http://www.kunstler.com
What's Next?
by James Howard Kunstler, CFN Update for March 2nd, 2009
The Peak Oil story was never about running out of oil. It was about the collapse of complex systems in a world economy faced by the prospect of no further oil-fueled growth. It was something of a shock to many that the first complex system to fail would be banking, but the process is obvious: no more growth means no more ability to pay interest on credit... end of story, as Tony Soprano used to say.
There was a popular theory among Peak Oilers the last decade that the world would enter a "bumpy plateau" period when the global economy would get beaten down by peak oil, would then revive as "demand destruction" drove down oil prices, and would be beaten down again as oil prices shot up in response -- with serial repetitions of the cycle, each beat-down taking economies lower -- the only imaginable outcome being some sort of quiet homeostasis. This scenario did not play out as expected. It was predicated on a mistaken assumption that all systems would retain some kind of operational resilience while ratcheting down. Anyway, the banking system was mortally wounded in the first go-round and the behemoth is dying hard.
The last desperate act of the banking system in the face of Peak Oil's no-more-growth equation was to engineer species of tradable securities that could produce wealth out of thin air rather than productive activity. This was the alphabet soup of algorithm-derived frauds with vague and confounding names such as credit default swaps (CDSs), collateralized debt obligations (CDOs), structured investment vehicles (SIVs), and, of course, the basic filler, mortgage backed securities. The banking system is now choking to death on these delicacies.
The trouble is that the EMT squad brought in to rescue the banking system -- that is, governments -- can't remove these obstructions from the patient's craw. They don't want to drown in a mighty upchuck of the alphabet soup.
The collapse of complex systems is actually predicated on the idea that the systems would mutually reinforce each other's failures. This is now plain to see as the collapse of banking (that is, of both lending and debt service), has led to the collapse of commerce and manufacturing. The next systems to go will probably be farming, transportation, and the oil markets themselves (which constitute the system for allocating and distributing world energy resources). As these things seize up, the final system to go will be governance, at least at the highest levels.
If we're really lucky, human affairs will eventually reorganize at a lower scale of activity, governance, civility, and economy. Every week, the failure to recognize the nature of our predicament thrusts us further into the uncharted territory of hardship. The task of government right now is not to prop up doomed systems at their current scales of failure, but to prepare the public to rebuild our systems at smaller scales.
The net effect of the failures in banking is that a lot of people have less money than they expected they would have a year ago. This is bad enough, given our habits and practices of modern life. But what happens when farming collapses? The prospect for that is closer than most of us might realize. The way we produce our food has been organized at a scale that has ruinous consequences, not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news, or listens to farm reports on the radio. Guess what, though: we are entering the planting season. It will be interesting to learn how many farmers "out there" in the Cheez Doodle belt are not able to secure loans for this year's crop.
My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world's most productive places -- California, northern China, Argentina, the Australian grain belt -- are caught in extremes of drought on top of capital shortages. If the US government is going to try to make remedial policy for anything, it better start with agriculture, to promote local, smaller-scaled farming using methods that are much less dependent on oil byproducts and capital injections.
This will, of course, require a re-allocation of lands suitable for growing food. Our real estate market mechanisms could conceivably enable this to happen, but not without a coherent consensus that it is imperative to do so. If agri-business as currently practiced doesn't founder on capital shortages, it will surely collapse on disruptions in the oil markets. President Obama at least made a start in the right direction by proposing to eliminate further subsidies to farmers above the $250,000 level. But the situation is really more acute. Surely the US Department of Agriculture already knows about it, but the public may not be interested until the shelves in the Piggly-Wiggly are bare -- and then, of course, they'll go ape****.
The recent huge drop in oil prices has left the public once again convinced that the world is drowning in oil -- if only the scoundrelly oil companies were forced to deliver it at reasonable prices. The public has been consistently deluded about this for decades. What's missing so far is for the president of the US to lay out the reality of the situation in a dedicated TV address. I know a lot of you think that Jimmy Carter already tried this and failed to make an impression (and ruined his presidency in the process). I guarantee you that Mr. Obama will have to do this sometime in the next few years whether he likes or not, and he'd be well-advised to get it done sooner rather than later. And by this I don't mean just vague allusions to "energy independence" or "renewables" in speeches devoted to many other issues. I mean telling the public the plain truth that we'll never offset oil depletion and the intelligent response is to do everything possible to transition to walkable towns and public transit, not to sustain the unsustainable.
The alternatives -- i.e. what we're trying now -- is to further delude ourselves into thinking that we can run WalMart and the suburbs by some other means than oil. Despite all our investments in these things, we won't be able to run them by other means, and the news about this had better get out before enormous disappointment turns into titanic rage. If Americans think they've been grifted by Goldman Sachs and Bernie Madoff, wait until they find out what a swindle the so-called "American Dream" of suburban life turns out to be.
On this blizzardy Monday in the power centers of America, attention is fixed on the never-ending fiasco of AIG -- a company whose main product turned out to be credit default swaps, and is now choking on them. Kibitzers on the sidelines of finance are forecasting a king-hell bear market suckers' rally in the stock markets followed by a belly flop to Dow 4000 or lower. I myself called for Dow 4000 two years ago -- and was obviously a bit off on my timing. All this is surely trouble enough. But while your attention is focused on Rick Santelli in the Chicago trader's pit, or Larry Kudlow desperately seeking "mustard seeds" of new growth in financials, try to let one eye stray to the horizon where these other complex systems are working out their next moves. Farming. The oil markets. These are the coming theaters of alarm and distress.
Wednesday, February 25, 2009
http://market-ticker.denninger.net/
I keep getting "pushback" from people in the mortgage industry and elsewhere, especially related to my Youtube Videos, with all sorts of claims that "we can't go after all the fraud in the mortgage business - get over it", along with similar missives.
Folks, you need to understand something very clearly, because Bernnake and the rest of the policymakers have laid out the truth for you - if you care to listen.
Fully 2/3rds of credit provided in our economic system is non-bank lending.
That is, it is hedge funds, sovereign wealth funds, pension funds, insurance companies and both foreign and domestic private investors who have extra capital they do not need at the moment, and they are willing to lend that money into the economy.
These are the buyers of securitized debt instruments.
This market is closed.
Both ASF (American Securitization Forum) and Federal Reserve statistics say that there has been essentially no securitized debt issuance over the last six months.
None.
That market is closed because this class of investors was gang raped by the pernicious and outrageous fraud up and down the line within the market.
Arguing over whether the banks are responsible for not verifying information provided (they are), automated approvals are responsible (they are), ratings agencies are responsible for being essentially purchased rubber stamps (they are) or borrowers who fraudulently overstated income and understated debt (they are) misses the point.
The point is that all of these factors are in fact elements of fraud.
All of these are willful and knowing misrepresentation - either by omission or commission - of the risks and true credit profile of the collateral, borrower's character and capacity, market assumptions used in modeling or all of the above.
The fact of the matter is that this 2/3rds of the credit provided to our market has left and is not coming back until the misrepresentation ends and they can be assured that it will not happen again.
That is, these people are demanding their pound of flesh using the most powerful weapon they have - their checkbook.
As just one of many examples:
Feb. 20 (Bloomberg) -- Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.
And why should they?
These investors got boned. Repeatedly. In the non-agency market they didn't just get boned they got gang-raped, with losses in some cases on CDOs and similar being 100%.
These events are not supposed to happen, according to risk modeling. And if the risk model actually had put into it the quality of underwriting (none), the verification of income and assets (none), a realistic model of credit growth and asset prices (ha!) and similar, it wouldn't have - because there would have been no competitive market for those securities at the prices asked.
The argument that this was all "the bank's fault" is simply not true. The blame is spread across the curve - the fact that your local bank has no guard does not give license to someone that desires to come in and rob it; in that case we penalize the bank but we still lock up the bank robber.
But all of this belies the underlying problem: in the attempt to divert attention from one group or another - and all of the guilty parties are engaged in it at this point, including Congress and our other regulatory agencies such as The Fed - we are forgetting that the private capital is still gone and until we find a way to guarantee that another assault will not happen that capital will not return.
As I listen to Bernanke's testimony in front of both the House and Senate, and as I watched President Obama's speech last night, I remain stunned by the lack of recognition of the above facts.
While lawmakers and policymakers such as Bernanke continue to blame "understaffing" (code in DC for "we want more money") and the lack of fully-formed plans, the fact remains that unless private capital can be convinced to return, and soon, we are headed for an economic depression worse than the 1930s.
This is not some manner of conjecture or fear-mongering - it is a fact that there is absolutely no way we can maintain our standard of living or economic output at anywhere near former levels with 2/3rds of credit capacity gone, nor can we replace that 2/3rds of the former capacity via other means.
To put this in perspective we are talking about a $50 trillion (roughly) credit universe for the United States; 2/3rds of that is ~$30 trillion dollars. It is simply not possible for the government or Fed to replace this, which is why even with a commitment of $9 trillion as has been made thus far the economy is not responding; 2/3rds of what disappeared is still gone and yet trying to actually fund $9 trillion through T-bond sales would cause an immediate implosion in the Treasury market.
