Augusta, Georgia. "Noon Hour. Workers in Enterprise Cotton Mill. The wheels are kept running through noon hour (which is only 40 minutes) so employees may be tempted to put in part of this time at machine if they wish
Ilargi: Was that just me, or did Google News fail all over for a while? As in, the while I needed........
Anywaydeedelydays, 6 more banks were closed, and Guaranty, Texas' no 2. bank, will likely -self announced- follow as early as this weekend, and be the biggest failure in 2009 at $14 billion. Which would bankrupt the FDIC. Lovely! So let's go for a more timeless take, shall we? I’m all for it. My buddy whom I never met at EconomicDisconnect asked me today for a song to contribute to his regular Friday upbeat helping. What popped into my head within 2 seconds, for no specific reason, there's after all a million songs out there that have something to say, was Springsteen's My Hometown.
I was eight years old and running with a dime in my hand
Into the bus stop to pick up a paper for my old man
I'd sit on his lap in that big old Buick and steer as we drove through town
He'd tousle my hair and say son take a good look around
This is your hometown
Written in the early 80's, in the recession then that seemed really heavy in Jersey and other places, a recession which will look like an exuberant Vegas top notch penthouse suite birthday bash compared to what’s around the Asbury corner. You'd have to go all the way back to Woody Guthrie or Leadbelly to find a song that better describes what lies ahead for America. Springsteen captured the coming decade almost 30 years before it happened, and I suggest you listen very closely, with your eyes closed, and see in your minds' eyes the images he evokes. That's what you'll be living.
Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back to your hometown
The whole country that America once proudly was is breaking into ever smaller shattering pieces, while you're watching Wall Street numbers go up. Hey, say what you will about God, you can't claim her sense of irony ain't dead on. California will take many years just to appear normal, forget about recovery. The mayor of Detroit throws the towel, without acknowledging he does (as is the spirit of politics). The Motor City is broke, and there's nothing on the horizon that could possibly prevent complete and utter bankruptcy. Neither in Detroit nor anywhere else, that is.
They're down to praying for miracles now. Not that there's anything wrong with that. It‘s just that there's a million other towns, counties, states and countries praying for the same sort of preferential heavenly treatment. And even if one of them miraculously got what they prayed for, don't you think they'd likely be overrun by all the rest that didn't?
Tax revenues for all levels of government, all over the country, are plummeting at frightening and astonishing rates. It's over people, the experiment that is America has failed. In its present form, that is.
Open your eyes. Put your son in your lap, as in the Springsteen song, and drive through your town. To what extent are his interests best served by your belief in some opaque sort of change to believe in, by your blind running after green shoots that are always one inch beyond your receding horizons? Isn't it perhaps a better idea to put your kids' feet down on solid ground instead of some belief based soil?
What do you think? Or do you even think to begin with? Not to insult you, but if you actually do believe in Obama's green shoots, take it from me: you ain't thinking straight. And while you're at it, take this from me too: I don't care about what you do to yourself. It's that kid on your lap I'm worried about, who's apt to fall prey to your inability to face your own reality, your own frustrations and your own failed dreams.
Will you at least consider the option that it's over, and it will not ever come back? That you need to build your next set of dreams on a foundation of your own making, and not a media slash politics induced one? That for your kid to survive, you may need to come up with a plan of your own, instead of one hammered into your dainty little skull since kindergarten? Something of your own making, something your own hands built from scratch, and not what your plastic allows you to drag out of the strip mall. What happened on the way here? Do you have the answer if that kid of yours asks you that question?
So where are these sorts of initiatives like Little Steven's Sun City one, below, when will artists stand up against Obama and his Goldman Sachs cabal? Yeah, they won't, you're right. And that's a bitter shame. There was a time, after all, when there was the idea that the little people had a say in their own lives.
And if you don't get that, why not go for the depths of your soul, for the purest form of emotion and tragedy ever delivered by the most divine human voice that ever sang in our times. Whatever you do, whatever pulls your crank, make sure something can still touch your heart. If not, you've gone the way of the Norwegian blue.
U.S. Home Vacancies Hit 18.7 Million on Bank Seizures
More than 18.7 million homes stood empty in the U.S. during the second quarter as the steepest recession in 50 years sapped demand for real estate and banks seized properties from delinquent borrowers. The number of vacant properties, including foreclosures, residences for sale and vacation homes, was little changed from 18.6 million a year earlier, the U.S. Census Bureau said in a report today. The quarterly homeownership rate was 67.3 percent, seasonally adjusted.
More than 14 percent of homes were vacant in the period, the Census said. Home values dropped 33 percent since 2006, according to the S&P/Case-Shiller index, and the unemployment rate in June rose to the highest in almost 26 years. Tumbling home prices and rising job losses have thwarted government efforts to reverse the housing decline at the heart of the longest U.S. recession since the 1930s. “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Federal Reserve Chairman Ben S. Bernanketold the House of Representative’s Committee on Banking, Housing, and Urban Affairs on July 21.
The percentage of all U.S. homes empty and for sale, known as the vacancy rate, fell to 2.5 percent in the quarter. It hit a high of 2.9 percent in the first and fourth quarters of 2008, the Census Bureau said. The vacancy rate fell slightly as the number of homes on the market declined because they were sold or because their owners gave up trying to market them. The inventory of homes on the market averaged 3.8 million in each of 2009’s first six months, according to data from the National Association of Realtors. Last year, the monthly average was 4.2 million. The vacancy rate was the lowest in the U.S. northeast region, at 2 percent, and the highest in the south, at 2.7 percent, according to the report.
There were 130.8 million homes in the U.S. in the second quarter, the Census Bureau said. In addition to the 1.9 million empty properties for sale, the report counted 4.4 million vacant homes for rent and 4.6 million seasonal properties that are only used for part of the year. Foreclosures are included in a part of the report that includes vacation homes intended for year-round use and homes that are unoccupied because they are under renovation or tied up in legal proceedings. There were 7.8 million such properties empty in the second quarter, up from 7.7 million a year earlier, the report said. Foreclosures could also be counted as vacant homes for sale or rent, or as owner-occupied properties if lenders have not yet evicted previous owners, the federal agency said.
Companies have shed about 6.5 million jobs since the recession began in December 2007, cutting demand for homes and eroding the consumer spending that makes up about 70 percent of the world’s largest economy.
One in every eight U.S. households with a mortgage is now late on their payments or already in foreclosure, according to Jay Brinkmann, chief economist for the Washington-based Mortgage Bankers Association. The U.S. delinquency rate rose to a seasonally adjusted 9.12 percent in the first quarter and the share of loans entering the foreclosure process rose to 1.37 percent, the bankers’ group said in a May 28 report. The total inventory of homes in foreclosure, old and new, was 3.85 percent. All three figures were the highest in records going back to 1972.
U.S. foreclosure filings -- notices of default, auction or bank seizure -- rose to a record in 2009’s first half, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. More than 1.5 million properties, one in every 84 U.S. households, received a foreclosure filing, RealtyTrac said in a July 16 report. That was a 15 percent increase from a year earlier. U.S. banks in the first quarter held $29.7 billion of property acquired through foreclosure, including repossessed homes and condominium projects gone bust, according to the Federal Deposit Insurance Corp. in Washington. That’s almost double the $15.7 billion of property a year earlier.
Fannie & Freddie: The most expensive bailout
The first big government bailout of the financial crisis -- the takeover of mortgage finance giants Fannie Mae and Freddie Mac -- is poised to be the most expensive and complicated to complete.
Since Congress essentially wrote a blank check to the Treasury Department in July 2008 to do what needed to be done to inject capital into the two firms, Fannie (FNM, Fortune 500) has received $34.2 billion of direct government support while Freddie has received $51.7 billion.
While that's lower than the $117.5 billion poured into insurer AIG by the Federal Reserve and the $200 billion given to the nation's largest banks through the Troubled Asset Relief Program, or TARP, the current cost of the Fannie and Freddie bailouts dwarfs original estimates from a year ago When Congress was debating the bailout of Fannie and Freddie last July, the official estimate from the Congressional Budget Office was that a bailout would most likely cost taxpayers $25 billion, with only a 5% chance of the price tag reaching $100 billion between them.
In addition, both Fannie and Freddie are likely to need billions of dollars more after they report second quarter results in the coming weeks. Experts believe the cost will only continue to rise in the next year.
"We're assuming they each will cross the $100 billion mark fairly soon. They could be hitting the $200 billion barrier by the end of next year," said Bose George, mortgage analyst at Keefe, Bruyette & Woods, an investment bank specializing in financial services firms. The direct government aid has helped keep the two troubled firms solvent. The amount of any additional aid will be determined by their ongoing losses and reserves for future losses on the trillions of dollars in mortgage loans they own or guarantee.
