"Two assembly line workers at the Long Beach, California, plant of Douglas Aircraft Company enjoy a well-earned lunch period. Nacelle parts of a heavy bomber form the background"
The Fukushima disaster continues, and will do so for a long time to come. This is hardly surprising given the overwhelming force the plant was exposed to, which far exceeded the worst case scenario it was designed to withstand.
The immediate devastation from the earthquake and tsunami was immense, even before the accident began.
As we have seen over the past several weeks, the loss of power to the site, and subsequent inability to circulate coolant in the reactors and the spent fuel pools, led to explosive consequences. We saw a series of hydrogen explosions at units 1, 3 and 2 and 4, and have seen at least three partial meltdowns, with varying degrees of apparent containment breach. Hydrogen is produced as an exothermic reaction when the fuel cladding reacts with water steam at high temperatures (Zr + 2 H2O -> ZrO2 + 2 H2), indicating damage to the reactor core from loss of coolant.
The first image below shows the four units, with unit 4 on the far left and unit 1 on the far right. The second shows a close up of units 3 and 4, where the buildings sustained the greatest visible damage.
Unit 4 is particularly interesting, since the reactor had been offline for maintenance at the time of the earthquake, with its fuel removed and stored in the spent fuel pool. The explosion in this unit must have been related to this accumulation of fuel. The pool is believed to have been damaged, leading to loss of cooling water and partial exposure of the fuel rods.
The first image below is of unit 4 and the second is a close up inside the unit taken by helicopter:
It is not difficult to see how the spent fuel pool, which is situated above the reactor, could have come to be damaged.
Operators have been spraying the ground surrounding the plant with resin in order to prevent radioactive dust from the debris from becoming airborne:
Engineers have been working intensively to restore power to the site under very difficult conditions:
In the meantime, essential cooling has been ad hoc through the use of seawater, but this results in a salt build up that leads to further difficulty cooling the plant and also to rapid corrosion at high temperatures. Salt accumulation will need to be flushed out with fresh water.
Seawater spraying into cracked vessels has also led to the accumulation of large quantities of radioactive water. As a result, 10,000 tons of contaminated water (measuring about 500 times above the legal limit for radioactivity) were emptied into the sea in order to make room for much more highly contaminated water.
In addition, the world's largest concrete pumps are being sent to Japan, first to pump water, and later perhaps to create a concrete sarcophagus. Here’s one that arrived on an Antonov plane.
Pumps used at the site would have to be abandoned there as they will be too radioactive to recover. The dimensions of a sarcophagus entombing at least 4 reactors would have to be truly gargantuan - considerably larger than the pyramids at Giza per reactor. This would be no small undertaking. Alternatively, Japan may attempt to drape the plants with fabric. There are clearly no easy long term solutions.
The accident process is being reconstructed, often from foreign sources through nuclear forensics. French nuclear company Areva initially (and inadvertently) provided a particularly detailed explanation of the accident sequence in the early days, indicating a more serious accident in unit 2 than in units 1 and 3. At unit 2, the condensation chamber at the base of the reactor appears to have been damaged, leading to the loss of highly radioactive water into the environment. Thus, while unit 2 appears to the least damaged from the outside, the internal damage poses a larger threat than units 1 and 3.
This analysis fits with subsequent events. Operators faced a leak of highly radioactive water from a maintenance pool associated with unit 2. This took desperate measures to plug. Concrete initially failed to harden, whereupon operators resorted to sawdust, shredded newspapers, special polymers and screens were used. According to TEPCO, the leak was plugged on April 6th.
The leak caused radiation levels to spike in the sea surrounding the plant:
The operator of Japan's stricken Fukushima nuclear plant said Tuesday that it had found radioactive iodine at 7.5 million times the legal limit in a seawater sample taken near the facility, and government officials imposed a new health limit for radioactivity in fish.
The reading of iodine-131 was recorded Saturday, Tokyo Electric Power Co. said. Another sample taken Monday found the level to be 5 million times the legal limit. The Monday samples also were found to contain radioactive cesium at 1.1 million times the legal limit.
It has also caused diplomatic difficulties with neighbours:
Regarding the release of radiation contaminated water into the ocean from Fukushima I Nuclear Power Plant, the South Korean government conveyed its worries to Japan's Foreign Ministry through its Embassy in Japan at night of April 4 [when TEPCO started dumping], that "this may cause problems in international law."
India has already banned the import of produce from Japan, and other countries are likely to follow suit. Seafood is likely to be the most affected. The Japanese authorities are still saying this is safe, although they have imposed new standards:
The plant operator insisted that the radiation will rapidly disperse and that it poses no immediate danger, but an expert said exposure to the highly concentrated levels near the Fukushima Dai-ichi plant could cause immediate injury and that the leaks could result in residual contamination of the sea in the area.
The new levels coupled with reports that radiation was building up in fish led the government to create an acceptable radiation standard for fish for the first time, and officials said it could change depending on circumstances. Some fish caught on Friday off Japan's coastal waters would have exceeded the new limit.
Nuclear analyst Arnie Gundersen more recently identifies unit 2 as the reactor of most concern. There is a combination of temperature above boiling point and no additional pressure inside the reactor. The implication is that unit 2 is not currently water cooled and likely contains hot air or hydrogen instead. There is also not pressure in the containment system at unit 2. A containment breach in the bottom of unit 2 would be consistent with these observations.
Unit 1 has both high temperature and elevated pressure inside the reactor, indicating perhaps a water/steam combination, Unit 3 has low pressure and a temperature at boiling point, indicating relative stability. Both these units have somewhat elevated pressure inside the containment structures.
Operators at Fukushima have sent robots into the damaged units to assess the radiation currently present:
The data released by TEPCO for units 1 and 3 are translated as follows:
Reactor 1 building:
Date and time: 4:40PM to 5:30PM, April 17, 2011
Radiation (1st floor, through the north door): 10 to 49 milli-sievert/hr
Reactor 3 building:
Date and time: 11:30AM to 1:30PM, April 17, 2011
Radiation: 28 to 57 milli-sievert/hr
According to TEPCO, there were a lot of debris inside the Reactor 3 building, and the robots had a hard time moving forward and didn't go much beyond the door.
Part of the reason why they had the robots enter through the north door was because of the high radiation level at the south door.
On April 16, the radiation level at the south door to the Reactor 1 building was measured at 270 milli-sievert/hr. The distance between the north door and the south door is about 30 meters, according to TEPCO. The radiation right outside the north door was also measured on April 16, and it was 20 milli-sievert/hr.
Apparently the unit 2 building was too steamy for the robots to record readings. This is also the location where readings are most urgently needed.
Official Japanese radiation data have shown some disturbing values over the last couple of weeks. See for instance this screen shot for unit 1 taken April 9th:
On April 17th the same site had the following radiation levels recorded for units 1-3:
Dry Well: 121.4 Sv/hr
Suppression chamber: 97.5 Sv/hr
Dry Well: N/A
Suppression Chamber: 131 Sv/hr
Dry Well: 253.2 Sv/hr
Suppression Chamber: 103.9 Sv/hr
A single dose of about 5Sv would be fatal in about 50% of cases according to the IAEA.
The allowable emergency dose for nuclear workers has been climbing recently. It was originally 100 mSv/yr, was raised to 250 mSv/yr and is now to be raised again, likely to 500mSv/yr. Translated from Nihon Television News 24 on April 18th:
The radiation exposure limit for workers at nuclear power plants is 100 milli-sievert/year, but the limit has been raised to 250 milli-sievert/year to deal with the Fukushima I Nuke Plant accident. According to the government sources, the higher limit is being considered because it is getting increasingly difficult to have enough workers to work on the plant. Also, the radiation inside the Reactor buildings is high, and the annual limit of 250 milli-sieverts may not be high enough to achieve the goals laid out by the TEPCO road map.
The international standard allows 500 milli-sievert/year in an emergency work, but it hasn't been decided how high the new limit will be. The government will carefully assess the timing of announcement, keeping in consideration the health concerns of the workers and the public opinion.
It continues to be difficult to secure skilled and experienced workers at Fukushima, likely because they know what happened to their counterparts at Chernobyl.
In my view the Japanese government is being far too sanguine about the risks in the neighbourhood of the stricken plant, while risks far from the plant are often overstated. The evacuation zone may be extended in light of continuing aftershocks, but probably not by enough, for logistical reasons:
One reason for the reluctance of the Japanese government to widen the evacuation from 20km to 40 km is because it will need to relocate another 130,000 people from the affected zone on top of the 70,000 people who are already evacuated from the 20km zone. So where are they going to resettle this 200,000 people as they can never return to their homes for the next few hundred years.
If the evacuation zone be enlarged to 80 km as recommended by the IAEA, it is estimated that they need to evacuate another 1.8 million people or making the total of 2 million residents out from the danger zone. Where are they going to put those 2 million refugees?
Another reason for the reluctance to widen the evacuation zone is due to logistics. The Tohoku expressway is a national expressway in Japan and links Tohoku region in the northernmost region in the Honshu Island with the Kanto region and Greater Tokyo.
So if the government decided to entomb the Fukushima reactors, it will need to cordoned off an area with a radius of 50km from Fukushima. Hence the cost of not able to move people and goods from Tokyo to Northern Honshu will be staggering . Moreover it will also prohibit traveling using train services as the main train track passes through the region in Sendai-Fukushima-Iwate and runs parallel to the coast.
The risk of further adverse events at the unstable plant will remain high for months, if not years, to come, and reactors at Onagawa and Fukushima II may also be vulnerable. Many other locations should urgently review their safety standards and design-basis accident scenarios in light of the catastrophe that is unfolding in Japan.
10 Doomsday trends America can’t survive
by Paul B. Farrell - MarketWatch
Doomsday Capitalism? Capitalism is killing America? Yes, that’s the message in my tenth book. "Doomsday Capitalism, 10 Self-Destructive Trends." But you’ll never see it in print. No one, even book publishers want to read this truth: Capitalism is destroying America.
Why? Super-Rich Capitalists get rich off these macro trends. They want happy talk. Back in 2007 Vanguard founder Jack Bogle called my warnings "prescient." But that didn’t stop the meltdown. Next time financial historians warn of a bigger meltdown; a total collapse has been the destiny of every nation for eight centuries. This time, capitalism is the saboteur.
What S&P U.S. credit warning means
In the wake of Standard & Poor's warning that the U.S. AAA credit rating is at risk, former Congressional Budget Office Director Douglas Holtz-Eakin explains to David Wessel why politicians are watching and what it might mean for a deal on the the deficit.
Yale scholar Immanuel Wallerstein warns that capitalism’s at the end of a 500-year cycle: The "political struggle is over what kind of system will replace capitalism, not whether it should survive." We cannot stop this cycle.
Yes, Super-Rich Capitalists will fight to the death. But destiny is trapped in our DNA, historians warn, and will not change. America is run by these short-term thinkers. They never learn the lessons of history. They do not want you to know that their capitalism is self-destructive, that capitalism’s cycle is in a suicidal end game, that their "mutant capitalism," as Bogle calls it, is destroying the very soul of America’s democracy.
Instead, leaders inside this conspiracy want Americans to follow their rigid doctrine: In Milton Friedman’s 1962 "Capitalism and Freedom," the bible of Reaganomics; In Ayn Rand’s manifestos that guided Alan Greenspan and now Paul Ryan; and in Steve Forbes post-meltdown apologia, "How Capitalism Will Save Us: Why Free People and Free Markets Are the Best Answer in Today’s Economy."
