New York Yankees outfielder Babe Ruth, in a Giants uniform, with Giants manager John McGraw at an exhibition game with the Baltimore Orioles at the Polo Grounds. Ruth played in the Giants outfield for the benefit game
Ilargi: As Japan falls into a hole so deep it will take decades to crawl out of it, Paul Krugman manages to wane nostalgic about the economic miracle that was World War II. We’ve heard a lot lately, but that, you must agree, takes first place with flying colors. What, we are afraid to ask, will he come up with next? Anything seems permissible as long as it means even more control over your money will be handed over to a government made up entirely of bankers and bank beneficiaries. It’s hard to ignore the nagging feeling that Krugman, and Nouriel Roubini alongside him, have turned into politicians overnight.
Roubini's praise of Tim Geithner looks oddly out of place, and can only be explained by the suggestion that he, like Krugman, is vying for a post closer to the center of power and money. I mean, you can hae some misguided theory that a $10 or $100 trillion bail-out is always better than a $1 trillion one (economics doesn't require an elevated brain volume), but to claim that Geithner is the man for the job is uniquely odd in the face of his stimulus plan, which has been hammered down by everyone across the political spectrum. Except for the government itself, that is.
Obama changes yet another of his very recently announced plans. Not a car czar, but the tragi-comic duo of Summers and Geithner will lead the bankrupting of the auto industry. Yes, again, the clowns who failed to come up with a stimulus plan that had any detail or substance. Instead of focusing on crafting a better stimulus, they now take on a second major issue head first. Is there anyone at all who feels confident that they, after utterly failing test no.1, will suddenly see the light and ace test no.2?
I guess it doesn't matter much, does it, as long as there are unlimited amounts of other people's money at their disposal? Or perhaps that's even their only focus to begin with. In the background, you can hear Robert Rubin, Henry Paulson, Goldman Sachs and Citigroup laugh their cold and hollow laughter. What place Obama has in all this, I don't know, but I’m getting more suspicious by the day. Small mistakes are one thing, repeated small mistakes another, and repeated huge mistakes are downright suspect. Let's ask Obama what happened to Paul Volcker, and why. While Volcker is standing next to him. What is increasingly happening, in three weeks and change, is the gutting of the democratic level of American politics, in plain daylight, in the name of huge and urgent emergencies that were created by the very people Obama has picked to solve them.
Systematically, every potential form of criticism is eradicated, whether it's ignoring Joe Stiglitz or shoving aside Paul Volcker. If the president wants to get anywhere in solving what still can be salvaged from the ruins of America, he has to know that openness is the most important factor. Obama has so far chosen the opposite direction. I get these ad-banners on my screen from time to time that advertise IQ tests. Obama's IQ, they claim, is 125. While that is just over Paris Hilton’s 120, it’s certainly not brilliance territory. I guess maybe Obama is simply not that smart.
The oligarchy’s bailout ball
You know what they say -- half a million dollars just doesn’t go as far as it used to. News from the White House that $500,000 was the cap the government wants to put on executive salaries at the banks receiving bailout cash had some on Wall Street and along the plush corridors of Manhattan’s swank Upper East Side hollering, "Unfair!" (But without those unsightly street demonstrations and picket lines, of course.) "You Try to Live on 500K in This Town" was the tongue-in-cheek headline in last Sunday’s New York Times. Just add up private school tuition, mortgage payments, maintenance fees and wages for the nanny and you’re already up to more than $250,000 a year -- and that’s pre-taxes, assuming you’re paying any. Then tote up payments and upkeep on vacation and weekend homes, charity balls, car and driver -- pretty soon you’re maxing out your American Express Black Card.
But they work hard for their multi-million dollar salaries and bonuses, perks and solid gold benefits, complained some of the financiers. Besides, executive headhunters say, the money giants just can’t get good help for anything less. Good help? Spare us the kind of moguls who helped us straight into the current deep, dirty hole we’re trying to climb out of. "Like spoiled, petulant children," is how Washington Post columnist Steven Pearlstein described them. "These guys won’t be happy until the government agrees to relieve them of every last one of their lousy loans and investments at inflated prices, recapitalize every major bank and brokerage and insurance company on sweetheart terms and restore them to the glory days, so they can once again earn inflated profits and obscene pay packages by screwing over their customers and their shareholders." Pearlstein was reacting after the 5 percent dive that stock prices took following freshly minted Treasury Secretary Timothy Geithner’s announcement of the Obama administration’s Financial Stability Plan. It’s the latest iteration of the bank bailout plan intended to go hand-in-hand with the economic stimulus package. Combined, as much as three trillion dollars may be at stake.
The plan immediately was attacked by many as too vague and ineffective. Part of the trouble, critics say, is that Geithner isn’t part of the solution, he’s part of the problem -- former head of the Federal Reserve in New York and a protégé of Clinton Treasury Secretary Robert Rubin, who last month retired as senior counselor at Citigroup. That’s the bank the government agreed to insure against projected losses of $306 billion, on top of bailouts totaling $45 billion. In other words, Geithner’s a player. The New York Times reported that in preparing the Financial Stability Plan, Geithner opposed tougher conditions on investment firms sought by others in the White House. Geithner, the Times wrote, "successfully fought against more severe limits on executive pay for companies receiving government aid . . . resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives . . ."
This week, on The Baseline Scenario, a blog he co-founded, MIT professor of global economics and management and former International Monetary Fund chief economist Simon Johnson wrote, "There comes a time in every economic crisis, or more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that -- they say -- will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains. Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?" That question caught the attention of my colleague Bill Moyers, who interviewed Johnson on the current edition of Bill Moyers Journal on public television.
The problem, Johnson told him, is that via millions spent for political contributions and lobbying efforts, the revolving door that sees elites shuttle between jobs in government and business, and by creating a situation in which technical knowledge is limited to a privileged few, the banking and financial services industry has become a kind of ruling oligarchy that stifles attempts to shake up the status quo and make the real change necessary to get us out of the current crisis. "Either you break the power," Johnson said, "or we’re stuck for a long time with this arrangement . . . "The policy that we seem to be pursuing, of being nice to the banks, is a mistake. Both from a technical/economic point of view, and from a deeper political point of view . . . [The banks] think that we’re going to pay out 10 or 20 percent of GDP to basically make them whole. It’s astonishing."
Johnson has written on The Baseline Scenario blog what he thinks needs to be done: "Reboot the financial system. Find out immediately which banks are insolvent using market prices. Allow private owners to fully recapitalize, if they can. Have the FDIC, the Federal Deposit Insurance Corporation, take over all banks that cannot raise enough private capital, and try to re-privatize those banks quickly, while making sure the taxpayer has strong participation in the upside." Unfortunately, Johnson fears the oligarchy will prevail. "My intuition is that this is going to get a lot worse," he told Moyers. "It’s going to cost us a lot more money. And we are going down a long, dark, blind alley . . . "Eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money and they will cash out. . . . We and our children will be paying higher taxes so those people could have those bonuses. That’s not fair. It’s not acceptable. It’s not even good economics."
Johnson doubts the political will exists to do what needs to be done. According to Tuesday’s Boston Herald, last August, another former Treasury Secretary and Rubin pal, Lawrence Summers, now chairman of the of the National Economic Council, hitched a ride back from the Democratic National Convention on board a Citigroup corporate jet -- "the same type that . . . Citigroup infamously wanted to replace last month with a new $50 million French jet." Summers didn’t pay for the trip, but Citi said it has paid the appropriate taxes. The Herald reported that the plane "was the same one former Citi chief executive Sandy Weill took on vacation to Mexico last month, it reportedly includes a full bar, crystal stemware and ‘pillows made from Hermès scarves.’" When you’ve got it, flaunt it, Larry. Why go to hell in a handbasket when you can fly there executive class, leaning back on a French silk pillow? It’s good to be part of an oligarchy.
Japan Economy Goes From Best to Worst on Export Slump, Yen Gain
Japan’s economy, only months ago predicted to be the best performing among the world’s most advanced nations, has become the worst. Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S. The credit crisis that crippled the U.S. financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007: a U.S. consumer-spending bubble and a cheap yen. The speed of the deterioration has taken companies by surprise: Toyota Motor Corp. this month forecast a 450 billion yen ($4.9 billion) loss, reversing a November estimate it would make 550 billion yen.
"We thought this would be a cyclical slowdown for the Japanese economy," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "It’s now clearly a structural one. Eventually we should see some stabilization in consumption globally, but there just won’t be the same" willingness to fund spending by taking on debt. The International Monetary Fund last month forecast Japan’s economy would shrink 2.6 percent in 2009, versus contractions of 1.6 percent and 2 percent in the U.S. and Europe. In November, the fund predicted Japan would outpace its rivals. Since then, industrial production plunged at the steepest pace in 55 years in the fourth quarter, and unemployment rose at the fastest rate in 41 years in December. Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month.
The end of easy credit in the U.S. will lead to a "quantum downward shift" in consumer spending in the world’s largest economy that may have long-term and devastating effects on economies that have relied on it, according to Allen Sinai, chief global economist at Decision Economics Inc. in New York. Exporters Toyota and Canon Inc. get more than a third of their sales in North America. "Companies that planned their businesses around the idea that U.S. consumer spending would grow by 3 percent per year, as it has for decades, are in for a shock," said Sinai, who spoke in an interview in Tokyo after he briefed Japan’s biggest business lobby, Keidanren, on the U.S. outlook. Investment in production capacity in the six years through 2007, when Japan enjoyed its longest post-World War II period of growth, may have saddled manufacturers with factories and workers they no longer need. Toyota, which has forecast its first loss in seven decades, will slash domestic production by half this quarter.
"Manufacturers have been left with big structural excesses in capacity that need to be worked out," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. "It’ll take years." The second blight on the economy is the surge in the yen. Japan’s currency has traded at an average of about 90 per dollar so far this quarter, up 22 percent from the average of about 115 during the six-year expansion that ended in 2007. The yen jumped as investors reduced so-called carry trades, where they borrowed in the currency to invest in nations where interest rates exceeded Japan’s, which have been at or below 0.5 percent since 1995. "Where Japan stands out is the fact that we’ve got the hot currency," said Jesper Koll, Tokyo-based chief executive officer at hedge fund TRJ Tantallon Research Japan. "Where I’m different from Germany, from Korea, from China, from America is my currency, the yen, has appreciated against everything in the universe."
The bursting of what Eisuke Sakakibara, former top currency official at the Ministry of Finance calls a "weak yen bubble" could make it unprofitable for many manufacturers to keep making cars and electronics at home. Toshiba Corp., which is forecasting a record $3.1 billion loss, says it will postpone building two domestic chip factories. The company may send some production to Southeast Asia to cut costs, according to the Asahi Newspaper. "The very sharp adjustment of the yen toward fair value has made as lot of the capacity that has been put in place over the recovery simply redundant," said Maguire at Societe Generale. "A lot of the production that’s occurring in Japan is just no longer economically viable."
To be sure, decisions by companies to cut production and sack workers may mean they will be in better shape once demand recovers, according to Tetsuro Sugiura, chief economist at Mizuho Research Institute in Tokyo. During the so-called lost decade that followed the bursting of Japan’s stock and property bubbles in the early 1990s, companies were slow to cut production and sack workers. "The situation isn’t as bad as looks," said Sugiura. "Companies are saying that, while the downturn is severe, they can survive. They’re adjusting very, very quickly."
Japan's Leaders Powerless as Economy Plunges
A slurring, muddled performance by Japanese Finance Minister Shoichi Nakagawa at the Group of Seven meeting in Rome over the weekend is attracting plenty of attention in Japan. At a news conference on Feb. 14, the minister, an ally of Prime Minister Taro Aso, appeared to be drunk: He misunderstood questions, his speech was unclear, and at one point he even appeared to almost drift off to sleep. A day later, back in Tokyo, Nakagawa explained that he had been suffering from a cold and reacted badly to medicine. "I wouldn't drink before a G7 meeting," he told reporters outside his home, sniffling.
Explaining away Japan's dreadful economic performance is likely to prove rather more challenging. Stung by collapsing exports, a surging Japanese yen, and ineffective government, Japan's Cabinet Office today announced that Japan's gross domestic product slumped at an astonishing annualized rate of 12.7% between October and December. The fall is more than most Tokyo economists expected and marked the biggest quarterly slump since 1974. "There's no doubt that the economy is in its worst state in the postwar period," Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. For the quarter ended Dec. 31, Japan's economy declined 3.3% compared to the previous three months. That's worse than U.S. and Europe, which posted declines of 1% and 1.5% respectively. The outlook for the current quarter is only marginally better. Barclays Capital projects Japan's GDP will slip at annualized rate of 9.6% between January and March, although the pace of decline will at least slow after that as government stimulus packages, especially in the U.S. and China, boost demand for Japanese goods.
As the government says, external events are having a massive impact on Japan's economy, which until November 2007 was experiencing its longest period of expansion since World War II. In particular, as the slump in demand for Japanese autos and electronics products has spread from the U.S. and Europe to China and other previously fast-growing markets, exports have collapsed at a unprecedented pace, falling 13.6% compared to the previous quarter in the three months through December. Making matters worse is that the Japanese yen has soared against rival currencies. In 2008, the yen gained 20% against the dollar and even more against the euro and other currencies, further gnawing into exporter competitiveness.
That's causing Japanese companies to take drastic action. Last week, Pioneer and Nissan said they would cut 10,000 and 20,000 employees, respectively. Toyota (TM), like many Japanese companies, is shedding thousands of contract workers and said on Feb. 6 it would show its first loss since 1950. "We're facing a once-in-a-hundred-years crisis," Akio Toyoda, who will take over as the company's president in June, said last month. Toyota is also trimming U.S. labor costs. But why should Japan's economy be plunging at twice or more the pace of the U.S. or the euro zone? After all, a year ago there was still confidence that Japan's economy was relatively well-positioned to weather the economic crisis that started with the onset of the subprime crisis in the U.S. Even today, one oft-cited reason for the yen's surge is that Japanese financial institutions were relatively unexposed to subprime and other toxic assets. Despite today's dreadful figures, Japan is seen as a safe haven for parking cash.
Critics and the Japanese public (who have given Prime Minister Aso approval ratings of just 10%, according to one recent TV poll) say Japanese government must take its share of the blame. Even by Japan's low standards, the political response to the current crisis is disappointing. The biggest criticism is that Japan's politicians and bureaucrats, shielded from the worsening realities of everyday life, appear unable or unwilling to do anything address the country's spiraling problems. "It's as if after Keynesianism and monetarism, we are now trying a new paradigm: fatalism—whatever the world does to Japan, there's almost no attempt to do anything about it," says Richard Jerram, chief economist at Macquarie Securities in Tokyo.
Aso's difficulty in passing a fiscal stimulus bill is one example of Japan's political deadlock. While the U.S., China, and European countries have agreed to large expenditures to bolster slumping economies, parliamentary gridlock in Tokyo means that the $111 billion economic stimulus plan proposed by the ruling Liberal Democratic Party late last year is still on hold. Even if it passes, critics point out it is small compared to President Obama's $789 billion plan and China's $560 billion plan. That's despite a surge in unemployment, which Barclays Capital estimates will reach 5.7%—more than the 5.4% peak following the collapse of Japan's bubble economy in the early 1990s. "In terms of job creation, the government isn't doing what it is supposed to do," says Kyohei Morita, Barclays' chief economist.
Monetary policy options are more limited. Having been slow to raise interest rates from near-zero when the economy boomed, the Bank of Japan has had little leg room to make big interest rate cuts. As the economy has slowed, Japan's base rates have fallen from a recent peak of 0.75% to 0.1%. That's far less than the steep cuts undertaken in the U.S. and Europe and another factor in the yen's surge. Nevertheless, economists say additional measures being undertaken by the Bank of Japan, such as plans to buy corporate stock holdings from banks and special credit measures for business, aren't enough to halt Japan's slide.
Japan's authorities have also failed to curtail the yen's rise. In late October, the Group of Seven issued a statement, which some interpreted as implicit backing for Japan to step in and attempt to stem the yen's rise. Japan's Ministry of Finance, however, chose not to intervene and the yen strengthened further, reaching 13-year-highs against the dollar in December. Notably, a G-7 statement following this weekend's meeting in Rome, attended by Finance Minister Nakagawa, made no mention of the yen, suggesting Japan's window of opportunity had closed. With the global economy worsening, attempts by Japan to go it alone and sell yen are unlikely to be welcomed. In any case, with seemingly little leverage over rival powers, the success of an intervention seems unlikely.
One idea, mooted recently, is that Japan and the U.S. could do a deal with Japan using surpluses to help the U.S. fund bailout and stimulus costs in return for a combined effort to reduce the yen. Economists, though, aren't convinced. A problem is that the U.S. has little to gain from such a deal. One reason is that U.S. is unlikely to need Japan's help to buy treasuries, particularly as the Federal Reserve chief Ben Bernanke has said it may make purchases and, despite some tough talking by new Treasury Secretary Tim Geithner, China is another option. "As far as I can see a deal on the yen is against the interests of the U.S.," says Macquarie's Jerram. "Effectively it would be a donation of U.S. growth to Japan."
Critics also contend that policies by Japan's ruling LDP taken several years earlier are now coming back to haunt them. Under former Prime Minister Junichiro Koizumi, Japan scaled back public investment and paid scant attention to dwindling domestic demand, relying on exports to grow the economy. Now, with exports in decline, Japan cannot rely on the the domestic economy act as a buffer. What's more, with unemployment rising, long-suffering consumers are understandably reining in spending. (On Feb. 11, Koizumi delivered another blow to Aso, giving him a public dressing down for expressing criticism of Koizumi's plan to privatize Japan's post office.