We therefore have two choices, and if we do not pick #1 we will get #2:
- Stop "the bezzle" - right here and now - punishing the fraudsters across the board and clamping down on all manner of fraud in the future with enforcement of the law both looking back and forward being the primary driver of policy.
- Accept that we will have an economic Depression worse than the 1930s, as the continued absence of private credit provision will guarantee a contraction in GDP of at least 30%. This will result in the bankruptcy of about 20% of the S&P 500, 25-30% unemployment, half of all private businesses in the United States going under and general economic malaise at least equivalent to the 1930s and quite possibly far worse.
Those are the only choices ladies and gentlemen. All the handwaving in the world will not convince private capital to come back and you cannot force that private capital to return.
We can only convince private capital to return by guaranteeing that the rule of law will be upheld, that those who screwed them this time will be punished in accordance with the law and that anyone who attempts to screw them in the future will be immediately dealt with under the same provisions.
Those are the choices folks, and if we do not accept this and adopt it as policy within a very short period of time the economic contraction will continue and, once it reaches a critical point, the collapse in the equity and credit markets will accelerate and be impossible to stop until liquidation has run its course.
We are very close to reaching that tipping point and the reaction today in the markets, after being filled with "hope" yesterday, is a direct consequence of the administration's failure to follow through with concrete steps to restore trust, transparency, and the rule of law.
Until and unless you hear that message come out of Washington DC your wisest course of action is to be prepared for economic conditions at least as bad as those during the 1930s, because unless policy changes that is exactly what we are going to get.
The math is never wrong.
Monday, February 23, 2009
What lies ahead is the accelerating exit of foreign investors from the US markets. That will be bad enough. But if what lies ahead dawns upon a growing number of Americans, and if they too all decide to exit in ever growing numbers, then there is no possible economic salvation for the USA in any form at all." —Bill Buckler
Ponder that for a moment...
Ponder that for a moment...
Thursday, February 19, 2009
Consumers Cut Food Spending Sharply
http://online.wsj.com/article/SB123448606475780133.html
Markets and Restaurants Feel the Pinch as People Purchase Generic Brands and Stay Home
The bad economy is hitting America right in the stomach.
Consumers have cut back sharply on food spending, shunning restaurants, opting for generic products over brand names, trading in lattes for home-brewed coffee and shopping for bargains. That is hurting sales and profits at many food processors, grocery chains and restaurants.
In 2008's fourth quarter, consumer spending on food fell at an inflation-adjusted 3.7% from the third quarter, according to data from the Commerce Department's Bureau of Economic Analysis. That is the steepest decline in the 62 years the government has compiled the figure. The report is based on receipts from a sampling of food-oriented businesses across the country.
The big drop likely comes from two things, said Joseph Carson, an economist at AllianceBernstein who worked at the Commerce Department in the 1970s. First, consumers have been trading down to lower-priced items. Second, he thinks many households dug into their pantries for staples rather than going to the store, a trend that can't continue indefinitely. "You can't contract at this rate for long," he said. "It's just shocking."
Cindy Greco, a 45-year-old Chicago resident, said she's shopping more at Costco Wholesale Corp. stores and buying less expensive meat, such as chicken, shrimp and ground turkey, for her husband and 11-year-old daughter.
"I'm someone who used to never ever pay attention to the prices of groceries," Ms. Greco said while shopping Thursday at a Chicago supermarket. "But now it's a different story." She showed off a bottom round roast she had unearthed that was marked down to $7.21 from $18.26.
"In recent years, a lot of discretionary income has gone into buying fancier food, whether it's Starbucks coffee or prepared dinner or restaurant meals," said Barclays Capital economist Ethan Harris. Now, he said, that trend seems to be waning.
Last week, Kraft Foods Inc. lowered its earnings forecast for the year, saying customers are cutting back purchases of snack foods and trading down to private labels. Groupe Danone SA said this week that U.S. consumers sharply trimmed their purchases of yogurt and other dairy products at the end of last year.
Even makers of chocolates are worried about how well their products will sell for Valentine's Day on Saturday.
On Tuesday, Citi Investment Research warned of a "modern-day price war" based on Wal-Mart Stores Inc.'s plan to freshen up its Great Value private-label foods and the analyst's expectation that it will trim national-brand prices. That could force grocery stores to cut prices to compete.
U.S. sales of private-label food rose 10% in 2008 from 2007, to $82.9 billion, according to a spokesman for the Private Label Manufacturers Association, citing Nielsen grocery-sales numbers. At the same time, branded food products saw sales rise 2.8% to $416.6 billion, he said.
When times get tough, restaurants are one of the first places where people economize. In its quarterly surveys, research firm WSL Strategic Retail of New York has found that more people are preparing food at home, eating at lower-priced restaurants when they do eat out and picking less pricey items from the menu.
"Food expenditures have dropped, but it's not because people have stopped eating," said WSL consultant Shilpa Rosenberry.
Declining sales at established locations have forced Starbucks Corp., Ruby Tuesday Inc. and other chains to shut hundreds of outlets and put many independent restaurants out of business.
On Wednesday, P.F. Chang's China Bistro Inc. said same-store sales fell 7.1% at its bistro locations in the fourth quarter, and the deterioration intensified as the quarter progressed. "The lights went out in December," Robert Vivian, the company's co-chief executive, told investors.
The shift has a silver lining for some companies. While supermarkets passed along last year's high ingredient costs to customers, McDonald's Corp. and other fast-food chains absorbed some of the expense and kept many items priced at $1. Now, some consumers consider a fast-food meal a bargain. On Monday, McDonald's said same-store sales rose 7.1% in January, including a 5.4% increase in the U.S.
Other consumers are opting for home cooking. In Bellevue, Neb., stock broker Kevin Vaughan and his wife cook chicken to make broth from scratch instead of buying it in cans, and use all of the resulting meat for multiple dishes.
"You'll have three or four meals off a $10 to $12 investment," he said. And there's another bonus from reduced food purchases, he added: less trash to take out.
http://online.wsj.com/article/SB123448606475780133.html
Markets and Restaurants Feel the Pinch as People Purchase Generic Brands and Stay Home
The bad economy is hitting America right in the stomach.
Consumers have cut back sharply on food spending, shunning restaurants, opting for generic products over brand names, trading in lattes for home-brewed coffee and shopping for bargains. That is hurting sales and profits at many food processors, grocery chains and restaurants.
In 2008's fourth quarter, consumer spending on food fell at an inflation-adjusted 3.7% from the third quarter, according to data from the Commerce Department's Bureau of Economic Analysis. That is the steepest decline in the 62 years the government has compiled the figure. The report is based on receipts from a sampling of food-oriented businesses across the country.
The big drop likely comes from two things, said Joseph Carson, an economist at AllianceBernstein who worked at the Commerce Department in the 1970s. First, consumers have been trading down to lower-priced items. Second, he thinks many households dug into their pantries for staples rather than going to the store, a trend that can't continue indefinitely. "You can't contract at this rate for long," he said. "It's just shocking."
Cindy Greco, a 45-year-old Chicago resident, said she's shopping more at Costco Wholesale Corp. stores and buying less expensive meat, such as chicken, shrimp and ground turkey, for her husband and 11-year-old daughter.
"I'm someone who used to never ever pay attention to the prices of groceries," Ms. Greco said while shopping Thursday at a Chicago supermarket. "But now it's a different story." She showed off a bottom round roast she had unearthed that was marked down to $7.21 from $18.26.
"In recent years, a lot of discretionary income has gone into buying fancier food, whether it's Starbucks coffee or prepared dinner or restaurant meals," said Barclays Capital economist Ethan Harris. Now, he said, that trend seems to be waning.
Last week, Kraft Foods Inc. lowered its earnings forecast for the year, saying customers are cutting back purchases of snack foods and trading down to private labels. Groupe Danone SA said this week that U.S. consumers sharply trimmed their purchases of yogurt and other dairy products at the end of last year.
Even makers of chocolates are worried about how well their products will sell for Valentine's Day on Saturday.
On Tuesday, Citi Investment Research warned of a "modern-day price war" based on Wal-Mart Stores Inc.'s plan to freshen up its Great Value private-label foods and the analyst's expectation that it will trim national-brand prices. That could force grocery stores to cut prices to compete.
U.S. sales of private-label food rose 10% in 2008 from 2007, to $82.9 billion, according to a spokesman for the Private Label Manufacturers Association, citing Nielsen grocery-sales numbers. At the same time, branded food products saw sales rise 2.8% to $416.6 billion, he said.
When times get tough, restaurants are one of the first places where people economize. In its quarterly surveys, research firm WSL Strategic Retail of New York has found that more people are preparing food at home, eating at lower-priced restaurants when they do eat out and picking less pricey items from the menu.
"Food expenditures have dropped, but it's not because people have stopped eating," said WSL consultant Shilpa Rosenberry.
Declining sales at established locations have forced Starbucks Corp., Ruby Tuesday Inc. and other chains to shut hundreds of outlets and put many independent restaurants out of business.
