"Rural filling stations become community centers and general loafing grounds. Cedargrove Team members about to play in a baseball game, near Chapel Hill, North Carolina"
Ilargi: 'There Has Been a Clear Crisis of Confidence', says IMF head Christine Lagarde. What confidence is she talking about? Turns out, it's not your confidence in her. Neither is it your confidence in your elected politicians. While both may be shaken to the core, Ms. Lagarde addresses another form of confidence, the confidence "in the markets". And she has a solution for it. She says she knows how to restore this confidence.
'There Has Been a Clear Crisis of Confidence'When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks. [..]
The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we'll avoid the recession.
SPIEGEL: Does the US need a new stimulus package?
Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.
SPIEGEL: You suggest fighting the effects of a debt crisis with more debt?
Lagarde: That's not how I see it. In a world that is so economically interwoven, where the actions of industrial countries have direct influence on emerging economies, one can't be stubborn when the situation changes. We didn't change our minds about the dangers of too much debt, but over the current state of the world economy.
Ilargi: Nothing new from Ms. Lagarde, in other words. What we need is growth! Never mind that with high unemployment in many European countries, as well as the United States, and with housing markets either about to burst (Britain, Holland, Denmark, Sweden) or in just the first steps of doing so (United States, Spain, Ireland), substantial economic growth is but a mirage. It's not all that far-fetched to say we haven't seen any real growth for three decades; instead we've done nothing but borrow our way into an increase in spending power.
And the debt we've accumulated while we were borrowing has now reached levels that make growth no longer possible. In the US, each additional dollar of debt doesn't presently have any positive effect on growth anymore. In Greece, government bonds, the favorite debt instrument among politicians, have reached yields that top 70% for 1-year debt and 40% for 2-year paper. Italy needs to roll over €62 billion in debt before the end of September (the most ever in a single month). There are no buyers on the horizon except for the ECB; a scary realization.
Still, Ms. Lagarde pushes head first and full force for even more debt. In the US, where ..there is probably space at the moment to contain the short-term adjustment .., and in Europe, where ..there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks..
In both cases, this would mean more money to be transferred from the taxpayer to the financial institutions. One might say that the crisis of confidence Lagarde talk about is one in which banks are starting to get worried about the size of their next bail-out. Nothing more, nothing less.
Over the weekend, German Chancellor Angela Merkel lost another one of her local elections. Question: anyone know where Western Pomerania is? Look it up! It's where Merkel is from, and her own people are fleeing from her, so to speak. And Merkel is like Lagarde: desperate enough for another one of those double or nothings. Where the German president and the Bundesbank have become very vocal in their criticism of Europe and its bail-out plans, Merkel wants more power for Europe, which will lay the ground work for more bail-outs.
On Wednesday, the Verfassungsgericht is set to decide whether the previous bail-outs were legal. They're expected to rule in favor, but to insist parliament gets a final vote in all subsequent bail-out plans. It would be good thing if they just strike down all that's been concocted to date. Good for the German taxpayer, that is. Not necessarily for the Greek ones, and certainly not for the banks and their stockholders.
The main European banks have another challenge to contend with, or so it seems at least: the US mass lawsuits by the Federal Housing Finance Agency (FHFA) on behalf of Fannie Mae and Freddie Mac, which contends that these were cheated by the banks when they purchased their mortgage-based securities.
It's a truly odd case is more than one way. First, what are the chances that Fannie and Freddie had no clue what they were buying. And is that were true, what does that say about a system where the US taxpayer gets to guarantee $5 trillion "worth" of paper through these institutions?
Second, because of these guarantees, as well as the trillions of dollars in bail-outs that have been transferred to the banks since 2008 in an alphabet soup worth of plans, the US government is de facto simply suing itself. Sure, 170 individual bankers were named -though none of the CEO‘s-, but what exactly was their part in it all? Can they be found guilty simply for signing documents? Even if they can -get me a scapegoat!-, the US wouldn’t recover any money, since all it might get already belongs to it anyway.
Yes, there may be some American schadenfreude over the cases against non-American banks, but most are still primary dealers. And if you risk them going down, they may very well take American banks with them.
The cases against Bank of America total some $57 billion, since they include Merrill Lynch and Countrywide ones, and BofA has bought these fine institutions. Even if there follows a verdict, which could take years, BofA will simply call itself too big to fail and find a Fed window where hand-outs are available.
Because it is obvious that these cases will linger for along time, here's thinking they constitute the real start of the 2012 election. Or that at least that is the plan; as Angela Merkel knows all too well, in today's finance world it's impossible to plan that far in advance. It's highly doubtful she’ll still be around in 14 months time. Or Sarkozy. European leaders are losing their constituencies fast, and that process will accelerate. Where Obama will be in November 2012 is harder to say. On his way to losing an election? Quite possible. But Americans are still far more timid than Europeans when it comes to protesting bail-outs.
Still, to come back to Christine Lagarde, these days, when you so clearly state that when you say "confidence", you're talking only about the markets, you're committing an act of blindness, whether it's willful or not. To even try and reinstate that kind of confidence, you will need trillions of additional dollars, euros and pounds. Trillions that belong to the people, not to politicians or banks.
To spend it, you will -increasingly- need the confidence of the people. Without that, going forward, you can kiss the confidence of the markets goodbye. And your career.
The Great Bank Robbery
by Nassim Nicholas Taleb and Mark Spitznagel - Project Syndicate
US Public Will Pay Bankers $5 Trillion Over The Next Decade
For the American economy – and for many other developed economies – the elephant in the room is the amount of money paid to bankers over the last five years. In the United States, the sum stands at an astounding $2.2 trillion for banks that have filings with the US Securities and Exchange Commission. Extrapolating over the coming decade, the numbers would approach $5 trillion, an amount vastly larger than what both President Barack Obama’s administration and his Republican opponents seem willing to cut from further government deficits.
That $5 trillion dollars is not money invested in building roads, schools, and other long-term projects, but is directly transferred from the American economy to the personal accounts of bank executives and employees. Such transfers represent as cunning a tax on everyone else as one can imagine. It feels quite iniquitous that bankers, having helped cause today’s financial and economic troubles, are the only class that is not suffering from them – and in many cases are actually benefiting.
Mainstream megabanks are puzzling in many respects. It is (now) no secret that they have operated so far as large sophisticated compensation schemes, masking probabilities of low-risk, high-impact "Black Swan" events and benefiting from the free backstop of implicit public guarantees. Excessive leverage, rather than skills, can be seen as the source of their resulting profits, which then flow disproportionately to employees, and of their sometimes-massive losses, which are borne by shareholders and taxpayers.
In other words, banks take risks, get paid for the upside, and then transfer the downside to shareholders, taxpayers, and even retirees. In order to rescue the banking system, the Federal Reserve, for example, put interest rates at artificially low levels; as was disclosed recently, it also has provided secret loans of $1.2 trillion to banks. The main effect so far has been to help bankers generate bonuses (rather than attract borrowers) by hiding exposures.
Taxpayers end up paying for these exposures, as do retirees and others who rely on returns from their savings. Moreover, low-interest-rate policies transfer inflation risk to all savers – and to future generations. Perhaps the greatest insult to taxpayers, then, is that bankers’ compensation last year was back at its pre-crisis level.
Of course, before being bailed out by governments, banks had never made any return in their history, assuming that their assets are properly marked to market. Nor should they produce any return in the long run, as their business model remains identical to what it was before, with only cosmetic modifications concerning trading risks.
So the facts are clear. But, as individual taxpayers, we are helpless, because we do not control outcomes, owing to the concerted efforts of lobbyists, or, worse, economic policymakers. Our subsidizing of bank managers and executives is completely involuntary.
But the puzzle represents an even bigger elephant. Why does any investment manager buy the stocks of banks that pay out very large portions of their earnings to their employees? The promise of replicating past returns cannot be the reason, given the inadequacy of those returns. In fact, filtering out stocks in accordance with payouts would have lowered the draw-downs on investment in the financial sector by well over half over the past 20 years, with no loss in returns.
Why do portfolio and pension-fund managers hope to receive impunity from their investors? Isn’t it obvious to investors that they are voluntarily transferring their clients’ funds to the pockets of bankers? Aren’t fund managers violating both fiduciary responsibilities and moral rules? Are they missing the only opportunity we have to discipline the banks and force them to compete for responsible risk-taking?
It is hard to understand why the market mechanism does not eliminate such questions. A well-functioning market would produce outcomes that favor banks with the right exposures, the right compensation schemes, the right risk-sharing, and therefore the right corporate governance.
One may wonder: If investment managers and their clients don’t receive high returns on bank stocks, as they would if they were profiting from bankers’ externalization of risk onto taxpayers, why do they hold them at all? The answer is the so-called "beta": banks represent a large share of the S&P 500, and managers need to be invested in them.
We don’t believe that regulation is a panacea for this state of affairs. The largest, most sophisticated banks have become expert at remaining one step ahead of regulators – constantly creating complex financial products and derivatives that skirt the letter of the rules. In these circumstances, more complicated regulations merely mean more billable hours for lawyers, more income for regulators switching sides, and more profits for derivatives traders.
Investment managers have a moral and professional responsibility to play their role in bringing some discipline into the banking system. Their first step should be to separate banks according to their compensation criteria.
Investors have used ethical grounds in the past – excluding, say, tobacco companies or corporations abetting apartheid in South Africa – and have been successful in generating pressure on the underlying stocks. Investing in banks constitutes a double breach – ethical and professional. Investors, and the rest of us, would be much better off if these funds flowed to more productive companies, perhaps with an amount equivalent to what would be transferred to bankers’ bonuses redirected to well-managed charities.
Fed Up With Bank Buybacks?
by David Reilly - Wall Street Journal
Picture this: J.P. Morgan Chase CEO James Dimon walks up to a paper shredder and feeds $100 bills into it while Federal Reserve Chairman Ben Bernanke looks on approvingly. It's a nightmarish image.
Unfortunately for J.P. Morgan shareholders, it isn't wholly divorced from reality. The bank spent $4.3 billion in the first seven months of this year buying back its own stock—with Mr. Bernanke's blessing. Yet, thanks to the recent slide in bank stocks, the purchases are already about $600 million in the red. And the loss would be even greater if stocks hadn't bounced off recent lows.
That highlights once again the dubious benefit to shareholders of buybacks versus capital returns through dividends. Buybacks mean management decides on the best time to buy stock. Dividends, on the other hand, leave that decision with investors, who can choose whether to reinvest or put the cash elsewhere.
And while J.P. Morgan's paper loss could prove fleeting, it is also a reminder of the Fed's questionable decision in the spring to allow some banks to resume capital returns even as the central bank was printing money in an attempt to resuscitate the economy. Now, the Fed has trimmed its growth forecasts and declared it will maintain near-zero interest rates until mid-2013.
If the economy is headed for a double-dip, as some investors fear, banks could need more capital, not less. While the Fed doesn't share in the double-dip fears, it has also signaled it will consider further extraordinary measures to stimulate growth at its coming September meeting.
The Fed's green-lighting of capital returns also ran counter to recent experience. Many banks spent huge amounts buying back stock in the years before the crisis, only to require government bailouts when trouble hit. Citigroup, for example, bought back more than $20 billion between 2004 and 2008, according to Capital IQ, only to require about $50 billion in bailout money during the crisis.