Fannie and Freddie were originally created to help ensure that financing for homes would be available and affordable to more consumers. The two firms buy mortgages from banks and other lenders and bundle them together into securities. They then either hold those securities or sell them to them to investors with a guarantee that they will be paid the money owed by homeowners. But as more homeowners continue to default on mortgages, the two firms will likely book additional losses well into next year.
Neither firm has given an estimate as to how high losses will reach. But the original limit of $100 billion in losses set in place when the government put Fannie and Freddie into conservatorship, essentially a form of bankruptcy, last September was quickly raised early this year to $200 billion each because of concerns about looming losses. In return for pumping taxpayer dollars into the two firms, Treasury received preferred stock, which is designed to give the government a healthy 10% to 12% dividend. But few expect that Fannie or Freddie will be able to pay that dividend, let alone return the money handed to the firms to cover their losses..
Even James Lockhart, director of the Federal Housing Finance Agency, the government body that has overseen the two firms since they were placed into conservatorship, said it will be a challenge for Fannie and Freddie to make their scheduled payments. "Obviously the 10% dividend is a high rate," he said, but added that this is probably below what private market investors would demand to own preferred shares in the two companies.
Lockhart also agrees with experts who believe that the government will eventually have to write down at least a portion of the money that has been sunk into Fannie and Freddie. He would not estimate how much, saying it will depend upon housing prices in the future. But Lockhart maintained that the loss of taxpayer money is worth it in the long run because Fannie and Freddie have continued to be vital parts of the housing market during the credit crunch.
"They really have been the backbone of the housing market throughout this period," he said. "The money spent, we can at least say has gone to a good cause -- keeping the housing market much more stable than it would have been [without the bailout]." And it's precisely for this reason that experts think the ultimate bailout cost will climb much higher. The money allocated for Fannie and Freddie is being used not to simply return the firms to profitability, but to try and fix the broader housing market's problems.
Both the Bush administration and the Obama administration have used government control of Fannie and Freddie to implement various policies to try to address rising home foreclosures and falling prices. The firms are a key part of the Obama administration's efforts to refinance mortgages of at-risk home owners, in some cases making loans for up to 125% of the home's current market value. "The way to think of the cost is not as a loan," said Phillip Swagel, a professor at Georgetown's business school who was the assistant secretary for economic policy in the final months of the Bush administration. "It's really a way of spending taxpayer money for policy purposes."
In contrast, other companies receiving federal bailout dollars, such as automakers General Motors and Chrysler, money-losing banks and AIG, were given the charge by Treasury Department officials to stem their financial bleeding so they could eventually be returned to full ownership by the private markets. But unlike the rapid six week bankruptcy process at GM and Chrysler, the conservatorships at Fannie and Freddie won't be coming to a conclusion any time soon. Even as it laid out its plans to reform the nation's financial regulatory system last month, the Obama administration said it would not put forward a permanent plan to fix the mortgage finance firms until February 2010.
After that, it's uncertain how long it will take to get the necessary approval from Congress for any changes to the current structure of Fannie and Freddie. There is a case for maintaining the status quo since Congress and the Obama administration have been able to use the two firms to deal with broader problems in the housing market. What's clear is that there will continue to be a need for companies like Fannie and Freddie to keep mortgage costs relatively affordable by packaging loans into securities, placing a guarantee on them, and selling them to investors.
Some experts believe that this business can become very profitable again, especially if Fannie and Freddie maintain tight underwriting standards from now on. Fannie and Freddie "may own the securitization game for the next decade," said Jaret Seiberg, analyst with Concept Capital's Washington Research Group. "They'll have a duopoly, a smaller portfolio and a profitable business model."
But before any of that happens, taxpayers will likely take an even bigger hit on the Fannie and Freddie bailouts first.
Six More Banks Fail Bringing Year’s Total To 64
State regulators shut down 6 subsidiaries of the Security Bank Corporation based out of Macon, Georgia Friday, bringing the total number of banks to fail in the U.S. to 64 in 2009. 16 banks have failed so far in Georgia ; more than in any other single state. To protect the depositors, the FDIC said it entered into a purchase agreement with State Bank and Trust Company of Pinehurst, Georgia, to assume all of the deposits of the six bank subsidiaries of Security Bank Corporation. State Bank and Trust Company received a $300 million capital infusion from a group of 26 investors, led by Joseph Evans, notes the FDIC.
The six banks had as of March 31, a total of 20 branches and $2.8 billion in combined assets. Total deposits were approximately $2.4 billion. Six of the banks involved in today’s transaction, which will reopen Saturday as branches of State Bank and Trust Company, are:
- Security Bank of Bibb County, Macon, GA, with $1.2 billion in total assets and $1 billion in deposits.
- Security Bank of Houston County, Perry, GA, with $383 million in assets and $320 million in deposits.
- Security Bank of Jones County, Gray, GA, with $453 million in assets and $387 million in deposits.
- Security Bank of Gwinnett County, Suwanee, GA, with $322 million in assets and $292 million in deposits.
- Security Bank of North Metro, Woodstock, GA, with $224 million in assets and $212 million in deposits.
- Security Bank of North Fulton, Alpharetta, GA, with $209 million in assets and $191 million in deposits.
The failure is expected to cost the FDIC deposit insurance fund an estimated $807 million.The last FDIC-insured institution to be closed in the state was First Piedmont Bank, Winder, on July 17, 2009.
Guaranty Financial, No.2 Texas bank, says may fail
Guaranty Financial Group Inc, the second-largest publicly traded bank in Texas, said it will probably fail after loan losses and writedowns left it "critically" short of capital. The bank, whose investors include Carl Icahn and Robert Rowling, is in talks with at least one investor group for a possible recapitalization, said a source familiar with the situation. The source requested anonymity because the talks are not public.
"The company believes that it is probable that it will not be able to continue as a going concern," Guaranty said in a regulatory filing. The Austin-based lender has about $16 billion of assets and more than 150 branches in Texas and California, according to its website. On that basis, if it were to fail, Guaranty would be the largest U.S. bank to collapse in 2009. Guaranty is about half the size of IndyMac Bancorp Inc, which failed last July.
Its largest investors include companies run by billionaire Carl Icahn and by Rowling, whose investment firm owns the Omni Hotels chain. In a regulatory filing late on Thursday, Guaranty said it has been unable to obtain new capital from shareholders, and believes it will be ineligible for help from U.S. regulators. Guaranty said it does not expect to raise enough capital to comply with an April cease-and-desist order from the federal Office of Thrift Supervision (OTS). It said losses and writedowns have left it "critically undercapitalized," with negative capital ratios.
Guaranty also said it has agreed to an OTS demand for the appointment of the Federal Deposit Insurance Corp as a receiver or conservator. That appointment has not yet happened, but the OTS is exercising "a significant degree of control" over what had been functions of the board of directors, Guaranty said. The company has not filed official results since the third quarter of 2008. It has estimated it lost $444 million in all of 2008 and another $256 million in the first quarter of 2009.
Chief Marketing Officer John Wessman said in a statement that Guaranty is still working with regulators, and believes it can avoid disruptions to customers. Guaranty's largest investors include Rowling's investment firm TRT Holdings Inc, which has a 19.9 percent stake according to a regulatory filing. A company run by Icahn has a 17 percent stake, Reuters data shows.
Icahn and Rowling did not immediately return calls for comment.
Guaranty began operations in 1988, according to its website. It was spun off in December 2007 by Temple-Inland Inc, a corrugated packaging and building products company.
The largest publicly traded bank based in Texas is Dallas-based Comerica Inc. Guaranty shares closed down 7 cents, or 32 percent, at 15 cents on the New York Stock Exchange on Friday. Their 52-week high is $6.75, set last September 18.
Detroit mayor: It's time for the city to face reality
Labor concessions, big cuts in services needed
Detroit is in danger of running out of cash if the city doesn’t take steps to eliminate a $20-million to $25-million budget shortfall before Oct. 1, Mayor Dave Bing told the Free Press on Thursday. After spending most of his first two months in office poring over Detroit’s financial books and organizational structure, Bing said the city is so deeply in the red that the following measures must be taken to avoid bankruptcy:
- The consolidation and elimination of some city departments.
- A reduction in nonessential city services.
- Concessions by city employees, including job losses in some cases.
- The hiring of an outside emergency collection agency to help recoup some of the debt owed to the city.
“We’ve got a cash-flow problem in the second quarter,” Bing said, referring to the autumn period of the city’s budget cycle. He told Free Press editors and reporters in an exclusive interview: “The city could actually run out of cash if we do nothing, and I’m not going to sit back and do nothing.” Bing said the city cannot afford to continue operating the way it has for generations, nor can it afford to keep all of its 13,000 employees.