For all that, Richard Koo, chief economist at Nomura Research Institute in Tokyo says positives can emerge from the current crisis. First, he says Japan and other Asian economies are learning that they cannot rely on uninterrupted export-based growth and begin to take necessary, but difficult, steps accordingly. "For 60 years, Asia has had a single model of keeping currencies low, making good products, selling them to Americans and getting rich," he says. "We have to reinvent ourselves." In the nearer term, Koo notes that while Japan has been slow to enact stimulus plans, the impact of its measures may at least take effect faster than in other countries. One reason: Many infrastructure projects delayed as the Koizumi government cut back on spending can be undertaken relatively easily. "There are a lot of projects at regional government level that were put on hold even though all the environmental studies and usual procedures had been completed," he says. "They are ready to go." For Japan Inc., anything that slows the economic free fall cannot come quickly enough.
Japan Economy Shrinks 12.7%, Steepest Drop Since 1974
Japan’s economy shrank at an annual 12.7 percent pace last quarter, the most since the 1974 oil shock, as recessions in the U.S. and Europe triggered a record drop in exports. Gross domestic product fell for a third straight quarter in the three months ended Dec. 31, the Cabinet Office said today in Tokyo. The median estimate of 26 economists surveyed by Bloomberg News was for an 11.6 percent contraction. Exports plunged an unprecedented 13.9 percent from the third quarter as demand for Corolla cars and Bravia televisions collapsed amid a slump that the Group of Seven nations said will persist for most of 2009. Toyota Motor Corp., Sony Corp. and Hitachi Ltd. -- all of which forecast losses -- are firing thousands of workers, heightening the risk a decline in household spending will prolong the recession.
"The economy is in terrible shape and the scary part is that we’re likely to see a similar drop this quarter," said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. "All we can do is wait for overseas demand to pick up." Stocks in Europe and Asia declined after the report. The MSCI World Index dropped 0.5 percent to 832.99 at 1:43 p.m. in London, extending its 2009 retreat to 9.5 percent. Europe’s Dow Jones Stoxx 600 Index fell for the fourth time in five days. In Japan, the Nikkei 225 Stock Average fell 0.4 percent in Tokyo, extending the loss so far this year to 13 percent. The yen rose to 91.59 per dollar from 91.76 on speculation Japan will refrain from taking measures to weaken the currency. The yen’s 18 percent gain in the past year has compounded exporters’ woes by eroding the value of their overseas sales.
The world’s second-largest economy shrank 3.3 percent from the third quarter, today’s report showed. That compared with the U.S.’s 1 percent contraction and the euro-zone’s 1.5 percent decline, which was the sharpest in at least 13 years. "There’s no doubt that the economy is in its worst state in the postwar period," Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo. "The Japanese economy, which is heavily dependent on exports of autos, electronics and capital goods, has been severely hit by the global slowdown."
G-7 finance chiefs meeting in Rome on the weekend vowed to tackle a "severe" economic downturn. Indonesia grew 5.2 percent in the fourth quarter from a year earlier, the slowest in more than two years, the government said in Jakarta today. Japan has been in a recession since November 2007, according to a government panel that dates the economic cycle. The Sept. 15 bankruptcy of Lehman Brothers Holdings Inc. worsened a credit crisis that erased more than $14 trillion from global equity markets and paralyzed world trade.
Yosano said the government has no plans to compile additional stimulus measures before next fiscal year’s budget is passed. Parliamentary gridlock has blocked the passage of Prime Minister Taro Aso’s 10 trillion yen ($111 billion) package, eroding his popularity ahead of elections due by September. Aso’s approval rating fell to 9.7 percent, the poorest showing since the Yoshiro Mori administration in 2001, according to a Nippon Television news survey. The Bank of Japan, which in December cut its key interest rate to 0.1 percent, is trying to get credit flowing by purchasing shares and corporate debt from lenders. It has little means of addressing what analysts say is the economy’s central problem: a lack of overseas demand. Net exports -- the difference between exports and imports - - accounted for 3 percentage points of the 3.3 percent quarterly drop in GDP.
Japan has become more dependent on sales abroad for growth over the past decade. Overseas shipments make up 16 percent of the economy today compared with about 10 percent in 1999. "Japan produces high-end durable goods, which are very, very sensitive to credit conditions," said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. "People normally borrow to buy these things. In that sense, too, Japan was vulnerable." Domestic demand, which includes spending by households and companies, made up 0.3 percentage point of the contraction. Capital investment fell 5.3 percent. Manufacturers cut production by a record 11.9 percent in the quarter, indicating they have little need to buy equipment as factories lay idle. Consumer spending, which accounts for more than half of the economy, dropped 0.4 percent, as exporters fired workers.
Panasonic Corp., Pioneer Corp., Nissan Motor Co. and NEC Corp. announced a combined 65,000 job cuts in the past month. That may have pushed the recession into a "new phase" in which consumers become more defensive and spend less, according to Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo. Sentiment among households is close to the lowest level in at least 26 years. The jobless rate surged to 4.4 percent in December from 3.9 percent, the biggest jump in four decades. "The best we can expect for this year is to see the collapse stop," said Kyohei Morita, chief economist at Barclays Capital in Tokyo. For Japan to recover, "we’ll need the U.S. and Chinese economies to take off first." Without adjusting for inflation, Japan shrank 1.7 percent from the previous quarter, less than the 2.1 percent analysts estimated. The GDP deflator, a broad measure of price changes, rose 0.9 percent, the first increase in a decade.
Japan’s Economy May Shrink 20% This QuarterJ
apan’s economy may shrink at an annual 20 percent pace this quarter, the steepest drop in the postwar era, according to the Japan Research Institute. The research group published the estimate after a government report today showed gross domestic product fell an annualized 12.7 percent in the three months ended Dec. 31, the fastest pace since the 1974 oil crisis. The institute was one of the first to predict the scale of last quarter’s deterioration, saying on Dec. 26 that the economy would contract 14.1 percent.
Exporters including Toyota Motor Corp. are shutting factories and firing workers as recessions in the U.S. and Europe cause exports to dry up. Economic and Fiscal Policy Minister Kaoru Yosano said today that the country faces its biggest economic crisis in postwar history. The institute’s forecast for the three months ending March was based on a Trade Ministry survey that showed manufacturers planned to cut output by 9.1 percent in January and 4.7 percent this month. Production plunged a record 9.8 percent in December from a month earlier, revised ministry figures showed today.
Toyota will slash domestic output 54 percent in the current quarter, accelerating from 23 percent in the previous three months, according to figures derived from the automaker’s latest full-year forecast. In addition to the worsening global economic outlook, the yen’s gains will continue to hurt exporters, the institute said. Japan’s currency has climbed 21 percent against the dollar in the past six months, eroding the value of overseas sales. Japan Research Institute is owned by Sumitomo Mitsui Financial Group Inc., the country’s third-largest publicly traded bank, according to its Web site
IMF chief Dominique Strauss-Kahn warns second wave of countries will require bail-out
A "second wave" of countries will fall victim to the economic crisis and face being bailed out by the International Monetary Fund, its chief warned at the G7 summit in Rome. Dominique Strauss-Kahn's warning comes amid growing concern that at some point in the next year a major economy could have to seek support from the Fund. Mr Strauss-Kahn, who was yesterday attending the Group of Seven leading finance ministers' meeting in Rome, said: "I expect a second wave of countries to come knocking." The IMF managing director also said the rich world was now in the midst of a "deep recession".
It came as the G7 pledged to avoid slipping into protectionism and repeating the same political and economic mistakes as were made in the 1930s. Ministers also pledged to do more to support their banking systems, sparking speculation that a number of countries, including Germany and France, will unveil new bail-outs and possibly set up "bad banks" as they scramble to fight the crisis. But with some countries' economies effectively dwarfed by the size of their banking sector and its financial liabilities, there are fears they could fall victim to balance of payments and currency crises, much as Iceland did before receiving emergency assistance from the IMF last year.
Some have speculated that the UK may have to seek IMF support if capital markets become frightened of the size of its foreign financial liabilities, which increasingly appear to have become supported by the state. But there are a swathe of Eastern European countries which appear particularly vulnerable and may need IMF support. With the Fund's warchest expected to run dry later this year, the Japanese confirmed in Rome that they would supply an extra $200bn of capital to the Washington-based institution. Mr Strauss-Kahn, who warned recently that his resources could run dry within six months, said: "This is the largest loan ever made in the history of humanity. "The biggest concrete result of this summit is the loan by the Japanese... now I will continue with the objective of doubling the Fund's resources." He added that it was now essential for countries to support their banking sectors.
Anxiety high as US bank rescue plan in limbo
Financial market angst remains high over the lack of a clear strategy to rescue the US banking system under the plan unveiled by the administration of President Barack Obama, analysts say. Fixing the banking system will be a critical element of any economic recovery by restoring health to the sector and getting credit flowing again. But Treasury Secretary Timothy Geithner omitted key details in unveiling the plan last week, notably how a proposed public-private partnership would absorb the toxic assets on bank balance sheets, and how a so-called "stress test" for the major financial institutions would work.
"It remains unclear how banks with capital shortfalls will be treated and how much of the plan will be voluntary," said Alec Phillips, analyst at Goldman Sachs. But Phillips added that "once these details are cleared up, the plan is likely to represent the most important step to date in strengthening the banking system." Geithner's plan calls for a public-private fund aimed at soaking up toxic assets clogging the financial system, starting with at least 500 billion dollars. It also included new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks. Some analysts say the new plan aims to identify the weakest banks and either save them through additional capital injections or allow them to be taken over by regulators.
Gerard Cassidy, analyst at RBC Capital Markets, said the plan needs to be tough in weeding out banks that are not viable. "US regulators need to move in and close down insolvent banks, regardless of size," he said. "The banks are seized, the deposits are sold along with any good assets, and bad assets are transferred" to an authority, to be liquidated. Nobel laureate economist Paul Krugman said the stress test may help the administration intervene with big banks in the same manner it has been doing with smaller banks in trouble. "The problem is not toxic assets,"" he said, referring to risky real estate-related assets being held by banks. "The problem is that financial institutions have lost a lot of money and many of the big ones, if they are not actually insolvent, are very close."
Krugman said the "stress test" may reveal that "five or maybe seven of these institutions are actually not viable," and thus could be put into government receivership, noting that this is the same process used for smaller banks that fail. Michael Jones, chief investment officer at Riverfront Investment Group, said the administration must choose between the "punitive" solution of taking over the troubled banks and bad assets or "generous" guarantees for the banks to allow time for beaten-down mortgage assets to recover. Any effort to find a middle ground, Jones said, could delay a recovery by propping up "zombie banks" that "undermine the profitability of other firms." Some analysts say the administration may be forced to nationalize key banks despite Geithner's insistence that the sector remain in private hands.
"The US banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it," says Nouriel Roubini, a New York University economist who predicted a major crisis two years ago. "Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."
Michael Gregory, economist at BMO Capital Markets, says the administration needs additional time to develop a credible plan. "Given the enormity and complexity of the US banking crisis, it was probably unrealistic to expect too much detail at this early stage of the new administration," Gregory said. "Geithner was giving a roadmap, but the market was impatiently asking 'Are we there yet?' "And, there might be another reason for the disappointment -- the simple realization that time and options may be running out for the banking system to be saved -- last resort: nationalization -- and economic depression averted."
Could little-known banking law fix this mess?
While the Treasury busily fills in the gaps in its latest plan to save the banking industry, a former Federal Reserve official says that regulators should instead apply a law enacted in the wake of the savings and loan meltdown. The law, the Federal Deposit Insurance Corporation Improvement Act, was signed into law in 1991. In an interview with Financial Week, Bob Eisenbeis, a former research director of the Federal Reserve Bank of Atlanta, said the FDICIA contains more than enough tools for regulators to help stem the current financial crisis. If regulators had applied FDICIA’s provisions once the solvency of major banks was first called into question, Mr. Eisenbeis said, many would already have been taken over by Uncle Sam.
That would mean that their good assets would have been separated from their bad and sold off to healthy institutions or other investors. This, he claims, would have gone a long way toward solving the credit crisis. The most obvious candidate for such a takeover is Citigroup, which is considered by many analysts to be insolvent because its liabilities are worth vastly more than its assets. Christopher Whalen, principal in the financial consulting firm Institutional Risk Analytics, estimated on Friday that Citi needs roughly $200 billion in additional capital, and that this would become apparent after the bank reports further losses in the first quarter of this year.
"When the Q1 numbers for the financials come out, the children’s hour in DC will end," Mr. Whalen wrote in a note posted on the blog, The Big Picture. "The markets will react and Washington will finally be forced to have an adult conversation with the global community as to how much we haircut the bondholders." Mr. Eisenbeis insists that such a haircut should already have been provided, as FDICIA stipulates that the federal banking agencies "facilitate early resolution of troubled insured depository institutions whenever feasible if early resolution would have the least possible long-term cost to the deposit insurance fund." Instead, said Mr. Eisenbeis, the Treasury’s new Financial Stability Plan further delays such resolution.
The Treasury’s Financial Stability Plan does call for all banks with at least $100 billion in assets to undergo a stress test to determine whether they have enough capital. The New York Times on Thursday reported that regulators have begun applying those tests, and are assuming a worse-case scenario to evaluate whether the banks’ common equity was equal to less that 3% of their assets. If the equity does not meet that minimum threshold, the banks would have to raise more capital from investors. Barring that, they could take convertible preferred shares from the Treasury under the Capital Assistance Program of the FSP.
That program has onerous limits on recipients’ dividends, stock buybacks, acquisitions and executive compensation, however, which has led some observers to liken the program to a plan for gradual nationalization of troubled banks. But Mr. Eisenbeis, for one, is skeptical that the Treasury’s stress test will lead to that, since the plan also provides for up to $1 trillion in financing from the Federal Reserve to help take bad assets off of banks’ balance sheets through a so-called "public/private partnership." Essentially, the partnership is an investment fund that would warehouse the bad assets until they can be sold off to investors. In theory, the offloading might remove enough assets from a banks’ balance sheet that it would qualify as sound under the Treasury’s stress test.
Without government help, Mr. Eisenbeis doubts many of the banks in question could meet any of FDICIA’s capital adequacy tests. "I don’t think they could pass even a modest shock," he said. Indeed, he said the Treasury’s approach suggests regulators have forgotten that the earlier law is in place, since the capital injections the department has provided since the Troubled Asset Relief Program was authorized by Congress last October reflect what Mr. Eisenbeis calls "regulatory forbearance." Rather than apply FDICIA’s numerous capital adequacy tests, he said, regulators seem intent "to throw it out and start over."
While that may buy the banks time in hopes that they won’t need further capital injections, Mr. Eisenbeis is skeptical. He said both the stress test and the plan to relieve banks of their toxic assets would only mask their losses—that is, if the banks aren’t required to value the assets on a mark-to-market basis. Bank executives insist that they shouldn’t have to do that, because the banks intend to hold the assets until maturity rather than trade them. And some analysts suggest that skeptics such as Messrs Eisenbeis and Whalen are overstating the industry’s problems.
After the Times report, analyst Richard Bove of Ladenburg Thalmann issued a research note saying that all of the 18 banks subject to the Treasury’s stress test would have common equity of at least 3% of assets (based on values reported as of last Dec. 31). But Mr. Eisenbeis insists such a view flies in the face of FDICIA’s capital adequacy requirements. "The flaw is that it’s all based on book value," he said. Indeed, he contends that the failure of regulators to force banks to write down their losses based on actual market conditions—and then deal with the consequences—has merely delayed the solution to the financial crisis.
Mr. Eisenbeis isn’t alone. In a research note put out late last week, analysts at research firm, Friedman, Billings, Ramsey & Co. said the Treasury’s plan "does not adequately address the toxic assets on bank balance sheets," since private investors in the proposed investment fund "will want to buy assets at distressed prices and the banks will only sell assets at above-market prices." The analysts, Paul Miller, Bob Ramsey and Annett Franke, echoed Mr. Eisenbeis’ preference for the government to take over troubled banks and restructure them. "We would prefer to see the government take bold steps now, either putting the much-needed capital into financials or providing a closed-bank solution, in which the government briefly takes over the weakest financials (regardless of size), strips out the bad assets, and sells the good back to public markets."
Nationalization? FDICIA stipulates that when the government bails out troubled institutions "preexisting owners and debt-holders of any troubled institution or its holding company should make substantial concessions," and that "directors and senior management should not include individuals substantially responsible for the troubled institution’s problems." Until such an approach is taken, Mr. Eisenbeis fears regulatory policy will just go in circles, and that insolvent banks will keep getting taxpayer support but won’t return to health.
He noted that Mr. Geithner’s proposed new investment fund isn’t much different from the Master Liquidity Enhancement Conduit that his predecessor, Henry Paulson, proposed back in the fall of 2007. At the time, Citi’s problems with assets taken off its balance sheet through so-called Structured Investment Vehicles were first coming to light. Mr. Paulson’s Super SIV was abandoned within a few weeks of its debut because it failed to attract enough investors. "We’re back to Paulson’s Super SIV reincarnated—with no specifics."
Wall Street eyes influence over rescue plan
Wall Street is to lobby the Obama administration to relax its plans for stringent reviews of banks’ financial health and capital injections that could leave the government as a large shareholder in many of those institutions. People close to the situation say financial groups were frustrated by the administration’s decision not to hold detailed talks with the industry before last week’s release of its $2,000bn (£1,390bn) financial rescue plan. Administration officials said the announcement was always intended to be a framework rather than a final plan and stressed that input would be sought from industry "stakeholders" as details were fleshed out. "We’re going to get opinions from across the industry ... to help shape the final plan," said one official.