J.P. Morgan maintains that it has more than enough capital to run its business, even under stressed conditions and that it will have no trouble meeting new, more stringent capital requirements in coming years. Also, while its stock is down roughly 12% year-to-date, that is still much better than the KBW Bank Index, which is off 24%. And J.P. Morgan hasn't been the only bank to take a hit on buybacks. Wells Fargo, which also received Fed approval to resume capital returns, is also in the red on recent purchases.
To the Fed's credit, it at least declined a request from Bank of America to resume capital returns. Still, as the Fed in the future weighs further plans from banks to return capital, it should be more cautious. And investors should remember that banks are supposed to be specialists in lending money, not timing stock markets.
The US Taxpayer Suing Itself
by Ken Frankel, KIF Capital Management
The lastest news is that Fannie and Freddie are suing 17 major banks over mortgage deals gone bad. This is the latest in a string of lawsuits where essentially the US Taxpayer is suing himself – the only beneficiaries are the lawyers. AIG is suing Bank of America over mortgage bonds. The NY Fed sued Bank of America over mortgage bonds. BofA is a main target because it acquired Countrywide which was the largest pure player in the mortgage market. The housing and mortgage debacle is so complex and entangled that Wells Fargo was even suing itself.
What is lost in all of this is all these entities mentioned above are part of the government or whose existence depends on the government. We should stop pretending these are indeopendent entities with separate shareholder bases, though in some cases this is technically true – both BofA and AIG would not exist in present form with a huge assist from the American taxpayer -at one point as a result of the federal bailout of AIG, the government owned 80% of AIG. Despite this AIG kept spending millions on lobbyists to lobby the federal government, its 80% owner. Even Fannie and Freddie stopped their lobbying activities when the government formally took them over.
Instead of spending money or loaning money to start new businesses across mutliple industries or even making new mortgages more available, we are spending money on legal fees debating transactions that are five years or more old. If there was actually fraud in some of these mortgage bond securitizations, then the government should prosecute those who committed the fraud. But the aftermath should be limited to criminal prosecutions where warranted – the civil litigation needs to stop and money being used to fight these suits put to more productive uses. Does anyone think suing lenders over old mortgages is going to encourage them to make new ones?
I should point out that even PIMCO which also sued BofA along with the NY Fed was a beneficiary of federal largess. Had the government not bailed out Fannie and Freddie, something it was not legally required to do as there is no such thing an "implicit guarantee" PIMCO bond business would have been crippled as it owned massive amounts of GSE debt banking on a federal bailout.
The federal government should be putting the pressure on all the direct and indirect beneficiaries of the taxpayer bailouts to not sue each other and that would start with Fannie and Freddie which are now part of the government not suing anyone. Fannie and Freddie are itself as responsible as any entity for the financial meltdown and the housing debacle and should not be casting aspersions to others when they are plenty guilty themselves.
One Reason Why The Government Will Have A Difficult Time Suing The Banks
by Megan McArdle - Atlantic
The New York Times reports that our government is going to file suit against a bunch of major banks, alleging fraud in the mortgage securitization process. Apparently, the statute of limitations expires in a few days, so the Federal Housing Finance Agency is expected to slip the suit in just under the wire.The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers' incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.
The details are rather sketchy, and I am not a securities lawyer, but I expect that this is going to be a fairly difficult case to make. Fannie and Freddie already have the right to force banks to take back loans with obvious underwriting flaws, or that go bad too quickly, and my understanding is that they've been doing just that.
Securities cases are hard to prove in the best of circumstances--even Eliot Spitzers' famous crusade against Wall Street consisted of getting fairly minor settlements from most of the big fish he went after . . . and losing every case he took to court. The first mortgage securities case to go to trial, with two Bear Stearns bankers, likewise returned a "not guilty" verdict. Many of these same banks got themselves in serious financial trouble by gorging on their own toxic mortgage securities, which dims the fraud angle. Unfortunately, being arrogant idiots with the risk appetite of a coked-up skydiver is not a crime.
On the issuance side, most of the knowing, obviously provable fraud seems to have been at the mortgage broker level, or in mortgage mills that are now out of business. Proving that someone ought to have known that they were being scammed is harder--especially since they can argue that if they ought to have known, so should the GSEs.
But it's easy to understand why the government wants to preserve its option--if nothing else, the political pressure to bring cases like this is enormous. It will be interesting to see where this goes, and if they can actually prove malfeasance rather than gross stupidity.
BofA, JPMorgan Among 17 Banks Sued by U.S.
by Bob Van Voris and Patricia Hurtado - Bloomberg
Bank of America Corp. and JPMorgan Chase & Co. were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities. "The loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to the enterprises for those securities," the FHFA said in a statement. FHFA is seeking to rescind the transactions plus other damages, including civil penalties and punitive damages in cases alleging misconduct.
In addition to JPMorgan and Bank of America, the agency filed complaints in federal court in Manhattan yesterday against Citigroup Inc., Goldman Sachs Group Inc., Merrill Lynch & Co., Barclays Plc, Nomura Holdings Ltd., HSBC Holdings Plc, Societe Generale SA, Credit Suisse Group AG, Deutsche Bank AG and First Horizon National Corp. The FHFA sued Ally Financial Inc., Countrywide Financial Corp., General Electric Co. and Morgan Stanley in state court in Manhattan, according to the agency. It sued Royal Bank of Scotland Group Plc in federal court in Connecticut.
Fannie and Freddie
Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.
The FHFA said in its filings that Fannie Mae and Freddie Mac bought $6 billion in mortgage-backed securities from Bank of America; $24.8 billion from Merrill Lynch, which Bank of America took over in 2008, and $26.6 billion from Countrywide, which Bank of America acquired the same year.
The FHFA claims Fannie Mae and Freddie Mac bought $33 billion in securities from JPMorgan and $30.4 billion from Royal Bank of Scotland. According to the complaints, Fannie Mae and Freddie Mac also bought $14.2 billion from Deutsche Bank, $14.1 billion from Credit Suisse, $11.1 billion from Goldman Sachs, $10.6 billion from Morgan Stanley, $6.2 billion from HSBC, $6 billion from Ally, $4.9 billion from Barclays, $3.5 billion from Citigroup, $2 billion from Nomura, $1.3 billion from Societe Generale, $883 million from First Horizon and $549 million from GE.
The FHFA sued UBS AG, Switzerland’s biggest bank, in July over $4.5 billion in residential mortgage-backed securities sold to Fannie Mae and Freddie Mac, claiming the bank misstated the risks of the investments. "The claims brought by the FHFA are unfounded," said Frank Kelly, a spokesman for Frankfurt-based Deutsche Bank. "Fannie Mae and Freddie Mac are the epitome of a sophisticated investor."
Ally, based in Detroit, said in a statement that it believes FHFA’s claims are meritless and the company intends to defend its position. Fannie Mae and Freddie Mac "acknowledged that their losses in the mortgaged-backed securities market were due to the unprecedented downturn in housing prices and other economic factors," said Larry DiRita, a spokesman for Charlotte, North Carolina-based Bank of America. Kim Cherry of Memphis, Tennessee-based First Horizon said the company would defend itself.
Knew the Risks
The firms claimed to understand the risks, and continued buying, even after their regulator said they lacked adequate risk-management capabilities to do so, DiRita said. Company representatives who declined to comment on the suits yesterday included Danielle Romero-Apsilos of New York- based Citigroup, Kerrie Cohen of London-based Barclays, Kristin Lemkau of JPMorgan in New York and Russell Wilkerson of Fairfield, Connecticut-based GE.
Edinburgh-based Royal Bank of Scotland Plc will defend the claims. "We believe we have substantial and credible legal and factual defences to these claims and will defend them vigorously," the bank said in an e-mailed statement. Some of the complaints described mortgages that were already performing worse than investors were told at the time securitizations were sold. Disclosures by some firms overstated home values or misrepresented the number of homes occupied by borrowers, according to the FHFA.
An instrument underwritten by an affiliate of Merrill Lynch was reported to have no loans larger than the value of the house, known as the loan-to-value ratio. In reality, about 20.7 percent of the mortgages had an LTV ratio above 100 percent, meaning they were already under-secured or "under water" from the start, according to the FHFA’s complaint. Some pools packaged by GE or its affiliates were said to have no loans with an LTV over 100 percent, when about 13 percent did, according to another suit.
In the complaint against Goldman Sachs, the FHFA claimed the bank securitized many mortgages that failed to meet underwriting standards even after outside firms it hired reported "high percentages of defective or at least questionable loans." "Goldman simply ignored and did not disclose the red flags," the FHFA claimed.
Fresh Scrutiny of BofA
by Dan Fitzpatrick - Wall Street Journal
Fed Asks Bank to Supply Contingency Plans; Float of Merrill Shares Is Option
U.S. regulators have pushed Bank of America Corp. to show what measures it could take if conditions worsen for the Charlotte, N.C., lender, according to people familiar with the situation.
Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank's most profitable division.
Chief Executive Brian Moynihan isn't expected to pull the trigger soon, if ever, on the creation of a so-called Merrill Lynch tracking stock. Such a move would raise money from investors but could be viewed as counter to Mr. Moynihan's strategy of knitting together the disparate parts of the franchise into a cohesive whole. Its inclusion on the list as a theoretical option shows the bank is considering all possibilities as it wrestles with an array of problems weighing down its shares.
The heightened scrutiny from the Fed is another pressure point for the 51-year-old Mr. Moynihan, who faces mounting investor concerns about the bank's legal costs and its ability to withstand another economic downturn.
The bank's stock-market value fell $16 billion in a single day in early August. Shares rallied following a deal announced on Aug. 25 for Warren Buffett's Berkshire Hathaway Inc. to buy $5 billion of Bank of America's stock. The bank also recently reached an agreement to sell half its shares in China Construction Bank Corp., realizing a $3.3 billion gain on the sale, and has decided to sell a sizable piece of its mortgage business. Still, the stock is down 41% for the year after falling 26 cents to $7.91 Thursday in New York Stock Exchange trading.
Bank of America has posted losses in three of the six quarters since Mr. Moynihan took over as chief executive Jan. 1, 2010. The bank has battled for profits following the financial crash of 2008. It reported a loss of $8.8 billion for the second quarter, as it took a $14.5 billion loss in the consumer real-estate services unit that is dominated by its Countrywide unit.
Bank of America has been operating under strict regulatory oversight since 2008. In May 2009, regulators surprised executives by slapping the bank with a nonpublic memorandum of understanding that required it to improve governance, risk and liquidity-management policies. The action followed a downgrading of the bank's ratings by the Fed and Office of the Comptroller of the Currency and repeated tussles with regulators over the bank's risk controls, capital levels and purchase of Merrill.
Earlier this year, regulators surprised executives again by rejecting the bank's request for a small dividend increase in the second half of 2011. It was an embarrassing turn of events for Mr. Moynihan, who had hinted publicly that a second-half increase was likely. Many of Bank of America's rivals were allowed to raise their payouts for the first time since the crisis. Regulators have pushed Mr. Moynihan this year to put management-team changes in place quickly to deal with the bank's mounting legal and regulatory problems, according to a person familiar with the situation.