Capitalism has become a religion for the Super Rich, with many such "saviors." Heresies must be denied, such as this one: Doomsday Capitalism is destroying America from within. Here are highlights, with links to a few of the earlier hundred columns on topic. Ten macro trends building to a perfect storm, a critical mass, a flash point:
1. Doomsday Capitalism: Death of the American dream, spirit, soul
After our bankrupt Wall Street was resurrected in 2008 — thanks to their Trojan Horse, an ex-Goldman CEO inside the Treasury conning trillions from a clueless Congress — it became obvious that capitalism is killing America’s soul. Nobody trusts government. And no matter who’s elected, wealth, Wall Street and the Super Rich rule America; total collapse is coming.
Why? Sen. Bernie Sanders, the independent from Vermont, said it best: "There is a war going on in this country … the war waged by the wealthiest people in America on the disappearing and shrinking middle class of our country. The nation’s billionaires are on the warpath. They want more, more, more. Their greed has no end and they are apparently unconcerned for the future of this country if it gets in the way of their accumulation of power and wealth."
2. Doomsday Democracy: ‘Mutant Capitalism’ killing ‘We the People’
Stop kidding yourself, democracy is dead: "All men are created equal" is a quaint political fiction. The public has no real say in a nation where wealth buys votes, a naive public is easily manipulated and elected officials have a price.
In "The Battle for Soul of Capitalism," Bogle warned us the "Invisible Hand" no longer serves "We the People" nor the public welfare. Today, Wall Street and the insatiable Super Rich 1% rule America. And they are obsessed with restoring the same unregulated free-market Reaganomics that loves gambling in the same speculative $580 trillion derivatives casino that triggered the 2008 meltdown.
3. Doomsday Conspiracy: Wall Street takeover, the new ‘Invisible Hand’
The Super Rich have always had some hand in America’s destiny, operating from the shadows. Today, this conspiracy of Wall Street, Corporate CEOs, politicians and Forbes 400 billionaires operates openly, with absolute power and an arrogance that is corrupting the nation’s soul, their souls, your soul. This conspiracy has no moral compass, yet ironically, is legal.
Why? Wealth can easily buy favorable laws, making even the most unethical, selfish, corrupt behavior legal by fiat. And their high-priced lobbyists all over Washington, Congress, government regulatory agencies and the Fed all have the power to grab the rewards of capitalism for the Super Rich, while transferring the liabilities to the other, clueless 99% of America’s taxpayers
4. Doomsday Politics: Monopoly of Super-Rich Anarchists rules America
Forget buzzwords like oligopoly, plutocracy, socialism. Today Washington is a pure anarchy, a game played by tens of thousands of high-priced lobbyists squeezing the best deals out of America’s budget, solely for their clients’ interests, never the general public. Our economy is a monopoly of Super-Rich Anarchists. They know the only votes that count are in Congress. And they’re for sale.
Lobbyists are "brokers." Today there are 261,000 lobbyists brokering special interests, all fighting for the maximum possible slice of a $1.5 trillion federal budget pie — special regulations, exemptions, loans, tax loopholes, earmarks, access, agency appointments, defense contracts, you name it — endless gambits that further consolidate the power and wealth at the top for Super-Rich Donors.
5. Doomsday Economics: Growth is a numbers game for politicians
The principle of grow or die, once a given in economics and politics, is being challenged by new "growth and die" research, while a bizarre numbers racket is used by economists as propaganda to hide the truth, manipulating investors, consumers, voters, the public.
All economists tend to be biased, work for banks, politicians, corporate CEOs, think tanks and the Fed, all with political agendas. They’re more speech writers, supporting partisan slogans like "drill baby drill," ignoring long-term consequences. For example, global population will increase 50% by 2050, yet old-school economists keep pretending natural resources are infinite.
6. Doomsday Psychology: The broken promises of behavioral science
Back in 2002 behavioral science offered investors hope: Psychologist Daniel Kahneman won the 2002 Nobel Prize in Economics, exposing Wall Street’s myth of the "rational investor." Their promise: We’ll help you understand your brain, make better decisions. You’ll be "less irrational," control your brain, be a successful investor.
Wrong. That will never happen. Why? Because your brain will always be irrational. Worse, Wall Street quants are always light-years ahead of our home-school brain rewiring; they know you’re vulnerable, easy to manipulate. They also hire the top neuroscientists for their casinos. No wonder the house always wins.
7. Doomsday Technology: Innovation, derivative casinos, the singularity
Sophisticated new technologies, mathematical algorithms and neuroscience all guarantee Wall Street insiders huge margins gambling in their derivative casinos, leveraging deposits from Main Street’s "dumb money." Today Wall Street is even more obsessed, grabbing for high-risk profits in a tough "new normal" of high volatility, increasing risks, lower returns.
Average investors are no match for Wall Street’s high-frequency traders who easily win by huge margins on this rigged playing field. Still, naive Main Street investors keep betting despite warnings that the more you trade the less you earn.
8. Doomsday Warfare: Pentagon math: population + commodities = wars
The Pentagon predicts that by 2020 "warfare will define human life" as global population explodes 50% to 10 billion in 2050. Powerful commercial, political and ideological forces drive globalization. Emerging nations compete for scarce resources. This is "the mother of all national security issues," warns the Pentagon.
"Unrest would then create massive droughts, turning farmland into dust bowls and forests to ashes. Rather than causing gradual, centuries-spanning change, they may be pushing the climate to a tipping point. By 2020 there is little doubt that something drastic is happening. As the planet’s carrying capacity shrinks an ancient pattern reemerges: the eruption of desperate, all-out wars over food, water and energy supplies and warfare defining human life."
9. Doomsday History: This time really is different — the final meltdown
Bubble/bust cycles have been well documented for eight centuries. But the lessons of history are never learned. Euphoria blinds us in boom times. We deny risk. Bubbles blow. Meltdowns happen. We will always recover.
Wrong. Many now challenge that naive assumption. Financial historian Niall Ferguson comments in his "Rise and Fall of the American Empire:"
"Collapse may come much more suddenly than many historians imagine. Fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice. Many nations in history, at the very peak of their power, affluence and glory, see leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation."
10. Doomsday Investing: Survival strategies in the post-capitalism era
Former Morgan Stanley guru and hedge fund manager Barton Biggs, offers his Super-Rich Investors a doomsday strategy in his "Wealth, War and Wisdom." He warns of "the possibility of a breakdown of the civilized infrastructure." No hippie radical, he says "think Swiss Family Robinson, your safe haven must be self-sufficient, capable of growing food, well-stocked with seed, fertilizer, canned food, wine, medicine, clothes. And be ready to fire a few rounds over the approaching brigands’ heads, to persuade them there are easier farms to pillage."
But will that work for Main Street investors in the next meltdown/depression? Read our 12 tips and six worst-case scenario rules for average investors preparing for the doomsday scenario.
Has America passed the point of no return?
Can’t we deflect the trajectory? Yes, but America would need a fundamental shift in how our leaders think, says Jared Diamond in "Collapse: How Societies Choose to Fail or Succeed." We need leaders with "the courage to practice long-term thinking and make bold, courageous, anticipatory decisions at a time when problems have become perceptible [like in 2011] but before they reach crisis proportions."
Never happen, says Jeremy Grantham, a guy managing $100 billion: "It’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history," like 2008, America’s leaders on Wall Street, Washington and Corporate CEOs "are always going to miss it." Yes, miss the next big one too.
Bottom line: Underneath America’s endless political drama lie deep wounds that are widening the gap between the Super Rich and the other 99% of America, wider today than before the 1929 Crash. And now as then, we know the Super Rich don’t really care about the needs of the rest of America — witness their agenda in states like Wisconsin and Michigan, and the GOP’s new "Path to Prosperity" budget, a rush to restore failed Reaganomics policies.
The greed of the Super Rich is insatiable. For them, more is never enough. Without a fundamental shift in how our leaders think, soon the 2020 timetable projected in the work of the Pentagon, Ferguson and others will mark the final countdown, the inevitable trajectory of "Doomsday Capitalism" which we detailed in "America’s 10 Worst Years: 2011-2020."
A banking crisis is a terrible thing to waste
by Francesco Guerrera - Financial Times
Two reports, 853 pages, one question: is this it?
Last week, the banking world was gripped by the findings of a probe into the financial crisis by a powerful US Senate committee and the interim report of Britain’s government-appointed Independent Commission on Banking, led by Sir John Vickers.
The two efforts are important contributions to understanding what caused the turmoil and avoiding a repeat. But they are also the last gasps of the regulatory fervour that followed the crisis – an apt time to assess whether the policy responses were commensurate with the magnitude of the event. Wall Street executives argue that the authorities’ reformist zeal is alive and well. After all, Carl Levin, who led senators into a two-year search for wrongdoing and malfeasance during the crisis, has pledged to refer evidence to the Department of Justice for possible criminal prosecutions.
And the ICB’s work in the UK – especially the proposal that lenders "ringfence" retail units from the riskier securities businesses – will lead to significant changes in the operations of British banks. The issue, though, is whether these and other reform efforts are the best regulators could do to remedy the faults laid bare by the worst financial storm in generations. My empirical gauge – looking at how bankers reacted – suggests not.
Last week, the usual outrage at regulatory over-reach, big government and "banker-bashing" was replaced by a Zen-like acceptance. "We can live with this," is how a top executive summed it up. Even inside Goldman Sachs and Deutsche Bank – the two groups lambasted by the Levin investigation – the mood was one of relief. In their view, the 639-page report uncovered no "smoking guns" that could lead to prosecutions, especially when the DoJ shows no appetite for such cases.
In short, they thought it could have been worse. Perhaps it should have been. Charged with drawing the blueprint for rebuilding after a financial earthquake, regulators shied away from large scale structural measures. During the crisis, as the inadequacies of the existing system became painfully apparent, policymakers considered radical solutions such as breaking up banks, limiting their size and forcing more transparency in their financial reporting.
Two years and a massive lobbying campaign later, most of those plans lie on the cutting room floor of parliamentarians’ and regulators’ offices. In the US, the Dodd-Frank law did overhaul areas such as credit card fees and "proprietary trading". But it failed to provide a definitive answer to two crucial questions: how to prevent lenders from taking excessive risks? And, how to wind down large banks when they fail? The fact that we still don’t have a list of "systemically-important" institutions and that nobody knows how "the resolution authority" might work is truly worrying.
In Europe, the authorities have done even less. One of the reasons why bankers were so relaxed about Levin and the ICB is that they are the last efforts at reform. Survive those, and you can go back to business as usual. Many already have. JPMorgan Chase reported record quarterly profits this week – a great way to celebrate the $5m bonus paid to Jamie Dimon, its chief, for 2010. His rivals at Goldman Sachs and Morgan Stanley have also received cash pay-outs for the first time since the crisis.
Regulators, especially the Swiss ones, may be right in focusing on higher capital buffers to put the brakes on banks’ irresistible desire to take ever more risks. But lack of capital was only part of the problem for the likes of Lehman Brothers, Bear Stearns and Northern Rock. The attitudes instilled by "I want it all and I want it now" incentives and pay systems were just as responsible for those failures. Attitudes such as the one of Rocky Kurita, a Deutsche trader, who in a 2005 e-mail uncovered by the US Senate, stated: "[W]e have to make money. Customer happiness is a secondary goal."
Before we close this dark chapter of banking history, it is worth looking back at Ferdinand Pecora. In 1933, this Italian immigrant was put in charge of the Levin commission of his day – an inquiry into the causes of the 1929 crash. Its findings of banks’ abusive practices and conflicts of interest led to the creation of the Securities and Exchange Commission and the passage of the Glass-Steagall Act separating commercial and investment banking. The half a century that followed was among the most stable in US banking history.
Levin, Dodd, Frank and Vickers should have striven for the same level of ambition, if not the same solutions, as Pecora, Glass and Steagall. A crisis is a terrible thing to waste.