Banks’ worries were reinforced last week when Tim Geithner, Treasury secretary, cancelled a meeting with Wall Street chiefs. An administration official denied that Wall Street was snubbed, pointing out that regional banks and other interested groups were also invited to the meeting, which was postponed because of "scheduling problems". The industry’s frustration contrasts with the cautious welcome given to Mr Geithner’s plans by private equity and hedge fund groups. The government package contained two items at the top of those investors’ wish-list: financial assistance to purchase toxic assets from banks; and a guarantee to cover some of the losses on those assets. Bankers say the government’s decision to leave out some of the plan’s most important details gives them an opportunity to try to modify some of its more controversial provisions.
Several banks want the government to clarify that its plans for a "stress test" of companies’ ability to survive a sharp deterioration in the economy and financial markets would not result in a "pass or fail" grade. They argue that any sense that banks have inadequate resources to stave off a worsening climate would destroy investors’ and savers’ confidence. Another sticking point is the authorities’ plan to buy convertible preferred shares in banks deemed to be in need of capital following the "stress test". Banks argue that the sale of preferred shares, which, if converted, would give the government a sizeable stake, would amount to a "creeping nationalisation" of the sector.
Bad Bank, Bad Idea; Good Bank, Good Idea
Secretary Geithner has proposed the formation of a "bad bank" to buy $1 trillion or more of troubled loans and securities off the books of banks and get credit moving. This idea deceives the public, will not work and provides all the wrong incentives to bankers. This is a rehash of the idea former Secretary Paulson first proposed and then quickly abandoned.
A good idea is to create a "good bank". Let’s first look at why I am opposed to Secretary Geithner’s idea for a "bad bank". Geithner hopes the purchase of toxic assets by the "bad bank", funded in part with private capital, will get the banks to lend again. He is not even making the claim this makes economic sense. This is a fatal flaw causing the idea to fail from all points of view.
1. Geithner’s description of the "bad bank" is not "honest". He says "bad bank" will use partially private equity. No private equity is going to invest in the "bad bank" if it is run for non economic purposes. The key is the price of the toxic assets. As a generalization, the current market value of the toxic assets is probably somewhere between 5% and 20% of nominal value. If the "bad bank" pays more than this, private investors will not invest. If the banks sell these toxic assets for this value, there will probably be an enormous unfavorable P & L impact as most banks have not really marked all of their toxic assets down to real market value even though they should have through mark to mark regulations.
So probably the assets will be purchased for much more than their current value, so no private sector participation unless there is a behind the scenes guarantee of the government to bail out the private sector investor in the "bad bank". Furthermore, the "bad bank" is made to sound more like a commercial transaction that is only partially dependent upon the taxpayer. The truth is the taxpayers absorb all the costs of the "bad bank" from 3 or 4 directions that are not obvious to the quick reader.
2. New conservative credit standards and the lack of new securitized funding are the real causes of the inability of the banks to lend, not the current bad assets. Every financial bubble is based on lots of low cost money. Securitization is what provided lots of low cost money. Like all bubbles, this one finally blew up starting in 2006 with the home mortgage market financing. As in every bubble, banks have learned again that easy, low cost financing is not a substitute for good credit. While banks lent 10 to 15 times their capital in the 1970’s, banks were lending in 2007 30 to 100 times their capital when you take into account derivatives and off balance sheet financing such SIVs.
Every bank is now deleveraging to get its risk profile back in order. Even if they wanted to fund themselves through the traditional source of securitized transactions, banks are drying up with the new recognition of the danger they can be. Home equity issuance is off 98%. Securitized auto loans were down 40% in 2008. Student loan issues were down 43% in 2008. Credit card financings were down 21%. About the only one still provided this type of securitized financing is Ginnie Mae and Fannie Mae. Both have lost all their capital and are bombs which will explode (again) very shortly. In short, buying up all the bad debts of the banks will not jump start lending again, because the current bad assets are not the real cause of not lending more now.
3. The Geithner plan creates all the wrong incentives for the banking sector, which ultimately will increase the cost and defer the day we resolve the problem. A government plan which says we want to bail out everyone in trouble rewards the imprudent and leaves the bill to be paid by the prudent. This is not the American way. This is not smart. Even the porn industry has said it should get a bail out too. The press reports GM is going to say "I go broke if you do not bail me out". It has not been able to provide a plan where it can credibly say it can work its way out of the problem. We need incentives that promote success, not failure as the current Geithner plan does. Ironically, the new government plan to rein in compensation of top executives in banks may have the effect to cause some banks not to take government financial aid. This shows the structure of incentives determines the type of outcome. A wrong structure of the Geithner incentives means there will be a bad outcome from their use.
A completely different approach (albeit unusual) is to use some of the government stimulus money to provide seed money for a series of new commercial "good banks". This could provide the right incentives, bring in a lot capital and funding and thereby really provide loans to businesses that need it for their everyday operation.
1. The Idea. Provide $1 billion dollars each for 20 new regional commercial banks (pick your number here on initial capital and number of banks). There are vast sums of private money on the side looking for good investments. The equity could probably be increased tenfold very quickly from private sources. Then it should be easy to find indebtedness of 10 times that from debt markets. In short, the government money should be multiplied 100 times in terms of funds available for lending to needy Americans and American business. I think $20 billion of government seed capital would realistically be turned into $2 trillion of lending capacity.
The new good banks would be prohibited by law from engaging in what would be called investment banking today. They would be old fashioned commercial banks that lend their customer deposits and a modest amount from external sources. No derivatives (e.g. CDO's SDS), no stock brokerage (think Merrill in B of A, no lending for stock acquisition or other non self liquidating type loan. The focus is to provide working capital and equipment and mortgage financing for individuals and businesses. These banks would be staffed with professional "Commercial" bankers who would work for a decent living. Investment bankers who think they have the right to up to 50% of the gross fee income as a bonus would be prohibited from employment.
2. What will happen? Since the new good banks have money to lend, they will be the first choice for everyone. They can be like Warren Buffett and cherry pick good deals that deserve credit, but they will not ask for warrants for stock like Buffett gets.
3. The effect on existing banks? The new good banks will make things harder for the existing banks. The existing banks will argue that rather than helping, the creation of new good banks increases the chances that the existing banks will go broke. Yet, that is the way the system works, i.e. competition. When it is clear that there is no bail out from the government, you can be sure that these bankers will devote their energies to surviving. Most will survive, many will not survive. But now a clear signal has been given that stimulates them to do what they can to save themselves, as opposed to finding ways for the government to bail them out.
4. Resolution Trust type work out bank. There needs to be a bank or organization that assumes control of the assets and liabilities of the bankrupt banks. This does not have a political purpose to save existing banks in risk of bankruptcy. It is strictly a workout mechanism for the banks that will be going broke. It widely speculated that 1,000 banks will go broke in the next two years and some of the biggest banks are likely to be among these. If Citibank and B of A fail, there may be no choice but to nationalize them. However, they should be rapidly converted into the type of bank described above as a "good bank". It will be better to do this and take the losses than continually pump money into them as we are doing with AIG and the "bad bank" idea of Secretary Geithner and without real hope of getting the money back.
In summary, the feel good plan to pump money into the banks to stimulate lending will not work. It is illusory to think the world will get out of this problem without pain for most people. Yet, well intended schemes like the Geithner plan delay and make more expensive the solution. The nation would do better to bite the bullet and let fail those who cannot succeed on their own. The government can provide more effective help to needy borrowers by creating new, healthy banks than pouring endless money into unhealthy banks that continue to be run by the same people who bankrupted the banks through their excesses and imprudence. As a people, Americans are resourceful. When bankers know they will not be bailed out by the government, most of them will become very effective in finding a solution for their bank – if there is a solution. And if there is no solution to a specific bank’s problem, the people of the United States should not put the next generation’s money into it.
Roubini tells Geithner to nationalise US banks
Tim Geithner must nationalise some of America's biggest banks and take the total toll of the US bail-out to around $2 trillion, according to one of the world's most prominent economists. Nouriel Roubini – the man feted with having foreseen the financial crisis before almost any of his peers – has warned that the US Treasury Secretary must go significantly further than his detail-light bail-out plan delivered last week, and argues that the Obama administration should move swiftly to take public ownership of those major US banks which are failing.
Professor Roubini, who worked with Mr Geithner in the Clinton administration, told The Daily Telegraph: "Many US banks are insolvent, even the major ones." While nationalisation is "a politically- charged decision" which needs to handled carefully, he said it needs to take place "sooner rather than later" for the sake of the wider economy. Professor Roubini calculated that, on top of the existing $700bn (£491bn) of American taxpayers' money allocated to solving the banking crisis, Mr Geithner may need to ask the US Congress for between $1,000bn and $1,250bn in extra funds. "Sooner rather than later, they'll need more money," he added. Prof Roubini, professor of economics and international business at NYU Stern, New York University's business school, is highly critical of Mr Geithner's bail-out plan, which he unveiled to much market chagrin last Tuesday.
The New York-based academic believes that although his former boss — the two worked together when Mr Geithner was under-secretary of international affairs at the Treasury in the dying days of the Clinton era — is moving in the right direction, he is either unwilling or unable to be direct enough when it comes to taking the tough decisions. Prof Roubini also has some stern advice for the British government, itself facing yet another banking crisis this week as it considers whether to increase its ownership of Lloyds Banking Group. "In the UK, the government has taken over those banks in distress through a number of measures. But the question now is whether they want to go from de facto ownership to de jure? "It's necessary and I think that's the way we're going in the UK," he continues, saying he would be "supportive" of such a decision.
Politicians "might not want it," he adds "but it is strong in action," before going on to explain that it is better for markets that governments nationalise banks quickly, resolve problems whilst in public ownership, before returning them to the market. Prof Roubini argues that the UK is very similar to the US in terms of its economic position due to its analogous problems – both suffered housing and consumer credit bubbles – but is even more concerned about Germany, which produced dismal gross domestic product figures at the end of last week. "Germany did not have the same excesses as the UK, but even the German banks had significant exposure to other types of excesses in lending, and they're weak," he says.
Nouriel Roubini trusts Timothy Geithner to get it right on US banks
Nouriel Roubini can see that the 'N' word might be a little difficult for Western governments to swallow right now. But for him, it's the right – indeed, the only – route to follow. The "N" word, of course, is nationalisation: nationalisation of failing banks which are continuing to wreak havoc on the world's economies. "Many US banks are insolvent, even the major ones," argues Roubini, professor of economics and international business at NYU Stern, New York University's business school, without naming names. "Call it nationalisation, or if you don't like the dirty N-word, use 'receivership' or whatever is palatable."
Call it what you want, says Roubini, but without nationalisation of some of the major banks in both the US and the UK, the banking crisis will get worse and the current recession deepen. "If the problem of banks is one of liquidity, you can do anything you like, which seems to me what the US Treasury wants to do," he says, with reference to US Treasury Secretary Tim Geithner's slightly-fumbled banking bail-out plan launched last week to much disregard from Wall Street. "But if the banks are insolvent, none of these will work," says Roubini of Geithner's three-part plan which includes stress-testing major banks to see if they need more public capital.
"To see which banks are insolvent, a stress test is a step to making these tough decisions," he says, tough decisions which are so politically charged that they need to be "done right" due to the number of stakeholders involved who face being wiped out if nationalisation were to occur. "Triage the banks that are solvent but illiquid, and those that are beyond redemption need to be nationalised. But it's urgent to do it sooner rather than later. Let's not wait another 12 months."
Roubini, one of the world's foremost experts on the current banking crisis, argues that until now, the US government, like many of its European counterparts, has been busy "trying to provide manna to everyone" without actually working out who needs what. So why, given that Geithner appears to know some of what is needed, does Roubini think he didn't go the whole hog last Tuesday? "The benevolent view of what they've done is realise the problem, but maybe not go as far as they might like to. A month into the [Obama] administration, saying "we're going to take over most of the US banks" because they're insolvent - that might lead to being accused of being Bolshevik," he surmises.
The second reason Geithner may have held back, Roubini adds, is that perhaps he and the rest of Obama's economic team – including senior adviser Larry Summers and chairman of the White House Council of Economic Advisers Christina Romer – were banking on the economy recovering somewhat later in the year, which might lead to less stress being placed on bank assets. "A sense of cautiousness, perhaps?" he says. Based on Roubini's forecast for the US economy, such caution is perhaps a little unwise.
He estimates that a "broad recession" – will continue well into next year, with some form of recovery into 2011. But even that is not certain, he argues, saying there is a "risk" that the current recession does not create a U-shaped curve as the majority do, but that the US ends up like Japan of the 1990's with "nasty L-shape stagnation." "In a banking crisis, some banks are so under-capitalised that they might as well just take them over," he argues, pointing out that often it is better from a capitalist-friendly perspective to take them over, clean them up in public ownership, and sell them off again, than it is to leave them flailing for help on the open market.
Roubini, who turns 50 in March, makes his comments with a degree of inside knowledge. Although he is no way connected to the Obama administration – and is an independent economist whose only commercial tie is as chairman of economic analysis firm RGE Monitor – he did work with Geithner at the tail-end of the Clinton administration. When Geithner was promoted to under-secretary for international affairs, Roubini became his adviser, working together for just under a year. "I trust him," he says, despite acknowledging that he may not quite have got his ducks in a row yet. "He's someone I know well and I have great respect for him."
Why then did Geithner get it so wrong, with his ill-timed and ill-structured banking bail-out which was in many ways smothered by the ongoing debate on the now-passed $787bn fiscal stimulus package? "You cannot blame him," says Roubini, pointing out that he's facing the "worst economic crisis since the Great Depression" and also that he is just one of a number of high-level economic advisers working under Obama. Although he does concede that his old boss could have waited for a few weeks to "get it right."
Getting it right, in Roubini's eyes of course, means nationalisation, which will invariably involve Geithner returning to the US Congress for additional funds on top of the existing $700bn bail-out fund. "Sooner rather than later, they'll need more money," estimating that $1 trillion to $1.25 trillion of extra money needs to be injected in to the US financial system to revive it, having previously warned that credit losses from US institutions will total $3.6 trillion by the time the crisis is over. "If you do it fast, you will get private money. But if you take time, and mix good apples with bad apples, then private investors won't want to get involved," he warns.
Aware that going back to the US Congress for an extra $1 trillion of taxpayer's money will be a hard sell for Geithner, Roubini stresses that sum would not necessarily be the final cost. "That's not necessarily the total loss for the taxpayer, as the net costs are less than the headline number due to interest payments and the hope that most of the capital will be repaid." "They'll get to that point, it's just a matter of when," shrugs Roubini, who, nationalisation or not, will no doubt be watching the actions of his former boss with keen interest.
The Case for Nationalizing the Entire Economy
The advocates for nationalizing U.S. banks have been out in force recently. Senator Lindsay Graham, who almost certainly does not have a PhD in economics or finance told ABC News that banks were in such deep trouble that government ownership of the institutions may be the only way to save the financial system. Economist Nouriel Roubini, who probably has several advanced degrees, wrote in The Washington Post that the Swedes set a precedent for bank nationalization nearly 20 years ago. The first counter to his argument is that it is dark over 20 hours a day in Sweden during the winter which causes a level of depression among the population that may undermine their judgment and views of how dire any economic situation is. If this theory is true, banks in Panama will never face being taken over by the government.
Disagreeing with Roubini has not been rewarding. He predicted the current economic collapse with precision long before most economists. His forecasts for the next year or so seem reasonable and are widely viewed as a good road map for what is likely to be ahead for GDP and employment. However, he may not be right with his estimate that total banks write-offs due to toxic financial instruments sold by U.S. will be about $3.3 trillion worldwide. That is well above projections by most economists and the IMF. Nationalization of U.S. banks would cause hundreds of billions of dollars of losses to the common and preferred stockholders in the firms. This, in turn, could cause the failure of some investment funds that hold those shares.
Nationalization would obviously make taxpayers responsible for the losses these banks may experience in the future. But, the taxpayer is already likely to face that fate. The federal government is in the process of guaranteeing bad paper at the banks and may end up buying many of these toxic assets to keep losses at the firms at a level where they do not have to raise even more capital. Nationalization seems tempting because it seems simple. The U.S. owns the banks. They continue to do business as usual, but their balance sheets become, in essence, the balance sheet of the Treasury. In theory, as time passes and the banks become profitable, those profits go back to the government and pass though to citizens in the form of lower taxes. The banks may also end up being sold back into the private enterprise system bringing the government an even better return.
Bank ownership becomes more complex when a firm owned by the government does something materially different from what its competitors in the private sector do. If bank owned by the government offers business loans at 3% interest, what does a foreign-based public bank like DeutscheBank do to match that? A government-owned bank can be driven, at least short-term, by policy and not profits. That puts financial firms in the private sector in peril whenever they try to compete. The relationship between a national U.S. bank and private banks both inside and outside the U.S. causes a series of inequities within the system. Banks lend money to one another and charge interest in the process. The risk of borrowing from a firm owned by the government should be extremely low. Borrowing from a U.S. regional bank is, on paper, more risky. All inter-bank borrowing would almost certainly move toward taking money from the firms backed by the government balance sheet. Interbank lending among private banks could disappear.
A national bank is almost certain to follow practices which are unsound, which would not make it terribly different from the large firms that helped get the economy into trouble. Bank managements bought toxic assets two or three years ago. A government-controlled bank might offer mortgages at extremely low rates, rates so low that they clearly do not take into account the level of home loan defaults. From a policy standpoint, it may make "sense" to do that to help buttress the housing market. But, to some extent that moves the government's control of the credit system from nationalizing banking to nationalizing the home lending system. The government could decide to apply the same principles to consumer credit loans and business lending. It may just be a better idea to nationalize the entire economy and be done with it.