Detroit's financial picture is grim, but Bing says a complete overhaul of city government by 2010 could help the city avoid the appointment of an emergency financial manager or the filing of municipal bankruptcy. Bing said Thursday there are no more creative moves to make -- those budgetary tricks were all tapped by previous administrations -- and the city is up against a wall financially. The only answer, he said, is to change how the city functions. The time frame is pressing -- Bing said the city could run out of money by the start of the second quarter, Oct. 1 -- if a $20-million to $25-million hole is not plugged.
"There's a reality that we all have to live with, and the reality of the City of Detroit is that we are broke and we are in a financial crisis," Bing told the Free Press on Thursday. To start, he said, these are his priorities:
- Bing said city workers must accept some concessions and end contract negotiations within the next 30 days. "Every day that we go forward without understanding what our labor costs are is a missed opportunity. ... There are financial consequences for the city," he said.
- Reach out to Lansing legislators for ideas and help in tackling the city's accumulated debt, especially as it relates to revenue sharing.
- Determine which city services can be cut or eliminated. Bing said he has some ideas, but he couldn't be more specific because of the ongoing labor negotiations. "There are going to be services we can't provide anymore -- we can't afford it," he said.
- Partner with the City Council to identify outstanding debts owed to the city and possibly hire an emergency collection agency to gather that cash quickly.
- Begin weeding out the 10% of city employees he estimates aren't producing as they should, while maintaining as many jobs as the city can afford.
- Study the suggestions from his crisis management turnaround team -- attorneys steeped in labor law, accountants and business and technology professionals who are scheduled to deliver their assessment by mid-August -- and implement changes where appropriate.
"The system has been broken, and it's not going to be easy to fix, but it can be fixed over time," Bing said. The mayor said this year's budget is padded with soft or unrealistic revenue, including money from plans to sell the rights to the profit generated by the city's parking system, lighting system and the Detroit-Windsor Tunnel. He said the short-term goal is to manage through the current deficit, while planning for the three to five years it will take to eliminate the city's debt.
John Riehl, president of AFSCME Local 207, which represents water and sewer employees, said Bing's plans to consolidate or eliminate city departments is "just a way to mess with the unions," and he's certain city residents won't tolerate having more city services cut. "It's not our role to give any more concessions -- we've heard the same crying for 30 years that they don't have money for us," Riehl said. "He needs to find another way to solve the budget problem."
Bing, who spoke with editors and writers at the Free Press, said he has been at a disadvantage since taking office in May because a budget already had been approved, and he didn't want to use the resources it would take to revamp it. The city's fiscal year runs from July 1 to June 30. He said once he became immersed in the budget, his comfort zone wavered, and he recognized how much of it was based on pie-in-the-sky revenue. Bing said the overall deficit could balloon to $400 million -- he estimates it to be about $275 million to $300 million now -- if swift changes are not made. He also acknowledges that he won't be the most popular mayor to inhabit the 11th floor of City Hall, but he is working to improve the lives of Detroiters.
"There's no easy way to say this ... there are going to be a lot of unhappy people with the decisions I make," he said. Clyde Walker, a retired General Motors Co. worker who lives on the city's west side, said Bing deserves a chance to utilize his business background and map out a new beginning for Detroit. Past practice hasn't worked, he said, and voters spoke at the polls about their desire for a new approach. "He's only been in office two months -- those problems didn't build up overnight, and they won't go away overnight," said Walker, 68. "Everybody is going to have to take a cut. If you want a better city, everybody has to pitch in and do their share."
Bing said he views municipal bankruptcy -- Chapter 9 -- as a last option. Chapter 9 allows a financially distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts while being protected from a forced liquidation of assets. Often a muncipality can reduce the outstanding debt or interest rate by extending the term of a loan or refinancing debts. "Right now, I'm still pretty competitive," Bing said. "I don't want to get into this situation and fail. We're going to get the job done."
California Pension Fund Hopes Riskier Bets Will Restore Its Health
Big as California’s budget woes are today, so are the problems lurking in its biggest pension fund. The fund, known as Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall. Meanwhile, local governments in the state are pleading poverty and saying they cannot make the contributions that would be needed to shore it up.
Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets. Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.
That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio. Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns.
“Three percent on a portfolio as large as ours makes a material difference,” he said. If he can inch Calpers’s investment performance up, many problems will disappear. If not, Calpers may end up in an even bigger financial squeeze than it is today. The scope of his task elicits sympathy from one of Calpers’s harshest critics, Marcia Fritz, a Sacramento lawyer and vice president of the California Foundation for Fiscal Responsibility, which has led a loud campaign over the rich benefits received by some Calpers retirees.
“Joe Dear has got a tough job,” Ms. Fritz said. “I wouldn’t wish it on anyone. There’s so much pressure. It’s horrible.” A somewhat unorthodox choice for the job, Mr. Dear sounds a little like Captain Kirk surveying the Starship Enterprise when he explains why he leaped at the opportunity earlier this year: “Calpers is the flagship command of the public pension fund world.” He was hired in large part for his management skills and political savvy — honed in Washington, where headed the Occupational Safety and Health Administration in the Clinton years. He does not have an M.B.A. or any other advanced degree in finance. Harvard, Yale or Wharton is not on his résumé. Instead, his lone degree, in political economy, is from Evergreen State College in Olympia, Wash.
Most recently, Mr. Dear headed the Washington State public pension fund, which gained a reputation as a daring investor under his oversight. It risked more of its portfolio — 25 percent — on private equity than any other public fund. The bet pushed the Washington State Investment Board, which now has $67 billion in assets, into the top 1 percent of its peer group in performance during the boom years, according to Wilshire Associates. But in the fiscal year that ended last month, the fund lost 27 percent of its value, or $18 billion.
Calpers has a lot riding on Mr. Dear’s effort to achieve above-market performance. The fund just posted a loss of 23 percent, the worst in its history. That leaves it 66 percent funded, the lowest level in two decades, meaning it has only $66 on hand for every $100 in benefits promised to 1.6 million California public employees and their families. Gov. Arnold Schwarzenegger, who is on the Calpers board, has called the fund “unsustainable.” He has specifically criticized a decision by Calpers last month to give California municipalities a break on their required contributions. Rather than stepping up contribution rates to 5 percent to cover investment losses, Calpers set a maximum increase of 1.1 percent — saving municipalities hundreds of millions of dollars.
Mr. Schwarzenegger called it a “pass the buck to our kids idea.” Calpers says municipalities, which pay 15 percent of their payroll — or about $11 billion a year — into the fund, needed the help.
Steering through the political cross currents would seem to be one of Mr. Dear’s strengths. “My career sort of culminates in this job, where this combination of investment and political management and organization management come together because that’s what Calpers needs,” he said in his expansive corner office decorated with a photo of himself and Bono. (Bono was a general partner in an equity fund in which the Washington State fund invested.)
“The fun part is the investment part,” Mr. Dear added, speaking in fast, yet measured tones. “The necessary part is the organization, the management and the work in the political environment. The common element in my career is that I’m extremely focused on improving the performance of the organizations I work for.” Mr. Dear, 57, is also chairman of the Council of Institutional Investors, a Washington nonprofit group that promotes shareholder activism — an effort close to the heart of the Calpers’s board and one reason he was hired.
“The board felt that we had extremely good depth on the investment staff,” said George Diehr, chairman of the board’s investment committee. “We were looking for someone to knock down silos and get various asset managers talking to each other. We felt Joe would have those skills. He’s well known in the public pension field, and he’s a strong advocate for corporate governance.” In the end, Mr. Dear, who will get $408,000 to $612,000 in salary and can qualify for a performance bonus of up to 75 percent of that salary, will be judged by portfolio returns.
Already, Calpers has raised its target for private equity and related investments by 40 percent to about 14 percent of the total portfolio. To cover any calls by private equity firms for additional money, the fund has also raised its target for cash on hand to 2 percent of assets. It is ratcheting back on public domestic stocks, which account for less than 25 percent of the portfolio, while another 25 percent of the portfolio is in international equities.
Critics say that Mr. Dear and Calpers — which has a staff of 200 investment professionals — are taking on too much risk. “Calpers is significantly underfunded, and they have decided that they will roll the dice,” said Edward A. H. Siedle, president of Benchmark Financial Services, which audits pension plans. “Is that appropriate if you have just lost 25 percent of your portfolio? These are high-risk, illiquid, unregistered products where there is tremendous valuation uncertainty. I would bet you any amount that five years from now, this plan will not have outperformed the market.”