S&P Cuts US Ratings Outlook To Negative
by Damian Paletta and E.S. Browning - Wall Street Journal
A blunt warning Monday from a credit-rating firm about the U.S. government's mounting debt pushed stock markets lower and intensified political divisions in Washington about how best to tackle growing deficits.
Both the Obama administration and House Republicans scrambled to gain leverage from Standard & Poor's changing its outlook on U.S. Treasury securities to "negative" from "stable." S&P didn't lower its top-notch AAA-bond rating for U.S. government Treasury securities, and their prices initially fell but later rebounded amid optimism that the report could serve as a catalyst to force both sides in Washington to compromise.
The Dow Jones Industrial Average fell 140.24 points, or 1.14%, to 12201.59, its biggest decline in a month, after earlier tumbling almost 250 points. Stocks in Britain, Germany and France fell more than 2%, with most of the declines coming after the S&P news, and in early trading Tuesday, Japan shares fell 1%. Gold surged to just below $1,500 an ounce. But hopes that the report might spur a deficit deal actually helped U.S. borrowing costs and the dollar. The 10-year Treasury note rose 9/32 in price, pushing its yield down to 3.373%, its lowest 3:00 p.m. level since March 23. The dollar rose against the euro.
A downgrade would push up interest rates on Treasurys, which are a benchmark for other consumer and business borrowing rates, raising the cost of credit throughout the economy. S&P also revised its outlook on five big U.S. insurance groups that currently are rated AAA, to negative from stable. S&P said the five U.S.-focused insurers "are constrained by the sovereign rating on the U.S."
The insurers are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Assoc. of America and United Services Automobile Association. New York Life said its financial and business strength justified continued triple-A ratings. USAA noted that S&P maintained the insurer's AAA credit and financial strength ratings. And Northwestern Mutual said it remains "confident in the strength of our business model." The others couldn't immediately be reached for comment.
Japan, meanwhile, expressed confidence in U.S. government debt. "We continue to believe that U.S. Treasurys are an attractive product for us," said Finance Minister Yoshihiko Noda. The S&P report questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits. "The sign of political gridlock was a key determinant in our outlook change," said John Chambers, chairman of the sovereign ratings committee at Standard & Poor's Ratings Services.
This year's budget deficit is projected to rise to between $1.5 trillion and $1.65 trillion, equal to roughly 10% of America's gross domestic product, or total economic output. The White House is hoping to form a group of Democratic and Republican lawmakers to craft a framework for reducing the deficit, but has made little progress. Vice President Joe Biden plans to host the group's first meeting May 5. Treasury Secretary Timothy Geithner has warned lawmakers that their reluctance to raise the federal borrowing limit could cripple the recovery, and the jittery reaction to the S&P report could underscore his arguments about how badly markets would react to any failure to raise the debt ceiling.
The U.S. debt now stands at $14.219 trillion—just shy of the $14.294 trillion cap—and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest on existing debt. If no action is taken, the government could default on its debt by July 8. Wall Street executives have called Capitol Hill with increasing frequency in recent weeks, urging it to raise the debt ceiling immediately.
Although S&P said it changed its outlook even while assuming the debt ceiling will be increased, many Republicans cited the report in affirming their position that they would raise it only in exchange for a commitment to address the deficit. "As S&P made clear, getting spending and our deficit under control can no longer be put off for another day, which is why House Republicans will only move forward on the President's request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington," said House Majority Leader Eric Cantor (R., Va.).
White House and Treasury Department officials, who were alerted to the report on Friday, questioned its conclusions but said it validated their efforts to broker a bipartisan deal to address the debt. Administration officials had sensed the downgrade was coming for weeks, and informed President Barack Obama about the change over the weekend. "Any call for a bipartisan agreement on deficit reduction, on fiscal reform, is a welcome one, and in that context, I think that it adds to what we believe is some momentum towards that end," said White House spokesman Jay Carney.
The move to a negative outlook means S&P believes there is a one-in-three chance that Treasury bonds could be downgraded from their AAA rating, the ratings agency said. Mr. Chambers said outlooks cover a period of six months to two years, during which the credit-rating agency monitors whether the government is moving toward resolving the situation.
Moody's, another U.S. ratings firm, came to a different conclusion in its Weekly Credit Outlook. It called the changed parameters of the debate a turning point. Since S&P began assigning outlooks to government debt in 1989, five AAA-rated countries have been assigned negative outlooks, including Britain in 2009. Three were subsequently downgraded, and Britain and one other were returned to a stable outlook. S&P acted after it determined that new British austerity measures to cut spending and raise revenue would reduce the government deficit to 3% of GDP by 2014 from 11.2% in 2009.
If the U.S. reaches a British-style resolution, S&P will restore the U.S. outlook to stable, Mr. Chambers said. The White House last week proposed reducing the deficit at a moderate pace through a combination of tax increases, changes to Medicare and cuts in military and other spending. Republicans have called for quicker action, with bigger cuts in spending and overhauls of Medicare and Medicaid. S&P said the difference was stark. "We see the path to agreement as challenging because the gap between the parties remains wide," the report said.
Bill Gross, a founder of Pacific Investment Management Co., manager of the world's biggest bond fund, dumped government-related holdings in February and began shorting them in March. He said the S&P action "is one warning shot at least to investors that should be loud and clear in Washington."
S&P: There's Still A Huge Risk Of More Bailouts, More Money For Fannie And Freddie, And A Collapsing Student Loan Market
by Joe Weisenthal - Business Insider
One of the more interesting paragraphs from S&P's downgrade of the US debt outlook focuses on the financial sector:Additional fiscal risks we see for the U.S. include the potential for further extraordinary official assistance to large players in the U.S. financial or other sectors, along with outlays related to various federal credit programs. We estimate that it could cost the U.S. government as much as 3.5% of GDP to appropriately capitalize and relaunch Fannie Mae and Freddie Mac, two financial institutions now under federal control, in addition to the 1% of GDP already invested (see "U.S. Government Cost To Resolve And Relaunch Fannie Mae And Freddie Mac Could Approach $700 Billion," Nov. 4, 2010, RatingsDirect).
The potential for losses on federal direct and guaranteed loans (such as student loans) is another material fiscal risk, in our view. Most importantly, we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008, as our downward revisions of our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3 from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008 reflect (see "Banking Industry Country Risk Assessments," March 8, 2011, and "Banking Industry Country Risk Assessment: United States of America," Feb. 1, 2010, both on RatingsDirect).
In line with these views, we now estimate the maximum aggregate, up-front fiscal cost to the U.S. government of resolving potential financial sector asset impairment in a stress scenario at 34% of GDP compared with our estimate of 26% in 2007.
S&P aims to whip Congress into debt action
by Brad DeLong - Financial Times
A spokesperson for Standard & Poor’s said on Monday that there was an "at least a one-in-three likelihood" that the rating agency "could lower" its long-term view on the US within two years. US equities quickly dropped by more than 1.5 per cent. Importantly, however, the dollar did not weaken and US Treasury interest rates did not rise. The reason for this unexpected pattern is simple: the markets think this move is important not because it signals something fundamental about the economy, but because of the political impact it will have in Washington.
So what is going on? A sovereign-debt downgrade is supposed to mean that a government’s finances have become shakier. This means that the likelihood of internal price inflation is higher, the future value of the nominal exchange rate is likely to be lower, and the possibility that creditors might not get their money back in the form and at the time they had contracted for had gone up. But if this were true the value of the dollar should have fallen on Monday. At the same time nominal interest rates on US debt should also have risen. The value of equities, meanwhile, could have gone either way: macroeconomic chaos would diminish future profits, but stocks have always been and remain a hedge against inflation.
But that is not what happened here. Instead equities fell, the dollar rose, and nominal Treasury interest rates were unchanged. Given this, there are two things to bear in mind. First, you can go insane trying to over-interpret short-term market movements. Second, news comes in flavours: new news, old news, no news, and political news. And it is important to understand which type this was. If S&P’s announcement were genuine "new news" to the market, we would have expected to see the standard pattern: equities down, dollar down, rates up.
Meanwhile, if the announcement were old news, we would have expected to see no price movements at all – the smart money would already have taken up their positions. Equally, if it were no news – if the market as a whole simply thought that S&P was irrelevant – then we would have expected to see no price movements at all. But this did not happen: we did see price movements, both in equities, and in the dollar. Instead what we saw just what might have been expected to see if S&P’s announcement is seen not as a piece of information produced by a financial analyst studying the situation, but instead as a move by a political actor trying to nudge a government toward its preferred policies.
Why? On Monday we saw confidence in the US, and the dollar as a safe haven, strengthen. This means that some who were previously leery of keeping their money in dollars, out of fear of future depreciation, are now less leery. This means some in the markets expect the S&P announcement to be successful as a political intervention. In short, the market thinks the S&P has just increased the chance of a long-term budget deal.
Monday’s pattern makes sense, therefore, if S&P’s announcement is seen as a political move. The market reaction sees Congress like a mule: it only moves when hit with a whip. Normally the whip to get a deficit-reduction deal is fear of the bond market’s producing a spike in interest rates and borrowing costs, but perhaps a fear of a ratings downgrade will do instead. Over the next few months we will see if the market is right.
S&P: US Financial System Riskier Than Before Financial Crisis
by Shahien Nasiripour - Huffington Post
The financial system poses an even greater risk to taxpayers than before the crisis, according to analysts at Standard & Poor's. The next rescue could be about a trillion dollars costlier, the credit rating agency warned.
S&P put policymakers on notice, saying there's "at least a one-in-three" chance that the U.S. government may lose its coveted AAA credit rating. Various risks could lead the agency to downgrade the Treasury's credit worthiness, including policymakers' penchant for rescuing bankers and traders from their failures. "The potential for further extraordinary official assistance to large players in the U.S. financial sector poses a negative risk to the government's credit rating," S&P said in its Monday report. But, the agency's analysts warned, "we believe the risks from the U.S. financial sector are higher than we considered them to be before 2008."
Because of the increased risk, S&P forecasts the potential initial cost to taxpayers of the next crisis cleanup to approach 34 percent of the nation's annual economic output, or gross domestic product. In 2007, the agency's analysts estimated it could cost 26 percent of GDP. Last year, U.S. output neared $14.7 trillion, according to the Commerce Department. By S&P’s estimate, that means taxpayers could be hit with $5 trillion in costs in the event of another financial collapse.
Experts said that while the cost estimate seems unusually high, there's little dispute that when the next crisis hits, it will not be anticipated -- and it will likely hurt the economy more than the last financial crisis. "The impact of the next crisis will be greater because the economy is in a much more fragile state," said Andrew Lo, professor of finance at the MIT Sloan School of Management. "My worry about the next financial crisis is it will come from some corner we haven't really thought about, and we'll be locked into more constraints on the Fed's ability and on the Treasury's ability to really do anything," said Jeremy Stein, an economics professor at Harvard University who worked as an adviser to both the Treasury Department and the White House in 2009.
The constraints are a result of the last round of multiple bailouts. "I think it's literally going to be politically harder to put in resources, for better or for worse," Stein said. That could either induce those in the financial system to take less risk, forestalling the next breakdown, or, "the mop up will be more difficult," Stein said.
The U.S. banking industry poses as much of a credit risk as Spain's, S&P wrote in an April 8 report in which it judged 92 nations' banking sectors. Spain is frequently mentioned as a candidate for an international bailout because many of its banks are under-capitalized, its banking system remains dogged by delinquent bubble-era loans and it faces losing investor confidence. The ranking is partly based on the quality of a nation's financial regulation and lending patterns. U.S. bank regulators failed to prevent the crisis or the poor lending that led to it, S&P analysts wrote in a Jan. 6 report.
