"The Single Men's Unemployed Association parading to Bathurst Street United Church. Toronto, Canada"
Ilargi: First off, apologies for the long radio silence. Stoneleigh and I are traveling in Europe, from one of her talks to the next. Just a few days ago, we were in Slovakia, now we’re in Britain, and all that means a lot of driving. The next two talks are in Coventry and Norwich, March 24 and 25, and you re more than welcome to attend. I’ll post the venues and times tomorrow. And then here's reality:
Eminent US physicist Michio Kaku says that the Japanese government may call the situation at Fukushima stable, but that it would be "stable in the sense of hanging by your fingernails" (which I in turn would suggest is a perfectly apt description of our entire global economy and various societies). Kaku indicates that the only "solution" he sees for Fukushima is for the Japanese army to start dropping massive amounts of sand, boric acid and concrete on the Fukushima 1 reactors. Two of which are presently producing clouds of smoke, the origin of which is unknown to either TEPCO or Tokyo. In other words, "stable" is hardly the first term that comes to mind. And Japan may well be heeding Kaku's words; just not admitting to it yet. Thomas H. Maugh II writes for the Los Angeles Times:
Smoke seen at Fukushima reactorsThe company has also brought in a large construction device normally used to pump a cement mixture. Officials initially said they were going to use it to pump the cement mixture and water into the spent fuel pool of reactor No. 4, which is thought to have boiled dry, allowing damage to have been done to the fuel rods there. Officials later said, however, that they intended to use the device only to pump water into the pool.
What Kaku proposes is known as the "sarcophagus" approach. In which the entire construction is basically buried, so no radioactivity can spread from the above ground facilities. This may sound good, but it's also an admission that meltdown cannot be halted, and will continue beneath the concrete "structure".
In the meantime, radioactivity has already spread into the local food supply. Milk and spinach are being taken off the market, and persistent reports claim water dumped and sprayed on the reactors is flowing out to sea. Nick Allen for the Telegraph:
Japan nuclear crisis: Fears mount over radioactive waste in foodFears are mounting among Japanese health authorities that food and milk from areas surrounding the Fukushima nuclear plant could be contaminated with radioactive waste. Yukio Edano, Japan's Chief Cabinet Secretary, said shipments of spinach from four provinces surrounding the plant had been halted. Milk shipments from Fukushima province have also been banned.
Mr Edano, the increasingly haggard face of the Japanese government's response to the crisis, sought to quell fears by saying radiation levels in food were not harmful to human health, and that he was prepared to eat contaminated produce himself. He said: "Even if you eat and drink them several times it will not be a health hazard. So I would like you to act calmly without reacting." Asked if he would be happy to give spinach and milk to his family, he said: "Of course."
His comments were reminiscent of when John Gummer, the then Agriculture Minister, was pictured with his four-year-old daughter and half-eaten hamburgers, in an attempt to calm the British public during the "mad cow disease" outbreak in 1990. [..]
Andre-Claude Lacoste, head of France's Nuclear Safety Authority, said local contamination would be a problem "for decades and decades." He added: "Ground deposits of radioactive particles are significant. Given the weather, it is likely that contaminations have occurred up to 100km (60 miles) or so." The World Bank said Japan may need five years to rebuild after the catastrophic March 11 earthquake and tsunami, which caused up to £144 billion in damage and left nearly 22,000 people dead or missing.
The sarcophagus "tactic" was also applied in Chernobyl. While it did halt immediate radiation levels, it seems that radioactive water is now making its way, slowly but surely, towards the groundwater of Kiev, the Ukranian capital located some 80 km (50 miles) away. This is what almost certainly awaits the Fukushima region, and who knows which other adjacent regions. It will be interesting to see how large the exclusion zone (at Chernobyl it's called the "Zone of Alienation") will be. Radioactivity creates expansive regions that are off-limits to people.
Like a sarcophagus that fits over a failed and out of control nuclear plant, seemingly solving problems, but in reality only pushing immediate issues forward into the future, where our very own children will be confronted with the dire consequences of our dramatic failures, we also distinguish a pattern of the sarcophagus of war being laid over economic crises. I see many comparisons of the 2011 western attacks on Libya with the 2003 invasion of Iraq, but when I saw the first footage a few days ago, I was thinking that we need to wonder where and how 2011 differs from, say, 1938.
War has throughout history been used by "leaders" as a means to cover up their economic failures. The Great Depression never truly ended before World War II broke out for real in 1939.
- Top 1929
- Decline until 1932/33
- Reflation 1933 - 1937
- Decline 1937-1942
- And war in 1939, the US entered in 1941
- Top 1999/2000 (peak in real terms)
- Decline until 2002/03
- Reflation 2003 - 2007 (peak in nominal terms)
- Decline 2007 - 2009
- Lesser reflation 2009 - 2011
- Decline 2011 - ? (probably several years)
Here’s a graph from Elliott Wave on the present situation through 2009, the DJIA measured in gold:
It’s obviously too early to tell where the attack on Libya fits into the potential comparison of the two crises. Still, the way I see people like Hillary Clinton and UK PM David Cameron declare on TV that the strike is "right" and legal", fills me with dismay. They look far too trigger happy, far too eager to send young people into war, from which some, if not many, will return maimed and/or dead. And we do have an ongoing financial crisis, no matter what anyone pretends. Look at unemployment numbers, home sales, home prices in America.
At the height of the 1930s crisis, unemployment in the US was something in the order of 25%. In real numbers, we're not that far below that now. And all it takes to get there is a few more bad data. Or a drought, as happened in those days 70 years ago.
And then of course there's this: Most of Libya's oil, some 80%, is in the east near Benghazi. It's some of the lightest, sweetest, easiest to extract crude oil left on the planet. Its marginal extraction could be as low as $1 per barrel. Libya also has about 41 billion barrels in oil reserves, the US has 21 billion barrels. Libya has an estimated 1,500 billion M^3 of natural gas as well according to the National Oil Company. This war, like any other, is first and foremost one of resources. Getting rid of Gaddafi is a mere bonus, but the main idea for now might well be to split the country in two. "We" are only interested in the eastern part.
And the financial markets? Yeah, they’re moving up, aren't they? War is a profitable business still. We are always led into these adventures with the notion that it’ll be over in no time at all (think Iraq). But then it never works out that way. And here I am wondering if the purpose of it is really to make it as short as possible. You don’t beat Gaddaffi on his home turf in two seconds flat. He may not have the most advanced equipment, but he knows the turf. Same as it ever was: Iraq, Afghanistan, the US hasn't won a war since World War II. You get the idea that being in wars in more important than winning them. It could certainly be more profitable.
At the height of the Vietnam war, the average age of a US soldier was 19 (it was 26 in WWII).
A lot of the US soldiers fighting in Iraq were young kids who signed up just to pay for a college education. And we really need to wonder how far away we are from a draft, with a new battlefield that could easily expand greatly. The Arab League may have supported the attack on Libya at first, but there are already cracks showing in their united resolve. The Clintons and Camerons of this world may say it's all legal, but when they say "we need to help the people of Lybia", where do the people of Yemen and Bahrain come in exactly?
Russian PM Putin has likened the attack to the Crusades. Iran is waiting in the wings. China is an interested bystander. And all of them have their eyes on the same prize: oil.
One of Adolf Hitler's main objectives from the very beginning was construction and control of the Baku pipeline. He didn’t get it, he had to make do with Fisher-Tropsch oil from coal, a very costly and elaborate process. It may well have cost him WWII victory.
These are the kinds of things I think about these days, the 1930s depression, how Hitler came to power, how it all led to mass warfare. I then look at developments in the world today and they fill me with dread. Especially when I think back to 1938. It's about seeing war against the backdrop of an unsolvable financial crisis. Whch is then in turn seemingly solved by going to war.
Michio Kaku on Japan's Nuke Crisis & Chernobyl Option
Michio Kaku: Time for the "Chernobyl Option"
As Libya Air Strikes Intensify, What Next For The United States?
by David Wood - Huffington Post
U.S.-led air attacks on Libya are intensifying even as Libya’s erratic leader, Muammar Gaddafi, vows a bloody "long war." Now what? Having failed to dislodge Gaddafi from power with a "shock and awe" barrage of cruise missile attacks and air strikes Saturday and Sunday, the United States and its European partners are left with the prospect of an extended air campaign with uncertain prospects of success and a growing risk of civilian suffering. Nor does the U.S. have any clear military option of escalation: in effect, the United States is boxed in by a U.N. Security Council resolution that authorizes “all necessary measures’’ to protect Libyan civilians -- "excluding a foreign occupation force."
So far, the allied air attacks -- as of Sunday afternoon, no Arab nations have taken part -- have had "a pretty significant effect," Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, insisted Sunday, as he made the rounds of the TV talk shows. Mullen said the attacks are "narrow and focused" on a mission confined to protecting Benghazi, the last major rebel hold-out, and opening routes for humanitarian aid.
But he declined to say how long the campaign might take or how it might be escalated to dislodge an unrepentant Gaddafi, the ultimate goal announced by President Obama Feb. 26 that the Libyan leader must step down. "We're not retreating anywhere," Gaddafi boasted on a radio broadcast Sunday, taunting the western military coalition. "You are going to return defeated." The air and missile attacks, joined Sunday by Marine Harrier strike fighters from the strike carrier USS Kearsarge in the Mediterranean, are targeting purely military targets, and as the conflict continues, Gaddafi reportedly is moving more of his assets into schools and mosques, knowing that the U.S. won’t attack for fear of causing civilian casualties.
And he retains an unnerving ability to retaliate. With his long experience with terrorism, he could launch terrorist attacks inside Benghazi without exposing his tanks and artillery to allied air strikes. He might threaten to use his stockpiles of mustard gas on civilians unless the U.S. backs off. And he might authorize terrorist strikes against Americans and other civilians in Europe -- as he has done many times before.
Gaddafi "will fight until the end," said Ali Suleiman Aujali, who was Gaddafi’s ambassador in Washington until he defected earlier this month. He told ABC’s Christine Amanpour Sunday that Gaddafi "has no other choice. He has no shelter to go. And this is his -- his attitude. He will never give up."
Much on the minds of Obama administration officials and others is Gaddafi’s record of deadly attacks on civilian aircraft, including the 1988 bombing of Pan Am flight 103, which killed all 270 people on board, and the bombing a year later of a UTA flight over Niger, killing all 171 on board. Both of those attacks followed the U.S. air strikes against Tripoli ordered by President Reagan in 1986. Obama held a secure conference call Sunday with his national security team, including adviser Tom Donilon, Secretary of State Hillary Clinton, Pentagon chief Bob Gates, and Army Gen. Carter F. Ham, who is directing the operation as commander of U.S. Africa Command.
Their dilemma eerily reflects the NATO air war against Yugoslavia’s Slobodan Milosevic more than a decade ago, which took 78 days of bombing to bring to a conclusion. Even then, analysts believe the bombing was not instrumental in convincing Milosevic to give up.
Called Operation Allied Force, the 1999 Yugoslav air war -- like the current operation against Libya -- was envisioned as a quick strike against a militarily weak force. But the NATO campaign led by the United States quickly bogged down, hampered by "a surprisingly resilient opponent" in Milosevic, according to a thorough post-war analysis by Benjamin Lambeth, a senior air analyst at the RAND Corporation. In another lesson for those in charge of Operation Odyssey Dawn against Libya, the allies were hampered by "sharp differences of opinion" about how to proceed, especially on whether to use ground forces to put further pressure on Milosevic, Lambeth wrote.
When the Yugoslav leader eventually did give up, it was as much because Russia had withdrawn its support, and because an impatient U.S. was taking initial, hesitant steps to deploy ground troops into Yugoslavia. No such options seem to exist at the moment. But one factor weighs heavily against Gaddafi: Virtually all of his Arab and North African neighbors are united against him. With good reason: At one time or another over the past decades, Gaddafi has directed terrorist attacks against almost all of them.
Japan Warns Fukushima Crisis Unlikely to Be Resolved Quickly
by Yoshiaki Nohara and Tsuyoshi Inajima - Bloomberg
Japan said efforts to stabilize the Fukushima Dai-Ichi plant had some success while a quick resolution is unlikely as the fight to contain the worst nuclear catastrophe in a quarter century entered its second week.
Japan’s military sprayed water from fire engines to cool the Fukushima Dai-Ichi No. 4 reactor, the site of two blazes last week. Pressure in No. 3, which spiked earlier, has stabilized, Chief Cabinet Secretary Yukio Edano said in Tokyo. “There will be more ups and downs,” Edano told reporters today. “This kind of situation will continue for a while.”
Tokyo Electric Power Co., owner of the crippled 40-year-old power plant, is yet to provide an update on its plan to partially restore power at two reactors by 4 p.m. local time. Workers reconnected a 1.5-kilometer (1 mile) power cable yesterday to unit No. 2 seeking to revive cooling systems knocked out after the magnitude-9 temblor and tsunami. “The difficulty really is to get the power supply restored in a lasting way without shortcircuits,” Olivier Gupta, deputy chief executive officer of France’s Nuclear Safety Agency, told reporters in Paris today. ’’The situation is still fragile.’’ Tokyo Electric, known as Tepco, said water pumps and controls may fail to function even with power restored due to damage from the disaster.
A successful hook-up would have advanced efforts to prevent a total meltdown of the reactors following the March 11 disaster. Tepco had planned to partially restore power at the No. 1 and No. 2 reactors by 4 p.m. today, according to Teruaki Kobayashi, a nuclear maintenance official. Storage pools used to cool spent fuel rods atop the No. 4 reactor had little or no water, and large amounts of radiation could be released as the exposed rods overheat, Gregory Jaczko, the chairman of the U.S. Nuclear Regulatory Commission, told Congress on March 16, citing reports he received from NRC officials in Japan.
Efforts to prevent a full-scale meltdown of the reactors have been hampered by radiation that made it hazardous for workers to spend prolonged periods in the immediate vicinity of damaged buildings. Soldiers from Japan’s Self Defense Force and firefighters from Tokyo have used long-range water cannons, specialized fire equipment and helicopters to douse damaged reactor No. 3 for the past five days. Tepco considered venting radioactive steam from the reactor earlier today before pressure levels stabilized, company spokesman Naoyuki Matsumoto said.
Temperatures of spent-fuel storage pools at the No. 5 and No. 6 reactors fell after workers restarted the cooling pump from backup generators, said Takashi Kurita, spokesman at Tepco. Unit No. 5 was undergoing maintenance at the time of the earthquake and was one of the least damaged. Engineers at Tepco hope to use a separate power cable attached to the No. 2 reactor as a hub to restore electricity to the other five reactors, said Hikaru Kuroda, chief of the company’s nuclear facility management department. Reactors No. 5 and No. 6 may be connected tonight, he said.
The longer the company can prevent overheating of the reactor cores and water-filled pools used to store spent fuel, the smaller the supply becomes of the most dangerous, volatile elements, said Roger N. Blomquist, principal nuclear engineer at the Energy Department’s Argonne National Laboratory, near Chicago.
The radioactive nature of the fuel means that it’s in a constant state of decay, he said. Even if some of the nuclear material has started melting, restoring electrical systems will enable Tepco to bring temperatures down to a manageable level so corrective measures and a cleanup can begin, said Blomquist, who oversees the nuclear section at Argonne, a federal research center managed by the University of Chicago, birthplace of the nuclear industry. “Reading from the figures of monitoring, we have a feeling that things are getting a little better,” said Hidehiko Nishiyama, a spokesman for the Nuclear and Industrial Safety Agency.
Edano, the chief cabinet secretary, said radiation above government limits was found in milk and spinach produced near the plant struck by the earthquake, Japan’s strongest on record. Radioactive iodine in drinking water from Fukushima prefecture was at one point slightly above government safety limits, the Associated Press reported. People living within 30 kilometers of the plant should wear masks and long sleeves and stay out of the rain, Japan’s nuclear safety agency said.
Residents in an adjacent region that covers an area equivalent in size to Los Angeles were evacuated in the first few days after the disaster. In Tokyo, 220 kilometers (140 miles) to the south, people have been watching weather reports for signs that winds may carry fallout toward them. Tepco will boost power supply by 20 percent before the end of April by restarting oil-fired plants to make up for the electricity shortage caused by the shutdown of the Fukushima plant, the Nikkei newspaper reported, citing Takashi Fujimoto, vice president of the utility.
No home no help no hope: Now Japan’s despair turns into anger
by Andrew Buncombe - Independent
As Japan struggles to gain control of a nuclear crisis and to feed and shelter the thousands of people left homeless by last week's devastating tsunami, the Japanese government is facing a growing chorus of criticism for its handling of the catastrophe.
Amid vociferous unease in the Japanese media at the apparent lack of progress in providing people in the country's stricken north-east with the bare essentials they need to survive, the Governor of Fukushima prefecture, Yuhei Sato, has voiced frustration at shortages that were slowing evacuations. "Anxiety and anger felt by people have reached boiling point," he said. He warned evacuation centres did not have enough hot meals, medicine or petrol.
