banks Will Fail as Consumers Deleverage: Roubini
Even if the US and European economies manage to avoid a double dip, it will still feel like a recession, while more than half of the 800-plus US banks on the "critical list" are likely to go bust, according to renowned economist Nouriel Roubini of Roubini Global Economics. The second half of the year will remain weak as tailwinds become headwinds, Roubini told CNBC on the shores of Lake Como, Italy at the Ambrosetti Forum economics conference. "In the second half, fiscal policy becomes a headwind, no more cash for clunkers," Roubini said. "The positive scenario is that growth will be below par."
Roubini recently said the chance of a double-dip recession in the US was now more than 40 percent. "The big risk is that there will be a downturn in markets that could impact the bond, the equity and the credit markets," he said. "Job losses have been higher, the US jobs number will show that. There is no private sector jobs growth," he said. "Consumption is weak, exports are weak and housing is weak." "If there is no final sales and no final demand, companies will not invest," he added.
Roubini said he believes hopes of decoupling will be dashed as the slowdown in the US impacts China, Japan and the euro zone. "In Europe, Germany is strong but the rest of the continent is pretty dismal," he said. "The rest of the world cannot cope without the prop of the US consumer. Chinese growth in the second half will be 7 percent." "Get used to it," Roubini said. "Deleveraging has to continue as governments and consumers deleverage in the developed world." "We have to expect the new normal," he added. "We do not need a double dip for it to feel like recession."
"The biggest banks have been backstopped, but 800-plus small- and medium-sized banks in the US remain on the critical list and half of those will go bust," Roubini said. Roubini said corporate and consumer debt problems will get worse and that there are more problems ahead in the commercial and residential property market. "Policy makers are running out of bullets, the problem is we need fiscal consolidation, fiscal policy is constrained by the debt problem, monetary policy is becoming ineffectual," he said.
Roubini, known as Dr. Doom to most and voted as Roubini the Realist by CNBC.com readers, said further quantitative easing is pointless as interest rates are already low. "We are in a liquidity trap and we have insolvency problems," he said. "What we need is credible spending plans over the medium term on health care, welfare and retirement age," Roubini said. "This will create a fiscal constraint lasting well into next year." "The best growth over the next 18 months will come from the domestically-focused Brazil, which will outgrow China for the first time in 20 years," he added.
No defence left against double-dip recession, says Nouriel Roubini
by Ambrose Evans-Pritchard - Telegraph
The United States, Japan and large parts of Europe have exhausted their policy arsenal, leaving them defenceless against a double-dip recession as recovery slows to ‘stall speed’. "The US has run out of bullets," said Nouriel Roubini, professor at New York University, and one of a caste of luminaries with grim forecasts at the annual Ambrosetti conference on Lake Como. "More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5pc yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems," he told Europe’s policy elite.
Dr Roubini said the US growth rate was likely to fall below 1pc in the second half of the year, despite the biggest stimulus in history: a cut in interest rates from 5pc to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system. The anaemic pace compares with rates of 4pc-6pc at this stage of recovery in normal post-war recoveries. "We have reached stall speed. Any shock at this point can tip you back into recession. With interbank spreads rising, you can get a vicious circle like 2008-2009," he said, describing a self-feeding process as the real economy and the credit system hurt each other. "There is a 40pc chance of double-dip recession in the US, and worse in Japan. Even if it is not technically a recession it will feel like it," he added.
Hans-Werner Sinn, head of Germany’s IFO Institute, said the US would have to purge its debt excesses the hard way. "The bitter truth is that there is no way out of this with monetary and fiscal policy. They will just have to see their living standards go down. I see a decade of difficulties for the US," he said. Dr Sinn said the US the market for mortgage securities (CDOs) had collapsed from $1.9 trillion in 2006 to just $50bn last year, leaving the US property market reliant on federal agencies. "The world is simply not willing to buy these dubious financial products again. Germany is leaving, China is no longer there, and Japan is pulling away. The US system of mortgage finance is on government life support and that cannot drive a sustainable upswing," he said.
Harvard Professor Niall Ferguson said the US has exhausted fiscal stimulus given warnings from the Congressional Budget Office that interest payments as a share of tax revenues will reach 20pc by 2020 and 36pc by 2030 without drastic retrenchment. "The fiscal crisis seems to be out of control. The 'big crossover’ is approaching when the US spends more on debt service costs than on security, and historically that is the tipping point for any global power," he said. Mr Ferguson said the "Chimerica" marriage of recent years is on the rocks. China is no longer willing to fund the US Treasury bond market, cutting its share of holdings from 13pc to 10pc of the total debt stock.
While China must find ways to recycle its trade surplus and hold down the yuan, it is doing this by stockpiling commodities, buying hard assets around the world, or rotating into Asian bonds. Dr Roubini said US companies have plenty of cash but are boosting profits by a policy of "slash and burn" on labour costs. "We’ve lost 8.4m jobs and if you include the loss of hours worked it is equivalent to another 3m. We need to generate an extra 450,000 jobs every month for three years to get it back," he said.
The US non-farm payrolls data released on Friday was better then expected but still showed a net loss of 54,000 jobs. Dr Roubini said average public debt in the rich countries would rise to 120pc of GDP by 2015 in the rich countries, leaving no scope for a further fiscal stimulus. If they push their luck, they too risk the sort of bond crises seen in Southern Europe this year.
In the US, the fiscal boost has faded, switching to tightening over coming months The lift from the inventory cycle is finished. Capex spending by companies has held up well, but this slowed sharply in July. Housing is already in a double dip. The last support for the US economy is consumption, barely growing at 1pc. "All we did was kick the can down the road and stole demand from the future," he said.
Bernanke Says He Failed to See Financial Flaws
by Sewell Chan - New York Times
Ben S. Bernanke, who told Congress in 2007 that the subprime mortgage crisis was "likely to be contained," said Thursday that he had failed to recognize flaws in the financial system that amplified the housing downturn and led to an economic disaster. Under pointed but polite questioning from members of the Financial Crisis Inquiry Commission, Mr. Bernanke, the chairman of the Federal Reserve, signaled that the central bank was eager to embrace its expanded powers under the Dodd-Frank financial regulatory law that President Obama signed in July.
Mr. Bernanke spoke favorably of forcing huge banks to hold much more capital, particularly if they were systemically important — so much capital that being big would be costly. He declared that "for capitalism to work," executive pay had to be linked to performance. And he said Americans were justifiably angry that bankers "who drove their companies into a ditch walked off with lots of money."
He reiterated that the Fed could not have prevented Lehman Brothers from declaring bankruptcy on Sept. 15, 2008, the financial crisis’s nadir moment. But he said he might have unwittingly "supported this myth that we did have a way of saving Lehman," by failing to make it clear to Congress at a hearing shortly after the bankruptcy that the Fed did not have other options. "This is my own fault, in a sense," Mr. Bernanke said, adding that he was worried at the time about contributing to panic in the markets. "I regret not being more straightforward there."
Mr. Bernanke said that when he made his remarks in 2007 he thought the subprime problems were "manageable." "What I did not recognize was the extent to which the system had flaws and weaknesses in it that were going to amplify the initial shock from subprime and make it into a much bigger crisis," he said.
While Mr. Bernanke stuck with his long-held stance that the Fed had not aided the housing bubble by keeping interest rates too low for too long in 2002-4, he embraced the view of Gary B. Gorton, an influential Yale finance professor. Professor Gorton has compared the crisis to a classic bank run, but with the "banks" in this case being short-term wholesale financing markets — a loosely regulated, uninsured system known as shadow banking.
Mr. Bernanke offered an analogy of his own, likening the housing crisis to E. coli bacteria that can have deadly consequences when passed along through a vulnerable food safety system. "E. coli got into the food system, and it created a much bigger problem," he said. "There was an awful lot of dependence on short-term, unstable funding, which is analogous to the deposits in banks before the period of deposit insurance."
Asked about the role of financial innovation in the economy, Mr. Bernanke, said that "innovation is not always a good thing." Some innovations have unpredictable consequences, are used primarily "to take unfair advantage rather than to create a more efficient market," and create systemic risks, he said. In a 2002 speech when he was a Fed governor, Mr. Bernanke argued that central banks should not try to use monetary policy to pop asset bubbles. As part of his nearly three hours of testimony on Thursday, Mr. Bernanke held to that view, but said that at the time he had called for careful supervision and regulation to maintain financial stability. "We didn’t do that," conceded Mr. Bernanke, who became Fed chairman in 2006. "Going forward, we need to be able to do that."
As he did in an address to the American Economic Association in January, Mr. Bernanke argued against the perspective that the Fed stood by passively, "not recognizing the obvious," as housing prices soared. "As of 2003 to 2004, there really was quite a bit of disagreement among economists about whether there was a bubble, how big it was, whether it was just a local or a national bubble," Mr. Bernanke testified. He added: "By the time it was evident that it was a bubble and that it was going to create risk to the financial system, it was rather late to address it through monetary policy."
Mr. Bernanke said the most important lesson of the crisis was the need to end the "too-big-to-fail problem," a view echoed by Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, who also testified Thursday. The Dodd-Frank legislation gives the Fed oversight over the largest financial institutions, including those that are not banks. It gave the Fed a prominent role in the Financial Stability Oversight Council, a body of regulators with the power to seize and break up a systemically important company if it threatens economic stability. The F.D.I.C. would manage that process, known as resolution.
In deciding which large companies will fall under its supervision, Mr. Bernanke said, the Fed will look at size, complexity, interconnectedness and degree of involvement in areas like payments and settlements systems. He also said the Fed was overhauling how it supervises banks. Alongside traditional examiners, the Fed has assigned additional finance experts, accountants, economists and lawyers to work on oversight. "We really need to take a much broader, multidisciplinary approach," he said.
Mr. Bernanke and Ms. Bair said it was also imperative that the Basel Committee on Banking Supervision, an international coordinating body of regulators, impose tougher standards on how much and what kinds of capital banks must hold. The increased capital requirements should include capital that is more aligned with risk and able to absorb losses more effectively, and that works in a countercyclical manner, so that banks have more of it during times of financial stress, he said. Several European countries have expressed resistance to the Basel process, seeking either to weaken some of the requirements or to stretch out the period of time before the new rules will take effect.
Obama Says His Economic Policies Halted "Bleeding"
President Barack Obama, previewing a big push on the U.S. economy next week, on Saturday defended policies that he said "have stopped the bleeding" and put the middle class on the road to recovery. Obama, struggling to bring down the 9.6 percent jobless rate, is to spend next week talking up proposals on improving the economy. He hopes to gain some traction with impatient voters as they ponder whether to toss out his Democrats in the November 2 congressional elections.
In his weekly radio and Web address, Obama pointed to measures funded by the Democrats' $814 billion economic stimulus as responsible for halting the economic slide he faced when taking office in January 2009. This includes spending on roads and bridges and money given to local governments to avert layoffs of teachers, firefighters and police officers. "The steps we have taken to date have stopped the bleeding," Obama said. "But strengthening our economy means more than that."
Other steps, he said, were aimed at helping the middle class, citing a portion of his U.S. healthcare overhaul that stopped insurance companies from refusing to cover people with pre-existing health conditions. Obama is trying to convince Americans that Democratic policies offer the best economic future for them as he seeks to turn back a strong challenge from Republicans for control of the U.S. House of Representatives and possibly the Senate.
No Second Stimulus
Obama is to visit a labor rally in Milwaukee on Monday, the Labor Day holiday, and then is to lay out targeted proposals to boost job growth when he visits Cleveland on Wednesday. A presidential news conference is planned on Friday at the White House. A number of options are likely, such as extending middle class tax cuts, investing in clean energy, spending more on infrastructure, and delivering more tax cuts to businesses to encourage hiring.
The White House is careful to say these proposals do not add up to a second stimulus package, given voters' anxiety about the country's record budget deficit. Democrats are to kick off their autumn effort to hang on to Congress on Wednesday when Democratic Party Chairman Tim Kaine delivers a speech in Philadelphia that the party said will frame the choice for voters.
Kaine will "explain the choice the American people have in front of them -- a choice between Democrats, who are moving America forward and Republicans, who want to take us back to the failed policies of the past that brought our economy to the brink of collapse," a party statement said. Republicans said Democratic policies are responsible for the sagging economy.
"This administration claimed its economic policies would keep unemployment under 8 percent, cut the deficit and turn our economy around. Instead, the unemployment rate is nearing 10 percent, the debt is exploding and we've lost hundreds of thousands of jobs over the summer months," said Senate Republican leader Mitch McConnell.
Obama to Unveil Plans to Shore Up Economy As Unemployment Edges Up
by Sheryl Gay Stolberg - New York Times
President Obama, calling the latest jobs report "positive news," said Friday that he planned to unveil a "package of ideas" next week to shore up the flagging economy, and does not regret his administration’s decision to declare this season the "recovery summer."
Mr. Obama spoke from the White House Rose Garden hours after the latest jobs report showed unemployment had nudged up to 9.6 percent, even as private employers added 67,000 jobs in August. He tried to put a positive spin on the developments, noting that August was the eight consecutive month of private job growth, and that the numbers for July had been revised upward.
Both the June and July numbers on private job growth were revised Friday by the Labor Department. In July, growth in the private sector was revised up to 107,000 jobs from 71,000, and in June, 61,000 jobs were added instead of 31,000. Mr. Obama did not offer specifics about what ideas he is considering, though he has said repeatedly that he wants to extend middle class tax cuts and promote new investment in clean energy.
Once again, he called for Congress to pass a stalled bill that would offer tax breaks to small businesses and create a $30 billion loan program to encourage community banks to lend. "I will be addressing a broader package of ideas next week," Mr. Obama said, taking the rare step of responding to a reporter’s shouted question. "We are confident that we are moving in the right direction but we want to keep this recovery moving stronger and accelerate the job growth that’s needed so desperately across the country."
Asked if he regretted calling this ‘’the recovery summer," Mr. Obama said, "I don’t regret the notion that we are moving forward because of the steps we have taken," adding that he would take more questions at a news conference scheduled for next Friday. The unusual impromptu question-and-answer session — Mr. Obama usually slips quickly out of the Rose Garden after making such prepared statements — reflects the deep pressure the president is under to address the high unemployment rate as the midterm elections quickly approach.
After a week spent on foreign affairs, including an Oval Office address to announce the end of the combat mission in Iraq and a new round of Middle East peace talks, the president is pivoting to the economy, Americans’ primary concern. He will travel on Monday, Labor Day, to a union picnic in Milwaukee and will deliver a speech on the economy in Cleveland on Wednesday, followed by the news conference on Friday. "There’s no quick fix for this recession," Mr. Obama said Friday. "The hard truth is that it took years to create our current economic problems and it will take more time than any of us would like to repair the damage."
Romer Says August Payrolls Report Shows U.S. Won't Relapse Into Recession
by Joshua Zumbrun and Carol Massar - Bloomberg
Christina Romer, President Barack Obama’s departing chief economist, said a report that U.S. companies added more jobs than forecast ends concern the economy may slide back into a recession. "I think it does erase that worry," Romer said in an interview today with Carol Massar on Bloomberg Television’s "Street Smart." "That’s one of the reasons why today’s report is important," she said. "Even though the job creation was not as strong as we would have liked, it shows that steady, continued private-sector job growth, and we’re just going to have to build on that."
Private payrolls climbed 67,000 after a revised 107,000 increase in July that was more than initially estimated, Labor Department figures in Washington showed today. The gain exceeded the 40,000 median increase in a Bloomberg News survey of economists. The unemployment rate rose to 9.6 percent as more people looked for work. A separate report showed service industries expanded more slowly than estimated.