"Systemic risk is greater now," said Mark T. Williams, a finance professor at Boston University and a former bank examiner for the Federal Reserve. "It was uncorked because of the fall of Lehman Brothers, and the genie has been let out of the bottle," he said, referring to the September 2008 failure of the former investment bank.
The continued rise of globalization and the separate growth of derivatives -- financial instruments that aim to spread risk -- have led to greater connections between countries, industries and companies, Williams said. The level of so-called interconnection has tied firms to one another in ways experts do not completely understand. Regulators and policymakers didn't know how interconnected various banks and insurance companies were prior to the near-financial meltdown of 2008.
Because the giant insurer American International Group, better known as AIG, was connected to so many firms through derivatives, policymakers felt forced to bail the company out when it ran into trouble. "Systemic risk knows no national boundaries," said Williams, who published "Uncontrolled Risk," a book on the topic, last year. "It is not random or a force of nature, it is man made. [And] the global financial market remains fragile due to weak policies, lax regulation, poor accountability and systems not designed to capture global risk management."
The risk of another financial collapse also has increased, Lo of MIT argues, because banks have not accounted for losses on poorly-performing assets they're still hiding on their books; lawmakers' likely aversion to another bailout should the system run into trouble again; and the perception that many national economies aren't as durable as they were just a few years ago. China, for example, was able to help the U.S. through the depths of the last crisis thanks to the steps it took to increase domestic spending.
But today, China is trying to cool down an over-heating economy. "Next time around, if we see another systemic shock, it will be very difficult for us to depend on our foreign trading partners to cushion that kind of a blow," Lo said. "The world economy is not as resilient as it was just a few years ago."
Beware Wounded Rating Agencies
by David Cottle - Wall Street Journal
As the United States has just discovered, a wounded credit-rating agency is a dangerous beast.
The raters stood accused of contributing to, even precipitating, financial crisis by awarding top grades to securities, institutions and even countries which proved unworthy of them, to put it mildly. They then compounded the error by lowering these ratings too slowly, or so the charge sheet reads. Stung by such barbs, Standard & Poor’s, Moody’s and Fitch have clearly resolved not to get caught behind the curve again. Hence, presumably, S&P’s seismic decision to give the U.S.’s gold-standard credit rating a negative outlook Monday. Quite a start to the week.
In one sense, of course, the action tells us little we didn’t already know, and is merely a response to the agonizing budgetary wrangling taking place in Washington. It’s those pesky voters again, you see. They generally favor deficit reductions, but are not so keen on any measures which would hit their personal finances (this is the post-crisis catch-22 for governments all over the spent-out west).
However, brightening the structural fiscal outlook in Washington will require painful adjustments, and these are generally rare in the year or so prior to a Presidential election. What S&P has done is highlight the threat to both the dollar’s status as the world’s reserve currency, and the "risk free" position of U.S. debt if the next few months don’t prove an exception to this rule.
Of course the U.S. is not the only nation to feel the force of the agencies’ new vigor. Europe’s struggling threesome, Ireland, Greece and Portugal, have suffered frequent downgrades as the raters try to stay ahead of their developing fiscal crises, as have their banks. That other Anglo-Saxon credit-crunch casualty, the U.K., has at least come up with a plan which might just see it keep its own gold-standard ratings. But it hasn’t been implemented yet, and opposition among public sector workers is significant. Any signs that the political will is foundering will see the agencies pounce on gilts, too.
All in all financial markets should probably welcome this newfound aggression from the bond watchdogs. However, taxpayers in the nations involved will ultimately face the higher borrowing costs which come with lower sovereign ratings. They’ll likely come to wish the agencies had got their claws out before the private sector’s vast debts were dumped on their buckling shoulders.
Taxes to Balance US Budget? Not Unless Rates Go Up 150%
by FOX News
It's Tax Day, and the Washington chatter is all about whether America's top earners should be taxed more. But, as the dim outlook from a key ratings agency showed Monday, Uncle Sam's deficit problem is deep. And if the federal government really wanted to use the tax code to close the deficit, it turns out everybody would feel the burn.
A new Tax Day study showed that if Washington wanted to balance the budget using tax increases alone, rates would have to more than double across the board -- including on the middle class -- to keep up with federal spending. As Republicans often argue, the top tier already pays a greater percentage in taxes than all the rest. The government could extract hundreds of billions more by upping their rates, but without significant spending cuts would have to turn next to the middle brackets. "Everyone would be looking at a tax hike if that's the answer here," Public Notice director Gretchen Hamel said.
IRS data showed that in 2008, the top 5 percent of earners -- households earning more than $160,000 -- accounted for about 59 percent of all federal income tax paid. The next 45 percent -- solidly middle-class taxpayers earning between $33,000 and $160,000 -- accounted for about 39 percent of all personal income tax paid. The bottom 50 percent accounted for the remaining sliver of tax revenue. In fact, a Tax Policy Center study showed that 45 percent of households in the United States will pay no federal income tax for 2010.
White House spokesman Jay Carney said Monday that those households do pay taxes. "There are many taxes besides income taxes," he said. "Those who are paying payroll taxes, are working Americans, they very much have a stake in the system and they very much have a stake in the economic future of this country."
President Obama has said emphatically that he will not allow the tax rate on families earning more than $250,000 to remain at 35 percent after 2012, a source of contention among Republicans who say the top earners are already carrying the brunt of the "shared sacrifice." Meanwhile, critics warn that tax hikes will, in all likelihood, have a limited impact on the deficit -- unless they are raised beyond recognition.
The estimate from the nonpartisan Public Notice demonstrated this point. It showed that if Washington wanted to hoist tax rates to actually cover spending, the top tier rate would go from 35 to 88 percent; the middle tier from 25 to 63 percent and the lowest from 10 to 25 percent. "You'd have to more than double taxes and you still wouldn't solve this problem," Hamel said. "And the problem is spending."
Obama is targeting his proposed increase on the top 2 percent of wage earners, casting it as a hike on millionaires and billionaires. He argues they can afford to pay a little more to help the country balance its books. But as one might expect, virtually nobody thinks they’re taxed too little -- though the burden varies drastically across the income scale.
A new Gallup poll released Monday showed that while 57 percent of Americans describe their income tax as "fair," most think their taxes are still too high. The more an individual made, the stronger they felt on that question, the poll showed.
The Obama administration emphasizes that its deficit reduction plan leans more on spending cuts than tax increases. The administration is looking at $1 in revenue increases for every $3 in spending cuts. That's about the ratio being eyed by the "gang of six" senators working on a bipartisan compromise. But Sen. Mark Warner, D-Va., a member of that group, said in an interview Sunday that the revenue increases don't have to come from tax rate hikes. Rather, he stressed that lawmakers could instead cut back on deductions and other loopholes that are costing the U.S. Treasury.
Bernanke May Sustain Stimulus to Avoid 'Cold Turkey' End to Aid
by Scott Lanman - Bloomberg
Federal Reserve Chairman Ben S. Bernanke may keep reinvesting maturing debt into Treasuries to maintain record stimulus even after making good on a pledge to complete $600 billion in bond purchases by the end of June.
The Fed chief’s top two lieutenants said this month the economy and inflation are too weak to warrant the start of a monetary-policy reversal. Investors and economists including David Kelly at JPMorgan Funds see that as a signal the Fed will keep its balance sheet at current levels by replacing about $17 billion a month in maturing mortgage debt with Treasuries.
Ending the reinvestment policy and the $600 billion program at the same time would be like quitting stimulus "cold turkey," said Kelly, who is based in New York and helps oversee $400 billion as chief market strategist at JPMorgan. "It does make sense to reinvest for a while," he said. "Then they could watch how bond yields react to that."
Yields on 10-year Treasuries declined to 2.49 percent from 2.76 percent in the two weeks following the Fed’s Aug. 10 decision to begin reinvesting payments on assets purchased during the first round of bond buying from December 2008 until March 2010. An end to the reinvestment policy should be seen by investors as the first step in a tightening of credit by the Fed, said Neal Soss, chief economist at Credit Suisse Group AG. Soss is among economists who say the Federal Open Market Committee at the end of its April 26-27 meeting will probably affirm its plan to halt Treasury purchases on schedule.
Fed officials are starting to debate what steps to take after completing the purchases, a program dubbed QE2 for the second round of quantitative easing. Policy makers were divided at their last meeting on March 15, with a "few" officials saying tighter credit may be warranted this year, while a "few others noted that exceptional policy accommodation could be appropriate beyond 2011."
Janet Yellen, the Fed’s vice chairman, said April 11 that surging commodity costs over the past year are "unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy." William C. Dudley, president of the Federal Reserve Bank of New York and the FOMC’s vice chairman, said April 1 that the recovery is "still tenuous," while Bernanke said April 4 that higher commodity prices may have just a "transitory" effect on inflation. Bernanke last month identified ending the reinvestment policy as one of the Fed’s tools for exiting stimulus and draining reserves from the financial system.
The Fed chief may be asked how long the reinvestment policy will be maintained in a press conference April 27, and "he’ll probably say that will depend upon the tone of the economic indicators in the months ahead," said James Kochan, who helps manage $231 billion as chief fixed-income strategist at Wells Fargo Fund Management LLC in Menomonee Falls, Wisconsin. "The first step is to end QE2," Kochan said. "The next step will be to stop reinvesting the proceeds from the portfolio. I don’t know when that’s going to happen, but maybe around the turn of the year."
The FOMC decision in August to start the reinvestment program initially fanned investor anxiety that the recovery would falter. Bernanke said later that month the policy was aimed at keeping borrowing costs low and that the Fed was weighing more securities purchases, a move announced on Nov. 3.
Since then, yields on 10-year Treasuries have increased to 3.38 percent from 2.57 percent. The Standard & Poor’s 500 Index has gained 9 percent, while the dollar has weakened by 1.3 percent against an index of six currencies. Most of the 50 analysts in a Bloomberg News survey last month expected the Fed to keep its bond portfolio stable for some time after the purchases end, with a plurality of 16 betting on a period of four to six months. Five economists said the Fed would halt the policy once QE2 ends; 11 said it would keep reinvesting for one to three months; 14 said seven to nine months, and four said more than nine months.
"If necessary, the Federal Reserve can also drain reserves by ceasing the reinvestment of principal payments on the securities it holds or by selling some of those securities in the open market," Bernanke said in semiannual monetary-policy testimony before the House and Senate on March 1 and March 2. Federal Reserve Bank of Philadelphia President Charles Plosser, part of a minority of policy makers who favor a tougher approach to controlling inflation, said in a March 25 speech that ending reinvestment is one of the first steps in his preferred exit method.
‘Headwinds’ to Growth
"Headwinds" against U.S. growth, including higher gasoline prices, reduced spending by state and local governments and a housing industry that’s "flat on its back" make it difficult for Fed officials to end the reinvestment policy, former Fed Governor Lyle Gramley said. "The economy has a lot of problems," said Gramley, now senior economic adviser with Potomac Research Group in Washington. "If I had to call the shots today, I would say continuing to reinvest the proceeds from maturing issues is better than a 50-50 chance."
Extending the policy in the coming months would mean that a later decision to end it would signal the Fed’s broader exit from near-zero interest rates, said Soss, based in New York. "It wasn’t a package deal at the beginning, and I don’t think that it’s a package deal at this juncture," said Soss, who worked as an aide to former Fed Chairman Paul Volcker. "An announcement about not reinvesting would be a new policy innovation and undoubtedly should be viewed as the first move in a tightening program."
Big U.S. Firms Shift Hiring Abroad
by David Wessel - Wall Street Journal
U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization's effect on the U.S. economy.