Mr. Moynihan recently accelerated the start of Gary Lynch as the bank's top legal officer. A former Morgan Stanley chief legal officer and ex-director of enforcement with the Securities and Exchange Commission, Mr. Lynch was hired in April but couldn't start right away because he had signed a noncompete agreement with Morgan Stanley that locked him up until September.
In early July, Mr. Moynihan placed a call to Morgan Stanley Chief Executive James Gorman and asked if Mr. Lynch could start his new job two months early, according to people familiar with the call. The Morgan Stanley CEO agreed to free Mr. Lynch without any money changing hands. A week later, on July 11, Mr. Lynch started as Bank of America's chief of legal, compliance and regulatory relations.
The Fed's call for more documentation about what the bank might do in more-extreme circumstances was a response to uncertainty about a U.S. economic recovery and a downward swing in Bank of America's share price earlier this year, one of these people said. It was a one-time request, although the Fed has done the same with other firms in the past. Bank of America did the analysis at the Fed's request in late July and early August and then provided the Fed with its menu of options, said people familiar with the situation. Some items, such as the tracking stock, were more theoretical than others.
Mr. Moynihan isn't giving the tracking stock serious consideration at this point, said a person familiar with the situation, but he included it on the list to show the company has multiple levers to pull. Tracking stocks sometimes pay a dividend tied to the performance of a specific portion of the company—in this case, the operations Bank of America inherited with the 2009 purchase of Merrill Lynch.
Holders of the new shares typically don't have the voting rights or protections that owners of the larger parent company have, and they don't own the assets of the division.
Tracking stocks have a mixed record since their introduction in 1984 by General Motors, which developed new shares to follow the performance of its Electronic Data Systems division. The so-called GM class E shares performed well, but that hasn't always been the case. Tracking shares issued by Walt Disney Co. and AT&T during the Internet boom fell sharply and were retired a year or so later.
The Beauty Contest That’s Shaking Wall Street
by Robert J. Shiller - New York Times
The extraordinary surge of stock market volatility during the last month can’t be explained by conventional means. Yes, hundreds of scholarly papers have tried to predict the size of such swings, and whole markets — like those for futures and options — thrive on these movements. Yet we still don’t have a clear, mathematical understanding of volatility’s source.
Last month, market watchers might have thought they were witnessing a gamma ray burst from outer space, with waves of sudden, crazy noise: On Thursday, Aug. 4, the market, as measured by the Standard & Poor’s 500-stock index, fell by almost 5 percent. The next day was quiet, but the following Monday, the index dropped almost 7 percent. In successive days, it rose 4.7 percent, fell 4.4 percent and rose 4.3 percent. Bigger-than normal changes have persisted since, though they haven’t been quite as drastic.
Let’s put this into context. Since 1928, the daily change in the market has usually been no more than half of a percent. The kind of volatility we have just seen comes along only every five years or so, though there was an even more extreme episode at the peak of the financial crisis of 2008.
To be sure, at least some of the latest volatility has been linked to news events. Much of it came after S.& P., unsatisfied with the last-minute budget deal in Congress, downgraded the nation’s long-term debt after the close of the market on Friday, Aug. 5. In effect, this unprecedented move connected the United States to the debt crisis already under way in relatively small European countries. Four days later, in a significant commitment, the Federal Reserve promised to keep short-term interest rates near zero for two more years.
It’s tempting to think that the market has been responding rationally to these developments. But that isn’t an adequate answer. Why did investors react so strongly to the rating change, which, after all, was merely the opinion of a few analysts on a committee? And why did the market swing so much day to day, even when there was no significant news?
John Maynard Keynes supplied the answer in 1936, in "The General Theory of Employment Interest and Money," by comparing the stock market to a beauty contest. He described a newspaper contest in which 100 photographs of faces were displayed. Readers were asked to choose the six prettiest. The winner would be the reader whose list of six came closest to the most popular of the combined lists of all readers.
The best strategy, Keynes noted, isn’t to pick the faces that are your personal favorites. It is to select those that you think others will think prettiest. Better yet, he said, move to the "third degree" and pick the faces you think that others think that still others think are prettiest. Similarly in speculative markets, he said, you win not by picking the soundest investment, but by picking the investment that others, who are playing the same game, will soon bid up higher. Keynes didn’t say where and when he saw this beauty contest.
The New York Times ran one very much like it in 1913. It was called the "Girl of To-Day Contest," and readers were asked to submit a photograph of a young woman that they deemed "most typical of the American girl." A panel of artists was asked to select a winner from these pictures.
The Times reported the "dismay" of the panel at the difficulty of its job. Snippets of the conversation were recorded: "We are not here to select the prettiest girl of the lot," one judge said. "Here’s a face women would like," said another. "They would not consider her dangerous."
We see such dismay among stock market investors today. People are trying to guess whether other investors are thinking that yet others are thinking that the stock market is "dangerous," or whether it is instead a great time to invest. And investors are making that decision with little more information than the "Girl of To-Day" judges had.
When you hear a conversation among professional investors — including those who manage money for big institutions like university endowments and pension funds — it often sounds as if they are engaged in just this kind of guesswork. You wonder how many people are actually basing their decisions on what is taught in business school: calculating an optimal portfolio based on a rational statistical analysis of fundamental economic data. If you believe in efficient markets, you have to conclude that some other investors are doing those calculations today, because they don’t seem the main activity of the people I’m hearing.
In fact, the best explanation for the market’s back-and-forth swings is that each day we are conducting a Keynesian beauty contest, and reassessing what others think that still others are thinking. On days without much news, the market is simply reacting to itself. And because anxiety is running high, investors make quick, sometimes impulsive, responses to relatively minor events.
Alan Greenspan, the former Fed chairman, typified the concerns about other investors on "Meet the Press" on Aug. 7, the Sunday before the market’s big drop of almost 7 percent. "What I think the S.& P. thing did was to hit a nerve that there’s something basically bad going on, and it’s hit the self-esteem of the United States, the psyche," he said. "And it’s having a much profounder effect than I conceived could happen." He was talking about what other investors were thinking, not about the substance of the S.& P. downgrade.
Over that weekend, there was widespread speculation that the downgrade would push interest rates way up. But on Aug. 8, even before the Fed issued its statement, 10-year Treasury yields began to drop, not rise, and many people started to reassess what other people were thinking — and what other people were thinking about other people, and so on.
This process creates uncertainty not only for the stock market, but also for the overall economy. The only thing to fear is fear itself, Franklin D. Roosevelt said of the Great Depression, and he was right. We are constantly trying to reassess the fear of others, and others’ fear that others are also afraid. This may sound like a crazy game, but if others are playing it, we must, too. The outlook for the economy depends on how this convoluted beauty contest plays out.
IMF: global economy faces a 'threatening downward spiral'
by Ambrose Evans-Pritchard - Telegraph
The International Monetary Fund has called on the US and Europe to abandon fiscal austerity and switch to stimulus measures, warning that the global economy faces a "threatening downward spiral".
Christine Lagarde, the IMF's managing-director, said the outlook had darkened suddenly over the summer. "There has been a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken," she said. "The spectrum of policies available is narrower because a lot of ammunition was used in 2009. But if governments, institutions and central banks work together, we'll avoid recession," she told Der Spiegel.
The comments come at the start of a dramatic week for the eurozone as Italy prepares to roll over record sums of debt and Germany's constitutional court issues its long-awaited verdict on the legality of the EU's bail-out machinery. Markets are already tense after the EU-IMF 'Troika' withdrew abruptly from Athens on Friday, accusing the Greek government of failing to comply with rescue terms.
The Italian treasury must redeem €14.6bn of debts this week and €62bn by the end of September, the most ever in a single month. "We are experiencing very demanding times," Jean-Claude Trichet, the European Central Bank's president, said over the weekend. The ECB has stabilised Italy's debt over the last four weeks, capping yields on 10-year bond yields near 5pc through purchases on the secondary market.
It is unclear how much longer the ECB can keep doing this after a string of top officials in Germany described the bank's actions as illegal. "The ECB cannot substitute for governments," said Mr Trichet. He was speaking at the Ambrosetti Workshop at Lake Como, where he held a closed-door meeting to discuss the euro crisis with Bank of England Governor Sir Mervyn King.
The ECB has bought an estimated €35bn of Italian debt under an implicit accord that Rome will deliver on austerity promises. Premier Silvio Berlusconi has come close to breaching the terms by backsliding on a wealth tax and pension reform.
Emma Marcegaglia, head of Italy's Confindustria business lobby, said the austerity measures were "unjust, iniquitous, and inadequate", and undermine the credibility of the country.
Leading Italian economists have begun to question whether EMU itself is workable. "It's clear that the euro has virtually failed over the last ten years, even if you are not supposed to say that. We pretended to be Germans, but it was an illusion," said Professor Giacomo Vaciago from Milan's Catholic University.
Mrs Lagarde said the US has scope to "abandon short-term austerity and introduce some measures to drive growth" provided the country lays out a credible debt strategy over the medium term. She said Europe needs to take its foot off the fiscal brake and shift to "growth-intensive measures" until the danger has passed, insisting that Germany has leeway to "stimulate demand".
The comments are certain to cause fury in Berlin, where the IMF is viewed as an agent of Keynesians and French mischief. Mrs Lagarde was French finance minister until two months ago.
Separately, Germany's constitutional court is expected to rule on Wednesday that Berlin's participation in EU bail-outs is allowable so long as the Bundestag is given a veto over future payments. However, there is an outside risk that it will go further, concluding that the nexus of rescue policies subvert EU Treaty law and German fiscal sovereignty and must therefore be curbed. This would amount to a "sudden stop" for EMU debt markets.
The judges are aware of these risks, yet they ruled two years on the Lisbon Treaty that German democracy is "inviolable" and that Berlin is duty bound "to refuse further participation in the European Union" if the constitutional order is threatened. German patience with Athens is already near exhaustion. Prince Hermann Otto zu Solms-Hohensolms-Lich, the Bundestag's deputy president, said Greece cannot bring its debts under control.
"We must consider whether it would not be better for the currency union and for Greece itself to go for debt restructuring and an exit from the euro," he told the Frankfurter Allgemeine.
'There Has Been a Clear Crisis of Confidence'
by Marc Hujer and Christian Reiermann - Spiegel
SPIEGEL: Ms. Lagarde, the global economy is slowing, markets are volatile and banks have all but ceased lending each other money. Does the situation remind you of 2008 just before the investment bank Lehman Brothers collapsed?
Lagarde: Each moment in history is different from previous situations and it's wrong to try to draw comparisons. At the International Monetary Fund, we see that there has been, particularly over the summer, a clear crisis of confidence that has seriously aggravated the situation. Measures need to be taken to ensure that this vicious circle is broken.
SPIEGEL: What does that circle look like?
Lagarde: It is a combination of slow growth coming out of the financial crisis and heavy sovereign debt. Both fuel serious concerns about the capital and the strength of banks, notably when they hold significant volumes of sovereign bonds. Should banks experience further difficulties, further countries will be stricken. We have to break this cycle.
SPIEGEL: What should be done?
Lagarde: When we look at the European situation, there has to be fiscal consolidation qualified by growth-intensive measures. In addition, there has to be increased recapitalization of the banks. Clearly, the two go together. The sovereign debt issue weighs on the confidence that market players have in European banks.