Meanwhile, in the first sign that international frustration at the Japanese government's reticence on the status of the stricken Fukushima power plant has reached a critical moment, the director-general of the International Atomic Energy Agency issued a thinly-veiled rebuke to Prime Minister Naoto Kan's administration. "We do not have all the details of the information, so what we can do is limited," said Yukiya Amano, who is Japanese himself. "I am trying to further improve the communication."
The UK government was sufficiently alarmed by the situation, especially the radioactive leaks, that the Foreign and Commonwealth Office announced: "British nationals currently in Tokyo and to the north of Tokyo should consider leaving the area."
Since the news of difficulties at the plant first emerged, many analysts say the government in Tokyo has underplayed the situation. There was a hint that unease was reaching the very highest levels of the government when reports emerged that Mr Kan had lost his temper with executives from the plant operator, Tepco. "What the hell is going on?" he is said to have demanded, according to the Kyodo news agency. Tepco has been responsible for most of the information coming out of the plant.
But the sharpest reproach for the government was visible in the country's north-east on Wednesday. With lines for food stretching six city blocks, temperatures below freezing in many places and snow further hampering relief efforts, people in the region are struggling with shortages of necessities that the government appears unable to supply.
In the aftermath of the earthquake and tsunami, when the attention of the authorities was focused on rescue efforts and trying to save as many people as possible, it would have been understandable if the supply of basic commodities had been interrupted. But six days later, and with it still impossible to buy a bottle of water in a city located just five hours' drive from Tokyo, people are beginning to wonder what is happening. In many cases the absence of fresh water, electricity and gas is adding to the misery. The government has offered no explanation.
"It took me 10 hours to queue up to get petrol," said Ota, a 45-year-old office worker from Sendai. "And then each person was only allowed 10 litres. Nobody there was able to give me any information." Ota, who declined to give his second name, said a friend had told him that when he visited a store and bought some snacks, he was charged "100 times" the usual amount. "My friend had to buy the food," he added. "He has to live."
The shortage of supplies has not triggered panic. People queuing to get into the few shops that are open do so calmly and efficiently, even though the line could wait for more than an hour. Many of the shops have employed officials with flags to direct the queues. "I had to get in line for an hour. Then there was no milk, no bread. People were allowed two snacks each and one tin of food," said Tsugitaka Chiba. "In my neighbourhood, people have been giving food away. There's just no information about the resupply of the shops."
However difficult things may be for people in Sendai, where large parts of the city have electricity and water, a far more pressing situation exists in those towns and villages closer to the coast. There, there is no electricity and often no fresh water. There is also precious little to eat; at an elementary school in the town of Higashi Matsushima that had been turned into an emergency shelter for several hundred people who were homeless, there were boxes of instant noodles and a communal kitchen serving miso soup.
How long the supplies would last was unclear. There are similar reports from communities all along the coast. Officials believe 440,000 have been evacuated, either from the area struck by the tsunami or else from the proximity to the nuclear reactors. There are hundreds of shelters set up for those with nowhere else to go, but large numbers of people in isolated areas are still waiting for assistance and food.
The government has sent 100,000 troops to assist in the aid effort and delivered 120,000 blankets, 120,000 bottles of water and 110,000 litres of petrol to the worst-hit areas. But these can only be temporary measures. Officials warn it could take many days to restore supplies of power and water.
Japan crisis: 'There’s no food, tell people there is no food’
by Peter Foster - Telegraph
The unshaven man in a tracksuit stops his bicycle on the roadside and glances over his shoulder to check that he is unobserved. Satisfied, he reaches quickly into the sludge-filled gutter, picks up a discarded ready-meal and stuffs it into a plastic carrier bag.
In another time, another place, Kazuhiro Takahashi could be taken for a tramp, out scavenging for food after a long night on the bottle. In fact, he is just another hungry victim of Japan’s tsunami trying to find food for his family. “I am so ashamed,” says the 43-year-old construction worker after he realises he has been spotted. “But for three days we haven’t had enough food. I have no money because my house was washed away by the tsunami and the cash machine is not working.”
If his haul wasn’t so pitiful — his bag had two packets of defrosted prawn dumplings and a handful of vacuum-packed seafood sticks inside — Mr Takahashi might be taken for a looter. But in the port town of Ichinomaki, 200 miles north of Tokyo, his story is disturbingly common. Japan might be a rich country, but a week after the tsunami struck it is struggling to feed and house the victims adequately.
“I have a place in a rescue centre in the Aka’i Elementary School, but the food they are giving us is not enough,” Mr Takahashi says. “My parents are in their 70s and we receive a tiny bowl of plain rice twice a day, with nothing else, just a pinch of salt. We are hungry, so have come to look for food.”
Mr Takahashi is not alone. Over his shoulder, a small legion of “tramps”, their feet wrapped in plastic bags, can be seen trawling the muddy aisles of a smashed-up supermarket, hoping to find other edible treasures that might supplement rescue centre rations. “Don’t take my photograph!” barks a man in blue overalls with at least three days’ stubble on his chin. “This is so shaming, but I have given up on the government. We cannot rely on them so we have to help ourselves.”
Shame plays an important role in Japanese society, forcing people to maintaining the outward norms of life even when faced with the most extreme of circumstances, as the world has witnessed to its amazement this past week. But in Ichinomaki, and countless other stricken towns along the country’s northeast coast, raw necessity is starting to fray even Japan’s super-taut social fabric. “They are no longer Japanese,” says one woman bystander with a shiver of pity and disdain. “I don’t feel like this is Japan.”
Natural disasters have a cruel power to strip the dignity from both the living and dead, but in a country as polite and fastidious as Japan the process seems all the more brutal. “They are desperate, they have no other food to eat,” says a policeman guiding some emergency traffic at a nearby intersection. “You could call it stealing, but we understand that at these times there is perhaps no other choice.”
There are some signs of stealing in Ichinomaki — the supermarket cash-machine has been smashed open and on one ruined street a locked safe, the size of kitchen fridge, had been dragged out and fruitlessly vandalised — but broadly it feels as if law and order still hold sway. The frustration is that Ichinomaki does have at least one working supermarket, opposite the town’s police station, but shoppers must queue for two or three hours, can buy only 10 items or fewer and must pay cash — not possible if your house has been washed away.
Amazingly, many residents in Ichinomaki refuse to criticise the local or national authorities, excusing any shortcomings by blaming them on the sheer scale and breadth of the destruction that has made delivering aid such a mammoth task. Perhaps that too is hiding Japan’s shame, but they might be less sanguine if they could see the empty highways that remain closed to all to but emergency vehicles, yet still connect Tokyo to Ichinomaki in just four-and-a-half hours’ drive and could, surely, be used to carry some emergency food and fuel.
Finding petrol remains impossible, leading many to take to their bicycles, slithering through the mud-caked streets until they have to stop, clear their mudguards, and then slither on. Down in the docks, which were almost obliterated by the tsunami, people could be found climbing through the wreckage, trying pull out usable bicycles and siphoning petrol from cars that had been picked up and dashed against houses and harbour walls.
“There’s no food, tell people there is no food,” says a man filching petrol, who declined to be named. “They say on the television that aid is being delivered, that food is coming, but you can see for yourself it is not. “I thought we were a wealthy country, but now I don’t know what to think,” he adds, explaining that he is surviving on slowly defrosting food from his home freezer. “You must tell people what is happening here because the Japanese media is too frightened to tell the truth.”
It is true that coverage of the quake in Japan tends to show the brighter side of the relief efforts, while in reality for many the experience is humiliatingly grim. In one of Ichinomaki’s rescue shelters, The Daily Telegraph meets Kinniko Ishikawa, a deaf but indomitable 70-year-old who is bursting to tell how she watched from her second-floor bedroom window as her neighbour’s house was washed away.
“They went right past my window – my neighbour, her husband and their daughter still in their house, floating away on the wave — I waved at them as they went, I said 'bye-bye, bye-bye’ and then they were gone, just like that.” She laughs out loud at the memory, at the apparently surreal comedy of the moment and then just as suddenly becomes a tired and sad old woman again. “They are still missing,” she says, using a word that increasingly has come to mean only one thing.
Mrs Ishikawa and about 30 other pensioners sleep on the floor of a single room in an old government building opposite Ichinomaki’s city hall. The place is warm but has no water for the lavatories and is a far cry from the brightly-lit sports halls that feature on Japan’s television news. “Yes, it’s true, there is no food from the government,” she says. “But we are lucky ... we receive at least one bowl of rice each day from a local charity, and yesterday they bought us some snacks. “Of course we feel hungry, but we must try to ignore it.”
Smoke seen at Fukushima reactors
by Thomas H. Maugh II - Los Angeles Times
Although officials of the U.S. Nuclear Regulatory Commission said Monday that conditions at the Fukushima Daiichi nuclear power plant appear to have stabilized and that the containment vessels at three reactors had not been seriously breached, smoke was reported rising from two reactors Monday evening. The cause of the smoke was unknown, however, and it did not appear to be associated with a radiation spike.
The executive director of the NRC, Bill Borchardt, said Monday that the agency's staff in Japan reported that the three reactors that had shut down following the magnitude 9.0 Tohoku earthquake 10 days ago probably have suffered some core damage but do not appear to be leaking significant quantities of radiation. "I say optimistically that things appear to be on the verge of stabilizing," he said.
Workers on site have been pouring massive amounts of seawater onto the reactors and spent fuel pools in an effort to keep them cool, but Monday evening white smoke was seen rising from reactor building No. 2 and gray smoke from reactor building No. 3. In the latter case, the smoke was thought to be coming from the building's southeastern side, where the reactor's spent fuel pool is located.
Reactors No. 2 and No. 3 have been particular concerns. The containment vessel at reactor No. 2 is thought to be cracked, while reactor No. 3 is powered by a mixed oxide fuel that contains significant quantities of highly carcinogenic plutonium.
Engineers from Tokyo Electric Power Co., which owns the plant 140 miles north of Tokyo, have brought a new power line from the nation's electrical grid to the site and connected it to the reactor buildings. But only the cooling pumps in reactor buildings 5 and 6, which have only spent fuel pools, have been energized. The pumps have brought water temperatures in the cooling pools down to normal levels.
Company officials said damaged electrical parts in the other buildings have made it difficult to restore power in those units. The company is now bringing in replacement parts in an effort to restore power and bring cooling pumps in the other reactors back on line.
The company has also brought in a large construction device normally used to pump a cement mixture. Officials initially said they were going to use it to pump the cement mixture and water into the spent fuel pool of reactor No. 4, which is thought to have boiled dry, allowing damage to have been done to the fuel rods there. Officials later said, however, that they intended to use the device only to pump water into the pool.
Japan nuclear crisis: Fears mount over radioactive waste in food
by Nick Allen - Telegraph
Fears are mounting among Japanese health authorities that food and milk from areas surrounding the Fukushima nuclear plant could be contaminated with radioactive waste. Yukio Edano, Japan's Chief Cabinet Secretary, said shipments of spinach from four provinces surrounding the plant had been halted. Milk shipments from Fukushima province have also been banned.
Mr Edano, the increasingly haggard face of the Japanese government's response to the crisis, sought to quell fears by saying radiation levels in food were not harmful to human health, and that he was prepared to eat contaminated produce himself. He said: "Even if you eat and drink them several times it will not be a health hazard. So I would like you to act calmly without reacting." Asked if he would be happy to give spinach and milk to his family, he said: "Of course."
His comments were reminiscent of when John Gummer, the then Agriculture Minister, was pictured with his four-year-old daughter and half-eaten hamburgers, in an attempt to calm the British public during the "mad cow disease" outbreak in 1990.
The World Health Organisation appeared to disagree with Mr Edano, announcing that radiation seeping into food and water was "a lot more serious" than previously thought. Peter Cordingley, the organisation's Western Pacific spokesman, said: "Quite clearly, it is not what we thought in the early stages. It is more serious. "We have seen Japanese people in grocery stores paying close attention to where their produce is coming from, and we think this is a wise practice." In a Tokyo supermarket shoppers noticeably avoided spinach marked from northern Japan. Shopper Yukihiro Sato, 75, said: "I won't buy vegetables from that area."
Meanwhile, work at the stricken Fukushima Daiichi nuclear plant was delayed after workers had to evacuated when smoke began billowing from buildings housing two reactors. There was no immediate indication, of raised levels of radiation around the reactors but members of the "Fukushima 50," the band of volunteer workers tackling the disaster, were moved away to nearby buildings.
The plumes of grey and black smoke stalled work to reconnect power lines and restore cooling systems, which are needed to help stabilise the overheated reactors. Hidehiko Nishiyama, a spokesman for Japan's nuclear safety agency, said work had been delayed to ensure safety, but would resume on Tuesday. Tepco, the operator of the plant, said it did not know what had caused the latest problems.
Positive news emerged from US nuclear regulators, who said the concrete and steel containment built to prevent radioactive fuel from leaking from the reactors was still intact. But Yuhei Sato, the governor of Fukushima province, said: "Our crisis is still going on. Our crisis is with the nuclear plants. We are doing everything we can to bring this to an end." Earlier, Tepco had said it was making good progress and had successfully rigged power cables to all six reactors at the plant, a crucial step toward getting cooling systems working again. US Energy Secretary Steven Chu, asked whether the worst of the 10-day nuclear crisis was over, said: "Well, we believe so, but I don't want to make a blanket statement."
However, Andre-Claude Lacoste, head of France's Nuclear Safety Authority, said local contamination would be a problem "for decades and decades." He added: "Ground deposits of radioactive particles are significant. Given the weather, it is likely that contaminations have occurred up to 100km (60 miles) or so." The World Bank said Japan may need five years to rebuild after the catastrophic March 11 earthquake and tsunami, which caused up to £144 billion in damage and left nearly 22,000 people dead or missing.
Spinach with radiation 27 times higher than limit found in Japan
by Kyodo News
Spinach with radioactive iodine 27 times more than the government-regulated limit was found in the city of Hitachi in Ibaraki Prefecture, more than 100 kilometers south of the crippled Fukushima Daiichi nuclear power plant, but the radiation levels do not affect human health, local authorities said Sunday. In 1 kilogram of spinach grown in open air in the city, 54,000 becquerels of iodine was detected, exceeding the 2,000 becquerel limit set by the government's preliminary regulation under the food sanitation law, the Ibaraki prefectural government said.
The level of cesium in the spinach grown in the city was also higher at 1,931 becquerels, compared to the limit of 500 becquerels. The level of iodine in the spinach grown in open air in the Kitaibaraki city in Ibaraki, around 75 kilometers south of the nuclear plant, was 24,000 becquerels, 12 times more than the limit of 2,000 becquerels. A cesium level of 690 becquerels, 190 more than the limit, was also found in the spinach, which was taken for investigation Friday.
Ibaraki Gov. Masaru Hashimoto said it will continue to ask each municipality to voluntarily halt shipments of spinach grown in the prefecture, although there is no risk to human health. Also in Tochigi, levels of a radioactive substance exceeding the government regulation were detected in spinach and other vegetables, the prefectural government said. In Chiba Prefecture, a radioactive substance was detected at twice the regulation level in ''shungiku'' leaf vegetables, according to the Tokyo metropolitan government.
Meanwhile, iodine-contaminated raw milk was found in four municipalities, including the town of Iitate, around 35 km northwest of the nuclear plant. Following the revelation, the Fukushima prefectural government called on all dairy farmers within the prefecture to voluntarily refrain from shipping or consuming their milk. The local officials said the milk from these municipalities is not on the market.
On the Consumer Agency website, Renho, state minister in charge of consumer affairs and food safety, said the reported radiation levels in spinach and raw milk are ''not expected to immediately affect human health,'' and called on the public to ''act calmly.'' ''I hope the public will not be confused by groundless rumors but act according to information from reliable sources,'' she said. Chief Cabinet Secretary Yukio Edano said at the press conference Sunday that the government will decide on Monday whether it will impose restrictions on shipments or intake of the spinach and milk.
The Ministry of Education, Culture, Sports, Science and Technology said radioactive materials were found in sample water taken Saturday in prefectures of Tokyo, Tochigi, Gunma, Saitama, Chiba, Kanagawa and Niigata, while prefectural governments of Fukushima and Ibaraki said they have found the substances in tap water. According to the ministry, 16 becquerels and 3.6 becquerels of iodine per one kilogram of water was detected in Tochigi and Gunma, while Tokyo and Niigata saw 2.9 and 2.1 becquerels, but the levels were below the limit of 200 becquerels set by the Nuclear Safety Commission of Japan.
The ministry also said the levels of cesium found in one kilogram of water in Tochigi and Tokyo were 2.6 and 0.21 becquerels, against the limit of 300 becquerels. The Fukushima prefectural government said it detected 19 becquerels of iodine in water taken on Sunday. Edano said that the detected radiation levels cannot be assumed to influence human health and there is no need to take steps to address the matter at present.
However, the Ministry of Health, Labor and Welfare said Saturday it has detected 308 becquerels of iodine in tap water taken on Thursday. Meanwhile, the education ministry said radioactive iodine or cesium was found in precipitation and dust in Tokyo, Saitama, Chiba, Kanagawa, Yamagata, Tochigi, Gunma, Iwate and Niigata prefectures in the samples collected in the 24-hour period from 9 a.m. Friday. The ministry said that research has already shown that radioactive materials in the air and tap water in Tokyo and other prefectures pose no threat to human health.