The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That's a big switch from the 1990s, when they added jobs everywhere: 4.4 million in the U.S. and 2.7 million abroad. In all, U.S. multinationals employed 21.1 million people at home in 2009 and 10.3 million elsewhere, including increasing numbers of higher-skilled foreign workers.
The trend highlights the growing importance of other economies, particularly in rapidly growing Asia, to big U.S. businesses such as General Electric Co., Caterpillar Inc., Microsoft Corp. and Wal-Mart Stores Inc. The data also underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren't rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class.
Some on the left view the job trend as reason for the U.S. government to keep companies from easily exporting work overseas and importing products back to the U.S. or to more aggressively match job-creating policies used in some foreign markets. More business-friendly analysts view the same data as the sign that the U.S. may be losing its appeal as a place for big companies to invest and hire. "It's definitely something to worry about," says economist Matthew Slaughter, who served as an adviser to former president George W. Bush. Mr. Slaughter, now at Dartmouth College's Tuck School of Business, is among those who think the U.S. has lost some allure.
A decade ago, Mr. Slaughter, who consults for several big companies and trade associations, drew attention with his observation that "for every one job that U.S. multinationals created abroad...they created nearly two U.S. jobs in their [U.S.-based] parents." That was true in the 1990s, he says. It is no longer. The Commerce Department's summary of its latest annual survey shows that in 2009, a recession year in which multinationals' sales and capital spending fell, the companies cut 1.2 million, or 5.3%, of their workers in the U.S. and 100,000, or 1.5%, of those abroad.
The growth of their overseas work forces is a sensitive point for U.S. companies. Many of them don't disclose how many of their workers are abroad. And some who do won't talk about it. "We will decline to comment on future hiring or head-count numbers," says Kimberly Pineda, director of corporate public relations for Oracle Corp. Those who will talk say the trend, in some instances, reflects the rising productivity of U.S. factories and, in general, a world in which the U.S. represents a smaller piece of a bigger whole. "As a greater percentage of our sales have been outside the U.S., we have seen our work force outside the U.S. grow," says Jim Dugan, spokesman for construction-equipment maker Caterpillar, which has added jobs more rapidly abroad than in the U.S.
The Commerce Department's totals mask significant differences among the big companies. Some are shrinking employment at home and abroad while increasing productivity. Others are hiring everywhere. Still others are cutting jobs at home while adding them abroad. At some companies, hiring to sell or make products abroad means more research or design jobs in the U.S. At others, overseas hiring simply shifts production away from the U.S. The government plans to release details about various industries and countries in November.
While hiring, firing, acquiring and divesting in recent years, GE has been reducing the overall size of its work force both domestically and internationally. Between 2005 and 2010, the industrial conglomerate cut 1,000 workers overseas and 28,000 in the U.S.
Jeffrey Immelt, GE's chief executive, says these cuts don't reflect a relentless search for the lowest wages, or at least they don't any longer. "We've globalized around markets, not cheap labor. The era of globalization around cheap labor is over," he said in a speech in Washington last month. "Today we go to Brazil, we go to China, we go to India, because that's where the customers are." In 2000, 30% of GE's business was overseas; today, 60% is. In 2000, 46% of GE employees were overseas; today, 54% are. Mr. Immelt says GE did or will add 16,000 U.S. jobs in manufacturing or high-tech services in 2010 and 2011, including 150 in Erie, Pa., making locomotives for China, and 400 at a smart-grid technology center in Atlanta.
Caterpillar increasingly relies on foreign markets for its sales. It has been adding workers world-wide—except for global layoffs in 2009, amid the recession—but is hiring much faster abroad. Between 2005 and 2010, its work force grew by 3,400 workers, or 7.8%, in the U.S. and 15,900, or nearly 39%, overseas. Mr. Dugan, the company spokesman, says Caterpillar still does most of its research and development in Peoria, Ill., where it is based, and that "a little over half" of its planned $3 billion in capital spending this year is earmarked for facilities in the U.S.
Several high-tech companies have been expanding their work forces both domestically and abroad, but doing much more of their hiring outside the U.S. Oracle, which makes business hardware and software, added twice as many workers overseas over the past five years as in the U.S. At the beginning of the 2000s, it had more workers at home than abroad; at the end of 2010, 63% of its employees were overseas. The company says it still does 80% of its R&D in the U.S.
Similarly, Cisco Systems Inc., which makes networking gear, has been creating jobs much more rapidly abroad. Over the past five years, it has added 10,900 employees in the U.S. and 21,350 outside it. At the beginning of the decade, 26% of its work force was abroad; at the end, 46% was. Microsoft is an exception. It cut its head count globally last year, but over the past five years, the software giant has added more jobs in the U.S. (15,300) than abroad (13,000). About 60% of Microsoft's employees are in the U.S.
While small, young companies are vital to U.S. economic growth, big multinationals remain a major force. A report by McKinsey Global Institute, the think-tank arm of the big consulting firm, estimates that multinationals account for 23% of the nation's private-sector output and 48% of its exports of goods. These companies are more exposed to global competition than many smaller ones, but also more capable of taking advantage of globalization by shifting production, and thus can be a harbinger of things to come.
The economists who advised McKinsey on its report dubbed multinationals "canaries in the coal mine." They include Mr. Slaughter and Clinton White House veterans Laura Tyson, of the University of California, Berkeley, and Martin Baily, of the Brookings Institution. They warn that a combination of the U.S. tax code, the declining state of U.S. infrastructure, the quality of the country's education system and barriers to the immigration of skilled workers may be making the U.S. less attractive to multinationals. "We can excoriate them" and also listen to them, Mr. Slaughter says of the multinationals. "But we can't just excoriate them."
Other observers see the trend as a failure of U.S. policies to counter aggressive foreign governments. "All the incentives in the global economy—an overvalued U.S. dollar, lower corporate taxes abroad, very aggressive investment incentives abroad, government pressure abroad versus none at home—are such as to steadily move the production of tradable goods and the provision of tradable services out of the U.S.," says Clyde Prestowitz, a former trade negotiator turned critic of U.S. trade policy. "That has been having, and will continue to have, a negative impact on U.S. employment and wages."
Goldman posts 72% drop in quarterly earnings
by Dan Wilchins - Reuters
* Q1 EPS $1.56, vs. $5.59 year ago
Goldman Sachs Group Inc posted a 72 percent decline in first-quarter profit as it made less money from trading bonds for clients.
The largest U.S. investment bank posted a profit to common shareholders of $908 million, or $1.56 a share, compared with $3.3 billion, or $5.59 a share, in the same quarter a year ago.
Results in the latest quarter were also hit by the repurchase of $5 billion of preferred shares from Warren Buffett's Berkshire Hathaway (BRKa.N). The redemption resulted in a special preferred dividend of $1.64 billion. Excluding that charge, the bank would have earned $4.38 a share.
Revenue fell 7 percent. Goldman Sachs set aside $5.23 billion for employee compensation in the quarter, a 5 percent decline from the same quarter last year. (Reporting by
Funds accuse banks of manipulation
by Dan McCrum - Financial Times
Three investment funds have accused a group of US, European and Japanese banks of conspiring to manipulate the benchmark interest rate used to calculate the cost of billions of dollars of debt. The 12 banks named in the suit filed in a New York Federal Court are accused of harming investors by selling derivatives based on artificial prices between 2006 and 2009. The suit revolves around the London interbank offered rate, or Libor – the estimated cost of borrowing for banks between each other set daily by the British Bankers’ Association.
FTC Capital, based in Vienna, and two FTC Futures Funds registered in Luxembourg and Gibraltar contend in the complaint that the banks "collectively agreed to artificially suppress the Libor rate". "During the most significant financial crisis since the Great Depression, US dollar Libor rates submitted by contributor banks did not vary markedly, nor did they increase or decrease sharply," the complaint said. The plaintiffs are seeking unspecified damages and class action status for derivative investors harmed in a jury trial.
"We believe the suit is without merit," Citigroup said. The other banks named in the suit either declined to comment or spokesmen could not be reached. They are: Bank of America, Barclays, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Lloyds Bank, Norinchukin Bank, Royal Bank of Scotland, UBS and West LB.
The lawsuit comes as regulators in the US, Japan and UK are investigating whether some of the biggest banks acted in concert to manipulate the benchmark interest rate. Libor, which measures the rate banks charge each other, is used as a reference for about $350,000bn in financial products, making it one of the world’s most closely watched indices. Very small changes can have a huge knock-on effect on products such as interest rate derivatives and loans that are pegged to the rate.
"Because different banks were experiencing different levels of severe stress, the banks should have been receiving markedly different borrowing rates. None of this was reflected in the Libor rates reported," said the complaint. The complaint argues that the banks had two motives for suppressing Libor, "to avoid having the market doubt their financial stability", and "to take advantage of insider trading opportunities their inside information would provide in the Libor-based derivative market".
The process to set dollar Libor involves 20 banks submitting their borrowing costs every day at about 11am. The top and bottom five are discarded and the rate is then calculated from an average of the remaining 10.
Approaching the Eraser
by John Hussman - Hussman Funds
Two months ago, I noted that the surprise resignation of Wells Fargo's Chief Financial Officer had caught the eye of a number of shareholders, who noted my comment several quarters ago that we could observe a wave of fresh risk aversion "at the point where the first bank CFO resigns out of refusal to sharpen his pencil any further."
My impression is that the underlying state of mortgage debt is no better than it was quarters ago, and indeed may be worse in the sense that there has been no meaningful decline in the backlog of delinquent and unforeclosed homes. While foreclosure filings certainly fell significantly in the first quarter, the decline was driven by record-keeping problems and legal moratoriums.
As Realty Trac observed, "Weak demand, declining home prices and the lack of credit availability are weighing heavily on the market, which is still facing the dual threat of a looming shadow inventory of distressed properties and the probability that foreclosure activity will begin to increase again as lenders and servicers gradually work their way through the backlog of thousands of foreclosures that have been delayed due to improperly processed paperwork."
It's fascinating to hear JP Morgan's Jamie Dimon complaining "We have homes sitting there for 500 days rotting that we can't do anything about" while at the same time reducing loan loss reserves on those assets. But of course, that's precisely what the FASB has allowed banks to do. Specifically, there is no longer any need to mark to market, and the FASB appears to have dropped any plan to restore it.
The standard instead is "amortized cost" (on which basis you can continuously make the mortgages whole simply by tacking the delinquent payments on to the back of the loan). Little wonder half of all mortgage modifications re-default. The modifications themselves don't materially change the present value of the payment stream, and frequently don't reduce the payments themselves beyond the first year. Meanwhile, it's equally fascinating to observe how much bank earnings for the first quarter (thus far) have been driven by trading profits from commodities and fixed income (thanks Ben).
While the S&P 500 is slightly lower than it was when Wells Fargo's CFO resigned, it's probably worth noting that the CFO of Bank of America also resigned last week. The press releases focused on personal reasons in both cases, but then, those press releases on CFO departures invariably have a positive spin.
We're reminded of how Citigroup reported that it had "promoted" its CFO to Vice Chairman in 2009, which the Financial Times later reported was part of an agreement with regulators that included the provision "Citigroup will initiate a process that will result in a decision on (a) whether the CFO for Citigroup ... can be more effectively utilized in other Citigroup responsibilities, and (b) if so, on replacements by a person ... with relevant financial, accounting or other experience acceptable to the agencies, with the results publicly announced by ... publication of Citigroup's third quarter 2009 earnings."
Maybe it's nothing. In any event, given that the FASB has moved in the direction of permanently disabling transparency, it's not clear that problems with bank balance sheets - even if significant - need to actually work their way through to regulatory events. What is more likely, though, is that credit conditions may be more sluggish to normalize than the upbeat bank reports of recent quarters may suggest. So my concern isn't so much a replay of the banking crisis and customer runs of early 2009, as much as it is with the headwinds for the banking system and the economy as a whole from continuing debt burdens that have not been materially restructured.