SPIEGEL: Don't you think that your warning that €200 billion ($285 billion) might be missing in the balance sheets of European banks aggravates the situation of those banks?
Lagarde: In the course of our work on global financial stability, we are looking at the situation in Europe. We will publish the results of this work in a couple of weeks. More generally, we do see a need for recapitalization of European banks so they are strong enough to withstand the risks coming from sovereign borrowers and from weak growth. This is key to cutting the chains of contagion.
SPIEGEL: Is the world on the brink of a renewed recession?
Lagarde: We are in a situation where we can still avoid it. The spectrum of policies available to the various governments and central banks is narrower because a lot of the ammunition was used in 2009. But if the various governments, international institutions and central banks work together, we'll avoid the recession.
SPIEGEL: At the moment, however, exactly the opposite would appear to be happening. Many governments have introduced austerity packages in order to make up for the vast expenditures made during the crisis. Is that wrong?
Lagarde: I wouldn't pass general judgement on that because it's going to be country-specific. For some countries, the path is fine and should continue as is. For others, some of the measures that have been taken are so strong, given the current deficit situation, that they can accommodate some relaxation -- especially if the economy weakens further, and provided there is a clear medium-term consolidation path.
SPIEGEL: Do you consider Germany to be one of those countries which could do more to stimulate the global economy?
Lagarde: In the course of our annual country checks, our experts recently visited Germany. Their conclusion was that, under the circumstances, the fiscal consolidation path adopted by Berlin was perfectly fine.
SPIEGEL: For now.
Lagarde: Of course these things always depend on circumstances. Given Germany's heavy reliance on exports, if demand weakens so much that it really changes the equilibrium, then it would need to be revisited.
SPIEGEL: By, for example, stimulating domestic demand?
Lagarde: Domestic demand is good for both the German economy and for the other economies surrounding Germany. I do think that domestic demand in Germany has improved since the time when I floated this idea as finance minister in France.
SPIEGEL: Given the economic climate, do you not think it dangerous when countries pass laws mandating a balanced budget, as France is considering?
Lagarde: It's clearly a signal to market players. It shows investors the seriousness of the government's commitment to the principle of balanced finances. The general intention behind it is good.
SPIEGEL: Would you like to see the US implement such a "debt brake" rule?
Lagarde: Each country must find the best way to signal to the markets that they are serious about public finances. The IMF has a lot of experience and we would be very happy to give a hand to those countries that actually are in the process of implementing a debt brake.
SPIEGEL: Do you think the austerity measures recently agreed to in the US go far enough?
Lagarde: Which ones do you mean?
SPIEGEL: The commitment, after weeks of disagreement about the debt ceiling, to cut federal expenditures by at least $2.4 trillion over the next 10 years.
Lagarde: Such long-term commitments are a good principle because they credibly signal an intention to reduce the deficit and consolidate public finances on a more stable course, for example in health care spending. It can indicate that a country will reduce the deficit in the medium term and yet still have enough room in the short term to put in place measures that will actually stimulate growth and help create employment.
SPIEGEL: Does the US need a new stimulus package?
Lagarde: We are in a situation of slowed growth and we have a confidence issue that culminated this summer with the downgrading of the US from its AAA status. As long as the US puts in place a credible medium-term adjustment plan, there is probably space at the moment to contain the short-term adjustment and take some of those growth-inducing measures.
'European Leaders Have Made Very Strong Commitments'
SPIEGEL: You suggest fighting the effects of a debt crisis with more debt?
Lagarde: That's not how I see it. In a world that is so economically interwoven, where the actions of industrial countries have direct influence on emerging economies, one can't be stubborn when the situation changes. We didn't change our minds about the dangers of too much debt, but over the current state of the world economy.
SPIEGEL: The effects of too much debt can be seen right now in the euro zone, where the European Central Bank had to buy up billions in government bonds. At the end of September, the European rescue fund, the European Financial Stability Fund (EFSF), will take over this task. Does it have enough money to do so?
Lagarde: The EFSF will now be flexible enough. It has been in a bit of a straitjacket. Now it has the option to buy on the secondary market in certain circumstances, to support the banks and provide guarantees. That is very welcome.
SPIEGEL: Europe's leaders have given EFSF head Klaus Regling a pile of tasks, but not more money. Will the allotted €440 billion be enough?
Lagarde: French President Nicolas Sarkozy and German Chancellor Angela Merkel and other euro leaders have said they will do what it takes. That would include increasing the EFSF if necessary, I suppose.
SPIEGEL: Does that include going as far as supporting Italy? Isn't the country far too big to be bailed out by other EU countries?
Lagarde: The European leaders have made very strong commitments concerning the euro currency and the euro zone. I think markets should appreciate the strength of those statements and the strength of their political commitment. There has also been a significant improvement in terms of fiscal consolidation and structural reforms in Italy.
SPIEGEL: Critics say that Greece has had enough help and should be kicked out of the euro zone. Do you think that's a good idea?
Lagarde: Number one, it's not for me to decide. Number two, I think that all the partners, whether in the European Commission, ECB or IMF or members of the euro zone, are determined to make this work and ensure that the Greek economy regains competitiveness and is properly restructured.
SPIEGEL: There are a growing number of stumbling blocks emerging in the euro zone. Finland has demanded guarantees from Greece before the bailout money flows, inspiring other countries to consider following suit. Doesn't that put the entire rescue mechanism in doubt?
Lagarde: My understanding is that the euro members are working on this and are working on the pattern that would actually respond to all euro-area members' expectations. In other words, not a tailor-made program that would fit Finland and nobody else. I am certain the euro-zone members are aware of their responsibilities and will find a solution.
SPIEGEL: In France, it is possible that there could be legal proceedings against you. You are accused of having abused your position as French finance minister by making sure that businessman Bernard Tapie received compensation from the French state in connection to a deal involving Adidas that went wrong. Will you resign from your job if you have to defend your actions in court?
Lagarde: This issue was actually contemplated at the time of my candidacy for the position. The IMF board concluded that that case was perfectly compatible with me continuing my job and carrying out all my duties.
SPIEGEL: If we may ask one more question on this topic: Is it true that you acted on instructions from President Nicolas Sarkozy?
Lagarde: If I had to answer that question, I think I would answer it in court. I think that would be more appropriate than discussing it with SPIEGEL.
SPIEGEL: There is an unwritten rule that the top job at the IMF is always occupied by a European, and in return the Americans get to appoint the head of the World Bank. Given the world's shifting center of gravity, do you believe that you are perhaps the last European who will hold this position?
Lagarde: I hope not -- that would exclude many talented people from the competition -- but, you know, it's not for me to say. I'm not sitting here as a European, and I've tried to disengage from thinking as a European or thinking as a French national. The moment you walk into this organization, you become a servant of a global institution.
Euro Zone Risks Becoming Spanish Prisoner With Bond Buys
by Richard Barley - Wall Street Journal
A tourniquet can only be an emergency measure. The European Central Bank has stanched the bleeding in markets by buying Spanish and Italian bonds. But in stemming relentless selling, has the ECB simply swapped acute market dysfunction for a more chronic form? Yield distortions may now deter long-term investors. Meanwhile, a lack of clarity around the scale and duration of purchases, and the insistence that intervention is only temporary, add to market uncertainty.
The ECB has spent €41.6 billion ($59.33 billion) buying bonds since reactivating its Securities Markets Programme in early August, halting a destructive downward spiral in Italian and Spanish bond prices. Ten-year yields initially fell by more than one percentage point to around 5%. But artificially lower yields may not tempt investors worried about where prices would go if the ECB stops buying. Demand at Italian and Spanish bond auctions this week was relatively poor: Spain's five-year bond was only 1.76 times covered, versus 2.85 times at a July 7 sale, when it paid higher yields. Market participants say the ECB has stepped up purchases this week, but even that hasn't stopped Italian and Spanish yields from rising.
The ECB's purchases treat a symptom of the euro-zone crisis, not the cause. They can't address investors' concerns about the ability of governments to rein in budget deficits and start to bring debt burdens down. In fact, the ECB's purchases allow risk-averse investors to sell out of Italian and Spanish government bonds and buy safer debt such as German bunds.
That is all in stark contrast to the bond-purchase programs run by the Bank of England and the U.S. Federal Reserve. They also arguably distorted yields but ultimately didn't deter investors. First, markets knew exactly how much and when the BOE and Fed planned to buy. Yields rose during the U.S. and U.K. quantitative-easing programs in anticipation of a stronger economy and higher inflation. The purchases forced cash out of government-bond markets and into riskier assets since investors had no equivalent sterling or dollar safe-haven assets to buy. But because there were no real doubts about the credit-worthiness of these bonds, and yields weren't artificially held low, demand was still assured when purchases stopped.
By contrast, a halt in ECB buying would remove the one source of demand propping up the market. That leaves the ECB in an unenviable position. It can't credibly threaten to withdraw purchases if Italy or Spain fail to live up to budget promises without the market collapse it is seeking to prevent. Nor can it offer investors the long-term reassurance that they might need to return to Italian and Spanish bond markets.
Only improved budget positions, which may take months or years, will do that. In the meantime, the ECB is the buyer of both first and last resort in those markets—an unpleasant position it may have to resign itself to.
EU law "gutted" by bail-outs, growls Bundesbank
by Ambrose Evans-Pritchard - Telegraph
Germany's Bundesbank has issued a thundering denunciation of Europe's rescue policies and actions by the European Central Bank, alleging that EU treaty law has been "completely gutted".
Jens Weidmann, the bank's president, said monetary union risks losing its democratic legitimacy as EU leaders take a "large step" towards a debt union without legal authority, and sever the crucial link between budget policy and elected parliaments. He said mass bond purchases by the European Central Bank had "strained the existing framework of the currency union and blurred the boundaries between monetary policy and fiscal policy. Decisions on further risk-taking should be made by governments and parliaments, as only they have democratic legitimacy."
Mr Weidmanm said that if Europe is unwilling to accept a genuine fiscal union backed by a European tax system, it must strengthen the existing 'no bail-out' clause in the EU Treaties "instead of letting it be completely gutted."
The escalating protest from the Bundesbank leaves the ECB in an invidious situation as it tries to shore up Italy and Spain, holding yields on their 10-year bonds at 5pc by intervening on the secondary market.
Julian Callow said Italy must redeem a record €62bn (£55bn) of debt by the end of September yet the government of Silvio Berlusconi is blacksliding on its austerity package and cavilling over details. "This is a very large sum of money. The situation is extremely serious, and this is no time to be rearranging deck chairs," Mr Callow said, suggesting that ECB chief Jean-Claude Trichet may have to go to Rome to read the riot act.
The government has agreed on tougher measurs to curb tax evasions but a wealth tax was dropped on the insistence of Mr Berlusconi. The deal after three weeks of wrangling is so thin that the ECB may find it hard to justify further purchases of Italian debt. The bank has used intervention as a pressure tool to force states to deliver austerity.
Mr Callow said the eurozone is already in an industrial recession and needs stimulus to head off a possible credit crunch and stabilise the debt crisis. He said the ECB should cut interest rates to cushion the effect of fiscal tightening in a string of EMU states and halt accelerating capital flight from the eurozone.