The amount of iodine detected in Tochigi was 540 megabecquerel per square kilometer, 190 megabecquerel in Gunma and 40 megabecquerel in Tokyo. The amount of cesium was 45 megabecquerel per square kilometer in Tochigi and 63 megabecquerel in Gunma. In a related event, the transport ministry has decided to make public radiation levels detected at Narita and Haneda airports on its website, in efforts to stress safety as some foreign airlines have been refraining from using Narita airport, located in Chiba.
According to the Japan Meteorological Agency, showers of 10 to 20 millimeters in a 24-hour period through late Monday are expected in the area where the nuclear power plant is located. Nuclear and Industrial Safety Agency said there would be no effect to human health even if humans are exposed to small amounts of the rain, given the current radioactivity level but, as a precaution, people should avoid getting wet by the rain. The headquarters of the government's nuclear-disaster prevention task force in Fukushima has instructed Fukushima prefectural government and local municipalities to give out iodine pills to evacuees fleeting from area 20-km radius of the Fukushima Daiichi nuclear pow
Japan Offers Little Response to U.S. Assessment
by Norimitsu Onishi - New York Times
A day after the top American nuclear official portrayed the situation at the troubled Fukushima Daiichi nuclear plant in graver terms than the government in Japan, United States’ most important Asian ally, Japanese officials attributed the diverging accounts on Thursday to a “delay” in sharing information.
But, in public at least, they offered no sharp rebuttals of the comments made by Gregory Jaczko, the chairman of the United States Nuclear Regulatory Commission, that there was little or no water left in a pool holding hundreds of spent fuel rods at Fukushima Daichi’s No. 4 reactor. He also said that resulting high radiations levels could “impact the ability to take corrective measures.”
Most Japanese citizens did not react to Mr. Jaczko’s comments, which presented a far bleaker assessment of the unfolding nuclear crisis, for the simple reason that they went nearly unreported in the Japanese news media. “There was a slight delay conveying to the U.S. side the information about whether or not there is water,” the government spokesman, Yukio Edano, said about the No. 4 reactor. Mr. Edano was responding to a question asked by a Japanese journalist at a morning news conference — the single one that dealt with Mr. Jaczko’s comments.
But American officials in Japan appeared to continue to operate on the assumption that the danger level was higher than described by the Japanese. On Thursday evening, the United States Embassy in Tokyo offered space aboard chartered planes for dependents of embassy personnel to any American showing up at the two Tokyo area airports, Haneda and Narita. Perhaps because of what such a move implied about Japan’s own assessment of the potential for nuclear fallout, the embassy declined to provide basic details of the flights.
Karen Kelley, a spokeswoman for the embassy, said that embassy officials organizing the charter flights “prefer” not to say how many planes were leaving Japan, how many passengers were aboard or what their immediate destinations were.
American officials also continued to advise Americans to evacuate a radius of “50 miles” from the Fukushima plant, in contrast to Japanese directives that people within about 12 miles evacuate while those between 12 and 19 miles stay indoors. The difference could leave hundreds of thousands of Japanese exposed to potentially dangerous levels of radiation.
Japanese officials did not flatly deny Mr. Jaczko’s comments but hedged. Asked about the level of water in the No. 4 reactor, Yoshitaka Nagayama, a spokesman for Japan’s Nuclear and Industrial Safety Agency, said: “Because we have been unable to go to the scene, we cannot confirm whether there is water left or not in the spent fuel pool at Reactor No. 4.”
The technical nature of the issue perhaps compounded the Japanese news media’s tendency to shield the government. Reporters who cover agencies and ministries are organized in press clubs that have cozy ties with officials and decide what to report — and what not to. The lack of attention received by Mr. Jaczko’s comments was consistent in the news media.
As a result, most residents here were far more concerned with the announcement that a major blackout was being planned to conserve electricity in the Tokyo area. Department stores in this city’s most famous shopping district, Ginza, remained dark as shoppers stayed home. Restaurants closed early as many companies continued to tell their employees to stay home or those working rushed into lightly crowded commuter trains to beat the blackout.
Workers frantically try to restore power at nuclear plant
Work continued at a frenetic pace Saturday to restore electric power to the crippled Fukushima No. 1 nuclear power plant and prevent the nuclear crisis from deteriorating. Tokyo Electric Power Co. officials said they hoped to transmit power to the No. 1 and No. 2 reactors on Saturday, which would be a huge breakthrough for workers in their weeklong fight to stave off a full meltdown.
A restoration of power could begin the process of supplying huge amounts of water to the reactor cores to cool the overheating fuel rods. TEPCO officials also hope to restore power to the four other reactors at the Fukushima No. 1 plant. But TEPCO does not know if the cooling systems, damaged in the March 11 earthquake and tsunami, will work properly if power is restored.
In addition, the operation is expected to be a time-consuming affair, given the complexity of restoring power and operating the cooling systems. A special rescue unit of the Tokyo Fire Department began water-spraying operations over the plant from about 2 p.m. Saturday to deal with another problem--replenishing depleted storage pools filled with spent fuel rods at the No. 3 reactor. Plans called for spraying up to 1,000 tons of water for as long as seven hours straight.
Work began Thursday on restoring electricity to the nuclear plant, which was cut off after the Great East Japan Earthquake and tsunami severed the power supply and damaged emergency generators, TEPCO officials said. Power lines of Tohoku Electric Power Co. used 40 years ago when the Fukushima plant was constructed were connected to temporary cables leading to the No. 1 and No. 2 reactors.
To reduce radiation exposure for workers, cables measuring a total of 1.5 kilometers were laid in a roundabout way into the plant. Temporary cables will be connected to power lines used by TEPCO to restore electric power to the No. 3 to No. 6 reactors. Work on restoring power to those four reactors is expected to be completed on Sunday.
If all goes well, electric power will first be restored to the No. 2 reactor, where some of the fuel rods in the core have become exposed and the suppression pool under the containment vessel has been damaged. Officials fear radioactive materials may have leaked to the outside atmosphere. If electricity can be restored, pumps would be used to supply large volumes of water to the core to cool the fuel rods.
Although the No. 1 to No. 4 reactors are all in a serious state, the outer building of the No. 2 reactor is the only one that has not been damaged by an explosion. Some experts feared that an explosion at the No. 2 reactor building was inevitable. But the actual damage there was less than expected. In fact, TEPCO officials have found that the electrical system for several of the pumps to the No. 2 reactor had not been damaged.
However, apparent steam rising from the No. 2 reactor building indicates that the temperature in the fuel storage pool has risen and that water is evaporating. Cooling the water in the pool is an urgent task, and is one reason officials want to restore power to the No. 2 reactor first. If the pumps are operational, they can be used to supply seawater to cool the coolant in the storage pool.
But before a pump can be used, another pump must be able to cool the first pump. In addition, many vents must be properly operated, and each step of the process has to be confirmed before the switch can be turned on. Alternative pumps have been prepared in case the pumps in the reactor have been damaged. A TEPCO official said if any piece of equipment failed, workers would have to pinpoint the problem, fix it or find another method that works.
Officials of the Nuclear and Industrial Safety Agency said they couldn't provide a timeframe for when the water would be supplied to the reactor cores because they did not know the extent of damage to various equipment. Emergency generators were partially restored on Saturday for the No. 5 and 6 reactors. In the water-spraying operation, a water-supply vehicle dubbed "Super Pumper" has been placed by the ocean to supply seawater.
Another vehicle that can spray up to 3.8 tons of water a minute from a height of 22 meters will send water in the direction of the No. 3 reactor. The storage pool containing spent fuel rods in the No. 3 reactor has a capacity of about 1,000 tons. If the water spraying continues for seven hours, it would supply about 1,260 tons of water, enough to fill even an empty storage pool.
The spray vehicle can be operated automatically so firefighters can avoid being exposed to radiation. But gasoline would have to be supplied to the vehicle two or three times over the course of the seven-hour operation. The Tokyo Fire Department on Saturday dispatched 14 vehicles and 102 firefighters to replace the first group of 139 firefighters. Other fire departments, including the Osaka municipal fire department, were considering dispatching vehicles to the Fukushima nuclear plant.
A CH-47 helicopter of the Ground Self-Defense Force flew over the Fukushima No. 1 plant to measure temperatures. The data will be used to determine the level of danger and assess the effects of the water spraying.
A Crisis That Markets Can’t Grasp
by Jeff Sommer - New York Times
The risks are clear enough in hindsight.
The Tokyo Electric Power Company built its Fukushima Daiichi nuclear power plant, nearly 40 years ago, to withstand a powerful earthquake — but not one as big as the 9.0-magnitude quake that struck on March 11. Or the tsunami that followed. Now, the terrible “ifs” accumulate, as Japanese engineers work to bring the station’s reactors under control. The ultimate price, in human life, may not be known for years.
The details of this catastrophe were unforeseeable, leading some to conclude this was a black swan event — something so wildly unexpected, so enormous in its impact, that it seems to defy our understanding and expose the fragility of our knowledge of the world. How could anyone have predicted this?
And yet in 2007, Tokyo Electric Power, or Tepco, escaped a disaster at its huge Kashiwazaki-Kariwa nuclear power station, on the opposite side of Japan, when that plant was damaged by a 6.8-magnitude earthquake — three times as large as what the plant was designed to withstand. Tepco basically lucked out last time. So perhaps a bigger question is whether the markets — in which we have come to place so much trust — can put a true price on outsize risks like this.
Many have compared the events unfolding in Japan with 9/11, Hurricane Katrina, the financial collapse of 2008 and 2009, the BP oil spill, and the uprisings in the Arab world — in that all have shown the limits of the collective wisdom of the marketplace. For a moment, all the swans seemed black. And those swans seemed blacker still when viewed through the lens of today’s hyperkinetic global markets. “There are an amazing number of crosscurrents in the world economy right now, more than I’ve seen in 25 years,” said Shawn Reynolds, a co-portfolio manager at Van Eck Associates in New York.
Like everyone else, corporate executives, economists and financial analysts in Tokyo, New York, London and beyond struggled last week to wrap their heads around the scale of this disaster. But, as they so often do, the analysts quickly fell to work assessing the implications for companies, markets and economies. At times, it was almost surreal: On Tuesday, Laszlo Birinyi, a prominent stock market analyst based in Westport, Conn., e-mailed around a succinct report titled “Nuclear Meltdowns at a Glance.”
This is what happens on Wall Street. If you’re not immersed in the culture, it might be hard to understand the cool calculus that is applied to world events, however dire those events might be. After the quake hit on March 11, the CNBC anchor Larry Kudlow told viewers, “The human toll here looks to be much worse than the economic toll, and we can be grateful for that.” He later apologized.
As the week wore on, and prices were gyrating on everything from a share of I.B.M. to a ton of copper, everyone was making back-of-the-envelope calculations. There is still no clear consensus about how far the economic shocks will reverberate. Many analysts are guessing — and then second-guessing — how the disaster will play out in northeast Japan. The first, tentative analysis seemed painfully obvious: the Japanese economy, already weak, perhaps already in a recession before calamity struck, will become even weaker.
On Friday, the Group of 7 industrialized nations took the rare step of intervening on the world’s foreign exchange markets to stem a sudden rise in the value of the yen. The currency had soared all week against the dollar — the exact opposite of what you might expect. But Japanese companies and investors were bringing their money home, to pay for huge rebuilding costs.
After its most harrowing week since the 1987 market crash, the Tokyo Stock Exchange found its footing on Friday. But it was a week like few others on the exchange: the Nikkei 225 stock index, Japan’s equivalent of the Dow Jones industrial average, fell 6.2 percent on Monday, plunged 10.5 percent on Tuesday, rebounded 5.7 percent on Wednesday and sank 1.4 percent on Thursday. It closed up 2.7 percent on Friday, at 9,206.75. The loss for the week totaled 1,048 points, or 10.2 percent.
If you happen to visit a Wall Street trading floor, walk over to the nearest Bloomberg terminal, type “WRST” and hit the green key that says “go.” WRST — that is short for “worst,” as in, “worst-case scenario.” The program enables Wall Street types to measure the level of risk in their investment portfolios under a variety of scary circumstances modeled on past crises, including the attacks of Sept. 11, 2001, the bankruptcy of WorldCom in 2002 and the devaluation of the Thailand’s currency, the baht, in 1997.
Such “what if” scripts are the stuff of modern Wall Street. Everyone runs them. Entire schools of financial analysis are devoted to examining historical market patterns in the belief that those patterns can predict the future. Such analysis, of course, depends on — and perhaps even encourages — our belief that tomorrow will be much like today. And all that despite the fine-print caveat on your 401(k) statement that reads, “Past performance is no guarantee of future success.”
Nassim Taleb, the author and market theorist who popularized the phrase “black swan” in his 2007 best seller, argues that we have psychological biases that blind us to the enormous role played by rare events — like a 9.0-magnitude earthquake. And yet we rely on history for guidance. On Wednesday, Mr. Birinyi’s research firm sent out another report, this one titled “S.& P. 500 Enters Modest Correction.” His firm predicted a slight decline in the American stock market. “If the averages hold,” the report said, “the S.& P. 500 will bottom at 1,232 on 3/31/11.” On Friday, the S.& P. 500 closed at 1,279.19, down 1.9 percent for the week.
Whatever else they may be, markets are immensely complex counting machines. They assign values to products, whether computer chips or potato chips, based on the canny appraisals and gut beliefs of people around the planet. From day to day, it is often hard, if not impossible, to know exactly why a certain price moved the way it did. Those daily movements are often just the white noise of global capitalism.
Then there are stretches of extreme volatility, periods when no one quite seems to agree about where anything is going. That may be part of what occurred last week: in the face of such a disaster, not even a short-term trend could congeal.
As yet, no one has reliable numbers about the scope of the destruction, said Al Tobin, who heads the property practice at Aon Risk Solutions, the risk management brokerage business of the Aon Corporation. The human toll, the economic toll — “no one knows the answer to that question,” he said. Given such uncertainty, the markets could remain even more volatile than usual, said Mohamed A. El-Erian, chief executive of Pimco, the world’s largest bond manager. “The market right now is trying to wrap its arms around the enormity,” he said. The verdict is not yet in.
Mr. El-Erian divided market strategists into two camps. The first, he says, views the events in Japan as “more than just a massive human tragedy; it also has significant implications for the global economy.” The second, he says, believes that the effects of this disaster, however heart-rending, will be transitory for most of us. But he doesn’t yet know which camp is right. “I don’t understand it fully yet,” he said, “but I am worried about it.”
Big economic questions remain unanswered. How would a severe slowdown in Japan, the world’s third-largest economy, affect the rest of the globe? How will Japan, which is already deeply in debt, pay for the reconstruction? Some are already arguing that the enormous, high-cost task of rebuilding could, over time, snap Japan out of its long economic funk.
Market strategists pride themselves on being able to digest vast quantities of data quickly. They tend to be practical and versatile people, the kind who can put aside emotions and philosophical questions when business calls.
On Thursday, a sunny St. Patrick’s Day in Manhattan, Jonathan Golub, the chief equity strategist for the giant Swiss bank UBS, said he was trying to master some of the intricacies of nuclear technology. “Now I find myself talking about fuel rods and cooling pools,” he said. It was, he said, not an uncommon type of experience: Before the financial crisis, even many people on Wall Street didn’t quite know what a credit default swap was. Before long, everyone was throwing around terms like “swaps” and “C.D.S.”
Mr. Golub said he felt for the people of Japan. He then went on to say, at a news briefing, that once the current market volatility subsided, this crisis should have only a marginal impact on America’s economy and stock market, whose prospects were quite good. He predicted that the S.& P. 500 would reach 1,425 by the end of the year.
Still, because supply chains have gone global like so much else, the disaster has already had a very real impact in the United States. Last week, Subaru slowed operations of its auto plant in Indiana because it could not obtain key parts from Japan. General Motors said it would shut a truck plant in Louisiana because of a shortage of parts. The semiconductor industry has also slowed because Japan is a major supplier of silicon wafers and other components.
Despite its position as the world’s No. 3 economy, Japan actually accounts for a relatively small — and shrinking — amount of the world’s collective economic output. It contributes about 9 percent of global gross domestic product, down from about 18 percent in the 1990s. And because of the rapid acceleration of the so-called BRIC countries — Brazil, Russia, India and China — and of other emerging markets, Japan’s contribution to growth of global G.D.P. is marginal.
Lakshman Achuthan, the managing director of the Economic Cycle Research Institute, a private forecasting group with an excellent track record, says that Japan’s economy, which he believes is already in recession, won’t appreciably affect the direction of the economy in the United States. The disaster, however, “ensures that Japan is in a recession,” he said. All of this, of course, assumes that the nuclear disaster, already the biggest since Chernobyl, doesn’t get too much worse.
The financial markets have always had a difficult relationship with nuclear power, largely because the costs — and potential risks — associated with nuclear plants are so huge. Day to day, nuclear power is cheap. But it is unclear how to accurately assess the cost of disposing of nuclear waste over the long run — or, perhaps, the cost of disasters like the one in Japan.
