Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Lessons From JapanInteresting Article in the International Herald Tribune on Japanese monetary policy (both yesterday's version and that the more longer-term variety stretching back to the serious deflation days). Here's the most pertinent point:"According to Jerram, of Macquarie, one lesson of Japan's experience with such indirect measures is that they work only if bankers are confident that they will remain in place until the economy actually revives. To make this clear, he said the bank should accompany such an easing with public commitments not to raise borrowing costs again until some target is met, such as a rebound by consumer prices." Not sure if our program, such as it is, is geared toward this sort of option--at least not yet. Bank of Japan cuts rates for the first time in 7 years By Martin Fackler Friday, October 31, 2008 TOKYO: The Japanese central bank cut its benchmark interest rate for the first time in seven years on Friday, joining earlier moves by the U.S. Federal Reserve and other central banks to soften the brunt of a possible global recession. The Bank of Japan's policy board voted to lower the overnight lending rate between banks by 0.2 percentage point to 0.3 percent, reducing borrowing costs in order to rekindle growth in the country, which has the largest economy in Asia. The bank also seemed to confirm fears here that Japan was heading into a recession by lowering its forecasted growth rate for the current year to around zero percent, citing higher energy prices and weakening demand for Japanese exports. The loosening Friday was also aimed at easing a growing credit crunch in Japan, which had long seemed immune to the international financial contagion. As an additional credit-easing measure, the bank said it would start paying interest on some of the reserves that commercial banks keep at the central bank, a step that would provide more cash to lenders. This was the first interest rate cut during the current financial crisis by Japan, where short-term interest rates, already near zero, have constrained the central bank's room for maneuver. Read the rest of the article Labels: Bank of Japan, banking system, financial crisis bailout, Monetary Policy, recapitalization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Naomi Klein on US RecapitalizationI don't agree with all of this: Naomi seems to forget that there are no longer any Wall Street firms of the sort that could wreak so much havoc with the assets they conjured up and simply expect someone else to endure the liability. But she's always provocative, and her politics are spot on. From today's Guardian:The Bush gang's parting gift: a final, frantic looting of public wealth The US bail-out amounts to a strings-free, public-funded windfall for big business. Welcome to no-risk capitalism Naomi Klein The Guardian, Friday October 31, 2008 In the final days of the election many Republicans seem to have given up the fight for power. But don't be fooled: that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700bn bail-out out the door. At a recent Senate banking committee hearing, the Republican Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bail-out. When European colonialists realised that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts. Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as "distressed asset" auctions and the "equity purchase program". But make no mistake: the goal is the same as it was for the defeated Portuguese - a final, frantic looting of the public wealth before they hand over the keys to the safe. Read the rest of the article Labels: financial crisis bailout, Naomi Klein, The Guardian Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Demand from New Admin: Claw This Back!From Reuters:U.S. banks owe billions in pay, pensions to executives: report Fri Oct 31, 2008 6:36am EST (Reuters) - Troubled financial giants getting cash infusions from the U.S. Federal Reserve owe their executives more than $40 billion for past year's pay and pensions as of the end of 2007, the Wall Street Journal said in an analysis. The sums owed are mostly for special executive pensions and deferred compensation, including bonuses, for prior years, said the paper. The Journal also cited investment banks Goldman Sachs Group Inc, which owes its executives $11.8 billion; JPMorgan Chase & Co, which has a payment of $8.5 billion pending; and Morgan Stanley, which owes between $10 billion and $12 billion to executives. Criticism of executive pay has gained momentum this election year with presidential candidates from both major parties lashing out over rich payouts for CEOs of companies that have suffered big losses in the U.S. housing market bust and ensuing credit crisis. As a result, the government has sought to rein in executive pay at banks getting federal money as part of the Bush administration's $700 billion bailout program. But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces, the Journal said. For instance, nine banks paid out an estimated $50 billion of bonuses in 2007, based on the total compensation expense for the companies and assuming that for investment banks about 60 percent of total compensation was allocated for bonuses, and for commercial banks about 20 percent went to bonuses. Goldman Sachs, Morgan Stanley and JP Morgan Chase did not immediately return calls seeking comment. (Reporting by Shradhha Sharma in Bangalore; Editing by Kim Coghill) Labels: executive pay, financial crisis, financial crisis bailout, Goldman Sachs, JP Morgan Chase, Morgan Stanley, Reuters, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Barney Frank's JP Morgan Chase ConnectionFrom Bob Feldman:Since 1989, the corporation whose Political Action Committee [PAC] or executives have been the top source of campaign contributions for the House Financial Services Committee Chairman, Barney Frank, has been JP Morgan Chase & Company. A Democratic Congressional representative from Massachusetts, Frank has accepted over $70,000 in campaign contributions from JP Morgan Chase executives or its PAC since 1989, according to the Center for Responsive Politics web site data base at www.opensecrets.org. In 2007, for example, Rep. Frank accepted $6,000 in campaign contributions from JP Morgan Chase's PAC, according to the JP Morgan Chase web site. Coincidentally, Frank recently helped push through Congress a Wall Street corporate welfare bill which authorized the U.S. Treasury Department to invest $25 billion in JP Morgan Chase. In a January, 1996, I asked Rep. Frank, in a phone interview for the now-defunct Lower East Side alternative weekly, Downtown, why his campaign committee had accepted a $500 contribution from then J.P. Morgan vice-chairman Robert Mendoze in April 1995. "I'm surprised by the question," Frank replied in 1996. "There's no alternative to accepting such contributions, although I'm in favor of public financing of campaigns. I am on the banking committee and I accept contributions from many different contributors. But none of these contributors will determine how I vote on the banking committee." According to Frank, when he first ran for Congress he received no campaign contributions from banking industry executives. But apparently, after some banks saw that, as a House Banking Committee member, Frank favored allowing banks to again enter the securities business, he began to receive some campaign contributions from people in the banking industry. Asked in 1996 how he'd respond to the argument that the acceptance of a campaign contribution from a bank executive by a member of the House Banking Committee, which passes legislation that regulates banks, represents a conflict of interest, Frank replied in 1996: "That's nonsense." According to the Massachusetts representative, it was as ethical for him to accept campaign contributions from corporate special interest groups and JP Morgan's vice-chairman as it was for him to accept campaign contributions from public interest groups, labor union members or organizations that favor the legalized use of marijuana for medical purposes. Yet in the appendix of his 1992 book, Still The Best Congress Money Can Buy, Philip Stern defined "conflict-of-interest' receipts as "contributions given to, and accepted by, that lawmaker from groups having a particular interest in the decision of the legislative committee on which that lawmaker sits (e.g....gifts by banks and other financial PACs to members of the House Banking Committee)..." Stern also indicated in this same book that the "conflict-of-interest" receipts accepted by Rep. Frank between 1985 and 1990 exceeded $149,000. The chairman of the JP Morgan Chase board of directors' Risk Policy Committee and a member of the JP Morgan Chase corporate board's Public Responsibility Committee, General Dynamics board member James Crown, has also been a heavy campaign contributor to 2008 Democratic Presidential candidate Barack Obama's campaigns since 2003. On June 27, 2003, for example, JP Morgan Chase board member Crown gave a $10,000 campaign contribution to Obama's campaign committee, prior to Obama's 2004 election to the U.S. Senate. Coincidentally, U.S. Senator Obama also supported using U.S. Treasury Department money to help bail out JP Morgan Chase. Other members of the JP Morgan Chase board of directors besides James Crown include Exxon Mobil's retired chairman of the board and former CEO Lee Raymond and Comcast Cable Communications President Stephen Burke. --bob f. Labels: barney frank, Bob Feldman, JP Morgan Chase Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Another Taxpayer Bailout SwindleWilliam Greider explains in The Nation what happens when we let the foxes guard the henhouse.The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return. Labels: Corporate Swindles, financial crisis bailout, Goldman Sachs, Henry Paulson, The Nation, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). U.S. Consumers Shop, DropThe most recent Economic Snapshot from the Economic Policy Institute:American consumers shopped but have now dropped Bad signs for tomorrow's GDP report by L. Josh Bivens | October 29, 2008 For two years, consumer spending has managed to grow even in the face of trillions of dollars of evaporating housing wealth. As consumption spending is 70% of total U.S. gross domestic product (GDP), this resilience kept the overall economy from shrinking. Two recent government reports indicate that the U.S. consumer has finally surrendered, and this augurs badly for tomorrow's Commerce Department report on third-quarter GDP growth.  At the end of September, the Commerce Department reported no pickup in overall consumer spending in August, following a huge decline in July. A rough forecast based on these two months tells an ugly story: consumer spending probably fell by about 2.5% in the third quarter (see chart). If this happened, it will be the largest decline since 1990. (Note 1) Two weeks ago, the Census Bureau reported a large decline in retail sales for September, continuing a downturn that has now lasted an entire year. Retail sales are essentially a subset of overall consumption spending (and are the subset that fluctuate the most, falling more quickly than overall consumption in bad economic times). For the third quarter, inflation-adjusted retail sales fell more than 9%, the largest fall since the Census Bureau began tracking them consistently over time. (Note 2) The bursting of the housing bubble has forced what seemed impossible for so long—outright cutbacks from U.S. consumers. The result of these cutbacks will throw the entire U.S. economy into reverse in coming quarters, and the first sign of this will be tomorrow's GDP report. Notes 1. The September number for overall consumption spending will be released tomorrow. Using the "two-month method" employed here tends to give very accurate results for the overall quarter. 2. Retail sales are deflated using the overall personal consumption expenditures price index. The September value for this index is not yet available, so September prices were assumed to be unchanged from August—a conservative estimate. Further, the 9% decline is the quarter's decline expressed as an annualized rate; this makes it comparable to the overall consumption figures reported above and the overall GDP numbers that will be reported tomorrow. 1992 is the first year that detailed time-series data on retail sales are kept. Labels: consumer debt, consumerism, Economic Policy Institute, financial crisis, housing bubble Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banks Spend Cash On Dividends, Not LoansSenator Charles Schumer (D-NY) and others are raising alarm bells at reports that banks are spending more than half of their bailout money on paying dividends to shareholders, rather than lending money to borrowers.According to today's Washington Post