Holger Schmieding from Berenberg Bank said there is a "significant risk" of recession across Europe and the UK but insisted it would be a mistake for the authorites to relax on either the fiscal or monetary front. "They must tough it out," he said.
Mr Schmieding warned that it was a mistake to give the Bundestag and other eurozone parliaments a veto over the operational decisions of the EU's €440bn bail-out fund. "In a market panic when things start getting really hot, the EFSF has to act fast. It could happen over a weekend." He said the fund has its limits in any case and is too small to handle Italy, leaving the ECB as the eurozone's only viable lender of last resort. The ECB can probably risk ignoring complaints from the Bundesbank and act on the necessary scale so long as the German government is willing to acquiesce.
Europe's sharp downturn will make it even harder for Italy and Spain to meet budget targets and grow their way out of debt traps. It may doom Greece's rescue programme. Barclays Capital said the Greek economy is in the grip of debt-deflation and is likely to contract a further 5.7pc this year. The deficit remains stuck at 8pc of GDP. The parliament's own watchdog said debt dynamics are "out of control".
Talks on Greek Bailout Are Stalled
by Alkman Granitsas, Stelios Bouras and Costas Paris - Wall Street Journal
IMF, Commission and Central Bank Clash With Athens on Budget-Gap Fix
Talks over new bailout funds for Greece were suspended Friday amid disagreements over how to fill a government-deficit gap that once again is veering off track, raising doubts about the country's future access to finance and triggering renewed nervousness in financial markets across Europe. The suspension pushed yields on Greek government debt to levels indicating that investors see a default by Athens soon as a near certainty: Interest rates on one-year paper blew out past 70% and two-year yields rose close to 50%.
More disturbingly for euro-zone governments—given Greek bonds are barely traded and wild swings in yields are therefore likely—financial markets also pushed up borrowing costs for Italy, reflecting anxieties about Italian austerity measures being watered down, and for Spain. The continent's stock markets also retreated, with the French market down 3.6% and the German market down 3.4%.
The suspension of the talks in Athens between the government and a group of officials representing the providers of Greece's bailout cash came, officials said, amid a dispute about how to address new gaps opening up in the government budget deficit.
"The Greek side insisted the missed targets are the result of the recession. The troika said recession played a part, but Greece basically didn't keep up with its commitments, so more measures will be needed to make up for the lost ground," said a person with direct knowledge of the talks. "There is a clear disagreement that can't be bridged today," the person added.
The talks with the so-called troika—representatives of the International Monetary Fund, European Central Bank and European Commission—began earlier this week and were expected to be concluded by Sept. 5. According to a Greek government official, the delegation is now expected to return in about 10 days, after the government has prepared a draft of its 2012 budget.
On the talks hangs a payout of €8 billion ($11.5 billion) of rescue funds under the €110 billion package arranged last year, needed to ensure the government pays its way. Greece has negotiated a further official rescue package of more than €100 billion, meant to tide it through 2014, which has yet to be formally agreed by lenders. "I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim."
Failure of Greece to meet its targets, growing reluctance by some euro members to continue lending and the fact that private-sector participation in a second bailout won't significantly alter Greece's debt profile are the primary factors, the IMF official said. Besides projected fiscal deficits widening far beyond the IMF/EU program allows, Greece has failed to reach its targets on raising revenue through privatization of state assets, and even neglected to achieve simple bureaucratic requirements, according to people familiar with the matter.
Finance Minister Evangelos Venizelos told a news conference on Friday that the talks hadn't broken down. But he said Greece must avoid taking further measures that would worsen the country's deepening recession, putting his position at odds with that of the troika. Government officials say there are differences over new forecasts for the size of the budget deficit. The government expects this year's deficit to be about 8.1% to 8.3% of gross domestic product, compared with the official 7.6% target—although it hasn't ruled out a greater deterioration.
The troika, however, is expecting the deficit to reach 8.8% this year, and is seeking additional government spending cuts this year and next to meet the targets. Mr. Venizelos on Friday repeated his position that no further measures will be necessary if an austerity program passed by the Greek Parliament following violent public protests in June are fully implemented. "What is important for us is to restrain the recession, not to overstep and make things worse," he told reporters.
The Greek government is worried about a debt trap. It believes it is missing its budget-deficit targets mainly because the economy is weaker than expected. Mr. Venizelos said the Greek economy will shrink by 5% this year, against a previously forecast 3.9% contraction. More spending cuts, the government fears, will weaken the economy further and thereby increase the burden of paying off debt.
German endgame for EMU draws ever nearer
by Ambrose Evans-Pritchard - Telegraph
For fifty years Germany has invariably stumped up the money required to keep Europe’s Project on track, responding to unreasonable demands with grace and generosity.
It bankrolled French farmers through the Common Agricultural Policy, that disguised tithe for war reparations. It then bankrolled Spanish farmers as well. It funded each new wave of EU expansion, though reeling itself from the €60bn annual cost of its own reunification. It gave up the cherished D-Mark, the anchor of German economic stability.
We are so used to German self-abnegation for the sake of Europe that we can hardly imagine any other state of affairs. But the escalating protest against EMU bail-outs by Germany’s key insistutions go beyond the banalities of money. The fight is over German democracy itself.
Those who talk of a Fourth Reich or believe that EMU is a "German racket to take over the whole of Europe" – as Nicholas Ridley famously put it -- have the matter backwards. Germans allowed their country to be tied down with "silken chords". They are the most reliable defenders of freedom and parliamentary prerogative in Europe, precisely because they know their history.
Finance minister Wolfgang Schäuble could hardly have chosen a more toxic term than "Bevollmächtigung" or general enabling power when he requested blanket authority from the Bundestag for EU rescues, as if Weimar were so soon forgotten. He was roundly rebuffed.
You can feel the storm brewing in Germany. Within days of each other, President Christian Wulff accused the European Central Bank of going "far beyond" its mandate and subverting Article 123 of the Lisbon Treaty by shoring up insolvent states, and Bundesbank chief Jens Weidmann said bail-out policies had "completely gutted" the EU law.
Both believe the EU Project has taken a dangerous turn. Fiscal powers are slipping away to a supra-national body beyond sovereign control. "This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies," said Mr Wulff.
Otmar Issing, the ECB’s founding guru, fears that the current course must ultimately provoke the "resistance of the people". Instead of evolving into an authentic union with a "European government controlled by a European Parliament" on democratic principles, it has become deformed halfway house. In its rush to save EMU, he said, Europe has forgotten that legislative primacy over tax and spending is the crucible of our democracies. It was monarchical assault on the power of the purse that led to England’s Civil War, and America’s Revolution.
We will find out to what extent Germany’s constitutional court shares these fears when it rules this Wednesday on the legality of the EU rescue machinery, and delivers its verdict of life or death for monetary union.
The opinion will be drafted by Guido di Fabio, a Wilhelmine nostalagic and declared enemy of "libertarian nihilism". The judge has an odd outlook perhaps for the grandson of an impoverished nobleman from the Abruzzi who found work in Duisburg steel mills. He is quintessentially German now. His remarkable 2005 book "The Culture of Freedom" decries the "enfeebled" societies of the West, and judges multiculturalism and the welfare state to have failed miserably. He calls for a "renaissance of marriage and family" and a return to "the nation as common destiny". One awaits his Nieztschean verdict on Europe with curiosity.
The court is a formidable body, the last defender of sovereignty against EU overreach in a Europe of pliant judges. "European integration may not result in the system of democratic rule in Germany being undermined," was its verdict on the Lisbon Treaty.
In a defiant warning to the European Court and the plotters and usurpers of Brussels, it ruled that the nation states are "masters of the Treaties" and not the other way round. Core areas of policy – especially budgets -- "must forever remain German". "The principle of democracy may not be balanced against other legal interests; it is inviolable." "A blanket empowerment for the exercise of public authority may not be granted by the German constitutional bodies."
If democratic legitimacy is violated "in the course of the European integration", Germany must be prepared "in the worst case, even to refuse further participation in the European Union."
Even to refuse. Yet the court – or Verfassungsgericht – did not actually block the Lisbon Treaty. It barked, but did not bite. The assumption this time is that the eight judges will insist on beefed up powers for the Bundestag, but will not disturb the existing nexus of bail-outs and bond purchases. That is the most likely outcome.
Whether they go any further is the existential question for EMU. If they rule that the permanent bail-out fund (ESM) after 2013 breaches treaty law, they will queer the pitch greatly since the viability of the current fund (EFSF) depends on a hand-over. If they rule in any significant way that the EFSF itself breaches Lisbon’s `no bail-out’ clause, or even that Germany cannot participate until the Treaty is changed, market confidence in monetary union will collapse instantly.
Whatever the court does, the simmering revolt in the Bundestag over recent weeks lays bare the salient strategic fact that Germany is not about to embrace fiscal union or quadruple the EFSF to €2 trillion, as deemed necessary by City analysts and EU officials to stabilize Italy and Spain. Nor will it pay for a third Greek rescue.
The implication of this may become clear very soon since the Greek rescue programme is disintegrating. As the Greek parliament’s watchdog admitted, the debt dynamic is "out of control". Public debt will reach 172pc of GDP next year. Draconian austerity has crushed the economy, leaving the budget deficit stuck near 9pc. Barclays expects a 5.7pc contraction of GDP this year.
The EU-IMF Troika left Athens abruptly on Friday, blaming Greece for failure to comply. The equal failure is the scorched-earth austerity policies imposed by the EU itself. Fiscal deflation cannot work in a rigid economy with a large trade deficit and a high debt stock. It ensures a Fisherite debt deflation spiral. The IMF must know from its errors in Argentina a decade ago that Greece needs a 40pc devaluation and 50pc debt forgiveness to claw back to viability. Yet the EU has blocked both, and the Fund has until now acquiesced.
Perhaps there was no choice. Argentina was an isolated case in 2001. Greece is the detonating pin for EMU. Going to the root of Greece’s problem risks trauma and instant contagion to Portugal, and from there a systemic chain reaction through Spain and Italy to France. Yet this is where we no find ourselves as the Bundestag draws its line in the sand. Greece will be pushed into default, with ever larger haircuts for bondholders.
Needless to say, battered banks, insurance companies, and pension fund will not wait for further rounds of punishment. They know that Italy must redeem €14.6bn of debt this week and €62bn by the end of September, the highest ever in a single month. It must roll over €170bn by December. The ECB can in theory hold the line by soaking up the entire public debt of Italy, the world’s third largest at €1.84 trillion. The question is whether it can plausibly act on such a theory when the president of EMU’s dominant power deems this to be illegal.
Germany is not a banana republic. It is a sovereign democracy under the rule of law. Europe is belatedly discovering why this matters.
Berlin Lays Groundwork for a Two-Speed Europe
Chancellor Angela Merkel has always rejected a two-track Europe. But with the euro crisis persisting, Berlin is now considering far-reaching new powers for the Euro Group -- to the detriment of the European Commission. Could it work?
Herman Van Rompuy tends to be overlooked whenever European heads of state and government meet for their summits. The Belgian politician, president of the European Council, is an inconspicuous man with a receding hairline and metal-rimmed glasses, someone who doesn't seek the limelight, and who enjoys writing haikus about nature in his free time. He is one of the most powerful politicians in Europe, but he is almost unknown in most EU countries, including Germany.