Robert N. Stavins, a professor at the Kennedy School of Government at Harvard and director of the university’s environmental economics program, has studied this issue for years. In an article in the centennial edition of the American Economic Review in February, Professor Stavins said that economists had not yet solved the “tragedy of the commons,” the quandaries that arise when many people, acting in their own self-interest, ultimately pose a threat to the common good. For instance, how should we allocate environmental costs to power producers? How should the environmental costs of various fuels — fossil or nuclear — be calculated?
So far, the markets seem to have failed to provide an answer to all of those questions. A National Research Council study last year tallied up environmental costs for various fossil fuels but did not even try to do so for nuclear power because the “power-plant risk modeling and spent-fuel transportation modeling” required was beyond the scope of the council’s study.
In the United States and elsewhere, governments have capped the liability of nuclear power producers. As a result, Professor Stavins said, “You can argue that the markets have never really had a chance to price nuclear power.” In the face of black swans — also known as fat-tail events, for the way their occurrences are distributed along a probability curve — market pricing may be impossible.
Martin Weitzman, another Harvard economist, wonders, for example, how Wall Street or anyone else could place an accurate price on the risk that an asteroid would crash into a major population center. In a controversial mathematical proof called, perhaps appropriately, the Dismal Theorem, he found that “it’s very hard to make reliable inferences about rare events on the tails of probability distributions.” Is the nuclear disaster under way in Japan such a rare event, one that economists cannot accurately price? It is too early to say, Professor Weitzman said. “It might be.”
It has been more than 30 years since Three Mile Island, and 25 since Chernobyl. In the ensuing years, one nuclear plant was completed in the United States and shut down before ever going into commercial operation. That was the Shoreham plant, on Long Island, which cost roughly $6 billion. Its fate was decided in 1989, when state officials concluded that Long Island could never be evacuated in case of a disaster.
The Fukushima accident has already caused a temporary slowdown in the nuclear industry. Officials in India and China said last week that they would re-evaluate their plans for building plants. Germany announced that it would temporarily shut seven nuclear plants that went online before 1980. The European Union made plans to test all the other nuclear power plants within its member countries.
In the United States, President Obama, who has promoted building new nuclear power plants, asked the Nuclear Regulatory Commission last week to review the safety of all United States plants. However imperfectly, the market will pass judgment.
Mr. El-Erian of Pimco says the outlook is unusually uncertain. Investors, like everyone else, should understand that the world is a risky place. “You need to use a whole range of approaches to understand the market in a situation like this,” he says, “and you need to be humble.” And, perhaps, accept a sober reality: the next black swan is out there somewhere.
Economists React: If Worst Happens in Japan, All Bets Are Off
by Phil Izzo - WSJ
Economists and others weigh in on the economic effects of the Japanese earthquake and tsunami.
- At this stage, it’s too early to come up with meaningful estimates of the overall impact of the terrible events in Japan. And, in economic and financial terms, the effects may be dominated by other challenges facing the global economy, including still elevated oil prices and rising interest rates. And much still hinges on the radioactive threat to Japan’s more urbanised areas: if that threat fails to transpire, the  Kobe quake provides a useful framework but if the worst happens, all bets are off. –Stephen King, HSBC
- The government is focused on controlling the mounting nuclear catastrophe. It is obvious to everyone that the national infrastructure has been impaired in a very important way: Ports are wrecked. The damage extends for hundreds of kilometers up and down the coast, according to satellite pictures. The capacity to produce electricity has been reduced by as much as 40% for now, and probably will be limited to less than 80% of pre-quake/tsunami potential for a very long time. Major companies are shut down because their plants are wrecked, or they cannot get electricity to operate, or they cannot ship their products, or their suppliers are impaired. We have yet to experience all the financial dislocations from this disaster. –Carl Weinberg, High Frequency Economics
- A lot of physical capital in Japan has been destroyed by the tsunami tragedy alone. And more importantly we will never be able to put a value on the loss of human life or the physiological trauma that has been brought upon the Japanese people from these events. But adding the potential for a serious nuclear accident to the equation is nearly incomprehensible… Policy makers should recognize that meaningful stabilizing actions can add enormous value to an incomprehensible situation where risk premiums have skyrocketed. I hope the BoJ understands that it is the one institution in the world that can act swiftly in financial markets to instill some sense of order. I do not believe that there are many Japanese policy makers (or market participants) who believe the “long term” prospects for Japan are so dim that we should be at equity valuations which are only a few percentage points from the levels reached in mid 2003 or early 2009. But we need believers with strong hands at the moment and that is what central banks are for! –David Zervos, Jefferies & Co.
- The near-term impact on Japanese growth is likely to be negative and potentially quite large. However, by the end of this year the reconstruction effort is likely to get underway and provide a substantial boost to growth. The big uncertainty about this disaster (and what sets it apart from other such disasters) is that roughly 10% of electricity generation capacity (both nuclear and coal) may be off line for a few months, until oil- and gas-fired plants can ramp up.. In the near-term, this could have major negative ramifications for the Japanese industrial sectors; some steel and automotive factories have already been closed. –Nariman Behravesh, IHS Global Insight
- Of the four broad commodity sectors , we believe energy markets are likely to be most affected since the country imports approximately 85% of its energy use, with nuclear power representing just over 10% of energy consumed in the country. In July 2007, when the Niigita-Chuestsu-Oku earthquake led to the shutdown of the Kashiwasaki-Kariwa nuclear plant, lost nuclear production capacity had to be replaced by other fuel sources such as thermal coal, natural gas, petroleum products (and direct crude burning). –Torsten Slok, Deutsche Bank Securities
- Though initially, the interruptions in Japan’s economy seem to have depressed oil prices, any turn to rebuilding there could have the opposite effect. Longer-term, any departure from nuclear plans could redouble any upward pressure on oil. (Here, of course, it is important to remember that oil prices were already above fundamentals as a result of the North African and Middle Eastern turmoil, which has not disappeared even as the headlines remain dominated by Japan.) –Milton Ezrati, Lord, Abbett & Co.
- The four prefectures most heavily affected by the Tohoku earthquake are Iwate, Miyagi, Fukushima and Ibaraki. This region accounts for about 6-7% of the overall Japanese economy… The latest earthquake is expected to inflict more human and physical damage than the Great Hanshin-Awaji Earthquake of 1995. Given the region’s character as a “trading” economy, there is also a need to consider impacts on other regions. Based on currently available information, we estimate that damages could exceed 15 trillion yen (3% of GDP). –Kyohei Morita and Yuichiro Nagai, Barclays Capital
- Economic output from the affected region plus its connections to the rest of the economy have darkened the outlook. The cost of rebuilding collides with low levels of insurance coverage, and may require tax increases or much higher government deficit spending. In addition, power supplies will be limited, affecting the broader economy, with transportation services disrupted to the north of Tokyo, and tourism likely to be drastically affected for months. –Ron Napier, SBC Global
- We’ve been asked by some customers whether Japan was a major seller of Treasury securities specifically in response to the Kobe earthquake in 1995. We don’t know definitively, but the TIC data does suggest some selling — presumably by insurers — in response to that earthquake, but not for several months after the event, which occurred in January of 1995. –Nancy Vanden Houten, Stone & McCarthy Research
Unemployment adds 9 million uninsured in U.S.
by Steven Reinberg - USA Today
The millions of Americans who lost their jobs and their health benefits during the recession often had no way to regain affordable health coverage, leaving them and their families at risk of financial ruin, according to a new report from The Commonwealth Fund.
The spate of layoffs during the recession catapulted 9 million more Americans — or 57% of those who had had health insurance in a job that evaporated over the last two years — into the ranks of the millions already uninsured. In addition, 19 million people anxiously seeking private coverage over the last three years were either turned down or could not find a plan that was affordable and met their needs, the report found.
The Biennial Health Insurance Survey also found a whopping 60% increase in skipped care due to cost in the past decade. The survey reported that medical debt problems and out-of-pocket spending costs were on the rise as well, with 29 million Americans using up their entire life savings to pay for medical bills and millions more unable to afford food, heat and rent due to medical payments.
"The report tells the story of the continuing deterioration of health care accessibility, efficiency, safety and affordability over the past decade," Commonwealth Fund president Karen Davis said during a noon press conference Tuesday. All this despite the fact that the United States spends more than any other country on health care, she added."Most recently it has failed the millions of Americans who lost their jobs during the recession and lost health benefits as well, leaving them with no place to turn for affordable health care coverage," Davis said.
The Commonwealth Fund report focused on the struggles of the 43 million adults under 65 who have lost their health insurance along with their job over the past two years. "The silver lining is that the Patient Protection and Affordable Care Act has already begun to bring relief to families," Davis added. "Once the new law is fully implemented, we can be confident that no future recession will have the power to strip so many Americans of their health security."
According to the report, people who lost employer-based health insurance found new coverage exceedingly hard to come by. In fact, only 25% of these people were able to find a source for health insurance, and only 14% continued their coverage through COBRA (Consolidated Omnibus Budget Reconciliation Act), which allows the employee to buy continued coverage under the employer-based health plan for a limited amount of time.
COBRA, even with increased government participation, is still unaffordable for most people who have lost their job, Davis explained. Moreover, 71% of Americans who tried to purchase an individual plan — 19 million people — found it difficult or impossible to find a plan they could afford or that met their needs, or they were turned down or charged extra because of a pre-existing condition, the researchers found.
The problem of the uninsured in the United States has been getting worse. During 2010, some 52 million Americans went without health insurance, compared to 38 million in 2001, the survey revealed. The hardest hit were adults with family incomes of less than $22,050 for a family of four (54 percent of whom were uninsured) and those with family incomes between $22,050 and $44,100 (41 percent of whom were uninsured). Among those with higher incomes, only 13% had no coverage during 2010, the researchers noted.
As health care costs continued to climb, both insured and uninsured had trouble affording care, the report states. In fact, an estimated 75 million Americans skipped doctor visits, prescriptions and recommended tests or treatments in 2010 because of costs. That's up from 47 million in 2001, the researchers noted. The most likely to skip care were the uninsured, with 66% reporting just that. Among people with insurance — some of whom had high deductibles — 31% skipped care due to cost, the survey found.
Moreover, out-of-pocket costs continue to soar. According to the report, 49 million working adults spent 10% or more of their income on these costs and premiums in 2010, an increase from 31 million in 2001. In addition, health insurance doesn't cover what it used to. A full 31% of insured Americans spent 10% or more of their income on health care in 2010, up from 19% in 2001.
With rising costs comes more medical debt, the report added. In 2010, 73 million Americans reported they had trouble paying for medical care or were saddled with medical debt. That's up from 58 million in 2005, the researchers pointed out. These debts have forced 29 million people to use their savings to pay medical bills, while 17 million have put these costs on credit cards and 22 million couldn't afford food, heat and rent due to medical bills. In addition, medical bills forced 4 million into bankruptcy, the researchers found.
Some of these problems will be dealt with by the Affordable Care Act. Already the act prevents insurance companies from denying coverage due to a pre-existing condition, allows people up to age 26 to stay on their parents' insurance plans, gives tax credits to small businesses, has no lifetime limits on benefits, and mandates coverage of some preventive care without co-payments.
When the provisions of the law are fully in effect in 2014, almost all of the currently uninsured will have access to comprehensive health insurance through Medicaid or private health plans. There will also be consumer protections and tax credits for those with low and moderate incomes to help them buy insurance. In addition, health plans will have to meet a basic benefit standard and will not be allowed to deny coverage or charge more because of pre-existing health conditions. The data for The Commonwealth Fund report were collected by a phone survey of a nationally representative sample of 4,005 U.S. adults between July and November 2010.
TARP’s Watchdog: A Tough Act to Follow
by Gretchen Morgenson - New York Times
The American taxpayer will lose a rare straight shooter when Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, leaves his post on March 30. In his frequent testimony before Congress and in the nine quarterly reports and 13 audits his office has published, Mr. Barofsky has served taxpayers well by speaking truth to the powers at the Treasury.
This has often put him at odds with the Treasury officials whose work he is charged with overseeing — a natural consequence for any watchdog with teeth. Using facts, figures and extensive interviews, Mr. Barofsky has questioned the effectiveness of the administration’s loan modification program and the Treasury’s initial refusal to require institutions that received taxpayer-financed bailouts to account for their use of TARP funds.
He has also criticized the bank-friendly terms of the rescue in 2008 of the American International Group; that deal was led by Timothy F. Geithner, the Treasury secretary, who at the time was president of the Federal Reserve Bank of New YorkUnlike others in Washington, Mr. Barofsky has also spoken passionately about the continuing problems posed by too-big-to-fail financial institutions.
In addition to his candor, Mr. Barofsky delivered a solid prosecutorial record. Since it was created in the fall of 2008, his office has won criminal convictions of 18 people, helped keep $555 million in taxpayer funds from being lost to fraud and provided the Treasury with 68 recommendations to protect taxpayers from losses in its programs. The office — known as Sigtarp, for special inspector general for the TARP program — continues to work on 153 civil and criminal investigations, including 74 involving executives and senior officers at financial institutions who received or applied for TARP money.
Working on behalf of the taxpayer did not seem to win Mr. Barofsky many friends at the Treasury. In April 2009, for example, the Treasury’s acting general counsel advised Mr. Barofsky that he would seek a legal opinion from the Justice Department about whether Mr. Geithner had supervisory authority over Sigtarp. Never mind that Congress had specifically created the special inspector general to be an independent entity within Treasury that did not report to the Treasury secretary. After Congress’s intention was pointed out to Treasury, its officials backed off.
But comments by unnamed Treasury officials deriding Mr. Barofsky and his work often appeared in news articles after he published his reports. In mid-February, when he announced his retirement, an unidentified Treasury source told The Washington Post that the news was “a nice valentine to us.”
Now comes the business of replacing Mr. Barofsky — a decision that President Obama must make. In his resignation letter to Mr. Obama, Mr. Barofsky said that his office’s team, led by its deputy special inspector general, Christy Romero, is “fully prepared to continue advancing” its mission. Mr. Barofsky declined to comment about who might replace him.
With 153 continuing investigations covering possible accounting fraud, securities fraud, insider trading, mortgage servicer improprieties, obstruction of justice and other possible misconduct, it could not be more important that the person who takes over continues his vigorous approach. The inspector general’s mission will continue until the last TARP dollar has been repaid and a forceful pursuit of these inquiries sends a powerful message that at least some miscreants are being held accountable. Recently, there was roughly $160 billion outstanding among TARP recipients.
Government rules for filling vacancies in executive agencies like Mr. Barofsky’s give Mr. Obama three choices. If the president does nothing, Ms. Romero will take over temporarily as acting head. The president can also name someone who has already been appointed to another executive agency position and has therefore received the Senate’s consent. Finally, Mr. Obama could appoint someone else from within Sigtarp. An administration official would say only that the president would nominate the most qualified person for the post as soon as possible.
Behind the scenes, however, a Treasury official is arguing on Capitol Hill that no one from inside Sigtarp be appointed to head the office, according to three people who were briefed on the matter but who are unauthorized to speak publicly about it. That official, Eric Thorson, the inspector general for the Treasury Department, has spoken against an appointment of Ms. Romero or other internal candidates, these people said. He has not yet identified a preferred candidate but appears to be trying to get a blessing from Congress for an outsider to be appointed.
A phone message left with Mr. Thorson on Friday was returned by Rich Delmar, counsel to the Treasury inspector general. He said that with respect to Ms. Romero, Mr. Thorson “doesn’t know her and has no opinion on her qualifications for this position.” Unlike Mr. Barofsky, Mr. Thorson — in his role as inspector general of the Treasury — reports to Mr. Geithner. When asked whether higher-ups in the department were directing Mr. Thorson to Steve Adamske, a Treasury spokesman, said no.
Senator Charles Grassley, the Iowa Republican who has worked to strengthen the independence of agency-appointed inspectors general, has often praised Mr. Barofsky’s approach to oversight. Regarding his replacement, Mr. Grassley said: “The principle of advise and consent is especially important here because TARP has been so controversial and involved hundreds of billions of tax dollars. The Vacancies Act is intended to protect this check on the president’s power and give the people’s branch of government the opportunity to make sure the special inspector general’s office remains independent and effective.”
Last week, Mr. Barofsky testified before the Senate for the last time as special inspector general. His comments were, typically, and refreshingly, straightforward.
“For all its help in rescuing the financial system from the brink of collapse, TARP may have left a truly frightening legacy,” he said. “It has increased the potential need for future government bailouts by encouraging the too-big-to-fail financial institutions to become even bigger and more interconnected than before, therefore increasing their ultimate danger to the financial system, while at the same time, Treasury’s mismanagement of TARP and the resulting deep unpopularity of the program have decreased the government’s ability to actually accomplish such bailouts in the future, even if necessary.”
Later this spring, Mr. Barofsky will become an adjunct professor at the School of Law at New York University and a senior fellow at its Center on the Administration of Criminal Law. His anonymous critics at the Treasury will probably not miss him, but taxpayers will. ?
Stress Test for the Global Supply Chain
by Steve Lohr - New York Times
Tony Prophet, a senior vice president for operations at Hewlett-Packard, was awakened at 3:30 a.m. in California and was told that an earthquake and tsunami had struck Japan. Soon after, Mr. Prophet had set up a virtual “situation room,” so managers in Japan, Taiwan and America could instantly share information.