Obama Opts Against ‘Car Czar’; Geithner, Summers to Head Team
President Barack Obama opted against naming a "car czar," instead asking Treasury Secretary Timothy Geithner and White House economic adviser Lawrence Summers to head a task force on revamping the U.S. auto industry, according to people familiar with the decision. Ron Bloom, a United Steelworkers union adviser and former Lazard Ltd. vice president, will join administration members on the team, according to the two people, who declined to be named because the announcement hasn’t been made publicly.
The task force puts an end to reports Obama would recruit a well-known figure from outside to serve as the so-called car czar. The president was under pressure to say who would handle the issue before tomorrow, when General Motors Corp. and Chrysler LLC must give progress reports on plans to restructure as a condition of $17.4 billion in U.S. Treasury loans. "It’s going to be something that’s going to require sacrifice not just from the auto workers, but also from creditors, from shareholders and the executives who run the company," senior White House adviser David Axelrod said yesterday on NBC’s "Meet the Press." After Congress failed to approve a bailout for the automakers, former President George W. Bush’s administration authorized loans Dec. 19. That effectively made the Treasury secretary the car czar, with responsibility for making sure the companies meet deadlines and authority to revoke the loans.
Geithner will remain Obama’s official "designee" to oversee the restructuring. The Treasury secretary will have authority to recall the aid if the automakers fail to show they have a plan by March 31 to become profitable. Representatives from Cabinet departments and White House offices will serve on the Presidential Task Force on Autos along with Bloom, who was described by administration officials as an expert in restructuring who also has experience in manufacturing and in working with unions. Absent from the administration’s team is Steven Rattner, co- founder of private-equity firm Quadrangle Group LLC in New York. He had been under consideration for the post of car czar, people familiar with the matter said last month.
Members of Congress, automakers and industry analysts have spent weeks discussing who might be chosen from outside Washington to serve as the car czar and what expertise that person should bring to the task. Five Senate Democrats, including Debbie Stabenow of Michigan, wrote a letter on Feb. 5 urging Obama to name an expert in manufacturing as part of a panel to help oversee the auto loans. "This advisory group provides a tremendous opportunity to bring together our country’s greatest manufacturing leaders to help our domestic automakers create the vehicles and technology of the future," the senators said in the letter.
Bloom, who will be a senior adviser at the Treasury, has experience with an issue at the heart of the restructuring -- health-care costs. Bloom helped negotiate the Goodyear Tire & Rubber Co. health-care fund, union spokesman Wayne Ranick has said. In 2005, Bloom met with UAW officials who were then evaluating GM’s request for health-care concessions. Terms of the Dec. 19 loan agreements require GM and Chrysler to persuade the United Auto Workers to accept half of scheduled payments into a union-run retiree health-care fund next year in equity instead of cash.
Bloom counseled airline pilots in the $4.9 billion employee buyout of UAL Corp., parent of United Airlines. That 1994 deal included wage and work-rule concessions in exchange for 55 percent of the company. He also helped steelworkers negotiate an agreement with Goodyear in 2003. The deal preserved 85 percent of union jobs at 12 U.S. plants in exchange for agreements on productivity improvements, health-care cuts and other issues to save Goodyear at least $1.15 billion. The Presidential Task Force on Autos will include officials from the Treasury, Labor, Transportation, Commerce and Energy departments, as well as from the National Economic Council, the White House Office of Energy and Environment, the Council of Economic Advisers and the Environmental Protection Agency.
The industry’s preference for an overseer with a mastery of its workings and culture was voiced by Bill Ford, executive chairman of Ford Motor Co., on Jan. 11. "It would be really helpful to have somebody in there who would take the time to have a deep understanding of our industry," Ford said then at a dinner with reporters covering the Detroit auto show.
Deadline looms for Detroit
On Tuesday, General Motors and Chrysler LLC have to submit plans to the government that show how they plan to turnaround their troubled companies. It won't be an easy task. The two struggling automakers, which received approval for $17.4 billion in federal loans in December ($13.4 billion for GM and $4 billion for Chrysler), are required by the terms of their agreement to show that they can be viable for the long term. Otherwise, the government could recall the loans. Both companies submitted turnaround plans to Congress in December when they were first seeking federal assistance -- but conditions have gotten considerably worse in just two months.
Auto sales in January were terrible, with the industry reporting a seasonally adjusted annual sales pace, or SAAR, of only 9.5 million cars and light trucks, the worst in 26 years. And in a speech to the Economic Club of Chicago this week, Chrysler Vice Chairman Jim Press said that industrywide U.S. light vehicle sales could stay around 10 million annually for the next four years, a level at which no major automaker is able to make money. "It would be a mistake to assume that this "10-million market" is an aberration. Instead, we need to accept and come to grips with it," Press said. "Yogi Berra was right when he said, 'The future just ain't what it used to be.'" Unfortunately, another Berra quote also fits the current situation: "It gets late early out there."
Time and money could be running out for GM and Chrysler. The worsening economic environment makes drafting the final plans that much more difficult. Both companies need to win further concessions from creditors and the United Auto Workers union in order to really prove they can be viable. GM is in talks with holders of $35 billion of unsecured debt to try to meet the government's goal of shedding two-thirds of that debt. GM is trying to get bondholders to accepting additional equity in the company in exchange for the debt. Chrysler has little unsecured debt, which is the only type of debt the government is requiring to be cut. Still, Chrysler is also believed to be in talks with creditors about restructuring its debt.
On the cost-cutting front, both companies are offering buyouts to all their hourly workers. In addition, GM and Chrysler each won some concessions from the UAW, such as an end to the so-called "jobs bank" that guaranteed laid-off hourly workers nearly full pay during the life of the labor contract. GM has also announced it is cutting about 10,000 salaried staff worldwide, and reducing the pay of the salaried workers who remain. Both companies are negotiating with the union to try to win additional cost savings. Details of any agreements reached with the union and with creditors will be key parts of the plans that they submit Tuesday. Still, a prolonged slump in auto sales may make it impossible for the two companies to return to profitability any time soon -- even with concessions from the union and creditors.
When the Bush administration approved stopgap loans for GM and Chrysler in late December, it was assumed this money would be enough to see the two automakers through their cash crunch and allow Congress and the incoming Obama administration to craft a longer term solution. But the automakers could need additional cash sooner rather than later as long as sales remain depressed. GM said in its December plan to Congress that if industrywide sales stayed near the 10 million level through the first quarter, it would need about $15 billion in federal loans by the end of February. GM said is has taken additional steps to cut costs since December, and spokesman Greg Martin said the current loan package should be able to get the company through the end of March.
But he wouldn't comment on whether the plan being submitted Tuesday would include a request for additional money. GM originally asked Congress for up to $18 billion to get it through all of 2009. Chrysler is on record saying it still would like to receive the $7 billion it requested in December, which means it would need another $3 billion. The other Big Three automaker, Ford Motor, has said it believes it won't need access to federal loans. But it has asked for an $9 billion line of credit from the government in case conditions do not improve. It has been widely assumed that it would be easier for the Big Three to get more help from this session of Congress, which has a bigger Democratic majority than last year. The nearly evenly-split Senate failed to pass the automakers loan request last year.
But more funding for Detroit may still be a tough sell. Congress stripped out much of the tax breaks proposed to spur auto sales from the stimulus bill that passed the House and Senate Friday. Also on Friday, House Speaker Nancy Pelosi, D-Calif., and House Financial Services Committee Chairman Barney Frank, D-Mass., sent a letter to the auto executives saying they must see proof Tuesday that the automakers have a feasible turnaround plan. "We trust that your restructuring plan will demonstrate to the world that you are willing to make the tough decisions that modernize your operations, restructure your debt, enhance your competitive status in the global marketplace, and protect American jobs for the future," said the letter.
Still, questions remain as to how either company can truly be viable in this environment. Chrysler, for example, is submitting a plan with two different scenarios: one which assumes a partnership with Italian automaker Fiat goes forward and one in which the deal has to be dropped. As part of that partnership, announced last month, Fiat will provide Chrysler with "technology," including the engineering behind some of its small, fuel-efficient cars, in return for a 35% stake in the U.S. company. But the deal is non-binding, and Fiat, facing its own financial struggles, is not providing Chrysler with any much-needed cash as part of the arrangement.
Chrysler also issued a statement Thursday saying that it is re-evaluating a proposed product tie-up with Nissan. The companies said they need to "improve the financial objectives for both companies before the projects move further forward." Nissan, along with other Japanese automakers such as Toyota Motor, has also been hit hard during the global economic slump. It recently announced it would lose money this fiscal year and cut production. And with the normally profitable Asian automakers struggling, this shows just how important it is for the cash-strapped GM and Chrysler to hang on to the loans they've already received.
States and Cities in Scramble for Stimulus Cash
Well before President Obama’s stimulus package completed its tortuous path through Congress last week, state and local officials facing multimillion-dollar budget deficits, crumbling infrastructure and the prospect of massive reductions in services were already jockeying for the upper hand in deciding how the money should be spent. In Missouri, the Department of Transportation says that within 180 days of Mr. Obama’s signing the legislation it is prepared to begin 34 transportation projects, costing $510 million and with the promise of 14,000 jobs. Echoing the thoughts of many political leaders across the country, Mayor Frank C. Ortis of Pembroke Pines, Fla., says simply, "We have a wish list." And high on that list is money to repair aging sewer pipes in his city of 150,000.
When Mr. Obama signs the stimulus bill in Denver on Tuesday, it will release the biggest influx of federal dollars since the days of President Lyndon B. Johnson’s Great Society program. But it also is expected to set off a multitude of political battles across the map: between governors and legislatures, state capitols and city halls, and even between neighboring municipalities. Because the effectiveness of any stimulus plan depends on the money being quickly spent, whether state and local governments can work through the rules and resolve any disputes will have a large impact on the success Mr. Obama’s plan has in lifting the economy.
Along with the money, there are complex rules to the sprawling, $787 billion federal plan that local politicians from governors to small-town mayors say they are only now beginning to grasp. And while states will have direct say on the use of much of the money — especially on infrastructure projects like roads and bridges — many spending decisions will still rest with officials hundreds of miles away in Washington. "Still, within the parameters given, there are a lot of policy choices and decisions states and localities have to make," said Scott D. Pattison, executive director of the National Association of State Budget Officers.
Mr. Pattison said he has faced a barrage of questions in recent days from state budget officials on matters like how much discretion states will have, how the money will be transferred and how it must be tracked. "This is all rather daunting," he said. "It’s a lot of money, and this is happening fast." While it offers a patchwork of spending, the plan also provides battlegrounds for untold intrastate political fights. "There is a tension that’s happening between mayors and governors across the country now about who is going to receive what dollar amounts and for what purposes," said Mayor Michael D. Bissonnette of Chicopee, Mass., population 54,000.
Mr. Bissonnette said that even before the legislation made its way for an official vote in Congress last week, the political pressure was mounting in his region of Western Massachusetts. A council of mayors and other leaders there was outraged, he said, to learn that one state proposal would send millions to the Massachusetts Turnpike rather than what he considers a backlog of local road and bridge projects. Experts said the authorities in the states will probably have great discretion when it comes to billions of dollars for a broad range of state needs, including roads, bridges and other infrastructure projects. And states also will have considerable say in how billions are spent on Medicaid and for education.
The American Association of State Highway and Transportation Officials says the states have already identified 5,000 so-called "ready to go" transportation projects that could begin within a couple of months. "We have far more in the way of projects that are ready to go than we have money to fund them," Kevin A. Elsenheimer, a Republican state representative and the house minority leader in Michigan, said. "And it’s naïve to expect that politics will not be part of the process." Officials expect that politics will not be limited to the lawmakers. Spending decisions on education could pit urban school districts against suburban or rural ones; how billions are dispensed for energy could come down to how advanced, or not, one state might be when it comes to wind energy development; and in many cases, it will come down to whether extra money will be spent to save the job of a firefighter or a teacher.
Some state legislators said they feared that governors might try to dictate where the money goes, although in most states lawmakers would ultimately need to approve any spending. And clashes are already brewing over broad philosophical differences, particularly in state capitals with leadership divided along party lines. For example, some governors said they opposed the notion that stimulus money be used to plug budget deficits while others said that might be needed.
Gov. Mark Sanford of South Carolina, chairman of the Republican Governors Association, is among the most ardent opponents of the stimulus package, describing it as pork-barrel spending and bad policy and vowing — to the anger and chagrin of the Democratic members of the state’s Congressional delegation — not to take any of the money from Washington. "For every job the bill creates, American taxpayers will spend $223,000," Mr. Sanford wrote in an opinion article in The State newspaper on Sunday. "If we add the cost of this bill to the previous efforts of the federal government to deal with the financial crisis, the American taxpayer is on the hook for $9.7 trillion." He went on to write, "If the stimulus bill were a country, it would be the 15th-largest country in the world."
Governors and states hungering for the money will find themselves competing against other states. For example, states without enough eligible "shovel-ready" construction projects might have to pass up some money, which could then be granted to other states, said Michael Bird, a policy analyst at the National Conference of State Legislatures. There is also a flush of new money for Medicaid spending — $87 billion — but that, too, comes with strings attached. In Minnesota, for instance, Gov. Tim Pawlenty, a Republican, is expected to revise his budget proposal, which had suggested reducing the number of residents eligible for state health care programs as a way to close a deficit. But such cuts now could jeopardize any extra financing for Medicaid under the stimulus plan, because the bill penalizes states that change their Medicaid eligibility to save money.
Everywhere, state leaders are busily checking, searching through more than 1,000 pages in the federal bill, to see how their unique circumstances might be helped or harmed. In some cases, the package has put some proposed state budgets for next year on hold until lawmakers can see how things play out, and several states plan to rewrite parts of their budgets to secure more federal dollars. In Arkansas and North Carolina, state authorities said they were concerned, though uncertain, whether they would receive less education money than other states. Neither state has a shortfall in its education budget, the officials said, and thus might not be eligible for as much education financing under the federal plan.
"We don’t want to be penalized for not having a deficit," said Chrissy Pearson, a spokeswoman for Gov. Bev Perdue of North Carolina. In Rhode Island, Steven M. Costantino, a state representative, said he worried that the state might lose out when it came to alternative energy because it had fewer resources already dedicated to areas like wind power. "I hope that states that are just starting to get involved in renewable energy would still receive money to expand their programs," Mr. Costantino said.
Crisis leaves rare flaws in Goldman's reputation
For years, you were golden if you hired from Goldman Sachs. Alumni of the Wall Street firm have advised presidents from both parties, taken high-profile Cabinet posts, run big businesses and been involved in multimillion-dollar philanthropies. But recent missteps have challenged the notion that Goldman only breeds winners. Henry Paulson, who was criticized for mishandling the first incarnation of the bank bailout, is a Goldman alum. So is John Thain, who rushed billions of dollars in bonuses to Merrill Lynch employees before the investment bank had to be sold. Also a Goldman vet: Robert Rubin, the Clinton treasury secretary who resigned from his senior advisory role at Citigroup last month after being criticized for missing the warning signs of the financial crisis.
Those names have lent a rare tarnish to a firm sometimes called the New York Yankees of Wall Street. "When you become a partner at Goldman, you are supposed to be the master of the universe," said Ed Yardeni, who runs his own investment consulting firm and is a well-known Wall Street economist — and himself was turned down years ago for a Goldman job. "That meant you could run the greatest investment bank on earth, but it turns out that skill set doesn't always translate to the White House, Treasury or other Wall Street firms." Goldman draws its talent from the top students from the best universities and business schools. Those given a chance to embark on Goldman's recruiting gantlet encounter job interviews in which they are asked not just complex questions about finance but simply why they deserve to be at Goldman.
And just like the Yankees, Goldman employees are well-paid. Its 30,000 employees last year made more than $355,000 on average, including salaries, bonuses and benefits. The average at rival Morgan Stanley was about $250,000. Those given the coveted title of managing director — who are considered partners — can pull in seven figures. But flashing wealth runs against the Goldman culture, and employees, dubbed "billionaire Boy Scouts," are expected to give to charity or perform public service. "Does the firm create exceptional talent, or does exceptional talent create a truly great firm? I think the vast majority of ex-Goldman employees want to believe it's a little bit of both," said Janet Hanson, a 14-year Goldman veteran who went on to found a money management firm and the global women's networking group 85 Broads.
Teamwork, integrity, accountability and collegiality are other prominent parts of the Goldman ethos, said Charles Ellis, author of "The Partnership: The Making of Goldman Sachs." That breeds loyalty not seen at other Wall Street firms. For instance, the firm uses an evaluation system in which each employee is graded by everyone he or she works with. So low-level workers get to weigh in on their bosses. Goldman survived the financial meltdown last fall, but not without help. It took $10 billion from the government's Troubled Asset Relief Program, or TARP. It also received a $5 billion investment from Warren Buffett's Berkshire Hathaway that came with a strong endorsement from Buffett.
That helped to stabilize Goldman but couldn't stop the bleeding. From September through November, it lost $2.3 billion — the first quarterly loss since Goldman went public in 1999. CEO Lloyd Blankfein is forgoing a bonus for 2008. Still, Goldman made it out alive. That's more than can be said for three of its former fellow investment banks — Lehman Brothers, Bear Stearns and Merrill Lynch — none of which survived the meltdown as an independent firm. And now that fingers are pointing at top bank executives, Goldman veterans aren't immune. When Lehman imploded in September, it was Thain, a former Goldman president and chief operating officer, who engineered a deal to sell Merrill Lynch to Bank of America. At the time, he looked like one of the smartest guys around. But Thain became a poster child for Wall Street greed when news surfaced that he had rushed out billions of dollars in bonuses to Merrill employees just before the Bank of America deal closed.