The Treasury Department defends the practice, claiming that otherwise banks would be dissuaded from applying for bailout funds in the first place. For their part, the banks are claiming that the dividends are coming from an entirely different stash of money, presumably the one that they have kept hidden from anyone as they pleaded for government support. Labels: banking system, financial crisis bailout, taxpayer ripoff, Treasury Department Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Humble Pie Chart This is from a fantastic and hilarious site, Bubblewrapped, that we just discovered. It bills itself as offering "Financial tools, objective analysis and mixed metaphors to help you stay afloat in the crash." Besides Greenspan, this "humble pie chart" mostly skewers journalists from the British business press, including, alas, Anatole Kaletsky (sorry, Larry...). Alan Greenspan Chairman of the US Federal Reserve, 1987-2006; knighted by the Queen in 2002 for his "contribution to global economic stability" Before 2003 "What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so. We think it would be a mistake [to more deeply regulate the contracts]." 2004 "Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient." 2007 "I was aware that the loosening of mortgage credit terms for subprime borrowers increased financial risk … But I believed then, as now, that the benefits of broadened home ownership are worth the risk." "It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade. The worst have failed; investors no longer fund them and are not likely to in the future." After 2008 US Congress hearing, 23 October 2008 REPRESENTATIVE HENRY WAXMAN: [Mr Greenspan, you said:] "I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We've tried regulation. None meaningfully worked." That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now our whole economy is paying its price. Do you feel that your ideology pushed you to make decisions that you wish you had not made? GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to – to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact. WAXMAN: You found a flaw in the reality … GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak. WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working? GREENSPAN: That is … precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well. Check out the rest of the site. Labels: Alan Greenspan, Anatole Kaletsky, Bubblewrapped, financial crisis, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Singing for Our SalvationThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.One of the reasons Mozart's Requiem is the sublime work it is is that the end of the "Kyrie" (or, "Lord Have Mercy") expresses such a powerful entreaty that it seems that a superhuman mercy will surely take pity on the petitioners. But the "Dies Irae" ("Day of Wrath") immediately following is so savage, and impresses on us the majesty of superhuman justice so effectively that the former is reduced to a pathetic display of pride that should, and must, be punished accordingly. It seems like the global economy is getting to this part of the record. At 12.15 PM Eastern time, US and European equity markets are still in positive territory--only just--despite large gains earlier in the morning. The rally has been powered by the Federal Reserve's .5 % rate cut yesterday, the likelihood that the Bank of Japan will cut by a quarter-point (to .25%), and a flurry of bottom-fishing among investors. The Japanese cut is noteworthy not only because Japanaese rates are already so low: instead, the recent Yen strength that developed out of the unwinding of carry trades (a lot carried out by hedge funds cashing out to fund huge redemptions in other trades) promises to choke off Japan's all-important export sector, and that will, in turn, affect Japanese shares, which will hammer the Japanese banks that hold a lot of the shares, thereby making the banks vulnerable to a global bank crunch that only weeks ago Japan's banks were thought to be immune from (remember the Japanese bank, Mitsubishi UFJ, buying a stake in Morgan Stanley a few weeks ago?). Well, the Fed move and hopes for a Japanese one (done by a Bank of Japan that is as spooked by deflation--it's dealt with nearly 2 decades of it-- as the European Central Bank is by inflation) to follow promised to reverse this unwinding, and investors have responded accordingly. Also, Federal Reserve has teamed up with the IMF to offer swap lines to some important emerging economies. And though this does not, as yet, address the really huge problems in places like Ukraine and Pakistan, which are enduring intense crises, but do not have the dollars to deal with them, it shows global authorities are at least not going to sit back and wait for something really bad to happen before doing something. And that has added to the return of confidence, if you can call it that. Until now. Today, US GDP figures for the third-quarter came in, and there was a decline of .3%. In addition, bad news about pension underfunding of major US companies and a potential $8 billion charge to hospitals as a result of bad derivatives trading has spoiled the party. But the gloom goes further than this. Ultimately, it is another breakout of extreme pessimism that keeps resurfacing and is founded on the thought that despite all the extraordinary measures--and that's putting it mildly--that authorities worldwide, sometimes even, unusually, working in relative concert, have initiated, the blow to corporate profits (especially for US multinationals as long as the dollars remains a haven of saferty) of the slowdown we're facing now, which is characterized by long wage-and savings poor consumers abruptly cut off from all credit and continuing to face high, if levelling prices, will be particularly severe, especially given the wildly optimistic forecasts of profitablility that held only months ago. Not to mention the wave of deleveraging that is sapping the world of capital, and will continue to do so for a while, at an advanced rate. And this already dire situation is only to be exacerbated by the fact that banks will be cutting back lending even more to shore up their books for the end of the year, and the retail sector will be in for a very, very black Christmas. A true double-whammy here. Anatole Kaletsky of The Times had a interesting piece in the paper today, in which he mused over the steps that absolutely need to be taken if really, really serious pain is to be spared the US, and the world. His list of proposals includes: "emergency economic measures, which should be quickly implemented. Such measures could include a six-month moratorium on home foreclosures; a compulsory programme for reducing unsustainable mortgage debts; an urgent review of international monetary relations to protect emerging markets from the financial meltdown; and emergency tax cuts to support consumption, paid for by long-term revenues from a large-scale energy or carbon tax." So far, so good, and, from the point of view of a leftist (unlike the mainstream Kaletsky), a mere beginning. But the politically keen Kaletsky also notes that this stage of the crisis could exert so much of an adverse impact on the economy that the constitutional provisions regarding transfer of power between the incoming Obama (if it's McCain, by some miracle of American stupidity or fraud, we can just forget about it) may make even bold initiatives taken in the first hundred days rather moot in effect. He's hopeful that American politicians will be up to the challenge of speeding up the transition somehow to do something before the nominal transfer of power, something actively involving the presiodent-elect and the incoming administration. I think he's right. But I also believe, rather than sitting around waiting for the politicians, we must get out and agitate, and try like hell to force them, for once, to respond, now, to our concerns. Rather than chanting Kyries under our breath, we need to be chanting slogans, loudly and in unison, on the streets. Now. Labels: Anatole Kaletsky, financial crisis, financial crisis bailout, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Swap Lines Extended To At-Risk CountriesAs we expected (see blog post of October 22nd, "Not a Slow News Day"), the Fed has extended a lifeline facility to a number of pivotal, mainly emerging economies (Brazil, South Korea, Mexico and Singapore), whose currencies have been falling through the floor as a result of mass-repatriations under the impetus of the rush to safety in the US dollar. As usual, Yves Smith was on the ball:Wednesday, October 29, 2008 Fed Establishes New IMF Facility. Dollar Swap Lines with Brazil, South Korea, Mexico, and Singapore ... Today, the Fed provided Brazil, South Korea, Mexico, and Singapore with dollar swap lines of $30 billion each (hat tip readers Robertm, Dwight). From the Fed's press release: Today, the Federal Reserve, the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore are announcing the establishment of temporary reciprocal currency arrangements (swap lines). These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well managed economies. Federal Reserve Actions In response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies, the Federal Reserve has authorized the establishment of temporary liquidity swap facilities with the central banks of these four large and systemically important economies. These new facilities will support the provision of U.S. dollar liquidity in amounts of up to $30 billion each by the Banco Central do Brasil, the Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore. These reciprocal currency arrangements have been authorized through April 30, 2009. The FOMC previously authorized temporary reciprocal currency arrangements with ten other central banks: the Reserve Bank of Australia, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank, and the Swiss National Bank. Read the rest of the post Labels: currencies, Emerging markets, financial crisis bailout, IMF, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Commercial Paper (Max Fraad Wolff)A primer on commercial paper by the wonderful Max Fraad Wolff, special to the D&S website:Financialization's (Latest) Weak Link There may be no better illustration of the staggering pain emanating from financial market turbulence than the carnage experienced recently in commercial paper markets worldwide. Commercial paper (often abbreviated as "CP" in the financial press) is not a synonym for trade journals or advertising-heavy publications of little intellectual value. "Commercial paper" is the term used for short-term loans—for less than 35 weeks— that are made without needing (in the United States) to be registered at the Securities and Exchange Commission (SEC). Companies raise money by selling repayment promises—IOUs—below the full value at the time of repayment. The difference between the price received by firms in the commercial paper market and the amount they pledge to pay is referred to as the "discount." You may find large household name firms selling $1000 repayments in 90 days for between $960 and $980 today. A few months ago, firms were selling $1000 in 90 days for $990 or more. The discount has risen, as money has become hard to get. Most loans are for far less than 270 days, and loans average around one month's duration. Trusted firms with good credit ratings can borrow—nearly at will—for low cost when markets function well. So commercial paper markets allow corporations fast and easy access to cash for operations, near-term expenses, and even payrolls. Consequently, commercial paper markets grew to a size of about $2 trillion, and this market became essential to the basic functioning of many firms—and hence to the whole economy. Read the rest of the article. Labels: credit crisis, financial crisis, Max Fraad Wolff, SEC Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Movement on the Bailout FrontThis could be pretty big news. From Reuters:Bair says FDIC's powers could extend to insurers Wed Oct 29, 2008 11:34am EDT By Karey Wutkowski WASHINGTON (Reuters) - The Federal Deposit Insurance Corp's powers could be expanded if Congress decides to shift insurance companies from state regulation to federal regulation, FDIC Chairman Sheila Bair said on Wednesday. The FDIC could start providing guarantees for insurance companies, much like it already guarantees the deposits of most U.S. banks, if the insurance industry comes under federal regulation, Bair said. Insurance companies are currently regulated by individual states. "Our authorities would be expanded," Bair said at the annual conference of the International Association of Deposit Insurers. Read the rest of the article Many people know about this already, but remember the pressure on the automakers. They want to get a (subsidized) deal done before the election next week, so an incoming government won't be able to tamper with it. But the deal is so complex it'll be extremely difficult to pull off. Sounds a bit like Bear Stearns, but in the non-financial, real-economy sector. From the Financial Times: GM and Cerberus race to finalise Chrysler deal By Bernard Simon in Toronto, Julie MacIntosh in New York James Politi in Washington, John Reed in London. Tuesday Oct 28 2008 19:20 General Motors (NYSE:GM) and Cerberus Capital Management are racing to finalise a deal for the carmaker to acquire the private equity group's stake in Chrysler before next week's US election. While many motor industry experts question the benefits of a tie-up between Detroit's number one and number three carmakers, they increasingly recognise that the companies have few other options. Both are bleeding cash and in danger of running out of liquidity some time next year as sales fall in their core US market. Read the rest of the article Labels: Cerberus Capital Management, Chrysler, FDIC, financial crisis bailout, GM, Sheila Bair Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Explaining Yesterday's Mega-RallyMany people may still be a little puzzled by the impressive surge on Wall Street yesterday, despite the clear preopnderance of gloomy news (though taking into account the near-certainty of a big Fed cut today). The answer involves the yen carry trade, about which we posted a couple of items last weekend. Today's Financial Times takes up yesterday's story:Overview: Relief-rally but worldwide uncertainties persist By Dave Shellock in London and Michael Mackenziein New York Tuesday Oct 28 2008 16:30 Global equities staged a big rebound led by Asian and US markets as a sharp fall in the Japanese yen infused bargain-hunting for risky assets and offset grim US economic data. The improvement in investor risk appetite also extended to emerging market assets - which have come under severe pressure lately - as the yen registered sharp declines against its leading rivals amid talk of currency intervention and even a possible rate cut by the Bank of Japan. Ashraf Laidi, chief currency strategist at CMC Markets, said: "Yen-selling intervention would not be successful as long as Japan does not cut interest rates." Read the rest of the article Trying to jumpstart carry trades when a lot of emerging markets are still experiencing exceptional currency volatility is risky. Accordingly, the FT noted a just today: Yen rallies as growth fears return By Peter Garnham Wednesday Oct 29 2008 06:45 The turmoil on global currency markets continued on Wednesday as the yen advanced amid fears over a global economic slowdown. The yen's rally erased some of its losses during a volatile trading session on Tuesday. Maurice Pomery at IDEAGlobal said predicting moves on the currency market was close to impossible amid a lack of liquidity and increasingly volatile price action. Read the rest of the article Right now, Wall Street is pretty much flat. The Fed will cut later in the day, and China has already done so, so there may be a continued upside. But, to quote the latter article again, from Maurice Pomery, "Expect the unexpected and we see wild swings through this week continuing," Labels: currencies, Emerging markets, financial crisis, Financial Times, stock markets, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Was Wall Street's Banking Crisis Predictable?This is from former D&S collective member Bob Feldman:If you check out back issues of D&S and books like The Trouble With Capitalism: An Enquiry Into The Causes of Global Economic Failure by Henry Shutt, Origins of the Crash by Roger Lowenstein and American Theocracy by Kevin Phillips, you can see that Wall Street's banking crisis and crash of 2008 was a predictable one. Of course Clinton Administration