On Wednesday, P.F. Chang's China Bistro Inc. said same-store sales fell 7.1% at its bistro locations in the fourth quarter, and the deterioration intensified as the quarter progressed. "The lights went out in December," Robert Vivian, the company's co-chief executive, told investors.
The shift has a silver lining for some companies. While supermarkets passed along last year's high ingredient costs to customers, McDonald's Corp. and other fast-food chains absorbed some of the expense and kept many items priced at $1. Now, some consumers consider a fast-food meal a bargain. On Monday, McDonald's said same-store sales rose 7.1% in January, including a 5.4% increase in the U.S.
Other consumers are opting for home cooking. In Bellevue, Neb., stock broker Kevin Vaughan and his wife cook chicken to make broth from scratch instead of buying it in cans, and use all of the resulting meat for multiple dishes.
"You'll have three or four meals off a $10 to $12 investment," he said. And there's another bonus from reduced food purchases, he added: less trash to take out.
Wednesday, February 18, 2009
Wednesday, February 11, 2009
Bank of America’s Bernstein Says Bank Plan Won’t Work (Update2)
By Lynn Thomasson
Feb. 11 (Bloomberg) -- The U.S. Treasury’s bank-rescue plan won’t repair the financial system or revive credit markets, Bank of America Corp. strategist Richard Bernstein said as he recommended avoiding the industry’s shares.
Treasury Secretary Timothy Geithner pledged up to $2 trillion in government financing yesterday for programs aimed at spurring new lending and addressing mortgage assets that are difficult to value. The government’s prior measures to prop up financial institutions included backing $118 billion of Bank of America’s assets and injecting $45 billion into the Charlotte, North Carolina-based bank after it bought Merrill Lynch & Co.
“Financial stocks are likely to be as toxic to portfolio performance as banks’ assets are to their balance sheets,” New York-based Bernstein wrote in a research note. They plunged yesterday, driving the Standard & Poor’s 500 Financials Index to an 11 percent drop, on skepticism the rescue package will work.
Bernstein said the government should increase deposit insurance, seize assets, shut “large” banks and encourage takeovers.
“The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable,” the strategist wrote. “The latest Treasury program is simply another attempt to stymie the consolidation process.”
Financial shares in the Standard & Poor’s 500 Index tumbled 57 percent last year, driving the benchmark index for U.S. stocks to the steepest annual retreat since 1937.
Lehman, Merrill Lynch
Lehman Brothers Holdings Inc., once the nation’s fourth biggest securities firm, filed the largest U.S. bankruptcy in September after its shares lost almost all their value. Its rivals Merrill Lynch & Co. and Bear Stearns Cos. were forced into takeovers to avoid collapse, while Goldman Sachs Group Inc. and Morgan Stanley converted to bank holding companies as investors lost confidence in firms that depend on debt-market financing. American International Group Inc., Fannie Mae and Freddie Mac were taken over by the U.S. government.
Bernstein’s new employer, Bank of America, has plunged 57 percent in 2009. He had worked for New York-based Merrill Lynch since 1988.
To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.
Last Updated: February 11, 2009 16:23 EST
Sunday, February 08, 2009
Three Reasons the Stimulus Will Fail
The Administration and Congress have decided that a massive, debt financed, increase in government spending is correct public policy. This policy is marketed as a stimulus evoking the image of an after dinner restorative for a glutton. The stimulus will fail for 3 reasons that people in power today ignore but are surely not ignorant of since the current US regime assures us it is intelligent, well read, sophisticated, honest and hard working. We have their word for it.
The 3 reasons why the stimulus will fail in the US (as it will in the EU) are:
1. Foreigners will not bail us out
The US plans to issue trillions of dollars in new debt in the near to intermediate future. Americans either lack the resources or the appetite to buy much or even a majority of this debt. Foreigners are expected to be the principal source of financing.
The 5 largest holders of foreign reserves are, in descending order, China, Japan, Russia, Germany and Taiwan. Of these, Japan, Germany and Taiwan are nominal(but not reliable) allies while Russia and China are adversaries. China’s reserves are greater than those of the next 3 combined. For several years, these nations have been very large buyers of US treasuries, which financed US deficits and enabled both the government and scores of millions of consumers to live beyond incomes and earn beyond worth.
Foreigners have 3 reasons for investing in US government bonds and notes: national security (Japan and Germany in the 1970s and 1980s because the US protected them from the Soviet Empire and, until recently, Taiwan because the US protected it from China); market preservation (lend America the money to finance imports; as long as we over consumed, the rest of the world could enjoy export driven prosperity: our various domestic consumption and speculative bubbles became their export bubbles) and desperation (nowhere else big enough to park all the surplus dollars).
These reasons have now evaporated or are evaporating. Each of these 5 nations faces the same major economic problems, which are a squeeze on exports accompanied by contracting home markets. The problem is acute for Russia and Japan, becoming more serious for Germany and Taiwan and an increasing challenge for China which faces deep structural and demographic weaknesses that only high economic growth can disguise. Accelerating reverse internal migration in China and a crumbling real estate market suggest simultaneous unrest in both urban and rural communities lies ahead.
The response of each nation will be similar, which is to turn inward, use their financial surpluses to subsidize internal consumption and failing companies. Russia has experienced the most rapid depletion of foreign reserves in its modern history; if current, quite grim trends continue, Russia may be forced to be a net seller rather than a net buyer of US and EU government debt within 6 to 9 months; Japan’s exports have fallen faster than at any time since WW2 and China’s economic growth has now plunged below the worst case forecasts of its own government. Japan has admitted that it faces a long and deep recession and can do nothing to avert it, despite its elaborate stimulus plan. China concedes that its economic challenge is a test of the ability of the Communist Party to maintain its monopoly on power. Russia has failed in multiple efforts to defend the ruble and mitigate capital flight.
Foreigners, therefore, now have much less capacity to buy US treasuries than they did a year ago even as the US Treasury plans to issue vast amounts of new paper.
Moreover, most of the US debt held by foreigners has a maturity of under 3 years so there is an impending refinancing problem of monumental proportions for the US.
2. Confidence, not cash, is in short supply
The true currency of free and fair markets is confidence.The real currency of collectivism is coercion. Confidence has a higher multiplier than coercion. Confidence leads to enthusiastic innovation; coercion to sullen compliance. The value added to the economy from innovation far exceeds that from compliance. The current economic policy of the US is to replace confidence with coercion and staple this swap to an enormous increase in the supply of dollars that are backed by no assets at all.
Savers are told they can get no return on their funds and investors are told that bad investments will be salvaged while good investments will be savaged; bad managements will be coddled while good managements will be pilloried; bad judgments will be rewarded while good judgments will be punished. In this environment, confidence in all the major institutions of the US government (except the military) is plummeting. Americans who still have both investable resources and common sense (maybe 10% of all adults in the US, if that) are driven to hoarding cash and avoiding entrepreneurial risk. A significant portion of these people, who are essential to any revival of market based innovation, growth and productivity increases, are even spurning US Treasury investments because they believe US government debt is the new big bubble. These people understand that every dollar the government spends on low value added mandated programs will be at the expense of a dollar of private spending on high value added projects and ideas. They know why North Korea is not the most prosperous nation in the world and why Venezuela and Iran are becoming poorer by the day.
The worldview of the current US government is that the cure for problems caused by overconsumption is more government subsidized consumption; the cure for excessive private debt is more public debt; the cure for private overinvestment in real estate is public overinvestment in real estate; the cure for undesirable autos made at shareholder expense is undesirable autos made at taxpayer expense. According to this governing philosophy, bad private decisions about resource allocation can be remedied by bad public decisions about resource allocation. This remarkable philosophy states that it is not the decision per se that creates problems but who makes the decision. This is change indeed.
Private investors facing the current reality, it seems, plan to go into “internal exile”, endure and wait out the US Government until, exhausted and defeated, it retreats in muttering confusion. Only then, as coercion retreats, will confidence advance. Unfortunately, a market adjustment that would have taken 18 to 24 months without coercion will perhaps end up taking 36 to 48 months with coercion.
A trillion dollars in federal spending will probably not even create a trillion dollars in net economic benefits given the high overhead associated with spending this money. A trillion dollars in tax cuts aimed at investors, risk takers, entrepreneurs (e.g in the form of a 5 year elimination of the capital gains tax) would probably lead to $5 to $10 trillion dollars in net economic benefits.
3. Assumptions are not truths
The stimulus plan is based on 5 assumptions. The world has an endless appetite for government debt; government directed infrastructure spending on small to medium sized projects that private investors shun is a sound economic idea; increasing taxes on high income families and investors has no influence on their behavior; a one time check for people who pay no taxes and are behind in utility, credit card, auto and medical bills will lead to sustained increases in consumer spending; feeding incompetent corporate managements while starving competent corporate managements will lead to vigorous job creation. In the past 50 years, governments all over the world have pursued these notions at various times. There is no instance of documented, enduring, success.
Since WW2, four factors have impelled US recovery from recessions. These are: inventory rebuilding by businesses, household spending, home construction and payroll growth. These factors are, in turn, based on rising business and household confidence and expanding profits or household asset values. None of these factors are present in the economy in early 2009. They will, of course, eventually return.