Van Rompuy has been traveling a lot lately. His current schedule includes meetings with Finnish Prime Minister Jyrki Katainen and French President Nicolas Sarkozy. On Monday, Van Rompuy meets with German Chancellor Angela Merkel in Berlin, where he can look forward to a particularly pleasant conversation. Merkel wants to propose giving the European Council president even more power.
The chancellor is planning her next political policy reversal . Until very recently, she has insisted that she was firmly opposed to creating divisions within Europe. But under the pressure of the euro crisis , Merkel has recently been thinking about abandoning the concept of a unified EU -- and assigning a key role to Van Rompuy in the process. The EU has always been careful to ensure that all members acted in unison, whether it involved moving forward or standing still. But in times in which the common currency threatens to break apart, the 17 nations of the euro zone need a common economic and financial policy. Otherwise, as the crisis has demonstrated, the euro cannot function.
A New Power Center?
Today, it is primarily Great Britain that is preventing the EU from growing closer together. Merkel, though, has had enough -- and is now planning a two-speed Europe. It would mean tightly interlocking the countries of the euro zone, possibly by means of a separate treaty that would apply in parallel to the EU Treaty of Lisbon. This was the concept German Finance Minister Wolfgang Schäuble proposed last week to the leadership of his party, the center-right Christian Democratic Union (CDU). Merkel sees Van Rompuy, who already chairs the council of the 27 EU leaders, as the head of the new power center.
In addition to the club of 27 nations that primarily manages the common domestic market as it has done until now, Merkel envisions a tight alliance of the 17 euro-zone members -- one which would unify their fiscal, budgetary and social policies. This would create a two-class club, raising questions like: What happens to the European Commission? Will it still be responsible for economic matters in the euro zone, or will there be a new organization? The same questions apply to the European Parliament and the European Court of Justice in Luxembourg. Would all of these institutions have to be duplicated, meaning even more bureaucracy, effort and expense?
There are no answers yet to these questions, and there is already plenty of skepticism. The European Commission is just as opposed to Merkel's plans as most members of the European Parliament and many smaller EU countries are. They also have some within Merkel's own ranks raising their eyebrows. "We will not rescue the euro by creating more and more committees and instruments," says Horst Seehofer, the chairman of the CDU's Bavarian sister party, the Christian Social Union (CSU).
That is precisely what Merkel has in mind. She can draw on a concept known as "Core Europe," which was developed in the 1990s by the then-chairman of the CDU/CSU parliamentary group, a certain Wolfgang Schäuble, who now serves under Merkel as finance minister. Both have established various measures to rescue the euro in recent months, some for the EU as a whole and others exclusively for the 17 euro-zone member states.
Taking Things a Step Further
Although the heads of state and government have formally strengthened the Stability Pact for all EU countries, only those countries that have introduced the euro face the threat of harsh penalties. They, in particular, should commit to decreasing their government debt and strict conditions should govern the process. "No one cares whether Great Britain or Poland violate the 3 percent ceiling for the deficit," says a German government official.
A similar situation applies to the so-called Euro-Plus Pact. In it, the countries of the monetary union pledge to increase their competitiveness and fix weaknesses in their social systems, by raising the retirement age, for example. Every country that wants to participate can do so. Poland, for example, has joined the agreement. However, it cannot participate in the decision-making process. The rules were developed within the group of 17.
Labor Minister Ursula von der Leyen is interested in taking things a step further. She would like to see greater integration of social policy in the euro zone countries as well and envisions a Euro Group of labor ministers based on the finance minister model.
But it doesn't stop there. Merkel and Schäuble are seeking further steps toward integration in tax policy. At a meeting of the CDU/CSU parliamentary leadership last week, Schäuble said that because of resistance from countries like Great Britain, it is taking too long to agree on a financial-transaction tax applicable throughout the entire EU. Because of the delay, he said, he could imagine initially launching the project in the euro zone.
Giving Up Sovereignty
The scope of a joint corporate tax proposed by Merkel and Sarkozy at their meeting in mid-August is also likely to be expanded beyond the two largest member states. "This is much more broadly conceived," says a source within the German government. The two leaders envision a largely uniform tax for corporations within the euro zone.
All of these ideas amount to the euro countries gradually giving up parts of their national sovereignty. It wasn't until the crisis came along that a willingness to move in this direction began to emerge. Ironically, it is the countries most deeply affected by the crisis that serve as a model for this new approach. Greece, Ireland and Portugal have already overcome some obstacles when it comes to relinquishing sovereignty. Now the countries whose government finances are still healthy will be expected to give up some of their independence as well.
New bodies are to be formed to expedite the integration of the Euro Group. Germany and France want to make themselves more independent of the existing structures in the EU and no longer be solely dependent on the resources of the European Commission.
As a first step, the European Financial Stability Facility (EFSF), headed by the German economist Klaus Regling , is to develop its own analysis division. The division would monitor the financial markets and make proposals on how the EFSF can avert crises. Only the member states of the euro zone are involved in the EFSF. The Lisbon Treaty, the basis for the EU, has nothing to do with the institution.
The monetary union already had its own bodies that make decisions more or less independently of the European Commission. The important decisions have already been made for some time within the Euro Group, the group of finance ministers from the member states of the monetary union. They meet once a month, or more often, if necessary.
A New Shadow Government for the EU
But that isn't enough for Merkel and Sarkozy. They want the 17 leaders of the euro zone countries to convene for a summit twice a year, with Van Rompuy serving as its permanent chairman. The Belgian would also receive a bureaucratic structure for his new responsibilities, giving the Euro Group its own secretariat. According to initial ideas, the new agency would be appended to an existing European Council secretariat, so that the separation doesn't seem too obvious.
The group of finance ministers of the euro zone, which prepares the groundwork prior to meetings of heads of state and government, may also be strengthened. An idea being considered is to provide it with a full-time chairman, who would serve as a contact for Van Rompuy. Luxembourg Prime Minister Jean-Claude Juncker has taken care of the duties until now. The new chairman would be a former finance minister, making him more acceptable to a group of his peers.
While that is still in the planning stages, it has already been resolved that the working group of finance state secretaries will have a full-time chairman with his own team of employees. The body, with the cumbersome title Eurogroup Working Group, does the detail-oriented heavy lifting ahead of finance minister meetings. In short, a kind of shadow government is currently taking shape in Brussels. But officials in Berlin have begun considering ideas which go even further. Merkel, for example, is thinking about introducing a right to file complaints before the European Court of Justice against euro-zone member states that violate the Stability Pact. Such a move would require an amendment to the Lisbon Treaty.
Integrating Economic Policies
At present, such ideas are still in the development stage -- and it isn't even clear whether the chancellor will be able to prevail with her ideas for a core Europe. Based on experiences to date, it seems highly doubtful that the EU member states can even agree on taking a significant step toward integrating their economic policies.
"Everyone agrees that stronger coordination of economic policy is a good idea," says Polish Finance Minister Jacek Rostowski. But, he adds, as soon as steps in this direction become more concrete, individual states begin to block the initiative. "I have never met a finance minister from another country who has asked me what he can do to help, in terms of economic policy," Rostowski scoffs.
And evidence of a lack of willingness to coordinate is not hard to find. A so-called European Semester, for example, was introduced at the beginning of the year with great fanfare. Although it gives the Commission the right to monitor national budgets to gain more control over the debtor nations, the Commission cannot do more than issue recommendations. If countries do not comply with austerity requirements, as is currently the case with Italy, the Commission has no leverage to correct national fiscal policy.
The self-proclaimed boosters of enhanced integration also hesitate when they are the ones being asked to give up competencies. Sarkozy, for instance, is still blocking an agreement with the European Commission and the European Parliament on reforming the Stability Pact. Germany and France support the so-called intergovernmental method, which involves agreements being made among the member states. This prevents the European Commission and the European Parliament from having too much of a say. But small countries, in particular, fear that they cannot protect their interests against the large countries without the help of the Commission. The concern is that the large countries will end up dominating the smaller countries. "You can push experiments involving greater cooperation at the intergovernmental level, but in the end this policy should become part of the EU agreements," says Belgian Finance Minister Didier Reynders.
'A Few Idiots'
European Commission President José Manuel Barroso is also alarmed. In a "speech on the state of the union" last year, he warned against a division of Europe. He intends to read the member states the riot act before the European Parliament in Strasbourg at the end of the month. Last Thursday, Barroso tested the mood at a lunch with a few members. He argued that because of the principle of unanimity, the intergovernmental method would allow "a few idiots" in one country to "blackmail" the EU.
In addition, the consequences of the decisions are always perceived with some delay. In the most recent example, the German government wants to provide more guarantees for the expanded bailout fund than the current €211 billion. Unnoticed by the public, it is adopting a passage from the current guidelines, under which the fund can be increased by 20 percent if necessary. In an emergency, this could mean that Germany would be responsible for more than €250 billion.
The German-French ideas are also virtually unenforceable among the 17 euro zone members. Many of those countries suffering from bloated deficits are first calling for the introduction of joint euro bonds before they are prepared to relinquish more sovereignty. But that is precisely what Merkel and Sarkozy have rejected until now. "It's a chicken-and-egg problem," says Belgian Finance Minister Reynders. "Some want a fiscal union first, while others want a transfer union."
There is also resistance to Merkel's plans from within her own coalition. CSU Chairman Seehofer, for example, is strictly opposed to relinquishing "national sovereign rights to a European economic and fiscal union." "We don't want a European super-state," he adds.
The Right Approach
The business-friendly Free Democrats (FDP), Merkel's junior coalition partner in Berlin, is also uninterested in the chancellor's plans for a more integrated Europe. It is opposed to both euro bonds and outfitting Europe with additional competencies.
In short, Merkel's two-speed concept is not just creating a rift within Europe, but within German politics, as well. The CDU, SPD and Greens are calling for tighter political integration of the continent, while the CSU and the FDP are generally opposed to the idea.
This Monday, the chancellor is receiving support from a completely unexpected quarter. In recent months, the billionaire Nicolas Berggruen has assembled a "Council for the Future of Europe" under the auspices of his institute. In addition to former German Chancellor Gerhard Schröder, it includes former British Prime Minister Tony Blair, former Spanish Prime Minister Felipe González and former European Commission President Jacques Delors.
The council supports more instead of less of Europe. It advocates the EU expanding its bailout funds, tighter integration and the transfer of more national competencies to Brussels, not just in financial and economic matters. It also proposes a European tax that Brussels would be empowered to levy for the EU in the future, as well as a program for growth and employment in Europe and an overhaul of all labor markets and social welfare systems in the member states. It would be a vast and far-reaching reform.
It's no surprise that council member Schröder almost wholeheartedly supports his successor's plan for more European integration. "Germany and France issued a strong signal with the plan for a European economic government," the former chancellor said in an interview with SPIEGEL. "That's the right approach."
ABN Amro’s Zalm Says Banks Find Funding More Difficult on Loan Reluctance
by Maud van Gaal - Bloomberg
Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said.
Interbank borrowing for more than six months is also becoming problematic because banks are reluctant to lend to competitors with "big positions in weaker countries’ debt, for instance," he said today on Dutch television program "Buitenhof." ABN Amro is "well-capitalized," he said.