Then came embarrassing reports that he had spent more than $1 million to redecorate his office at Merrill. Thain later repaid the money. A spokesman declined comment. "It's not likely that he sat there and came up with ways to squeeze more for himself or the employees of Merrill Lynch. But he should have known better," said Sydney Finkelstein, a management professor at the Tuck School of Business at Dartmouth and author of the new book "Think Again: Why Good Leaders Make Bad Decisions." Rubin spent most of his early career at Goldman. He joined the firm in 1966, as an associate in trading and arbitrage, became partner in 1971 and was co-senior partner — CEO, in Goldman-speak — from 1990 to 1992. In 1993, Rubin left to work in the Clinton White House, and became treasury secretary in 1995. He followed a path into the public sector paved by many past Goldman leaders.
Among them was Sydney Weinberg, the firm's senior partner from 1930 to 1969, who advised five U.S. presidents. John Whitehead worked in the State Department in the Reagan administration and as chairman of the Federal Reserve Board of New York after he left Goldman, where he was senior partner from 1976 to 1984. And former Goldman head Jon Corzine is governor of New Jersey. "Goldman Sachs has a long history of people who have chosen to go into public service and we are proud of our alumni who have taken this path," said Goldman spokesman Ed Canaday. When Rubin joined Citigroup in 1999 as a senior adviser, it was considered a coup for the bank. While he never had an operational role at Citi, the company still took on massive risks that resulted in losses of $18.7 billion in 2008. In early January, Rubin resigned and said he wouldn't stand for re-election to the board. "My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today," Rubin said in a letter to Citi's CEO announcing his departure.
Paulson, too, was drawn to a role in government after leaving Goldman's helm in 2006, after more than 30 years at the firm. He became treasury secretary in the Bush administration. His arrival in the public sector came during a booming economy, but what soon emerged was a devastating recession matched with a financial crisis of historic proportion. Paulson never seemed to get his hands around it, even with the help of some former Goldman executives he brought to the Treasury Department. Among them was Neel Kashkari, who was appointed to oversee TARP and formerly worked as an executive in Goldman's San Francisco office. None of this seriously threatens Goldman's status on Wall Street, of course. It's still the place to be — perhaps now more than ever, given the carnage in investment banking. "The people they recruit have never lost anything," Ellis said. "They have always won. That is the kind of person Goldman wants to hire."
Companies cut ties with risky customers
The world’s biggest companies are terminating contracts with customers they fear will collapse, a report will show on Monday in a sign of the turmoil spreading through global supply chains. Of the 337 international corporates surveyed by accountancy firm Ernst & Young, most of which turn over more than $10bn a year, the majority said important customers were in financial distress and were taking longer to pay than usual. A quarter said one or more key customers had gone into bankruptcy while almost on in ten said suppliers had gone out of business. As a result, a third of the companies surveyed have stopped trading with customers they perceived as high risk.
John Murphy, global managing partner of markets at Ernst & Young, said managers would have to scrutinise the health of even ultra-safe trading partners very carefully. "A company’s risk profile can change almost overnight," he said. Respondents to the survey were split equally between two different strategies when dealing with suppliers. Half had narrowed their supplier base to obtain better terms while the other half had broadened theirs to reduce the impact of a key supplier going out of business. Faced with the prospect of a prolonged recession, nearly two thirds of the companies had made employees redundant and nearly half had sold or shut down parts of their business.
Starved of credit and with demand shrinking, 23 per cent were considering options to renegotiate debt covenants. Three-quarters said the availability of cash was an issue. The thirst for cash had grown so great that 40 per cent of global companies and 53 per cent of European ones were considering selling parts of their businesses, raising the prospect of a wave of assets coming on to the market with few potential buyers. But some companies saw the recession as an opportunity to expand, with a third planning to make acquisitions. And, while most developed markets were perceived as either stagnant or in decline, companies saw opportunities in emerging markets. Mr Murphy said: "Companies that are paralysed by fear or companies that are slow to act will not do well. "Speed, agility, courage, decisive action and a willingness to think of the future, not just today’s challenges – those will be the hallmarks of the companies that will do best."
Bill Clinton: I should have better regulated derivatives
Former President Bill Clinton was in Austin, Texas, over the weekend to host the Clinton Global Initiative University, which encourages college students and administrators to come up with creative ways to address global issues. CNN's John Roberts sat down with Clinton to ask him about how the Obama administration is performing, how his wife, Hillary Clinton, is doing as secretary of state, and what responsibility he may have for the current financial crisis.
John Roberts: Mr. President, in terms of the overall economic downturn, Time magazine had an article out this week in which it named 25 of the people most responsible for the economic downturn, and you were there. They, they had a picture of you in what looked like a police lineup. They had a little button where you could vote who's the most responsible? They pointed to your signing of the Gramm-Leach-Bliley Act, the Commodity Futures Modernization Act. I wonder what you think about that.
Former President Bill Clinton: I think that the only thing that our administration did or didn't do that we should have done is to try to set in motion some more formal regulation of the derivatives market. They're wrong in saying that the elimination of the Glass-Steagall division between banks and investment banks contributed to this. Investment banks were already...banks were already doing investment business and investment companies were already in the banking business.
The bill I signed actually at least puts some standards there. And if you look at the evidence of the banks that have gotten in trouble, the ones that were most directly involved in there ... in a diversified portfolio tended to do better. Some of the conservatives said that I was responsible because I enforced the Community Reinvestment Act, and they said that's what made all these subprime mortgages be issued. That's also false. The community banks, the people that loan their money in the community instead of buying these esoteric securities, they're doing quite well.
Roberts: So what's your take on what Sen. [John] McCain said, that [President] Obama is off to a terrible start?
Clinton: I just disagree with him, but we have a different economic philosophy. For example, there's 100 economic studies which show that you get a better return in terms of economic growth on extending unemployment benefits or investing money in energy conservation jobs to improve buildings than you do giving people in my income group a tax cut. But it doesn't stop them. Those guys are on automatic. You punch a button and they give the answer they give you. There are a lot of tax cuts in that bill -- for middle-class families, for lower-income families. There's a $7,500 tax credit that will kick in when these plug-in electric vehicles go on the market, which could help us to become the world's leader in that and secure us jobs for a decade or more.
Roberts: Do you really think the president can change Washington? Can he bring the type of change to Washington that he campaigned on? He's already up against a wall against the Republicans in Congress -- not quite as big a wall as you found yourself up against in 1993, but he does seem to be having some difficulty. Do you think he really can bring change to Washington?
Clinton: Here's what I think will happen. I think that as we go along, if the American people stick with him and if he begins to have good results, then I think more and more Republicans will cooperate with him because they will see that he's right or because he carried their states or for any number of reasons.
Roberts: How long do you think he has?
Clinton: First, his next big challenge is to come forward with the details of how we're going to rewrite as many home mortgages as we can. How we're going to take some of these bad assets off the banks' books so they can get cleaned up and they can loan money and what conditions will we give more money to banks for. In other words, they're going to have to loan money from now on. That's what [Treasury] Secretary [Timothy] Geithner is working on. Those three things make a lot of sense. That's our long-term answer.
Roberts: But how much time do you think he has? A hundred days, six months, a year, two years?
Clinton: The public, I believe, will support him at least for a year in trying to work these things out. And he's been very straight forward in saying it might take as much as two years for the economy to really get in gear again. My instinct is it will happen a little quicker than that.
Roberts: What do you think of the job that President Obama did on steering the stimulus plan through Congress, and does he in fact have the experience necessary to be a good president, reach across party lines and craft a bipartisan bill?
Clinton: Well first of all, he has reached across, and it takes two to tango. I find it amazing that the Republicans who doubled the debt of the country in eight years and produced no new jobs doing it, gave us an economic record that was totally bereft of any productive result are now criticizing him for spending money. You know, I'm a fiscal conservative, I balanced the budget, I ran surpluses. If I were in his position today, I would be doing what he's doing. Why? Because the problem with the economy is the housing decline led to the general decline in values.
Assets are going down. This stimulus is our bridge over troubled waters till the bank reforms kick in. He did the right thing, he did everything he could to get Republican support. He took some of their tax-cutting ideas. But if you look at this bill, it is designed do three things. And it does all three. It puts money in the hands of people who need money to survive -- unemployment benefits, food stamp benefits, tax cuts. Second thing it does is to give money to state and local governments so they don't have to lay a million people off or raise taxes. Either one would be bad for the economy. The third thing is it does is create new jobs. Given the Congress he had and the environment and the speed with which they had to move, I think he did a fine job with this.
Roberts: Your wife is on a big trip over to the Far East, talking with the leaders of China. She's going to be taking on the North Korea issue. There's been some talk in the last week that with the appointment of all of these high profile envoys, from Richard Holbrooke to South Asia, George Mitchell to the Middle East, Dennis Ross in the same area, Vice President Joe Biden out there talking about foreign policy, that maybe she might get a little bit elbowed out here when she it comes to the big projects. Are you concerned about that? Do you talk to her about that?
Clinton: No. I'm not concerned about it. And these envoys are her idea, both the idea of the envoys and the people who were selected. She thinks that Joe Biden has got one of the best foreign policy minds and certainly some of the most important foreign policy experience we've had. Let me remind you when I was president, Al Gore had special relationships with both Russia and South Africa. And it didn't undermine the authority of either Warren Christopher or Madeleine Albright as secretary of state. The reason they're doing this, and the reason the president agreed to support it -- and he came to the State Department to support the announcements of Holbrooke and Mitchell -- is that they all want to get off to a fast start and you've got to do a lot of things at once.
It's inconceivable that she could devote the time and detailed attention right now to having a diplomatic strategy for Afghanistan and Pakistan that exactly parallels the military strategy that [the head of U.S. General Command] Gen. [David] Petraeus has or figures out how to start the Middle East peace negotiations again and what the timetable is and do all this other stuff. So as long as they're working on a team and nobody is playing sharp elbows and this is a team -- these guys have got a team concept. The president has made it clear he wants everybody to be on the team, they all report in to her as well as to him. They're all working together. I'm very impressed by that. I think that she made a judgment that we needed in the country's interest to do everything at once. And I think she's right.
Roberts: Of course, bilateral relations between the United States and China, a big focus of your administration, did you talk to her at all about this trip?
Clinton: Sure I did. Just like she consulted with a lot of people, we talked about it. I told her what my take on the Chinese is and especially in light of the fact that I work there now in AIDS, I have a big AIDS project there. And I know how they think economically and I think she'll do quite well there. I think she made a really good decision obviously, she had to go to Japan and south Korea, but going to Indonesia, the word's biggest Muslim country, sends a loud signal because Indonesia has a part of it, Bali, which is predominantly Hindu, which has been the subject of terrorist attacks. It's a good deal, I mean the whole thing, it's the right place to start.
Roberts: A couple of real quick questions, what president do you think you're most like?
Clinton: Well, personally, I'm not sure. One guy wrote a book saying I was most like Thomas Jefferson, but the times in which I governed were most like Theodore Roosevelt. And the results I received were similar. He had enormous success, the country was better off when he quit than when he started, but several of the things he recommended were not actually done until his cousin, Franklin Roosevelt, became president more than 20 years later. I think a lot of things that I recommended in terms of health care reform will come to fruition now that we have more modern Democratic Congress and a new Democratic Congress and the Obama administration there. I'll be surprised if we don't get health care reform and some of the things I recommended. I'm excited about it.
ICE plans European CDS clearer
IntercontinentalExchange, the operator of futures exchanges and over-the-counter trading platforms, plans to set up a European clearer for credit default swaps in an effort to establish the first transatlantic clearing mechanism for such products. The move is aimed at offering the industry a simple solution for clearing of CDSs on both sides of the Atlantic at a time of increasing confusion over European efforts to establish a Europe-based clearing mechanism to complement one already planned for the US.
US authorities have already persuaded exchanges and the industry to come up with a central counterparty clearer (CCP) for the $28,000bn CDS market, with ICE one of four groups vying to become the preferred industry solution. But matters have been complicated by the insistence by the European Commission and European Central Bank that there also be a CCP in Europe. The development is opposed by many industry participants, including the Futures and Options Association, which says having two clearers would be costly and cumbersome – especially if each were owned and operated by different exchange-led groups. Participants are also alarmed about calls from some quarters for the creation of a "eurozone" clearer, when others appear to be calling for a wider "European" solution.
The FOA has written to the UK Treasury alerting it to a danger of "triggering a move to a create two European financial markets – an inner eurozone market and an outer, marginalised non-eurozone market", according to one FOA source. ICE is already well-advanced with plans to launch CDS clearing in the US, and recently received approval for a New York-state regulated banking entity, ICE Trust, to carry it out. So far two clearing providers have said they are working on a European CCP: Eurex Clearing, a unit of Deutsche Börse and and LCH.Clearnet. ICE’s plans for Europe would use its existing London-based clearer, ICE Clear Europe. The exchange group is in talks with the Financial Services Authority, the UK regulator, about expanding ICE Clear’s remit to CDSs.
The exchange operator believes that offering an integrated transatlantic CDS clearing solution would neutralise many of the concerns that dealer banks have, since such an arrangement would offer cross-netting and other market efficiencies. Sunil Hirani, chief executive of Creditex, a unit of ICE which offers trading of CDS contracts, told the Financial Times: "We have been working extensively with the credit derivatives market and much of the work that we’ve done to create our US solution is already being leveraged with our plans in Europe. "Our plan is to utilise ICE Clear Europe, which is already FSA approved to clear ICE’s energy OTC and futures contracts, to also clear CDS. We are working with the FSA as well as other UK and European regulators on this effort," Mr Hirani said.
Meanwhile, user-banks who met in Frankfurt on Friday to discuss their requirements for a CCP with the European Central Bank say that the talks went smoothly and that consensus quickly emerged. One item they are seeking is connectivity between the CCP and a central bank, which could be valuable in the event of a liquidity squeeze. In effect, this would probably mean either the UK’s Bank of England (in the event of a City-based CCP) or the ECB within the eurozone. A much larger meeting, involving regulators, banks, central bankers and fund managers, is scheduled for February 24 at which the European banks, ISDA and fund management representatives are all expected to present their separate wish-lists.
Among those present will be Pervenche Beres, chair of the European parliament’s economic and monetary affairs committee. Ms Beres, a socialist MEP, has tabled some last-minute amendments to an existing legislative initiative which could force banks that do not clear CDS in Europe to set aside extra capital. Her proposals could come to parliamentary vote in April. But banks are hopeful that, if talks on an industry-led solution are going well, some of her more punitive amendments might be dropped. That, however, does not appear to enthuse European regulators; having finally galvanised the industry into action over CDS clearing, they may be far more reluctant to see the legislative stick thrown away.
Wells Fargo sees pain for small banks
Wells Fargo & Co. executives told an analyst they expect community banks to suffer more than the bigger banks from problems with commercial real estate loans. Chairman Dick Kovacevich and Chief Executive Officer John Stumpf told RBC analyst Joe Morford they expect Wells Fargo will benefit from its customer relationships and underwriting standards as the financial health of borrowers for commercial mortgages deteriorates, according to a research report Morford shared with clients. Commercial mortgages are being closely watched as another source of pain for the nation’s bankers. At the height of the credit bubble, one industry observer said commercial real estate loans had become the crack cocaine of community banking, reflecting the pace of growth some were achieving with such loans.
On the consumer front, Morford said Wells Fargo expects to cover any rise in consumer credit losses from net interest income. Many expect banks to incur increased losses in credit cards, auto and other consumer loans as the recession deepens and unemployment rises. Morford addressed a frequent topic when it comes to Wells Fargo: prospects for a cut in the company's dividend, now yielding about 8 percent. "Wells seems unlikely to cut the dividend near-term, preserving it as a key component for long-term shareholder returns," he said. But the analyst cut his 12-month price target on Wells Fargo to $21 from $25 a share, reflecting the general sell-off in financial stocks. The bank’s shares traded at about $16 Friday.
Morford remains optimistic on the bank’s long-term outlook, especially with the growth potential in its recently acquired Wachovia Corp. territory. "At this point, the 10 percent cost-savings projection looks conservative, and many potential revenue synergies seem realistic including opportunities to reprice deposits or improve cross-sell ratios and add sales capacity at Wachovia," Morford said. "Furthermore, not only has customer retention been better, but also Wells is gaining market share." Wells Fargo bought Charlotte, N.C.-based Wachovia for $12.7 billion. The combined bank is the nation’s fourth-largest by assets. Together, Wells Fargo and Wachovia have more than 6,600 outlets in 39 states and Washington, D.C.
'Babygloomers' emerge as most striking phenomenon of credit crisis
More than three million people are having to help their parents financially as the savings crisis engulfs a generation of Britons, research has revealed. A Daily Telegraph survey - the first of its kind since the recession began - highlights the heavy toll being taken on Britain's so-called "Babygloomers". Almost one in ten adults are having to contribute to their parents' upkeep, the research found. The Norwich Union research suggests more than 1.3 million adults aged between 17 and 65 are paying their parents more than £250 each month, with some paying up to £1,000.
Many pensioners have found themselves struggling as their income from savings has virtually disappeared following the drop in interest rates. As a result, they have been forced to turn to their children for help. The Babygloomers - defined as those who are having to support both their own children and their parents - are being stretched to the limit as they also struggle to cover the cost of their own family, which often includes grown up children who cannot to afford to leave home. They have had also had to cope with an increase in their own cost of living as the recession takes hold.