The tragedy of the stimulus plan that it will actually hinder these factors from operating, rather than encouraging them. At the end we will have lost two years and a trillion dollars in taxpayers money. Now this is not great in the life of our nation or compared to the long term wealth creating capacity of free men and women; but, for a family with no wage earners, for a young adult fresh out of college, for a small business with shrinking revenues and no political patron, and for an electorate that is both impatient and anxious, two years is a very long time indeed.
http://seekingalpha.com/article/1191...ulus-will-fail
The 3 reasons why the stimulus will fail in the US (as it will in the EU) are:
1. Foreigners will not bail us out
The US plans to issue trillions of dollars in new debt in the near to intermediate future. Americans either lack the resources or the appetite to buy much or even a majority of this debt. Foreigners are expected to be the principal source of financing.
The 5 largest holders of foreign reserves are, in descending order, China, Japan, Russia, Germany and Taiwan. Of these, Japan, Germany and Taiwan are nominal(but not reliable) allies while Russia and China are adversaries. China’s reserves are greater than those of the next 3 combined. For several years, these nations have been very large buyers of US treasuries, which financed US deficits and enabled both the government and scores of millions of consumers to live beyond incomes and earn beyond worth.
Foreigners have 3 reasons for investing in US government bonds and notes: national security (Japan and Germany in the 1970s and 1980s because the US protected them from the Soviet Empire and, until recently, Taiwan because the US protected it from China); market preservation (lend America the money to finance imports; as long as we over consumed, the rest of the world could enjoy export driven prosperity: our various domestic consumption and speculative bubbles became their export bubbles) and desperation (nowhere else big enough to park all the surplus dollars).
These reasons have now evaporated or are evaporating. Each of these 5 nations faces the same major economic problems, which are a squeeze on exports accompanied by contracting home markets. The problem is acute for Russia and Japan, becoming more serious for Germany and Taiwan and an increasing challenge for China which faces deep structural and demographic weaknesses that only high economic growth can disguise. Accelerating reverse internal migration in China and a crumbling real estate market suggest simultaneous unrest in both urban and rural communities lies ahead.
The response of each nation will be similar, which is to turn inward, use their financial surpluses to subsidize internal consumption and failing companies. Russia has experienced the most rapid depletion of foreign reserves in its modern history; if current, quite grim trends continue, Russia may be forced to be a net seller rather than a net buyer of US and EU government debt within 6 to 9 months; Japan’s exports have fallen faster than at any time since WW2 and China’s economic growth has now plunged below the worst case forecasts of its own government. Japan has admitted that it faces a long and deep recession and can do nothing to avert it, despite its elaborate stimulus plan. China concedes that its economic challenge is a test of the ability of the Communist Party to maintain its monopoly on power. Russia has failed in multiple efforts to defend the ruble and mitigate capital flight.
Foreigners, therefore, now have much less capacity to buy US treasuries than they did a year ago even as the US Treasury plans to issue vast amounts of new paper.
Moreover, most of the US debt held by foreigners has a maturity of under 3 years so there is an impending refinancing problem of monumental proportions for the US.
2. Confidence, not cash, is in short supply
The true currency of free and fair markets is confidence.The real currency of collectivism is coercion. Confidence has a higher multiplier than coercion. Confidence leads to enthusiastic innovation; coercion to sullen compliance. The value added to the economy from innovation far exceeds that from compliance. The current economic policy of the US is to replace confidence with coercion and staple this swap to an enormous increase in the supply of dollars that are backed by no assets at all.
Savers are told they can get no return on their funds and investors are told that bad investments will be salvaged while good investments will be savaged; bad managements will be coddled while good managements will be pilloried; bad judgments will be rewarded while good judgments will be punished. In this environment, confidence in all the major institutions of the US government (except the military) is plummeting. Americans who still have both investable resources and common sense (maybe 10% of all adults in the US, if that) are driven to hoarding cash and avoiding entrepreneurial risk. A significant portion of these people, who are essential to any revival of market based innovation, growth and productivity increases, are even spurning US Treasury investments because they believe US government debt is the new big bubble. These people understand that every dollar the government spends on low value added mandated programs will be at the expense of a dollar of private spending on high value added projects and ideas. They know why North Korea is not the most prosperous nation in the world and why Venezuela and Iran are becoming poorer by the day.
The worldview of the current US government is that the cure for problems caused by overconsumption is more government subsidized consumption; the cure for excessive private debt is more public debt; the cure for private overinvestment in real estate is public overinvestment in real estate; the cure for undesirable autos made at shareholder expense is undesirable autos made at taxpayer expense. According to this governing philosophy, bad private decisions about resource allocation can be remedied by bad public decisions about resource allocation. This remarkable philosophy states that it is not the decision per se that creates problems but who makes the decision. This is change indeed.
Private investors facing the current reality, it seems, plan to go into “internal exile”, endure and wait out the US Government until, exhausted and defeated, it retreats in muttering confusion. Only then, as coercion retreats, will confidence advance. Unfortunately, a market adjustment that would have taken 18 to 24 months without coercion will perhaps end up taking 36 to 48 months with coercion.
A trillion dollars in federal spending will probably not even create a trillion dollars in net economic benefits given the high overhead associated with spending this money. A trillion dollars in tax cuts aimed at investors, risk takers, entrepreneurs (e.g in the form of a 5 year elimination of the capital gains tax) would probably lead to $5 to $10 trillion dollars in net economic benefits.
3. Assumptions are not truths
The stimulus plan is based on 5 assumptions. The world has an endless appetite for government debt; government directed infrastructure spending on small to medium sized projects that private investors shun is a sound economic idea; increasing taxes on high income families and investors has no influence on their behavior; a one time check for people who pay no taxes and are behind in utility, credit card, auto and medical bills will lead to sustained increases in consumer spending; feeding incompetent corporate managements while starving competent corporate managements will lead to vigorous job creation. In the past 50 years, governments all over the world have pursued these notions at various times. There is no instance of documented, enduring, success.
Since WW2, four factors have impelled US recovery from recessions. These are: inventory rebuilding by businesses, household spending, home construction and payroll growth. These factors are, in turn, based on rising business and household confidence and expanding profits or household asset values. None of these factors are present in the economy in early 2009. They will, of course, eventually return.
The tragedy of the stimulus plan that it will actually hinder these factors from operating, rather than encouraging them. At the end we will have lost two years and a trillion dollars in taxpayers money. Now this is not great in the life of our nation or compared to the long term wealth creating capacity of free men and women; but, for a family with no wage earners, for a young adult fresh out of college, for a small business with shrinking revenues and no political patron, and for an electorate that is both impatient and anxious, two years is a very long time indeed.
http://seekingalpha.com/article/1191...ulus-will-fail
Wednesday, February 04, 2009
Tuesday, February 03, 2009
California goes broke, halts $3.5 billion in payments
02/02/2009 @ 10:47 pm
Filed by Stephen C. Webster
California, the eighth largest economy in the world, is broke.
"People are going to be hurt starting today," said Hallye Jordan, speaking on behalf of the state Controller. "There's no money."
Since state legislators failed to meet an end of January deadline on an agreement to make up for California's $40 billion budget gap, residents won't be getting their state tax rebates, scholarships to Cal Grant college will go unpaid, vendors invoices will remain uncollected and county social services will cease.
At least, temporarily. Services and payments will resume once state legislators come to an agreement on the budget.
"This time, there are real-world consequences," said H.D. Palmer, spokesman for the California Department of Finance, in a report by KCRA in Sacramento. "Because we have not been able to get to a budget agreement, payments aren't going to be made."
"This is an issue of fairness," said Assemblyman Ted Gaines, R-Roseville, in the KCRA report. "It hurts hardworking families the most. Refunds, in fact, will stimulate the economy, and taxpayers need their money."
"Included are $515 million in payments to the state's vendors and $280 million to help people with developmental disabilities. Other public assistance agencies will be left waiting for hundreds of millions of dollars," reports CNN. "Other public assistance agencies will be left waiting for hundreds of millions of dollars."
"I see the will during the negotiations even though these are very, very tough things that we talk about, where we go into areas that we have never, ever dreamt of going into and trying to solve," said Governor Arnold Schwarzenegger. "So you will be very surprised when the whole thing is done. We're still not there yet. There is still a lot of work that needs to be done but we are moving slowly forward with this process."
"If there is no deal by Friday, state government workers will take their first furlough day," reports the San Diego Union Tribune. "Schwarzenegger has ordered state employees to take two days off a month without pay through June 2010 to save about $1.4 billion.
"'We're really hoping we can work out a compromise that helps the governor achieve the savings he wants while minimizing the disruption to state services and to the lives of the employees who provide the services,' said Jim Zamora, spokesman for the Service Employees International Union, Local 1000, which represents the state's largest employee union with 90,000 workers."
"Some 46 states face budget shortfalls, forcing them to slash funding for many services," reported CNN. "But California, the largest state in the union by population, faces a deficit that totals more than 35% of its general fund."