Mr. Dear says he can improve performance in other ways as well. He has pressed the private equity and hedge funds in Calpers’s portfolio to reduce their fees, provide more transparency and segregate Calpers’s money from that of other investors. While not ready to announce any agreements, Mr. Dear said he was making “good progress.” Last week, he testified before Congress that private equity and hedge funds should register with the Securities and Exchange Commission and be subject to the agency’s oversight.
On the activist front, Calpers has voted against management in a number of recent proxy battles, including management of Bank of America. And Mr. Dear or his staff meet regularly with members of Congress and the Obama administration. Saying he spends a third of his time as investment chief, a third on board matters and a third on outside issues, Mr. Dear remains passionate that this is the moment when shareholders can prevail. As he sees it, “You have public awareness, outrage over the consequences of a failed regulatory system and an administration and Congress prepared to respond.”
UK GDP shrinks at fastest rate for 60 years
Britain’s economy contracted in the second quarter, marking a full year of decline sharper than any since the 1930s barring that of second world war and its aftermath. Economic output fell by 0.8 per cent quarter-on-quarter in the three months to June, after a 2.4 per cent decline in the first quarter, according to the Office for National Statistics’ “flash” first estimate of gross domestic product on Friday. Although the economy is contracting at a much slower pace than earlier this year, the decline was far sharper than the average 0.3 per cent forecast by economists in a Thomson Reuters poll, and worse than even the most gloomy estimate in that survey.
The contraction, which is the fifth consecutive quarterly decline in UK output, prompted economists to speculate that the Bank of England may expand its bond buying programme of quantitative easing. “The provisional UK GDP figures for Q2 are shockingly bad and firmly dash any hopes that the UK had already pulled out of recession,” said Vicky Redwood, economist at Capital Economics. The latest official data seemed to cast doubt on the widely followed CIPS/Markit surveys of purchasing managers, which have been decidedly upbeat in recent months, Ms Redwood said.
Mike Saunders at Citigroup said that year-on-year the UK has just experienced the sharpest economic contraction in any year since the 1930s except for that seen during world war two and the wind down of the war economy.
Colin Ellis, economist at Daiwa Securities, noted that the economy has now shrunk by 5.7 per cent from peak to trough. “Ignoring the spike in GDP in the second quarter of 1979 that distorts the true peak in activity, this is the largest peak-to-trough fall since the current data series started in 1955,” Mr Ellis said. “But the bottom line was that today’s number is pretty dire, and a sharp wake-up call for anyone who had already been dreaming of recovery.”
Within broader GDP, the output of production industries declined by 0.7 per cent from their first quarter level, which itself was 5.1 per cent down on the last three months of 2008. Sterling fell by a cent against the dollar and euro following the release of the unexpectedly bad growth data. The weak data prompted economists on Friday to speculate that the Bank’s monetary policy committee would consider at its next meeting in August whether it should expand the quantitative easing programme of security purchases to the full £150bn allocated to it, and may even seek authorisation to expand purchases beyond that level.
Economists said that the main surprise in the data was the decline in services output, which fell by 0.6 per cent. The second quarter decline follows a 1.6 per cent drop in services output in the first quarter. Within that sector, business services and finance contributed most to the decline, falling 0.7 per cent, the ONS said. The drop in output in the service sector was underlined by the monthly index of services which was also released by the ONS on Friday. It showed output declined by 0.2 per cent in May compared to the previous month and by 1 per cent and in the three months to May, compared to the three months to April.
In the growth figures distribution, hotels and restaurants fell by 0.5 per cent after contracting by 1.5 per cent in the first quarter. Within that, wholesale and motor trades contributed most to the decline. Indeed, the weakness of the motor industry was reflected in new data out Friday morning from the Society of Motor Manufacturers and Traders showing that production of cars fell by 30.2 per cent from its year ago level. Production of commercial vehicles – a component of business investment – showed a much sharper contraction, with production down by 60.4 per cent in June.
British Economy Shrinks Much More Than Expected
The economy shrank more than twice as fast as expected in the second quarter of 2009 to register its biggest annual decline on record, dashing hopes of a speedy recovery from the worst recession in nearly 30 years. GDP fell 0.8 percent in the three months to June and by 5.6 percent lower on the year, the steepest yearly fall since similar records began in 1955, official data showed on Friday as Britain became the first major country to report Q2 data.
The annual decline was significantly worse than that forecast by the Bank of England in May. Its central forecast was for a year-on-year decline of 4.64 percent. "These are awful, awful numbers," said Ross Walker, UK economist at RBS Financial Markets. "It casts doubt on whether we will actually see growth in Q3." Many analysts had been confident of a return to growth later this year and sterling fell more than half a cent and gilt prices rose as investors bet the recovery could take longer and the Bank of England might add more stimulus to the economy.
"We would still tend to the view that the economy will expand in the second half of the year but these figures introduce some uncertainty to that outlook," said Philip Shaw, chief economist at Investec. The UK economy has now shrunk for five consecutive quarters with a cumulative decline of 5.7 percent -- more than double the drop seen in the early 1990s recession and not far off the 6 percent contraction experienced in early 1980s.
Analysts said government forecasts of the economy shrinking by around 3.5 percent this year -- which would be the worst outturn since the Second World War -- were looking very optimistic, putting more pressure on strained public finances. "For this to now happen would require a remarkable bounce back in the second half of the year with growth of around 1.5 percent in each of the remaining two quarters," said Richard Snook, senior economist at the Centre of Economic and Business Research.
Treasury minister Liam Byrne said that at least the figures showed the pace of decline was easing -- GDP shrank by 2.4 percent in the first quarter -- and that he was "cautious but confident that growth will return towards the end of the year."
Prime Minister Gordon Brown desperately needs an economic turnaround before an election expected in May 2010 as his Labour Party is languishing in the polls. The opposition Conservatives won a parliamentary seat in eastern England from Labour on Friday, with their candidate securing a big majority. Analysts warned that even if the economy starts to grow again, it may be a while before it picks up any real momentum and hundreds of thousands jobs could still disappear as more and more companies struggle to make ends meet.
A breakdown of the figures showed business services and finances, a sector that has boomed for much of the last decade, accounted for more than a quarter of the Q2 GDP decline. "Recent hopes of recovery have run ahead of reality. With credit still severely restricted, consumers and businesses continuing to retrench and world trade yet to pick up, it is hard to see any grounds for sustained optimism," said Hetal Mehta, senior economic adviser to Ernst and Young.
The Bank of England has already cut interest rates to a record low of 0.5 percent and has pumped close to 125 billion pounds of new money into the economy in order to pull the country out of recession and get lending going again. Policymakers will now debate next month whether even more stimulus is needed. The jury remains out on whether the BoE will choose to expand the scope of its asset-buying programme of mostly gilts when the 125 billion pounds total is completed. "It is still likely to be a long hard slog to get the economy back on track. Accordingly, we think that that it is premature to conclude that the Bank's quantitative easing programme has already come to an end," said Vicky Redwood, UK economist at Capital Economics.
EU youths hit worst by lack of work
Europe’s youth are bearing the brunt of unemployment created by the economic crisis, according to official data on Thursday that highlighted the risk of the recession leaving a permanent scar on the continent’s younger generation. Joblessness in the European Union has been rising since early last year. But the unemployment rate among 15 to 24-year-olds has been increasing at “a much higher pace” than overall unemployment, according to a study by Eurostat, the EU’s statistical office.
The largest increases were in the Baltic states of Latvia, Estonia and Lithuania, which have been particularly badly hit by the global economic turmoil. But Spain still has the highest youth unemployment rate – with more than a third of the labour force aged 24 or under without work. The latest figures will alarm policymakers as European youth unemployment rates were high even before the economic crisis. They suggested improvements in labour market flexibility in the past decade were at the expense of newer entrants into the workplace – and that companies have reacted to the severe economic downturn by stopping recruitment and ending short-term contracts, rather than dismissing existing staff.
In a report this week, Germany’s DGB trade union association warned that job prospects for young workers, as well as for the oldest employees, would deteriorate further. “The number of training places has fallen during the crisis and those who have finished their education are being taken on less often,” it warned. Lengthening jobless queues “started with the periphery, people fresh out of university or with short-term contracts”. But the main bulk of the labour force is still OK,” said Gilles Moec, European economist at Deutsche Bank.
Such trends explained why consumer spending had remained relatively robust in continental Europe, Mr Moec argued. The risk was that persistent economic weakness would eventually result in large-scale job losses.\ EU youth unemployment as a share of the labour force rose 3.7 percentage points to 18.3 per cent between the first quarter of 2008 and the first quarter of this year, according to the Eurostat analysis. Over the same period, the total unemployment rate rose by just 1.5 percentage points. In the 16-country eurozone, the youth unemployment rate hit 18.4 per cent in the first quarter, the highest shortly after the launch of the euro in 1999. Youth unemployment was lowest in the Netherlands, at 6 per cent, but was also relatively modest in Germany at 10.5 per cent, little higher than the 10.2 per cent record a year earlier.