Greek bond fears intensify debt debate
by Richard Milne and David Oakley - Financial Times
As the eurozone approaches the first anniversary of the bail-out of Greece, fears of a debt restructuring are intensifying. It was seven years from the start of the Latin American crisis in the 1980s to the first wave of restructuring. Could Europe go even faster? Recent action in the markets suggests a certain hysteria that it could. Yields on Greece’s three-year bonds surged to more than 20 per cent on Monday, up more than 1 percentage point on the day and nearly triple their October levels. "The markets clearly think it is now when, not if, the Greeks will default," says Don Smith, economist at Icap.
The fire has been stoked by comments by German officials about the possibility of a restructuring of Greece’s huge debt, something European policymakers have hitherto denied any need for. But many investors, in spite of acknowledging that Greece will clearly have to restructure its debt, believe there is little likelihood of it happening soon. Top of their list of reasons is a belief that having launched bail-outs of Greece and Ireland to avoid a restructuring, it would be premature for the European Union to backtrack so quickly.
"The only reason you would have a restructuring of Greece imminently is if the political situation merited it. Having committed well over a trillion euros trying to solve this in the past year it seems odd to throw in the towel now," says Jim Reid, credit strategist at Deutsche Bank.
Not for the first time, however, politicians are sowing confusion – particularly over whether Germany, long thought to be against a restructuring because of the weakness of its banks, now favours one. A big part of the uncertainty stems from the language of restructuring. As David Mackie, head of western European economic research at JPMorgan, says: "There is a multitude of ways a sovereign’s debt can be restructured. Policymakers are not necessarily using the term ‘debt restructuring’ to mean the same thing."
Wolfgang Schäuble, the German finance minister, who appeared to first provoke the recent sharp rise in Greek yields, ruled out a forced restructuring of Greece’s debt before 2013. Instead, he left the door open for a "voluntary restructuring". Although Mr Mackie calls that "a bit of an oxymoron", investors could agree to take losses in such a restructuring if they thought they could avoid an outright default.
But most analysts think that is unlikely with European banks some of the largest holders of sovereign debt. Investors and rating agencies estimate Greece would have to impose losses of 50-70 per cent to make its debt sustainable. Banks look unlikely to accept such losses given that BNP Paribas analysts estimate 80 per cent of their holdings are in their banking books, meaning they don’t have to hold capital against them.
Restructuring could also refer to two different types of debt: the "official debt" received as part of international bail-outs, or "market debt", which is all the other debt issued by a country to private investors. Greece is expected to see its official debt of about €100bn from the International Monetary Fund and EU extended – a technical restructuring – beyond 2013. But little has been said about its market debt of about €262bn.
That date is crucial because 2013 is when the permanent European Stability Mechanism comes into force with its ability to compel private investors to take losses as part of sovereign restructuring. One investor says: "The ESM agreement [at a summit last month] was a game-changer as it set out clearly that private investors would have to pay a big price for a sovereign default." Many therefore don’t expect a restructuring before 2013. But some believe the talk in the meantime could prove damaging, not least to Spain, the eurozone’s fourth-biggest economy, which in recent months seemed to have separated itself from the problems of Greece, Ireland and Portugal.
"The more you have discussions about a possible restructuring, the more the premise that you don’t have contagion is tested. That is where the nerves creep in," says Bill O’Neill, chief investment officer for Merrill Lynch Wealth Management. Mr Reid says the main problem is not Greece, rather "it is what it implies for other countries. If you let Greece go down this road then investors would have to question holding Portuguese and Irish debt. Even Spain could possibly be brought back into it."
Another unknown in the restructuring debate is the behaviour of creditor countries, particularly in northern Europe. The strong showing of an anti-euro party in Finland has some worried that the will to avoid a restructuring is dissipating in the north. Mr Mackie says: "If it is any kind of portent of things to come in creditor countries, it worries me. For Greece to avoid a restructuring it has to put in a lot of hard work but the rest of the region has to be pretty generous too.
Greece forced to pay sky-high rates to borrow
by Emma Rowley - Telegraph
Greece was forced to pay sky-high rates to borrow money for the next three months, amid reports Athens accepts that it has no alternative but to renege on the terms of its impossible debt burden.
The bailed-out nation sold €1.625bn (£1.43bn) of 13-week government bonds on Tuesday, but investors demanded a yield, or return, of 4.1pc to hold the debt - a quarter of a percentage point more than in a similar sale in February. That means Greece pays a higher rate to borrow for three months than Germany pays for three decades, at 3.8pc.
The costs of servicing Greece's debt keep rising as markets ignore politicians' protestations that the country will not have to restructure the burden - effectively default, by changing its repayment terms. A local report on Tuesday quoted a European Commission official as saying Greece "has realised that there is no other way and has accepted a mild debt restructuring". Denials from the Commission, which argued that discussions were "not even" taking place between Brussels and the Greek government, could not convince investors.
Greek government 10-year debt is trading with a yield around 14pc, surpassing the peaks seen during the country's €110bn bail-out last year. The nation's weak economy, hobbled by a severe austerity programme, means it is seen as an impossibility that Greece will manage strong enough growth to support a debt equivalent to 144pc of output.
Gold futures for June - contracts arranging to sell at a promised price - hit a record $1,500 an ounce as investors looked for a safe haven from Europe's debt crisis, as well as the problems in the US which saw its credit outlook downgraded by credit rating agency Standard & Poor's. Nonetheless, the euro held steady as data for the wider eurozone showed growth - and prices - had picked up.
April's purchasing managers' index (PMI), a survey tracking private sector activity across the region, ticked up to 57.8 from March's 57.6, where anything over the 50-level signals activity rose. Prices climbed at a near-record rate, raising expectations the European Central Bank will tighten monetary policy further. The bank raised interest rates earlier this month for the first time since mid-2008, despite concerns over the effect it could have on struggling countries.
Gov. Scott Walker Reportedly Planning Financial Martial Law In Wisconsin
by Rick Ungar - Forbes
Reports are surfacing that Scott Walker is now preparing his next assault on the democratic political process in the State of Wisconsin. Following the lead of Michigan GOP Governor Rick Snyder, Walker is said to be preparing a plan that would allow him to force local governments to submit to a financial stress test with an eye towards permitting the governor to take over municipalities that fail to meet with Walker’s approval.
According to the reports, should a locality’s financial position come up short, the Walker legislation would empower the governor to insert a financial manager of his choosing into local government with the ability to cancel union contracts, push aside duly elected local government officials and school board members and take control of Wisconsin cities and towns whenever he sees fit to do so.
Such a law would additionally give Walker unchallenged power to end municipal services of which he disapproves, including safety net assistance to those in need. According to my sources, the plan is being written by the legal offices of Foley & Lardner, the largest law firm in the state, and is scheduled to be introduced to the legislature in May of this year.
The story first came to public attention yesterday during an interview with Madison, Wisconsin attorney and activist, Ed Garvey, on Wisconsin Public Radio. While Mr. Garvey is a familiar player in Wisconsin politics, some of you who are football fans may recognize his name from his days as the Executive Director of the NFL Players’ Association, where Garvey is credited with making extraordinary strides in the protection of player rights and improving their earning opportunities.
I spoke with Mr. Garvey today to gain insight into his information, which led me to Mr. Nate Kimm – a Wisconsin based political organizer who is a leader in the effort to recall eight GOP Wisconsin State Senators who voted in favor of Gov. Walker’s anti-collective bargaining legislation. While Kimm was unwilling to reveal his source, he was able to confirm that he had received the information regarding Walker’s plans from a highly placed GOP source, very much in a position to know what the Governor has in the works.
Should these reports prove accurate, Walker’s plan would resemble-if not directly mirror- the legislation signed into law by Gov. Snyder of Michigan which gives Snyder extraordinary powers to take over municipalities when he determines them to be in financial trouble, further permitting him to actually fire locally elected public officials when he deems it desirable.
Gov. Snyder’s extraordinary law became all too real this week when Emergency Financial Manager, Joseph Harris, appointed by the Governor to take charge of Benton Harbor, Michigan, issued an order which took away all powers of the city’s elected officials.
Yes, this has really happened right here in the United States of America.
Walker’s plans give further credence to the notion that the efforts of the GOP governors with Republican majorities in their state legislative bodies are part of a coordinated plan to enforce a right-wing agenda designed to not only destroy state, county and municipal employee unions, but to take control of local governments by replacing elected officials with appointees, both corporate and individual, of the state’s highest executive officer.More on this as it becomes available.
Brazilian Criticizes Wealthy Nations’ Policies
by Binyamin Appelbaum - New York Times
Brazil’s finance minister said Saturday that developed nations like the United States were seeking to solve their own economic problems at the expense of the developing world.
The minister, Guido Mantega, said wealthy countries were attempting "to export their way out of difficult economic situations" by printing money and keeping interest rates low. Those policies are driving up the prices of food and oil, causing particular pain for the world’s poorest people, Mr. Mantega told the policy-making committee of the International Monetary Fund.
His strong remarks highlight the challenges the United States and Europe face as they try to change their economic relationship with the developing world. In place of unsustainable borrowing to fuel consumption of imported goods, they would like to sell more goods and services to those countries. The problem is that developing nations, losing business from their best customers, hope to replace sales by increasing domestic consumption — selling to the same customers developed nations are trying to reach.
It is a dispute that plays out largely in terms of exchange, with both sides charging that their rivals are boosting exports by artificially suppressing the value of their currencies.
The two sides spoke past each other over the last week, during the annual meetings of the major forums for international economic coordination — the monetary fund, the World Bank and the Group of 20.
The United States says that higher prices are not a necessary consequence of American policies, but instead have resulted from the efforts of developing countries to hold down the value of their own currencies in the face of the capital inflows from developed countries.
The treasury secretary, Timothy F. Geithner, said Saturday that developing nations should allow the value of their currencies to be determined by open-market trading. The United States believes that the exchange rates set by the market will contribute to a more sustainable allocation of economic activity among nations, and increased international growth.
"Major economies — advanced and emerging — need to allow their exchange rates to adjust in response to market forces," Mr. Geithner said.
Rising concerns about inflation shadowed the debate. Commodity prices and asset values are already rising sharply in the developing world, and there is concern that those pressures could contribute to inflation in developed countries.
Economic development in China and other emerging markets has long been felt in the United States largely in the form of lower prices. As those countries absorb a larger share of the world’s raw and finished goods, the impact instead may be felt in the form of rising prices.
"Interest rates rising in the emerging world could drive up interest rates in the developing world," said Tharman Shanmugaratnam, the finance minister of Singapore and the new chairman of the International Monetary and Financial Committee. "We’ve learned from very painful experience during the last few years that nothing is isolated."
Economic policy makers in the United States have played down the impact of commodity prices on domestic inflation. European policy makers, by contrast, are increasingly concerned.
Didier Reynders, the Belgian finance minister, warned in a statement that "one should not underestimate" the possibility that food and oil price inflation could travel from the developing world to Europe and the United States. He noted that those pressures would pass through the same financial and trade channels that helped to lower global inflation in the past by holding down prices. "Central banks everywhere should be highly vigilant," Mr. Reynders said.
Throw Out the Money Changers
by Chris Hedges
These are remarks Chris Hedges made in Union Square in New York City last Friday during a protest outside a branch office of the Bank of America.
We stand today before the gates of one of our temples of finance. It is a temple where greed and profit are the highest good, where self-worth is determined by the ability to amass wealth and power at the expense of others, where laws are manipulated, rewritten and broken, where the endless treadmill of consumption defines human progress, where fraud and crimes are the tools of business.