State lawmakers returned to the Capitol on Monday evening to continue budget negotiations.
http://rawstory.com/news/2008/Califo...lion_0202.html
02/02/2009 @ 10:47 pm
Filed by Stephen C. Webster
California, the eighth largest economy in the world, is broke.
"People are going to be hurt starting today," said Hallye Jordan, speaking on behalf of the state Controller. "There's no money."
Since state legislators failed to meet an end of January deadline on an agreement to make up for California's $40 billion budget gap, residents won't be getting their state tax rebates, scholarships to Cal Grant college will go unpaid, vendors invoices will remain uncollected and county social services will cease.
At least, temporarily. Services and payments will resume once state legislators come to an agreement on the budget.
"This time, there are real-world consequences," said H.D. Palmer, spokesman for the California Department of Finance, in a report by KCRA in Sacramento. "Because we have not been able to get to a budget agreement, payments aren't going to be made."
"This is an issue of fairness," said Assemblyman Ted Gaines, R-Roseville, in the KCRA report. "It hurts hardworking families the most. Refunds, in fact, will stimulate the economy, and taxpayers need their money."
"Included are $515 million in payments to the state's vendors and $280 million to help people with developmental disabilities. Other public assistance agencies will be left waiting for hundreds of millions of dollars," reports CNN. "Other public assistance agencies will be left waiting for hundreds of millions of dollars."
"I see the will during the negotiations even though these are very, very tough things that we talk about, where we go into areas that we have never, ever dreamt of going into and trying to solve," said Governor Arnold Schwarzenegger. "So you will be very surprised when the whole thing is done. We're still not there yet. There is still a lot of work that needs to be done but we are moving slowly forward with this process."
"If there is no deal by Friday, state government workers will take their first furlough day," reports the San Diego Union Tribune. "Schwarzenegger has ordered state employees to take two days off a month without pay through June 2010 to save about $1.4 billion.
"'We're really hoping we can work out a compromise that helps the governor achieve the savings he wants while minimizing the disruption to state services and to the lives of the employees who provide the services,' said Jim Zamora, spokesman for the Service Employees International Union, Local 1000, which represents the state's largest employee union with 90,000 workers."
"Some 46 states face budget shortfalls, forcing them to slash funding for many services," reported CNN. "But California, the largest state in the union by population, faces a deficit that totals more than 35% of its general fund."
State lawmakers returned to the Capitol on Monday evening to continue budget negotiations.
http://rawstory.com/news/2008/Califo...lion_0202.html
Monday, February 02, 2009
WASHINGTON (Reuters) - Dallas Federal Reserve President Richard Fisher warned on Monday against "Buy America" provisions in a proposed fiscal stimulus law and said it could lead to devastating protectionism.
"Protectionism is the crack cocaine of economics," Fisher told C-Span television in an interview for its "Washington Journal" program.
"It provides an immediate high that leads to economic death. We cannot afford to go down that route," said Fisher, who is not a voting member of the Fed's policy-setting committee this year.
President Barack Obama has proposed an $825 billion government spending package to end the country's yearlong recession, which is being debated by U.S. lawmakers.
In addition to avoiding language that will antagonize trade partners, Fisher also urged Congress to balance the immediate need to stimulate growth with the long-term consequences of piling on debt that could be a drag for years to come.
The Fed has cut interest rates almost to zero and taken other unorthodox steps to ease conditions in key credit markets and encourage borrowing and consumption.
To achieve this, it has pumped hundreds of billions of dollars into the financial system, more than doubling its balance sheet in the process, to almost $2 trillion.
Fisher said he supported the Fed's aggressive action but stressed it was crucial that the U.S. central bank have an exit strategy to prevent this massive build-up in liquidity from fueling inflation once U.S. growth recovers.
"The job of the Federal Reserve is to ... maintain price stability while we engender growth and employment in the United States," Fisher said.
(Reporting by Alister Bull; Editing by Jonathan Oatis)
Pension Tension
http://www.nypost.com/seven/02022009...ion_153124.htm
PENSION TENSION
GRAY LADY'S $625M DEFICIT ADDS TO PUBLISHER'S WOES
By HOLLY M. SANDERS and KAJA WHITEHOUSE
Just when it started to look as if The New York Times Co. had found a way to dig itself out from under its massive debt load, the beleaguered newspaper company may be on the verge of getting knocked down again.
The cash-strapped publisher last week reported that its pension plan was facing a $625 million shortfall at the end of 2008, compared with a deficit of $48 million a year earlier.
Without a significant recovery in the markets, the owner of the Gray Lady could be forced to sink in millions more to shore up the plan, starting in 2010.
The pension news gave investors another reason to fret about the Times' precarious financial position. And it pushed analysts like Citigroup's Catriona Fallon to further question the company's cash position.
More than $1 billion in debt is looming over the ad-starved company, which was forced to get a $250 million loan from Mexican billionaire Carlos Slim at a steep 14 percent interest rate, to put its stake in the Boston Red Sox up for sale and to negotiate the sale of part of its brand-new Eighth Avenue headquarters.
Now, the company is getting socked again by the financial crisis and subsequent market turmoil as it wreaks havoc on its pension plan. To be sure, the Times doesn't owe billions in retirement benefits like the Big Three automakers, but it's one of hundreds of US companies suffering from a severe pension squeeze.
According to Joe McDonald, a pension expert at consulting firm Hewitt Associates, the 500 companies in the S&P index started 2008 with a $29 billion surplus in their pension plans, but ended it with a $746 billion deficit. "Pension plans are invested heavily in the stock and bond markets, neither of which performed well in 2008," McDonald said.
The Times reported needing $1.6 billion to meet its pension obligations as of the end of 2007, according to public filings. At the time, the fund was short by only $48 million. Now the deficit has ballooned thirteen-fold to $625 million.
On a conference call with analysts, Times executives emphasized they won't have to deal with higher contributions until 2010, at which point the economy could start to recover.
Moreover, Chief Financial Officer James Follo suggested the government could offer legislative relief, such as allowing companies more time to replenish their pension funds.
"Quite frankly, I would be surprised if there wasn't some government intervention because I don't think this is a unique issue," he said.
Congress has already written some relief into the pension law passed in 2006, which included stricter rules for dealing with underfunded pensions.
Under those rules, if a company's pension plan falls below a certain funding level then the plan can be frozen, meaning the employees stop earning some or all of their benefits.
http://www.nypost.com/seven/02022009...ion_153124.htm
PENSION TENSION
GRAY LADY'S $625M DEFICIT ADDS TO PUBLISHER'S WOES
By HOLLY M. SANDERS and KAJA WHITEHOUSE
Just when it started to look as if The New York Times Co. had found a way to dig itself out from under its massive debt load, the beleaguered newspaper company may be on the verge of getting knocked down again.
The cash-strapped publisher last week reported that its pension plan was facing a $625 million shortfall at the end of 2008, compared with a deficit of $48 million a year earlier.
Without a significant recovery in the markets, the owner of the Gray Lady could be forced to sink in millions more to shore up the plan, starting in 2010.
The pension news gave investors another reason to fret about the Times' precarious financial position. And it pushed analysts like Citigroup's Catriona Fallon to further question the company's cash position.
More than $1 billion in debt is looming over the ad-starved company, which was forced to get a $250 million loan from Mexican billionaire Carlos Slim at a steep 14 percent interest rate, to put its stake in the Boston Red Sox up for sale and to negotiate the sale of part of its brand-new Eighth Avenue headquarters.
Now, the company is getting socked again by the financial crisis and subsequent market turmoil as it wreaks havoc on its pension plan. To be sure, the Times doesn't owe billions in retirement benefits like the Big Three automakers, but it's one of hundreds of US companies suffering from a severe pension squeeze.
According to Joe McDonald, a pension expert at consulting firm Hewitt Associates, the 500 companies in the S&P index started 2008 with a $29 billion surplus in their pension plans, but ended it with a $746 billion deficit. "Pension plans are invested heavily in the stock and bond markets, neither of which performed well in 2008," McDonald said.
The Times reported needing $1.6 billion to meet its pension obligations as of the end of 2007, according to public filings. At the time, the fund was short by only $48 million. Now the deficit has ballooned thirteen-fold to $625 million.
On a conference call with analysts, Times executives emphasized they won't have to deal with higher contributions until 2010, at which point the economy could start to recover.
Moreover, Chief Financial Officer James Follo suggested the government could offer legislative relief, such as allowing companies more time to replenish their pension funds.
"Quite frankly, I would be surprised if there wasn't some government intervention because I don't think this is a unique issue," he said.
Congress has already written some relief into the pension law passed in 2006, which included stricter rules for dealing with underfunded pensions.
Under those rules, if a company's pension plan falls below a certain funding level then the plan can be frozen, meaning the employees stop earning some or all of their benefits.
Monday, January 26, 2009
It has returned...
...ICE STORM WARNING IN EFFECT FROM 6 PM THIS EVENING TO 12 PM CST WEDNESDAY... ...WINTER STORM WATCH NO LONGER IN EFFECT...