Mr. Prophet oversees all hardware purchasing for H.P.’s $65-billion-a-year global supply chain, which feeds its huge manufacturing engine. The company’s factories churn out two personal computers a second, two printers a second and one data-center computer every 15 seconds.
While other H.P. staff members checked on the company’s workers in Japan — none of whom were injured in the disaster — Mr. Prophet and his team scrambled to define the impact on the company’s suppliers in Japan and, if necessary, to draft backup plans. “It’s too early to tell, and we’re not going to pretend to predict the outcome,” Mr. Prophet said in an interview on Thursday. “It’s like being in an emergency room, doing triage.”
The emergency-room image speaks volumes. Modern global supply chains, experts say, mirror complex biological systems like the human body in many ways. They can be remarkably resilient and self-healing, yet at times quite vulnerable to some specific, seemingly small weakness — as if a tiny tear in a crucial artery were to cause someone to suffer heart failure.
Day in and day out, the global flow of goods routinely adapts to all kinds of glitches and setbacks. A supply breakdown in one factory in one country, for example, is quickly replaced by added shipments from suppliers elsewhere in the network. Sometimes, the problems span whole regions and require emergency action for days or weeks. When a volcano erupted in Iceland last spring, spewing ash across northern Europe and grounding air travel, supply-chain wizards were put to a test, juggling production and shipments worldwide to keep supplies flowing.
But the disaster in Japan, experts say, presents a first-of-its-kind challenge, even if much remains uncertain. Japan is the world’s third-largest economy, and a vital supplier of parts and equipment for major industries like computers, electronics and automobiles. The worst of the damage was northeast of Tokyo, near the quake’s epicenter, though Japan’s manufacturing heartland is farther south. But greater problems will emerge if rolling electrical blackouts and transportation disruptions across the country continue for long.
Throughout Japan, many plants are closed at least for days, with restart dates uncertain. Already, there are some ripple effects worldwide: for example, a General Motors truck plant in Louisiana announced on Thursday that it was shutting down temporarily for lack of Japanese-made parts. More made-in-Japan supply-chain travails are expected. “This is going to be a huge test of global supply chains, but I don’t think it will be a mortal blow,” says Kevin O’Marah, an analyst at Gartner-AMR Research. “I think that over all we’ll see how resilient and quick-learning these networks have become.”
The good news for the world’s manufacturing economy is that the sectors where Japan plays a vital role are fairly mature, global industries. Consider computing and electronics. For major components, like semiconductors, production is now spread across several countries. By contrast, in the early 1990s, virtually all 486-microprocessors — the engines of the most powerful personal computers of the time — were made at a single Intel factory near Jerusalem.
Japan’s importance in the semiconductor industry as a whole has receded in recent years, as more production has shifted to South Korea, Taiwan and even China. Japan accounts for less than 21 percent of total semiconductor production, down from 28 percent in 2001, according to IHS iSuppli, a research firm.
Still, Japan produces a far higher share of certain important chips like the lightweight flash memory used in smartphones and tablet computers. Japan makes about 35 percent of those memory chips, IHS iSuppli estimates, and Toshiba is the major Japanese producer. But South Korean companies, led by Samsung, are also large producers of flash memory. Apple, like all major companies these days, treats its supply-chain operations as a trade secret.
But industry analysts estimate that Apple buys perhaps a third of its flash memory from Toshiba, with the rest coming mainly from South Korea. The lead time between chip orders and delivery is two months or more. A leading customer like Apple will be first in line for supplies, and it has inventories for several weeks, analysts say. So there will be little immediate impact on Apple or its customers, but even Apple will likely be hit with supply shortages of crucial components in the second quarter, predicts Gene Munster, an analyst at Piper Jaffray.
The field of buying and shipping supplies has been transformed in the last decade or two. Globalization and technology have been the driving forces. Manufacturing is outsourced around the world, with each component made in locations chosen for expertise and low costs. So today’s computer or smartphone is, figuratively, a United Nations assembly of parts. That means supply lines are longer and far more complex than in the past.
The ability to manage these complex networks, experts say, has become possible because of technology — Internet communications, RFID tags and sensors attached to valued parts, and sophisticated software for tracking and orchestrating the flow of goods worldwide. That geographic and technological evolution, in theory, should make adapting to the disaster in Japan easier for corporate supply chains. “In the past, when you had a disruption, the response was regional,” says Timothy Carroll, vice president for global operations at I.B.M. “Now, it’s globalized.”
Most anything can be tracked, but it takes smart technology, investment and effort to do so. And as procurement networks become more complex and supply lines grow longer — “thin strands,” as the experts call the phenomenon — the difficulty and expense of seeing deeper into the supply chain increases. “Major companies have constant communications and deep knowledge of primary suppliers,” says David B. Yoffie, a professor at the Harvard Business School. “It’s in the secondary layers of suppliers — things that are smaller, barely noticed — where the greater risk is.”
Indeed, supplies of larger, more costly electronic components, like flash memory and liquid crystal displays, tend to grab the most attention. But, says Tony Fadell, a former senior Apple executive who led the iPod and iPhone design teams, “there are all kinds of little specialized parts without second sources, like connectors, speakers, microphones, , batteries and sensors that don’t get the love they deserve. Many are from Japan.” Lacking some part, even if it costs just dimes or a few dollars, can mean shutting down a factory, Mr. Fadell adds.
A recent analysis by IHS iSuppli, taking apart a new Apple iPad2, identified five parts coming from Japanese suppliers: flash memory from Toshiba, random-access memory for temporary storage from Elpida Memory, an electronic compass from AKM Semiconductor, touch-screen glass from Asahi Glass, and a battery from Apple Japan.
Further down the supply chain lie raw materials. Trouble for a supplier to a company’s parts supplier can cascade across an industry. For example, reports that a Mitsubishi Gas Chemical factory in Fukushima was damaged by the tsunami have fanned fears of a coming shortage of a resin — bismaleimide triazine, BT — used in the packaging for small computer chips in cellphones and other products.
Two Japanese companies are the leading producers of silicon wafers, the raw material used to make computer chips, accounting for more than 60 percent of the world’s supply. The largest is the Shin-Etsu Chemical Corporation. Its main wafer plant in Shirakawa was damaged by the earthquake, and the factory is down. “The continuing violent aftershocks are complicating the inspection work,” said Hideki Aihara, a Shin-Etsu spokesman in Japan, on Friday. “Right now we can’t say how badly it was damaged or how long it might take to get started.”
Shin-Etsu does have factories outside Japan. “But the most advanced manufacturing and silicon-growing processes are done in Japan,” says Klaus Rinnen, a semiconductor analyst at Gartner. And growing silicon ingots, which are then sliced into wafers, is a lengthy, delicate process that will be hampered by power failures or other disruptions, he says. Big chip makers like Intel, Samsung and Toshiba typically hold inventories of silicon wafers for four to six weeks of production. “But after that, it will get tougher,” Mr. Rinnen says.
The Japan quake, some experts say, will prompt companies to re-evaluate risk in their supply chains. Perhaps, they say, there will be a shift from focusing on reducing inventories and costs, the just-in-time model, pioneered in Japan, to one that places greater emphasis on buffering risk — a just-in-case mentality.
Adding inventories and backup suppliers reduces risk by increasing the redundancy in a supply system. It is one way to enhance resilience, experts say, but there are others. They point to an example that is well known to supply-chain mavens. In 1997, there was a fire at a plant of one of Toyota’s main suppliers, Aisin Seiki, which made a brake valve used in all Toyota vehicles. Because of the carmaker’s just-in-time system, the company had just two or three days of stock on hand. So the fire threatened to halt Toyota’s production for weeks.
But Toyota and teams of suppliers in the company’s supply-chain network worked round the clock for days to design and set up alternative production sites. Toyota’s assembly plants reopened after being shut down for just two days. “That kind of resilient capability, I think, is what we’ll see in Japan over the weeks and months ahead to put these supply chains back on their feet,” says Charles H. Fine, a professor at the Sloan School of Management at the Massachusetts Institute of Technology.
For global operations managers like Mr. Prophet of H.P., the Japanese disaster will be a severe test of their supply networks and systems. Once the triage stage is passed, though, it will be a learning experience as well. “We’ll do a retrospective on what worked best and what didn’t, and how to change things to make our supply chain more resilient,” he says. ?
Easy Money and the Decapitalization of America
by Kevin Dowd and Martin Hutchinson
In the Gospel of Matthew, Jesus recounts the Parable of the Talents: the story of how the master goes away and leaves each of three servants with sums of money to look after in his absence. He then returns and holds them to account: the first two have invested wisely and give the master a good return, and he rewards them. The third, however, is a wicked servant who couldn't be bothered even to put the money in the bank where it could earn interest; instead, he simply buried the money and gave his master a zero return; he is thrown into the darkness, where there is weeping and wailing and gnashing of teeth.
In the modern American version of the parable, the eternal truth of the original remains — good stewardship is as important as it has always been — and there is still one master (the American public), albeit a master in name only, who entrusts his capital to the stewardship of his supposed servants.
Instead of three, however, there are now only two (the Federal Reserve and the federal government); they are not especially wicked, but they certainly are incompetent: they run amok and manage to squander so much of their master's capital that he is ultimately ruined, and it is he rather than they who goes on to suffer an eternity of wailing and teeth-gnashing, not to mention impoverishment. For their part, the two incompetent servants deny all responsibility, as good politicians always do, and — since there is no accountability (let alone biblical justice) in the modern version — ride off into the sunset insisting that none of this was their fault.
Future Asset Bubbles?
The Federal Reserve is supposed to be a monetary servant, but its masters in the general public don't seem to be able to control it. Its actions keep distorting returns in the economy and creating bubble after bubble.
Since past expansionary monetary policies led to bubbles, we should expect the even more expansionary policies pursued since the onset of the current financial crisis to produce new bubbles, and this is exactly what we find. Within the United States there are at least three very obvious bubbles currently in full swing, each fuelled by the flood of cheap money: Treasury bonds, financial stocks, and junk bonds. We can be confident that these bubbles will come to unpleasant ends like their predecessors, but on a potentially much grander scale. The bubbles will then burst in quick succession.
We have to consider also the nontrivial knock-on effects: the Treasuries collapse will trigger an immediate financing crisis for governments at all levels, and especially for the federal government, one that will likely involve the downgrading of its AAA credit rating, and so further intensify the government's by-then already chronic financing problems. Nor should we forget that these financial tsunamis are likely to overwhelm the Federal Reserve itself: the Fed has a highly leveraged balance sheet that would do any aggressive hedge fund proud; it too will therefore suffer horrendous losses and is likely to become insolvent. The events of the last three years will then look like a picnic.
There is also the problem of resurgent inflation. For a long time, the United States has been protected from much of the inflationary impact of Federal Reserve policies: developments in IT and the cost reductions attendant on the outsourcing of production to East Asia had the impact of suppressing prices and masking the domestic impact of Fed policies.
Instead, these policies have produced a massive buildup in global currency reserves: these have increased at 16% per annum since 1997–1998 and caused soaring commodity prices and rampant inflation in countries such as India (current inflation 16%) and China (maybe 20%, judging by wage inflation, and definitely much higher than official figures acknowledge), whose currencies have been (more or less) aligned to the dollar.
U.S. inflation was already rising by 2008 (annual rate 3.85%), but this rise was put into reverse when bank lending and consumer spending then fell sharply. However, the huge additional monetary overhang created over the last couple of years (or, to put it more pointedly, the vast recent monetizations of government debt) must eventually flood forth — and, when it does, inflation is likely to rise sharply.
Once inflation makes a comeback, a point will eventually come when the Fed policy has to go into sharp reverse — as in the late 1970s, interest rates will be hiked upwards to slow down monetary growth. The consequences would be most unpleasant: the U.S. would experience the renewed miseries of stagflation — and a severe one at that, given the carnage of a renewed financial crisis and the large increases in money supply working through the system. Moreover, as in the early 1980s, higher interest rates would lead to major falls in asset prices and inflict further losses on financial institutions, wiping out their capital bases in the process. Thus, renewed inflation and higher interest rates would deliver yet another blow to an already gravely weakened financial system.
The Decapitalizing Effects Of Repeated Bubbles
Federal Reserve monetary policy over the past 15 years or so has produced bubble after bubble, and each bubble (or each group of contemporaneous bubbles) is bigger in aggregate and more damaging than the one that preceded it. Each bubble destroys part of the capital stock by diverting capital into economically unjustified uses — artificially low interest rates make investments appear more profitable than they really are, and this is especially so for investments with long-term horizons: that is, in Austrian terms, there is an artificial lengthening of the investment horizon.
These distortions and resulting losses are magnified further once a bubble takes hold and inflicts its damage, too: the end result is a lot of ruined investors and "bubble blight" — massive overcapacity in the sectors affected. This has happened again and again, in one sector after another: tech, real estate, Treasuries, and now financial stocks, junk bonds, and commodities — and the same policy also helps to spawn bubbles overseas, mostly notably in emerging markets right now.
We also have to consider how periods of prolonged low (and often sub-zero) real interest rates have led to sharply reduced saving and, hence, to lower capital accumulation over time. U.S. savings rates have fallen progressively since the early 1980s, falling from nearly 12% to a little over 6% by the end of the decade, bottoming out at 1.4% in 2005. It then recovered somewhat, but even after the shock of 2008, the savings rate rose in 2009 to only 5.9% — well below its long-term average of about 8% — and the most recent data suggests that it is now declining again.
Even without federal budget deficits, it is manifestly obvious that such savings rates are inadequate to provide for the maintenance, let alone growth, of the U.S. capital stock (or, for that matter, its citizens' desires for a secure retirement): the U.S. economy is effectively eating its own seed-corn.
Now add in the impact of federal budget deficits of around 10% of GDP and we see that the deficits alone take up more than the economy's entire savings, without a penny left over for investment. It then becomes necessary to supply U.S. capital needs by foreign borrowing — hence the persistent and worrying balance of payments deficits — but even this borrowing is not enough.
Hence over the long term, low interest rates are decapitalizing the U.S. economy, with damaging long-term implications for its residents' living standards: in the long run, low interest leads to low saving and capital decline, and they in turn lead to stagnation and eventually to the prospect of declining living standards as America ceases to be a capital- rich economy.
Not to put too fine a point on it, savings have been suppressed for close to two decades, preventing the natural accumulation of capital as baby boomers have drawn closer to retirement, while much of the country's magnificent and once unmatched capital stock is being poured down a succession of rat holes.
The Federal Government Destroys Capital
We should also see these problems in the context of a vast number of other government policies that are decapitalizing the U.S. economy. The wastefulness of government infrastructure projects is an obvious case in point. One instance is the Amtrak proposal for a Boston-Washington highspeed railroad, costed at $118 billion, compared to $20 billion equivalent for similar lines in France and under $10 billion for a line recently opened in China. Even more striking is the ARC tunnel project between Manhattan and New Jersey, recently killed by Gov. Chris Christie because of its excessive cost of $8.7 billion plus likely overruns.
Yet the Holland Tunnel, performing an identical function and opened in 1927, came in at $48 million, equivalent to $606 million in 2010 dollars. Even allowing for the higher real wages of today's construction labor, and a certain amount of fiddling of the consumer price statistics by the Bureau of Labor Statistics, it should have been possible to bring the ARC project in at under $2 billion, less than a quarter of the actual projected cost. The high costs of infrastructure problems boil down to the onerous regulations under which such projects are carried out, such as the Davis-Bacon mandate to use union labor on federally funded projects and a whole welter of health, safety, and environmental regulations.
We also have to consider the impact of government fiscal policy. Large government deficits reduce capital accumulation insofar as they crowd out private investments; large levels of government debt also reduce capital accumulation in that they imply large future burdens on taxpayers, and these burdens reduce their ability (not to mention their willingness) to save. The government's deficits have risen from 1.14% of GDP in 2007 to a projected 10.64% of GDP in 2010.
In the process, U.S. government official gross debt has grown from almost 64% of GDP in 2007 to a little over 94% of GDP in 2010. The rate at which it is rising would suggest that the U.S. government's credit rating will soon be threatened, even without the prospect of an imminent Treasuries collapse; indeed, this figure alone portends a rapidly approaching solvency crisis.
Yet even these grim figures are merely the tip of a much bigger iceberg. The official debt of the United States, large as it is, is dwarfed by its "unofficial" debt: the prospective expenditures on entitlement programs — Social Security, Medicare, Medicaid, food stamps, and more — to which the federal government has committed itself, but not provided for — that is, additional debts that future taxpayers are expected to pay for.
Recent estimates of the size of this debt are hair-raising. Using CBO figures, Laurence Kotlikoff recently estimated that this debt was now $202 trillion. That is 15 times the "official" debt and nearly 14 times annual U.S. GDP — implying that the average U.S. citizen would need to work almost 14 years simply to pay off this debt: no wonder Kotlikoff concluded that the United States is in fact bankrupt. This burden implies punitive tax rates on future employment income (and hence major disincentives to work or at least to declare income), but will also greatly discourage future capital accumulation as investors will (rightly) fear that there is little point building up investments that will eventually be expropriated by the government.