The two most destructive forces of human nature—greed and envy—drive the financiers, the bankers, the corporate mandarins and the leaders of our two major political parties, all of whom profit from this system. They place themselves at the center of creation. They disdain or ignore the cries of those below them. They take from us our rights, our dignity and thwart our capacity for resistance. They seek to make us prisoners in our own land. They view human beings and the natural world as mere commodities to exploit until exhaustion or collapse. Human suffering, wars, climate change, poverty, it is all the price of business. Nothing is sacred. The Lord of Profit is the Lord of Death.
The pharisees of high finance who can see us this morning from their cubicles and corner officers mock virtue. Life for them is solely about self-gain. The suffering of the poor is not their concern. The 6 million families thrown out of their homes are not their concern. The tens of millions of pensioners whose retirement savings were wiped out because of the fraud and dishonesty of Wall Street are not their concern. The failure to halt carbon emissions is not their concern. Justice is not their concern. Truth is not their concern. A hungry child is not their concern.
Fyodor Dostoyevsky in "Crime and Punishment" understood the radical evil behind the human yearning not to be ordinary but to be extraordinary, the desire that allows men and women to serve systems of self-glorification and naked greed. Raskolnikov in the novel believes—like those in this temple—that humankind can be divided into two groups. The first is composed of ordinary people. These ordinary people are meek and submissive. They do little more than reproduce other human beings in their own likeness, grow old and die. And Raskolnikov is dismissive of these lesser forms of human life.
The second group, he believes, is extraordinary. These are, according to Raskolnikov, the Napoleons of the world, those who flout law and custom, those who shred conventions and traditions to create a finer, more glorious future. Raskolnikov argues that, although we live in the world, we can free ourselves from the consequences of living with others, consequences that will not always be in our favor. The Raskolnikovs of the world place unbridled and total faith in the human intellect. They disdain the attributes of compassion, empathy, beauty, justice and truth. And this demented vision of human existence leads Raskolnikov to murder a pawnbroker and steal her money.
The priests in these corporate temples, in the name of profit, kill with even more ruthlessness, finesse and cunning than Raskolnikov. Corporations let 50,000 people die last year because they could not pay them for proper medical care. They have killed hundreds of thousands of Iraqis and Afghanis, Palestinians and Pakistanis, and gleefully watched as the stock price of weapons contractors quadrupled. They have turned cancer into an epidemic in the coal fields of West Virginia where families breathe polluted air, drink poisoned water and watch the Appalachian Mountains blasted into a desolate wasteland while coal companies can make billions.
And after looting the U.S. treasury these corporations demand, in the name of austerity, that we abolish food programs for children, heating assistance and medical care for our elderly, and good public education. They demand that we tolerate a permanent underclass that will leave one in six workers without jobs, that condemns tens of millions of Americans to poverty and tosses our mentally ill onto heating grates. Those without power, those whom these corporations deem to be ordinary, are cast aside like human refuse. It is what the god of the market demands.
When Dante enters the "city of woes" in the Inferno he hears the cries of "those whose lives earned neither honor nor bad fame," those rejected by Heaven and Hell, those who dedicated their lives solely to the pursuit of happiness. These are all the "good" people, the ones who never made a fuss, who filled their lives with vain and empty pursuits, harmless perhaps, to amuse themselves, who never took a stand for anything, never risked anything, who went along. They never looked hard at their lives, never felt the need, never wanted to look.
Those who chase the glittering rainbows of the consumer society, who buy into the perverted ideology of consumer culture, become, as Dante knew, moral cowards. They are indoctrinated by our corporate systems of information and remain passive as our legislative, executive and judicial branches of government—tools of the corporate state—strip us of the capacity to resist. Democrat or Republican. Liberal or conservative. It makes no difference. Barack Obama serves corporate interests as assiduously as did George W. Bush. And to place our faith in any party or established institution as a mechanism for reform is to be entranced by the celluloid shadows on the wall of Plato’s cave.
We must defy the cant of consumer culture and recover the primacy in our lives of mercy and justice. And this requires courage, not just physical courage but the harder moral courage of listening to our conscience. If we are to save our country, and our planet, we must turn from exalting the self, to subsuming of the self for our neighbor. Self-sacrifice defies the sickness of corporate ideology. Self-sacrifice mocks opportunities for advancement, money and power. Self-sacrifice smashes the idols of greed and envy. Self-sacrifice demands that we rise up against the abuse, injury and injustice forced upon us by the mandarins of corporate power. There is a profound truth in the biblical admonition "He who loves his life will lose it."
Life is not only about us. We can never have justice until our neighbor has justice. And we can never recover our freedom until we are willing to sacrifice our comfort for open rebellion. The president has failed us. The Congress has failed us. The courts have failed us. The press has failed us. The universities have failed us. Our process of electoral democracy has failed us. There are no structures or institutions left that have not been contaminated or destroyed by corporations. And this means it is up to us. Civil disobedience, which will entail hardship and suffering, which will be long and difficult, which at its core means self-sacrifice, is the only mechanism left.
The bankers and hedge fund managers, the corporate and governmental elites, are the modern version of the misguided Israelites who prostrated themselves before the golden calf. The sparkle of wealth glitters before them, spurring them faster and faster on the treadmill towards destruction. And they seek to make us worship at their altar. As long as greed inspires us, greed keeps us complicit and silent. But once we defy the religion of unfettered capitalism, once we demand that a society serve the needs of citizens and the ecosystem that sustains life, rather than the needs of the marketplace, once we learn to speak with a new humility and live with a new simplicity, once we love our neighbor as ourself, we break our chains and make hope visible.
Insights from ecologists show ways of preventing economic disaster
by Larry Elliott - Guardian
In the eight centuries from 1000-1800 AD the world's fish stocks and species numbers were stable and healthy. In the subsequent 200 years, 40% of the species in coastal waters collapsed, showing falls in their population by 90% or more. There was a pattern to this story of decline. There was a much-less marked attrition in coastal regions with richly diverse marine ecosystems than in regions exhibiting low levels of diversity.
What does this have to do with economics? Quite a lot, as it happens. In recent years, as the limitations of the rigidly mathematical approach to economics have been exposed, there has been interest in what the dismal science can learn from biologists, ecologists, geneticists, physicists and psychologists.
Two years ago, Andrew Haldane, the Bank of England's executive director for financial stability, published a paper in which he used global fish stocks, the spread of epidemics, and the destruction of the rain forests to explain why the system collapsed so dramatically. The March edition of Central Banking contains a fascinating piece by its editor, Claire Jones, on how the work of the scientist Robert May on the stability and complexity in ecosystems supports the case for deep structural reform of finance.
This is, of course, a topical issue in the light both of the preliminary report by the UK government's independent commission on banking (ICB) and the setting up of a financial policy committee (FPC) at the Bank of England to keep tabs on what the City is up to. Both the ICB and the FPC seek to strike a balance between preventing another financial crisis and ensuring that the growth prospects of the economy are not impaired by over-zealous regulation.
As Paul Tucker, the Bank's deputy governor put it in a speech in New York last week: "The government has proposed that the FPC be subject to a constraint that it should not act to preserve stability at the cost of significantly impairing the capacity of the financial sector to contribute to medium-to-long term economic growth. What this means in practice is that when faced with an immediate or incipient threat to stability, we must try to find a solution that avoids damage to long-term growth. That discipline is welcome by the Bank."
But perhaps it shouldn't be. A light-touch approach could make the financial system less safe and increase the chances of a second financial crisis. It needs to be remembered that as a result of the first blow-up the UK economy is operating 10% of GDP below where it would be had the pre-crisis trend of growth continued.
Haldane's analysis certainly suggests that leaving the status quo largely untouched is risky. Judging reforms by whether one or more big UK bank might relocate in the US, Switzerland, Dubai or Singapore misses the point entirely. Seen from an ecological viewpoint it is a bit like asking whether half a point off Brazil's GDP for the next 10 years is more important than protecting the Amazon rain forest.
Précis of the argument goes like this. In the decade or more leading up to the crisis, the financial sector became bigger, more complex and more homogeneous. Mutual institutions became banks, commercial banks dabbled in investment banking, and investment banks set up in-house hedge funds . What had been a diverse financial ecosystem became a monoculture.
"In consequence, the financial system became, like plants, animals and oceans before it, less disease-resistant", Haldane noted. "When environmental factors changed for the worse, the homogeneity of the financial ecosystem increased materially its probability of collapse."
Those running the system did not think for one minute this was going to happen. They thought that the system was strong and durable because risk had been spread. They were also reassured by the way global finance had withstood the Asian crisis of 1997, shrugged off the dotcom collapse of 2001 and had continued to expand despite rising oil prices and wars in Iraq and Afghanistan.
The rationale was that complexity equalled stability, which was what biologists believed about ecosystems until the 1970s. Then, research showed that some simple ecosystems, such as the Savannahs were robust while more complex systems such as rain forests were vulnerable. For a while, this vulnerability lay hidden, with the system able to absorb a considerable amount of strain without appearing to suffer. But eventually, a tipping point was reached: the moment when fractionally more over-fishing caused irreparable damage to the stocks of cod on the Grand Banks.
Seen from this perspective, it becomes easier to explain why seemingly minor problems triggered a systemic crisis in global finance. Few could understand why the bankruptcy of Lehman Brothers in September 2008 could lead within a month to a situation where no bank in the world appeared safe, but that was because none of those responsible for the system – the bankers, the politicians and the regulators – understood that complexity plus homogeneity spelt danger.
Haldane noted in his paper that "in just about every non-financial discipline – from ecologists to engineers, from geneticists to geologists – this evolution would have set alarm bells ringing. Based on their experience, complexity plus homogeneity did not spell stability: it spelt fragility." In an echo of the loss of fish stocks after 1800, by early 2009, 23 of the biggest European and American banks had lost 90% of their market value.
All this is highly relevant to the debate about how to fix the financial system. Up until now, the focus has been on curbs on pay and on ensuring that banks have bigger capital buffers to limit their leverage and their exposure to risk. Neither is likely to do the trick. The root of the problem before the crisis was that bankers did not know the risks they were taking. If, in the years ahead, they still do not appreciate those risks, they will try to find ways to sidestep new capital constraints, no matter how much they are paid.
The task of the FPC is to ensure that the City is aware of those risks. Better information would help to reduce the risks of another crisis, particularly if information was shared across borders. Haldane cites the example of the World Health Organisation, which set up a Global Outbreak Alert and Response Network in 2000 to provide a co-ordinated global response to fighting epidemics such as bird flu and SARS.
But more transparency won't be enough on its own, because what the financial system needs is more diversity and more simplicity. That means a richer ecosystem: mutuals, commercial banks, investment banks, state-owned banks, banks dedicated to funding environmental industries. It also means greater simplicity to ensure that shocks do not lead to system collapse.
That is why it is a mistake to accept, at the first sign of resistance from finance sector, that there can be no Glass-Stegall-style separation of retail and investment banking. We need to be clear what an insufficiently robust response to the crisis means. It means allowing the City and Wall Street to hoover up all the fish and chop down all the trees.
Blame High Oil Prices on Speculators and Bernanke
by Ed Wallace - BusinessWeek
Watching traffic around Dallas and Fort Worth, you'd never know the U.S. was experiencing any kind of gasoline crisis. Many drivers on the freeways apparently think Texas has already approved the proposed 85 mph speed limit.
Most don't realize that driving a vehicle that's rated at 30 mpg on the road at 85 miles an hour will cut its fuel efficiency by around 35 percent. That makes the gas they are currently paying $3.79 for cost $5.11 in reality. It's reasonable to assume, too, that if we really cared about the cost of gas, we would do everything we could to mitigate that cost. We don't. We complain about prices but seem unwilling to do anything about them.