Financial experts and politicians noted that a 'sandwich generation' of adults squeezed between their parents and children has become one of the most striking phenomenons of the credit crisis. They warned that it is expected to become more pronounced as the economic downturn worsens. Dominic Fraser-Smith, a product manager at Norwich Union, said: "An increasing number of people are facing the dual emotional and financial challenges of caring for two sets of dependents. This has become one of the most striking side-effects of the economic downturn." The Daily Telegraph is calling for pensioners to be given a tax cut on the income earned from their savings and investments through its Justice for Pensioners campaign.
Norwich Union surveyed a total of 1,800 adults for the research and found that 7.9 per cent give money to their parents.With 40,101,000 adults between 17 and 65 living in the UK, that would mean the number supporting their parents is 3,167,979. Two thirds of those surveyed said they would like to support their parents financially but are unable to do so due to their own financial situation. Only a quarter have a pension and a robust financial plan for their own retirement. It also indicated that 60 per cent worry that their parents will not be able to afford to stay in their existing home.
George Osborne, the Shadow Chancellor, said: "This important research reveals the damage that 12 years of a Labour Government has done to Britain's savings culture. "The real lesson from the current economic mess is that we need to move from an economy hooked on debt to an economy built on savings and good pensions." The research also revealed that two thirds of those surveyed would like to support their parents financially but are unable to do so due to their own financial situation. It also indicated that 60 per cent worry that their parents will not be able to afford to stay in their existing home.
Savers are facing the lowest average rates of returns on record, according to the Bank of England, with rates as low as 0.29 per cent being offered on some types of account. It means that many current accounts offer better rates than some savings accounts, according to research by price comparison website Moneyfacts. Savers can take advantage of rates of up to 6 per cent by switching some of their money into a current account. Tim Newhouse, of price comparison site Moneysupermarket.com, highlighted the impact of falling savings rates, saying: "While the banks are being bailed out by the Government, it is the decisions of the Bank of England that are forcing millions of adults to bail out their ageing parents.
"When you rely on your savings to survive, plummeting interest rates do nothing but harm. This loss of income for the elderly has to be made up somewhere and now it is falling on the shoulders of their offspring." He went on to say: "The test of a society is how it treats the elderly – and society is being sorely tested right now." However, one of the positive aspects to emerge out of the difficulties facing Babygloomers is the sense of strengthened community spirit, charities said. Jonathan Werran, of the poverty charity Elizabeth Finn Care, said: "One benefit arising form the recession is the greater inter-generational cohesiveness, which can only bode well for society."
Many middle-aged parents are seeing their grown-up children return home to live with them because they are unable to find a sufficient deposit to buy a home of their own. The credit crisis has seen mortgage finance dry up, with lenders limiting their most preferential home loans to those with a deposit of at least 40 per cent. Melanie Bien, of mortgage brokers Savills Private Finance, said: "The Babygloomers have a huge responsibility on their shoulders. They are being squeezed in two directions - on one side by their children who need help with their mortgage or getting on the housing ladder, and on the other by their parents who are suffering from restricted income because of the low return on savings rates."
Pensions experts warned that while it was understandable that people wanted to support their parents, there is a risk that this could leave their own pension plans in ruin. Tom McPhail, a pensions expert at wealth managers Hargreaves Lansdown, said: "Societies operate on the basis of wealth flowing between generations, with families helping each other out at different stages of life. This system has broken down and the parents of today are trapped in the middle. The retired generation can't afford to support itself and so needs help; the children of today can't get jobs and so they need help; in the meantime, the parents of today also know that they must save for their own retirement because when they do get to old age the government of tomorrow won't have any money left to look after them." A Treasury spokesman said: "Since 1997 disposable household income has increased by a third and the government has taken significant steps to support people to save as much of that extra income as possible."
UK business investment to plunge, CBI warns
Britain's business leaders will cut investment across the board for the next 18 months, according to the CBI, as companies react to the worst year for the economy since the era of rationing. Business investment will fall 9.2pc this year and another 1.7pc in 2010, according to a new set of forecasts from Britain's biggest business lobby. The CBI expects the recession to drag on through 2009, with the economy only picking up again in late 2010. "In recent months we have seen a slew of gloomy economic data from across the globe, showing world economic activity plunging sharply," said CBI director-general Richard Lambert. "UK firms have been forced to scale back investment and cut jobs." The fear coursing through businesses was underlined by a sharp drop in confidence so far this year in a new survey from the Institute of Chartered Accountants, with decline spreading from the financial and property sectors to other parts of the economy.
The CBI now expects GDP to contract by 3.3pc this year – almost twice as bad as the forecast it made a little over three months ago. The last time the UK suffered such a slowdown, people were queuing for rations, and returning soldiers sent unemployment sky-high. According to the CBI, unemployment will peak at 3.04m in the second quarter of next year. Average earnings growth, meanwhile, will slow to a near stagnant 1.1pc later this year, as people accept slimmer pay packages. With the downturn hitting tax receipts, government borrowing will soar to an unprecedented £149bn in 2009/10, and £168bn the following year, almost 12pc of GDP. Amid the blizzard of gloomy forecasts, Mr Lambert urged the Government to urgently spell out the details of its second banking bail-out. "There is a sense that the Government is better at making announcements than implementing them," said Mr Lambert. "Once there is clarity about the timetable and scope [of the bail-out] that will give businesses confidence."
Irish government faces growing fears of debt default
Fears are growing that Ireland could default on its national debt after the cost to insure against possible losses on loans to the country rose to record highs at the end of last week. Credit ratings agency Moody's recently followed rival Standard & Poor's in warning it might downgrade Irish debt, amid fears that one of Europe's former success stories is falling into a deepening recession. The cost to hedge against losses on Irish debt tripled last week to a record 355 basis points - meaning that for every £100 of debt, investors have to pay £3.55 to insure against default, according to data firm CMA Datavision. It was about 262 basis points at the end of January.
Moody's has warned there is a more than 50% chance Ireland will lose its triple A rating within 12 to 18 months. The spread between Irish and German debt rose last week to 203 points, meaning Ireland has to pay 2% more interest than Germany to borrow in the financial markets because of its perceived higher risk. Ireland last week announced an additional €7bn (£6.3bn) injection into its top banks, Bank of Ireland and Allied Irish Banks, which are suffering from an increase in bad loans. Thousands of Irish citizens are struggling to pay their mortgages which they arranged at the peak of the country's real estate bubble. Unemployment is at a 15-year high. The IMF tried to calm investors by saying the country, once known as the Celtic Tiger because of its economic growth, did not need any financing from it.
Cargo volume in record 28.9% fall at Hong Kong airport
Cargo volume at Hong Kong International Airport plunged 28.9 percent in January- the biggest drop since the airport opened in 1998 - the Airport Authority said yesterday. The airport handled 210,000 tonnes of cargo, down from 295,000 tonnes the same month last year, the authority said. The slide in last month's cargo volume follows a 28.2 percent plunge in December, which at the time was an airport record.
Total air traffic movements in January fell 2 percent to 24,245, down from 24,752 in the same period last year. Passenger volume inched up 0.2 percent to four million in January, from 3.99 million for the same month last year. However, passenger traffic numbers were affected by the Lunar New Year falling in January, instead of February as last year. Authority chief executive Stanley Hui Hon-chung said he expects all types of airport traffic to report further declines as firms continue to keep a tight rein on business activities and individuals curtail spending.
"The aviation industry is a reflection of the general economic situation," he said. "Drops in air traffic figures covering passenger, cargo and aircraft movements will likely continue, with particularly notable declines on the cargo front." Almost all leading cargo markets served by Hong Kong airport experienced double- digit declines in January. Imports from Japan, Europe and Southeast Asia showed the biggest falls. For exports, traffic to Europe, North America and Taiwan fell the most. Cargo transshipments to and from Taiwan, the mainland and Southeast Asia were also hurt in January, the Airport Authority said.
Should China Devalue the Yuan?
As I reported in last Thursday’s blog entry, last week the research institute associated with China’s Ministry of Finance published a report on its website arguing that China’s central bank should "actively guide" the yuan’s exchange rate and devalue the currency to about 6.93 against the US dollar. The purpose of depreciating, the report said, was to help maintain economic growth and bolster employment
An exchange rate of 6.93 implies a depreciation of 1.5%. This is not much of a big deal and unlikely to make much of a difference in Chinese export prices, so I wonder why they would even say this except as a trial balloon. It is not just the research institute that has been making the devaluation argument. Although a number of officials have publicly called for stability in the exchange rate, within China there has been a heated debate about the country’s currency strategy, with several prominent commentators and economists arguing that China needs to devalue the yuan, by substantially more than 1.5%, so as to help Chinese manufacturers achieve greater competitiveness in the global export markets.
I think this kind of talk shows how mutually incompatible China’s two policy objectives are in the short term. First, China wants to boost domestic employment by boosting investment and helping restore manufacturing profitability. Second, China is under pressure, and this will almost certainly increase, to reduce its export of overcapacity, and China must address this pressure before it leads to worsening trade friction. These policy goals might not seem mutually contradictory on the surface, but I would argue that this is only because policymakers – and many commentators, it seems – are failing to distinguish between total demand and net demand. Global demand is contracting, so anything that China does to boost total domestic demand is good for the world, right?
Not necessarily. Domestically, any increase in total demand will have positive implications for employment, but globally the world needs increases in net demand – that is, consumption minus production. Since China provides negative net demand to the world (it runs a trade surplus), what the world needs from China as global demand contracts is a reduction in the amount of negative net demand China provides. China can boost total demand by boosting manufacturing – every worker not fired is a worker able to consume more – but boosting manufacturing also boosts Chinese production. If it increases production relative to consumption, then China is actually reducing net demand, even while it is increasing total demand. That this is happening, by the way, shows up in the rising trade surplus.
In that light devaluing the currency would be a mistake. Although it might make Chinese manufacturing exports seem more competitive in the near term, there are at least two sets of problems with devaluing the yuan. First, as should be very apparent, the slowdown in China’s exports is not a function of rising domestic costs but rather caused by declining global demand. With imports contracting rapidly, it is a mathematical necessity that countries like China that export excess capacity will, in the aggregate, be forced to export less. The fact that China’s exports have contracted by much less than most of its Asian trading neighbors suggests that in fact China has suffered much less than the average Asian exporter from the contraction in global demand, which makes the argument that China is losing export competitiveness hard to sustain. In that case devaluing the currency would almost certainly set off competitive devaluations.
Some in China are arguing that other Asian countries are already devaluing, so by devaluing China would simply be keeping up, but this argument is a weak one. With Chinese exports declining by less than other Asian countries, and the Chinese trade surplus rising, it will be hard, as I point out above, to argue that China has lost trade competitiveness. More importantly China is the third largest economy in the world and has the largest trade surplus in the history of the world. It cannot act as if it were a Vietnam, whose economy is small enough that devaluation would only have a slightly negative impact on the global balance. China must understand the impact of its actions on the global, which necessarily must constrain its behavior.
This is because with global demand contracting, any attempt by China to force more overcapacity onto a struggling world – i.e. reducing net demand even further – will require an even sharper contraction in manufacturing among its trade partners. China’s trade surplus is the measure of the amount of overcapacity, or negative net demand, it is exporting into the global economy, and January’s astonishingly high trade surplus of $39 billion, the second highest on record, caps a six month period during which China’s already record-breaking trade surpluses have surged. But with global demand contracting, any increase in China’s trade surplus requires that manufacturers in the rest of the world on average must cut production and fire workers by more than the amount implied by the global contraction in demand.
This will almost certainly lead to widespread claims that China is playing unfairly. Already China is in serious trade disputes with India and Indonesia, and with protectionist sentiment on the rise in the US, Europe, and the rest of the world, this is not the time to create more protectionist fury. A devaluation of the yuan, however small, would be seen as China’s answer to the Smoot-Hawley tariff increase, the notorious bill passed by the US Congress in 1930 that put the nail in the coffin of international trade (and a great example of the US failure to understand in 1930 that, like China today, it was too big to ignore the global impact of its domestic policies). In that case devaluation would almost certainly lead to an increase in trade friction.
In the 1930s, Smoot-Hawley had that very effect, and as the country with the world’s largest trade surplus in the 1920s, the US found itself, ironically, as the greatest victim of the contraction in world trade it did most to sponsor. As I have argued many times in a world of contracting demand, it is countries with excess capacity or negative net demand – the trade surplus countries – who are most vulnerable to a collapse in international trade. Even more than the US in the 1930s, China would suffer enormously from trade war.
The second set of arguments against devaluation involves a little longer term thinking, and so might easily be ignored in the panic of the crisis, but China’s economy must make the transition from export orientation to reliance on its domestic market. The process is never easy. To devalue the currency now would mean failing to take advantage of the shift that is already taking place and would push the economy in the wrong direction – that of further constraining already-too-low domestic demand, while increasing the importance of the export sector in the Chinese economy. The difficult transition from export reliance to reliance on domestic consumption is not a problem that can be evaded, and postponing it will only make the transition worse.
As counterintuitive as it may seem, I think China should actually continue revaluing the yuan, but before doing so it must reach an explicit agreement that in exchange for revaluing, its trade partners will maintain open markets for China’s exports. This is key, and on Wednesday I think I will have a piece in the Financial Times that tries to make this point very explicitly. A trade war would force China to adjust quickly, and I think that would be socially disastrous for China, and at any rate given the structure of the country’s financial system and development model it cannot make the transition quickly.
As the world’s leading provider of excess capacity, China cannot avoid a difficult adjustment in a world of collapsing global demand. The goal of policymakers must be to slow the necessary adjustment over several years by negotiating an orderly decline in global trade imbalances. This requires cooperation, not devaluation. Sunday’s softer G7 communiqué which, according to an article in today’s the Financial Times, "adopted milder language than recently regarding China’s handling of its currency," is a welcome step towards more civil discourse, but it should not mask the risk of rising protectionism. Among themselves the G7 can be as diplomatic as they like, but governments respond to domestic pressure, and nothing creates pressure like rising unemployment. Japan’s awful 2008 Q4 GDP numbers (down an astonishing 12.7% on an annualized basis) shows just how heavy that pressure will be. I am off to Washington DC later today to testify before the US-China Commission and meet a bunch of friends in Treasury and State. On Saturday I will try to write about what I hear there.
China banks show how to lend
There is now some optimism mainland Chinese banks can single-handedly rescue the nation's economy after new lending doubled in January. Despite dismal January exports figures and news signs of deflation, many economists are penciling in Beijing to meet an 8% economic growth target for the year. While governments around the world try to bully, blackmail or bribe newly bailed-out banks to lend again, it seems China has no such problems. In fact, it is now the only economy in the world showing significant growth in credit to corporate and household sectors since September of last year, according to Merrill Lynch.
It helps that China's less sophisticated banks are not encumbered with toxic assets and are still feeling flush from booking record earnings last year. And more importantly, the government -- having always been the largest shareholder -- knows how to get policy directives acted upon. That might put China in a better shape than many Western economies, but just what will this lending deliver? If you look at the numbers, the 1.62 trillion yuan ($237 billion) lent in January already amounts to 40% of the value of the stimulus plan promised last November. Still, the risk is that banks are churning out loans so fast proper controls will be forgotten, leading to surging bad debts down the road. It sounds like China's central bank shares similar concerns, as over the weekend it reportedly asked banks to compile lists of how and to whom this money was lent.
There is already speculation this new lending is behind the recent up-tick in A share turnover. Last week daily turnover in Shanghai and Shenzhen exceeded 200 billion yuan, taking it back to levels last seen in 2007. This comes at a time when analysts are cautioning against buying equities solely on stimulus hopes. Macquarie Research said in new note that corporate earnings numbers -- not GDP growth -- matter for a stock market recovery. It said it needs evidence that China is not merely growing but successfully "re-flating" and thus avoiding a late-1990s style margin collapse. While they are not yet calling for deflation, the 3% contraction in wholesale prices reported last week needs watching. The ugly scenario for earnings is when end user prices fall faster than inputs, leading to margin squeeze. (One way to avoid fallout from this is through defensive infrastructure.)
The ability of lending to stimulate jobs is also being questioned, although an infusion of working capital should at least stop more immediate losses. Standard Chartered warned that even if stimulus spending creates 8% growth this year, it is most likely to boost demand for steel and cement and is less likely to offer healthy, job-creating growth. There should be some jobs building new railways and roads, but wider employment growth needs a recovery in the export sector and more domestic consumption. Exports appear to have fallen off a cliff after a 17.5% year-on-year decline in January, while imports have slumped a massive 43.1%. Even taking into account that Chinese New Year came in January, the results were well below market forecasts.
The imports figures do not indicate much strength in China's domestic consumption. Nor does January's 23% jump in yuan deposits -- suggesting consumers are still saving, not spending. The World Bank said last week China had made little progress in rebalancing the economy toward consumption and services from industry and investment. One upshot of this situation is renewed talk that the People's Bank of China will seek another interest-rate cut in the days ahead, in order to get the stimulus dollars moving. The rest of the world is watching anxiously to see if China's stimulus package will move import numbers.
Neighboring Taiwan, which is a big supplier of components to China, just saw its December exports contract 42% as it enters its deepest recession on record. And in Hong Kong, it appears as if we will soon have a new monument to the collapse in the global shipping trade. There's a growing problem of where to store hundreds of thousands of unused shipping containers, and one suggestion is to stack then at the still-unused old Kai Tak Airport site. For a reversal here, China, like Hong Kong, will need an upturn in the global economy -- and the U.S. in particular, which means Beijing will not just be watching its own lending figures but also Barack Obama's stimulus package.