Long-Term Outlook For The U.S. Economy
The long-term effect of U.S. economic decapitalization will not necessarily be apparent in day-to-day headlines; instead, the process will be almost glacial: mostly slow but utterly devastating in its longer-term impact. Americans might also take heed from the experiences of other once-wealthy countries whose economies were crippled by progressive decapitalization:
• Britain was a wealthy country at the very frontier of technological advance in the late 1930s. However, when World War II broke out, the government took complete control of the economy and seized its entire capital stock, foreign investments and all. Over the next decades a bloated state sector and onerous controls deprived British industry of the capital it needed to refit, and the country went into long-term economic decline. By the late 1970s Britain was being referred to as the new "sick man of Europe," and British living standards were 30% lower than Britain's European competitors' and half those in the United States.
• Argentina, one of the world's wealthiest economies in 1930, with enormous foreign exchange reserves from wartime trading as late as 1945, embarked on wildly extravagant schemes of corruption, nationalization, and income redistribution under its 1946–1955 dictator Juan Perón. Once Perón was removed, successive governments tried to restore Argentina's position — it was after all superbly endowed with resources and in the 1940s had a highly competitive education system — but without adequate access to capital were unable to do so. The result was progressive impoverishment, repeated debt defaults, and the country's descent into its continuing socialist squalor.
What Can Be Done?
Thankfully, such a dire future is not inevitable, but radical reforms will be needed if it is to be avoided. Any reforms need to be based on a diagnosis of the underlying problems, and one of the most important of these is, quite simply, that U.S. policymakers place too much emphasis on the short term and fail to take adequate account of longer-term consequences. Nor should this be any surprise: the political environment in which they operate — including the fact that they are accountable over limited terms of office — encourages them to focus on the short term, so it is only to be expected that they would respond to such incentives: what happens after their watch is not their problem.
As far as monetary policy is concerned, these short-termist incentives create an inbuilt expansionary bias that has manifested itself in repeated asset price bubbles and now the prospect of renewed inflation, and the solution is to build in barriers to contain this bias. The key here is to reduce or — better still — eliminate the Fed's discretionary powers; this would put a stop to those who would meddle with the shortterm interest rate and would thus head off the asset bubble cycle at its root. Interest rates would then be higher (and more stable) than they have been over recent years and so provide a stronger incentive for saving. One possible reform would be to end the Fed's "dual mandate" and give it a single overriding objective — namely the maintenance of price stability — and reform its institutional structure to protect its independence from the federal government.
Reformers could take their lead from the late lamented Bundesbank: instead of a federated central bank accountable to the federal government and headquartered in the federal capital, the American central bank could be reconstituted as a unitary central bank accountable to the states and relocated in the heartland of the nation: our recommended choice would be St. Louis, which also has the attractions of a strong monetarist tradition and of being less susceptible to the influences of Washington or Wall Street. The ideal Fed chairman would then be more concerned with the St. Louis Post-Dispatch than the Washington Post or the Wall Street Journal, and even the feeblest appointee would be strong enough to stand up to the badgering of east coast politicians and financiers.
A far better reform — and a far more appropriate one, given the Fed's dismal record since its founding — would be to abolish the Federal Reserve altogether and re-anchor the dollar to a sound commodity standard. A natural choice would be a gold standard, with the currency issued by commercial banks but pegged to and redeemable in gold. Interest rates and money supply would no longer be determined by central bankers but by market forces subject to the discipline of the gold standard. An alternative anchor might be some broader commodity basket, which has the additional attraction of promising greater price-level stability than a gold standard.
Yet monetary reform on its own will not be enough to reverse the destruction of U.S. capital: the federal government also needs to reform its own vast range of capitaldestroying policies. Such reforms would include, among others, the following:
(1) Government should stop meddling in the financial system; it should stop such programs as mortgage guarantees and deposit insurance, implement measures to prevent future bailouts, and abolish governmentsupported enterprises such as Fannie Mae and Freddie Mac, whose machinations have devastated the U.S. housing market.
(2) Reformers should acknowledge the tendency of government to grow and to be excessively focused on the short term, and should push for a systematic program that will sharply reduce the size and scope of government and limit any future growth. (3) A range of tax reforms is needed to abolish tax-based incentives to borrow and remove tax penalties from saving, investing, and the transfer of capital between generations. (4) Government should tackle major budget imbalances.
This requires a reversal of current expansionary fiscal policies and, for once, the United Kingdom provides a positive role model: the U.K. faces similar problems, but the new U.K. coalition government acknowledges these problems and is in the process of implementing major cutbacks to take Britain back from the brink. The United States needs to do the same.
The longer-term fiscal prospects for both countries are of course dire, but the good news is that most actuarial deficits are not so much hard-and-fast debt obligations as projections of what will happen if current policies persist. There are obvious economies that can be made once the U.S. government finds the courage to tackle these problems.
Were we given to flippant remarks, we would be tempted to suggest that the situation is "desperate but not serious" — and more tea parties would be a good start. But then, being British ourselves, we would approve of tea parties, wouldn't we?
City uneasy over proposed 'coco' bonuses for Barclays executives
by Jill Treanor - Guardian
Barclays risks a shareholder backlash over its plans to revolutionise the way it pays its top bankers amid concerns that the new scheme will be too lucrative for senior executives. Leading City shareholders, who are being asked to vote on the change at the Barclays annual meeting next month, are concerned that the terms being proposed for senior staff – including chief executive Bob Diamond – are too generous and will prove costly for investors in the bank.
Barclays wants to issue contingent convertible bonds – "cocos" – to its key bankers, traders and executives as a form of payment alongside shares and cash. One senior investor said: "A lot of shareholders are very resistant. Cocos are very expensive for shareholders and very lucrative for the directors."
While investment industry sources caution that it is too early to say that big investors will vote against the scheme, because the annual meeting is still more than a month away, they say that the head of the bank's remuneration committee, Sir Richard Broadbent, is aware of the reservations. Cocos are a new type of financial instrument that can convert into equity during times of severe stress; they have previously been issued, by a handful of banks, only to raise fresh capital. By using cocos as a component of bonuses, Barclays is moving away from the traditional way of using shares. The cocos Barclays intends to use to pay its staff do not convert into equity, however, but merely fall away once the bank's capital ratio falls below 7%.
The Barclays cocos would pay a 7% coupon – or rate of interest – annually, not compounded. This suggests that Diamond – who could have £2.3m of his bonus paid this way over three years – would be in line for an extra £160,000, provided the bank's capital ratios do not fall below 7%. Some investors are concerned that though the Financial Services Authority (FSA) has not given Barclays the go-ahead to issue cocos for capital raising purposes the bank is prepared to issue synthetic cocos just for its staff. Another investor said: "Some of us don't like the use of cocos because of the high coupon."
The response of investors to Barclays' plan is being scrutinised by rival banks who are also considering whether cocos might be a useful way to pay high-earning staff, who have been forced to take much less of their bonuses in cash as a result of regulatory changes. They are also looking for evidence that investors are concerned about the amounts of shares and other instruments being handed to bankers.
New FSA regulations have forced Barclays to reveal it is the most generous of the UK banks towards its employees, paying an average of £2.4m to "code staff" – those who can have influence over the running of the bank – compared with £1.1m at Royal Bank of Scotland and £1m at HSBC. The Project Merlin agreement between the banks and the government also forced into the open the scale of some of the highest pay deals on offer in the City.
Barclays admitted that the five of its non-boardroom members who fell into the Project Merlin category shared £110m when share schemes from previous years paid out earlier this year. These disclosures from Barclays and other banks are the first time that investors have had evidence of pay deals outside bank boardrooms, and confirmation that the highest-paid staff do not have a seat at the boardroom table.
UK unemployment surges to 17-year high
by Louisa Peacock - Telegraph
Unemployment has reached a 17-year high of more than 2.5m and youth joblessness is at record levels, official statistics showed.
The total number of people unemployed increased by 27,000 in the three months to January to 2.53m, the highest figure since 1994, the Office for National Statistics said. The rate of unemployment rose to 8pc, higher than forecast and 0.1pc up on the previous quarter. More than one in five young people were trapped in unemployment, with a youth jobless rate of 20.6pc, up 0.8pc over the period.
Public sector employment fell by 45,000 in the final quarter of 2010 to 6.2m, even before the full impact of the Government's spending cuts started to take effect. However, the number of Britons claiming unemployment benefit showed an unexpected, sharp drop in February. The total claiming Jobseeker's Allowance fell by 10,200 last month to 1.45m, the biggest reduction since last June. The number of people classed as economically inactive increased - up by 43,000 to 9.33m, including 2.3m looking after a family.
Samantha O'Byrne, head of resourcing at Grant Thornton, said: “Today’s further rise in unemployment by 0.1pc is a clear signal to the Chancellor, one week before he is due to deliver his Budget, that serious measures need to be taken to curb the unemployment rate. “The shrinking economy over the last quarter will have had an impact on the already unsteady employment market and the Government is facing a mammoth task in returning UK plc to growth. Speeding up job creation is the only real solution to the problems the country is facing as unemployment has now reached its highest rate since 1994."
Employment Minister Chris Grayling said: "There is good news and bad news in these figures. There's been a welcome drop in the number of people on benefits, and the increase in full-time private sector jobs is a step in the right direction. "But the rise in overall unemployment is a real concern and underlines the need to press ahead with policies which will further stimulate growth in the private sector. "For those on benefits that are now looking to make the transition into the workplace our new Work Programme will provide tailored support to get them into jobs."
The Government's flagship new Work Programme will be in place by the summer and will offer personalised, tailored support to get people back into jobs. Other data revealed that the number of over-65s in work increased by 56,000 in the latest quarter to reach 900,000, the highest since records began in 1992. There was also a record number of 50 to 64-year-olds in work - up by 25,000 to 7.3m.
Average earnings increased by 2.3pc in the year to January, up by 0.5pc on the previous month, mainly driven by bonus payments in the finance and business services sector. There were almost half a million job vacancies in the three months to February, up by 24,000 over the previous quarter, although that figure included 29,000 temporary jobs for this year's census. The TUC branded the latest unemployment figures "shocking".
Brendan Barber, general secretary of the TUC, said: "These figures show that the jobs recovery is still some way off. Public sector employment has already fallen 39,000 between September and the end of last year, and with thousands more redundancies still to come – for example in local authorities – this is no time to be cutting back on support programmes for the unemployed. “This Government’s economic policies risk making high joblessness a permanent feature of our economy. It must change course before it’s too late.”
Image of France as a generous welfare state marred by grim reality
by Phillip Inman - Guardian
Thousands will pour into the Galeries Lafayette this week to enjoy the last few days of the spring sales and beat the recession. Tourists and Parisians will find huge discounts on designer clothes on every floor of the ornately domed department store that dominates Boulevard Haussman, Paris's main shopping street. As a measure of confidence, the sales present a gloomy picture of France's middle classes and their appetite for shopping. Marc Jacobs, Chloé and Lacoste offer 30% discounts. Givenchy dresses are knocked down by 40% and the Galleries' own ranges can be bought for 50% less than the list price. Only Prada, Dior and a handful of international brands hold their value.
Like their British counterparts, French shoppers can only be enticed with massive bargains. Technically, France like Britain, has escaped recession. But to ordinary French workers, blue and white collar, the pain of the last two years lingers. Shopping is expensive even in the sales, especially when a mix of high taxes and punishing national insurance leaves you with one of the lowest rates of take home pay of any western country. Only Belgium and Hungary exceed its average 45% tax on pay.
France appears to have a natural order still in place with food and wine at its heart and a generous welfare state to support the sick, the elderly and those out of work. Yet this picture disguises a slow decline, made worse by the financial crisis, that leaves the average French family struggling to make ends meet. Loïc Sadoulet, a professor of economics at the Paris-based business school Insead, says the word that sums up France is disconnect. By which he means the rosy image and the dour reality are miles apart.
A trip on the Paris Metro makes the point. It was always dowdy, if not a little shabby, which most residents and visitors accepted as part of its charm. Now there are major stations closed for refurbishment and some passageways are reminiscent of ancient caves with green slime and blown plaster adding to the effect. The construction at one station of glass screens to prevent passengers falling on the tracks can only be described as makeshift, with bits of wood screwed to the platform floor to hold the metal posts in place.
Paris train workers joined the protests against pension reforms last October and closed the city for several days after similar shutdowns in 2007, 2005 and 2003, over government plans to cut pensions and welfare.
An apocryphal story about France's slide from greatness goes back to the decision in 2005 on where to hold the 2012 Olympics. It is said the top brass from the IOC arrived for a fact-finding mission just as the Metro workers began another strike. A quick look through the records showed that the frequency of strike action meant there was a strong likelihood an Olympic year would be no exception. With little else to separate the bids, London was declared the winner.
True or not, the French establishment vowed revenge and last year president Nicolas Sarkozy pushed through a law forcing vital public services to provide a minimum service during industrial action. Railway workers will be among the state employees caught by the law. Recent polls have revealed the confusion many French workers feel about the colourful and sometimes violent protests against Sarkozy's welfare cuts and plans to end decades old employment protections. A majority say the reforms are necessary while telling pollsters they support the protests.
This perplexing need to adopt both sides of the argument has paralysed debate, especially on pensions and the totemic 35 hour week. Unlike Germany, which has spent 10 years discussing and implementing reforms with a view to becoming more competitive, the French have reached a position of stasis. Apart from the new strike law and bill freeing universities from state control, pensions reform is almost all Sarkozy has to show for his four years in power.
Next month the Paris-based think tank, the OECD, will publish its biannual report on the French economy. It is expected to argue the Elysée palace must move more quickly to tackle a low growth, high unemployment economy that could spark widespread social unrest . Antonio Gurria, the OECD boss, will stand next to finance minister Christine Lagarde and politely urge her to free small and medium sized businesses from the straitjacket that has stifled growth and innovation for decades.
Innovation has tended to come from France's industrial behemoths – France Telecom, Renault, engineering firm Alstom and Compagnie Générale des Eaux, the water company that spawned media giant Vivendi and Veolia, a waste management firm that empties many of the UK's dustbins. Others such as Pernod Ricard and the luxury goods maker LVMH dominate their industries. However, the government's support and reliance on their tax revenues has been at the expense of smaller firms.
The strategy is also undermined by the vulnerability of these large businesses to innovative rivals with access to cheap skilled labour. Renault and Peugeot have seen Mercedes, BMW and Audi sweep them aside in the race for Asian customers. Air France remains loss making and the oil business Total, with its close links to France's former colonies, is vulnerable to the changing political weather in many of the world's hotspots. Last week it was forced to suspend production in Libya and is embroiled in bribery allegations over deals in Iraq.
Hervé Boulhol, the OECD's France expert, says the country's finances have deteriorated for the last 35 years. Since the financial crash the situation has worsened. "The public finances must be fixed because while France has been largely immune to the worst of financial crisis, at least so far, it needs to address deep-seated problems," he says. Boulhol reels off a list of measures that Sarkozy could implement to bring the country more firmly into the 21st century. First it must get more women into work by reforming a tax system that encourages them to stay at home to reduce the household's taxable income. The result is the lowest employment rate among the 30 rich nations assessed by the OECD.
Second, its benefits system, which accounted for 3.5% of GDP in 2005, first in the OECD rankings, must be reformed. It is a source of Gallic pride but the system is largely universal, and boosts the incomes of the richest, as much as the poorest. Boulhol describes it as "regressive spending" that would be better channelled to the poorest. It may be the main reason middle income couples have continued to have children, unlike Italian and German families, but offering the same benefit to the wealthy is "just about writing cheques to people who are not going to change their behaviour," he says. A third problem is that France has the largest number of people in retirement as a proportion of the overall population.
The battle last year, which saw school cooks join teachers, factory workers and students on the streets of Paris, Marseille and Lyon, was eventually won by Sarkozy. A law pushing up the minimum retirement age to 62 was passed along with measures that mean younger workers must wait till they are 67 to pick up their full entitlement. Bruno Tardieu, a full time official at one of the country's most active anti poverty groups, ATD Quart Monde, is concerned that a growing number of working class people are being shut out of the benefits enjoyed by a decreasing number of white collar workers. He says every town is blighted by high unemployment, while 26% of young people are out of work compared with 20% in the UK.
A volunteering scheme designed to put 200,000 young people back into the workplace is directed largely at college educated under 25s and not those with poor qualifications. Tardieu will meet government officials this week to focus on ways to include low skilled people in the scheme. "It is elitist. Poor groups don't know it exists. It offers very low pay. And it presumes the young person will be housed and subsidised by their parents, which is often not possible for people from poorer families," he says.
Back at Insead, Sadoulet argues that the French fear of Anglo-Saxon capitalism has paralysed the debate and left poor workers to bear the brunt of globalisation. The number of "year in, year out" workers are growing he says, as companies resist giving full benefits to new employees. After six months, staff accrue full employment rights. A short term, six-month contract can be rolled over for another term, but then the workers must be laid off. Studies show that after a year of work, usually on the minimum wage, these workers spend a year on the dole, hence the "year in year out" tag that dogs them.
"France has spent two decades ignoring the problem and the longer it is left the bigger it will become. The debate about what to do, who should shoulder the cost, and how best to encourage innovation, is in its infancy compared with the UK and Germany," he says. "There is still a knee jerk reaction that says simply tax the rich some more. But increasingly ambitious people are leaving, they are going to London, to Silicon Valley, and anyway, there simply aren't enough rich people to pay for the current level of welfare bills", Sadoulet says.