Americans think they know whom to blame for high gas prices. The usual culprits are people who drive too fast, inefficient engines, OPEC, and even China. Sure, those are all factors, but that's like blaming the housing bubble on the lumber industry or a surfeit of carpenters. It's no great mystery who is responsible for higher gas prices. As I and others have written in the past, the biggest culprits are the speculators gaming the futures markets to line their own pockets. We know all that. What might come as a shock is that they are being enabled by the Federal Reserve.
This explains why the market for oil and gasoline is currently costing consumers and industry far more than necessary. Until recently it was impossible to tell whether the speculators were accurate in telling the media that high worldwide demand for oil has caused prices to skyrocket once again, pushing gasoline prices $1 a gallon above where they were at this time last year.
It's true that rail traffic is up in the U.S.—a sure sign of a strengthening economy—and it's equally true that cargo shipments worldwide are back to pre-Great Recession volumes. However, MasterCard and some oil analysts are saying that domestic gasoline consumption has dropped anywhere from 3 percent to 3.7 percent over the past five weeks; for a country that at times burns 400 million gallons of gasoline a day, that's no small drop. In futures trading, such a decline in demand should effect a comparable cost reduction in what buyers are willing to pay for fuel for resale. That's not happening.
Goldman Outs The Speculators
Meanwhile, the media continue to say that gasoline prices are directly tied to oil pricing, which isn't quite true. Oil and gasoline are sold to different sets of buyers. One needs to buy crude for refining and the other sells gasoline at retail; these are legitimate hedgers. Then there are speculators, who jump into the market in search of profits on all fuels.
To prove once again that no one in the investment banking business actually knows anything about oil, Goldman Sachs advised its clients on Apr. 11 to get rid of their commodities holdings, including oil. The Guardian quoted Goldman's advice as warning: "The record levels of speculative trading in crude have pushed their prices up so much in recent months that in the near term, risk reward no longer favors holding those commodities."
"Record levels of speculative trading in crude" have pushed up oil prices? Funny, all we've been hearing is that today's oil prices are justified because of abnormally large demand, owing to the world's improving economy.
On the same day, the Financial Times reported that in March, the Saudis "throttled back their production of oil"—which seems to contradict their promise to replace any oil lost to world markets because of the Libyan Revolution. According to analysts, the Saudis produced an extra 300,000 barrels a day, which was enough to satisfy buyers. That assessment certainly is true in the U.S. We started this year with 333 million barrels of oil on hand. Today we have 359 million barrels. Some shortage.
Leave it to Bank of America to issue a completely different forecast for oil on Apr. 13, giving 30 percent odds that oil could hit $160 a barrel sometime this year. Now the waters are truly muddy. As one investment bank claims it's time to bail because speculators have put crude oil into bubble territory, another suggests it's time to load up on oil because the price will go even higher.
Let's Quit Blaming China
If anyone knew what was going on in the crude oil market, you wouldn't have so-called investment banking experts taking diametrically opposite positions. So whom do we blame for all this confusion—or for high prices that force the average American family to shell out an additional $700 to $1,000 for gasoline this year, while companies such as American Airlines say they face another fuel crisis? To start with, let's quit blaming China.
Last year, China imported just 4.79 million barrels of oil per day. According to China Daily, official government figures show that the country is importing oil at a rate that's growing by only 5 percent this year, or 239,000 more barrels per day. Moreover, China has raised bank rates twice this year in an attempt to cool its roaring economy. Both times, oil prices declined slightly worldwide.
Who else can we blame? One could look at refinery utilization and find out exactly why gasoline supplies have fallen over the past two months, thereby raising the price of gas: In the week before last, U.S. refineries ran at just 81.4 percent of capacity—a mere 39 percent utilization rate on the East Coast. That's less than the first week of April 2009, at the bottom of the economy's post-meltdown crash, when refineries ran at just 81.8 percent of capacity.
Now let's look at the big picture to see why gasoline prices are so incredibly high. Remember that our refinery utilization a week ago was only 81.4 percent. In the same week in 2005 it sat at 93.7 percent, with 212.2 million barrels of gasoline on hand. Even at that exceptionally high refining rate, we were down by almost a million barrels three weeks later. By contrast, we have dropped our inventories of gasoline from 223.2 million barrels to 209.7 million barrels since the first of the year and we still have only slightly less gasoline on hand than we had at the same time in 2005, amid blistering economic growth. Our refineries then were running at nearly 10 percent greater utilization.
The Fed's Cheap Liquidity Flood
The problem starts with Ben Bernanke, no matter how many of his Fed presidents claim they are not to blame for the high price of oil. The fact is that when you flood the market with far too much liquidity at virtually no interest, funny things happen in commodities and equities. It was true in the 1920s, it was true in the last decade, and it's still true today.
When Richard Fisher, president of the Dallas Federal Reserve, spoke in Germany late in March, Reuters quoted him as saying: "We are seeing speculative activity that may be exacerbating price rises in commodities such as oil." Fisher added that he was seeing the signs of the same speculative trading that had fueled the first financial meltdown.
Here Fisher is in good company. Kansas City Fed President Thomas Hoenig, who has been a vocal critic of the current Fed policy of zero interest and high liquidity, has suggested that markets don't function correctly under those circumstances.
And David Stockman, Ronald Reagan's former budget director, recently wrote a scathing article for MarketWatch, "Federal Reserve's Path of Destruction," in which he criticizes current Fed policy even more pointedly. Stockman wrote: "This destruction is namely the exploitation of middle-class savers; the current severe food and energy squeeze on lower income households … and the next round of bursting bubbles building up among the risk asset classes."
Let's not kid ourselves. Oil in today's world is worth far more than the $25 a barrel it sold for over a decade ago. But the ability of markets to function properly, based on real supply and demand equations, has been destroyed by allowing ridiculous leverage and the unlimited ability to borrow the leverage at historically low interest rates. Fortunately for our elected officials, they've got the public convinced that the biggest threat from government is taxation and deficits. In reality the public should be infuriated with the rising costs of nondiscretionary items such as food and gasoline, which current Fed policy actively enables.
Whose Side Is The Fed On?
As far back as 1979, when then-Federal Reserve Chairman Paul Volcker started moving to stop inflation in its tracks, Jimmy Carter's White House said one of the benefits that higher interest rates would confer on the public would be to slow down speculators in the oil market, who were taking advantage of that year's turmoil in the Middle East. This isn't a new argument.
The economy is getting better and that's a good thing. But some claim gasoline could go to $5 a gallon this summer. The good news is that skyrocketing oil prices, like slasher movies, are truly frightening only the first time you watch one. They get less scary with repetition. But being less scary doesn't change the basic facts. Markets need both hedgers and speculators to function properly. When they lose balance, they no longer function according to true supply and demand.
Ben Bernanke doesn't seem to understand that while he is allowing huge profits for banks and investment firms so they can recover massive losses from the financial meltdown, he is intentionally damaging what could be a much stronger recovery with the misery he's causing the average American consumer. Maybe he does understand and just doesn't care. There's always China to blame.
Radiation, aftershocks could slow Fukushima stabilization
by Asahi Shimbun
High levels of radiation discovered at the Fukushima No. 1 nuclear power plant could disrupt Tokyo Electric Power Co.'s timeline for a cold shutdown of the crippled facility, TEPCO officials acknowledged.
On April 18 unexpectedly high levels of radiation were detected in water in the storage pool containing spent fuel rods in the No. 2 reactor, the officials said. TEPCO officials believe the radiation may have been triggered by damage to the spent fuel rods. One possibility being looked at is the damage was caused by debris falling into the pool when the Great East Japan Earthquake struck on March 11.
An analysis of water samples taken from the storage pool on April 16 found cesium-134 at 160,000 becquerels per cubic centimeter, cesium-137 at 150,000 becquerels and iodine-131 at 4,100 becquerels. Ordinarily, the level of radioactivity in the pools is much lower.
Another problem area is the building housing the No. 1 reactor. TEPCO officials used a U.S.-made robot on April 16 to measure radiation levels and detected radiation of 270 millisieverts per hour in the No. 1 reactor building. That level of radiation means a worker could spend less than an hour in the area before exceeding the allowable dosage. The exposure would be so high workers could not re-enter the area for several years, officials said. If radiation levels remain at high levels, TEPCO's experienced workforce would all quickly reach maximum radiation exposure levels, severely slowing the effort to stabilize the plant.
Radiation measurements were also taken at another entrance to the No. 1 reactor building and found levels of 49 millisieverts per hour. Radiation at an entrance to the No. 3 reactor building was also measured at 57 millisieverts per hour. Those are still high levels and workers who remain in that environment for five hours will reach the maximum amount of radiation exposure allowed. Huge volumes of water contaminated with radiation are also expected to slow work to bring the Fukushima reactors under control.
Officials of the Nuclear and Industrial Safety Agency (NISA) said April 18 that a pool of water about five meters deep had been found in the basement of the building housing the No. 4 reactor.
Radiation levels as high as 100 millisieverts per hour were detected on the water's surface. About 54,000 tons of radiation-contaminated water also sits in the basements of the turbine buildings for the No. 1 to No. 3 reactors. The radiation level in the basement of the turbine building for the No. 2 reactor is especially high.
Finding storage space for the contaminated water is a pressing issue, as is what to do with the rubble on the plant grounds that is also contaminated with radiation. NISA official Hidehiko Nishiyama said, "The situation is very serious. It is desirable to lower the level of radiation workers are exposed to by using anything that will shield the radiation as well as by decontaminating the workers. We will have to think of ways to carry that out from now."
TEPCO officials have plans to fill the core containment vessels at the No. 1 and No. 3 reactors with water to submerge the pressure containers that hold the fuel rods. To achieve TEPCO's road map objective of a cold shutdown of the reactors after six to nine months, officials are seeking to restore the cooling system rather than depend on pumping in water to the reactor cores. However, the main equipment and piping used in the continuous cooling system are all located within the reactor buildings. Workers will have to work in those buildings to inspect and repair the equipment and piping.
As a contingency plan in the event the cooling system cannot be restored, preparations are being made to install heat exchangers that use cool air rather than water. That installation work will also require workers to enter the reactor buildings.
At the No. 2 reactor, holes have opened in the suppression pool connected to the containment vessel so repairs will be needed before the No. 2 reactor can be submerged. However, there is the possibility that radiation levels of several dozens of sieverts are present near the suppression pool. Such levels would lead to immediate health problems for workers.
Plans are being considered to use robots for inspection and simple tasks to reduce radiation exposure among workers. Another factor that has slowed work at the Fukushima plant is the frequent aftershocks. Some have led to tsunami watches that have meant workers have had to be evacuated. An aftershock measuring an intensity of lower 6 on the Japanese scale of 7 hit Fukushima Prefecture on April 11. That caused a power outage that stopped the pumping in of water for about 50 minutes. Another tsunami triggered by an aftershock could also flood the plant site, damage equipment and lead to the leaking of highly contaminated water.
Meanwhile, NISA officials on April 18 for the first time publicly admitted that some of the fuel rods in the No. 1 to No. 3 reactor cores had melted in the wake of the March 11 quake and tsunami.
NISA officials gave a report to the government's Nuclear Safety Commission of Japan.
NISA officials had alluded to the possibility of a melting of the fuel rods, especially after hydrogen explosions rocked the No. 1 to No. 3 reactors. However, no NISA official had actually stated that some of the fuel rods had melted until April 18. NISA officials said that based on an analysis of the radioactive material collected and their radiation concentration, there has likely occurred a melting of the fuel pellets contained within the fuel rods.
Arnie Gundersen Fukushima Update