China to Offer Oil Loans; May Set Up Acquisition Fund
China, the world’s second-biggest energy user, will offer preferential lending rates for overseas oil investments and may tap the country’s $1.95 trillion foreign-exchange reserves to help companies buy fields abroad. The nation may set up an oil fund to boost exploration, China National Petroleum Corp., the country’s biggest oil producer, said in a statement on its Web site today, citing the state’s three-year energy plan. The government will increase capital injections of overseas spending on energy assets, it said. Chinese companies have resumed their quest for global resources after a two-year hiatus as the economic slowdown and falling commodity prices prompt a sell-off in share markets, making companies cheaper to acquire. Crude oil in New York has fallen more than 70 percent from a record $147.27 a barrel reached in July last year. China’s foreign-exchange reserves are the world’s biggest.
The fund "makes perfect sense because overseas acquisition will instantly boost production and reserves, probably at very attractive long-term prices amidst distressed asset valuations at the bottom of the oil price cycle," Gordon Kwan, head of China energy research at CLSA Ltd., wrote in an e-mail today. Oil companies are encouraged to boost development and acquisitions of resources abroad, China National, the parent of Hong Kong-listed PetroChina Co., said in the energy plan. The plan to 2011 covers China’s ambitions to speed up the development of alternative fuels, coal-to-liquids projects, and the setting up of a separate fund for the stockpiling of crude oil. The country aims to find additional recoverable crude oil reserves of 700 million metric tons and discover incremental recoverable natural gas deposits of 1.2 trillion cubic meters within the three years to 2011, it said in the report.
The country plans to have total oil refining capacity of 440 million tons by 2011. China will push forward joint-venture refinery projects with companies from Venezuela, Qatar and Russia, it said, without giving details. China’s oil-processing capacity is about 396 million tons currently, according to Bloomberg calculations. The government plans to start building four additional liquefied natural gas import terminals in Qingdao, Ningbao, Tangshan and Zhuhai, China National said. China will start building pipelines to import oil and gas from Myanmar before the end of 2011, it said. The construction of coal-to-liquids projects in the northern provinces of Shanxi, Inner Mongolia and Ningxia will be accelerated, it said, without giving further details. It will also set up separate government funds for crude oil stockpiling, energy exploration and coal-bed methane production, it said.
The government will simplify the administrative procedures of energy project approval, it added. China aims to boost crude-oil production by 1.2 percent to 192 million tons and targets 86 billion cubic meters in natural gas output this year, representing a gain of 13 percent, China National said. Crude output may reach 198 million tons in 2011 and gas production may rise to 120 billion cubic meters by then, it said. Emergency crude oil reserves may reach 44.6 million cubic meters by 2011, it added. China will take advantage of current lower prices to boost imports of oil and natural gas as it builds reserves, Zhang Guobao, head of the National Energy Administration, said on Dec. 29.
China has sought to take advantage of the rout in commodity prices to lock in resources worldwide. China’s oil and gas shortages will continue over the "long term," PetroChina Chairman Jiang Jiemin said on Jan. 12. The country relies on imports for about half of its crude consumption, which rose by 6.5 percent last year, China National Petroleum said Feb. 10. The nation’s oil companies including China National Petroleum, China Petrochemical Corp. and China National Offshore Oil Corp. have shown interests in the assets of U.S.-based Kosmos Energy LLC worth at least $3 billion, the South China Morning Post reported today, citing unidentified people. China Minmetals Corp., the country’s biggest trader of metals, agreed to buy Australia’s debt-laden OZ Minerals Ltd. for A$2.6 billion ($1.7 billion) in cash, gaining copper, zinc and gold projects in Asia, the Melbourne-based company said today. The purchase follows Aluminum Corp. of China’s $19.5 billion agreement to invest in Rio Tinto Group last week.
China’s Hu Pledges to Boost Aid, Trade With African Nations
China won’t abandon plans to boost aid, trade and debt relief to Africa because of the global economic crisis which is causing "difficulties" in the world’s third-largest economy, President Hu Jintao said. "We will continue to increase assistance to Africa and cut debts owed by African countries as our ability permits," Hu told officials, business leaders, diplomats and students in Tanzania’s commercial hub of Dar es Salaam today. "We will expand trade and investment and strengthen practical cooperation with Africa."
Hu, on his second trip to Africa since a China-African summit in 2006, stopped in Mali and Senegal and flew today to his final destination, the Indian Ocean island of Mauritius. In Tanzania, Chinese officials signed aid deals worth $22 million, while the Export-Import Bank of China agreed to provide low- interest loans to the east African nation. China’s trade with Africa jumped 10-fold to $106.8 billion last year from just over $10 billion in 2000, according to China’s Ministry of Commerce. Its African investments have focused on oil, such as in Angola, the continent’s top supplier of crude to China, and Sudan, and minerals in Congo and Zambia. Hu, the first Chinese president to visit Tanzania since it gained independence from the U.K. in 1961, opened a $60 million national stadium in Dar es Salaam that was built with Chinese funding.
China established diplomatic relations with Tanzania in 1964 and a decade later helped to finance and build the Tazara railway linking Zambia’s copper belt and Tanzania’s main port in Dar es Salaam. Chinese investors may play a role in "restructuring and refinancing" Tazara, Finance Minister Mustafa Mkulo said yesterday. Tanzania and Zambia, which jointly own the rail line, are considering a proposal to open it to private investment. China is planning to help build a conference center, named after Tanzania’s first president Julius Nyerere, and a clinic to treat patients with heart problems and train medical workers, in Tanzania, President Jakaya Kikwete said.
In Senegal, Hu agreed to provide a grant of $17.6 million, lend more than $23.2 million for improvements to public transport and finance a communications network projected at almost $50 million, the Dakar-based newspaper Le Soleil reported Feb. 14. China is plowing cash into building schools, hospitals and demonstration farms in Africa, while insisting on the reform of multilateral institutions to increase representation from the continent, said Hu. "We will always view African people as our all-weather friends whom we can fully trust and count on," said Hu.
Hungarian Forint Weakens to Record, Polish Zloty Tumbles, as Production Slumps
Hungary’s forint tumbled to a record low against the euro, and the Polish zloty and Czech koruna slumped, on increasing signs the region’s economies may be the hardest hit from the global recession. The forint fell as much as 2.2 percent as the government proposed tax cuts to shore up the economy amid the steepest decline in industrial output since at least 1991. The zloty lost as much as 4 percent to its lowest level in almost five years as analysts anticipated the worst slide in production in at least 17 years. The koruna slid as much as 2.2 percent to its weakest level since 2005, as economic growth reached a decade-low.
"The slowdown is worsening and this has negative impact on currencies," said Michal Karewicz, an analyst at Citigroup Inc. in Warsaw. "Investors are exiting east Europe and moving their capital west." The region is the among most vulnerable to the global credit crisis as a recession in the euro-zone hurts exports and weakened exchange rates push up the cost of repaying foreign- currency debt. Poland’s zloty lost 13.6 percent against the euro this year, the biggest decline among emerging-market currencies worldwide. Hungary was the first European Union member to seek a bailout from the International Monetary Fund last year. The NTX Index of the 30 largest publicly traded companies in central Europe fell 3.5 percent today.
Hungarian Prime Minister Ferenc Gyurcsany proposed as much as 900 billion forint ($3.8 billion) in tax cuts today. The government expects the economy to contract between 3 percent and 3.5 percent this year, while the budget gap will be between 2.7 percent and 2.9 percent of gross domestic product, rather than a previous plan of 2.6 percent, said a government official, who declined to be named. Inflation may accelerate to the range of 3.7 percent to 3.9 percent, instead of the current 2.5 percent to 3 percent forecast, after raising value-added taxes, the official told Bloomberg before Gyurcsany’s speech. The government secured 20 billion euros ($25.5 billion) of loans from the IMF, EU and World Bank last year in exchange for pledging to accelerate budget deficit cuts.
Production dropped 23.3 percent in December from a year earlier, the seventh monthly decline, the Budapest-based statistics office said in its final estimate today. The forint has fallen 12.6 percent this year and traded for as little as 304.68 per euro today. Poland’s zloty reached as low as 4.8335 per euro and was recently at 4.8006. Polish output probably sank by an annual 11.7 percent in January after falling by 4.4 percent in December, according to the median estimate in a Bloomberg survey of economists. Poland’s main interest rate fell by 1.75 percentage points since November to 4.25 percent and Hungary’s benchmark dropped to 9.5 percent from 11.5 percent.
Economic growth cooled to 1 percent in the fourth quarter, the slowest pace in almost a decade, according to a Czech government report Feb. 13. The koruna to traded for as littlee as 29.188 per euro today. To shield their economies, central banks in east Europe last year started to lower interest rates, diminishing the attractiveness of the region’s assets and spurring the downward pressure on the currencies. "There is so much noise going around on emerging Europe that we need to see coordinated policy action from all countries," said Simon Quijano-Evans, a strategist at Credit Agricole Cheuvreux in Vienna. "One possibility is a temporary stop to interest-rate cuts or even rate hikes. The currency depreciation has to be stopped, otherwise even those countries with stronger fundamentals will face a serious loss of confidence."
Total says oil output near peak
The world will never be able to produce more than 89m barrels a day of oil, the head of Europe’s third largest energy group has warned, citing high costs in areas such as Canada and political restrictions in countries like Iran and Iraq. Christophe de Margerie, chief executive of Total, the French oil and gas company, said he had revised his forecast for 2015 oil production downward by at least 4m barrels a day because of the current economic crisis and the collapse in oil prices. He noted that national oil companies, which control the vast majority of the world’s oil, and independent producers, which play a key role in finding new sources, were "substantially limited in their ability to fund investments in the current [financial] environment".
Oil prices have fallen from a record $147 a barrel in July to about $35 a barrel on Monday, with the world consuming 84m barrels of oil a day. This year oil consumption is expected to fall from 2008 levels. Mr de Margerie warned that the glut of oil caused by the dramatic reduction in demand would be short-lived and that, in spite of the economic crisis, in the long-term demand would remain constrained by supply. Three years ago, the International Energy Agency expected consumption and production to hit 130m b/d by 2025. It has since dropped its forecast to a little more than 100m b/d by 2030. Delays and cancellations in projects to extract oil from Alberta’s tar sands and Venezuela’s Orinoco belt – both expensive and environmentally difficult operations in which Total is active – will cut 1.5m b/d of supply that would have come on stream had oil prices remained strong.
The rest of the revisions from Total’s mid-2008 estimates came from the more pessimistic view of the political situation in Iran and Iraq, which hold the world’s second and third largest oil reserves. Meanwhile, Mr de Margerie now expects a faster decline in production at older fields, such as those in the North Sea. At lower price levels, companies will find it harder to justify the greater cost of keeping such fields pumping. Total’s chief executive has long been an outspoken advocate of maintaining investment, rather than repeating the mistakes of previous cycles by cutting costs so much that the industry is unable to meet global demand when economies recover. But he is also in the midst of trying to renegotiate contracts in Canada and is considering further investments in Venezuela.
Understanding Money and War- Part I
In medieval times, the goldsmith business developed in much of Europe (with involvement of people whom had been known earlier as money changers). By the Middle Ages, goldsmithing was an established reality. As gold was physical, heavy and bulky to store, but yet of great value, many people found that they lacked the means to store and safeguard it. Goldsmiths provided this service. When gold was stored with the goldsmith, he would write a receipt for it which was given to the gold owner. Since the gold owner could get his gold upon surrender of the receipt, the receipt was as good as gold. Soon, these gold receipts became a medium of exchange, just like coins. As these receipts represented money in the society at large, goldsmiths found that they could write more receipts than they had of gold. By issuing these receipts, they could then buy goods and services on the open market or make investments however they chose. Thus, these gold receipts were some of the earliest forms of paper money.
Since many of the goldsmiths were crooked as snakes, they often issued far more receipts than they had of gold. And, if the people became suspicious and made a run on the goldsmith, when he lacked physical gold to cover his outstanding receipts, he could end up being hung or having his head chopped off. Hence, goldsmithing could be a very dangerous business. In time, the goldsmiths thought of a workable solution on how they could issue forms of receipts as paper money and make the local governing politicians responsible if something went wrong and the public wanted to hang someone. If the local government people were responsible, then the people being cheated could take their anger out on the governing politicians/kings, rather than on the goldsmiths who were operating from behind the thrones/scenes.
This process paved the way for the establishment of privately owned central banks (as stock corporations) in various nations whereby these banks were given complete authority over the nations' money—to print it and distribute it almost however they saw fit. In order to be given this power, the goldsmiths/bankers typically made promises to the governing politicians and kings that they would provide them with all the money that they wanted. The privately owned Bank of England was organized in 1694. Soon, other privately-owned central banks developed in other parts of Europe. With their presence, it meant that the money of the nations involved was placed into the hands of private people who were answerable to no one. Yet, if the public became concerned over their money, and there was a run on the bank, the governing politicians/kings would be blamed and hung and not the bankers. This was a perfect scam to rip off and steal from the people.
Through wars and intrigues of various sorts, a goldsmith/money changing family named Bauer surfaced in Germany in the mid 18th century. In time, this Bauer family changed its name to Rothschild and eventually established international banks over much of Europe. While the Bauer connection is not discussed, "Encyclopaedia Judaica" (v. 14, p. 334) notes a Rothschild descendancy from Isaac Elhanan who died in Frankfort, Germany in 1585. Isaac owned the house where the Rothschilds later gained their riches and fame. Though not clear, the Elhanan connection could have occurred from a maternal connection. Nathan Rothschild (son of the progenitor Mayer Amschel Rothschild of Frankfort, Germany) settled in London and started an international Rothschild bank there. He was highly successful and in time became the primary owner of the Bank of England. His brother Jacob (who was also known as James) Rothschild established an international bank in Paris and he became a key owner of the Bank of France. The Rothschild family has controlled most European central banks ever since (even today, they control the European Central Bank and Swiss National Bank).
Following the American Revolution, the Rothschilds made immediate plans to move in and take over the US money as they had done in Europe. They used an agent named Alexander Levine who had been trained in banking in the West Indies. He came to New York in Colonial days and changed his name to Alexander Hamilton to better fool and deceive the New Yorkers about his true status. While Levine was not totally successful at that time, in establishing a permanent US central bank, he did get a temporary one established for a period of twenty years under Rothschild ownership. It was called the First US Bank. There was a Second US Bank also for twenty years. But by the time of Andrew Jackson, in the 1830s, Old Hickory opposed them and they had to sit on the sidelines and wait. While waiting and looking for an opportunity to create their dreamland of an all powerful, private, central, US bank, the Rothschilds periodically caused depressions/recessions, money panics, etc in the US to try to get a central bank in place. They thought they would succeed in the US Civil War under Lincoln. But their efforts fell through the crack when Lincoln opposed them.
On Dec 23, 1913 (while Congressional central bank opponents were home on Christmas vacation), the Federal Reserve Act was passed and President Woodrow Wilson immediately signed it into law. At last, the US had a permanent, privately-owned, central bank. By acting through agents, like the Warburgs, the Rothschilds have had primary control over this US central bank ever since 1913. Thus, the Federal Reserve Bank was born (called the Fed and actually made up of twelve member banks which are all owned/managed by private bankers). Under the act, the president is allowed to appoint a seven member overall board of governors. But the bankers organized their system by making this board a figure head operation when they created a controlling entity called the Federal Open Market Committee (FOMC). The FOMC makes the key decisions for the central bank. Though the so-called board of governors are members of the FOMC, the Fed law provides that all twelve participating private bankers are full participants in all FOMC meetings, discussions, plans and activities--although only five of these private bankers can vote on Fed actions at FOMC meetings.
While the private bankers are in actual control of the twelve member banks, they are also in de facto control of the seven member board of governors. This came about because the 18th century banker Mayer Rothschild said to permit him to control a nation's money and he cared not who wrote its laws. Most of us know about the golden rule—he who has the gold does the ruling. Proverbs 22:7 adds that the rich rule over the poor, and the borrower is servant to the lender. Certainly, once some person gains control of a nation's money, the door is opened for him to also control its law-makers and laws. This power insures that the law-makers never get bold and try to pass restrictive laws to interfere in the person's operation. With this money control, the US president always appoints people acceptable by the bankers to the seven member Fed board. Manifestly, the board works for the bankers, just like the FOMC works for the bankers. Since appointments to the board are for fourteen years, and since board members cannot be removed except in case of personal misconduct, it is academic to talk about the question of independence by the board. Once members are appointed, they always go along with the bankers--who, with their money, wield a big stick in American politics. And since the board has no power on its own, the topic is irrelevant anyway.
In offering the governing politicians unlimited supplies of money, the plan sold to the US was that the Fed would always buy any US Treasury bills, notes, bonds or paper which could not be sold to the public. This is called monetizing the debt when the Treasury simply hands a stack of interest bearing paper to the Fed in exchange for Fed money or bank credits (which are available in almost unlimited quantities at the Fed). This means that the Fed itself is one of the largest holders of US debt. With this huge inflow of interest annually to the Fed, the Fed offered a solution to satisfy the concern of politicians by transferring any unspent sums of interest back to the Treasury at the end of the year (and it does this annually so no one can claim that the Fed is out to make money on its own operations or from interest on US paper). Actually, there was never any plan or need for the Fed, itself, to be a money making operation. It doesn't need to make money because it was created for other purposes.