Treasury Secretary, Robert Rubin (who's apparently been advising the 2008 Democratic Party presidential candidate on how to solve the current crisis), played a big role in pushing for more U.S. banking industry deregulation in the 1990s. As Roger Lowenstein observed in his 2004 book, Origins of the Crash: "In the spring of 1998, when...the Commodity Futures Trading Commission proposed a study...to revisit the question of whether to regulate derivatives, Greenspan, along with Rubin, quashed the idea... Coincidentally, under the recent bipartisan corporate welfare bailout plan that both the Republican and the Democratic presidential candidates endorsed, $25 billion of U.S. Treasury tax dollars is to be invested in Citicorp stock. And, coincidentally, the fourth-largest source of 2008 campaign contributions ($499,598) for even the Democratic Obama presidential campaign came from executives of Rubin's failing Citicorp firm. Labels: Bob Feldman, financial crisis, Henry Shutt, Kevin Phillips, Robert Rubin, Roger Lowenstein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Financial Meltdown 30 Years in the MakingThis is from the fantastic Labor Notes:By Mark Brenner They break it, and we're stuck with the bill. In less than two weeks Congress lined up $700 billion to bail out the nation's bankers, leaving millions of homeowners on the sidelines, facing foreclosure, bankruptcy, or both. Somehow the argument that "it may seem unfair, but it was necessary" just doesn't cut it. It’s no wonder that the most popular sign at labor's September 25 protest on Wall Street said "Bailout = Bullsh*t." For union members, it sounds all too familiar. Management's perennial argument for concessions—take the cuts or say goodbye to your job—hasn't exactly saved U.S. manufacturing, whether in the 1980s or today. In past recessions, it's been each union for itself, and the companies always came out ahead. Corporations are already using the deep hole they've dug for themselves to demand even more from workers. Teamsters at the Minneapolis Star Tribune bucked the trend, refusing mid-contract concessions on September 10 and prompting newspaper executives to suspend a $9 million payment to their creditors. "The company is asking us to slash our own throats to save their profits," said Kevin Bialon, a 27-year pressman who served on the bargaining committee. "Management made the mistakes and they want workers to pay for it." Read the rest of the article. Labels: bailout, financial crisis, Labor Notes, Mark Brenner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Closures & Layoffs (Oct. 19-25)Hat-tip to Bob Feldman for letting us know about the excellent regular updates on layoffs and closures from Mark Heschmeyer of Co-Star Group. We hope to link to this every week, starting this week.Closures & Layoffs (Oct. 19-25): Canning Plants: We're Not Talkin' Vegetables A Weekly Report on Future Corporate Downsizings In this week's issue: * Pepsico to can six plants. * Tesla Motors is pulling the plug in Michigan. * Lear to cut costs through next year. * Plus we report on company closures and layoffs in: Alabama, Connecticut, Iowa, Maryland, Michigan, New Jersey, Ohio, Virginia, Washington and Wisconsin, which includes BuildersFirst exiting New Jersey. Read the whole report. Labels: closures and layoffs, co-star group, Mark Heschmeyer, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Something Has To GiveThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Last week global markets sold off big-time on Friday, and observers of the financial scene were puzzled due to the fact that no specific event seemed to set off such panic. Today, on the contrary, as of one PM Eastern time, stocks remain in positive terrritory, despite huge gyrations in the US, UK and Europe. And this in spite of these headlines, which I've just taken off Reuters: Consumers gloomiest ever as home prices plunge Iceland hikes rates massively W.House: Autos may be eligible for rescue package Emerging Europe scrambles to contain crisis threat OPEC officials say ready to act again to boost oil Industry bailouts risk unfair trade challenge And though shares are being boosted by a long-awaited stretch of bargain hunting (fuelled also by the certainty of a one-half percentage point interest rate cut by the Fed this week) the bad news does not end there. Trade expert Dani Rodrick published this salutary thought on his website on 26 October: "I have a feeling that this will be the make-it-or-break-it week for emerging markets. I hope the IMF will make an announcement in time to make a difference." Let's hope (against hope?) the news settles down a little before then. Or maybe not? Labels: Dani Rodrick, financial crisis, financial crisis bailout, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank of England Doubles Bailout EstimateApologies for the error in the first sentence (they had a US dollar figure in the original article, which is contradicted by the title). From The Independent:BoE warns credit crisis losses could hit 2.8trn Pounds By Sean O'Grady, Economics Editor Tuesday, 28 October 2008 Global bank losses as a result of write-offs on mortgage-backed and other badly devalued securities will spiral to $2.8 trillion before the credit crunch is over, according to the latest estimates produced by the Bank of England. The figure is around double the Bank's previous estimates and calculations by the IMF. It suggests that, while the recent injections of bank capital by governments may help stabilise the financial system, it is far from fully over the ravages of the credit crisis. The Bank says that the losses for the UK's banks will run to 122.6bn pounds, against a forecast of 62.7bn pounds made in April. For the US and the euro area, it gives figures of $1,577.3bn (was $738.8bn) and 784.6bn (previously 344.1bn euros) respectively. Read the rest of the article Labels: Bank of England, financial crisis bailout, The Independent Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Letters of Credit and Trade Finance FreezeFrom Naked Capitalism, another excellent, sobering post. Gives you an idea of the increasingly all-embracing extent of the crisis:Confirmation of the Role of Financing Difficulties in Collapsing Trade Volumes One of our pet themes in recent weeks is that the fall in trade traffic, indicated and possibly overstated by a dramatic fall in the Baltic Dry Index, is due at least in part to difficulties in arranging and getting other banks to accept buyers' letters of credit. For those new to this topic, international trade depends to a large degree on letters of credit. While they can help finance shipments, an even more fundamental role is that they assure the shipper that he will be paid for the cargo sent. Without banks using letters of credit as the means to send payment to exporters, parties that are new to each other or conduct business with each other infrequently could never trade with each other (one type, a documentary letter of credit, requires that forms, often a very long and elaborate set of them, verifying that the goods have been inspected and certified, that customs, have been cleared and all relevant charges and duties paid, be presented and vetted before payment is released). Some readers scoffed at the idea that a fundamental element of trade could be breaking down and yet attract more notice; a few argued that the L/Cs were being used as an excuse for buyers to break commodities deals struck when prices were higher. However, as has been discussed in gruesome detail, banks are reluctant to take credit exposures to other banks on the most plain vanilla. short term exposures, namely interbank lending. It has been a struggle for central banks to get banks to lend to each other for longer than overnight. Trade financing is a backwater, operationally intensive, low profit area that simply does not register on senior managements' or regulators' radars. And problems in this area would have virtually no impact on banks, so even acute problems here would simply not register, particularly in comparison to all the other fires that central banks are struggling to smother. Read the rest of the post Labels: Baltic Dry Goods Index, financial crisis, letters of credit, Naked Capitalism, Trade, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Alchemy of FinanceA truly wacky story, from today's Financial Times:VW vies for title of world's biggest company By Richard Milne in London Published: October 28 2008 09:34 | Last updated: October 28 2008 11:02 Volkswagen briefly became the world's largest company by market capitalisation on Tuesday as panic-buying by hedge funds desperate to cover losses caused its value to shoot up by up to 150bn euros. Shares in Europe's largest carmaker soared as high as 1,005 euros in early trading, having closed at about 210 euros on Friday. That gave it a market capitalisation of around 296bn euros ($369bn), higher than that of ExxonMobil, the oil company that closed on Monday with a value of $343bn. Read the rest of the article Labels: financial crisis, hedge funds, Porsche, Volkswagen Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dumb (Ideology) and Dumber (Modelling)Fine piece by the Financial Times' exceptional Gillian Tett:Insight: Volatility returns with a vengeance By Gillian Tett Monday Oct 27 2008 11:25 A couple of years ago - or before banks started to go bust - economists sometimes liked to talk about a phenomenon they christened The Great Moderation. This was the idea that the 21st-century financial system and global economy had become so stable and sophisticated that dramatic swings in activity had seemingly disappeared. Volatility, in other words, was supposed to be an issue of the past. These days a new phrase is needed to describe these Not-So-Moderate-After-All times (the Great Panic, perhaps?). On Friday, the Chicago Board Options Exchange Volatility Index, the Vix, rocketed 32.1 per cent to 89.53, as equity markets suffered another dramatic sell-off. The gyrations of the yen, euro, sterling and dollar have also been wild, pushing levels of currency volatility to heights barely seen in decades. Read the rest of the article Labels: financial crisis, Gillian Tett Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Asia and the Meltdown of American FinanceFrom the fine MRZine site, Japan scholar R. Taggart Murphy provides a breezy, accessible discussion of some important history:Asia and the Meltdown of American Finance by R. Taggart Murphy The boardrooms and finance ministries of Seoul, Bangkok, Jakarta, and Kuala Lumpur are today filled with a fair degree of schadenfreude at America's troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once defined it as "unanticipated delight in the sufferings of another." But asking Asia's business and governing elites to repress shivers of pleasure at the meltdown of the American financial system is probably demanding more than flesh and blood can bear. The spectacle of the politicians, pundits, and academics of Washington and Chicago thrashing about in attempts to justify the vast amounts of money being shoveled at their, um, cronies on Wall Street is just a little too rich. Particularly since much of the money will have to be borrowed from the very people who a decade ago at the time of the so-called Asian Financial Crisis were being pooh-poohed for their "crony capitalism," "opaque" banking systems, "incestuous" government-business relations, not to mention their supposed absence of transparent financial reporting, good corporate governance, or accountable executives and regulators. But the glee in seeing the United States hoisted by its own petard must surely be mixed with a good deal of apprehension. Not only because Asia cannot escape this crisis unmarked. But because the crisis could conceivably force Asia's elites to engage in the open political discussions they have largely avoided until now -- discussions about the kinds of economies they expect to shape in the wake of the American debacle; discussions that carry with them all kinds of risks. Read the rest of this post Labels: Bretton Woods agreement, currencies, financial crisis, Monthly Review, R. Taggart Murphy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Related Post on Fed Balance SheetFrom Brad Setser:One easy thing China could do to help stabilize global markets: buy Agencies! Posted on Saturday, October 25th, 2008 by bsetser There is constant talk -- too much, in my view -- about whether sovereign funds will come to the rescue of western financial institutions. Qatar did put a large sum of money into Credit Suisse recently, but in general the Gulf funds are reeling from large losses on their existing portfolio even as they are facing increased domestic demands (see Mufson and Pan of the Washington Post and Steven Johnson of Reuters) . "Rescuing*" US banks but not your own countries' markets -- and our own countries financial institutions -- is hard. And some Gulf countries' ability to carry out their ambitious local development plans will hinge on the availability of financing from their sovereign funds is oil stays at its current levels. China is still cash rich. But the CIC has yet to prove that it can manage a $100 billion balance sheet (its "frozen" investment in the Reserve Primary Fund is the latest case in point) let alone manage a US or European financial institution with a far larger balance sheet. Moreover, it would seem a bit bizarre -- at least to me --for the US taxpayer to guarantee the liabilities (and thus be on the hook for most future losses) of an institution that is effectively owned by China's government. As Uwe Reinhardt notes, US taxpayers are already on the hook for most of the downside -- and handing over both the upside and control to another country's government (typically a non-democratic government) hardly achieves the goal of keeping major financial institutions in private hands. Read the rest of the post Labels: currencies, Fannie Mae, Fredddie Mac, People's Bank of China, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Fed Balance Sheet and InflationGood piece on Econobrowser --thank you, Yves Smith--on how the Fed is trying to square what is, to many people, an apparent circle. May be tough going for some, but it's worth itOctober 25, 2008 The Federal Reserve's balance sheet On Thursday, the Federal Reserve issued its weekly H.4.1 report, which provides details of the Fed's balance sheet. Once upon a time, this was one of the least interesting of the government's many releases of data. These days, it's become one of the most exciting. The essence of the Fed's balance sheet used to be quite simple. The Fed's primary operations would consist of either buying outstanding Treasury securities or issuing loans to banks through its discount