Today was Romer’s final day as head of the White House’s Council of Economic Advisers. Romer, 51, an architect of the administration’s $814 billion stimulus package, will return to teaching at the University of California in Berkeley. She said in January of last year that the stimulus package would stop the unemployment rate from rising above 8 percent.
Recent economic reports indicate that "okay, we did have that rough period, but these are looking more like we’re getting back on that steady path of growth," she said. Romer said she "would be honored" to be considered to succeed Janet Yellen as president of the Federal Reserve Bank of San Francisco. Yellen is awaiting confirmation from the Senate to become the next vice chairman of the Fed’s Washington-based Board of Governors.
7 Weak Spots In The Employment Report
David Rosenberg rains on the bull parade and explains why the employment report was more bearish than the market response:
But there were many other parts of the nonfarm report that left much to be desired. Here’s an unlucky seven examples of softness beneath the surface:
- Aggregate hours worked were flat.
- All the employment gains were part-time — full-time employment, as per the Household Survey, plunged 254,000.
- Those working part-time for "economic reasons" surged 331,000 — the biggest increase in six months.
- While private payrolls were better than expected, 10,000 of that +67,000 tally reflected returning construction workers who had been on strike.
- Manufacturing employment was down 27,000 and total goods producing jobs were flat — hardly signs of a robust economic backdrop.
- The diffusion index for private payrolls actually fell to 53.0 from 56.7 in July — a seven-month low. It was 68.0 at the April high, which is consistent with an economy slowing down to stall-speed.
- The labour market gap widened with the all-inclusive U6 unemployment rate rising to a four-month high of 16.7% from 16.5% in July. This is why the odds are stacked against a sustained acceleration in wages.
Rosy Rhetoric On New Unemployment Numbers Doesn't Match Reality For Many Americans
by Megan Carpentier - TPM
On the cusp of America's celebration of labor's place in American life, the Labor Department released its monthly review of employment statistics to relatively optimistic reactions from the White House and the media, despite the fact that 54,000 fewer Americans had jobs at the end of August than did in July. The cause for all the celebration is that the 54,000 net new unemployed Americans were mostly Census workers who expected to be unemployed by September, so the overall increase in unemployment wasn't really that bad. But, a deeper look at the numbers belies the rosy rhetoric.
At issue in this month's statistics: the net job loss of 54,000 jobs -- which bumped the unemployment rate up to 9.6 percent -- was driven by the loss of 114,000 temporary Census jobs, and the private sector actually added a net 67,000 jobs. Some people, including at the White House, have seized on the modest gains in private sector employment to paint the economic picture as somewhat rosy.
However, the fact is that economists agree that America needs to add 150,000-200,000 jobs every month just to keep pace with new entrants to the job market (about 100,000 people every month) and begin to re-employ the millions of Americans who remain out of work. By that standard, the loss of 54,000 jobs, even if they are mostly temporary census workers, is pretty bad news.
But the bad news doesn't stop there: 6.2 million Americans -- 42 percent of all the unemployed -- have been unemployed for more than 27 weeks. While that's a reduction of 323,000 people, it is roughly equivalent to the number of Americans who are newly part-time employed for economic reasons (331,000). In total, 8.9 million Americans are working to support themselves with part-time work alone because they have no other options. And 2.4 million Americans are deemed marginally unemployed because they are looking for work but don't qualify for unemployment. In all, the underemployment rate is actually closer to 17 percent.
That, of course, doesn't account for people so discouraged by the job market that they've stopped looking for work altogether. According to the Labor Department's statistics, both the labor market participation rate (64.7 percent) and the employment-to-population ration (58.5 percent) are lower than a year ago -- and at the lowest level in a decade.
Discouraged yet? A look at overall government employment won't help. Despite the spin that the loss of jobs is almost all due to the loss of temporary Census jobs, state and local government employees -- especially teachers -- continue to experience job losses. Private sector employment is up by 67,000 jobs -- but gains in that sector remain driven by gains in skilled health care jobs (up 28,000 in August for an average of 20,000 job per month this year) and temporary jobs (17,000 in August, for a total of 392,000 new temporary jobs in the last year).
The manufacturing sector lost another 27,000 jobs, making for a net loss of 93,000 since last year. The construction industry -- one of the industries hardest hit by the economic downturn and at which much of the stimulus was initially aimed -- added 19,000 jobs this month (mostly because 10,000 workers came back from a July strike), but has a net job loss of 574,000 jobs since this time last year.
So while the analysts and politicians may claim that these are great numbers because they expected them to be worse, the reality is that 26.2 million Americans are underemployed; 14.9 million of those are unemployed; and 6.2 million of those people have been so for more than 27 weeks. There's no way that 67,000 new private sector jobs are going to make a dent in that -- and certainly not when the government is busy laying 121,000 government workers off.
Non Farm Payrolls: The Devil Is In the Adjustments
by Jesse - Café Americain
When the US government announced a 'better than expected' headline growth number in its non farm payrolls report for August, a loss of 'only' 54,000 jobs versus a forecasted loss of 120,000 jobs, people had to wonder, 'How do they do it? We do not see any of this growth and recovery in our day to day activity.'
Here's one way that those reporting the numbers can 'tinker' with them to produce the desired results.
As you may recall, there is often a very large difference between the raw, unadjusted payroll number and the adjusted number. Seasonality plays the largest role, although there can occasionally be special circumstances. Since this is designed to be a simple example I am going to lump all the various adjustments that could be and call them the 'seasonality factor' since it is most usual and signficant.
Here is a chart showing the unadjusted and the adjusted numbers. As you can see, a seasonal adjustment can legitimately normalize the numbers for the use of planners and forecasters. This is a common function in businesses affected by seasonal changes. Year over year growth rates, rather than linear, comparisons, can also serve a similar function.
Quite a variance in numbers that are very large.
Since it probably is in the back of your mind, let's address the infamous "Birth Deal Model" now, which I have advised may not be such a significant factor as you might imagine. This is an 'estimate' of new jobs created by small businesses. A comparison of the last few years demonstrates rather easily that this number is what is called 'a plug.'
How can the growth of jobs from small business not been significantly impacted by one of the greatest financial collapses in modern economic history?
Certainly the Birth Death model offers room for statistical mischief. It is important to remember that it is added to the RAW number before seasonal adjustment, and that number has huge variances. So the effect of Birth Death is mitigated by the adjustment for seasonality. If it were added to the Seasonal number from which 'headline growth' is derived it would be a huge factor. But it is not the case, although the timing of the significant annual adjustments and additions is highly cynical, and supportive of number inflation. Perhaps calling it a 'plug' is too kind, and 'fudge factor' would be more accurate.
From my own analysis of each month's data, and especially looking at the changes made to the numbers over time, the two biggest factors are the restatements of prior months, and sometimes years, and the monthly changes in seasonality factor.
Let's take a closer look at the seasonality adjustment.
The raw unadjusted number for US non-farm payrolls is very large, on the order of 130+ million in the most recent month.
The 'headline growth number' these days is generally around a hundred thousand jobs or so, which is several orders of magnitude difference smaller than the unadjusted number from which it starts to be derived. Even the month over month fluctuations in the unadjusted number are quite large, and added to that are the Birth Death adjustments, which are often as large or larger than the 'headline number.'
Do you think the Government uses the same seasonality adjustment factor profile each year? Let's take a look at just the month of June, and how the adjustments were made since 2003. It is important to point at here that the seasonality factor is subject to backward revisions. What is used in the current month can and often does change substantially as it becomes 'history' and is no longer in the public eye.
As it turns out the seasonality factor varies over time, as determined by year over year. Here is a chart that shows the adjustment factor by year. It does not seem that great does it, but the variance is there.
How significant are these variances? Let's take a look at a specific example.
Here is the use of seasonal adjustment in June of 2010, compared to June of 2009. The takeaway from this chart is that even a slight change in seasonal adjustment can result in a large impact to the 'headline number' that Wall Street and the political commentators watch and expound upon.
Quite a difference isn't it? Plus 43,000 jobs can be a big difference from no growth, especially if a flat growth was forecast by the economists.
Let's take a look further into the past to see how much variability there can be in adjustments for the SAME month over time.
What is important is not the result for a specific year per se, but the huge variance in results for the same month each year with little or no justification. Further, these results can be restated, and significantly, going forward in benchmark revisions. Whether they are 'correct' or not is not the point. The point is that this variability renders the current headline number as data highly suspect, vulnerable to manipulation by special interests and short term agendas.
Given the degrees of freedom in setting the seasonality, and adjusting prior months to add and subtract jobs once they have served their purpose in supporting the headlines, I think it is safe to say that if you give me a spreadsheet of jobs data, and you are my politically appointed supervisor, I can make the numbers come out pretty close to whatever you want within reason to support whatever messaging you may wish to put forward. As the errors start to add up over time, I can 'restate' the past numbers in a wholesale change to bring them into line with reality.
So what is the point of this discussion. First, and foremost, judging the health of the economy over a monthly headline number like this is more artifice than substance. At worst it is leaked to Wall Street cronies to help them skin the public from their money, and provide a few sound bytes to support whatever political message the government wishes to promote that month to 'restore confidence.'
At best and most properly it can be included in a series of numbers, a moving average preferably that shows the trend in employment, which along with other factors can help economists determine the actual growth and health of the economy.
The government was able to turn around a tremendous loss of jobs, which is good news. The bad news is that they accomplished this by essentially throwing trillions of dollars at the problem, and in particular a corrupt and oversized financialization industry, in order to bring the trend back to zero. Without a change one cannot return to a bubble economy and hope it to be sustainable without a growing asset bubble. This implies organic growth and a return to a growth in the median wage which has been declining or stagnant in a long term structural trend. Has anything been done to promote this? No. And in this sense of over cautious lack of reform Obama is more a Hoover than a Roosevelt.
But this cult of 'headline numbers' as used by the mainstream media, the government, and Wall Street is a sad commentary on the frivolous nature of US leadership. This childishness should not be surprising given that they think they can hide their monetary inflation by leasing gold into the bullion markets and buying Treasuries to hold down the long term rates while a private banking cartel prints money and provides it to their friends. And the primary capital allocation mechanism of the nation is riddled with false trades, naked short positions, and accounting fraud, schemes and subterfuges, that go largely unaddressed by the financial authority charged with enforcement of the integrity of the system even when they become so blatant as to cause a flash crash collapse of the system.
The only thing that is surprising about Wall Street and the US financial frauds is, as Eliot Spitzer famously observed, their scams and schemes are so simple and so obvious when one can pry back the veil of secrecy and see what is actually being done.
Sadly it will likely continue because 'it works' for the short term, and the US is preoccupied with the short term, instant analysis and results over substance and solid progress built on strong foundations, every time.
The true cost of the Iraq war: $3 trillion and beyond
by Joseph E. Stiglitz and Linda J. Bilmes - Washington Post
Writing in these pages in early 2008, we put the total cost to the United States of the Iraq war at $3 trillion. This price tag dwarfed previous estimates, including the Bush administration's 2003 projections of a $50 billion to $60 billion war.
But today, as the United States ends combat in Iraq, it appears that our $3 trillion estimate (which accounted for both government expenses and the war's broader impact on the U.S. economy) was, if anything, too low. For example, the cost of diagnosing, treating and compensating disabled veterans has proved higher than we expected.
Moreover, two years on, it has become clear to us that our estimate did not capture what may have been the conflict's most sobering expenses: those in the category of "might have beens," or what economists call opportunity costs. For instance, many have wondered aloud whether, absent the Iraq invasion, we would still be stuck in Afghanistan. And this is not the only "what if" worth contemplating. We might also ask: If not for the war in Iraq, would oil prices have risen so rapidly? Would the federal debt be so high? Would the economic crisis have been so severe?
The answer to all four of these questions is probably no. The central lesson of economics is that resources -- including both money and attention -- are scarce. What was devoted to one theater, Iraq, was not available elsewhere.
The Iraq invasion diverted our attention from the Afghan war, now entering its 10th year. While "success" in Afghanistan might always have been elusive, we would probably have been able to assert more control over the Taliban, and suffered fewer casualties, if we had not been sidetracked. In 2003 -- the year we invaded Iraq -- the United States cut spending in Afghanistan to $14.7 billion (down from more than $20 billion in 2002), while we poured $53 billion into Iraq. In 2004, 2005 and 2006, we spent at least four times as much money in Iraq as in Afghanistan.
It is hard to believe that we would be embroiled in a bloody conflict in Afghanistan today if we had devoted the resources there that we instead deployed in Iraq. A troop surge in 2003 -- before the warlords and the Taliban reestablished control -- would have been much more effective than a surge in 2010.
When the United States went to war in Iraq, the price of oil was less than $25 a barrel, and futures markets expected it to remain around that level. With the war, prices started to soar, reaching $140 a barrel by 2008. We believe that the war and its impact on the Middle East, the largest supplier of oil in the world, were major factors. Not only was Iraqi production interrupted, but the instability the war brought to the Middle East dampened investment in the region.
In calculating our $3 trillion estimate two years ago, we blamed the war for a $5-per-barrel oil price increase. We now believe that a more realistic (if still conservative) estimate of the war's impact on prices works out to at least $10 per barrel. That would add at least $250 billion in direct costs to our original assessment of the war's price tag. But the cost of this increase doesn't stop there: Higher oil prices had a devastating effect on the economy.
There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003 to $10 trillion in 2008 (before the financial crisis); at least a quarter of that increase is directly attributable to the war. And that doesn't include future health care and disability payments for veterans, which will add another half-trillion dollars to the debt. As a result of two costly wars funded by debt, our fiscal house was in dismal shape even before the financial crisis -- and those fiscal woes compounded the downturn.
The financial crisis
The global financial crisis was due, at least in part, to the war. Higher oil prices meant that money spent buying oil abroad was money not being spent at home. Meanwhile, war spending provided less of an economic boost than other forms of spending would have. Paying foreign contractors working in Iraq was neither an effective short-term stimulus (not compared with spending on education, infrastructure or technology) nor a basis for long-term growth. Instead, loose monetary policy and lax regulations kept the economy going -- right up until the housing bubble burst, bringing on the economic freefall.
Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed indirectly to disastrous monetary policy and regulations.
The Iraq war didn't just contribute to the severity of the financial crisis, though; it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession. With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war.
* * *
Reimagining history is a perilous exercise. Nonetheless, it seems clear that without this war, not only would America's standing in the world be higher, our economy would be stronger. The question today is: Can we learn from this costly mistake?
Grim Housing Choice: Help Today’s Owners or Future Ones
by David Streitfeld - New York Times
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve. "Housing needs to go back to reasonable levels," said Anthony B. Sanders, a professor of real estate finance at George Mason University. "If we keep trying to stimulate the market, that’s the definition of insanity."
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent. The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening. "The administration made a bet that a rising economy would solve the housing problem and now they are out of chips," said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. "They are deeply worried and don’t really know what to do."
That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN that the administration would "go everywhere we can" to make sure the slumping market recovers. Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway.
Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works. "In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced," the spokeswoman, Amy Brundage, said.
Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success. If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still.
Builders are in even worse shape. Sales of new homes are lower than they were in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick. The deteriorating circumstances have given a new voice to the "do nothing" chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called "extend and pretend" or "delay and pray" — has run its course. "We have had enough artificial support and need to let the free market do its thing," said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and five other states, also advocates letting the market fall. "Prices are still artificially high," he said. "The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000." A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners who are just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.
The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble. Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials now concede, the credit quality of the borrowers was too low.
With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances. Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data compiled by the research firm CoreLogic. "These are at-risk buyers," said Sam Khater, a CoreLogic economist. "They have very little equity, and that’s the largest predictor of default."
This is the risk policy makers face. "If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers," said Mr. Glaser, a consultant whose clients include the National Association of Realtors. "Then we’re back to Depression-era problems." Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.