Zalm was Dutch finance minister from 1994 to 2002, during which time he helped oversee the implementation of the euro currency and the associated "stability pact" aimed at ensuring member states adhered to specific budgetary criteria. Germany and France both exceeded those criteria during his later term as finance minister from 2003 to 2006.
He said today the euro region needs an independent authority to ensure budget discipline among national governments. Only when budgetary discipline has been achieved should the region as a whole consider issuing bonds, he said. There’s no need at present to increase the European Financial Stability Facility to calm financial markets as long as government leaders show sufficient willingness to expand the rescue fund should that need arise, he said.
A demise of the euro would have "catastrophic" consequences for the Dutch economy, which sends about three- fourths of its exports to other euro-zone states, and "would cause a recession that would make the 1930s a trifle by comparison," Zalm said.
Former Dutch Finance Minister: 1930s recession if euro zone fails
by Gilbert Kreijger - Reuters
• Recession worse than in the 1930s if euro fails
• Zalm does not want Greece to leave the euro zone
• Former EU Commissioner wants Greece to give up euro
Former Dutch Finance Minister Gerrit Zalm said on Sunday Europe would fall into a recession worse than the one seen in the 1930s if the euro zone fell apart. Asked on Dutch current affairs TV programme Buitenhof what would would happen if the euro zone broke up, Zalm said: "We will have a recession which makes the 1930s look like nothing."
"The whole of Europe will crumble. You will get Switzerland effects. Switzerland has gotten a very strong currency and are being pushed out competitively because of the strong franc," said Zalm, who was Dutch finance minister until 2007. "For the Netherlands it would mean that if the European economy plunges, we would follow. Three quarters of our export goes to Europe," said Zalm, who earned a reputation as a fiscal hawk in Europe as one of the proponents of budget rules.
Zalm, who was the longest serving Dutch finance minister having the job for a total of 12 years, said he disagreed with calls from former European Commissioner and Dutch politician Frits Bolkestein to put Greece out of the euro zone. "I don't think that is the solution. The next remark will be that Italy should leave the euro zone, that Ireland should leave, that Portugal should leave. If that continues long enough you remain with only the Netherlands and Germany. I don't think that is a good development," Zalm said.
European aid to Greece should be given on the condition that Greece left the euro zone and return to the drachma currency because keeping the euro would be worse, Bolkestein told Dutch current affairs TV programme Nieuwsuur on Saturday. By returning to the drachma, Greece could devalue its currency and stimulate exports. To be able to pay its debt with a weaker currency, Greece would have to restructure it, said Bolkestein, who was Internal Markets Commissioner until 2004.
Hidden In The Jobs Report: 15.4 Million Missing Jobs
by Wolf Richter - Testosterone Pit
The long-term problem in the jobs report issued by the Department of Labor today—a problem in every jobs report since April 2000—is the strangely inconspicuous Employment-Population Ratio.
It measures the percentage of people age 16 and older who have jobs. It's not perfect. But it's the purest, least corruptible employment number out there: It's not seasonally adjusted, manipulated by the infamous "Birth Death Adjustment," or mucked up in any other way—unlike the headline numbers that have become a joke. And it hovers at a 30-year low.
After World War II until 1975, it bounced up and down between 55% and 58%. As women entered the workforce in ever greater numbers, the participation rate began to edge up; and after the recession of 1983, it went on a bull run that peaked in April 2000 at 64.7%.
Then it began to decline. Whatever the cited reasons. Outsourcing, innovation, off-shoring, tax laws, technological progress, corporate shortsightedness, cheaper labor elsewhere, whatever. When the housing bubble and related activities unfolded in 2004, it stabilized at around 62.3% and increased a notch to 63.4% in 2006. As the housing bubble deflated, it began to decline again. And then it crashed in an ugly trajectory.
Today, it came in at 58.2% (a rounding error up from last month's 58.1%). These are numbers we haven't seen since August 1983. In other words, 41.8% of the working-age people in the U.S. don't have jobs, as opposed to 35.3% in the year 2000. To convert this percentage into real people: Since the working-age population in the U.S. these days is 238 million people, a decline of 6.5% in participation represents 15.4 million jobs.
There are no green shoots or improvements or recoveries in sight. It's a structural issue. Every time a U.S. company outsources production or services to entities overseas, or buys from foreign suppliers when it used to buy from domestic suppliers, it removes more jobs.
A superb example—not only because of its majestic physical aspect but also because of its economic impact—is the new San Francisco Bay Bridge, the most expensive single structure in the U.S. Incredibly, its most prominent segment was built in China.
These jobs gone offshore will continue to drag down our economy, and no amount of money-printing by the Fed and no amount of hope-mongering by the White House and no amount of deficit-spending by Congress are going to change that. Only one thing will: A collective corporate decision to reverse the trend of off-shoring production and services. Because, mathematically, you can't grow an economy by removing jobs.
Young workers are the losers in pensions politics
by Phillip Inman - Guardian
Over-55s remain a priority for the government and also the focus of union concern
When trade union leaders and delegates meet this weekend ahead of their annual congress, staged unusually in London, much of the discussion will focus on the second stage in the battle over public sector pensions.
Since the first round earlier this year, some of the anger and bitterness at government cuts has dissipated. Negotiators report that discussions entered a more nuanced phase over the summer as the Treasury minister Danny Alexander and Cabinet Office supremo Francis Maude recognised that health service pensions are different to teachers' pensions, which are separate again from the local government scheme.
This was partly tactical on the government side, which needed to prevent five million workers from striking together, and partly a recognition of the realities of public sector pension schemes.
Ministers now appear to accept that the health service has the advantage of lower average pay and a younger workforce, limiting its pension liabilities. Local government workers have a large deficit in their pension scheme, but it is partly funded by an investment pool that sets it apart from the schemes for nurses and teachers, which are paid out of workers' contributions, and when that is not enough, Treasury coffers.
A dispute of titanic proportions is still possible because Alexander and Maude appear to have made few concrete concessions. Their across-the-board attack will see all schemes suffer cuts after a planned switch from pensions based on final salary to ones based on career average salary, and a downgrading of the inflation-proofing of retirement incomes by linking them to the consumer prices index rather than the retail prices index.
These two changes alone would deny workers a significant slice of their retirement income. Some calculations put the figure at 20%, others higher, as the government seeks to save billions of pounds from the public sector pensions bill. Without attempting to determine which side presents a more accurate picture of public sector pension costs, it is obvious that some big winners and losers are likely to emerge from any agreement.
The first winner is anyone over the age of 55. Ministers have already conceded that all accrued rights will be respected, leaving older workers with all their final salary-linked benefits intact.
A 55-year-old with 30 years' service will lose some of his or her pension, but their accrued rights will limit the impact. Negotiations may also lead to them escaping from the government's third major reform – a blanket move to retirement at 65.
These 55-year-olds are the focus of union concern. At next week's congress there will be talk of supporting young families, of helping them fight benefit cuts and a lack of jobs. Speeches decrying the government's half-hearted and piecemeal proposals to boost the economy will, no doubt, be heartfelt. Yet they will have a hollow feel as the union top brass prepare to expend their intellectual and financial capital in a full-bloodied fight on behalf of their older members.
Who is the government fighting for? Last year it attempted to engage in the battle as champion of the young, who it was claimed were losing out to their greedy parents and grandparents. Some ministers had excellent credentials as sponsors of this war, especially the higher education minister David Willetts, whose book The Pinch examines in fascinating detail the power of the postwar baby boomer generation.
David Cameron and his benefits minister Iain Duncan Smith both defined pension benefits in generational terms as they sought to win the intellectual debate. Their own sectional interest is now obvious, if it wasn't at the time, and it is clearly not younger people.
The people who want public sector pensions cut are older workers in the private sector, who either see the rising bill for their public sector cousins in retirement as a threat to them (triggering, as it might, higher taxes) or who want the public sector to share the same pension cuts that have reduced their retirement income to a fraction of the halcyon final salary payout. So these two sides now face each other on the field of battle, as they do in some many areas of life these days, with young people by and large left unrepresented.
For the Liberal Democrats it is an especially tricky area of electoral debate. Much of their policy agenda has been skewed towards richer, older people who, crucially, would pay less tax under previous plans to scrap council tax in favour of a local income tax.
Away from pensions, Lib Dems will consider adopting one of the chief hopes of campaigners for intergenerational justice – a land value tax – at their conference this month, something older people with expensive properties rightly fear. It goes further than the previous mansion tax proposal because it would act as an annual charge on land wealth. Coupled with lower income taxes, especially on lower-income households, it has the potential to encourage more people to work.
How Lib Dem delegates react will give an indication of whom they plan to represent at the next election. Unions and the Tories have made it clear that the older voter remains their focus. As the average age of voters surpasses 55 at the next election, that seems electorally sensible. Lib Dems may ditch the land value tax for fear of limiting their popularity with this group.
Unions have a chance to escape their downward spiral if they embrace policies that appeal to younger workers, but at the moment they remain in the grip of shop stewards and leaders who feel compelled to do what their (largely older, public sector) paymasters want, which is to make sure they maintain as much of their promised standard of living as possible.
Surely, this route will only speed the long-term decline of unions, with the young choosing to fend for themselves rather than pay subs to an organisation that clearly favours a sectional interest – which is not them.
US Postal Service Is Nearing Default as Losses Mount
by Steven Greenhouse - New York Times
The United States Postal Service has long lived on the financial edge, but it has never been as close to the precipice as it is today: the agency is so low on cash that it will not be able to make a $5.5 billion payment due this month and may have to shut down entirely this winter unless Congress takes emergency action to stabilize its finances. "Our situation is extremely serious," the postmaster general, Patrick R. Donahoe, said in an interview. "If Congress doesn’t act, we will default."
In recent weeks, Mr. Donahoe has been pushing a series of painful cost-cutting measures to erase the agency’s deficit, which will reach $9.2 billion this fiscal year. They include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts. The post office’s problems stem from one hard reality: it is being squeezed on both revenue and costs.
As any computer user knows, the Internet revolution has led to people and businesses sending far less conventional mail. At the same time, decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.
The Senate Homeland Security and Governmental Affairs Committee will hold a hearing on the agency’s predicament on Tuesday. So far, feuding Democrats and Republicans in Congress, still smarting from the brawl over the federal debt ceiling, have failed to agree on any solutions. It doesn’t help that many of the options for saving the postal service are politically unpalatable.
"The situation is dire," said Thomas R. Carper, the Delaware Democrat who is chairman of the Senate subcommittee that oversees the postal service. "If we do nothing, if we don’t react in a smart, appropriate way, the postal service could literally close later this year. That’s not the kind of development we need to inject into a weak, uneven economic recovery."
Missing the $5.5 billion payment due on Sept. 30, intended to finance retirees’ future health care, won’t cause immediate disaster. But sometime early next year, the agency will run out of money to pay its employees and gas up its trucks, officials warn, forcing it to stop delivering the roughly three billion pieces of mail it handles weekly.