window. It paid for these transactions by creating credits in accounts that banks hold with the Federal Reserve, known as reserve deposits. Banks can turn those reserves into green cash any time they desire, so the process is sometimes loosely summarized as saying that the Fed pays for the Treasury bills it buys or loans it extends by "printing money". Before the excitement began, the Fed's assets consisted primarily of the Treasury securities it had acquired over time (about $800 billion as of August 2007) plus its discount loans (an insignificant number at that time). Its liabilities consisted primarily of cash held by the public (about $800 billion a year ago) plus the reserve deposits held by banks (which again used to be a very small number). Bernanke's overriding goal since then has been to extend a huge volume of short-term loans to financial institutions. If he'd done that in the usual way, just creating new reserve deposits with each new loan, the supply of cash would have ballooned, bringing worries of inflation. The Fed didn't want to do that, and in fact there was no shortage of funds available for overnight interbank lending. The fed funds rate, an average overnight lending rate between banks, is already quite low, and further reductions seem unlikely to accomplish much. But longer term interbank lending rates remain quite high relative to the overnight rate. Bernanke's first approach to this challenge was to "sterilize" the new loans from the Fed... Read the rest of the post Labels: banking system, Ben Bernanke, financial crisis bailout, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Safe Haven Musical Chairs......in a room with no furniture (or roof)?This is going to really complicate attempts to stop the bloodletting. From Marketwatch LONDON (MarketWatch) -- The U.S. dollar surged against the euro and the British pound Monday, but lost ground against ever-resilient Japanese currency as safe-haven flows trumped a G7 warning over "excessive" yen volatility. "Fear continues to grip global markets and traders are piling into whatever safe havens they can find," said James Hughes, analyst at CMC Markets. The dollar slipped to 93.30 yen in recent trade after touching a low of 92.02 earlier in the day. That's down from 94.18 late Friday. The dollar fell as low as 90.90 yen on Friday, the yen's strongest level versus the dollar since August 1995. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 said in a joint statement issued Monday morning. "We continue to monitor markets closely, and cooperate as appropriate," they said. Strategists said the statement shows high potential for coordinated intervention aimed at arresting the yen's strong rise. Meanwhile, the dollar lost ground against the Swiss franc, a traditional safe-haven, to change hands at 1.1590 francs, a loss of 0.7%. The dollar, however, has enjoyed safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments. Labels: currencies, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Here We Go AgainFrom today's International Herald TribuneStocks hammered again in Europe and Asia By David Jolly and Bettina Wassener Monday, October 27, 2008 PARIS: Stock markets shuddered Monday in Europe and Asia, with Japanese stocks falling to their lowest level since 1982, as the sell-off that has erased more than 51 percent of the value of global equities this year showed no signs of abating. Currency market traders were keeping nervous watch for central bank intervention, after Group of 7 finance and monetary officials expressed noted concern about the strength of the yen. "We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability," the G-7 statement said. "We continue to monitor markets closely, and cooperate as appropriate." Bilal Hafeez, global head of currency strategy at Deutsche Bank in London, said any intervention would probably take the form of central banks selling yen and buying dollars and euros. "The yen is the real standout currency at the moment," Hafeez said, "and that's what the authorities want to address." In early trading, the DJ Euro Stoxx 50 index, a barometer of euro zone blue chips, fell 5.9 percent, while the FTSE 100 index in London fell 5.4 percent. The CAC 40 in Paris fell 5.9 percent, and the DAX in Frankfurt fell 4.7 percent. Trading in U.S. index futures suggested Wall Street stocks would fall about 4 percent at the start of trading in New York. Read the rest of the article Labels: financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Desperate MeasuresFT.com on what it refers to as "dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector."Goldman chief sought tie-up talks with Citi By Henny Sender in Tokyo and Francesco Guerrera in New York Sunday Oct 26 2008 17:35 Lloyd Blankfein, Goldman Sachs' chief executive, called Vikram Pandit, his Citigroup (NYSE:C) counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector. The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events. They added that the conversation was brief as Mr Pandit rejected the proposal at once. Read the rest of the article Labels: Citibank, financial crisis, financial crisis bailout, Goldman Sachs Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Good Basic Article on Leverage and the CrisisFrom James Saft of Reuters:October 24th, 2008 Distortion is the new normal for markets Posted by: James Saft Tags: Uncategorized, Credit crisis (James Saft is a Reuters columnist. The opinions expressed are his own.) LONDON (Reuters) - The evaporation of borrowed money has fundamentally changed the way markets function, and what look like crazy anomalies may end up being closer to the new reality. Across financial markets, especially in fixed income, strange things are happening. Take two examples: The U.S. government takes Fannie Mae and Freddie Mac into conservatorship, essentially guaranteeing their debts. Investors first narrow the premium they demand to lend to the two mortgage giants, then stage a strike and send these premiums to all-time highs. Treasury inflation-protected securities (TIPs) hugely underperform standard Treasuries, and are factoring in precious little inflation in comparison to market expectations. And while fundamental explanations and official policy errors may explain some such moves, they probably don't account for all of them. The common denominator is the rapid disappearance from the market of leverage, money borrowed by investors to magnify what they can buy. Read the rest of the article Labels: financial crisis, financial crisis bailout, leverage Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Crisis Focus Turn: To Currencies, and EuropeYves Smith posted yet another absolutely essential entry on how the focus on the crisis is rapidly turning to currencies, and on what some of the responses might be as the crisis becomes acute. Reuters indicates S&P futures are trading up in early Monday Asian trading. From the post:Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become "the second epicentre of the global financial crisis", this time unfolding in Europe rather than America. ... Yves again. Now the meltdown may resume Monday, but another scenario may play out. Recall 40 nations (EU and Asian) met in Beijing over the weekend, endorsing Nicolas Sarkozy's call for a revamping of international banking regulations and more coordinated, tougher supervision. None of this directly addresses the looming currency crisis, but the markets sold off badly Friday, and if there is any stabilization or reversion on Monday, the backing away from the abyss plus the hope that the next phase of meetings, scheduled for November 15 in Washington DC, might ameliorate the situation, may put the currency crisis in abeyance for a couple of weeks. ... In this fraught environment, for China visibly (and the key is visibly) to start buying other currencies would have a disproportionate effect on psychology (and be rewarding to China, since it would profit from the rally it helped engineer). That might stem the panicked capital flight, and while it is probably insufficient to restore real stability, it could keep a necessary (and painful) revauluation/readjustment process from morphing into a rout. Read the post Labels: currencies, financial crisis, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). View from UK: US Joins UK on Recession BrinkI don't know which specific government figures the authors are referring to.From today's Observer: America joins UK on brink of recession Fed expected to lower interest rates to 1 per cent Heather Stewart and Richard Wachman The Observer, Sunday October 26 2008 Federal reserve chairman Ben Bernanke is poised to slash American interest rates to just 1 per cent this week, the lowest level since the depths of the dotcom crash, as government figures reveal the US has joined Britain on the cusp of recession. World investors were focused on Britain last week after Bank of England governor Mervyn King and Prime Minister Gordon Brown confirmed recession was looming, and it emerged that the economy had shrunk by a worse-than-expected 0.5 per cent in the third quarter of the year. But all eyes will now turn to the US, as the Fed meets to set borrowing costs and government figures reveal the full scale of the deterioration in the economy over the past three months. Read the rest of the article Labels: Ben Bernanke, financial crisis, The Observer, US economy Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street and the Return of the RepressedFrom TomDispatch.com; hat-tip to Claire for this one.The Specter of Wall Street Wall Street's Comeback as the Place Americans Love to Hate By Steve Fraser Wall Street sits at the eye of a political hurricane. Its enemies converge from every point on the compass. What a stunning turn of events. For well more than half a century Wall Street has enjoyed a remarkable political immunity, but matters were not always like that. Now, with history marching forward in seven league boots, we are about to revisit a time when the Street functioned as the country's lightning rod, attracting its deepest animosities and most passionate desires for economic justice and democracy. For the better part of a century, from the 1870s through the tumultuous years of the Great Depression and the New Deal, the specter of Wall Street haunted the popular political imagination. For Populists it was the "Great Satan," its stranglehold over the country's credit system being held responsible for driving the family farmer to the edge of extinction and beyond. Read the rest of the article. Labels: bailout, financial crisis, Steve Fraser, TomDispatch.com, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailedout Cash for Acquisition, Not LoansJoe Nocera, New York Times business columnist, has a particularly interesting piece today. We all suspect that the money being injected by the Treasury Department in order to recapitalize banks is more likely to fund acquisitions than to ease the credit crisis by getting banks to lend again. In fact, we suspect that was part of the plan all along--to encourage (further) consolidation in the banking industry. Nocera helps confirm these suspicions, first by pointing us to the fine print in the bailout bill, which gives a tax break to banks that acquire other banks:In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, "the government wants not only to stabilize the industry, but also to reshape it." Now they tell us. Nocera also managed to listen in on an employee-only phone conference over at JPMorgan-Chase, in which an executive tipped his hand on how the $25 billion injection the bank just took might be used. When someone asked the obvious question: "Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?", here's how the executive responded: "Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase," he began. "What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop." Joe the journalist observes: Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I'm not naming because he didn’t know I would be listening in) explained that "loan dollars are down significantly." He added, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side." In other words JPMorgan has no intention of turning on the lending spigot. Read the full article. Labels: bailout, financial crisis, Joe Nocera, JP Morgan Chase, recapitalization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Recapitalization: A Sisyphean TaskThe indispensable Yves Smith rightly directs attention to this FT Alphaville post. Here's the last sentence of the post:"Which is an admission, basically, that the Fed lost control of the Federal Funds Rate." Happy reading. Labels: financial crisis bailout, FT Alphaville, The Fed, US Treaury, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Carry Trade: Key To Understanding Crisis TurnA fine piece by the Financial Times' John Authurs on the unwinding of this trade, and the impact it has been having on the recent, otherwise partially inexplicable, US dollar strength. Understanding this trade is absolutely essential to understanding the turn the crisis has taken. Apologies for the image: it's the only link I can find to this article.Read the article "Chaos Carries a Risk for Emerging Markets" Labels: currencies, Emerging markets, financial crisis, John Authers, Yen carry trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interpreting Friday's CrazinessSome snippets from today's Financial Times lead piece. All are horrific.Looming recession batters stocks By Michael Mackenzie in New York and Michiyo Nakamoto in Tokyo and Song Jung-a in Seoul Friday Oct 24 2008 12:10 Traders said the massive reversal of currency positions in favour of the yen, reflected further liquidation of the so-called "carry trade", in which investors had borrowed at low Japanese interest rates to fund risky global investments. . . . The sharp rise in the yen forced further sales of risky assets, with equities, commodities and emerging markets suffering sharp declines while investors sought the safety of owning short-term government paper. Redemption requests from investors in mutual and hedge funds intensified the wave of forced selling. . . . "The magnitude of such historical market moves in currencies could only be the result of imploding hedge funds leading to massive liquidations," said Ashraf Laidi, chief currency strategist at CMC Markets. . . . Kazuyuki Sugimoto, vice finance minister, warned that rapid and excessive currency moves were not desirable for the economy, prompting speculation that the government might intervene in the currency markets or that the Bank of Japan might cut interest rates. However, analysts said neither move would be effective. . . . But one thing from the print version of the same article really caught my eye: Jack McDonald, president