Geithner, Bernanke at odds on consumer protection
Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke staked out opposing sides Friday in a turf war over who should protect Americans from shady mortgage lending, abusive credit card fees, payday loans and other high-cost or risky financial products. The White House wants to create a new Consumer Financial Protection Agency to oversee a vast range of financial products, stripping the Federal Reserve and other banking regulators of their current authority for policing them.
"I think it's very hard to look at that system and say that it did anything close to an adequate job of what it was designed to do," Geithner told the House Financial Services Committee. He cited the collapse of the housing and credit markets because of high-risk subprime mortgages made to borrowers who didn't understand and couldn't afford them. Bernanke, appearing before the same committee after Geithner, argued that the Fed should retain its consumer protection powers regarding consumer products. "Without extensively entering the debate," Bernanke said, Congress should be aware of "some of the benefits that would be lost through this change," including the Fed's consolidated resources for also ensuring the safety and soundness of banks.
Geithner brushed aside the Fed chairman's concerns as part of a typical Washington turf battle. "With great respect to the chairman and other supervisors who are reluctant to do this, they are doing what they should, which is defend the traditional prerogatives of their agencies," Geithner said. "I think frankly all arguments should be viewed through that prism." While that's understandable, Congress has to intervene, Geithner added. "Inherent in your job is to think about how to make those choices," he said.
Other regulators testifying with Bernanke said they, too, had concerns about the administration's plan. Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, suggested that the new agency be allowed to write rules that protect consumers, but that existing regulators be tasked with enforcing them. When asked by Rep. Carolyn Maloney whether such an arrangement would work, Geithner said no, because enforcement would remain uncoordinated across the government.
The House committee's chairman, Rep. Barney Frank, and Senate Banking Chairman Christopher Dodd both support the plan to create a new Consumer Financial Protection Agency. But the effort has slowed amid opposition from bankers and other financial industry leaders, as well as the regulators, Republicans and some Democrats. Frank has delayed a vote on the measure until after the August recess, but maintains he has the votes to pass it.
Rep. Jeb Hensarling and other Republicans on the panel said Friday they thought it was foolish to give unelected bureaucrats the authority to determine what financial products are fair.
"They will be empowered to decide which credit cards we can receive, which home mortgages we are permitted to possess, and even whether we can access an ATM machine," Hensarling said. House Republicans have offered an alternative that would strip the Fed of its regulatory role and abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections. Unlike the administration's plan, the Republican-envisioned regulator would have no authority over nonbank institutions, such as mortgage brokers.
Obama's plan taps the Fed to be the regulator of huge, globally interconnected financial companies whose collapse could endanger the entire U.S. financial system and the broader economy. Bernanke said Friday that at a "very rough guess" about 25 companies would currently be deemed too big to fail under the Obama proposal. Virtually all of those firms are organized as bank holding companies, which means that they are subject to regulation by the Fed, Bernanke said. Given that, Bernanke said he doesn't envision the Fed's oversight extending to any "significant number of additional firms." Both Democrats and Republicans in Congress are leery of giving the Fed additional powers, blaming what they say was its lack of regulatory oversight of banks and risky mortgages for leading to the current financial crisis.
We Now Have A Total Gangster Government
FDIC’s Bair Seeks Fund to Wind Down Finance Firms
Federal Deposit Insurance Corp. Chairman Sheila Bair urged U.S. lawmakers to impose fees on the nation’s largest financial firms to keep the government from having to prop up companies deemed too large to fail. Congress should create an industry-supported Financial Company Resolution Fund to provide working capital and cover unanticipated losses when government steps in to unwind a failed firm, Bair said today in testimony at the Senate Banking Committee.
The U.S. should impose “assessments on large or complex institutions that recognize their potential risks to the financial system,” Bair said. “This system also could provide an economic incentive for an institution not to grow too large.” Bair’s proposal is aimed at preventing the government from having to bail out or arrange an acquisition for a firm whose failure would disrupt the financial system. In the past two years, the U.S. has rescued, taken over or helped sell Bear Stearns Cos., Merrill Lynch & Co., American International Group Inc., IndyMac Bancorp Inc., Fannie Mae and Freddie Mac.
Bair said the proposed reserve would be similar to the FDIC deposit insurance fund, which backs consumer accounts at U.S. banks that pay fees to support the fund. “In a properly functioning market economy there will be winners and losers, and when firms -- through their own mismanagement and excessive risk taking -- are no longer viable, they should fail,” Bair said. She urged creating a mechanism to wind down “large, systemically important financial firms” with no cost to taxpayers similar to the system in place at the FDIC for shutting failed commercial banks and thrifts.
“Without a new comprehensive resolution regime, we will be forced to repeat the costly, ad hoc responses of the last year,” Bair said. Bair joined Securities and Exchange Commission Chairman Mary Schapiro and Fed Governor Daniel Tarullo in discussing an Obama administration proposal to give the Federal Reserve authority over firms that pose a systemic risk to the economy. Schapiro said a council of agencies with the Treasury Department, the SEC and the FDIC should oversee “systemically important institutions.” Bair endorsed the idea. The council should “prevent the creation” of companies deemed too large to fail, rather than just regulating such companies, Schapiro said. It should have authority to identify firms it deems systemically risky, Schapiro said.
“Insufficient attention has been paid to the risks posed by institutions whose businesses are so large and diverse that they have become, for all intents and purposes, unmanageable,” Schapiro said. Tarullo said giving the Fed the authority “would be an incremental and natural extension” of the central bank’s current role. “I hope people are not expecting that anything that the Fed, the SEC, the FDIC or anybody else does is going to eliminate all potential for systemic risk,” Tarullo said. Senators Christopher Dodd and Richard Shelby, leaders of the banking panel, opposed giving the Fed new powers.
“The Fed hasn’t done a perfect job with the responsibilities it already has,” said Dodd, the chairman and a Connecticut Democrat. “This new authority could compromise the independence the Fed needs to carry out effective monetary policy.” Shelby, the panel’s leading Republican, said the power would make the Fed “a regulator giant of unprecedented size and scope,” and Congress “should consider every possible alternative to the Fed as the systemic-risk regulator.”
Geithner Calls for Financial-Rules Revamp to Be Passed This Year
Treasury Secretary Timothy Geithner, hoping to refocus the public's attention and prod the scattered attention of Congress, on Friday called on lawmakers to complete a revamp of the financial regulatory system by the end of the year. But while Mr. Geithner claimed a national mandate to quickly make changes to an "outdated and ineffective" regulatory system, the vicious ongoing turf war between the regulators that will make up the new oversight structure made clear that policy makers face an uphill climb to enact substantive legislation this year.
Mr. Geithner, appearing before the House Financial Services Committee, said that there should be "no disagreement on the need to act" to address the myriad of problems laid bare by the financial crisis. Lax oversight of financial firms, weak and rarely enforced consumer protections, and firms considered "too big to fail" shouldn't be the norm, he said.
"We cannot afford a situation where we leave in place vulnerabilities that will sow the seeds for future crises," Mr. Geithner said in prepared remarks before the panel. The alphabet soup of federal financial regulators is generally in agreement with that position, as evidenced by strong statements Friday by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency in favor of the outlines of the Obama administration's plan.
But with significant power at stake and the regulatory kitty still to be officially divvied up, the various agencies testifying Friday aggressively staked out positions that would at turns expand on or erode the Obama administration's attempts to rein in what Mr. Geithner called the "dangers of market-driven excess." Even something as seemingly simple as the name of the agency that will oversee U.S. banks is up for debate.
"We see no reason for the government to incur the cost of changing the 146-year-old name of the agency as the Office of the Comptroller of the Currency," OCC Director John Dugan said in his prepared remarks. The Obama administration's proposal calls for a merger of the OCC and the Office of Thrift Supervision, creating a new "National Bank Supervisor." But even such a merger should still be an open question, OTS Acting Director John Bowman said. "The OTS did not regulate the largest banks that failed; the OTS regulated the largest banks that were allowed to fail," Mr. Bowman said in his remarks.
The key division between the Obama administration and the federal regulators is over the creation of a Consumer Financial Protection Agency with broad authority to write and enforce rules dealing with financial products used by consumers. Mr. Geithner and other top administration officials have made the agency a centerpiece of their regulatory agenda, but the regulators present Friday uniformly sought to limit the scope of the potential agency.
"Without extensively entering the debate on the relative merits of this proposal, I do think it important to point out some of the benefits that would be lost through this change," Fed Chairman Ben Bernanke said in his testimony of the proposal to transfer rule-making authority away from the Fed to the new agency. The new consumer agency has already come under attack from business and financial lobbying groups, but Friday's testimony showed that regulators are also wary of the proposed changes.