William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would "provide a crucial stimulus of $50 to $60 billion in consumption, as well as a potential lift of 5 to 10 percent in terms of housing prices."
The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus. Some members of the National Association of Home Builders say a new credit of $25,000 would spark demand, but they realize their chances of getting this through Congress are nonexistent. "Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?" said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
What Bernanke doesn’t understand about deflation
by Steve Keen - Debt Deflation
[A] key point can be grasped just by considering the GDP and the change in debt for the two years 2008 and 2010: in 2007-2008, GDP was $14.3 trillion while the change in private sector debt was $4 trillion, so aggregate private sector demand was $18.3 trillion. In calendar year 2009-10, GDP was $14.5 trillion, but the change in debt was minus $1.9 trillion, so that aggregate private sector demand was $12.6 trillion. The turnaround in two years in the change of debt has literally sucked almost $6 trillion out of the US economy.
That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.
Ignoring this growth in debt—championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme—was the greatest failing of the Federal Reserve and its many counterparts around the world.
Though this might beggar belief, there is nothing sinister in Bernanke’s failure to realize this: it’s a failing that he shares in common with the vast majority of economists. His problem is the theory he learnt in high school and university that he thought was simply "economics"—as if it was the only way one could think about how the economy operated. In reality, it was "Neoclassical economics", which is just one of the many schools of thought within economics. In the same way that Christianity is not the only religion in the world, there are other schools of thought in economics.
And just as different religions have different beliefs, so too do schools of thought within economics—only economists tend to call their beliefs "assumptions" because this sounds more scientific than "beliefs". Let’s call a spade a spade: two of the key beliefs of the Neoclassical school of thought are now coming to haunt Bernanke—because they are false. These are that the economy is (almost) always in equilibrium, and that private debt doesn’t matter.
One of Bernanke’s predecessors who also once believed these two things was Irving Fisher, and just like Bernanke, he was originally utterly flummoxed when the US economy collapsed from prosperity to Depression back in 1930. But ultimately he came around to a different way of thinking that he christened "The Debt Deflation Theory of Great Depressions" (Fisher 1933).
You would think Bernanke, as the alleged expert on the Great Depression—after all, that’s one of the main reasons he got the job as Chairman of the Federal Reserve—had read Fisher’s papers.
And you’d be right. But the problem is that he didn’t understand them—and here we come back to the belief problem. The Great Depression forced Fisher—who was also a Neoclassical economist—to realize that the belief that the economy was always in equilibrium was false. When Bernanke read Fisher, he completely failed to grasp this point. Just as a religious scholar from, for example, the Hindu tradition might completely miss the key points in the Christian Bible, Bernanke didn’t even register how important abandoning the belief in equilibrium was to Fisher.
To know this, all you have to do is read Bernanke’s summary of Fisher in his Essays on the Great Depression:The idea of debt-deflation goes back to Irving Fisher (1933). Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed.
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. " (Bernanke 2000, p. 24)
There’s no mention of disequilibrium there, and though Bernanke went on to try to develop the concept of debt-deflation, he did so while maintaining the belief in equilibrium. Compare this to Fisher himself on how important disequilibrium really is in the real world:We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…
It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. (Fisher 1933, p. 339)
We might not be in such a pickle now if economics had started to become more of a science and less of a religion by following Fisher’s lead, and abandoning key beliefs when reality made a mockery of them. But instead neoclassical economics completely rebuilt its belief system after the Great Depression, and here we are again, once more experiencing the disconnect between neoclassical beliefs and economic reality.
by Steve Matthews and Joshua Zumbrun - Bloomberg
The new financial regulation law gives the Federal Reserve chairman the authority to force banks to raise capital and tighten lending -- just as he’s trying to steer monetary policy in the opposite direction.
In November 2009, Senate Banking Committee Chairman Christopher Dodd advanced a radical proposal: to create a super-regulator that would take over most of the bank supervision that had been done by the Federal Reserve System, the Federal Deposit Insurance Corp. and other agencies. Dodd had been a harsh critic of the Fed and its chairman, Ben S. Bernanke, declaring in July 2009 that the central bank’s supervision of financial services had been an "abysmal failure," Bloomberg Markets magazine reports in its October 2010 issue.
In January 2010, the U.S. Senate approved Bernanke for a second four-year term by a tally of 70 to 30 -- giving him the most negative votes any nominee had received since the chamber started confirming Fed chiefs in 1978. Six months later, when President Barack Obama signed into law a 2,300-page bill overhauling financial services regulation, the super-regulator had been forgotten. Instead, the Federal Reserve had acquired new regulatory heft, and Bernanke had emerged as the most powerful Fed chairman ever -- with more authority even than his legendary predecessor, Alan Greenspan, who had chaired the Fed for 18 years.
For all of the heat Bernanke took for failing to see the gathering credit storm in 2007, lawmakers -- with a few exceptions -- have come to appreciate the actions he has taken to rescue the banking system and the economy in the past two years. He has pushed interest rates as low as they can go and vowed to keep them there until the employment picture improves. Last week at a Fed meeting in Jackson Hole, Wyoming, he said the Fed was ready to provide still more stimulus if needed.
Vote of Confidence
"When the dust settled, Congress realized that Bernanke and the Fed knew what they were doing," says Mark Gertler, a New York University economics professor who did research with Bernanke, a former Princeton University professor, on the causes of the Great Depression. "The power of any Fed chairman is ultimately based on the perception by Congress that he will use it prudently. He has this reputation."
Under the Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank law, Bernanke’s Fed gains powers never before housed in one regulator. The central bank remains the supervisor of 5,000 U.S. bank holding companies and 830 state banks. The law gives it new authority to control the lending and risk taking of the largest, most "systemically important" banks. Among them: investment banks Goldman Sachs Group Inc. and Morgan Stanley, which became bank holding companies in September 2008.
The Fed gains authority over about 440 thrift holding companies and will also regulate "systemically important" nonbank financial firms, including, analysts say, the biggest insurance companies, Warren Buffett’s Berkshire Hathaway Inc. and General Electric Capital Corp., the financial unit of GE. The Fed is now required to look for evidence that practices in the banking system threaten the country’s financial stability and, if necessary, take action to put a stop to those practices. It’s also obliged under the law to administer stress tests at the biggest banks every year to determine whether they need to set aside more capital.
The law prescribes that those banks write so-called living wills, approved by the Fed, that would make it easier for the government to break them up and sell the pieces if they’re suffering from a Lehman Brothers-style meltdown. Bernanke’s Fed will also house and fund a new federal consumer protection agency, although it will operate independently. The Fed will even have the power to tell U.S. banks how much they can charge merchants when a consumer uses a debit card to buy a suit or a sack of groceries. Regular credit cards will be the responsibility of the new consumer agency.
"There are an enormous number of powers given to the Fed," says Vincent Reinhart, who was the Fed’s chief monetary policy strategist from 2001 to 2007. "The Fed has a very powerful and very broad mandate." That kind of power was just what Senate opponents of the financial regulation bill wanted to deny Bernanke, who declined to comment for this story.
"Augmenting the Federal Reserve’s authority risks burdening it with more responsibility than one institution can reasonably be expected to handle," Alabama Senator Richard Shelby, the ranking Republican on the Senate Banking Committee, said at a hearing in July 2009. "In fact, the Federal Reserve is already overburdened with its responsibility for monetary policy, the payment system, consumer protection and bank supervision." Shelby also raised the issue of the inherent conflict between the Fed’s role in setting interest rates and its job of bank supervision.
"The mixing of monetary policy and bank regulation has proven to be a formula for taxpayer-funded bailouts and poor monetary policy decisions," Shelby said. The Fed’s role as a bank regulator dates to its creation in 1913, in the wake of another financial crisis: the Panic of 1907. It originally supervised only state banks that chose to operate under a Federal Reserve charter.
Its bank supervisory duties were expanded with the 1933 passage of the Glass-Steagall Act, which, in addition to splitting apart commercial and investment banks, established the FDIC to insure deposits and required bank holding companies to submit to audits by the Fed. One opponent of giving the Fed new regulatory power is former chairman Greenspan. "The additional power that the Fed has been given I had not been in favor of," he told Bloomberg News on July 16. "I do not think they can actually prevent the next crisis."
As Bernanke, 56, assumes his new responsibilities, he continues to take bold and unprecedented steps in the Fed’s traditional areas of responsibility: managing the money supply and setting interest rates. To rescue the banking system and stimulate economic activity, the Fed has for more than two years been buying bank and government debt, swelling its balance sheet to more than $2 trillion.
With the crisis past, the Fed by early 2010 had decided to let the securities-buying program wind down, shrinking its balance sheet as the bonds it held matured. The Federal Reserve Bank of New York estimated in March that more than $200 billion of agency debt and mortgage-backed securities held by the central bank would mature or be prepaid by the end of 2011. Bernanke reversed the decision to stop buying securities on Aug. 10. The central bank’s Federal Open Market Committee announced it would replace maturing bonds with longer-term Treasuries, explaining that the economy had weakened since June and it didn’t want to add to the problem by driving up interest rates.
Jackson Hole Assurance
"In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly," Bernanke said Aug. 27 at the Kansas City Fed’s annual monetary symposium in Jackson Hole.
Buying bonds pushes yields on Treasury notes lower, which forces down mortgage rates and other long-term borrowing costs. The average rate of a 30-year fixed-rate mortgage dropped to a record low of 4.36 percent in the week ended on Aug. 26, from 4.42 percent the week before, according to mortgage packager Freddie Mac, which began compiling the data in 1971. The yield on 10-year Treasury notes touched a 19-month low on Aug. 25. The yield dropped to 2.52 percent on Aug. 30 from 2.65 percent late on Aug. 27.
Sending a Message
"The simple option of reinvesting the proceeds of maturing assets will not have a huge impact on the scale of market liquidity," says Lena Komileva, an economist at Tullett Prebon Plc, a London brokerage firm. "But it will send the message that the Fed is still in easing mode, which may create an appetite for risk and borrowing." William Ford, a former president of the Federal Reserve Bank of Atlanta who now teaches at Middle Tennessee State University, calls the Fed action "a wrong move" that will have little impact except to increase the losses the Fed suffers on its portfolio of long-term Treasuries when interest rates rise.
"They are sticking their foot deeper in a liquidity trap," Ford says. "It will not cause any lending." Bernanke’s use of nearly every tool at his disposal to stimulate economic growth could conflict with his new job as regulator-in-chief, says former Fed Governor Lyle Gramley. "If the regulators were to get very tough right away and make major changes in liquidity and capital requirements, that could be a problem," he says.
Hitting GDP Growth
Mark Zandi, chief economist at Moody’s Analytics, says any move by the Fed to increase reserves against bad debt will hurt economic growth. "The higher the capital ratios, the greater the hit to bank profitability, credit growth and GDP growth," he says. "The near-term consequence will be to slow growth." Bernanke says his examiners are working with the nation’s financial institutions to minimize the economic impact of tougher regulation.
"Our message is clear," he said on July 12 at a meeting of small-business owners. "Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers. Doing so is good for the borrower, good for the lender and good for our economy." Bernanke and his supporters triumphed over the opponents of expanding the Fed’s regulatory power by exploiting the institution’s historical prestige.
"The Fed ended up on top because Democrats and Republicans can agree that its independence is more significant than that of any other agency," says John Silvia, chief economist at Wells Fargo Securities and former chief economist for the Senate Banking Committee. Bernanke says it’s important that the Fed continue to be the country’s main bank regulator because no agency knows the banks better.
"Because of its wide range of expertise, the Federal Reserve is uniquely suited to supervise large, complex financial organizations," Bernanke told a hearing of the House Financial Services Committee on March 17. The Fed chief has taken his message to the public in a series of appearances, including a profile on CBS TV’s 60 Minutes in March 2009 and a half dozen speeches and question- and-answer sessions.
‘It Wasn’t Pretty’
On Aug. 2 of this year, he spoke in his native South Carolina to an audience of Southern state legislators, defending the Fed’s role in the bailout of big financial firms like Citigroup Inc. and insurer American International Group Inc. "In September and October 2008, our financial system came as close as it has come since the 1930s to utter meltdown," he said. "I am not just talking about the United States but the entire world. We did what we did -- it wasn’t pretty -- to prevent the collapse of the global financial system because we knew what effect that would have on Main Street, not on Wall Street."
Bernanke’s supporters see the financial regulation bill as a gesture of trust in the Fed chief, who has been working with the Fed since 1987, when he began several stints as a visiting scholar at regional Fed banks. Dodd, 66, a five-term Democrat who is retiring in January, was one person Bernanke brought around in the months Congress spent wrangling over the financial regulation bill. "I have real concerns about how the Fed responded at a time they should have been more aggressive," he says. "But I think Ben Bernanke learned a lot from it and I have a lot of confidence in him today to lead."
Frank Backs Bernanke
Bernanke also won the backing of Barney Frank, the Massachusetts Democrat who is head of the House Financial Services Committee, and of Obama, who signed the Dodd-Frank law on July 21. Former Fed Governor Gramley says Bernanke was just one of many financial regulators who didn’t see the buildup of bad debt that brought the economy low.
"Bernanke has to take his lumps along with everyone else who missed the boat," says Gramley, now senior economic adviser at Potomac Research Group in Washington. "But were it not for what a few people like Bernanke did to keep us from going over the deep end, we would now be in the midst of a catastrophic depression. So Ben comes out a hero in my book."
Bernanke the Optimist
Bernanke saw no catastrophe on the horizon in 2005, when he was serving as head of President George W. Bush’s Council of Economic Advisers, a post he resigned from the Fed Board of Governors to take. At a briefing for reporters in August of that year, he was asked about the rapid rise in home prices. "Housing prices certainly have come up quite a bit," he said. "But I think it’s important to point out that house prices are being supported in very large part by very strong fundamentals."
Bernanke remained an optimist in the first year after he was sworn in as Fed chairman, in February 2006. On March 28, 2007, addressing what was by then a collapsing subprime housing market -- 13.3 percent of such borrowers made late payments in the fourth quarter of 2006 -- Bernanke told Congress’s Joint Economic Committee, "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."
Five months later, credit markets seized up. The Fed then began a long chain of actions that Bernanke would later say were necessary to avert financial collapse. "The Fed was slow to appreciate the loss of liquidity in the global financial markets," says Ernest Patrikis, a partner at law firm White & Case LLP and a former general counsel for the New York Fed. "Once the Fed got it, it truly got it. The Fed was creative, pulled out all the stops."
Beginning in September 2007, the central bank repeatedly lowered the federal funds rate, which is the rate banks charge to lend to each other. It now ranges from 0 to 0.25 percent. The Fed also cut the interest rate it charges banks to borrow directly from the Fed, to 0.5 percent in December 2008 from 6.25 percent in August 2007. In March 2008, the Fed directly intervened to try to still the crisis, lending $29 billion to buy toxic assets from failing Bear Stearns Cos. and facilitate its takeover by JPMorgan Chase & Co.
By December 2008, in the wake of the financial chaos triggered by the bankruptcy of Lehman Brothers Holding Inc., Bernanke’s Fed was flooding the financial system with money. At the same time that Bernanke was taking emergency measures, he was imposing some regulatory discipline on the banks. Congress had given the Fed the authority to regulate mortgage lending in 1994, yet Greenspan’s Fed had never written the rules that banks must follow in issuing such loans.
Enforcing the Rules
In July 2008, the Fed finally signed off on new rules, and Bernanke announced that the central bank would enforce them rigorously. "Far too much of the lending in recent years was neither responsible nor prudent," he said, adding that "strong, uniform oversight of different types of mortgage lenders is critical to avoiding future problems." That same month, the Fed ruled that mortgage lenders must verify a homebuyer’s income or assets -- a detail that had been neglected in the era of the so-called liar loan.