of Conifer Securities, a prime brokerage for small and medium-sized hedge funds said: "Funds will only have a good idea about the actual size of redemptions towards the end of November." That will be something to look forward to, indeed. If we make it that far. Read the rest of the online edition article Labels: currencies, Emerging markets, financial crisis, hedge funds Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Capitalism with American CharacteristicsCreeping socialism continues. Of the costs, anyway....From today's Financial Times:Treasury urged to aid car and insurance sectors By James Politi in Washington and Joanna Chung in New York Friday Oct 24 2008 17:50 The US Treasury is coming under increasing pressure to expand its financial rescue plan beyond banks to include direct assistance to the ailing car and insurance sectors. In recent days, lawmakers and interest groups have stepped up their efforts to persuade the administration of George W. Bush, US president, to divert part of the $700bn authorised by Congress to a range of companies that were not originally expected to be helped. The emergency legislation enacted this month gives the Treasury broad authority to buy any assets that are important for the stability of the US financial system. Read the rest of the article Labels: auto industry, financial crisis bailout, george bush, insurance industry, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It Wasn't Just an OverreactionStock markets got hammered today, but it was nowhere near as bad as some (including me) had feared it might (might, mind you) be. Still, things are by no means peachy. I leave you with the wise words from Across the Curve:The next two weeks have the potential to be watershed events for the markets. There is a veritable tsunami of data and events which will shape views and mold opinions. Three events dominate the landscape. The FOMC meets this coning week and the market has priced in a 50 basis point ease. I am confident that they will do that and I am also strong in the belief that the statement at the conclusion of the meeting will encourage the belief that another rate cut is not far behind. The Committee will acknowledge the debilitated condition of the domestic economy and the similarly dire state of the global economy. During this period the Treasury will announce the refunding package for November. They should return the 3 year note to the flock and given their absolutely gargantuan appetite they will give the market some guideposts regarding the methods they will employ to raise those funds. Finally, the results of the election could signal the end of an era of laissez faire capitalism and usher in an era of unaccustomed regulation and government control. It certainly seems as though Senator Obama is on track to be the next President. If the Democrats can sweep the Senate they will have a clear field to change the nature of the debate as Ronald Reagan did in 1980. We will know on the morning after. There is also a plethora of economic data on the immediate horizon. Among the reports which print next week are Consumer Confidence and Durable Goods . We will get our first glimpse of Q3 GDP and the quarterly employment cost index. The Chicago Purchasing Managers Index is on the docket as well as Personal Income and Spending data. In the following week there is the labor data for October as well as the ISM. When all of that data has been digested and absorbed, I think participants in the major markets will have a better idea on the near term course of the economy and interest rates. Labels: Across the Curve, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Keeps SinkingAIG executives, back from their spa retreat and British hunting trips, are busily back at work throwing tax dollars into the furnace.In little over a month, the company has accessed $90.3 billion (nearly three-quarters) of the $122.8 billion in credit lines extended by the Fed in exchange for an 80% stake in the company. AIG chief Edward Liddy said that the company may soon have to ask for more money if the company is forced to post more collateral for bond holdings that it guaranteed but that are now being downgraded. Under extreme pressure from NY Attorney General Andrew Cuomo, AIG has agreed to put a hold on paying out performance bonuses to former and current executives. The impact of the AIG collapse is being felt far and wide. Thirty municipal transit agencies, including those in Atlanta, Chicago, DC, San Francisco, and Los Angeles, are facing the prospect of being forced to come up with hundreds of millions of dollars. The crisis is a result of complicated (but legal) tax dodges between the transit agencies and private banks (explained here in the Washington Post). Basically, the banks paid the agencies large sums upfront that would be repaid in installments over time. Exploiting a loophole in the tax code, the banks saved hundreds of millions in taxes, but split the profit with the transit agencies. The deals were guaranteed by AIG, but now that the insurer is on the skids and the federal government has declared an end to the tax dodge, the banks are demanding that cash-strapped transit agencies hand over hundreds of millions in cash in the next few weeks. The demands may actually be a bargaining tactic to force Congress to extend the tax breaks. Labels: AIG, corporate taxes, economic meltdown, public transit, tax dodges Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dean Baker: Why Economists Get It WrongAnother insightful commentary from the inestimable Dean Baker:Unlike custodians, cab drivers, or dishwashers, economists are not held accountable for their job performance. They can be wrong on everything they do every day of the week, and still be viewed as respected authorities by the Washington Post, and other media outlets, as well as members of Congress and others in policy positions. Labels: Dean Baker, economics, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Chrysler Slashes WorkforceChrysler announced that it will cut 25% of its white-collar workforce of 17,300 by the end of the year through early retirements and buyouts. The announcement follows yesterday's news that it would lay off 6% of its hourly workforce by shuttering a plant in Delaware and slowing production at one in Ohio. Chrysler's sales are down 25% for the year.Labels: auto industry, Chrysler, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Chronology of Today's EventsUS shares seem to be settling down at with losses at a level below five percent. But today has still been a very ominous day. Reuters provided the following timetable of various goings on initiated largely in repsonse to market falls from the opening of trading in New York at 9.30am EST to about half an hour ago:12.20 ET Bank of Canada injection through special purchase and resale agreements now totals C$1.285 bln - Reuters 12:08 ET Venezuelan oil basket falls $6.91 to $61.09 per barrel: energy ministry - Reuters 12:03 ET U.S. Treasury polling dealers on impact of recent govt interventions on credit markets, treasuries - Reuters 11:52 ET U.S. Treasury exploring ways to aid insurance companies under financial rescue law: sources - Reuters 11:46 ET U.S. govt to shortly announce a list of about 20 next banks to receive capital injections: source - Reuters 11:33 ET Britain's FTSE 100 falls 5.6 pct, Germany's DAX falls 5.4 pct and France's CAC 40 falls 3.9 pct - Reuters 11:16 ET Spain's Popular says mergers will not be forced by need to survive crisis, but opportunistic - Reuters 11:14 ET Head of IMF Iceland mission says urgent challenge is for govt to stabilize Icelandic crown - Reuters 11:07 ET Bank of Canada injects C$830 mln into market through special purchase and resale agreements - Reuters 10:52 ET Iceland PM says if central bank needs to change monetary policy, it would be done after IMF deal - Reuters 10:51 ET IMF liquidity plan still under discussion, not yet finalized, official says - Reuters 10:49 ET Proposed emerging nation liquidity fund would lend up to 5 times of a country's IMF quota: Official - Reuters 10:47 ET Iceland PM says inflation will go down rapidly over next 12 months - Reuters 10:41 ET U.S. PGBC has 'sufficient funds' to pay obligations for 'number of years': director - Reuters 10:32 ET Iceland PM says cabinet has agreed to request formal negotiations with IMF for $2 bln - Reuters 10:29 ET Morgan Stanley says key risks for Boeing shares remain continued cyclical concerns, machinist strike, ability to finance aircraft, concerns over credit crisis fallout, erratic fuel prices, delays in 787 program - Reuters 10:25 ET Chrysler to cut 25 percent of white collar jobs in November - Wall Street Journal 10:22 ET PNC says was competitive bidding for National City, declines to comment on whether deal forced by government - Reuters 10:19 ET PNC CEO says $19.9 bln of losses on National City portfolio will come in as writedowns at time of close of acquisition, but also as provisions over time - Reuters 10:11 ET PNC Financial Services Group Inc CEO says planning to record $19.9 bln of writedowns on National City Corp loans - Reuters 10:08 ET U.S. treasuries hit session lows as stocks pare losses, curb safe-haven bids - Reuters 10:07 ET 'You look at these markets, whether it is agricultural or industrial commodities-- we are not tradig on fundamentals, we are trading on money flow.': Bill O'Neill, Logic Advisors - Reuters 10:01 ET 'As trading gets underday and we're seeing the Dow extend its losses, so I would probably bet on a further decline in dollar/yen probably towards the lower end of it's ranges': Omer Esiner, Ruesch Int'l 09:58 ET 'You have the hedge fund audience preparing for redemption': Keith Wirtz, Fifth Third Asset Management 09:49 ET White House says markets trying to digest lots of new information, will take time to settle - Reuters 09:43 ET Iceland to receive some aid from Nordic countries as part of $6 bln deal, says official - Reuters 09:41 ET Iceland to get $1 bln from IMF in total $6 bln aid package, says official with knowledge of Iceland-IMF discussions - Reuters 09:38 ET S&P 500 down 23.52 points, or 2.59 percent, at 884.59 after market openS&P 500 down 23.52 points, or 2.59 percent, at 884.59 after market open - Reuters 09:35 ET U.S. treasuries pare gains slightly after stock market opens sharply lower - Reuters 09:34 ET U.S. dollar trims losses vs yen despite lower open for U.S. stocks - Reuters Labels: financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). In Defense of Low-Income HomeownershipFor many years progressive community-development folks worked hard to make homeownership accessible to low-income households. This effort was based in significant part on their view that homeownership represented a critical opportunity for low-income households to build assets and move into the middle class.Now a new skepticism about low-income homeownership has emerged—including in these pages (see Howard Karger's The Homeownership Myth in D&S #270). But before we let the subprime crisis completely wash this whole effort away, we should revisit the argument for low-income homeownership and examine what is left of it after the subprime debacle and how to move forward. There are a number of avenues by which a higher rate of homeownership may benefit neighborhoods and communities as aggregates. But for the purposes of this discussion, let's leave those community-level benefits aside. At the level of individual households, the case for expanding low-income homeownership opportunities that fair-lending and community development activists began making perhaps 30 years ago took as its starting point the fact that all households must pay for a place to live. Many low-income households spend just as much on rent as their homebuyer neighbors spend on mortgage payments (or at least this was true prior to the recent housing bubble, which pushed house prices up much more than rents on average). For these households, what holds them back from homeownership is not the ability to make the monthly payments, but rather (1) enough savings to make a down payment; and (2) a lender willing to extend them credit. Households that have these two advantages and so can buy a home reap big benefits. Rent is like money down the drain, whereas mortgage payments build equity—i.e., you're paying yourself. As a result, over time renters actually pay far more to keep a square foot of roof over their heads than homeowners do. This is one of the biggest ways in which life is more expensive for the poor than for the nonpoor. If you can make mortgages available, then, along with either no/low down payment terms or the opportunity to borrow the down payment, then low-income households can jump the hurdle. This was the case for expanding low-income homeownership opportunities. So what went wrong? Why does it appear that so many low-income homebuyers in the most recent period were not able to keep their homes and reap the benefits of homeownership? One factor is no doubt the often-unpredictable ancillary costs of homeownership. What do you do when the water heater breaks? If you don't have the savings to suddenly put out $1,000 for a new one, you're in trouble. The variability of income over time is probably another factor. Income fluctuations that a middle-income household can manage can put a lower-income household into foreclosure. And income fluctuations have been getting larger for most Americans in recent decades, a fact that is obscured if you look only at population snapshots or at individuals' average earnings over time. But the factor that seems likely to have been the thousand-pound gorilla here is that the private financial services industry was never going to provide credit to low-income earners on the same terms as it did to middle- and high-income earners. Twenty and thirty years ago, did progressive low-income homeownership advocates take this little wrinkle into account? I don't know. But in any case, this fact turned out to invalidate the side-by-side comparison of a renter and a homebuyer paying out the same monthly sum for housing. Instead of getting the same 30-year fixed-rate mortgages at prime (i.e., relatively low) interest rates that middle-class white households had been getting en masse in the decades since World War II, the new lower-income and more often nonwhite entrants to the home purchase market got newfangled, deceptive, designed-to-fail mortgage products. The private financial services industry is not the only way credit can be provided, however. Perhaps the solution is public mortgage lending—a quasi-governmental institution that does not merely expand liquidity via private for-profit lenders as Fannie Mae and Freddie Mac were designed to do, but actually makes direct loans to