Union leaders point to the success of the country's banks and risk averse property market as reasons to be cheerful. Here was good reason to avoid the risk taking of the Anglo Saxons.
They have a point. Compare Sarkozy, who pledged €40bn (£35bn) to boost bank finances and a further €320bn to guarantee interbank lending, with Gordon Brown, who had to pledge about £850bn to prop up the British banking system, of which £117bn was pumped straight into the worst hit banks.
But while Britain suffers wild property crashes, prices in many areas of France keep rising and finished higher in 2010 on the year before despite predictions of a slump. The steady rise has taken prices beyond the UK and shut middle income families out of the market, or prevented them moving. The long-term effect is the same as in the UK, where the financial crisis has left the incomes and assets of the wealthiest largely untouched, while hitting the growing number of – young people, immigrants and unskilled workers – who stand on the outside of protected, unionised industries.
Much of the French establishment, like the wider population, supports the unions' conservative, old world view that globalisation is to be feared, feeding the sense of paralysis.
Social Security lockbox is full of empty promises
by Charles Krauthammer - San Francisco Chronicle
Last week, President Obama's budget chief, Jack Lew, took to his White House blog to repeat his claim that the Social Security trust fund is solvent through 2037. And to chide me for suggesting otherwise. I had argued in my last column that the trust fund is empty, indeed fictional.
If Lew's claim were just wrong, that would be one thing. But it provides the intellectual justification for precisely the kind of debt denial and entitlement complacency that his boss is now engaged in. Therefore, once more unto the breach.
Lew acknowledges that the Social Security surpluses of the last decades were siphoned off to the Treasury Department and spent. He also agrees that Treasury then deposited corresponding IOUs — called "special issue" bonds - in the Social Security trust fund. These have real value, claims Lew. After all, "these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are."
Really? If these trust fund bonds represent anything real, why is it that in calculating national indebtedness they are not even included? We measure national solvency by debt/GDP ratio. As calculated by everyone from the OMB to the CIA, from the Simpson-Bowles to the Domenici-Rivlin commissions, the debt/GDP ratio counts only publicly held debt. This means bonds held by China, Saudi Arabia, you and me. The debt ratio completely ignores the kind of intragovernmental bonds that Lew insists are the equivalent of publicly held bonds.
Why? Because the intragovernmental bond is nothing more than a bookkeeping device that records how much one part of the U.S. government (Treasury) owes another part of the same government (the Social Security Administration). In judging the creditworthiness of the United States, the world doesn't care what the left hand owes the right. It's all one entity. It cares only what that one entity owes the world.
That's why publicly held bonds are so radically different from intragovernmental bonds. If we default on Chinese-held debt, decades of AAA creditworthiness is destroyed, the world stops lending to us, the dollar collapses, the economy goes into a spiral and we become Argentina. That's why such a default is inconceivable.
On the other hand, what would happen to financial markets if the Treasury stopped honoring the "special issue" bonds in the Social Security trust fund? A lot of angry grumbling at home for sure. But externally? Nothing.
This "default" would simply be the Treasury telling the Social Security Administration that henceforth it would have to fend for itself in covering its annual shortfall. How? By means-testing (cutting the benefits to the rich), changing the inflation formula, raising the retirement age and, if necessary, hiking the cap on income subject to the payroll tax.
You can plug in whatever combination of numbers you prefer for the definition of "rich," for the slope of the sliding scale of benefit reduction, for the rate of the retirement-age increase, or for any other variable. Whatever the formula, we will ironically have been forced to adopt the very reforms needed to keep Social Security in balance for years to come - the kind President Obama's own deficit commission recommended. Arguably, that would add to U.S. creditworthiness by finally demonstrating to the world our seriousness about bringing our unsustainable pension liabilities under control.
Invoking the "full faith and credit" mantra for those IOUs in the trust fund is empty bluster. It does not change the fact that, as the OMB itself acknowledged, those IOUs "do not consist of real economic assets that can be drawn down in the future to fund benefits." Yet Lew continues to insist that these "special issue" trinkets will pay off seniors for the next 26 years.
Nonsense. That money is gone with the wind. Those trust fund trinkets are nothing more than a record of past borrowings. They say nothing about the future.
Consider: If Treasury had borrowed twice as much from Social Security in the past - producing twice as many IOUs sitting in the lockbox - would this mean the trust fund is today twice as strong? Solvent for 50-some years instead of just 26? Of course not. The trust fund "balances" are mere historical record-keeping. As the OMB itself admitted, future payouts will have to be met by future taxes and future borrowings - or by Social Security reform that, by reducing benefits, makes such taxing and borrowing unnecessary. There is no third alternative. There is no free lunch. And there is nothing in the lockbox.
Citing pension costs, Costa Mesa, California, plans to lay off nearly half its employees
by Peter Whoriskey- Washington Post
Nearly half the city workers in Costa Mesa received layoff notices last week. Street sweepers. Firefighters. Mechanics. Payroll clerks. Animal control workers. In all, about 210 of the city's 472 employees, many of whom have worked there for decades. On Thursday, as the notices were being handed out, one maintenance worker committed suicide by jumping from the city hall roof. "It's like they decided to blow up the city," said Billy Folsom, 58, a mechanic who got a pink slip. "It's devastating."
The cutbacks are necessary because the escalating costs of providing pensions for police, firefighters and other unionized employees are draining the city's revenue, city leaders say.
Within three years, city projections show, more than one of every five tax dollars will be spent on employees' retirement benefits, which were made far more generous in the years before the stock market crashed in 2008.
"Just do the math - this is unsustainable," said Jim Righeimer, the city's recently elected mayor pro tem. He campaigned on the pension issue, eliciting anger and a counter-campaign from the city's police and firefighters. "Under these kinds of burdens, we can't do everything the city needs to do."
The public pension fight
The financial follies of the boom years - by banks that lent too easily, by home buyers who bought places they couldn't afford, by consumers who didn't save - became obvious shortly after the recession. But many states and cities may have overextended themselves as well, and the risks they undertook are now playing out in the public pension shortfalls provoking political battles across the nation.
Republican efforts to roll back public employee benefits and bargaining rights has triggered mass protests in places such as Wisconsin, Indiana and Ohio. But in Costa Mesa, where conservatives dominate city politics, the offensive against public worker compensation has gone further. During the boom, many state and local governments promised their employees better pensions. Some employees were allowed to retire earlier. Others received a larger portion of their final pay. Financially, it was easy to do; the stock market was soaring, lifting pension fund balances.
Between 1998 and 2008, the last year for which figures are available, total pension payments by state and local governments rose twice as fast as their payrolls, according to census figures. But now that the recession has led to steep drops in pension funds, those promises to past and present employees may be much harder to keep. Dozens of state and local pension funds around the country are now considered seriously underfunded. By 2009, about 58 percent of state and local pension funds were less than 80 percent funded, a standard benchmark of pension soundness, according to the Center for Retirement Research at Boston College.
The shortfalls have had far-reaching political ramifications. Already, some politicians ideologically opposed to public employee unions have attributed the problems to their greed and political influence. Now members of those unions are on the defensive. "What angers a lot of us is that we're being blamed for the economic situation," said Jason Pyle, 38, a fire department captain who earned $160,000 in base, overtime and certification pay in 2010, according to city records.
Pyle, who has been with the department for 14 years, could retire at age 54 with 90 percent of his base salary and some other forms of pay. "They're marginalizing what we actually do - like everything I've done in my life now has no meaning." He called the city's approach to the problem - the layoff notices - "a scorched-earth policy."
Indeed, in few places has the rhetoric over the unions and the "ticking pension bomb" been as strident as it is in California - or, more specifically, this coastal bastion of conservatism where the battle erupted most clearly during Righeimer's fall campaign.
Righeimer, 52, an Orange County developer, has long fought against unions. In the mid-1990s, after forming a political action group, he ran afoul of teachers unions while pushing for vouchers and a back-to-basics approach to education. Then, in 1997, he pushed a ballot measure to prohibit labor unions from using their members' dues for political purposes without the permission of each member, each year.
Not surprisingly, when he declared his intention to run for City Council in this city of 116,000, he blamed the city's budget shortfalls on the union-negotiated compensation for police, firefighters and other city employees. nIn his view, governments have been too generous with public employee unions that have wide influence over local elections.
First, he and other critics note, the unions can be a major source of funding in local races. Righeimer's campaign spent $70,000 for the November election, according to city records; the Costa Mesa police and fire unions, meanwhile, spent $101,000 in a campaign to discredit him. (Righeimer won the post of mayor pro tem, similar to a vice mayor.)
Second, he notes, many candidates compete to win the endorsement of police and firefighters. "Everyone wants to get their endorsement," he said. "They fight crime, save people's lives, all these good things. The people really go for that." The unions note that their candidates have frequently lost. But when it comes to gaining richer pension benefits, they have often won.
After the state allowed richer pensions for many workers in 1999, many localities, including Costa Mesa, quickly followed suit. Today, police and firefighters in the city can retire at 50 with as much as 90 percent of their base salary and some other forms of pay. It was, in part, the tenor of the times, some said.
"After 9/11 happened, they were national heroes," said Scott Baugh, chairman of the Republican Party of Orange County and a Righeimer ally. "Wouldn't it be great to give a million dollars to every hero? It would be, but it is really unsustainable." Earlier this year, a bipartisan commission looking into pensions in California warned that "the retirement promises that elected officials made to public employees over the last decade are not affordable. . . . Pension costs will crush government."
Pensions, by the numbers
According to city figures, for every dollar the city pays a police officer or firefighter, it must also set aside more than 40 cents to fund the employee's pension. For every dollar paid a general employee, it must set aside 27 cents. The average Costa Mesa police officer earned $105,000 in base overtime and certification pay in 2010, according to city records. The average firefighter earned $109,000 in base, overtime and certification pay last year.
City Council members say the rising costs of pensions compelled them to issue the layoff notices. The idea is to outsource many of the functions of city government to private firms or other governments. Firefighting, for example, could be contracted out to Orange County at a savings of millions of dollars. Private firms could take up payroll services and street sweeping. Police services are not currently slated for outsourcing.
Among those receiving pink slips Thursday was city building technician Huy Pham, 27. About an hour later, Pham plunged to his death from the top of the city's Civic Center. "We're trying to understand the circumstances that led to it," Lt. Bryan Glass said, according to the Associated Press. Relatives and others said Pham had not seemed suicidal anytime recently, the AP reported.
Although union leaders acknowledge the burden the rising costs of pensions has placed on the city, they note that they have offered to close the gap. Last year, the police and firefighters agreed to contribute 5 percent and 6 percent of their pay, respectively, to fund pensions. General employees agreed to raise their pension contributions by 4 percent. "For three years we've given them every concession they've needed," said Folsom, the city mechanic. He made $68,000 last year, according to city records. "We worked it out. This time, they're just giving us the pink slips."
Pyle, of the fire department, said the union was willing to make more concessions. He even called the City Council's vote to raise pension benefits "a bad decision" because of its financial implications. But the firefighters and police are angry, too, because they feel that their role in the city has been unfairly minimized by those seeking to restrict their compensation.
"If you agree to being spit on, bit, or have blood or fecal matter carrying the AIDS virus or hepatitis thrown at you, or have someone attempt to stab you with a knife or use your own sidearm to kill you, or simply run you down with a car, then the risk and dangers of a 30-year career in law enforcement justify an appropriate retirement," said Jason Chamness, a police officer who earned $108,000 in base, overtime and certification pay last year and the president of the Costa Mesa police officers association.
But Righeimer says he is only asking the tough question. "These are good, hardworking people, and to characterize them any differently is wrong," Righeimer said. "The issue is . . . so how much?"
US manufacturing is all over the place
by Gillian Tett - Financial Times
Last week I popped into the American Girl store in Manhattan, the giant consumer temple that sells wholesome “all-American” dolls and clothes. As I queued to buy 6in replicas of a cheerleader costume and football suit, I could not help but chuckle: between the red, white and blue, there was a tag saying “Made in China”. Those American Girls were not so “American” after all.
It is a telling metaphor for a much bigger economic, cultural and political dilemma stalking the western world. Over the past decade, a growing proportion of the manufacturing processes that used to occur in the US and western Europe have moved elsewhere. Last week, for example, the economics consultancy IHS Global Insight calculated that in 2010 China displaced America as the largest manufacturer in the world – the first time that the US has lost this top slot for 110 years.
And the list of goods involved in this shift is growing longer by the day. According to a recent piece of analysis by Newsweek magazine, a host of seemingly American items are no longer produced in America, such as Barbie dolls, Hummers, gumball machines, Wurlitzer jukeboxes, Levi’s jeans and Converse All Star basketball boots. Even Spalding basketballs – the official ball of the NBA – are not truly “American”, since they are stitched offshore.
Unsurprisingly, this makes many Americans very nervous. President Barack Obama likens the rise of China and other emerging markets to the Soviet Union’s launch of the Sputnik missile – an event so shocking that it should galvanise the nation. And when the IHS data emerged last week, Deborah Wince-Smith, president and CEO of the Council on Competitiveness, told my colleague Peter Marsh that the US “should be worried” by China taking the top slot from the US. “This shows the need for the US to compete,” she declared.
On one level, such anxiety is understandable. But if you peer into the trade statistics, there is another, more subtle, shift under way: the real story behind these “made in” labels is not just that some items are no longer entirely “American”; instead, the bigger issue is that they are now produced in so many places, with such convoluted supply chains, that it is hard to tell where they are “made in” at all.
Take a look, for example, at a fascinating paper recently produced by the Asian Development Bank, which looks at where an iPhone is made. In this case, the company – Apple – is American; however, components for the iPhone are variously assembled in China, Korea, Taipei, Germany and the US, involving almost a dozen companies which are hard to pigeonhole with any ethnic label.
And it is not just in the world of electronics that these labels blur. Two decades ago, Sylvia Yanagisako, a Stanford University anthropology professor, went out to Italy to study the Italian textile and fashion trade – only to realise that so many of the key processes had moved to China that she shifted her research to Shanghai. She also found that Italian fashion designers are now tying themselves up in knots about what being an “Italian” designer really means.
After all, the “Made in Italy” label carries cachet among consumers (including, ironically, wealthy Chinese shoppers). Many Italian designers insist that the concept of italianità (Italian-ness) is almost sacred. What, in other words, does italianità really mean if a product is partly made in China? The cultural contradictions on this new “21st-century Silk Road” – as Yanagisako dubs it – are intense.
The challenge for economists is even more profound. In the old days, they typically measured the output of an economy by watching where goods were “made”; but which country should claim the “value” for an iPhone (or an Italian suit or an American Girl doll)? Where does the real “output” come, in a world where companies can shift profits around?
Indeed, such is the complexity that Pascal Lamy, the head of the World Trade Organisation, recently voiced the seemingly heretical idea that economists should stop paying so much attention to “import” and “export” statistics. Thus, instead of trying to measure what is now “made in America” – or “China” – what economists should do is focus on the global economy as a whole, he insists. “It no longer makes sense to think of trade in terms of ‘them’ and ‘us’,” he argues; 20th-century-style trade statistics can be too arbitrary in the 21st-century world.
In rational terms, Lamy is absolutely right. But it is unlikely to cut much ice in political terms – or in a world where American unemployment is rising and politicians are muttering about currency wars. So the next time I pop into the American Girl store, I will look for the “Made in China” labels – and both chuckle and fret. This new, 21st-century Silk and Plastic Road is full of artifice on all sides; but, sadly, that does not prevent it from being a potential future flashpoint.
Fannie and Freddie Probe Faces a Snag
by Nick Timiraos - Wall Street Journal
The Securities and Exchange Commission's probe into whether Fannie Mae and Freddie Mac properly disclosed their growing exposure to riskier mortgages between 2006 and 2008 could also spotlight the oversight role of the firms' federal regulator, which approved those disclosures.
So far, four current or former officials of the firms have said they received Wells notices and could face civil charges from the SEC, including Daniel Mudd and Richard Syron, the former chief executives of Fannie Mae and Freddie Mac, respectively. Several other executives are believed to have received the notices as well.
The potential defendants have indicated they plan to respond in writing to the Wells notices, which are formal notifications the SEC intends to pursue enforcement action. In statements, Mr. Mudd and a lawyer for Mr. Syron have argued the agency shouldn't bring charges, in part because their disclosures about subprime mortgages were reviewed by the Federal Housing Finance Agency, the firms' federal regulator. "It very much complicates the government's case," said Mark Calabria, director of financial-regulation studies at the libertarian Cato Institute. Mr. Calabria said the SEC would nevertheless have a strong case if it had evidence that Fannie or Freddie executives misled not just investors, but also the FHFA, about the quality of their loans.
David Felt, the former deputy general counsel of the FHFA, said the agency had reviewed potential disclosure issues and had not found sufficient evidence to bring cases against individuals as of January 2010, when he retired from the agency. Shareholders have had a hard time winning cases against the mortgage titans over the issue of disclosure. Some of those cases have been dismissed after the FHFA intervened on behalf of Fannie and Freddie.