The causes of the crisis are well known and immensely difficult to overcome. Mail volume has plummeted with the rise of e-mail, electronic bill-paying and a Web that makes everything from fashion catalogs to news instantly available. The system will handle an estimated 167 billion pieces of mail this fiscal year, down 22 percent from five years ago. It’s difficult to imagine that trend reversing, and pessimistic projections suggest that volume could plunge to 118 billion pieces by 2020. The law also prevents the post office from raising postage fees faster than inflation.
Meanwhile, the agency has had a tough time cutting its costs to match the revenue drop, with a history of labor contracts offering good health and pension benefits, underused post offices, and laws that restrict its ability to make basic business decisions, like reducing the frequency of deliveries. Congress is considering numerous emergency proposals — most notably, allowing the post office to recover billions of dollars that management says it overpaid to its employees’ pension funds. That fix would help the agency get through the short-term crisis, but would delay the day of reckoning on bigger issues.
The agency’s leaders acknowledge that they must find a way to increase revenue, something that will prove far harder than simply slicing costs. In some countries, post offices double as banks or sell insurance or cellphones. In the United States, the postal service is barred from entering many areas. Still, the agency is considering ideas, like gaining the right to deliver wine and beer, allowing commercial advertisements on postal trucks and in post offices, doing more "last-mile" deliveries for FedEx and U.P.S. and offering special hand-delivery services for correspondence and transactions for which e-mail is not considered secure enough.
Mr. Donahoe’s hope is to cut $20 billion of the $75 billion in annual costs by 2015. To do that, he wants to close many post offices and slash the number of sorting facilities to 200 from 500 and trim the agency’s work force by 220,000 people, from its current 653,000. (A decade ago, the agency employed nearly 900,000.)
The postal service has the legal authority to close facilities, although community opposition can make the process difficult. To placate critics and cut costs, officials say they would seek to run some postal operations out of stores like Wal-Mart or to share space with other government offices. Cutting the work force is more difficult. The agency’s labor contracts have long guaranteed no layoffs to the vast majority of its workers, and management agreed to a new no layoff-clause in a major union contract last May.
But now, faced with what postal officials call "the equivalent of Chapter 11 bankruptcy," the agency is asking Congress to enact legislation that would overturn the job protections and let it lay off 120,000 workers in addition to trimming 100,000 jobs through attrition. The postal service is also asking Congress for permission to end Saturday delivery.
Given the vast range of stakeholders, getting consensus on a rescue plan will be difficult.
Senator Susan Collins of Maine, like many lawmakers from rural states, vigorously opposes ending Saturday delivery, which would trim only 2 percent from the agency’s budget. Ms. Collins, the ranking Republican on the committee overseeing the postal service, said the cutback would be tough on people in small towns who receive prescriptions and newspapers by mail. "The postmaster general has focused on several approaches that I believe will be counterproductive," she said. "They risk producing a death spiral where the postal service reduces service and drives away more customers."
The post office’s powerful unions are angry and alarmed about the planned layoffs. "We’re going to fight this and we’re going to fight it hard," said Cliff Guffey, president of the American Postal Workers Union, which represents 207,000 mail sorters and post office clerks. "It’s illegal for them to abrogate our contract."
Senators Carper and Collins do back several of the postal service’s main ideas to avoid default, including recovering around $60 billion that some actuaries say the agency has overpaid into two pension funds. Although the Obama administration is working closely with the senators to find a solution, it has signaled discomfort with the pension proposals, questioning whether the postal service really overpaid.
Meanwhile, Representative Darrell Issa, the California Republican who is chairman of the House Oversight Committee, says the pension proposals would amount to an unjustifiable bailout that would not solve the agency’s underlying problems. He is pushing a bill that would create an emergency oversight board that could order huge cost-cutting and void the postal service’s contracts — a proposal that not just the unions, but Senators Carper and Collins oppose.
Fredric V. Rolando, president of the National Association of Letter Carriers, warned of disaster if partisanship keeps Congress from acting. "This is about one of America’s oldest institutions," he said. "It survived the telegraph, it survived the telephone, and we have to do everything we can to preserve it and adapt."
The revolution of capitalism
by John Gray - BBC
As a side-effect of the financial crisis, more and more people are starting to think Karl Marx was right. The great 19th Century German philosopher, economist and revolutionary believed that capitalism was radically unstable. It had a built-in tendency to produce ever larger booms and busts, and over the longer term it was bound to destroy itself.
Marx welcomed capitalism's self-destruction. He was confident that a popular revolution would occur and bring a communist system into being that would be more productive and far more humane. Marx was wrong about communism. Where he was prophetically right was in his grasp of the revolution of capitalism. It's not just capitalism's endemic instability that he understood, though in this regard he was far more perceptive than most economists in his day and ours.
More profoundly, Marx understood how capitalism destroys its own social base - the middle-class way of life. The Marxist terminology of bourgeois and proletarian has an archaic ring. But when he argued that capitalism would plunge the middle classes into something like the precarious existence of the hard-pressed workers of his time, Marx anticipated a change in the way we live that we're only now struggling to cope with. He viewed capitalism as the most revolutionary economic system in history, and there can be no doubt that it differs radically from those of previous times.
Hunter-gatherers persisted in their way of life for thousands of years, slave cultures for almost as long and feudal societies for many centuries. In contrast, capitalism transforms everything it touches. It's not just brands that are constantly changing. Companies and industries are created and destroyed in an incessant stream of innovation, while human relationships are dissolved and reinvented in novel forms.
Capitalism has been described as a process of creative destruction, and no-one can deny that it has been prodigiously productive. Practically anyone who is alive in Britain today has a higher real income than they would have had if capitalism had never existed. The trouble is that among the things that have been destroyed in the process is the way of life on which capitalism in the past depended.
Defenders of capitalism argue that it offers to everyone the benefits that in Marx's time were enjoyed only by the bourgeoisie, the settled middle class that owned capital and had a reasonable level of security and freedom in their lives.
In 19th Century capitalism most people had nothing. They lived by selling their labour and when markets turned down they faced hard times. But as capitalism evolves, its defenders say, an increasing number of people will be able to benefit from it.
Fulfilling careers will no longer be the prerogative of a few. No more will people struggle from month to month to live on an insecure wage. Protected by savings, a house they own and a decent pension, they will be able to plan their lives without fear. With the growth of democracy and the spread of wealth, no-one need be shut out from the bourgeois life. Everybody can be middle class.
In fact, in Britain, the US and many other developed countries over the past 20 or 30 years, the opposite has been happening. Job security doesn't exist, the trades and professions of the past have largely gone and life-long careers are barely memories. If people have any wealth it's in their houses, but house prices don't always increase. When credit is tight as it is now, they can be stagnant for years. A dwindling minority can count on a pension on which they could comfortably live, and not many have significant savings.
More and more people live from day to day, with little idea of what the future may bring. Middle-class people used to think their lives unfolded in an orderly progression. But it's no longer possible to look at life as a succession of stages in which each is a step up from the last.
In the process of creative destruction the ladder has been kicked away and for increasing numbers of people a middle-class existence is no longer even an aspiration. As capitalism has advanced it has returned most people to a new version of the precarious existence of Marx's proles. Our incomes are far higher and in some degree we're cushioned against shocks by what remains of the post-war welfare state.
But we have very little effective control over the course of our lives, and the uncertainty in which we must live is being worsened by policies devised to deal with the financial crisis. Zero interest rates alongside rising prices means you're getting a negative return on your money and over time your capital is being eroded. The situation of many younger people is even worse. In order to acquire the skills you need, you'll have to go into debt. Since at some point you'll have to retrain you should try to save, but if you're indebted from the start that's the last thing you'll be able to do. Whatever their age, the prospect facing most people today is a lifetime of insecurity.
At the same time as it has stripped people of the security of bourgeois life, capitalism has made the type of person that lived the bourgeois life obsolete. In the 1980s there was much talk of Victorian values, and promoters of the free market used to argue that it would bring us back to the wholesome virtues of the past. For many, women and the poor for example, these Victorian values could be pretty stultifying in their effects. But the larger fact is that the free market works to undermine the virtues that maintain the bourgeois life.
When savings are melting away being thrifty can be the road to ruin. It's the person who borrows heavily and isn't afraid to declare bankruptcy that survives and goes on to prosper. When the labour market is highly mobile it's not those who stick dutifully to their task that succeed, it's people who are always ready to try something new that looks more promising.
In a society that is being continuously transformed by market forces, traditional values are dysfunctional and anyone who tries to live by them risks ending up on the scrapheap. Looking to a future in which the market permeates every corner of life, Marx wrote in The Communist Manifesto: "Everything that is solid melts into air". For someone living in early Victorian England - the Manifesto was published in 1848 - it was an astonishingly far-seeing observation.
At the time nothing seemed more solid than the society on the margins of which Marx lived. A century and a half later we find ourselves in the world he anticipated, where everyone's life is experimental and provisional, and sudden ruin can happen at any time.
A tiny few have accumulated vast wealth but even that has an evanescent, almost ghostly quality. In Victorian times the seriously rich could afford to relax provided they were conservative in how they invested their money. When the heroes of Dickens' novels finally come into their inheritance, they do nothing forever after.
Today there is no haven of security. The gyrations of the market are such that no-one can know what will have value even a few years ahead.
This state of perpetual unrest is the permanent revolution of capitalism and I think it's going to be with us in any future that's realistically imaginable. We're only part of the way through a financial crisis that will turn many more things upside down. Currencies and governments are likely to go under, along with parts of the financial system we believed had been made safe. The risks that threatened to freeze the world economy only three years ago haven't been dealt with. They've simply been shifted to states.
Whatever politicians may tell us about the need to curb the deficit, debts on the scale that have been run up can't be repaid. Almost certainly they will be inflated away - a process that is bound to painful and impoverishing for many. The result can only be further upheaval, on an even bigger scale. But it won't be the end of the world, or even of capitalism. Whatever happens, we're still going to have to learn to live with the mercurial energy that the market has released.
Capitalism has led to a revolution but not the one that Marx expected. The fiery German thinker hated the bourgeois life and looked to communism to destroy it. And just as he predicted, the bourgeois world has been destroyed. But it wasn't communism that did the deed. It's capitalism that has killed off the bourgeoisie.
Nephew of Bootsy Collins Dies of Tooth Infection: Could Not Afford Medicine
by IB Times Staff
The 24-year-old nephew of musician Bootsy Collins has died at the University Hospital in Cincinnati after a tooth infection spread to his brain. Kyle Willis, an unemployed single father of a 6-year-old girl, first went to a hospital complaining of a painful toothache two weeks ago.
Willis had no health insurance and couldn't afford the $27 antibiotic he was prescribed. Left untreated, the infection in his tooth apparently spread to his brain. Willis was violent and delirious when an ambulance brought him to the hospital where he died Tuesday. Bootsy Collins, a member of the Rock and Roll Hall of Fame, is best known for his work with soul superstar James Brown and the '70s funk-soul-rock fusion band Parliament-Funkadelic.
Getting access to dental care is particularly tough for low-income adults and children, and it's getting tougher as the economy worsens. Trips to the dentist aren't the only expenses hard-up Americans are skipping. Even general health checkups are getting expensive. There are a number of free dental clinics in operation around the country, where dentists volunteer to provide care to those without health insurance. But even if Willis had access to a free dental clinic, he still may not have been able to get the care he needed for his infection as one needs to wait for months to get an appointment.