In the wake of the financial breakdown, the focus in Congress was on which agency of government should be charged with searching out systemic risk. During July 2009 hearings by the Senate Banking Committee, Shelby said the one body that shouldn’t have the job was the Fed. "I believe anointing the Fed as the systemic risk regulator will make what has proven to be a bad bank regulator even worse," he said.
Clash of Tasks
William Poole, a former president of the Federal Reserve Bank of St. Louis, says Bernanke has to deal with the conflict between his bank supervision duties and the orchestration of monetary policy. The clash was apparent as early as the 1970s, when the Fed was battling both high inflation and growing problems in the savings and loan industry, he says. "There was concern about raising interest rates, which would put further pressure on the savings and loans," says Poole, who was at the St. Louis Fed from 1998 to 2008 and who is now a senior economic adviser to Palo Alto, California-based Merk Investments LLC. "You don’t want monetary policy decisions to be dominated by what’s a side issue."
Poole’s view isn’t popular among his Fed colleagues, he says. "I’ve never believed that it’s essential for the Federal Reserve to have supervision authority," he says. "I know my Federal Reserve colleagues will regard me as a traitor if you publish that. I don’t think it’s essential."
Killing the OTS
It was partly to answer this argument that Dodd, in November 2009, proposed the creation of a super-regulator to replace the Fed, the FDIC, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. The only agency that ended up getting axed was the OTS, whose responsibilities were divided up among other agencies, including the Fed.
While Congress was debating the fate of the Fed’s bank supervision powers, Bernanke took to the streets and airwaves to repair the central bank’s image. In March 2009, he agreed not only to sit for an interview with 60 Minutes’ Scott Pelley but also to travel with Pelley to his hometown of Dillon, South Carolina, where his father and uncle once ran a drugstore. Bernanke talked about the damage the financial crisis had done to Dillon’s economy. In July 2009, he made a town-hall-style appearance on PBS television in Kansas City, Missouri. In May 2010, Bernanke toured a Philadelphia shipyard and a Tasty Baking Co. factory in a part of the city that is being redeveloped.
‘An Inspiring Morning’
The Philadelphia visit, well covered by local media, had the aura of a political campaign tour. "It was just an inspiring morning for me," Bernanke said afterward. Bernanke chatted with ABC News’s Sam Donaldson at a June 7, 2010, dinner in front of a live audience. Two days later, he traveled to Richmond, Virginia, to meet with 20 students at J. Sargeant Reynolds Community College, where he praised job training programs as a way to help the unemployed.
"I call that the summer-of-love tour," former Fed monetary policy chief Reinhart says. "He recognized the voting public was angry and they were angry at the Federal Reserve. He came out of this recognizing that the Fed’s legitimacy depended on how it was viewed by the public." Other members of the Fed Board of Governors and the leaders of the 12 regional Fed banks were also busy in the spring and summer of 2010 defending the Fed’s bank supervisory power, particularly its jurisdiction over 830 banks with state charters.
Fed President Lobby
On May 5, four regional Fed presidents -- Kansas City Fed President Thomas Hoenig, Minneapolis Fed President Narayana Kocherlakota, Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser -- traveled to Washington to urge Congress not to enfeeble the Fed. They "argued very vociferously" that a Dodd proposal then on the table to strip the Fed of supervision of smaller banks would make Fed regulation "too New York-centric," says Senator John Ensign, a Nevada Republican.
Dodd recalls that the regional Fed presidents’ arguments resonated with Congress. "The regional banks did a lot of work on this that had a lot of influence in various parts of the country," he says. "That clearly caused some people to change their views. It became a local issue."
As the July vote on financial regulation approached, Bernanke himself pleaded the Fed’s case over and over. From Jan. 1 until the vote, he spent at least 35 hours testifying at congressional hearings, meeting with members of Congress and talking to them on the phone, according to congressional records and Bernanke’s personal calendar, which is periodically released by the Fed. Bernanke dealt with the conflict issue head-on.
"The Federal Reserve’s participation in the oversight of banks of all sizes significantly improves its ability to carry out its central banking functions, including making monetary policy, lending through the discount window and fostering financial stability," Bernanke said at the Mar. 17 hearing of the House Financial Services Committee. Now that the Fed has won the argument over who should regulate the banks, Bernanke must answer those who worry that his newly vigilant agency will throttle the financial system with new restrictions, NYU’s Gertler says.
Striking a Balance
"The Bernanke Fed is acutely aware of the need to strike a balance," Gertler says. "Some increase in costs from regulatory protection is entirely justifiable. But the trick is to not overdo it." Bank of America Corp. says the section of the law covering debit cards is an example of overdoing it. The law says banks must cap fees to merchants so that they are "reasonable and proportional to the cost" of the transaction. The Charlotte, North Carolina-based lender interprets that to mean it isn’t allowed to make a profit on such transactions.
The bank planned to take a charge of $7 billion to $10 billion for the third quarter in anticipation of a fee reduction. Richard Bove, a banking analyst for Stamford, Connecticut- based Rochdale Securities LLC, says bank regulators have already done too much. "If they don’t ease up on bank capital restrictions and requirements for liquidity, they are going to continue to see declines in money supply, and that will create another recession," Bove says.
He blames regulators for a contraction in lending. As of mid-August, U.S. banks had cut back credit for 16 of the past 17 months, according to data compiled by the Fed. The new regulatory regime will have its own bureaucracy. The law calls for the president to name a new Fed vice chairman for bank supervision, who will be subject to confirmation by the Senate and will supervise a staff of at least 3,000 people.
The career civil servants will be led by bank supervision chief Patrick Parkinson, a Ph.D. economist who joined the Fed in 1980. Parkinson, 58, works from an unmarked office building on Washington’s K Street, eight blocks from Fed headquarters. "One of the lessons we learned from the financial crisis is that we need higher capital, and better quality capital, especially at the largest institutions," he says. "There is no doubt we need to be very sensitive about imposing too strict standards too soon."
Part of the vice chairman’s job will be to oversee the annual stress tests. Fed bank examiners will subject all banks with $50 billion or more in assets to the tests. As of June 30, that would have included 36 U.S.-based firms, compared with 19 tested last year, when the cutoff was $100 billion.
The Fed staff will look at each bank’s risk of failure under three economic scenarios: base line -- that is, no crisis -- adverse and severely adverse. The 2009 tests, formally known as the Supervisory Capital Assessment Program, resulted in a Fed demand that 10 of the banks increase their capital cushion by a total of $75 billion. Big nonbank financial firms will, for the first time, have to meet Fed standards for capital reserves. A new council of regulators will designate which nonbank firms are systemically important.
Two likely to face Fed examinations are Berkshire Hathaway and GE Capital, says Christopher Whalen, managing director at research firm Institutional Risk Analytics and a former New York Fed official. "It is the nonbanks that will really go through the wringer," Whalen says. "With Berkshire Hathaway, it will be a significant annoyance and they will have to report a lot of data. GE will have to raise capital levels and have a more centralized risk-management regime, which goes against the entrepreneurial, more decentralized regime that has been their strength."
General Electric Co. Chief Financial Officer Keith Sherin says GE Capital isn’t worried about any Fed demands. "We feel confident that we’re going to be able to meet whatever the requirements are to be well capitalized," he said in a July 16 conference call with investors. Berkshire Hathaway, 29 percent of whose revenue comes from insurance, declined to comment on the possibility that it will come under the Fed’s sway. CEO Buffett, though, has a high regard for Bernanke.
Out of the Abyss
"Paul Volcker was essential to this country coming out of that 1979 to ’82 period like we did," Buffett told PBS and Bloomberg Television talk show host Charlie Rose in November 2009, referring to the economic crisis of 30 years ago. "Ben Bernanke was essential to keeping us from going into the abyss last September." Now, Bernanke’s job is to lay down stiff new banking rules and make them stick. It won’t be easy, says Edward Kane, a professor of finance at Boston College.
"Once the rules are defined and put in place, then the loopholes will also be defined," says Kane, who’s a senior fellow at the FDIC’s Center for Financial Research. "The new system means a new system of getting around the rules." Bernanke told Congress on July 21 that the outlook for the economy is "unusually uncertain." The same might be said for his prospects as the new master of financial regulation.
Megabanks Will Shrink, Bernanke Tells Financial Crisis Commission, Yet Doubts Over Too Big To Fail Remain
by Shahien Nasiripour - Huffington Post
In one of his most definitive statements on the subject to date, the nation's central banker said Thursday that he expects some of the nation's megabanks to start getting smaller. "The most important lesson of this crisis is we have to end Too Big To Fail," Federal Reserve Chairman Ben Bernanke testified before the Financial Crisis Inquiry Commission. "My projection is that, even without direct intervention by the government, that over time we're going to see some breakups and some reduction in size and complexity of some of these firms as they respond to the incentives created by market pressures, and regulatory pressures as well."
Throughout the legislative slog toward financial reform, Bernanke -- like the Obama administration -- resisted congressional efforts to break up the handful of too-big-to-fail firms that dominate the financial system. In May, however, a third of the Senate voted to effectively bust up the biggest of those giant financial institutions. That effort didn't succeed, but Bernanke attempted to put some lingering concerns to rest during his critical questioning by the panel created to investigate the roots of the financial crisis.
The nation's four biggest lenders collectively hold about $7.5 trillion in assets, according to their most recent quarterly filings with the Fed. That's equal to more than half the estimated total U.S. output last year, International Monetary Fund figures show. Those four banks -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo -- each hold more than $1 trillion in assets. BofA and JPMorgan each have more than $2 trillion. The four giants control about 48 percent of the total assets in the nation's banking system, according to Fed data collected through March 31. In 2001, it took 16 banks to control half of the market, Fed data show.
During the height of the financial crisis, the same four firms received or benefited from hundreds of billions of dollars in taxpayer funds in direct equity investments and guarantees on debt and assets. Effectively deemed too big to fail, meaning that any one of their failures could have destabilized the financial system, the lenders were rescued from failure -- and have since prospered, thanks to widening spreads between how much banks pay for funds and how much they charge borrowers.
"Too-big-to-fail financial institutions were both a source (though by no means the only source) of the crisis and among the primary impediments to policymakers' efforts to contain it," Bernanke wrote in his prepared remarks. Yet when presented with the opportunity, the Obama administration declined to break up the banks. Instead, administration officials argued that a combination of stricter regulation, higher capital requirements and a new hybrid regime that combines bankruptcy with the Federal Deposit Insurance Corporation's bank-failure process would send the message that these firms would indeed be allowed to fail, and that it would be too expensive for them to remain so large.
Noted economists, former bank regulators and some presidents of regional Fed banks have panned that reasoning. The crisis commission seemed likewise skeptical Thursday, peppering Bernanke -- as well as FDIC Chair Sheila Bair, who was next to testify -- with questions regarding the new financial-regulatory law's ability to end Too Big To Fail. Bernanke told them that the breakup of the big banks, which Democratic Sens. Ted Kaufman (Del.) and Sherrod Brown (Ohio) could not get the Obama administration to rally behind, will happen naturally. In effect, it will be too expensive to be Too Big To Fail, and so the firms will get smaller.
But that process won't be painless. "Let me just be clear: this is not going to be easy to implement," Bernanke warned. "I think the one area that's going to take a lot of effort is the international element." As an example, he said, likely referencing Citigroup, "one of the banks that we supervise has offices in 109 countries, each one with its own bankruptcy code and its own rules and so on."
Prominent critics of the bill's perceived shortcomings in ending Too Big To Fail -- like Simon Johnson, a former chief economist of the International Monetary Fund and a contributing editor for the Huffington Post -- have pointed to the byzantine structures of massive international lenders like Citigroup and JPMorgan Chase. It's nearly impossible to shut down a U.S-based megabank with extensive overseas operations, they warn. Regulators will thus feel pressure to simply keep them alive.
One top FDIC official said the new bill, guided through Congress by Senate Banking Chairman Christopher Dodd (D-Conn.) and House Financial Services Chairman Barney Frank (D-Mass.), may not have made a difference when it came to resolving the fate of Wachovia, a firm that wasn't allowed to fail and instead was taken over by Wells Fargo. Wachovia's creditors were saved from losses.
"Taking the new rules, you all seem to have gained a lot of comfort with some of the new legislation that's passed about the ability that you will have in the future to be able to govern situations where firms may fail," Heather H. Murren, an FCIC commissioner who until 2002 was a managing director of global securities research and economics at Merrill Lynch, told Wednesday's panel of FDIC, Federal Reserve and former Treasury officials. "And I'm curious about what would have been different if you were to apply the rules that we now have today at the time when you were looking at situations like Wachovia.
"So then how would your body of knowledge have been different, and how might the outcome have differed had we had those rules instead of what we had at the time?" asked the former highly-ranked equity research analyst. After a polite back-and-forth in which John Corston, the acting deputy director of the unit overseeing complex banks at the FDIC, explained the situation during those tense moments of the crisis when regulators were debating whether to allow firms to fail or bail them out, Murren finally asked: "So then the outcome might not have differed, it just would have been a little bit easier as you went along?" "It might not have differed, but it certainly would have been -- I think we would have then made much more informed decisions," Corston replied.
Bair, his boss, was adamant that too-big-to-fail firms on the cusp of failure will be shut down in the future. Firms of systemic importance also will be required to present blueprints on how they'd be shut down should they approach failure. Bernanke and Bair both argued that this would have been invaluable during the height of the last crisis.
Bair said that companies that don't comply with the new rules -- or if regulators feel that some part of the firm poses too much of a threat -- will be forced to divest parts of the firm so that it "no longer creates undue risk to the financial system." Bernanke echoed that point during his testimony when he said regulators could make firms unwind to make dealing with their potential failures "feasible."
Given policymakers' proclivity for bailing out and propping up too-big-to-fail banks, though, questions remain as to whether they'll follow through on these threats. "When it's crunch time, that's when the test will come," said FCIC commissioner Byron S. Georgiou. "A healthy skepticism about it is appropriate."
The commission's 43-page preliminary report on Too Big To Fail, released in conjunction with the two-day hearing, details the nation's recent history of bailing out massive banks and their Wall Street cousins, like hedge funds and securities firms. During the Great Depression, the government rescued a number of large banks. But it didn't happen again until 1974, the report notes. Then in 1980. And again in 1984 -- though this time, policymakers admitted outright that some firms simply were too big to fail.
"During a hearing on Continental Illinois's rescue conducted by the House Committee on Banking, Housing, and Urban Affairs in September 1984, Comptroller of the Currency C. Todd Conover stated that federal regulators would not allow any of the eleven largest 'money center' banks to fail," according to the FCIC report. "Representative Stewart McKinney of Connecticut, a member of the committee, declared that '[w]e have a new kind of bank. It is called too big to fail. TBTF, and it is a wonderful bank.'"
The next day the Wall Street Journal headlined its piece on the hearing, "U.S. Won't Let 11 Biggest Banks in Nation Fail -- Testimony by Comptroller at House Hearing Is First Policy Acknowledgment." At the time of its failure Continental Illinois was the nation's 7th-largest bank, the FCIC notes. Policymakers went on to rescue several large firms throughout the 1980s and the early 1990s.
Then Congress passed a law in 1991 attempting to end bailouts -- just like this year. It was useless during the most recent crisis, which saw two notable failures -- Washington Mutual, a lender, and Lehman Brothers, a securities dealer -- but several rescues of firms like Bear Stearns, another dealer; AIG, an insurer; the nation's biggest and smallest banks; and money market funds.