Mr. Dugan said he has "serious concerns" about the agency because the administration's plan wouldn't allow the federal banking regulators to offer "meaningful input" into new consumer rules. "A stronger role for federal banking supervisors is needed in writing the rules in order to provide better protection for consumers...while ensuring safe and sound banking practices," Mr. Dugan said.
FDIC Chair Sheila Bair offered a different take, but also moved away from the administration's proposal. She said the proposed agency should have sole rule-writing authority for consumer financial products, but that federal banking regulators should be called on to examine and enforce those rules. That's a departure from the Obama administration's vision of an agency that both writes and enforces the rules for products such as mortgages and credit cards.
Those objections are unlikely to sit well with Mr. Geithner, who noted that one of the initial causes of the current crisis -- subprime mortgages -- were never dealt with by the same regulators now eager to defend their turf. "It took the federal banking agencies until June 2007 to reach final consensus on supervisory guidance imposing even general standards on subprime mortgages. By then it was too late," Mr. Geithner said.
One area regulators do agree on, and are sensitive to public opinion of, is institutions that are considered "too big to fail." Mr. Bernanke, whose agency would be given oversight authority over systemically important firms under the Obama proposal, said policy makers need to make sure shareholders and creditors don't believe they will be fully protected in the case an individual firm fails.
"It materially weakens the incentive of shareholders and creditors of the firm to restrain the firm's risk-taking," Mr. Bernanke said of firms that investors currently believe the government will bail out in an emergency. Ms. Bair, expressing a similar sentiment, said the "notion of too big to fail creates a vicious cycle that needs to be broken."
What's Good for Goldman is Bad for the Nation
by Bill Bonner
[..]Yesterday came more evidence that the depression is over. The Dow shot up 188 points. From a technical point of view, if you believe that kind of thing, it looks as though the rally has farther to go. We recall setting a target of Dow 10,000. Perhaps we will get there. Oil traded at $67 yesterday. Gold rose to $954 and bond yields on the 10-year T-note rose to 3.7%. All of this sounds vaguely inflationary...and vaguely bullish. Besides, Goldman stock is rising. And as we all know, what's good for Goldman is good for the country.
Yes, we are kidding. What's good for Goldman is generally bad for the country. Goldman makes money by separating investors from their money. Nothing wrong with that; someone has to do it. But the big banks are most profitable when speculation is rampant and debt is growing. That is, when people are going further and further into debt...and speculating on rising asset prices. We know you don't really prosper by borrowing and gambling. But that doesn't make casinos unpopular, or lenders unlawful. Bankers, like undertakers, benefit from human frailty. At least, they benefit as long as the government bails them out. Otherwise, they fall victim to their own human frailty.
But this is a minority opinion. Most economists disagree with us. And there are so many of them...if all the economists who disagreed with us were laid end-to-end...it would be a good thing. They believe that the economy is stabilizing...and on its way back to normal. Trouble is, 'normal' ain't what it used to be.
Wall Street banks are making money, 'tis true. But they're not financing new businesses...or factories. They're not aiding the process of capital formation nor allocating capital in ways that will result in new jobs and new industries. Instead, they are refinancing old debts...and speculating on zombie assets. This will not increase the real wealth of the planet. Instead, money just changes pockets. Which, of course, raises an interesting question; where did all this money come from? If Goldman's pockets are fatter, whose are thinner? If the four biggest banks earned a combined $11 billion in the last quarter...who did they take the money from? Who's got that kind of money?
Meanwhile, we found out this week that the feds have wagered an amount equal to 170% of GDP in their attempt to bailout the world (more below). Part of that money was used to buy Wall Street out of the investments that they didn't want. Which ones were those? Well, the ones that didn't work out.
No wonder the banks are making money.
But while the banks are making billions, cometh another report from another sector - manufacturing. Caterpillar announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer's money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors...big things...things that make noise and give off exhaust...things you use to dig holes and move dirt...things you need if you're going to have a real economic recovery. Unfortunately for CAT, these things aren't selling.
So what does this tell us? Well...it suggests that there is no real economic recovery at all. The real economy is suffering...sinking...and shutting down.
The banks are not earning their money helping Caterpillar expand. They're making their money not because of a recovery, but because there isn't one. In other words, they're profiting from the financial stress of the early stages of a depression. There's a post-crash bounce...and the government is sending a lot of money their way. As for a real recovery - forget it. There's no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren't the things that presage a recovery...they herald a deeper, darker depression.
The depression darkens because people are not just being laid off - their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits...and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.
We've mentioned John Williams and his excellent service called Shadow Government Statistics. He looks at the numbers and figures out how they are twisted and tortured...and then figures out what they would be if they were treated properly. Currently, the unemployment rate nationwide officially is almost 10%. But if you computed the unemployment numbers the way they did back in the Great Depression, Williams says one in five people are out of work. In some places the figure is as high as one in four.
In other words, the unemployment numbers are already beginning to look like those of the Great Depression. But that's true of almost all the numbers. They've all got a '30s era look to them. And if you stopped water boarding them, they'd tell a similar story. Almost all the indicators are worse than any we've seen since WWII.
Unemployment, trade, defaults, foreclosures, bankruptcies, prices, manufacturing...you name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war, the wartime economy shut down. Millions of people who have been in uniform...or making tanks and airplanes...were suddenly out of work. Economists thought the economy would go right back into the Great Depression. Instead, it boomed.
Those soldiers and their families had savings. They had pent up demand - they hadn't bought a new car in 10 years...they were young...they got married...they had children...they needed baby cribs and houses. We remember going to look at one of the first major suburban developments as a child - Harundale - in Maryland, built by the Levitt Company. It was a horrible place, but you could buy a house for peanuts...on credit. And it set the pace for the suburban consumer credit expansion of the next half a century.
But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they're doing the same for the government, helping the feds raise money on a scale never seen before in human history.
As we said...no wonder they're making money. Too bad.
The Wall Street rally: Watch your wallets
by Robert Reich
The profits aren't real. Keep your eye on the real economy, where unemployment and underemployment keep rising
"Been Down So Long It Seems Like Up To Me," the precocious 1966 novel by the late Richard Farina, defined the late 1960s counterculture. The stock market rally that's pushed the Dow Jones Industrial Average back above 9000 for the first time since early January could be given the same title, and it might well come to define the much-wished-for financial recovery.
What's pushing the stock market upward? Mainly, unexpectedly positive second-quarter corporate profits. But those profits aren't being powered by consumers who have suddenly found themselves with a lot more money in their pockets. The profits are coming from dramatic cost-cutting -- including, most notably, payroll cuts. If a firm cuts its costs enough, it can show a profit even if its sales are still in the basement.
The problem here is twofold. First, such profits can't be maintained. There's a limit to how much can be cut without a business eventually disappearing -- becoming, in effect, a balance sheet in space. Secondly, when businesses slash payrolls to show profits, consumers end up with even less money in their pockets to buy the things businesses produce. Even if they hold on to their jobs, they're likely to fear that they won't have the jobs for long, which causes them to retreat even further from the malls.
Most companies that have reported earnings so far have surpassed analyst's estimates, but that only means that earnings have been less bad than analysts had feared. According to the chief investment officer at BNY Mellon Wealth Management, if the companies that haven't yet reported earnings show the same pattern as the companies that have reported so far, overall corporate earnings will have dropped 25 percent over the past year. That may not be as much of a drop as analysts had expected, but it's still awful. Operating income for companies in the S&P 500 that have reported so far has been almost 29 percent lower than last year, more than 80 percent lower than 2007, according to Standard and Poors. Ouch.
"Better-than-expected" is Wall Street's euphemism these days for "we're happier than we thought we'd be." But Wall Street is in the business of cheerleading, even when there's really nothing to cheer about. It wants investors to think positively, on the assumption that positive thinking can be a self-fulfilling prophesy: If investors begin putting more money into the market, then the market will automatically rise, leading more investors to put in more money -- until, that is, the rally ends because nothing has fundamentally changed in the real economy. Keep your eye on the real economy, where unemployment and underemployment keep rising. It's not as much fun as cheering and investing right now, but it's far safer.
Blankfein Deflects 'Backlash' by Paying Loans in Full
Goldman Sachs Group Inc. may have gone from public enemy to model citizen in eight days. The most profitable firm on Wall Street paid 98 percent of fair market value to buy back warrants from the U.S. government this week, after BB&T Corp. and U.S. Bancorp paid less than 60 percent, according to University of Louisiana finance professor Linus Wilson. JPMorgan Chase & Co. has disagreed with the price set by the Treasury for the warrants, which the U.S. received when it bailed out the banks last year.