THE NATIONAL WEATHER SERVICE IN FORT WORTH HAS ISSUED AN ICE STORM WARNING FOR SIGNIFICANT ICING ACROSS THE NORTHERN TWO THIRDS OF NORTH TEXAS FROM 6 PM THIS EVENING TO 12 PM CST WEDNESDAY. THE WINTER STORM WATCH FOR TUESDAY AND TUESDAY NIGHT IS NO LONGER IN EFFECT.
PERIODS OF FREEZING RAIN WILL DEVELOP LATE THIS EVENING AND OVERNIGHT ALONG AND NORTHWEST OF A LAMPASAS... HILLBORO...TO CANTON LINE. TEMPERATURES WILL REMAIN BELOW FREEZING THROUGH WEDNESDAY MORNING AND PERIODS OF LIGHT FREEZING RAIN WILL CONTINUE. TOTAL ICE ACCUMULATIONS OF ONE QUARTER INCH ARE LIKELY WITH ISOLATED ONE HALF INCH AMOUNTS.
ALL PRECIPITATION WILL END WEDNESDAY MORNING BUT TEMPERATURES SHOULD REMAIN BELOW FREEZING UNTIL AFTERNOON.
AN ICE STORM WARNING MEANS SEVERE WINTER WEATHER CONDITIONS ARE EXPECTED OR OCCURRING. SIGNIFICANT AMOUNTS OF ICE ACCUMULATIONS WILL MAKE TRAVEL EXTREMELY DANGEROUS OR IMPOSSIBLE.
Nationalization Gets a New, Serious Look
By DAVID E. SANGER
Published: January 25, 2009
WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?
Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.
But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?
The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.
“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.
“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”
So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.
That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.
Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.
“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”
“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”
So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.
Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.
Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.
“The nightmare scenarios are endless,” one of the administration’s senior officials said.
The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.
Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.
Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.
Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”
“We think of it,” he continued, “as something foreigners do to us, not something we do.”
It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.
Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?
Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.
Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.
“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”
“And now,” he said, “we are doing the polar opposite of our advice.”
Eric Dash contributed reporting from New York.
By DAVID E. SANGER
Published: January 25, 2009
WASHINGTON — Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?
Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.
But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?
The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.
“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.
“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”
So far, President Obama’s top aides have steered clear of the word entirely, and they are still actively discussing other alternatives, including creating a “bad bank” that would nationalize the worst nonperforming loans by taking them off the hands of financial institutions without actually taking ownership of the banks. Others talk of de facto nationalization, in which the government owns a sizeable chunk of the banks but not a majority, with all that connotes.
That has already happened; taxpayers are now the biggest shareholders in Bank of America, with about 6 percent of the stock, and in Citigroup, with 7.8 percent. But the government’s influence is far larger than those numbers suggest, because it has guaranteed to absorb the losses of some of the two banks’ most toxic assets, a figure that could run into the hundreds of billions of dollars.
Many believe this form of hybrid ownership — part government, part private, with the responsibilities of ownership unclear — will not prove workable.
“The case for full nationalization is far stronger now than it was a few months ago,” said Adam S. Posen, the deputy director of the Peterson Institute for International Economics. “If you don’t own the majority, you don’t get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over. It’s the mistake the Japanese made in the ’90s.”
“I would guess that sometime in the next few weeks, President Obama and Tim Geithner,” he said, referring to the nominee for Treasury secretary, “will have to come out and say, ‘It’s much worse than we thought,’ and just bite the bullet.”
So far the Obama administration has signaled that it is trying to avoid that day, and members of its economic team — among them Mr. Geithner and the president’s top economic adviser, Lawrence H. Summers — made the case during the Asian financial crisis in the 1990s that governments make lousy bank managers.
Indeed, the risks of nationalization they warned about then apply equally to the United States now. The first is that nationalization can prove contagious. If the Obama administration took over Bank of America and Citigroup, two of the largest banks in the United States, private investors could decide to flee from the likes of JPMorgan Chase and Wells Fargo, or other major banks, fearing they could be next.
Moreover, Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff.
“The nightmare scenarios are endless,” one of the administration’s senior officials said.
The argument in favor of nationalization, even a brief nationalization of a few months or years, is straightforward: It might be the only way to pull America’s largest financial institutions out of the downward spiral that makes it enormously difficult to raise the capital they need to keep operating.
Right now, many banks are reluctant to write off their bad debts, and absorb huge losses, unless they can first raise enough capital to cushion the blow. But they cannot attract that capital without first purging their balance sheets of the toxic assets. Japan’s experience proved the dangers of that downward swirl; the economy stagnated, new lending ground to a halt and the country’s diplomatic clout shrank with its balance sheets.
Nationalization could pull the banks out of that dive, at least temporarily, as the government injected capital, hired new managers and ordered a restart to lending. But some Republicans who bit their tongues when President George W. Bush ordered huge interventions in the market would charge that Mr. Obama was steering America toward socialism.
Nationalization, said Charles Geisst, a financial historian at Manhattan College “is just not a term in the American vocabulary.”
“We think of it,” he continued, “as something foreigners do to us, not something we do.”
It is also something foreigners do to themselves: the British have recently taken a majority stake in the Royal Bank of Scotland.
Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?
Another option is for the government to buy the banks’ most toxic assets either through a giant fund, or, more likely, a federally supported bad bank designed to buy up troubled investments. But in that case, taxpayers might well be the losers: They would have all of the banks’ worst assets and none of their performing loans. And unless a deal is worked out to take a larger share of the banks whose bad loans are shuffled off to the government, the taxpayers would not have the chance to benefit by selling the shares back to private investors.
Moreover, cleaning up the banks’ bad assets, without extracting a heavy price for the bank managers, shareholders and their lenders, is exactly what Mr. Summers and Mr. Geithner warned against during the Asian financial crisis.
“We told the Asians that they had to be willing to let banks and companies fail,” said Jeffrey Garten, a professor at the Yale School of Management and a top official in the Clinton administration. “We warned that there was great moral hazard if governments just bailed them out.”
“And now,” he said, “we are doing the polar opposite of our advice.”
Eric Dash contributed reporting from New York.
Jan. 26 (Bloomberg) -- Caterpillar Inc., Sprint Nextel Corp. and Home Depot Inc. led companies announcing plans today to cut at least 61,000 jobs as sales withered and construction slowed amid the global economic decline.
The biggest layoffs were at Peoria, Illinois-based Caterpillar. The world’s largest maker of construction equipment said it’s cutting 20,000 jobs after fourth-quarter profit fell by almost a third.
Pfizer Inc., the leading drugmaker, said it’s acquiring competitor Wyeth for $68 billion and will close five factories and eliminate 19,000 jobs, or 15 percent, of the combined company’s workforce.
The firings came as American jobless claims reached 589,000 in the week ended Jan. 17, matching the highest level in 26 years, as shrinking demand for products and services forced companies to lower costs. U.S. President Barack Obama today said job cuts demonstrate the urgent need for the economic stimulus program being debated in Congress.
Employers “are each cutting thousands of jobs. These are not just numbers on a page,” Obama said today at the White House. “We cannot afford distractions, we cannot afford delays” in getting legislation to boost the economy through Congress.
Sprint Nextel Corp., the U.S. wireless carrier, will cut 8,000 jobs, or 14 percent of its workforce, in order to reduce expenses by $1.2 billion a year.
Home Depot
Home Depot Inc., the world’s largest home-improvement retailer, said it will cut 7,000 jobs, or 2 percent of its workforce, and exit its Expo home-décor business.
“Certainly since 2001, with the dot-com collapse, we haven’t seen these kinds of large cuts,” James Pedderson, a spokesman for Challenger Gray & Christmas Inc., a Chicago-based provider of executive-outplacement services, said in an interview. “In terms of the number of companies and the number of cuts, this morning is certainly unusual.”
ING Groep NV, the biggest Dutch financial-services company, said it will reduce its workforce by 5.4 percent, eliminating 7,000 jobs. ING reported its second consecutive quarterly loss as it took 1.8 billion euros ($2.36 billion) worth of writedowns on the value of mortgage assets.
To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.
Last Updated: January 26, 2009 11:22 EST
The biggest layoffs were at Peoria, Illinois-based Caterpillar. The world’s largest maker of construction equipment said it’s cutting 20,000 jobs after fourth-quarter profit fell by almost a third.
Pfizer Inc., the leading drugmaker, said it’s acquiring competitor Wyeth for $68 billion and will close five factories and eliminate 19,000 jobs, or 15 percent, of the combined company’s workforce.
The firings came as American jobless claims reached 589,000 in the week ended Jan. 17, matching the highest level in 26 years, as shrinking demand for products and services forced companies to lower costs. U.S. President Barack Obama today said job cuts demonstrate the urgent need for the economic stimulus program being debated in Congress.
Employers “are each cutting thousands of jobs. These are not just numbers on a page,” Obama said today at the White House. “We cannot afford distractions, we cannot afford delays” in getting legislation to boost the economy through Congress.
Sprint Nextel Corp., the U.S. wireless carrier, will cut 8,000 jobs, or 14 percent of its workforce, in order to reduce expenses by $1.2 billion a year.
Home Depot
Home Depot Inc., the world’s largest home-improvement retailer, said it will cut 7,000 jobs, or 2 percent of its workforce, and exit its Expo home-décor business.