Because of the crisis, large firms swept up their almost-as-large competitors. JPMorgan Chase, for example, took over Washington Mutual, a $300-billion lender. At the time Wells Fargo took over Wachovia, the latter was the nation's fourth-largest bank. "There's been a concentration of size and strength, obviously a disturbing trend," Georgiou said. "It doesn't give one a great deal of confidence" that regulators will be able to allow these firms to fail should they be near failure, he added, "but we hope for the best."
The last crisis, regulators and some academics stress, was a liquidity crisis -- there was a run on the banks. Money was no longer flowing, and so policymakers had to do whatever they could to ensure the markets didn't completely freeze, taking down the whole economy with them. Others have argued that if one of the nation's largest firms runs into trouble -- a Bank of America, for example -- it's likely that because of the interconnectedness of the megabanks, BofA's failure would likely simultaneously cause the failures of other large institutions. Another crisis would ensue.
Asked if he thought regulators would be able to shut down one of the nation's largest banks if its failure could cause other big banks to fall, Douglas Holtz-Eakin, another crisis commissioner, responded with a question of his own: "Are you going to pull the trigger and wind down the six largest financial institutions simultaneously?" The answer was clearly no.
10 Things You Should and Should Not Do During Deflation>
This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.
The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.
By Robert Prechter, CMT
1) Should you invest in real estate?
Short Answer: NO
Long Answer: The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60 percent and you realize you’ve made a horrendous mistake, you can call your broker and get out (unless you’re a mutual fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.
– Conquer the Crash, Chapter 16
2) Should you prepare for a change in politics?
Short Answer: YES
Long Answer: At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to use force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property.
You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.
– Conquer the Crash, Chapter 27
3) Should you invest in commercial bonds?
Short Answer: NO
Long Answer: If there is one bit of conventional wisdom that we hear repeatedly with respect to investing for a deflationary depression, it is that long-term bonds are the best possible investment. This assertion is wrong. Any bond issued by a borrower who cannot pay goes to zero in a depression. In the Great Depression, bonds of many companies, municipalities and foreign governments were crushed. They became wallpaper as their issuers went bankrupt and defaulted. Bonds of suspect issuers also went way down, at least for a time. Understand that in a crash, no one knows its depth, and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.
– Conquer the Crash, Chapter 15
4) Should you take precautions if you run a business?
Short Answer: YES
Long Answer: Avoid long-term employment contracts with employees. Try to locate in a state with “at-will” employment laws. Red tape and legal impediments to firing could bankrupt your company in a financial crunch, thus putting everyone in your company out of work.
If you run a business that normally carries a large business inventory (such as an auto or boat dealership), try to reduce it. If your business requires certain manufactured specialty items that may be hard to obtain in a depression, stock up.
If you are an employer, start making plans for what you will do if the company’s cash flow declines and you have to cut expenditures. Would it be best to fire certain people? Would it be better to adjust all salaries downward an equal percentage so that you can keep everyone employed?
Finally, plan how you will take advantage of the next major bottom in the economy. Positioning your company properly at that time could ensure success for decades to come.
– Conquer the Crash, Chapter 30
5) Should you invest in collectibles?
Short Answer: NO
Long Answer: Collecting for investment purposes is almost always foolish. Never buy anything marketed as a collectible. The chances of losing money when collectibility is priced into an item are huge. Usually, collecting trends are fads. They might be short-run or long-run fads, but they eventually dissolve.
– Conquer the Crash, Chapter 17
6) Should you do anything with respect to your employment?
Short Answer: YES
Long Answer: If you have no special reason to believe that the company you work for will prosper so much in a contracting economy that its stock will rise in a bear market, then cash out any stock or stock options that your company has issued to you (or that you bought on your own).
If your remuneration is tied to the same company’s fortunes in the form of stock or stock options, try to convert it to a liquid income stream. Make sure you get paid actual money for your labor.
If you have a choice of employment, try to think about which job will best weather the coming financial and economic storm. Then go get it.
– Conquer the Crash, Chapter 31
7) Should you speculate in stocks?
Short Answer: NO
Long Answer: Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you [spend to read Conquer the Crash].
In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation.
– Conquer the Crash, Chapter 20
8) Should you call in loans and pay off your debt?
Short Answer: YES
Long Answer: Have you lent money to friends, relatives or co-workers? The odds of collecting any of these debts are usually slim to none, but if you can prod your personal debtors into paying you back before they get further strapped for cash, it will not only help you but it will also give you some additional wherewithal to help those very same people if they become destitute later.
If at all possible, remain or become debt-free. Being debt-free means that you are freer, period. You don’t have to sweat credit card payments. You don’t have to sweat home or auto repossession or loss of your business. You don’t have to work 6 percent more, or 10 percent more, or 18 percent more just to stay even.
– Conquer the Crash, Chapter 29
9) Should you invest in commodities, such as crude oil?
Short Answer: Mostly NO
Long Answer: Pay particular attention to what happened in 1929-1932, the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too.
You can get rich being short commodity futures in a deflationary crash. This is a player’s game, though, and I am not about to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies to sell short. Make sure that your broker keeps your liquid funds in T-bills or an equally safe medium.
There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a war scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere to go but down during a depression.
– Conquer the Crash, Chapter 21
10) Should you invest in cash?
Short Answer: YES
Long Answer: For those among the public who have recently become concerned that being fully invested in one stock or stock fund is not risk-free, the analysts’ battle cry is “diversification.” They recommend having your assets spread out in numerous different stocks, numerous different stock funds and/or numerous different (foreign) stock markets. Advocates of junk bonds likewise counsel prospective investors that having lots of different issues will reduce risk.
This “strategy” is bogus. Why invest in anything unless you have a strong opinion about where it’s going and a game plan for when to get out? Diversification is gospel today because investment assets of so many kinds have gone up for so long, but the future is another matter. Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.
– Conquer the Crash, Chapter 18
China fears depreciation of $2.45 trillion of reserves still heavy in dollars
China offered a rare glimpse into its foreign exchange reserves on Friday, confirming that they are overwhelmingly allocated in dollars, while a central banker said the mountain of cash could face depreciation risks. The Chinese government's currency reserves, the world's largest such stockpile at $2.45 trillion (£1.59bn), are held roughly in line with what was described as the global average: 65pc in dollars, 26pc in euros, 5pc in pounds and 3pc in yen. The report in the China Securities Journal, an official newspaper, cited unnamed reserve managers.
The allocation of Chinese foreign exchange reserves is considered to be a state secret, but analysts have long estimated that about two-thirds are invested in dollar assets. Separately, Hu Xiaolian, a vice governor with the People's Bank of China, warned that depreciation loomed as a risk for foreign exchange reserves held by developing counties. "Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets," she wrote in an article that appeared in the latest issue of China Finance, a Chinese-language magazine published under the central bank.
She reiterated China's long-standing discomfort with a global financial system dominated by a single currency in the dollar. "The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system," she said. "A diversified international currency system will be more conducive to international economic and financial stability," she added. To that end, developing countries must speed up reform of their financial markets, and China would work to promote greater cross-border use of the yuan, she said.
There have been signs in recent months that Beijing has stepped up the pace of diversification of its foreign exchange reserves away from dollar assets. Chinese net buying of Japanese debt has surpassed 1.7 trillion yen this year, far surpassing its record of 255.7 billion yen in 2005. China has also raised holdings of South Korean bonds by 2.5 trillion won (£1.4 trillion) in the first seven months of this year from 1.87 trillion won at the end of last year. However, Chinese investors only started buying South Korean bonds in the middle of 2009.
At the same time, China has slightly cut back its vast holdings of US Treasuries, from $894.8bn at the start of the year to $843.7bn in June, according to the most recent data. China remains the biggest single holder of U.S. government debt. The China Securities Journal laid out the prospects for a shift back to the dollar in the near term. "It is unlikely that China will increase purchases of Japanese bonds in the coming months because the yen might weaken at any time," the newspaper said. "China is very likely to increase purchases of US Treasuries in September. The possibility for China to buy more Korean bonds can't be ruled out," it said.
Dangerous Defeatism is taking hold among America's economic elites
by Ambrose Evans-Pritchard - Telegraph
Goldilocks has played a trick on America. Growth is not warm enough to prevent hard-core unemployment climbing to post-war highs and sticking at levels that corrode the body politic, but not yet cold enough to overcome the fierce resistance of the Fed's regional hawks for a fresh blast of stimulus.
The US economy has slowed to stall speed: successive quarters of 5pc growth, 2.7pc, and 1.6pc (to be revised down), the worst recovery of the post-war era. Such is the crush of debt. While last week's data was less bad than feared, it was still awful. Manufacturing orders fell to the lowest in 15 months. Some 54,000 jobs were lost in August and the broad U6 gauge of unemployment rose from 16.5pc to 16.7pc. The US needs to create 150,000 a month just to stay even. The social depression is getting worse, not better.
Hardline bears think growth will drop below to 1pc in the second half as the inventory boost wears off and the tail winds of stimulus turn to headwinds, leaving no margin for error. Soft bears such as Bank of America's Ethan Harris said the economy will limp along just shy of a double-dip. "Our sense is that the 'growth recession' is already here and it is likely to linger through the first half of next year," he said. His reason for concluding that it will not be worse is telling: the Fed will step in with $500bn to $750bn of fresh QE every six months if necessary.
Perhaps, but perhaps not. The luminaries are lining up to say there is very little that the Fed can do after already cutting rates to zero and purchasing $1.7 trillion of bonds. "The heavy artillery has already been fired," said former Fed vice-chair Alan Blinder. "I really don't think there is a lot the Fed can do," said Harvard's Martin Feldstein. "The benefits of additional QE are quite small," said Stanford's John Taylor, of the Taylor rule. "The US has run out of bullets. More QE is not going to make any difference," said Nouriel Roubini, our Dr Gloom.
Get a grip, the lot of you. While there is no easy way out for the US after stealing so much prosperity from the future through debt, there is no excuse for this dead-end defeatism. Clearly, the 'canonical New Keynesian' model that holds such sway on America's elites is intellectually exhausted. The Fed has an arsenal of neutron bombs if it wants to use them, and uses them correctly. It can engage in "monetary policy a l'outrance" as Maynard Keynes propsed in his Treatise on Money in 1930, before he lost his way with the General Theory.
Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the "monetary base" has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory. This is quite different from the Fed's QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke's 'creditism' is certainly better than nothing, it is not gaining full traction.
"Bernanke continues to babble on about futile credit easing: neither he nor his staff seems to appreciate the difference between purchases of assets from non-banks and from banks," said Tim Congdon from International Monetary Research. Crudely, banks sit on the money. Others use it. Mr Congdon said a $750bn blitz of QE done the right way would lead to 5pc rise in M3 over three months. "This would indeed transform the US economic outlook". Instead, America drifts. It is already closer to a Japanese trap than Washington wants to admit, and may not escape from it for similar reasons of ideological paralysis.
Dr Bernanke said in November 2002 that Japan had the economic instruments to pull itself out of malaise but failed to do so. "Political deadlock" and a cacophony of views over the right policy had prevented action. He insisted that a central bank had "most definitely" not run out of ammo once rates were zero, and retained "considerable power to expand economic activity". Yet eight years later, the US is in such "deadlock". Worse, Fed officials now say "the ball is in the fiscal court", arguing that budget policy should do more to "complement" the Fed's existing stimulus. Oh no!
This is the worst possible prescription. What is needed is fiscal austerity (slowly) before debt spirals out of control, offset by easy money or real QE for as long as it takes. This formula rescued Britain from disaster in 1931-1993, and 1992-1994. Damn the rest of the world if they object. They have been free-loading off US demand for too long. A weaker dollar will force the mercantilists to face some hard truths. So keep those helicopters well-oiled and on standby.
Employers shifting health-care costs to workers, survey shows
by David S. Hilzenrath - Washington Post
The premiums that employees pay for employer-sponsored family coverage rose an average of 13.7 percent this year, while the amount that employers contribute fell by 0.9 percent, the survey found. For family coverage, workers are paying an average of $3,997, up $482 from last year, while employers are paying an average of $9,773, down $87, according to the survey by the Kaiser Family Foundation and the Health Research & Educational Trust. With so many people out of work, employees have little power to demand a better deal, the organizations said.
Overall, premiums for employer-sponsored coverage - the amounts paid by employer and employee combined - rose an average of 3 percent for family coverage and 5 percent for single coverage, the survey found. That was modest by historical standards. But the costs fell disproportionately on employees. Workers with health benefits are paying an average of 30 percent of the premium for family coverage and 19 percent of the premium for single coverage this year, the highest in 12 years of surveys by the two organizations. Last year, workers were paying an average of 27 percent of the premium for family coverage and 17 percent for single coverage.
Premiums for single coverage rose an average of $225, and employees bore more than half of the increase. "Many employers looked into their recession survival kit and seem to have concluded that one way to make it through the recession and hang on to as many employees as possible was to pass on their health premium increases to their employees this year," Kaiser Family Foundation President Drew Altman said by e-mail.
How much, if at all, the federal health-care overhaul enacted in March will restrain cost increases over the long run remains to be seen. While experts debate its likely impact, the legislation is "the only thing we have coming on line as a country to control costs other than what now seems like the primary default strategy in the private sector - shifting costs to people," Altman said.
Since 2005, employees' premium payments have gone up 47 percent while overall premiums have risen 27 percent. Over the same period, wages have increased 18 percent and the consumer price index, a measure of inflation, has risen 12 percent, the foundation and trust said in a news release. Thirty percent of employers offering health benefits reported that this year, as a result of the economic downturn, they reduced the scope of benefits or increased cost-sharing - the amounts employees pay for medical services in co-payments, deductibles and the like.
Increasingly, employers are offering insurance plans with high deductibles. Twenty-seven percent of employees with health benefits now face annual deductibles of at least $1,000, up from 22 percent last year, the organizations said. The Kaiser Family Foundation, which is not affiliated with the Kaiser Permanente health plan, conducts research on health issues. The Health Research & Educational Trust is an affiliate of the American Hospital Association. The survey, which covered public and private employers with three or more workers, was conducted by phone from January through May.
California 'Budget Kabuki' Increases Schwarzenegger Debt Costs
by Michael B. Marois - Bloomberg
California’s borrowing costs are rising, even as Governor Arnold Schwarzenegger says he’s not ready to call lawmakers into special session to eliminate a $19.1 billion deficit before the state runs out of cash. The extra yield investors demand on 10-year California bonds rose to 124 basis points above AAA rated municipal securities yesterday, up 14 percent in a week, Bloomberg Fair Value Index data show. The increase comes as the state will need to borrow as much as $10 billion in short-term notes within four weeks of any budget agreement and more than $6 billion in longer-dated bonds by December for public-works projects.
California hasn’t had a budget since the fiscal year began on July 1. Schwarzenegger, a Republican, yesterday said he would resume private negotiations with Legislative leaders after lawmakers rejected a pair of dueling deficit-cutting plans and then adjourned for the year. The state may need to issue IOUs to pay bills by next month and Standard & Poor’s has said it may cut California’s A- rating, already the lowest among states.
The "budget Kabuki did not bring us any closer to a solution, but it did highlight the fundamental and critical differences about how to close our deficit and bring our economy back," Schwarzenegger told reporters yesterday in Sacramento. California last sold general-fund backed bonds in June, when it offered about $120 million of debt for veteran’s homes. The state sold $450 million of public works bonds in May and $5.9 billion of debt in March. The state’s credit grade may be cut if the stalemate continues for several months or more, S&P said in June. A lower rating may add to California’s borrowing costs.
CDS Rates Rise
The stalemate also has forced up the price of credit- default swap contracts on California bonds. A contract maturing in 10 years rose to about $300,000 to protect $10 million of bonds on Aug. 31, the highest since July 12, according to data compiled by Bloomberg. The cost slipped to $295,000 yesterday. "We’re waiting it out," said Kenneth Naehu, a managing director at Bel Air Investment Advisors in Los Angeles. He manages almost $3 billion in municipal bonds.