In fact, the Fed does not need to make money because it already has essentially unlimited supplies of its own money and can issue this money in a virtually unchecked and unverified manner (because its operations are carried out in secret and there is no checking or auditing of what it does--even the CIA does not have this secrecy since the CIA has to ask the president and Congress for money and must accordingly accommodate them. With the Fed, it asks no one for money since it already owns the bulk of the US money supply). So, although the Fed carries on its operations in secret, and although it is never independently checked or audited (by anyone), the Fed chairman does occasionally testify before Congress on what the Fed is doing. Because of a lack of verification, the Fed Chairman can tell the Congress about whatever he wants to and no one will be the wiser. In putting this thing over, the Fed was given complete power and authority to control US interest rates at all levels and to be able to make money available to whomever or wherever it chooses at a given point in time. By controlling interest rates, it is an acknowledged fact that the Fed can enter and participate in the buying and selling of US notes, bonds, bills, etc. And it does so. The Fed enters the allegedly free markets and either buys or sells US and/or other paper to control interest rates (thus, the Fed insiders always know in advance which way interest rates and bond prices are going to go).
Some years ago, the Fed/Treasury created something called the "Exchange Stabilization" fund or system to use a vast sum of Federal Reserve Notes to influence, control and participate in the currency markets (this thing was approved by Congress, though it is clearly an unconstitutional action). Hence, the Fed/Treasury can enter the different currency markets around the world to control the value of various foreign currencies. Thus, they can make the Mexican peso (or any other foreign currency) go up or down (and especially, in collusion with other privately-owned central banks--like the Bank of England, the Bank of Japan, the ECB, the Swiss National Bank, etc). The last item that the Fed/Treasury can do (or rather is doing since it is being done in secret and evidently illegally) is to rig and control the US stock and commodity markets by entering the markets with unlimited supplies of dollars to make selected items go up or down. Though gullible and uninformed US stock and commodity market investors believe that the markets are free and market responsive, they are not. They are manipulated and controlled.
The Fed and the Treasury collaborated on this madness and created something in 1988 with the approval of Ronald Reagan (reportedly, per executive order 12631 on Mar 18, 1988) called the "Working Group on Financial Stability" (popularly known as the Market Control Unit or the Plunge Protection Team/PPT). This unit operates in collusion with the market-makers (the stock and commodity brokers making the markets on the major stock and commodity exchanges) to buy or sell certain stocks, bonds, currencies and/or commodities at certain times. In the way of a backdrop, let me add some material which shows how the US government has been involved in manipulating the markets. The old Spotlight newspaper and its successor the American Free Press were apparently some of the first sources to broach the work of the US government in intervening in the markets. "Spotlight" of May 8, 2000 (p. 1, 3), had an article on the roller coaster market by James Harrer which described the market control unit and how it works. As noted above, it is technically called the "Working Group on Financial Stability." It operates in collusion with the market-makers (the stock brokers making the markets on the major stock exchanges) by flooding the markets with US dollars through them to buy stocks and reflate the market when desired.
This Plunge Protection Team unit has intervened several times to prevent the US stock markets from tanking (Apr 22, 2002, "American Free Press," p. 4). In 1998, one of its key players was Peter Fisher, the number two man at the New York Federal Reserve Bank (which manages this unit). Fisher was the specific person who was then known to swap intelligence and rumors with traders and dealers in his manipulation of the markets (ibid, p. 4). Clearly, this was insider information to some of the people tipped off by Fisher. Allison deMott, an economist and retired portfolio manager, said that when the market goes up, the insiders collect big winnings and when it goes down, the taxpayers eat the biggest losses. Obviously, this type of an arrangement is a gold mine for the clique of money changers running things in the Fed and the Treasury (like Alan Greenspan, Robert Rubin and Lawrence Summers; back in the Clinton days).
Financial reporter Jim Metz said that he thought a market rigging operation like this one would cost mountains of money; but in fact, "a couple of billion worth of instant cash put up by the Fed and the Treasury did the trick" (in reference to the April 2000 intervention). Well known financial columnist John Crudelle confirmed that the government was propping up the US stock market. "Spotlight," of February 19, 2001 (p. 1), quoted the well known Watergate reporter Robert Woodward of the "Washington Post." Woodward has publicly acknowledged in a recent book that Fed Chairman (Alan Greenspan) was willing to do things that were "not legal." Obviously, some persons are beginning to be aware that the Fed operates illegally (actually, by using its unlimited supply of dollars--belonging to the US). This whole operation is a price fixing scheme which would be illegal for private citizens to engage in. However, the Fed can get away it and with the full concurrence of at least government leaders.
The above quoted April 22, 2002, "American Free Press" (p. 4) also had an article by Fred Lingel on "Felonious Fed Fingered for Financial Finagling" which illustrated how far this money scam can and may go in the coming days. Linger quoted the London "Financial Times" of April 2, 2002, which outlined some current thinking along the lines of "buying U.S. equities," by a reporter named Crudelle (evidently John Crudelle). According to an unnamed Fed official, the Fed could "theoretically buy anything to pump money into the system including state and local debt, real estate and gold mines--any asset. Including stocks." Years ago, former Fed governor Robert Heller suggested the purchasing of stock index future contracts as an inexpensive way to rig the markets without leaving a trace (as reported in the "Wall Street Journal"). In watching the work of the PPT, it has become clear to me and indeed others that these conspirators have massaged their work to the point that not only can they influence/control stocks through the futures indexes, but even the value of commodities which are heavily influenced by the futures markets.
For example, gold and silver advocates have discovered that the manipulators have established paper prices for gold and silver simply on the basis of the futures markets. Of course, it is becoming increasingly hard to find gold, silver or certain other commodities on the actual open market based on the futures prices. That's why some persons call the futures prices "paper" prices. While the market rigging practice is carried out under the guise of "protecting the US economy," the truth is that it is a process of manipulating markets "in order to protect the money powers from the consequences of their risky investments." If there are losses, the US taxpayers will pick them up. Now, there is obvious thinking at the top level that the Fed can enter any and all kinds of markets--real estate, gold mines, state and local bonds, etc. Consequently, most or all of the markets are not truly "free" and independent in terms of their primary motions. Like the gold market, the other markets are set up and controlled in order for the fat cat, international bankers to make massive profits with the ups and downs in the markets. Obviously, the big bankers engineer and direct these up and down, oscillating motions by manipulating those markets. They specifically cause the ups and downs so they can continuously buy at the lows and sell at the highs (which they control and know about in advance).
If something happens in any given market which is not planned and directed by the money changers, operating from behind the scenes, they could lose all kinds of money and particularly so if the motion should get out of hand. If the stock market collapsed all at once, while the fat cats are fully or heavily invested, it would be disastrous for them. To preclude such an eventuality, they have obviously set this market control unit up with access to unlimited US dollars to alter free market operations. Consequently, the stock and commodity markets are not free or market responsive based upon supply and demand. They are subject to the wishes of the Fed (and its secret owners and insiders) to control them. Since these markets are manipulated and controlled by the Rothschild network of insiders, the unsuspecting public gets ripped off and cheated with regularity.
All along, there was no plan that the Fed itself had to be a profitable operation because it has all of the money it can possibly use in the context of the printing presses and the huge inflow of interest annually from the US Treasury. Actually, the plan always was that the Fed would do things and carry on its buying and selling options in ways to benefits its secret owners, managers and other insiders. Therefore, the Fed itself does not need to make money in its buying and selling operations in the various financial markets. All it has to do is to keep its owners and other key selected insiders aware of what it is doing in secret. Can the reader possibly begin to understand the benefit that would come to an investor if he had prior knowledge that the Fed would enter the bond markets on a given day to buy or sell US government bonds to alter bond prices and/or to drive interest rates up or down? Alternatively, how about the benefits to a trader in commodities on the commodity exchanges? What if the trader had advance knowledge that the Fed would enter the commodity market at a given point in time and sell huge quantities of an item to drive the price down (which can be either long or short sales since the Fed has unlimited money to play with)? Would this type of information allow a trader/investor to make gobs and gobs of profits? Has a cat got a tail?
Working the stock exchanges is even more enticing. Suppose you are a stock market player and you have advance information that the Fed will buy (or sell) Dow-Jones stocks on a certain day--like maybe GM or whichever. With your advance information, you can buy (or sell) these stocks in advance and then later sell (or buy) them back with fantastic profits. If the Fed loses five or ten billion dollars in Fed notes in the markets, it is no big deal because the Fed can simply print more of them (although it should be obvious to anyone above the idiot level that this squander of money belongs to US taxpayers who will have to pick up the liability for all of these Federal Reserve Notes and bank credits which have been liberally distributed around the world to make profits for the Fed owners and insiders). This type of Fed information on Fed actions is highly secret and no one knows much about it except the Fed's secret owners, people on the inside in the Fed, and brokers who execute orders for the Fed. Of course, it goes without saying that these insiders do tip off and keep some of their friends, relatives and colleagues apprised of what all is going on.
Thus, Fed owners (like the Rothschilds and Rothschild relatives/colleagues like the Rockefellers, Warburgs and Lazards), Rothschild US agents (like JP Morgan-Chase and Goldman-Sachs) and Rothschild friends and relatives (like George Soros) will always know in advance which way things are going in order to make huge profits. Besides its primary functions, which allow the Fed to manipulate and control various financial markets to benefit its secret owners and insiders, the Fed also has other powers over the banks and financial markets. While these incidental powers are extremely important and represent enormous profit opportunities for member banks, they are not as important to the overall profitability of the operations to the Fed owners, as is realized in the ability of the Fed to secretly enter the financial markets to control and manipulate them in any desired direction (within reason and to a point, as long the US dollar has value and acceptance).
In 1913, everything was ready for the fat cat bankers. But there remained some problems. First, the US Constitution set the power to coin money and to regulate the value thereof with the US Congress. How could all of this power be placed in a privately owned corporation? Well, the solution was that the US Treasury would print all of the paper money wanted by the Fed and charge the Fed for the cost of printing. Hence, the Treasury prints the Fed notes and sells them to the Fed for pennies on the dollars. The next big issue for the bankers was the possibility that the dumb, gullible public might become informed on what all was happening to their money and the secret actions of the Fed to use the US money in ways to make profits and gains for its secret owners and insiders. In other words, the people could find out the truth and get riled up against the bankers. The last big issue concerned the possibility that the Fed could conceivably lose control of events or precipitate a collapse of the historically strong dollar. The stock market crash of 1929, as caused by the Fed, almost brought about the end of the system. But massive federal spending by FDR saved the process for the Fed owners.
Writer Stephen Lendman had a story at rense.com on Dec 24, 2008 on the Federal Reserve Abolition Act. In it, Lendman mentioned the work of Congressmen Ron Paul to abolish the Federal Reserve. Lendman then added: "In theory, the Fed was established to stabilize the economy, smooth out the business cycle, manage a healthy, sustainable growth rate, and maintain stable prices. In fact, it failed dismally. It contributed to 19 US recessions (including the Great Depression) and significantly to the following equity market declines that accompanied them as measured by the Dow or S & P 500 average - the S &P's inception was 1923; it became the S & P 500 in 1957: -- 40.1% (Dow) from 1916 - 1917; -- 46.6% (Dow) from 1919 - 1921; -- the 1929 (Dow) crash in two stages - 47.9% in 1929 followed by a strong, temporary rebound; then - 86%; an 89% peak to trough total from October 1929 to July 1932; -- 49.1% (Dow) from 1937 - 1938; -- 40.4% (Dow) from 1939 - 1942; -- 25.3% (S & P) from 1946 - 1947; -- 19.8% (S & P) in 1957; -- 26.8% (S & P) from 1961 - 1962; -- 19.3% (S & P) in 1966; -- 32.7% (S & P) from 1968 - 1970; -- 45.1% (S & P) from 1973 - 1974; -- 20.2% (S & P) from 1980 - 1982; -- 32.9% (S & P) in 1987; -- 19.2% (S & P) in 1990; -- 18.8% (S & P) in 1998; -- 49.1% (S & P) from 2000 - 2002; and -- about 50% (S & P) and counting (excluding a bear market rebound) from October 2007.
"The Fed is also directly responsible for monetary inflation and the decline in the US standard of living since its year-end 1913 inception and especially since the 1970s. From the late 18th century to 1913, virtually no inflation existed under the gold standard except during times of war. Using government data, it now takes over $2000 to equal $100 of pre-Fed purchasing power. In other words, a 1913 dollar is worth about a nickel today. "At that time, a dollar was defined as 1/20 of an ounce of gold or about an ounce of silver. The Fed then changed the standard away from precious metals to the full faith and credit of the government. Ever since (except for periods such as the 1930s) inflation eroded the currency's value and (more than ever) continues to do it today… "Under the Federal Reserve System (besides inflation), we've had rising consumer debt; record budget and trade deficits; a soaring national debt; a high level of personal and business bankruptcies; today, millions of home foreclosures; high unemployment; the loss of the nation's manufacturing base; growing millions in poverty; an unprecedented wealth gap between the rich and all others; and a hugely unstable economy now lurching into crisis mode…
"Our existing monetary system combines money, credit and debt into a dishonest system of empty promises in exchange for future ones. There is no eventual payment, only unfulfillable assurances to new generations that will be forced to pay for the debt now accumulated. It's a moneychanger's dream - ever-expanding debt and a continuing interest rate stream, masquerading as wealth creation for the people. It's in fact a system of bondage and indebtedness benefitting the few at the expense of the many, a modern-day feudalism. It's how an elite 1% got to own 70% of the nation's wealth…" Although not mentioned by Lendman, the operations of the Fed and its control of the US economic and monetary systems have allowed a clique of money changers and other insiders an opportunity to make untold amounts of profits and gains which they could never have made before 1913. Many of these money changers have become some of the wealthiest people in the world—thanks to the Fed and the gullible American taxpayers who have sat back and allowed this scam to proceed. On Sep 10, 2002, Ron Paul on the House floor said: "Since the creation of the Federal Reserve, middle and working- class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve's inflationary policies. This represents a real, if hidden, tax imposed on the American people...."
With the development of the privately owned US central bank, there has been a simultaneous process underway where virtually the same people who own or benefit from the Fed also own or control the US media powers. Thus, the people who control or have access to the Fed (i.e., the large international banks and bankers—like the Rockefellers, Rothschilds, Warburgs, City Bank of NY, J. P. Morgan-Chase, Bank of NY, Kuhn Loeb and Company, Goldman-Sachs, etc--but this list does not include most small town local banks which are not privy to this operation) also own or control the US media powers, either directly or through agents and collaborators (like ABC, CBS, NBC, CNN, AOL-Time-Warner, the Washington Post, Newsweek, etc). With this dual control, the masses can be forever kept in perpetual ignorance about what all is going on behind the scenes. With an ignorant public, the status quo can continue and the big bankers will continue to make vast profits.
The fantastic success of privately-owned central banks in England, France, the US, etc, prompted the banking plutocrats to decide in the 20 th century to branch out into a world configuration. Yes, instead of stealing and cheating the people of single nations, the big bankers could go global and steal from and cheat all of the people all over the world. The plan was simple. The bankers joined arms with numerous other people who also wanted the implementation of world government. In the deal, the bankers wanted to own and operate the world's central bank (to make incredible profits). This reality means that the big bankers (who have the money) are some of the most powerful persons of all working for world government.
Some Quotes from People Who Understood the Problem (taken from an article by Matthias Chang on "The Shadow Lenders")
Napoleon Bonaparte: "When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain."
Niccolo Machiavelli: "For the great majority of mankind are satisfied with appearances as though they were realities, and are often more influenced by the things that seem than by those that are."
President James Madison: "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control of governments by controlling money and its issuance."
President Abraham Lincoln: "The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy."
President James A Garfield: "Whoever controls the volume of money in any country is absolute master of all industry and commerce."
The Rt. Hon. Reginald McKenna – Chancellor of the Exchequer: " I am afraid that the ordinary citizen will not like to be told that the banks can, and do, create money. The amount of money in existence varies only with the action of the banks in increasing and decreasing deposits and bank purchases. Every loan, overdraft, or bank purchase creates a deposit and every repayment of a loan, overdraft or bank sale destroys a deposit. And they who control the credit of a nation direct the policy of governments, and hold in the hollow of their hands the destiny of the people."
Sir Josiah Stamp – Bank of England: "Banking was conceived in inequity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the costs of your own salary, let them continue to create deposits."
President Woodrow Wilson: " A great Industrial nation is controlled by its system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world – no longer a government of free opinion, no longer a government by conviction and vote of majority, but a government by the opinion and duress of small groups of dominant men…I am a most unhappy man. I have unwittingly ruined my country (Wilson regrets after the Fed took over)."
Supreme Court Justice Felix Frankfurter: " The real rulers in Washington are invisible and exercise power from behind the scenes."
Louis T. McFadden, Chairman of Banking & Currency Committee, in 1932: "The truth is the Federal Reserve Board has usurped the Government of the United States. It controls everything here and it controls all our foreign relations. It makes and breaks government at will …"
McFadden, in 1933: "Roosevelt has brought with him from Wall Street James P. Warburg, son of Paul M. Warburg, Organizer and first Chairman of the Board of the Federal Reserve System…"
McFadden, in 1950: "This same Warburg had the audacity and arrogance to proclaim before the U.S. Senate: ‘We shall have World Government whether or not we like it. The only question is whether World Government will be achieved by Conquest or Consent'."
Senator Barry Goldwater: "Most Americans have no real understanding of the operation of the international money-lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States."
Henry Ford: "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Benjamin H. Friedman, Letter to Dr. David Goldstein dated October 10, 1954: "The history of the world for the past several centuries and current events at home and abroad confirm the existence of such a conspiracy (to destroy Christianity and obtain global power). The world-wide net-work of diabolical conspirators implements this plot against the Christian faith while Christians appear to be sound asleep. The Christian clergy appear to be more ignorant or more indifferent about this conspiracy than other Christians … It seems so sad."