low-income homebuyers. The microlending phenomenon has demonstrated that low-income borrowers are not inherently worse credit risks than high-income borrowers. They just need a chance: access to credit on equitable terms. Labels: financial crisis, homeownership, predatory lending, subprime crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Could Save Us -- Today, AnywayAlso, oil is down another $5 a barrel today.From Reuters: Home sales gain biggest since July 2003 Fri Oct 24, 2008 10:57am EDT By Patrick Rucker WASHINGTON (Reuters) - Sales of previously owned U.S. homes rose 5.5 percent last month, the biggest gain since July 2003, and the inventory of unsold homes fell, a hopeful sign for a housing market mired in a long slump. The National Association of Realtors said on Friday that sales of existing homes rose to a 5.18 million-unit annual rate from the 4.91 million unit pace set in August. Economists had expected sales to rise to only a 4.93 million unit rate. It was the first time the sales pace had risen above its year ago level in three years, a sign the market could be stabilizing. The surprisingly large jump in sales pushed the inventory of unsold homes down by 1.6 percent to 4.27 million, or a 9.9 months' supply at the current pace. While the inventory is still uncomfortably high, the decline is welcome news for a housing market mired in a deep slump. Home prices, however, showed no signs of escaping their long, deep slide. The median national home price declined 9 percent from a year ago to $191,600, the lowest level since April 2004, the industry trade group said. The increase in sales was spurred by a rise in foreclosure and other 'distress sales' in regions of the country hard-hit by the ongoing housing downturn, said the Realtors' chief economist, Lawrence Yun. "n some regions, the lower prices are seeing buyers return to the marketplace," The said. "his was a nice jump and hopefully this trend can continue because the first step to stabilizing the market is an increase in home sales." Sales rose in three regions, with the West recording a 16.8 percent jump. The Midwest saw an increase of 4.4 percent and the South saw a 2.2 percent rise. In the Northeast, sales fell 1.2 percent. (Editing by Andrea Ricci Labels: financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). What To Expect Today?From Nouriel Roubini...I was accused yesterday of being alarmist arguing that policy makers may have to shut down financial markets. But today Friday Asian markets and in free fall and European markets are also in free fall. And US equties futures have fallen so much today before the US markets have opened that trading in the S&P futures index and the DJIA futures index has already been suspended in Europe as these indices reached their daily limits of a 5% drop. So it has taken only one day for my prediction that markets will be shut down to start to be realized. If - as possible -the free fall will continue today once US markets open then automatic circuit breakers on the S&P 500 may be triggered and trading may be stopped; and if - as likely - the capitulation panic continues today and in the next few days authorities may be forced - as I argued yesterday - to close down financial markets for a week or more in the next few days. We have reached the scary point where the dysfunctional behavior of financial markets has destructive effects on the financial system and - much worse - on the real economies. So it is time to think about more radical policy actions and government interventions of the type I discussed in my London talk yesterday (see the video below that may be worth to watch in its entirety of 48 minutes). Read the rest of the post Labels: financial crisis, Nouriel Roubini Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Black Friday?Now we've got a particularly toxic mix of recession fear and possible reversal in interbank lending. This spells disaster. This post from Naked Capitalism sums it up pretty well:Friday, October 24, 2008 Bloodbath I had warned readers against assuming that because we had a bounce in the equity markets, that life would soon return to normalcy ("It Isn't Over Until the Fat Lady Sings"). But I didn't expect a rout like this, particularly with no looming news trigger. The yen has gone to 91. The Nikkei was down over 9%, most other Asian markets down 7%, Continental markets down over 10%, but have reverted to down a mere 7% plus. A more aggressive than expected production cut by OPEC has done nothing to stem the fall of oil, down 5%. Gold has fallen below (and a reader who sometimes laments the fact that he runs a gold fund noted that he had been watching trading this week hawkishly, and it had withstood attempts to drive it below that level). US stock futures trading has been restricted because it has fallen below 6%, its daily limit. From the Wall Street Journal: European shares tumbled Friday as fears of a long and deep recession grew, with the auto sector slumping after profit warnings from Renault and Peugeot-Citroen as well as weak results from Swedish truck maker Volvo. The pan-European Dow Jones Stoxx 600 index dropped below 200 for the first time since mid 2003, falling 9.0% to 189.87. Among regional markets, the U.K. FTSE 100 Index dove 8.73% to 3730.78 and the German DAX 30 Index dropped 10% to 4068.43. The French CAC 40 index was down 10.2% at 2974.95, with Peugeot-Citroen among the biggest decliners, falling 14.1%. And the credit market news is taking a gloomy turn again. From Bloomberg: The cost of borrowing in dollars may rise as increasing prospects of a global recession prompts banks to hoard cash even after policy makers injected record amounts of the U.S. currency into financial markets. The London interbank offered rate, or Libor, that banks charge for overnight loans in dollars may climb 4 basis points to 1.25 percent today, according to Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. It increased for the first time in 10 days yesterday. The three-month lending rate for Hong Kong dollars, known as Hibor, rose for the second day, gaining 5 basis points to 3.29 percent. ``The level of activity in the money markets remains significantly below standard norms and subject to sporadic abnormalities that can only be a function of illiquidity,'' said Charles Diebel, head of European rates strategy at Nomura International Plc in London. Now I want to know how Nouriel Roubini saw this coming. He went into what reader Dwight called Defcon One yesterday. Marshall Auerbach e-mailed, saying (as we have) that the Fed is making matters worse: All that's left is the Fed buying longer-term Treasury securities to attempt to flatten the curve, get mortgage rates down, and add reserves. This will flood the market with reserves that now pay interest. so they can do this without a zero interest rate policy. Their theory is that with more reserves bank will lend more, which is not the case, both in theory and in practice, as Japan proved not long ago. Instead of the Fed buying longer term securities, the Treasury should simply stop issuing them and issue more bills. The Treasury not issuing longer term securities is functionally the same as the Treasury issuing them and then the Fed buying them, but with a lot fewer transactional costs. Labels: financial crisis, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Notes on the Financial Crisis (Tom Weisskopf)We've posted three web-only articles drawing on notes on the financial crisis by Tom Weisskopf, professor of economics at the University of Michigan. He sent out the notes on Oct. 1st, Oct. 5th, and Oct. 15th, but we only just received them. We'll continue to post Tom's notes as he sends them along.We've also posted the most recent Ask Dr. Dollar column (a preview of our November/December issue), by Arthur MacEwan, professor emeritus of economics at UMass-Boston. Labels: Arthur MacEwan, Ask Dr. Dollar, financial crisis, Tom Weisskopf Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Automakers Ditch Jobs, 401Ks, and NASCARA quick gloom and doom update on the US auto industry today.Chrysler announced that it was cutting 1,825 jobs. The cuts are about 6% of the company's hourly workforce of 33,000. General Motors announced that it is indefinitely suspending company matching contributions to employee 401K retirement accounts. The Washington Post reports that Detroit automakers are pulling out of NASCAR: GM's annual investment alone was rumored to be $120 million-$140 million at the peak of its involvement in NASCAR. But it severed sponsorships with Bristol Motor Speedway and New Hampshire Motor Speedway this summer, and deeper cuts are promised as part of GM's $10 billion cost-savings program. Labels: 401K, auto industry, Chrysler, General Motors, GM Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On the More Serious (Only Just) SideInteresting article from the International Herald Tribune on Paulson's kicking-and-screaming acceptance of his "inner statist."The last line is worth the price of admission Struggling to keep up as crisis raced on By Joe Nocera and Edmund L. Andrews Published: October 23, 2008 "I felt like Butch Cassidy and the Sundance Kid. Who are these guys who just keep coming at us?" -- Treasury Secretary Henry Paulson Jr. It was the weekend of Sept. 13, and the moment Treasury Secretary Henry Paulson Jr. had feared for months was finally upon him: Lehman Brothers was hurtling toward bankruptcy -- fast. Knowing that Lehman had billions of dollars in bad investments on its books, Paulson had long urged Lehman's chief executive, Richard Fuld Jr., to find a solution for his firm's problems. "He was asked to aggressively look for a buyer," Paulson recalled in an interview. But Lehman could not -- despite what Paulson described as personal pleas to other firms to buy some of Lehman's toxic assets and efforts to persuade another bank to acquire Lehman. With all options closed, he said, the government's hands were tied. Although the Federal Reserve had helped bail out Bear Stearns -- and was within days of bailing out the giant insurer American International Group -- it could not help Lehman, even as its default threatened to wreak havoc on financial markets. Read the rest of the article Labels: Bear Stearns, financial crisis bailout, Henry Paulson, Lehman Brothers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Greenspan Is Shocked! Shocked!This definitely falls into the "Give me a break" categoryIn case anyone didn't know, Greenspan now runs a hedge fund (can you spell R-E-V-O-L-V-I-N-G D-O-O-R?) I wonder it it's tanking like most of the other hedge funds these days.... Greenspan "shocked" at credit system breakdown Thu Oct 23, 2008 Reuters By Mark Felsenthal WASHINGTON (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities. Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform. Read the rest of the article Labels: Alan Greenspan, financial crisis bailout, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). NOT a Slow News DayThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Assuming we're all becoming inured to the idea that greater-than-five-percent losses on US and global stock markets are becoming an everyday occurrence, a couple of things happened today that simply demand our attention if we're going to maintain a handle on this crisis. First, Wachovia. Wachovia announced today that it lost $24 BILLION--that's billion--in a single quarter. This is simply staggering. Added to the second quarter, the company has lost the equivalent of the GDP of Guatemala, as Reuters noted today. And Wells Fargo and Citibank were fighting over it.... Back to the point, though, that announcement was merely the beginning of a slew of poor third-quarter earnings reports that came out today. These indicate weakness spread broadly across the economy, which has reinforced the fears of recession that have been dragging down stocks despite improvements in money and commercial-paper markets, which have been force-fed staggering amounts of money by the Federal Reserve. But the problems don't end there. Regarding the improvements in interbank and commercial-paper markets, Yves Smith, in a post that should be required reading, indicates that the market for credit-default insurance continues to deteriorate, and there is reason to believe that it will do so at an accelerating pace. Seeing that this market, in tandem with the other two troubled ones, has been at the center of the unprecedented freeze-up in credit since the fall of Lehman Brothers, problems here could well reverse what improvement we've seen in the other markets (not to mention having further adverse effects on equity markets, etc.). And if that happens, the game is up, at least until the the free-marketeers at the Treasury and so on decide to socialize more--a lot more--bailout costs. And there's more, much more, afoot on this score, as well. Emerging market currencies are posting huge losses (some have been forced back into the arms of the IMF), even in places like Brazil, which had been considered strong enough to withstand the crisis (in another fantastic post, Smith points us towards the plight of Brazilian and other emerging-market exporters, who hedged their local-currency exposure with currency derivatives, only to see their supposed hedge turn into a problem of vastly larger proportions; and, on this score, Brad Setser's Tuesday post--"The End of Bretton Woods 2"--is also absolutely essential reading) only weeks, or even days ago. And that brings me to my final point. A conference has slated for the 15th of November in Washington, in which the so-called G-20 (which, unlike most similar international groupings, includes important developing countries) group of major economies are to discuss the international aspects of the crisis. Many will probably consider the proceedings a joke, presided over as it will be by one of the most unpopular US governments ever, and one set to leave office within two months. But I wonder: it seems virtually certain that Bush will go down as the worst president in US history unless he can pull some rabbit out of the hat in his mercifully few weeks left. The administration has, after all, been making major overtures to North Korea (taking it off the list of sponsors of terrorism--making Cuba, by implication, more of a threat to the US than North Korea). Now, especially with this administration, will can by no means be confused with ability or competence. Still, I can see a faint possibility of a major initiative being taken at the conference, especially if events (like a reverse spike in interbank rates, or a currency crash in a major emerging market) intervene; in fact, the conference (not to mention the US elections) may turn out too late to prevent something of this sort from