"We don’t have to chase yield," Naehu said yesterday in a telephone interview. "California general-obligations, if they get downgraded, could go 150 basis points over high grades versus 124 now." A basis point is 0.01 percentage point. Yields on top-rated tax-exempt municipal debt due in 10 years rose 3 basis points yesterday to 2.61 percent, the second rise in yields since June 15, according to data from Concord, Massachusetts-based Municipal Market Advisors. The first increase since June, also of 3 basis points, was on Aug. 27.
Municipal interest rates were driven to record lows last month as investors sought the perceived safety of the market amid concern that the economic recovery may be slower than expected. Yields fell about 10 percent in August, to 258 basis points on Aug. 25 from 286 basis points on July 30. A yield of 2.58 percent is the lowest ever, according to MMA data dating to January 2001.
"My thought is that it may be more directly related to the general market movement and that it’s not a direct consequence of the budget impasse," state Treasurer Bill Lockyer said in a telephone interview. California requires a two-thirds vote in both legislative chambers to pass budgets, and neither Republicans nor Democrats hold enough seats to meet that threshold. Schwarzenegger and Republicans want to dismantle the state’s main welfare program and slash $12.4 billion of spending. Democrats proposed $5.9 billion in higher taxes and fees combined with spending cuts.
California’s constitution says lawmakers must send a budget to the governor by June 15, a deadline they’ve met five times in the last 30 years. The 2008 budget was enacted 85 days into the fiscal year, the latest ever. The second latest was signed into law Sept. 5, 2003. Absent a budget, the state can’t sell the short-term notes it typically uses each year to bridge cash shortages, because repayment of the debt must be part of an approved spending plan. Chiang and Schwarzenegger’s department of finance have said the state may need to borrow as much as $10 billion on a short-term basis once a budget is signed. The state sold $8.8 billion of such notes in September and repaid the loan June 23.
"It’s harder to finish the fiscal year with a sizable cash-flow surplus," Lockyer said. "And without a significant surplus at the end of the year, bond investors tend to be a little bit more anxious and the cost of borrowing increases."
Following are descriptions of pending sales of municipal debt in the U.S.:
- Minnesota, which sold $865 million in debt through a competitive sale last month, plans to issue about $900 million in tax-exempt refunding bonds as early as next week. RBC Capital Markets, which won the bidding on $635 million of the August issue, will lead underwriters in marketing the latest sale to investors. The state’s general-obligation bonds carry top ratings from S&P and Fitch Ratings, and Aa1 from Moody’s Investors Service, one level lower. (Added Sept. 1)
- Arkansas Student Loan Authority, which helps state students finance higher education, plans to sell $267.5 million in asset- backed notes as early as next week. The interest on the floating-rate securities will be based on the three-month London interbank offered rate, or Libor, the rate at which banks borrow from other banks. The benchmark stood at 0.296 percent yesterday. The securities must receive top ratings from Moody’s and Fitch before they can be issued, according to preliminary offering documents. RBC Capital Markets and Bank of America Merrill Lynch will underwrite the offering. (Added Sept. 2)
- North Carolina Eastern Municipal Power Agency, a wholesale power supplier to 32 cities and towns, plans to sell about $170 million in tax-exempt bonds Sept. 8 to refinance existing debt. The offering, rated by A- by S&P and Fitch, the fourth-lowest investment grade, will be marketed by underwriters led by Citigroup Inc.
As Pay Falls, Borrowers Lose Ground
by Bob Tedeschi - New York Times
Lenders scrutinize all elements of a mortgage application, but one factor remains critical: the debt-to-income ratio, or the percentage of a borrower’s monthly gross income that goes toward housing expenses. If it surpasses 36 percent, lenders will typically reject the loan. A report released this summer by the Joint Center for Housing Studies of Harvard University said that about one in eight homeowners had household debt that exceeded half their monthly income in 2008, the year reviewed in the study. That figure is up from 1 in 11 homeowners in 2001.
The higher debt-to-income ratios are a function of the diminished income levels of many homeowners since the economic downturn, said Nicolas P. Retsinas, a senior lecturer in real estate at Harvard Business School and one of the authors of the report. The real median household income in 2008 — the latest year for which census data is available — was $50,303, which represents a 3.5 percent drop from $52,113 in 2007. In keeping with lenders’ 36 percent debt-to-income limit, households in this category had $1,509.09 available for monthly housing expenses, $54.30 less than in 2007.
"In some ways it’s counterintuitive to the big headlines about falling home prices and increased vacancies," Mr. Retsinas said. "And while housing prices have moderated, they really haven’t tumbled enough to account for falling incomes." Of course, historically low interest rates offer some hope for those wishing to reduce household debt. But borrowers are less likely to qualify for a low-cost mortgage if their finances aren’t strong to begin with.
The average credit score for mortgage borrowers is 750, according to the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the government-sponsored companies that establish underwriting standards. Those borrowers with lower incomes or credit scores, or who have less than 30 percent equity in their homes, often cannot qualify for the lowest mortgage rates because lenders consider them to be riskier. "So if you have higher income, you can go through that door marked ‘Lower Cost Mortgage,’ " Mr. Retsinas said. "But if you’re struggling, that door is locked."
Government programs have been encouraging lenders to modify mortgage terms for struggling borrowers, but critics have decried the slow progress of these programs, and the relief efforts are often temporary. The Harvard report noted another shift in the conditions of homeowners that could affect their borrowing strategies: less mobility, in large part because of the weak economy.
According to the report, 12.6 percent fewer households moved in 2008, for example, than in 2005. For those in the 35-to-64 age bracket, the drop was roughly 35 percent from 2005 to 2009. This reduced mobility could have some implications for mortgage borrowers. Mortgage executives say a typical homeowner stays in a home for about eight years, and some borrowers set their financial strategies accordingly, opting for adjustable-rate mortgages, or ARMs, that carry a low fixed rate for the first seven years of the loan, for instance.
"Some people, even if they pay their mortgage every month, may not be able to sell their home without writing a check to the bank," Mr. Retsinas said, referring to borrowers whose mortgages exceed the value of their home. "Many people aren’t in position to do that," Mr. Retsinas said, "so they’re tethered to their house."
Ex-Hedge Fund Manager Makes $14 Million Off Insider Trading, Settles With SEC for $600.000
by Joshua Gallu and Lorraine Woellert - Businessweek
A former hedge-fund manager who reaped $14 million trading on confidential information about the 2007 takeover of MedImmune Inc. will pay $600,000 to settle U.S. Securities and Exchange Commission claims, the agency said. Stephen Goldfield of Odessa, Florida, learned about MedImmune’s search for a buyer from James Self, a drug company executive who looked into a possible acquisition, the SEC said today in a complaint filed at U.S. District Court in Pennsylvania. Goldfield bought 17,000 call options and 255,000 shares of MedImmune before the Gaithersburg, Maryland-based drug maker was acquired by AstraZeneca Plc, the SEC said.
Goldfield, 46, and Self, 45, agreed to settle without admitting or denying wrongdoing, the SEC said in a press release. Self, who works for Merck & Co. Inc., will pay $50,000.
The penalties reflect the financial condition of the two men, the SEC said, noting that Goldfield is unemployed.
"Mr. Goldfield is happy with settlement and looking forward to putting the matter behind him," said his attorney, Robert Heim of Meyers & Heim LLP in New York. Goldfield and Self met while attending the University of Pennsylvania’s Wharton School of Business in the mid-1990s. When MedImmune, maker of the FluMist vaccine, began shopping for a buyer in 2007, Self was assigned by his company to help conduct due diligence on a possible acquisition, the SEC said.
‘Weather in the 50s’
In April 2007, Self’s firm submitted a bid to acquire MedImmune for $51 a share. In a telephone conversation that month, Self told Goldfield the "weather was in the 50s," a message meant to convey the bid price, the SEC said. MedImmune was trading at about $35 a share at the time. Goldfield made more than 30 trades in the weeks leading up to AstraZeneca’s April 23, 2007, announcement that it would buy MedImmune for $58 per share.
On April 20, 2007, one business day before AstraZeneca’s announcement, Goldfield purchased 2,300 call options. He made about $1.9 million from that trade, the SEC said. By May 31, Goldfield had lost all his profit after betting that the shares would fall. Self is still employed by Merck in Whitehouse Station, New Jersey, where he works in business development for the vaccines and infectious disease unit, the company said in a statement.
Libor Falls as Banks Sit on Cash
by Mark Gongloff - Wall Street Journal
A closely watched indicator of credit-market stress has fallen to its lowest level in five months. But the decline may be more a sign of bank caution than an all-clear for financial markets. The three-month dollar London interbank offered rate, or Libor, at which banks lend each other money on a short-term basis, fell on Friday to 0.2928%, its lowest level since early April, before the height of the European debt crisis.
The decline suggests that another credit meltdown is a distant threat. It is also a sign of cash hoarding that could stoke deflation. At the same time, changes in the market since the 2008 credit crisis mean Libor may no longer be the premier credit-stress indicator it once was. Lower dollar Libor rates should be a boon to financial markets and the economy. The short-term lending market is where banks borrow money to finance operations, including investments and loans to consumers and businesses. Libor is also used to price mortgages, corporate loans and other forms of debt.
But with little demand for loans and a need to rebuild their balance sheets, banks are hoarding the mountains of cash being shoveled their way by the Federal Reserve and have less need for short-term borrowing. That lack of demand helps keep Libor rates low. "The depressed Libor rate reflects a lot of dead-weight liquidity trapped in the financial system," says Lena Komileva, head of G-7 market economics at London broker Tullet Prebon.
Banks have more than $1 trillion in cash reserves sitting idle, according to the latest Fed data, down only slightly from the record $1.1 trillion in February. The combination of low borrowing rates and a huge stockpile of cash should be tinder for a wildfire of economic growth and inflation. Instead, growth remains sluggish and inflation a distant risk. The longer this situation persists, some observers warn, the greater the possibility of deflation, a pernicious decline in prices that occurs as consumers, businesses and investors hoard cash that grows more valuable by the day as prices fall.
"Demand for cash versus investable assets is a hallmark of deflation fears," says Brian Yelvington, fixed-income strategist at Knight Capital. "In a deflationary environment, it's always to your advantage to hold cash." Certainly, lower Libor rates are an indication that the liquidity crisis that gripped financial markets in 2008 isn't about to erupt again. Typically, short-term Libor rates are closely aligned with the federal-funds rate, the overnight bank lending rate set by the Fed. During the financial crisis, three-month Libor rates spiked to nearly 5%, more than three percentage points above the fed-funds rate, as banks stopped trusting their peers enough to lend short-term money to them at low rates.
Libor suffered a mini-spike this spring as European banks scrambled for dollar-denominated short-term funding amid worries about the health of their peers. While Libor rates now are low, Libor is still higher relative to the fed-funds rate than it was before the financial crisis, indicating some anxiety about the possibility, however slim, of banks having liquidity issues in the near future. Under the circumstances though—with short-term rates anchored at rock-bottom indefinitely and the market for overnight bank lending lethargic—Libor might no longer be the best early indicator of financial-market stress. What's more, banks are being pushed by regulators to borrow longer term, so short-term funding has become less desirable.
Some analysts are thus watching longer-term indicators, such as the gap between corporate bond yields and risk-free Treasury yields, for signs of stress. Those aren't flashing red at the moment, though they are still more elevated than they were before the European crisis. "What Libor used to indicate, it really doesn't indicate anywhere near as well as it used to," said Jim Vogel, analyst at FTN Financial. "When the system was far more leveraged, stress would appear first in the shortest-term borrowing market there is, interbank lending," Mr. Vogel said. "Now it's far more likely to be seen in longer-term corporate credit spreads or in stock prices
High-frequency trading: Up against a bandsaw
by Jeremy Grant - Financial Times
Moments in time: trading patterns such as ‘Bandsaw II’ are among those that can signal unusual activity by high-frequency dealers. Such practices may cast ‘doubts on the depth of liquidity, stability, transparency and fairness of equity markets’, argues US Senator Ted Kaufman
At an industrial estate on the edge of Tseung Kwan O, a new town connected by road tunnel to Kowloon, work has started on a data centre where traders of stocks, futures, options and currencies will place their computers next to Hong Kong Exchanges’ own systems. The idea is that by having their equipment only metres away from where the operator of the territory’s securities markets handles the trades, those for whom speed is everything can shave milliseconds off the time it takes for a transaction to be completed. It is a far cry from the days when shares were bought and sold by humans on a trading floor.
The concept – known as co-location – is growing fast. Last week, NYSE Euronext completed the move of trading in thousands of New York Stock Exchange-listed companies to a similar data centre in New Jersey. The Hong Kong facility is being built by the local exchange as one of its "strategic business initiatives". The same is happening in India, where the National Stock Exchange has rented out racks of computer space for traders. In Australia, ASX plans a centre offering co-location by next August.
The speed with which exchanges are building such facilities is a sign of the global spread of a phenomenon gripping the markets: "high-frequency trading" (HFT). The phrase describes a style of electronic dealing that uses algorithms to dip automatically in and out of markets hundreds of times faster than the blink of a human eye. The practice is controversial. In the US, HFT has chilling associations with the "flash crash" of May 6, when rapid, computer-driven orders were seen as a main culprit in sending the Dow Jones Industrial Average down by 1,000 points in 20 minutes – a fall unprecedented in its depth and speed.
Ted Kaufman, a US senator for Delaware, where many of America’s listed companies are incorporated, wrote to the Securities and Exchange Commission last month arguing that "excessive messaging traffic, the dissemination of proprietary market data catering to high-frequency traders, and order-routing inducements all may be combining in ways that cast doubts on the depth of liquidity, stability, transparency and fairness of our equity markets".
Regulators such as the SEC are still puzzling over exactly what caused the flash crash. But what is clear is that it exposed fundamental flaws in the mechanics of today’s markets – and, some maintain, in the rules that govern them. High-frequency traders are by and large privately held, have no clients and trade using their own money. That has led, some believe, to a point where there has been a dangerous breakdown in investor trust in the way markets work.
Christian Thwaites, chief executive of Sentinel Investment Companies, a US asset manager, says: "The mystery and mystique of HFT, the lack of clarity and therefore opacity has meant that retail investors – who have obviously been terribly burned over the last few years – look at this and say: ‘this whole Wall Street thing is just rigged against me’."
But like an invasive species in the natural world, HFT had grown rapidly before the wider public even noticed. Tabb Group, a consultancy, estimates that HFT now accounts for 56 per cent of all equity trades in the US and 38 per cent by value in Europe. Another sign that Asia is the latest growth spot came this week as traders and technology companies gathered for a Hong Kong conference billed as Asia’s first high-frequency trading event.
At the same time, changing regulations and increasing competition have created a complex matrix in the US of nine exchanges and dozens of other types of venue, including networks run by banks and brokers, and "dark pools" set up to handle large blocks of shares away from public markets. Exchanges now compete not only with each other for their order flow but also with bank and broker networks, including dark pools.
In Europe the same pattern has played out thanks to the Markets in Financial Instruments Directive, a European Commission regulation that broke the national monopolies of exchanges. Mifid allowed the emergence of rival platforms such as Chi-X Europe, fragmenting trading across many venues: the London Stock Exchange now accounts for only 55 per cent of trading in the stocks that comprise the FTSE 100 index.
Such fragmentation has been a driving force behind the growth of HFT, since it produces a variety of trading venues each with slightly different trading systems, speeds and fee schedules. This allows traders to exploit these differences by using computer algorithms to trade back and forth from one platform to another. Concern is therefore growing that the markets may be morphing into little more than a playground for a specialised type of trading that has minimal economic benefit and contributes little if anything to capital formation – the traditional function of stock exchanges.