Chief Executive Officer Lloyd Blankfein’s decision to hand over the full amount sought by Treasury Secretary Timothy Geithner reflects an effort by Goldman Sachs to defuse the public’s anger at firms that took taxpayer money, said Simon Johnson, a finance professor at Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts. Goldman Sachs drew criticism from lawmakers last week when the New York-based bank set aside a record $11.4 billion for employee pay.
“They are beginning to realize that there is a broader backlash here,” Johnson said. “The Goldman precedent puts pressure on people to agree with the Treasury’s offer, and it puts pressure on the Treasury to make a reasonable offer” when setting the price for banks to redeem their warrants, he said. House Financial Services Chairman Barney Frank, a Massachusetts Democrat, said yesterday on Bloomberg Television that the amounts Goldman Sachs and other banks are funneling into employee pay are “unwise.” Paul Krugman, the Nobel Prize- winning economist, faulted Blankfein’s firm in a July 17 column in the New York Times, saying the bank’s pay practices may spur employees to take risks.
Morgan Stanley, the biggest U.S. brokerage, and credit-card issuers American Express Co. and Capital One Financial Corp. are among the financial firms that have yet to buy back the government’s warrants, even after repurchasing preferred shares the Treasury acquired at the same time. Bank of America Corp., the largest U.S. bank by assets, and Citigroup Inc., the third- biggest, have not returned any of the taxpayer’s funds.
“Once it was clear that there would be substantial public scrutiny, backed up by rigorous valuation analysis and a clear delineation of the policy choices, Goldman surely understood that there were no great deals left on the table,” Elizabeth Warren, chairwoman of the Congressional Oversight Panel, which is monitoring the federal bailout, said in an e-mail. “The rest of the warrant repurchases will take place in the same sunshine- filled arena.” Morgan Stanley, American Express and Citigroup are based in New York. Capital One’s headquarters are in McLean, Virginia. Bank of America is based in Charlotte, North Carolina.
Goldman Sachs said July 22 that it agreed to Treasury’s request for $1.1 billion to repay warrants the government received when it injected $10 billion into Goldman Sachs last October.
That’s 98 percent of the warrants’ value, according to calculations by Wilson, the finance professor at the University of Louisiana at Lafayette, using the Black-Scholes and Merton option pricing models. He estimates that BB&T, in Winston-Salem, North Carolina, and Minneapolis-based U.S. Bancorp are paying less than 60 percent of their warrants’ value.
“We think the price we paid to redeem the warrants was both full and fair,” said Lucas van Praag, a Goldman Sachs spokesman. “We’re grateful to the government for the extraordinary steps taken to stabilize the financial system, and have always maintained it was appropriate that taxpayers should receive a significant return on their investment.” Blankfein’s warrant repayment “will certainly have an influence or an effect on the price going forward” said U.S. Representative Scott Garrett, a New Jersey Republican. “Now we have another indication of where that market is.”
The warrants on New York-based JPMorgan, which has repaid $25 billion it received from the government, will be sold in a public auction after the bank said its offer was rejected by the Treasury earlier this month. Taking into account the dividends that Goldman Sachs paid on the government’s preferred shares, the Treasury earned an annualized 23 percent return on its funds, according to estimates from the bank and the Treasury. Garrett, a member of the House Financial Services Committee, said the public and Congress will be more aware of the bank’s record compensation set-asides than the taxpayers’ return. He said neither should affect the firm’s reputation.
“This shouldn’t give them any positive points, and conversely what they’re doing with their salaries shouldn’t be negative points,” Garrett said. Lawmakers were concerned that banks may shortchange taxpayers after Old National Bancorp, in Evansville, Indiana, paid less than half of fair market value for its warrants in May, according to valuations by Wilson and Pluris Valuation Advisors LLC. “It seems like there is a little bit more realism on the valuation from both the buyer and the seller in this case, that people are coming a little bit closer together,” said Espen Robak, president of Pluris in New York. “That would seem to reduce the level of contention going forward.”
The Congressional Oversight Panel said July 10 that taxpayers should have recovered $10 million more from warrant sales with 11 banks. A Treasury official disputed the conclusion, saying the government has rejected as too low most proposals from the largest banks seeking to retire the warrants. “Treasury is committed to getting fair value for the taxpayers for these warrants,” Herb Allison, the Treasury’s assistant secretary for financial stability, said July 22 in testimony before the House Financial Services Committee’s subcommittee on investigations.
He said the Treasury has a “consistent and clear process” for valuing the warrants that applies to all banks. Johnson, the MIT professor, said the Treasury may continue to demand fair-value payment, rather than risk being accused of easing the cost for banks at taxpayers’ expense. “The Treasury shooting itself in the foot politically on this issue for basically small money doesn’t make sense,” Johnson said.
Ilargi: The Dow Jones story on CIT below evoked this great comment from Michael Panzner:
Another Crack Opening Up?
You see plenty of reports nowadays suggesting that financial Armageddon has been avoided. Meanwhile, "experts" in Washington and on Wall Street congratulate each other on their apparent success in preventing the crisis flood waters from breaching the financial system's levee walls. In reality, all they've really done is plugged some of the initial gaps with funny money-filled sandbags -- just as a raft of other holes are beginning to open up. That's the thing about bursting credit bubbles: every time you think you've turned back the tide, more red ink suddenly starts flowing through the cracks.
What's more, these bubbling breaches aren't necessarily seen by those in charge as the spearheads of deadly surges to come. In many respects, in fact, that describes the miscalculation that occurred with Lehman Brothers. Now, according to Dow Jones Newswires columnists Donna Childs and Sameer Bhatia, writing in CIT Poses Lehman-Like Risk," we may be poised to see it happen once again.
CIT Poses Lehman-Like Risk
The implications of the capital crisis of CIT Group Inc. fill 24-hour news coverage and yet credit default swaps are near record lows and the markets appear calm, a peculiar disconnect given the events that followed Lehman Brothers' bankruptcy. What gives? The century-old lender narrowly avoided a bankruptcy filing this week when it obtained $3 billion in loan commitments from its bondholders. Tuesday, documents filed with the Securities and Exchange Commission laid out steps that it will take to avoid bankruptcy, though it warned that any misstep likely would lead to a Chapter 11 filing. Who has correctly gauged the risk CIT poses to institutions, markets and the economy - the media, the markets or the government?
The market judged Lehman a serious matter. In the days preceding Lehman's bankruptcy, credit default spreads spiked. The Markit iTraxx Europe Senior Financials Credit Default Swap Index spread rose from 94 on Sept. 12 last year to 147 three days later, the date Lehman filed bankruptcy. The index spread peaked on March 6 this year, reaching 199, but it has since retreated to 114. It appears anomalous that CDS spreads are near historic lows, despite a possible imminent collapse of an important commercial lender. So why haven't spreads moved significantly despite the media's scrutiny of CIT's crisis?
The likely reason is that markets clearly understood the systemic financial risk posed by Lehman's more than $350 billion counterparty exposure yet don't grasp the risks posed by CIT's exposure to the manufacturing, retail and commercial real estate sectors. This may also explain why the U.S. government bailed out American International Group Inc., an entity it deemed too connected to fail given the significant counterparty exposure to other financial institutions, and yet appears unfazed by the risks posed by CIT.
Such a view is shortsighted. CIT factors the accounts of some 1 million small businesses, by which process it purchases their accounts receivable. In some cases, it advances cash against those purchases; in other cases, particularly with many Chinese institutions, it doesn't. Should CIT default, small businesses that believed they were borrowing from CIT would become unsecured creditors of CIT. Many of those small businesses operate in the manufacturing, textile and garment industries. This appears to be a different type of risk exposure than that represented by Lehman or AIG yet it is nonetheless a real risk to the economy and by extension the global financial system.
The failure of Lehman precipitated a seizure in the credit markets from which the world has not yet recovered. The failure of CIT will likely precipitate similar seizures in both trade finance and commercial real estate markets. The attendant consequences will inevitably come back to haunt the larger financial institutions with exposure to these sensitive sectors. The business news media correctly report that CIT has a 1% share of market for loans to U.S. small and mid-size businesses. Friday, The Wall Street Journal reported a pertinent fact: CIT services roughly 300,000 retailers and 1,900 manufacturers and importers, representing as much as $40 billion in receivables. The CIT story is complex, mid-chapter and sometimes hard to read but it can't be ignored by the government, markets and financial institutions.
Stock Traders Find Speed Pays, in Milliseconds
It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices. It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets. Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.
These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk. Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.
And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage. Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.
“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.” For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.
But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds. High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.
High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss. “It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”
The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.
It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.
The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.
In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise. Soon, thousands of orders began flooding the markets as high-frequency software went into high gear.
Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.
The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders. Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.