“Certainly since 2001, with the dot-com collapse, we haven’t seen these kinds of large cuts,” James Pedderson, a spokesman for Challenger Gray & Christmas Inc., a Chicago-based provider of executive-outplacement services, said in an interview. “In terms of the number of companies and the number of cuts, this morning is certainly unusual.”
ING Groep NV, the biggest Dutch financial-services company, said it will reduce its workforce by 5.4 percent, eliminating 7,000 jobs. ING reported its second consecutive quarterly loss as it took 1.8 billion euros ($2.36 billion) worth of writedowns on the value of mortgage assets.
To contact the reporter on this story: Don Jeffrey in New York at djeffrey1@bloomberg.net.
Last Updated: January 26, 2009 11:22 EST
Crisis claims Icelandic cabinet
http://news.bbc.co.uk/2/hi/europe/7851415.stm
Crisis claims Icelandic cabinet
Iceland's coalition government has collapsed as a result of an escalating economic crisis.
Prime Minister Geir Haarde announced the immediate resignation of his cabinet, after talks with coalition partners broke down.
Iceland's financial system collapsed in October under the weight of debt built up during years of rapid growth.
The currency has since plummeted, with unemployment soaring. The economy is forecast to shrink by 9.6% this year.
In a series of protests, demonstrators have accused the government of leading the country to ruin.
Mr Haarde told reporters on Monday: "I really regret that we could not continue with this coalition. I believe that that would have been the best result."
The coalition between Mr Haarde's Independence Party and Foreign Minister Ingibjorg Gisladottir's Social Democratic Alliance had been under strain for the past three months.
The prime minister said he would speak to Iceland's president to formally dissolve the government.
Last week Mr Haarde called an early general election for 9 May, adding that he would not stand for health reasons. The Social Democratic Alliance is now expected to look for new coalition partners to form a government until the election.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/h...pe/7851415.stm
Published: 2009/01/26 13:52:23 GMT
© BBC MMIX
http://news.bbc.co.uk/2/hi/europe/7851415.stm
Crisis claims Icelandic cabinet
Iceland's coalition government has collapsed as a result of an escalating economic crisis.
Prime Minister Geir Haarde announced the immediate resignation of his cabinet, after talks with coalition partners broke down.
Iceland's financial system collapsed in October under the weight of debt built up during years of rapid growth.
The currency has since plummeted, with unemployment soaring. The economy is forecast to shrink by 9.6% this year.
In a series of protests, demonstrators have accused the government of leading the country to ruin.
Mr Haarde told reporters on Monday: "I really regret that we could not continue with this coalition. I believe that that would have been the best result."
The coalition between Mr Haarde's Independence Party and Foreign Minister Ingibjorg Gisladottir's Social Democratic Alliance had been under strain for the past three months.
The prime minister said he would speak to Iceland's president to formally dissolve the government.
Last week Mr Haarde called an early general election for 9 May, adding that he would not stand for health reasons. The Social Democratic Alliance is now expected to look for new coalition partners to form a government until the election.
Story from BBC NEWS:
http://news.bbc.co.uk/go/pr/fr/-/2/h...pe/7851415.stm
Published: 2009/01/26 13:52:23 GMT
© BBC MMIX
Caterpillar cuts 20,000 jobs
By Hal Weizman in Chicago
Published: January 26 2009 13:45 | Last updated: January 26 2009 13:45
Caterpillar, the world’s biggest maker of construction equipment and heavy-duty engines, is cutting 20,000 jobs as it struggles to cope with the global economic downturn.
The action comes a month after the Illinois-based bellwether group slashed executive salaries by up to half and cut 814 jobs from its site in Mossville, Illinois, citing a decline in orders and weaker demand for engines in Caterpillar machines.
The company was one of several in the US to announce job cuts on Monday morning. Sprint Nextel said it would cut 8,000 jobs while Home Depot said it would shed 7,000.
Caterpillar announced the latest round of cuts as it reported that fourth-quarter profits fell by more than 32 per cent and warned that earnings would come under pressure again in 2009.
Caterpillar said profit in the quarter was $661m or $1.08 a share, down from $975m or $1.50 in the same period a year earlier and well below analysts’ expectations of about $1.28.
“Fourth-quarter profit was disappointing,” said Jim Owens, chief executive. “It is now clear that we need to sharply lower our production and costs.”
“These are very uncertain times, and it’s imperative that we focus Team Caterpillar on dramatically reducing production schedules and costs in light of poor economic conditions throughout the world,” Mr Owens said.
“While it’s painful for our employees and suppliers, it’s absolutely necessary given economic circumstances. We expect to have most of the actions needed to lower employment and cost levels in place by the end of the first quarter.
“Financial markets remain under stress, and our expectations for 2009 have deteriorated,” said the company. “Uncertainty around the depth and duration of this recession makes it very difficult to forecast sales and revenues.”
By Hal Weizman in Chicago
Published: January 26 2009 13:45 | Last updated: January 26 2009 13:45
Caterpillar, the world’s biggest maker of construction equipment and heavy-duty engines, is cutting 20,000 jobs as it struggles to cope with the global economic downturn.
The action comes a month after the Illinois-based bellwether group slashed executive salaries by up to half and cut 814 jobs from its site in Mossville, Illinois, citing a decline in orders and weaker demand for engines in Caterpillar machines.
The company was one of several in the US to announce job cuts on Monday morning. Sprint Nextel said it would cut 8,000 jobs while Home Depot said it would shed 7,000.
Caterpillar announced the latest round of cuts as it reported that fourth-quarter profits fell by more than 32 per cent and warned that earnings would come under pressure again in 2009.
Caterpillar said profit in the quarter was $661m or $1.08 a share, down from $975m or $1.50 in the same period a year earlier and well below analysts’ expectations of about $1.28.
“Fourth-quarter profit was disappointing,” said Jim Owens, chief executive. “It is now clear that we need to sharply lower our production and costs.”
“These are very uncertain times, and it’s imperative that we focus Team Caterpillar on dramatically reducing production schedules and costs in light of poor economic conditions throughout the world,” Mr Owens said.
“While it’s painful for our employees and suppliers, it’s absolutely necessary given economic circumstances. We expect to have most of the actions needed to lower employment and cost levels in place by the end of the first quarter.
“Financial markets remain under stress, and our expectations for 2009 have deteriorated,” said the company. “Uncertainty around the depth and duration of this recession makes it very difficult to forecast sales and revenues.”
Smurfit-Stone, Cardboard Maker, Files for Bankruptcy (Update2)
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By Dawn McCarty and Tiffany Kary
Jan. 26 (Bloomberg) -- Smurfit-Stone Container Corp., a maker of cardboard packaging and one of the world’s largest paper recyclers, filed for bankruptcy in the face of falling demand and heavy debt payments.
The petition for Chapter 11 bankruptcy, filed today in a U.S. Bankruptcy Court in Wilmington, Delaware, listed $5.6 billion in consolidated debt and $7.5 billion in consolidated assets as of Sept. 30. Twenty-four affiliates also sought protection.
The company joins other pulp- and paper-related bankruptcies as rising Internet use hurts magazines and newspapers. Corp. Durango SAB, Mexico’s largest papermaker, sought U.S. bankruptcy in October. Quebecor World Inc., a magazine printer, and Pope & Talbot Inc., a pulp-mill operator, also sought cross-border bankruptcies for their operations in the U.S. and Canada.
“The acceleration of the unprecedented global economic recession has weakened demand for packaging, and the frozen credit markets have prevented an out-of-court refinancing of our capital structure,” Patrick J. Moore, chairman and chief executive officer of Chicago-based Smurfit-Stone, said in a statement. “While this is not the outcome we anticipated, we are taking this action to become a more financially healthy company.”
Smurfit-Stone, is North America’s second-largest maker of corrugated packaging, and has 22,000 employees in the U.S., Canada, Mexico and Asia, according to its Web site. Operations outside of the U.S. and Canada are excluded from the bankruptcy process, the company said.
Debt Levels
Smurfit-Stone’s 30 largest consolidated creditors without collateral backing their claims are owed about $4.2 billion, court papers show. The Bank of New York, as agent for bondholders, has an unsecured claim of $2.2 billion, CIT Group Inc. is owed $36.8 million and British Petroleum is owed $22.1 million, according to court papers.
Rivals AbitibiBowater Inc., Temple-Inland Inc. and International Paper Co. also have significant debt, according to Mark Wilde, an analyst at Deutsche Bank Securities in New York.
In December, Smurfit-Stone said fourth-quarter earnings would be “significantly” lower than the previous period, citing slowing demand for containers for industrial and consumer goods. It said it would reduce production of containerboard and some types of paper.
Credit Ratings
Credit-rating companies Moody’s and Standard & Poor’s downgraded their ratings on Smurfit-Stone’s debt shortly thereafter. Both said the company could be required to get waivers on its debt covenants.
Smurfit-Stone has an $800 million revolving credit facility due Nov. 2009. Moody’s also rates an estimated $3.5 billion in debt, and noted in December that the company could need to get waivers on some of its covenants to maintain access to the revolver.