Established market users – such as the asset managers that take care of pension funds – say HFT, coupled with the fragmentation of trading across venues, makes it harder to rely on one of the most basic functions of the markets: orderly and fair price formation. "Because of the predatory nature of some participants we have no incentive to post liquidity," Kevin Cronin, head of equity trading at fund manager Invesco, told a hearing into the flash crash last month. "There are 40 places where stocks are transacted and none of us has clarity of supply and demand on most [equity] issues. These are fundamental issues as to what the value of a securities market is."
One worry is the use in HFT of algorithms to direct trades automatically, often to several market centres at once. Not only do such algorithms generate huge volumes of trades, but they can – like any machinery – go wrong. The past six months have brought three cases where an algorithm has run amok – and those are only the ones that have been revealed publicly. The latest came last month when the Osaka Stock Exchange handed an "admonition" to Deutsche Bank for not having "a sufficient degree of control" over an algorithm trading Nikkei 225 index futures.
Mr Cronin is not alone in suspecting that certain kinds of algorithms are actually predatory. Analysts at Nanex, a Chicago market data company, say high-frequency traders may be using algorithms to send unusually heavy traffic to exchanges and other platforms in a deliberate attempt to slow down their data systems. Knowing that a certain exchange’s system is about to run more slowly gives a trader an opportunity to set up a buy or sell order in advance. The process is called "quote stuffing" and is used in a strategy known as "latency arbitrage" – latency referring to the speed at which message traffic moves through a system.
In its analysis of the flash crash, Nanex managed to plot how the bursts of traffic looked visually on graphs. Many appeared as distinct geometric patterns, such as jagged shapes that Nanex dubbed "Bandsaw II", and another pattern called the "Boston Zapper". "There’s no economic justification for it," says Eric Scott Hunsader, founder of Nanex. "If this is OK by everybody, the market is not going to function in a very short period of time."
Some go further and suggest outright wrongdoing. "When orders get pinged out to multiple trading venues, there is at least circumstantial evidence that there’s quite widespread use of that information to front-run trades," Jim McCaughan, chief executive of Principal Global Investors, a large US asset manager, told CNBC last month. Yet for regulators it is hard to figure out who is behind any of the activity. That is because high-frequency traders can operate with minimal supervision. In Britain, for example, all it takes to set up a HFT operation is a company registration and the necessary technology.
Trading systems can be bought off the shelf from a number of specialist companies. Registration with the Financial Services Authority, the UK markets watchdog, is not needed under a long-standing exemption for people trading on their own account – as high-frequency traders do – unless they present themselves as marketmakers. Similarly, in the US some are registered as broker-dealers but many are not. "Some of the people who are doing the really big volumes are completely unregulated," says one lawyer familiar with the business. "Now, they have become a potential systemic risk. That’s the issue."
Many exchanges say they have ?controls in place that can detect unusual trading patterns before they cause trouble. Rolande Bellegarde, head of European execution at NYSE Euronext, says that a month ago the exchange disconnected the algorithm that a trader was using, after software detected that his dealings deviated significantly from the normal pattern the exchange had observed over time.
For their part, the few HFT firms willing to show their face in public are at increasing pains to demonstrate that their business is beneficial to markets in providing liquidity and tighter bid-ask spreads. Firms such as Getco, based in Chicago and formed by a pair of former pit traders, and peers in Europe including Optiver of the Netherlands, argue that high-frequency trading is a label used too loosely to describe almost any kind of rapid electronic trading, whether beneficial to markets or not. Getco and other US firms – excluding the banks and hedge funds that are equally big in HFT – recently formed an association to make their case more coherently.
Getco rejects allegations that high-frequency traders’ interests are at odds with those of ordinary investors. "While the story line may be a compelling narrative, there is no reliable evidence to suggest that this conflict exists. To the contrary, most retail brokers ... intentionally route a majority of their customers’ marketable orders to firms that engage in high-frequency trading." Some studies back up their assertions. Woodbine Associates, a Connecticut consultancy, found in a study of US equity markets over 2008-09 that HFT had "improved execution quality". Matt Samelson, a principal at the company, says that if there are any high-frequency traders "gaming the market", then "we don’t think that constitutes the majority of HFT".
But many asset managers remain unconvinced that the liquidity high-frequency traders provide is as valuable as they claim. For one thing, many exited the market during the flash crash. That has led to calls for regulators to impose as yet undefined obligations on marketmakers, including high-frequency traders. According to an online poll on FT Trading Room, a section of the Financial Times’ website focused on market structures, a clear majority (56 per cent) favours the move.
Asset managers worry that their interest in depth of liquidity and making long-term bets on company fundamentals is being crowded out by traders interested only in speed – cheered on by exchanges eager to offer incentives to attract such participants in order to stay ahead of rival platforms in the battle for liquidity. Exchanges have little incentive to discourage HFT since, aside from the fees it generates, they have found a new revenue stream in the rent they charge for rack space in data centres such as the ones emerging across Asia.
However, according to Mr McCaughan, investors are being put off by the volatility that phenomena such as HFT can cause. NYSE volumes were the lowest last week since 2006 – a fact that he attributes in part to a loss of trust in US equity market structures. "Our business is Main Street, not Wall Street," he says, noting that Principal looks after "millions of people’s" pension schemes. "We want to be able to look them in the eye and say the market is fair. And unfortunately, at the moment it’s quite difficult to do that."
For many unemployed workers, jobs aren't coming back
by Alana Semuels - Los Angeles Times
The U.S. unemployment rate will remain elevated for years, experts say, a grim prospect for Americans who have exhausted their benefits.
The U.S. economy will eventually rebound from the Great Recession. Millions of American workers will not. What some economists now project — and policymakers are loath to admit — is that the U.S. unemployment rate, which stood at 9.6% in August, could remain elevated for years to come. The nation's job deficit is so deep that even a powerful recovery would leave large numbers of Americans out of work for years, experts say. And with growth now weakening, analysts are doubtful that companies will boost payrolls significantly any time soon. Unemployment, long considered a temporary, transitional condition in the United States, appears to be settling in for a lengthy run.
"This is the new reality," said Mark Zandi, chief economist at Moody's Analytics. "In the past decade we've gone from the best labor market in our economic history to arguably one of the worst. It's going to take years, if not decades, to completely recover from the fallout." Major employers including automakers and building contractors were at the core of the meltdown this time around. Even when the economy picks up, these sectors won't quickly rehire all the workers they shed during the downturn.
Many small businesses, squeezed by tight credit and slow sales, similarly aren't in a hurry to add employees. Some big corporations are enjoying record profits precisely because they've kept a tight lid on hiring. And state and local governments are looking to ax more teachers, police officers and social workers to balance their budgets. Meanwhile, U.S. legislators have shown little appetite for a new round of stimulus spending.
It all points to a long slog for the nation's unemployed. In May, a record 46% of all jobless Americans had been out of work for more than six months. That's the highest level since the government started keeping track in 1948, and it's about double the percentage of long-term unemployed seen during the brutal recession of the early 1980s. Jobless Americans such as Mignon Veasley-Fields of Los Angeles don't need government data to tell them that something has changed. A former administrative assistant at an L.A. charter school, she has searched fruitlessly for employment for more than two years. She's losing hope of ever working again.
"If I were 18, I'd say, 'I can bounce back.' But I'm 61," said Veasley-Fields, a dignified woman with graying, close-cropped hair. "It's really scary. It's like someone just put a pillow over your head and smothered you." Laid off in June 2008 from her $45,000-a-year post, Veasley-Fields at first wasn't overly concerned. A college graduate, she had always enjoyed steady employment, including a long stint as a research manager at consulting firm McKinsey & Co. She crafted a crisp resume, networked through job clubs and navigated online employment sites like the seasoned researcher that she is.
But weeks stretched into months, with hundreds of unanswered job applications. California's jobless rate in July stood at 12.3%, the third-highest in the nation, behind Nevada and Michigan. Veasley-Fields' unemployment benefits have run out, her credit cards are maxed. She fears losing the tidy mid-Wilshire District bungalow where she and her 77-year-old husband are raising two granddaughters. Above all, she's stunned that a middle-class life that took decades to build could unravel so quickly. She recently visited a food bank to secure enough staples to feed the girls. "I'm just hanging on a thread," she said.
Veasley-Fields suspects her age isn't doing her any favors. Indeed, 50.9% of unemployed workers 55 to 64 have been out of work at least 27 weeks. That's the highest percentage of long-term employment for any age group. But young workers are suffering too. In August, the unemployment rate for workers 16 to 24 was 18.1%. Research has shown that economic downturns can stunt the prospects of these new entrants to the job market for a decade or longer. Some college graduates unable to find jobs in their chosen fields are forced to trade down to lower-skilled, often temporary work. That translates into puny wages, missed opportunities and a slower climb up the career ladder.
The challenge is even tougher for those with less education. Juan Trillo, 23, was laid off from his $8-an-hour maintenance job two years ago. Trillo, who didn't finish high school, said he now finds himself competing against seasoned veterans for entry-level work. He recently rode the bus from his home in Boyle Heights to interview with a company that administers professional exams. The job would consist mainly of rudimentary tasks like handing out tests and collecting them. Trillo, who sports a thin mustache and neatly trimmed hair, wore his nicest clothes — slacks, a tie and a fresh dress shirt. What he saw when he arrived made his heart sink.
"There was a waiting room full of people, all kinds of people, a lot of older people and a lot of them were college graduates. And I'm not," he said. Trillo said he thought the interview went well but hasn't heard back from the recruiter. In the meantime he's studying for his high school equivalency exam and scouring online job sites, applying for as many as a dozen positions a week. His parents, both immigrants from Mexico, let him live rent-free in their half of a cramped duplex. His father works long hours driving a big rig. His mother is a caretaker for an elderly couple. They've been supportive, always offering encouragement. That, Trillo said, sometimes stings worse than a rebuke. "I don't really even feel like a man, because I have no work," he said.
For the U.S. labor market to regain all the jobs it had when the recession started in December 2007, employers would need to boost their payrolls by 7.6 million positions. That figure doesn't include the roughly 125,000 jobs a month the country must create just to keep up with new entrants into the labor force. To get the national unemployment rate back to 5%, where it was before the downturn, would require the economy to generate about 17 million jobs — or about 285,000 a month for five straight years — according to Heidi Shierholz, a labor economist at the Economic Policy Institute in Washington. To appreciate the enormity of that employment hole, consider that U.S. employers have shed 283,000 jobs since May.
Ask economists to project which industries might spark robust job creation and the news isn't encouraging for America's 14.9 million unemployed workers. Sectors that traditionally have led the nation out of recession — including home building and financial services — are laboring amid a housing glut and a credit freeze. The U.S. auto industry, long under assault by foreign manufacturers, just completed a brutal downsizing. Outsourcing of call centers and other service jobs to places such as India is growing too. Meanwhile, U.S. productivity grew steadily through 2009 and into the first quarter of this year, in part because many employers have replaced people with technology and are working their existing staffs harder.
"It's going to take a long time to get back," economist Shierholz said. The nation is looking at "eight or nine years of elevated unemployment, and we just haven't seen anything like that." The U.S. safety net wasn't designed to withstand such a strain. The extent and duration of unemployment benefits vary by state, but 26 weeks is typical. Several federal extensions have increased that to 99 weeks in California and other hard-hit states. Even so, an estimated 3.5 million Americans will have run out of benefits by the end of the year. About 180,000 Californians have already fallen off the rolls.
There are few other places to turn. Applications for federal food stamps and state programs such as CalWorks, which provides temporary assistance to families with children, are up sharply in recent years. But because asset limits for applicants are so strict, many of the unemployed don't qualify. Veasley-Fields, the unemployed secretary, is now considering applying for Social Security benefits when she turns 62. That will mean reduced benefits in her later years. But with the job market so poor and retraining opportunities limited for someone her age, she said she may have no choice. Others are coming to the same conclusion. A record 2.74 million seniors applied for Social Security in 2009; more than 70% of them sought early benefits.
Desperation is growing, said Ofer Sharone, an assistant professor at MIT's Sloan School of Management who has spent the last year interviewing dozens of long-term jobless workers. "The U.S. is clearly not equipped to deal with this high level of unemployment," Sharone said. "People are running out of benefits, health insurance, retirement and pensions." Many are turning to traditional networks of family and friends.
Two years ago, Southern California native Ryan Payne was a mergers and acquisitions associate at a Manhattan investment bank earning a base salary of $140,000 a year. Then came the Wall Street meltdown. As one of the newest members of his firm, he was among the first to go when the layoffs came. Saddled with $100,000 in student loans and consumer debt, the 33-year-old moved back in with his parents in Malibu. He now trades commodities online from his home computer.
Handsome and genial, Payne uses his ample free time to exercise and pursue whims such as improv comedy. He formed a club of other jobless professionals that he cheekily named the Westside Unemployment Appreciation Team. Members, known as "enlightened slackers," gather occasionally for low-cost outings and a few laughs. But in more reflective moments, Payne, who holds an MBA and a law degree, admits he's not where he thought he'd be at this time of his life. "I live with my parents and I drive a Saturn," he said. "I need to figure out how I contributed to this.… I need to get some core, organic sense of success back."
Turmoil on Wall Street and in the nation's banking and mortgage industries has hammered financial services workers. Nearly 800,000 have lost their jobs since employment in that sector peaked in December 2006. Other classes of employees have experienced outsized pain as well. More than 1 million clerical and administrative workers have lost their jobs in the downturn. Some of those positions won't return even when the economy improves. To reduce labor costs, companies increasingly are requiring employees to handle their own calls, appointments and travel arrangements with the help of smart phones and laptop computers rather than secretaries.
Mary Bueno lost her $44,000-a-year job as an office manager early last year. The 52-year-old has sent out hundreds of resumes and worked online job sites, but found little on offer besides domestic work. She has burned through her savings and retirement nest egg trying to hang on to the Bellflower home she shares with her young son. Her 26-year-old daughter, a bank teller, recently moved back home to help out with the bills. Bueno has no health insurance, so when she needed to see a doctor her daughter paid the tab. Bueno said she's blessed to have such good children. But she's humbled. And scared.
"No one wants to rely on someone else, especially your kids," Bueno said. "You want to be the one who's there for them." Bueno is now considering switching careers, maybe pursuing her dream of becoming a substance abuse counselor.
Bernie Doyle, 54, just wants to get back on a building site. Before he was laid off in 2009 he made nearly $90,000 a year as a construction supervisor on high-end apartment projects in San Diego. He bought a 26-foot boat that he and his wife, Suz'Ette, took out nearly every weekend. He had a sense of pride each time he finished a job on schedule. "They'll slap me on a job and it's nothing but bare dirt. By the time I leave, the thing is built," said Doyle, his accent betraying his New England roots. "I love it. I live it. I like the pressure. I like dealing with people. I like getting the job done on time."
But the hangover from the nation's building binge is likely to last for years. There are simply too many empty dwellings and too few buyers. Doyle figures he has applied for more than 100 jobs, including an apartment building handyman and a Home Depot salesman. "I've had two interviews," he said. "I didn't get either one."
With depression mounting, he once shut off his telephone for three days, stopped checking his e-mail and isolated himself from friends. He's since turned the phone back on but remains discouraged. He now smokes two packs of cigarettes a day. The boat he and his wife used to cruise every weekend is now up for sale. He can no longer afford the payments. "I never thought I'd be in a spot like I am now, not in a million years," Doyle said. "I guess a lot of other people feel like that too."