Last fall, a federal judge dismissed several claims by shareholders. Even though Mr. Mudd had made statements in 2007 noting that Fannie Mae wasn't heavily exposed to subprime loans, U.S. District Judge Paul Crotty threw out many of the investors' claims on grounds that the firm's public filings "contained cautionary language that warned investors" about increased mortgage risks. "Far from signifying a departure from proper behavior, Fannie's actions in this case seem cautious, and their disclosures do not provide a compelling inference of fraud," he wrote. The decision also noted that Fannie "operated in a heavily regulated environment," and that since being taken over by the government, "no restatements of Fannie's financials have been ordered."
The judge has allowed other claims to move forward involving Fannie executives' emails that questioned the company's internal controls and risk management. Judge Crotty said the emails suggested "Fannie may have been saying one thing while believing another." One potential complication of any case charging executives for improperly disclosing loan purchases is that there wasn't an agreed-upon definition of subprime loans. The term generally refers to loans given to borrowers with weak credit. "There's a big gray area," said Cato's Mr. Calabria.
Guidance issued by the Federal Deposit Insurance Corp. in 2001 said that loans with credit scores below 660 generally had a "relatively high default probability," but the mortgage industry generally defined subprime loans as those with scores below 620. Fannie Mae, which classified 0.3% of its loan guarantees as subprime as of October 2007, defined subprime loans as those that were either identified by the loan seller as subprime or that were purchased from subprime originators. Without an accepted industry definition, Fannie and Freddie "took what was arguably a far narrower definition," Mr. Calabria said.
But Fannie also disclosed other risk measures, including that 4.9% of its loan guarantees had credit scores below 620, and that around 9% of its loans went to borrowers that had loan-to-value ratios above 90%. Freddie disclosed both the share of loan purchases with scores below 620 and between 620 and 660.
Many Banks Are Clinging to Billions in Bailout Money
by Ben Protess and Eric Dash - New York Times
Even as the nation’s biggest banks stepped further out of the government’s shadow on Friday, hundreds of financial institutions were still clutching to billions of taxpayers’ dollars. Nearly 600 institutions, ranging from large regional powerhouses to small community banks, are holding on to more than $30 billion — about 13 percent of the $245 billion handed out to banks at the height of the financial crisis.
Some of the money will be paid back quickly. Two of the largest remaining bailout recipients, SunTrust and KeyCorp, swiftly announced plans to return their bailout funds, after getting a clean bill of health from the Federal Reserve on Friday.
But others will be slower to part with their federal money. A number of institutions like Synovus Financial and Regions Financial are struggling to return to profitability. Relatively healthy banks like M&T Bank and MB Financial are holding on to their emergency cash, while using the money to acquire other banks, make more loans and buy investments for their portfolios.
The rest of the bailout cash is scattered among community banks across the country. Many small lenders remain dependent on the low-cost capital. Dozens more like Security Business Bank of San Diego are simply swapping their federal rescue money for potentially cheaper financing from the same source: the government. The situation underscores how difficult it is for the government to extricate itself from the financial system and the broader economy.
At the height of the financial crisis, the government opened its coffers, injecting much needed capital into the banking industry through the highly contentious Troubled Asset Relief Program. Wall Street titans, eager to shed the stigma and restrictions on executive compensation, quickly repaid the TARP money. A few smaller institutions did the same this month, putting the bank bailout program within a few dollars of breaking even.
The Treasury Department now estimates that it will turn a $12 billion profit on the bank bailout, mainly from its investment in Citigroup. “This program helped to support the nation’s small, medium and large banks during an unprecedented financial crisis,” said David Miller, the Treasury’s chief investment officer. “Since then, the markets have begun to stabilize, and we now estimate that taxpayers will see a healthy return on their investment.”
But the government’s ultimate gain will depend on the 600 or so banks that are sitting on taxpayer dollars. Some banks desperately need the money. More than 140 banks have missed their recent dividend payments to the government, according to an analysis by Linus Wilson, professor of finance at the University of Louisiana at Lafayette. The financial institutions — including Bank of Blue Valley in Overland Park, Kan., and Anchor Bank in Madison, Wis. — risk defaulting on their federal debt, said Professor Wilson. The group collectively owes the government about $4 billion.
Mark A. Fortino, Blue Valley’s chief financial officer, said his bank has enough capital to catch up on its dividend payments. The bank, however, may hold on to its original bailout funds for up to three years, Mr. Fortino said. “Frankly, a 5 percent dividend is very attractive financing,” Mr. Fortino said. “It’s given us the cushion to be an active lender.”
Other banks like Synovus Financial are current on their payments, but bleeding money. The lender based in Columbus, Ga., which owes the United States nearly $1 billion, recently posted its 10th consecutive quarterly loss. It also faces civil lawsuits stemming from soured investments in luxury resorts. “The repayment of TARP is not their greatest concern at this point,” said Brett Scheiner, an analyst with FBR Capital Markets. “The main thing they care about is reducing their troubled loan balances.”
For banks in similarly weak positions, the only way to get off the government dole may be to find a deep-pocketed buyer. In December, Marshall & Isley, which owes the government $1.7 billion, agreed to a takeover by the BMO Financial Group of Canada. BMO plans to pay off the TARP cash before the deal closes. The Whitney Holding Corporation, the oldest bank in New Orleans, agreed in December to merge with the profitable and healthy Hancock Holding Corporation. Hancock expects to repay Whitney’s $300 million in bailout funds, too.
“TARP is a driver of mergers,” said Christopher McGratty, an analyst with Keefe, Bruyette & Woods. “The solution is: Why not sell and let them pay it off for me?” Dozens of other small banks are looking to the government to help them repay their bailout funds because many are finding it difficult to raise money in the capital markets
Under a new program designed to spur small business lending, community banks can exchange their rescue money for a potentially cheaper capital. So far, about 400 small banks have applied for $6 billion through the program, with about half planning to repay their bailout.
Institutions that take advantage of the program can cut their government borrowing costs from 5 percent to as low as 1 percent, if they meet certain lending targets. Paul Rodeno, chief executive of Security Business Bank of San Diego, calls the program a “breath of fresh air” since he will immediately lower his interest payments — and use fresh money to pay back the bank’s $5.8 million bailout.
Even so, it’s hard to shake the “son of TARP” or “TARP Jr.” moniker that some Republicans initially gave the program. After all, banks are simply trading one form of federal aid for another.
While bigger banks have better access to capital, some are reluctant to repay the government, even though they are in decent financial shape. “There are definitely banks healthy enough to repay,” said Jim Sinegal, an analyst at research firm Morningstar. “Some of the more high-quality banks should be ready and willing to repay. It’s clearly a management decision at this point.”
Some banks worry that issuing new stock would hurt existing investors. The banks would prefer to delay offerings for months, in the hopes their stock prices will be higher. “They see tomorrow as a better day,” said Mr. Scheiner of FBR.
Meanwhile, banks are using the emergency funds to finance long-term operations. In November, M&T, which owes taxpayers $750 million, bought another bailout recipient Wilmington Trust, for $351 million. At the time, M&T said it was aiming to repay TARP funds “at some point in the near future.” The bank turned a $736 million profit last year. Citizens Republic Bancorp in Flint, Mich., which has $300 million in bailout capital, used the money to make more loans and buy mortgage-backed securities, according to government records.
But politicians and federal officials want healthy banks to follow the lead of SunTrust and KeyCorp, rather than worrying about the stock price or other issues. “It’s a better deal for the shareholders, not the taxpayer,” said Representative Patrick T. McHenry of North Carolina, the Republican chairman of the House oversight committee’s bailout panel. “Any institution that’s financially stable should pay back taxpayers as soon as possible.”
U.S. Coast Guard Investigating Oil Slick Reports in Gulf
by Ryan Dezember - Wall Street Journal
The U.S. Coast Guard said late Saturday that it is investigating reports of a miles-long oil slick in the Gulf of Mexico. The Coast Guard said in a news release that it received a report of a three-mile-long rainbow sheen off the Louisiana coast just before 9:30 a.m. local time on Saturday. Two subsequent sightings were relayed to the Coast Guard, the last of which reported a sheen that extended from about 6 miles south of Grand Isle, La. to 100 miles offshore.
Though the Coast Guard was able to confirm that there is a substance on the water's surface, it has not yet been able to determine if it is oil. Petty Officer Casey Ranel said that those that observed the sheen from a helicopter said they saw no sheen associated with the substance. That flight was diverted from the scene on a separate search and rescue mission, however, and could not continue their investigation, the Coast Guard said in the news release.
The Coast Guard has since launched additional aircraft and boats to the scene from New Orleans and Mobile, Ala., to collect samples of the substance. Ranel said the area where the substance has been reported is about 20 miles west of where the Deepwater Horizon rig exploded last April, killing 11 and unleashing the largest offshore oil spill in U.S. history. Ranel said the Coast Guard has not linked the substance to any particular rig or well. The Oil Spill Liability Trust Fund, which holds oil royalties to pay for spill clean-up costs, has been opened, the Coast Guard said.
G7 bankers sell yen reserves to calm investors
by Heather Stewart - Guardian
Share prices have staged a comeback after G7 central bankers rode into the foreign exchange markets to sell the Japanese yen and soothe investors' shattered nerves. In an emergency phone conference late on Thursday night, finance ministers from the G7 countries, including Britain, agreed that they would offer "any needed co-operation" to drive down the value of the yen, which hit a postwar high against the dollar on Wednesday night. The Japanese currency declined sharply as a result, to ¥81.20 against the dollar, down more than 6% from its peak at ¥76.25.
George Osborne said the sell-off was "absolutely the right thing to do" and the Treasury confirmed that the Bank of England, whose chief economist, Charlie Bean, took part in the phone call, had joined the move. The Bank has just over $5bn in yen reserves, according to official figures. No announcement was made about the scale of the Bank of Japan's intervention, but reports in Tokyo suggested it may have been as large as $25bn. The US Federal Reserve and the Canadian central bank also joined the selling spree when their markets opened.
The G7's action had a soothing effect on rattled equity markets, which had been focusing on the costs of the earthquake. In London, the FTSE 100 closed up 0.39% at 5,739 while in New York the Dow Jones Industrial average was up more than 100 points by mid-morning, at 11,875. The Nikkei climbed more than 3% and stock markets across Asia also bounced back. The G7's action was its first co-ordinated intervention in the currency markets for more than a decade, underlining the seriousness with which the world's policymakers are taking the potentially catastrophic blow to confidence from unfolding events in Japan and across the Middle East.
"We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed co-operation and our confidence in the resilience of the Japanese economy and financial sector," the G7 ministers said in a statement, adding, "we will monitor exchange markets closely and will co-operate as appropriate". Japan's export-led economy would be vulnerable to a sharp rise in its currency, and with the world economy still bearing the scars of the credit crunch, central bankers were nervous that volatility on the foreign exchanges could destabilise other financial markets.
The yen had been boosted by fears that insurance firms would have to bring funds back home to pay multibillion dollar claims for earthquake damage, but the Japanese government blamed speculators for driving up the yen in the days since the earthquake hit. Deputy finance minister Fumihiko Igarashi said: "G7 countries agreed that if we caved in to such speculators who took advantage of people's misfortunes, the Japanese economy would be ruined and the whole world economy would be harmed," comparing investors betting on the yen's rise as "sneaky thieves at the scene of a fire".
However, some analysts were sceptical about whether the G7's actions would help Japan in the longer term. John Hardy, of Saxo Bank, said that once the nuclear crisis at Fukushima is resolved, investors' attention will turn to the tough challenges Tokyo faces in meeting the costs of reconstruction. "One has to imagine that Japan has a few months of good will. Beyond that, one wonders if the yen-positive implications of this catastrophe will have faded and whether the focus may have reverted by then to the yen-negative aspects of the fallout, particularly the damage this crisis has wrought on the nation's balance sheet," he warned.
Julian Jessop, international economist at consultancy Capital Economics, said that despite the apparent initial success of the G7's actions it could still fail to cap the yen: "Intervention alone is not always effective when there are strong economic or financial pressures pushing in the opposite direction. So far, the amount spent by the central banks seemed too low to guarantee success. To have any chance of a lasting impact the intervention needs to be more than just symbolic."
The More Secure You Feel, the Less You Value Your Stuff
People who feel more secure in receiving love and acceptance from others place less monetary value on their possessions, according to new research from the University of New Hampshire.
The research was conducted by Edward Lemay, assistant professor of psychology at UNH, and colleagues at Yale University. The research is published in the Journal of Experimental Social Psychology. Lemay and his colleagues found that people who had heightened feelings of interpersonal security -- a sense of being loved and accepted by others -- placed a lower monetary value on their possession than people who did not.
In their experiments, the researchers measured how much people valued specific items, such as a blanket and a pen. In some instances, people who did not feel secure placed a value on an item that was five times greater than the value placed on the same item by more secure people. "People value possessions, in part, because they afford a sense of protection, insurance, and comfort," Lemay says. "But what we found was that if people already have a feeling of being loved and accepted by others, which also can provide a sense of protection, insurance, and comfort, those possessions decrease in value."
The researchers theorize that the study results could be used to help people with hoarding disorders. m"These findings seem particularly relevant to understanding why people may hang onto goods that are no longer useful. They also may be relevant to understanding why family members often fight over items from estates that they feel are rightfully theirs and to which they are already attached. Inherited items may be especially valued because the associated death threatens a person's sense of personal security," Lemay says.
Human prejudice has ancient evolutionary roots
by Yale University
The tendency to perceive others as "us versus them" isn't exclusively human but appears to be shared by our primate cousins, a new study led by Yale researchers has found.
In a series of ingenious experiments, Yale researchers led by psychologist Laurie Santos showed that monkeys treat individuals from outside their groups with the same suspicion and dislike as their human cousins tend to treat outsiders, suggesting that the roots of human intergroup conflict may be evolutionarily quite ancient. The findings are reported in the March issue of the Journal of Personality and Social Psychology.
"One of the more troubling aspects of human nature is that we evaluate people differently depending on whether they're a member of our 'ingroup' or 'outgroup,'" Santos said. "Pretty much every conflict in human history has involved people making distinctions on the basis of who is a member of their own race, religion, social class, and so on. The question we were interested in is: Where do these types of group distinctions come from?"
The answer, she adds, is that such biases have apparently been shaped by 25 million years of evolution and not just by human culture. Santos and her lab studied the rhesus macaques living on an island off the coast of Puerto Rico. Like humans, monkeys in this population naturally form different social groups on the basis of family history. In order to assess whether monkeys made the same distinctions between ingroup and outgroup individuals, the researchers used a well-known tendency of animals to stare longer at novel or frightening things than at familiar or friendly things.
They presented subject monkeys with pictures of monkeys who were either in their social group or members of a different group. They found that monkeys stared longer at pictures of other monkeys who were outside their group, suggesting that monkeys spontaneously detect who is a stranger and who is a group member.
"What made this result even more remarkable" noted Neha Mahajan, a Yale graduate student who headed up this project, "is that monkeys in this population move around from group to group, so some of the monkeys who were 'outgroup' were previously 'ingroup.' And yet, the result holds just as strongly for monkeys who have transferred groups only weeks earlier, suggesting that these monkeys are sensitive to who is currently to be thought of as an insider or an outsider. In other words, although monkeys divide the world into 'us' versus 'them,' they do so in a way that is flexible and is updated in real time."
Santos and colleagues then asked whether monkeys evaluated ingroup and outgroup members differently – did they associate these individuals automatically with "good" and "bad" respectively? To study this, they developed a monkey version of a test of implicit attitudes known as the IAT (see http://implicit.harvard.edu). In humans, this test measures the extent to which people show implicit biases against members of other groups. To look at the same capacity in monkeys, the researchers showed monkeys a sequence of photos in which photos of ingroup or outgroup monkey faces were paired with photos of either good things, such as fruits, or bad things, such as spiders.
The researchers then recorded the time monkeys spent looking at both kinds of sequences. The monkeys spent little time looking at sequences that included ingroup faces paired with good stuff like fruits or outgroup faces paired with bad stuff like spiders, suggesting that the monkeys treated these two kinds of stimuli as being similar. On the other hand, the monkeys stared longer at sequences in which outgroup individuals were paired with positive objects like fruit suggesting that this association was unnatural to the monkeys. Like humans, monkeys tend to spontaneously view ingroup members positively and outgroup members negatively.
The Yale team's results suggest that the distinctions humans make between "us" and "them"— and therefore the roots of human prejudice—may date back at least 25 million years, when humans and rhesus macaques shared a common ancestor.
"Social psychologists introduced the world to the idea that the immediate situation is hugely powerful in determining behavior, even intergroup feelings," said Mahzarin Banaji, of the Department of Psychology at Harvard University and a co-author of the paper. "Evolutionary theorists have made us aware of our ancestral past. In this work, we weave the two together to show the importance of both of these influences at work"
"The bad news is that the tendency to dislike outgroup members appears to be evolutionarily quite old, and therefore may be less simple to eliminate than we'd like to think," Santos said. "The good news, though, is that even monkeys seem to be flexible about who counts as a group member. If we humans can find ways to harness this evolved flexibility, it might allow us to become an even more tolerant species."