happening. And, it's hard to see how any initiative could even be taken up by Congress before it recesses and is replaced by the next (almost certainly overwhelmingly Democratic) Congress in January. But any initiatives will probably center on somehow extending to the developing world some means to attain dollar support which they are lacking now (and which prevents them from flooding their markets with a cash defense, as the developing countries have been able to do). So we've been through quite a day. Be ready for tomorrow. A quick note: barring a "major event" I'm not planning to blog for a few days: I hope to post a longer piece on the D&S website (not the blog!) early next week on the historic events of the last few weeks. Labels: Brad Setser, financial crisis, Larry Peterson, Naked Capitalism, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Interesting Piece on Marx and the CrisisFrom Stumbling and Mumbling. Hat tip to Economist's View. I don't agree with all of this, but it's thought-provoking:Marx: less relevant The credit crunch is making Marx fashionable again. Which I find odd. Strictly speaking, this crisis has made Marx less relevant, not more. Our current crisis is a less Marxist one than almost any post-war recession. To Marx, crises originated in the real economy. Recessions occur when an over-accumulation of real capital equipment combine with a lack of demand to cause a falling rate of profit and then capital-scrapping, job cuts and slump. Now, this was a great explanation for previous recessions. The long boom of the 1950s and 60s led to over-accumulation and falling profits and the recessions of the 70s and 80s. The tech bubble of the late 90s caused a massive over-accumulation of capital and nugatory profits. It's this stress upon profits that elevates Marx and his follower such as Kalecki above mere Keynesians. However, this is a poor description of our current woes. Non-financial profits have been reasonably healthy. Instead, this crisis originates in the financial system. Read the rest of the article Labels: Adam Smith, financial crisis, Karl Marx, Keynes, Michael Kalecki, Minsky, overproduction Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Something Good Comes Out of the Crisis!Remember, though, all those who will be (and have been) hurt by the effects of this monumental waste; and that it provides us with a fine example of the possible effects of outsourcing social and environmental policy to "Billanthropists" like Gates. Note also the similarities in the hyper-exaggerated investment incentives with the financial crisis proper....Biofuels: From hope to husk Financial Times By Kevin Allison and Stephanie Kirchgaessner Tuesday Oct 21 2008 14:20 It was an American dream that has failed to become a reality. For much of the last decade, enthusiasts from President George W. Bush down have touted corn-based ethanol as something approaching a superfuel, a home-grown alternative to foreign oil that would help cut smog and bring hope to struggling farmers. It has not worked out that way. Instead, the ethanol industry has undergone a great boom and bust in which a Financial Times analysis has found investors as savvy as Bill Gates, Microsoft's founder, have collectively lost billions of dollars. Despite the billions more in taxpayers' dollars that was spent to subsidise it, ethanol now eats up nearly one-quarter of the US corn crop without so far fulfilling the hopes held for its beneficial effect either on the environment or US dependence on foreign energy. Read the rest of this article Labels: biofuels, energy, Environment, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Banks Mine Data and Woo Troubled BorrowersA good article in yesterday's New York Times talks about data-mining companies that specialize in finding credit-challenged customers that banks can prey upon. Some selections, including a nice quote from Jim Campen, D&S Associate and frequent contributor:
And this particularly appalling bit: Peter Harvey, chief executive of Intellidyn, a consulting company based in Hingham, Mass., that helps banks with their targeted marketing, says the industry's newest challenge is to personalize each offer without appearing too invasive. Read the rest of the article. Labels: consumer debt, data mining, Jim Campen, predatory lending Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bleak Earnings Swamp StocksJust posted to wsj.com:By PETER A. MCKAY | Faltering profits and fears of global recession sent stocks into a spiral Wednesday, nudging major indicators ever closer to their bear-market lows. The Dow Jones Industrial Average slid for a second straight day, ending down 514.45 points, or 5.7%, at 8519.21, hurt by declines in all 30 of its components. The Dow has tumbled almost 750 points over its two-day slide and now stands about 640 points above its Oct. 10 intraday low, which traders are hoping will hold up as a market trough. Read the rest of the article. Labels: stock market, Wall Street, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Bad News For AutomakersBillionaire investor Kirk Kerkorian is cutting his losses by shedding part of his 6.49% stake in Ford Motor Company, and has announced that he will sell of the remainder of his holdings in the near future. Starting in April, Kerkorian began buying up about $1 billion worth of Ford stock. As of Tuesday, his holdings were worth less than $290 million, a loss of 71%.Like other US automakers, Ford is facing trouble from all sides: tightened consumer spending, a growing distaste for gas-guzzling SUVs, and a frozen credit market. According to the LA Times, Ford and GM are each burning through $1 billion a month in scarce cash just to keep going. Adding another blow to Detroit's desperate hope for a quick fix, the Washington Post reports that US automakers may not see any of the recently approved $25 billion government loan program for more than a year. The emergency loan, the largest government support of the US auto industry since the 1979 Chrysler bailout, was enacted to help Detroit automakers switch to more energy-efficient vehicles. However, carmakers have been counting on it to tide them over until the credit markets begin to thaw. Labels: auto industry, bailout, Chrysler, credit crisis, ford, GM, Kirk Kerkorian Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Trading PlacesAnd, from Ha-Joon Chang (whose new book Mark Engler will review in a forthcoming edition of D&S), a fine piece on trade and the likely victims of the crisis. From The Guardian:The economics of hypocrisy After implementing the largest government bail-out in history, the US continues to tell other nations, "do as I say, not as I do" Ha-Joon Chang guardian.co.uk, Monday October 20 2008 14.00 BST in July, the Republican Senator Jim Bunning of Kentucky famously denounced the $200bn nationalisation of Fannie Mae and Freddie Mac, the mortgage lenders, as something that can only happen in a "socialist" country like France. France was bad enough, but now Senator Bunning's beloved country has turned into the Evil Empire itself. The US government is using $700bn of taxpayers' money to buy up the "toxic assets" choking up the financial system and -- horror of the horrors -- partially nationalising the US banking system. President George Bush, however, did not see things quite that way. Announcing the bail-out package, he argued that, rather than being "socialist", the plan was simply a continuation of the American system of free enterprise, which "rests on the conviction that the federal government should interfere in the market place only when necessary". Obviously, in his view, nationalising a huge chunk of the financial sector was one of those "necessary" things. Bush's statement is not only an ultimate example of political doublespeak -- one of the biggest state interventions in history is dressed up as another workday market process -- but it also reveals America's long-standing pragmatism towards the free market. Throughout history, Americans have supported the free market when it suits them but not when it doesn't. Today, the US is the self-proclaimed defender of free trade and free finance, but in the days when it was struggling to catch up with Europe, it resorted to the most blatant kinds of protectionism both in trade and finance. Read the rest of the article Labels: Dollars and Sense, financial crisis bailout, free trade, Ha-Joon Chang, Mark Engler Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Thoughts from an Unusual QuarterPoor performance on markets in New York, despite movement in money and commericial paper markets (and oil down another 4%!). Anna Schwartz, former co-author with Milton Friedman, of all people, has some interesting thoughts on why this may be so (Hat tip to Marginal Revolution):From The Wall Street Journal "Weekend Interview," October 18, 2008 By Brian M. Carney ...To understand why, one first has to understand the nature of the current "credit market disturbance," as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs. This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. "The Fed," she argues, "has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible." So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue." Read the rest of the article Labels: Anna Schwartz, financial crisis bailout, Marginal Revolution, Milton Friedman, The Fed Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Economic Positions of (almost) All the CandidatesCompare the records and policy proposals of not only John McCain and Barack Obama, but also Libertarian Party candidate Bob Barr, Green Party candidate Cynthia McKinney, and independent candidate Ralph Nader on a wide range of (mostly domestic) economic issues.Find a pdf of the candidate comparison here. Labels: Barack Obama, Bob Barr, Cynthia McKinney, john mccain, Ralph Nader Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bernanke Endorses Obama [sorta]And this from the cranky side of the Wall Street Journal—the editorial page:Bernanke Endorses Obama Labels: Ben Bernanke, Obama, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama and Paul VolckerFrom today's Wall Street Journal, an article about Obama's relationship with former Fed chair Paul Volcker; hat-tip to Shane Taylor on lbo-talk:Volcker Makes a Comeback as Part of Obama Brain Trust By MONICA LANGLEY [....] The Obama-Volcker relationship continues to evolve, campaign advisers say. At the start, Sen. Obama sought advice from Mr. Volcker and other outside voices through his economic adviser, Austan Goolsbee, a 39-year-old University of Chicago professor. But starting with the demise of Bear Stearns Cos. in March and continuing today, Sen. Obama speaks directly and often with Mr. Volcker about the intricacies of the financial crisis and possible solutions. They've become "collaborators," as one aide puts it. For example, when the U.S. Treasury put forth a plan to set up a $700 billion rescue fund to buy up toxic assets, Sen. Obama quickly backed it on the advice of Mr. Volcker. Like other prominent economists, Mr. Volcker also advocated early on for the recapitalization of banks. On this advice, Sen. Obama proposed direct equity infusions in banks in his frequent conference calls with Treasury Secretary Henry Paulson. The idea, initially rejected by Mr. Paulson, was finally proposed last week by the administration, in an effort to get banks lending again to businesses and each other. Relying on Mr. Volcker Sen. Obama's team of economic advisers includes two former Treasury secretaries, Robert Rubin and Lawrence Summers, and in some decisions, Mr. Volcker doesn't reign supreme. The candidate's latest proposal, for example, a $60 billion stimulus package, was initially fought by the former Fed chief on the grounds that Americans were already overspending. Moreover, he is unlikely to take a long-term role in any Obama administration. But for now, and going into the campaign's final weeks, aides say Sen. Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker. Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, "The most important question to Obama: What does Paul Volcker think?" says Jason Furman, the campaign's economic-policy director. Read the rest of the article. Labels: Obama, Paul Volcker Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). ...But It's Always Wise To Heed Nouriel RoubiniAll the bubbles are burstingRadical, coordinated action among all advanced and emerging-market economies is needed to avert the looming possibility of a decade-long global recession By Nouriel Roubini Saturday, Oct 18, 2008 The rich world's financial system is headed toward meltdown. Stock markets have been falling most days, money markets and credit markets have shut down as their interest rate spreads skyrocket, and it is still too early to tell whether the raft of measures adopted by the US and Europe will stem the bleeding on a sustained basis. A generalized run on the banking system has been a source of fear for the first time in seven decades, while the shadow banking system -- broker dealers, non-bank mortgage lenders, structured investment vehicles and conduits, hedge funds, money market funds and private equity firms -- are at risk of a run on their short-term liabilities. On the real economic side, all the advanced economies -- representing 55percent of global GDP -- entered a recession even before the massive financial shocks that started in late summer. So we now have recession, a severe financial crisis and a severe banking crisis in the advanced economies. Emerging markets were initially tied to this distress only when foreign investors began pulling out their money. Then panic spread to credit markets, money markets and currency markets, highlighting the vulnerabilities of many developing countries' financial systems and corporate sectors, which had experienced credit booms and had borrowed short and in foreign currencies. Countries with large current-account deficits and/or large fiscal deficits and with large short-term foreign currency liabilities have been the most fragile. But even the better-performing ones -- like Brazil, Russia, India and China -- are now at risk of a hard landing. Many emerging markets are now at risk of a severe financial crisis. Read the rest of this article Labels: financial crisis, Nouriel Roubini Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Worst May Be Over...Markets worldwide are reacting favorably to (from Reuters):Interbank lending, stimulus provide hope in crisis Monday, October 20, 2008 By Daniel Trotta NEW YORK (Reuters) - Interbank lending emerged from deep freeze and Fed chairman Ben Bernanke gave his blessing to a second U.S. government stimulus package on Monday, providing hope the world's financial crisis may be easing. The three-month