“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”
Lack of ambition leaves Europe in the slow lane
Debates about the future of Europe have an unreal quality about them these days. Eurosceptics – most noisily in Britain but also elsewhere – still live the old nightmare of a united states of Europe. Yet on the other side of the barricades, the pro-Europeans could scarcely be said to be celebrating. They are more likely to lament the European Union’s palpable failure to claim a say in global affairs. Were I to count myself among the sceptics, I would have claimed victory some time ago in the imagined great struggle between sovereign nation state and Brussels-led behemoth. The integrationist impulse that led to the creation of a single market and a European currency has long since dissipated.
If ever there was a moment when it might have been feared the nations of Europe were being subsumed into a federal superstate it passed a decade and more ago. Any residual doubts on that score should have been dispelled by the robustly nationalistic responses of Berlin, Paris and London to the international financial meltdown. The once legendary Franco-German motor is in serious disrepair, too feeble to drive a Union now enlarged to 27 states. Grandiose talk of Europe’s emergence as a superpower alongside the US and China has been lost to its weak economic performance and even weaker political leadership. The rest of the world looks on with scorn (Beijing and Moscow) and disappointment (Barack Obama’s administration in Washington).
As a member of the pro-European camp I find myself torn between standing up for the significant successes of the European enterprise and lamenting all the missed opportunities. Half the time the cup is half-full; the other, half-empty. Among audiences friendly to the less than startling idea that it makes eminent sense for Europe to pool its capabilities if it wants to remain visible in the fast-turning kaleidoscope of global power, I tend to accentuate the negative. Europe has become the greater Switzerland of the 21st century: comfortable, complacent and unwilling to venture abroad.
Among the sceptics who conveniently gloss over the first half of the 20th century in their quest to reclaim 19th century concepts of indivisible sovereignty, I point to the Union’s many successes. They are not hard to find. Post-second world war peace and prosperity apart, the entrenchment of democracy in post-communist central and eastern Europe stands out as a truly momentous achievement. That said, it is easy to lapse into depression about the continent’s introspection. The world is witnessing as big a geopolitical upheaval as any in the past century. Power is shifting from west to east. The international institutions and rules upon which Europe relies for security and prosperity are under strain. And Europe looks set to absent itself from the debate.
This pessimistic case has been made eloquently by Charles Grant, the director of the London-based Centre for European Reform. Mr Grant, the CER’s founder and director, is nothing if not a convinced European. But the title of a recent essay speaks to his present mood: “Is Europe doomed to fail as a power?” A decade or so ago, the EU might have been counted alongside the US, China, India, Russia and, perhaps, one or two others as a shaper of a new international order. Now, when he talks to Chinese, Russian or Indian policymakers, Mr Grant finds their views on European influence “withering”.
The Union may still have pretensions, but it is seen as “divided, slow-moving and badly organised”. Mr Obama had great hopes of Europe as a partner in his efforts to recast the west’s relationship with the rest of the world. But the US president is learning fast about the Union’s reluctance to act as one in foreign policy and defence. The stakes here are considerable. It has become a cliché to say that we are moving rapidly into a multi-polar world in which the west will have a diminishing capacity to determine events. In such an environment, the middle-sized powers of Europe have more to lose than anyone else by any breakdown of the rules-based system. Even for the continent’s biggest nations going it alone is simply not an option.
But as Mr Grant notes, European governments are much more concerned to hold on to the totems of power – a gross over-allocation of seats in the various global institutions – than to help design the architecture of a new order. One obvious danger is that the US and China will bypass Europe by creating a G2. You can already see that happening on climate change. All those European seats in the Group of Eight, the International Monetary Fund and such like would then be devalued currency. Behind this lies the bigger threat that the emerging multi-polar order will be based on power rather than law.
Mr Grant acknowledges there is another side to the story. Europe still has substantial “soft power” – rooted in its considerable economic strength, values and political stability. If it has failed to frame common policies towards, say, China or India, it makes a substantial, often overlooked, contribution to safeguarding peace and stability around the world. Robert Cooper, the EU’s director general for external affairs, makes this case well in a critique that, with admirable fairness, Mr Grant has published alongside his own essay. For all that it is often inefficient and sometimes infuriating, today’s EU is a huge advance on what went before. Those who dispute this might consider the dismal failure of the Europe of the 1990s in response to the break-up of Yugoslavia.
Mr Cooper points also to the common mistake of judging Europe against unrealistic expectations. The EU was never going to emerge as a single state, so it should not be measured against the US or China. In Mr Cooper’s words: “The ambition of the EU cannot often be much greater than the sum of the ambitions of its member states, and they are not always ambitious.” But there, I think, lies the problem. I cannot think of a moment in recent history when it has been more important for Europeans to demonstrate their ambitions for the world. Comfortable though it may seem now, Europe will discover that a future in the slow lane promises anything but an easy ride.
How the budget hole developed
Conventional commentators have been horrified by the British government’s estimate of public sector net borrowing of 12.4 per cent of gross domestic product for this financial year. Even if you believe that the deficit will decline to 5.5 per cent by 2013-14 this will not prevent the public sector net debt from climbing to reach 76 per cent of GDP by that year, according to official projections. Never mind that the debt ratio was far higher not only after and between the two world wars, but in the supposedly virtuous mid-Victorian period. Never mind the historian Lord Macaulay’s mockery of the debt obsession. This is clearly far from what the Labour government intended when it came to office in 1997 full of talk of “prudence for a purpose”.
How has this deterioration occurred? There are two deeply unconvincing explanations. There is the opposition Conservative accusation that Gordon Brown took leave of his senses and suddenly went on an ideologically driven spending spree. Then there is the opposite plea that the British leader was virtuously delivering “Labour investment” as opposed to “Tory tax cuts” when he ran into an international financial storm. By far the best analysis I have seen is in a paper by Giles Wilkes – A Balancing Act: Fair Solutions to a Modern Debt Crisis. It is published by Centre Forum, a Liberal Democrat-leaning think-tank, but the analysis is non-partisan. It has so far attracted attention because of its proposals for a flat rate to supplement council tax on high-value residences and for imposing capital gains tax on primary residences.
But the most valuable part of Mr Wilkes’s paper is his explanation of the rising national debt. He starts from the Treasury estimate for 2012-13 and dissects its composition. Only 4 per cent is due to increases in spending induced by the present recession, mostly due to automatic increases in benefits. Some 9 per cent is attributed to bank rescues and another 9 per cent to over-reliance on volatile bubble revenues derived from the financial markets. A sizeable but not overwhelming proportion – 16 per cent – is attributed to the government’s “failure to fix the structural deficit”, due to an overestimate of the UK’s growth potential. A greater proportion, 25 per cent, is due to revenue losses from the recession including the “temporary” cut in value added tax. This leaves 37 per cent – roughly £30bn ($49.5bn, €35bn) – which would have been there anyway and would probably have represented genuine public investment. The culpable items seem to me the structural deficit and the over-reliance on bubble revenues.
Almost alone among analysts, Mr Wilkes endorses Margaret Thatcher’s tight fiscal policies of the 1980s that were made necessary by “high real interest rates, soaring inflation and a bloated public sector”. But he asserts that a repetition of these would be a serious mistake when “interest rates are at rock bottom, inflation is threatening to turn negative and the state no longer controls swathes of nationalised industry”. He is extremely clear that dealing with the deficit must wait for definite signs that the recession is over and should be carefully paced so as not to undermine recovery. His most interesting suggestion is that 40 per cent or more of the national debt should be put on an indexed basis. This strategy should do more than anything else to reassure market fears of a return to inflationary finance, as it would make a high rate of inflation extremely expensive for the government.
But let me explain in my own words why I am more relaxed about debts and deficits than some other commentators. First, there is no regular and predictable business cycle, just an irregular movement of activity into which clever people can read patterns with hindsight. In the 1930s it was once claimed that the difference between Friedrich Hayek and John Maynard Keynes was that what the former saw as a boom the latter saw as a slump; and in the coming years it is all too likely that some economists will be diagnosing the return of inflation while others will still be talking of lingering depression. The US New Deal recovery was turned into a mini-depression in 1937-38 because of premature action to tighten money and balance the US budget. There is now more danger of economic stimuli across the world being reversed too soon than of their being continued too long.
There is a more profound point. Writing in the 1930s, Keynes believed that world economies faced not a temporary recession but “secular stagnation” because the urge to save exceeded perceived investment opportunities; and the two were only brought into balance by depressed output and employment. In this situation there is a strong case for long-term “dissaving” by the state to offset private saving. In that case measures to stabilise national budgets would have to be put on the back burner. There is no certainty in such matters. But thinking of the vast savings of China and the oil producers it would be foolish to rule out the recurrence of such stagnation.