Containerboard and corrugated containers are Smurfit-Stone’s main products, and it collects recycled paper as a raw ingredient through 27 recycling plants. Its net sales were $7.4 billion in 2007, and a three-year program designed to make mills more productive is slated to finish in the first half of this year, according to the company’s Web site.
The case is Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware at dmccarty@bloomberg.net; Tiffany Kary in New York Bankruptcy Court at tkary@bloomberg.net.
Last Updated: January 26, 2009 06:02 EST
Email | Print | A A A
By Dawn McCarty and Tiffany Kary
Jan. 26 (Bloomberg) -- Smurfit-Stone Container Corp., a maker of cardboard packaging and one of the world’s largest paper recyclers, filed for bankruptcy in the face of falling demand and heavy debt payments.
The petition for Chapter 11 bankruptcy, filed today in a U.S. Bankruptcy Court in Wilmington, Delaware, listed $5.6 billion in consolidated debt and $7.5 billion in consolidated assets as of Sept. 30. Twenty-four affiliates also sought protection.
The company joins other pulp- and paper-related bankruptcies as rising Internet use hurts magazines and newspapers. Corp. Durango SAB, Mexico’s largest papermaker, sought U.S. bankruptcy in October. Quebecor World Inc., a magazine printer, and Pope & Talbot Inc., a pulp-mill operator, also sought cross-border bankruptcies for their operations in the U.S. and Canada.
“The acceleration of the unprecedented global economic recession has weakened demand for packaging, and the frozen credit markets have prevented an out-of-court refinancing of our capital structure,” Patrick J. Moore, chairman and chief executive officer of Chicago-based Smurfit-Stone, said in a statement. “While this is not the outcome we anticipated, we are taking this action to become a more financially healthy company.”
Smurfit-Stone, is North America’s second-largest maker of corrugated packaging, and has 22,000 employees in the U.S., Canada, Mexico and Asia, according to its Web site. Operations outside of the U.S. and Canada are excluded from the bankruptcy process, the company said.
Debt Levels
Smurfit-Stone’s 30 largest consolidated creditors without collateral backing their claims are owed about $4.2 billion, court papers show. The Bank of New York, as agent for bondholders, has an unsecured claim of $2.2 billion, CIT Group Inc. is owed $36.8 million and British Petroleum is owed $22.1 million, according to court papers.
Rivals AbitibiBowater Inc., Temple-Inland Inc. and International Paper Co. also have significant debt, according to Mark Wilde, an analyst at Deutsche Bank Securities in New York.
In December, Smurfit-Stone said fourth-quarter earnings would be “significantly” lower than the previous period, citing slowing demand for containers for industrial and consumer goods. It said it would reduce production of containerboard and some types of paper.
Credit Ratings
Credit-rating companies Moody’s and Standard & Poor’s downgraded their ratings on Smurfit-Stone’s debt shortly thereafter. Both said the company could be required to get waivers on its debt covenants.
Smurfit-Stone has an $800 million revolving credit facility due Nov. 2009. Moody’s also rates an estimated $3.5 billion in debt, and noted in December that the company could need to get waivers on some of its covenants to maintain access to the revolver.
Containerboard and corrugated containers are Smurfit-Stone’s main products, and it collects recycled paper as a raw ingredient through 27 recycling plants. Its net sales were $7.4 billion in 2007, and a three-year program designed to make mills more productive is slated to finish in the first half of this year, according to the company’s Web site.
The case is Smurfit-Stone Container Corp., 09-10235, U.S. Bankruptcy Court, District of Delaware (Wilmington).
To contact the reporters on this story: Dawn McCarty in Wilmington, Delaware at dmccarty@bloomberg.net; Tiffany Kary in New York Bankruptcy Court at tkary@bloomberg.net.
Last Updated: January 26, 2009 06:02 EST
Sunday, January 25, 2009
I was thinking the other day that Joe McNally had it right when he said that the best shoots are the free ones! They are the assignments you give to yourself. They are the ones that "you do for yourself, for whatever reason, and hopefully come out of it on the other side a better photographer."
These are the assignments that force you to use whatever is in your bag, and whatever is laying around to create the best image possible with what you have...and this in turn forces you to push yourself and learn from the experience...and that is always a good thing!
Above is Danielle, shot in the old grain mill here in McKinney...
Saturday, January 24, 2009
Britain on the brink of an economic depression, say experts
Britain is heading for economic depression for the first time since the 1930s, economists have warned.
By Edmund Conway, Economics Editor
Last Updated: 9:49PM GMT 23 Jan 2009
http://www.telegraph.co.uk/finance/f...y-experts.html
Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression.
The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone.
The contraction follows a 0.6 per cent fall in gross domestic product (GDP) — the most comprehensive measure of Britain’s wealth generation — during the previous three months. This means Britain fulfils the criteria for a technical recession — two successive quarters of negative output.
The news sent the pound sliding to its lowest level since 1985. Sterling dropped more than three quarters of a cent to $1.3688 as investors speculated that the Bank of England may be forced to cut interest rates towards zero in response to the recession.
John McFall, the Labour chairman of the Treasury select committee, sounded a more optimistic note. He said: "We know that 2009 is going to be really tough for many people. There is a determination in Britain and across Europe to keep people in work, to avoid unemployment, so people’s contribution will not be lost."
Confirmation that the economy has entered recession capped a week in which Gordon Brown was forced to announce a new £350 billion bank rescue plan. Unemployment has almost reached two million. President Barack Obama discussed the financial crisis with the Prime Minister on the telephone yesterday, his first call to a European leader.
The fall in GDP is the sharpest since 1980, when Britain was mired in its most severe post-war recession. The news is an embarrassment for Mr Brown, who pledged as Chancellor not to return Britain to "boom and bust".
Britain is likely to suffer more than other economies due to its heavy reliance on the financial services sector, which has all but imploded in the wake of the economic crisis, experts said.
Others raised the spectre of an outright economic depression, often defined by experts as a peak-to-trough economic contraction of 10 per cent. Aside from the demobilisation periods following the First and Second World Wars, this kind of contraction has never taken place — not even in the 1930s’ Great Depression.
Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end.
The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.
This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.
Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.
“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”
Britain is heading for economic depression for the first time since the 1930s, economists have warned.
By Edmund Conway, Economics Editor
Last Updated: 9:49PM GMT 23 Jan 2009
http://www.telegraph.co.uk/finance/f...y-experts.html
Families must brace themselves for a slump of far greater severity and longevity than the recessions of the 1980s and 1990s, they warned. They said the current crisis will be of a scale to rival the biggest peace-time crisis in modern history — the Great Depression.
The warning was delivered by economists and politicians after the Office for National Statistics revealed that the economy shrank by 1.5 per cent in the final three months of 2008 alone.
The contraction follows a 0.6 per cent fall in gross domestic product (GDP) — the most comprehensive measure of Britain’s wealth generation — during the previous three months. This means Britain fulfils the criteria for a technical recession — two successive quarters of negative output.
The news sent the pound sliding to its lowest level since 1985. Sterling dropped more than three quarters of a cent to $1.3688 as investors speculated that the Bank of England may be forced to cut interest rates towards zero in response to the recession.
John McFall, the Labour chairman of the Treasury select committee, sounded a more optimistic note. He said: "We know that 2009 is going to be really tough for many people. There is a determination in Britain and across Europe to keep people in work, to avoid unemployment, so people’s contribution will not be lost."
Confirmation that the economy has entered recession capped a week in which Gordon Brown was forced to announce a new £350 billion bank rescue plan. Unemployment has almost reached two million. President Barack Obama discussed the financial crisis with the Prime Minister on the telephone yesterday, his first call to a European leader.
The fall in GDP is the sharpest since 1980, when Britain was mired in its most severe post-war recession. The news is an embarrassment for Mr Brown, who pledged as Chancellor not to return Britain to "boom and bust".
Britain is likely to suffer more than other economies due to its heavy reliance on the financial services sector, which has all but imploded in the wake of the economic crisis, experts said.
Others raised the spectre of an outright economic depression, often defined by experts as a peak-to-trough economic contraction of 10 per cent. Aside from the demobilisation periods following the First and Second World Wars, this kind of contraction has never taken place — not even in the 1930s’ Great Depression.
Roger Bootle, the managing director of Capital Economics, said: "I think there’s a very good chance this recession will be the worst since the 1930s. I suspect the economy could shrink by 6 per cent from last year to the end of next year — and that might not be the end.
The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.
This “debt deflation” is among the most painful of all economic phenomena, since it means the amount families owe increases each year even if they borrow no more.
Albert Edwards, a strategist at Société Générale, likened the British economy to a Ponzi scheme — a fraudulent debt mountain like that allegedly used by the New York hedge fund manager Bernard Madoff.
“What I find amazing is that people aren’t really nailing Gordon Brown and [Bank of England Governor] Mervyn King for this,” he said. “At least in the US they had the excuse of the arrival of sub-prime — a new sector of the market. We didn’t really have anything similar but we ended up with a bigger national Ponzi scheme than the US.”
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