No "Pot of Gold": The Rainbow's End is Far Away for Irish Firms
by Robert Jay - Elliott Wave International
Emerald Isle Companies Need More "Green"
The "debt crisis" is real. It's global. And it's far from over. You've likely heard of the P.I.I.G.S. -- an acronym for the debt-ridden nations of Portugal, Ireland, Italy, Greece, and Spain. But the problem of too much debt goes beyond a handful of nations in Europe. Over borrowing is also crippling private enterprises. Consider, for example, the startling findings of a recent business survey in Ireland. As Irish citizens sat at their kitchen tables and opened up the Irish Examiner (8/30), they read this:"MORE than a third of the 100,000 business assessed in a survey are at risk of collapsing.
"The study from company records agency, vision-net.ie, found more than 38,000 or 36% of Irish companies are classified as 'high-risk' and showing signs consistent with business failure.
"High-risk businesses are those that are performing badly on a number of key business ratios such as deteriorating liquidity, reduced or negative cash flows, lower sales or profits, over reliance on debt versus equity, significant interest repayment burdens and poor stock control.
"...companies who appear to be normal are in fact in trouble."
EWI's monthly Global Market Perspective recently addressed Europe's debt problems and financial "austerity." Banks which made business loans before the debt crisis are unable to do so now:
"Irish, Spanish and Portuguese banks are now effectively shut out of credit markets and now depend upon European Central Bank liquidity. Money has retreated from the periphery of Europe to its economic center, Germany, a trend that is unlikely to change over the coming months."
The alarming data in the Irish survey of businesses (over one-third of all the companies in Ireland are at "high risk") raise the questions:
What other country or countries have tens of thousands of companies "who appear to be normal" but are "in fact in trouble?"
Is the debt-ridden global economic "house of cards" getting ready to collapse?
We already know from recent experience how quickly "the rug can be pulled out from under us" economically.
Anglo Irish Bank to Be "Decommissioned": Minister
by Andras Gergely - Reuters
Nationalized Anglo Irish Bank will be "decommissioned," with a decision on its fate expected within a few weeks, a junior government minister was quoted on Saturday as saying. The comments by Conor Lenihan, a minister of state in charge of science, technology, innovation and natural resources, was the latest signal from the government that it was about to bow to growing political pressure to shut down the lender.
"It has to be decommissioned, it will be decommissioned -- fairly swiftly in terms of the actual decision being made in a few weeks with the permission of Europe," Conor Lenihan, who is the brother and ruling party colleague of Finance Minister Brian Lenihan, told the Irish Independent newspaper. Investors see the escalating cost of rescuing Anglo Irish as a major threat to Ireland's creditworthiness and the next potential euro zone troublespot after Greece.
Anglo's new management has proposed carving out a small functioning bank via a "good bank/bad bank" split but ministers have signaled a shift in policy toward an eventual wind-down. The government -- with a wafer-thin parliamentary majority -- will be hard-pressed to ignore public opinion, already aghast at having to shell out 25 billion euros ($32 billion) for the bank's reckless property lending while facing yet another round of tax hikes and spending cuts in this December's budget.
The final decision will be up to the European Commission. Prime Minister Brian Cowen said on Friday that a swift wind up could cost 70 billion euros or more and would not be in the taxpayers' interest. "There has to be an orderly wind-down," Conor Lenihan said. "But it would be costly and dangerous to wind it down quickly."
'The Irish banking system is basically one big Anglo'
by Simon Kelly - Sunday Tribune
- When the other banks are forced to recognise their losses it will be fatal to their balance sheets
The effects of this credit crunch are a catalyst for radical change in Ireland. It is the only way to view this economic storm. The purging from our banking and business system of all bad debts at a national scale is the driver of this. I do not think that this has ever been tried before on this scale. It's one hell of a cleansing, with Anglo and the developers at the top of the pile.
We saw last week from the further decline in the Anglo figures the effect it is having on asset values. I have had my own experience in this area recently and the Anglo numbers do not surprise me. I have spent the past number of weeks preparing and reviewing business plans for Nama. In preparing these plans, we have had to face up to the asset destruction that has taken place and it is truly frightening.
I have to admire the new management of Anglo for pinning their colours to a maximum loss of €25bn. I do not think that it will be possible to contain the losses at this level and I cannot understand how they can have this opinion with the backdrop of rising property yields and falling rents. Deflation means destruction for the banks' balance sheets and it is rampant in the property market at present. We will soon enter the era of negative property values on certain assets as the existing buildings become a liability and their demolition becomes a cost.
Where Anglo goes the other banks are sure to follow. The purging of the toxic loans from the other Irish banks has not happened to the same extent as in Anglo. These institutions still have an element of freedom and a faint hope of independence and this is preventing them from facing their losses. This cannot last. There is an epic battle going on as we speak between Nama and the banks over loans and values.
The banks are now frantically trying to minimise their loan transfers to Nama because these transfers are forcing them to recognise the full loss on the loan immediately. They are looking up the road towards Anglo, living in fear that they are closer cousins than they care to admit. These banks are much happier in the old world, where they could time loan-loss provisions to match their profits, thus creating a false sense of calm. Nama removes this power on the developer portion of their loan books. Are their provisions accurate for the balance of their non-Nama loans? Not by a country mile.
Imagine if AIB and Bank of Ireland were forced to immediately recognise all of the loan-book losses ranging from mortgages to commercials loans. The effect of this would fatal to their balance sheets, and the result would be more Anglos. In truth the whole Irish banking system is basically one big Anglo and the losses are immense. Have we got the energy as a nation for more of this? We might need it because this is the path we have chosen. The question about whether this should be happening is now immaterial.
I am trying to view this destruction in a positive light. It's really not easy and I am hoping that the medicine does not kill the patient. That is the risk with all of this honesty. In the world of finance and banking, honesty is a rare thing. Nobody tells the complete truth, and we are certainly bucking this trend. We are putting everything on the line, to the applause of the rest of the world. After the applause, I hope that they are on hand to help pick us up off the floor.
At the end of this process, and when this will happen is far from clear, all bad and marginal debts in Ireland will be gone. The system will be completely purged. This will surely give us the cleanest and most straightforward banking system in the world. This can be the platform on which we can rebuild our economic growth and repair the damage that this recession or depression will have caused. We are certainly a long way from Japan's lost decade. They limped through their asset collapse, refusing to recognise the toxic loans after the 1980s. We are admitting to it all.
Like any economic war, there will be casualties and Ireland will be strewn with them. There will probably be so many that an industry will form around dealing with the financial leprosy that many of us will have. The causes of this are clear for us all to see in the form of failed business loans with personal guarantee, and negative equity mortgages. This financial subsector will number in the ten of thousands and we might have to stick together to move forward.
Withdrawals Continue at Afghanistan's Largest Bank
by Matthew Rosenberg - Wall Street Journal
Afghans continued pulling money from their country's largest bank Saturday as Afghan central bank officials, aided by American experts, explored ways to stabilize the ailing lender with deep ties to President Hamid Karzai's administration, weighing the possibility of an Afghan-financed bailout.
Averting the failure of Kabul Bank has become a top priority for U.S. and Afghan officials, who fear the possible political and economic crisis that could result. Even with the bank still solvent, U.S. officials are concerned that its woes, brought on by allegations of corruption and insider dealing, are going to further setback faltering Western efforts to restore confidence in President Karzai's administration, a pillar of the allied strategy for beating back the Taliban.
Hours after dozens of branches of Kabul Bank closed following the first business day since the Islamic weekend, there was no word from Afghanistan's central bank or the lender's management on how much money had been withdrawn Saturday. Senior Afghan officials and one of the bank's major shareholders said the pace of withdrawals had slowed Saturday, compared with the rush to pull out money late last week. Finance Minister Omar Zakhilwal said the Afghan government Saturday transferred $100 million dollars to the bank to cover salaries for about 250,000 soldiers, police and teachers, who are paid through accounts at the lender.
Another senior Afghan official said the central bank was working with U.S. experts, Kabul Bank's management and its major shareholders on plans to aid the lender should it falter. The official said an "intervention" by the Afghan government was "a possibility." He declined to elaborate but did say Kabul Bank hadn't yet run out of cash. The U.S. says it will not finance a rescue of Kabul Bank. "No U.S. taxpayer funds will be used to support Kabul Bank," said a spokeswoman for the U.S. Treasury, Marti Adams.
But some U.S. officials say the fragile state of Afghanistan's finances—it collected less than $1 billion in revenue last year is dependent on donor nations for most of its annual budget—could result in U.S. and other donor funds indirectly assisting an Afghan government bailout the bank. Pay for Afghan soldiers and police, for example, comes from the U.S. and is funneled through the Afghan government.
Scenes at many branches of Kabul Bank in the Afghan capital—long lines at the entrances giving way to packed lobbies inside—suggested that the run on the bank didn't subside Saturday. At some locations, people waited for hours only to be told that the branch had run out cash, a situation that may have kept withdrawals down Saturday. The problem appeared particularly acute for those holding accounts in U.S. dollars as opposed to afghanis, the local currency.
"The bank says it has no more dollars and my account is a dollar account," said Abdul Qadir Sufizudah, a candidate in coming parliamentary elections. He was trying to withdraw $20,000 from a branch in Kabul. "I'm worried I'll lose my money," he said. Kabul Bank's woes first became public late Tuesday, when word leaked out that Afghanistan's central bank had forced out the lender's chairman and chief executive—its two biggest shareholders—amid allegations they made hundreds of millions of dollars in sometimes clandestine loans to themselves and Afghan government insiders.
Kabul Bank's former chairman, Sherkhan Farnood, used bank money to buy more than $150 million in properties in Dubai in his and his wife's name. Large loans were given to powerful Afghans, including brothers of President Karzai and First Vice President Muhammad Fahim. U.S. officials say the bank used one of Afghanistan's traditional hawala money transfer outfits to move hundreds of millions of dollars out of the country in an apparent attempt to avoid detection, though it is not clear what the money was then used for.
Afghan and U.S. officials say the problems at the bank came to light because of an intensifying feud between its major shareholders, especially Mr. Farnood, and Khalilullah Fruzi, the former chief executive. On Wednesday and Thursday, panicked depositors withdrew almost $180 million, more than a third of the $500 million the bank had on hand before the onset of the crisis. The bank was closed on Friday, the Muslim day of rest, and reopened Saturday.
Mahmud Karzai, the president's brother and third-largest shareholder with a 7% stake, says the lender's assets are roughly equal to the $1.3 billion in deposits it held before last week. He said the situation was stabilizing and shareholders were to meet with central bank officials on Sunday. It isn't clear if Kabul Bank's assets—mostly loans and property—are easily recoverable. If the pace of withdrawals hasn't slowed, the bank could run out of cash in the next few days, despite its relatively large cash reserves.
U.S. officials fear that even the hint of failure at Kabul Bank, the largest of Afghanistan's 10 private banks, could prove dangerously destabilizing. More than a quarter of a million soldiers, police and teachers are paid their salaries through the bank, and the Afghan government keeps many of its accounts there. A U.S. military officer said the allied mission to train Afghan soldiers and police was trying to come up with alternate ways to pay the Afghan security forces if electronically transferring the funds through the bank ceased to be an option.
For the moment, though, those concerns seemed unfounded with the transfer of the salaries Saturday. Mr. Zakhilwal, the finance minister, said money was deposited in the Kabul Bank accounts so soldiers, police and teachers would have cash on hand for Eid ul-Fitr, a Muslim holiday marking the end of the fasting month of Ramadan in a few days. Mr. Zakhilwal attributed the long lines Saturday to people withdrawing their pay. "They made it look worse than it really is," he said in a brief telephone interview.
More broadly, U.S. and Western officials are concerned the crisis will further set back their faltering efforts to restore confidence in President Karzai's administration, a pillar of the allied strategy for beating back the Taliban. Already, many Afghans view the crisis at the bank as just the latest sign of officially sanctioned corruption. "The president and his brothers and their friends were playing around with all our money," said Daoud Afzal, 30 years old, who owns a construction company. He said he had $100,000—his life savings—deposited at Kabul Bank but didn't know if he would get it back. "No one can trust this government," he said.
To keep negative sentiments from spreading, U.S. and other Western officials say they are pressing the Afghan government to quickly start investigating the allegations of corruption and financial impropriety that led to the management shake-up. Afghan officials say they will take whatever steps are necessary to restore confidence, although they have so far avoided public talk of an investigation. "From our side, we have to be very careful how we handle this so we don't add to the confusion and chaos," said Mr. Zakhilwal, the finance minister. He blamed the run on Kabul Bank on "alarmist" foreign media reports, a common refrain from Afghan officials in recent days.
Other Afghan officials have played down the management shake-up, describing it as a routine effort to comply with new rules barring shareholders from running banks. The Afghan government says it will guarantee all of Kabul Bank's deposits. President Karzai said Thursday that his administration could use Afghanistan's hard currency reserves of about $4.8 billion to protect depositors. But it isn't clear how readily available that money is and whether the government has the legal authority to use it to secure the accounts of private citizens.
Fears grow over global food supply
by Javier Blas, Jack Farchy, Courtney Weaver and Simon Mundy - Financial Times
Wheat prices rose further on Friday in the wake of Russia’s decision to extend its grain export ban by 12 months, raising fears about a return to the food shortages and riots of 2007-08. In Mozambique, where a 30 per cent rise in bread prices triggered riots on Wednesday and Thursday, the government said seven people had been killed and 288 wounded. Vladimir Putin’s announcement on Thursday extended an export ban first introduced last month until late December 2011, sending wheat and other cereals prices to a near two-year high. It came as the UN’s Food and Agriculture Organisation called an emergency meeting to discuss the wheat shortage.
In Maputo, trade and industry minister Antonio Fernandes told a national radio station on Friday that the riots had caused 122m meticais ($3.3m) of damage. Police opened fire on demonstrators after thousands turned out to protest against the price hikes, burning tyres and looting food warehouses. Although agricultural officials and traders insist that wheat and other crop supplies are more abundant than in 2007-08, officials fear the food riots could spread.
Wheat prices remained high on Friday morning. Futures in Chicago were up 1.5 per cent at $6.91 a bushel, while European wheat futures remained at historically high levels above €230 a tonne, just shy of last month’s two-year high of €236. Wheat prices have surged nearly 70 per cent since January, and analysts forecast further rises after Russia’s decision and concerns about weather damage to Australia’s crop.
The crop problems in Russia, which suffered its worst drought on record this summer, and elsewhere, have heaped pressure on US farmers to supply the world’s wheat. The US Department of Agriculture has increased its estimates for US wheat exports to $8bn for the current crop year. The 2007-08 food shortages, the most severe in 30 years, set off riots in countries from Bangladesh to Mexico, and helped to trigger the collapse of governments in Haiti and Madagascar.
The FAO said that "the concern about a possible repeat of the 2007-08 food crisis" had resulted in "an enormous number" of inquiries from member countries. "The purpose of holding this meeting is for exporting and importing countries to engage." Russia is traditionally the world’s fourth-largest wheat exporter, and the export ban has already forced importers in the Middle East and North Africa, the biggest buyers, to seek supplies in Europe and the US.
Mr Putin said Moscow could "only consider lifting the export ban after next year’s crop has been harvested and we have clarity on the grain balances". He added that the decision to extend the ban was intended to "end unnecessary anxiety and to ensure a stable and predict-able business environment for market participants". "This is quite serious," said Abdolreza Abbassian, of the FAO in Rome.
"Two years in a row without Russian exports creates quite a disturbance." Dan Manternach, chief wheat economist at Doane Agricultural Services in St Louis, added: "This is a wake-up call for importing nations about the reliability of Russia." Jakkie Cilliers, director of South Africa’s Institute of Security Studies, said there was concern over a repeat of the protests of 2008: "That certainly strengthened a return of the military in politics in Africa."