Libor rate fell more than one-third of a percentage point, its biggest one-day drop in nine months in one sign that banks may have the confidence to lend to each other again, crucial to reactivating the world economy. The chairman of the U.S. Federal Reserve told Congress on Monday that another wave of government spending may be needed as the economy limps through what could be an extended period of subpar growth. Read the rest of the article Labels: ben, financial crisis bailout, fiscal stimulus, interbank market, Reuters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Gordon Brown Raises the (Borrowed) AnteFrom the UK Independent. Some really scary stuff here. The UK measures are, comparatively speaking, very bold, but the country has a stubbornly high inflation rate and large deficits. A couple of snippets:Brown to splash billions on schools and hospitals After committing 50bn pounds to rescue banks, now Government will bring spending forward to stave off recession. Jane Merrick and David Randall reports Sunday, 19 October 2008 But the move is another major gamble by the Government, after the 500bn pound bailout of the banks, because it depends on a major recovery by the time a public spending black hole emerges in 2010. In a further sign of the impact of the crisis on the real economy, universities yesterday warned they are on the verge of a financial crisis because of soaring rates of inflation, and may be forced to cut costs or call for voluntary redundancies among staff. Remember that 500 billion pounds is the equivalent of about one-fifth of annual GDP. It's as if the sundry US bailout measures added up to $2.6 trillion. Read the rest of the article Labels: Alistair Darling, financial crisis bailout, Gordon Brown Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bailout-Related GiveawaysFrom Michael Perelman, who cites a Wall Street Journal article. Do try to resist the urge to punch walls....More Bailout Obscenity As if the bailout were not were not bad enough, the Wall Street Journal reports that the Treasury Department is, in effect, rewriting the tax code to give away what will easily be tens of billions of dollars. On the opposite page, the paper reports that the Fannie and Freddie bailout is likely to cost the government considerably more than expected because of court suits charging, probably correctly, that management misled investors. One can safely as that more will be discovered later. Read the rest of the post Labels: financial crisis bailout, Micheal Perleman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Financial Innovation in Desperate TimesBut these are initiatives of (increasingly desperate) governments, not financiers.First, from The Observer (London): Bank Chiefs Ordered To Cut Home Evictions Survey Shows Start of Brown Revival Cameron Urges Business Tax Break Gaby Hinsliff and Toby Helm The Observer, Sunday, October 19, 2008 Banks will face new curbs on home repossessions to prevent families from being evicted when they fall into financial difficulties, the Chief Secretary to the Treasury has promised. The pledge was made by Yvette Cooper in an interview with The Observer as the government braces itself this week for official confirmation that Britain is entering recession for the first time since the early Nineties. Rising unemployment is expected to trigger a wave of mortgage defaults as people who lose their jobs find themselves unable to keep up payments on their homes. Repossessions have already increased to 19,000 in the first half of this year - a 40 per cent increase on the previous six months. Experts believe the figure will climb to 26,000 in the second half of 2008. The total number of people suffering negative equity is expected to rise to around two million as house prices plunge Read the rest of this article Second, from the New York Times. Remember that South Korea's currency has been under severe pressure during the past week. October 19, 2008 South Korea to Guarantee Bank's Foreign Currency Debt By THE ASSOCIATED PRESS Filed at 7:28 a.m. ET SEOUL, South Korea (AP) -- South Korea announced measures Sunday to shore up its banks by guaranteeing their external debt and pumping more money into the financial system amid the global credit crisis. The government said it will provide up to $100 billion to secure banks' maturing foreign currency debt for three years on loans taken out from Oct. 20 this year until June 30, 2009. The announcement came as analysts have questioned South Korean banks' ability to acquire dollars to pay off maturing foreign loans amid the global credit crunch. Read the rest of this article Labels: financial crisis, foreign exchange, Gordon Brown, mortgage meltdown, South Korea, United Kingdom, Yvette Cooper Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). CEOs cause meltdown, take 10% cut of bailout"Pay yourself first" goes the personal finance maxim. Apparently the current and former captains of America's failed finance system appear to be heading this all too well. In a nice post by Magnifico at the Daily Kos, 10% of $700 billion bailout to cover Wall Street banker pay and bonuses.The top execs at Morgan Stanley have, in fact, received $10.7 billion in compensation for the year to date, an amount greater than the current net worth of the company. The CEOs defended their action, noting that it is generally considered rude to tip waiters less than 10%, even when the service is bad. Labels: bailout, Daily Kos, financial crisis bailout, Golden Parachutes, Morgan Stanley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Subpeaonas for Lehman ExecsThree US Attorneys' offices (two in New York and one in New Jersey) have launched separate grand jury investigations of failed financial services giant Lehman Brothers. Subpoenas have already been issued to a dozen past executives.The exact nature of the investigations has not been made public, but a lawyer representing Lehman Brothers in bankruptcy court disputed the claim by an administrator for Lehman's European unit that $8 billion was transferred from the companies European operations on the eve of the bankruptcy. The Times of London reports that investigators are also focusing on whether top executives made misleading public statements about the financial health of the company when they solicited billions in additional capital from investors, despite internal communications acknowledging the dire situation of the firm's finances. So far, the executives have maintained that they had no knowledge of how bad things were until the final moments before the bankruptcy. Investigators are also looking into the possibility that the company put undue pressure on ratings agencies artificially inflated the safety of the company's bonds. The New York Times reports that one of the executives that received a subpoena is Richard Fuld Jr. , Lehman's former CEO. Fuld was recently raked over the coals by Rep. Henry Waxman (D-CA) during Congressional hearings. Labels: Corporate Fraud, financial crisis, Henry Waxman, Lehman Brothers, Richard Fuld Jr Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Our Recapitalization, Your ProblemLooks like the collateral damage burden of the largely Western fight to save the global financial system may be shifting somewhat to the usual victims:From the Financial Times: Financial crisis stalks new victims By Peter Garnham Friday Oct 17 2008 14:15 The next leg of the turmoil gripping global financial markets could see the currencies of some emerging market commodity producers plunged into crisis. Until recently, emerging market currencies have held up well as the focus of markets was the turmoil wrought by problems engulfing the financial system in the developed world. However, as the credit crisis reached a crescendo over the last month, emerging markets' currencies began to come under pressure as foreign investors facing liquidity problems at home repatriated funds. Read the rest of this article Labels: Emerging markets, financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). So Long, SuckersThis guy seems kind of like a cross between former Minnesota governor Jesse "The Body" Ventura and George Soros...From the Financial Times: Top hedge fund manager slams 'idiot' bankers Friday Oct 17 2008 15:15 A hedge fund manager who made what is thought to be one of the biggest percentage profits of all time bowed out of the business on Friday with a fierce attack on the "idiots" running big banks who were willing to take the other side of his bets. Andrew Lahde, founder of California's Lahde Capital, used his farewell letter to investors to round on the US "aristocracy" able to pay for their children to gain a top-class education. Labels: Andrew Lahde, financial crisis, hedge funds, shadow banking system Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Committee To Screw the WorldExcellent article from the Washington Post on the deregulatory atmosphere that enabled the formation of the overlapping super-bubbles in derivatives, credit default insurance, and all the other gizmos we've come to know and love (and will pay handsomely for):What Went Wrong Read the rest of the article. Labels: Alan Greenspan, Brooksley Born, Commodity Futures Trading Commission, financial crisis, Lawrence Summers, Robert Rubin Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Harley In Hog HellLike the hawkers of their 4-wheeled brethren, Harley Davidson is facing tough times. The Wall Street Journal reports today that the company is being hit by a double whammy of slumping consumer sales and a major squeeze on their in-house financing unit, which provides credit for both customers and dealers.Although they're not in as bad shape as GM (currently in merger talks with Chrysler, although the lack of available credit is holding things up), company sales are down 9% for the first three quarters of 2008 versus a year earlier, and operating income from Harley's financing unit fell 28% in the latest quarter, according to the WSJ. While still profitable, Harley's net income in the third quarter fell 37% compared to a year earlier. Labels: auto industry, credit crisis, economic meltdown, GM, Harley Davidson, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Wall Street Coup (Ismael Hossein-zadeh)From the fantastic MRZine.The Wall Street Coup and the Bailout Scam by Ismael Hossein-zadeh The "rescue" plan is not only fraudulent, it is also the wrong medicine for the ailing economy. The Wall Street took the US (and the world) hostage and extracted a heavy ransom. But while the enormous ransom was successfully extracted, there are no guarantees that the hostages will be set free from the shackles of trickle-down economics. On the contrary, there are strong indications that the fraudulent (and perhaps criminal) bailout may turn the current crisis into a protracted agony of a long-bleeding economic depression. Why the Bailout Scam Is More Likely to Fail than to Succeed The bailout scam is doomed to fail because it avoids diagnosis and dodges the heart of the problem: the inability of more than five million homeowners to pay their fraudulently inflated mortgage obligations. Instead of trying to salvage the threatened real assets or homes and save their owners from becoming homeless, the bailout scheme is trying to salvage the phony or fictitious assets of Wall Street gamblers and reward their sins by sending taxpayers' good money after the gamblers' bad money. It focuses on the wrong end of the problem. The apparent rationale for the bailout plan is that, while the injection of tax payers' money into the Wall Street casino may not be fair, it is a necessary evil that will free the "troubled assets" and create liquidity in the financial markets, thereby triggering a much-needed wave of lending, borrowing, and expansion. There are at least five major problems with this argument. Read the rest of the article. Labels: bailout, financial crisis, Ismael Hossein-zadeh, MRZine, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Some Quick Opening Comments, October 17thThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Asian and European markets generally followed the US upwards after the big late afternoon rally on Wall Street yesterday afternoon, showing that some buyers are finally probing the market for bargains. This sentiment is no doubt fortified by the improvements in the interbank and commercial paper markets, which have finally, after several weeks, shown signs of revival, albeit of a frustratingly tentative sort so far. Then again, it's a bit much to expect confidence to return to these markets amidst volatility of unprecedented levels and a bleak economic outlook that gets bleaker daily, and is in fact spreading geographically at a phenomenal rate. Other causes for concern: US mortgage rates have spiked, as holders of US agency (the recently nationalized Fannie Mae/Freddie Mac) debt have, in response to US plans to recapitalize the banks, sold off and piled into riskier, higher-yielding bank assets. As US recovery seems predicated on the eventual revival of the housing market (so that house prices will find a floor, and repossessions/payment defaults stop), this rise, as the Financial Times noted in breaking the story, is a pernicious effect of the plan to recapitalize the banks, and shows how complicated, and risky, this plan can be. Also, hedge funds are selling their assets at a rapid pace to pay off investors headed for the exits, creating a spiral of losses and further sell-offs that has led to a number of funds being closed, and this trend is set to accelerate at a potentially alarming rate. That means downward pressure on stocks, though hedge funds' unwinding of their huge speculative positions in oil and commodities should keep inflation falling, barring a brutal Northern hemisphere winter or geopolitical event of some magnitude. Still, the fact that the funds are in this trouble partially because they are having problems cashing out of failed banks like Lehman shows how delicate all bank-related finance still remains, and more turmoil in hedge fund land will only exacerbate these tensions. Finally, US industrial production statistics show a decline the likes of which hasn't been seen in decades, and September housing figures just came in and are poor. So the economic gloom element may be the dominant factor as US trading starts today, even as the extraordinary measures taken by Central Banks and finance ministries worldwide starts to show signs of having an effect (though, as was the case with US mortgage costs, as we saw above, these effects are far form straightforward and completely serendipitous). Also: watch the situation in South Korea: the currency there fell some 9% yesterday, and its financial situation is dire, characterized by a large current account deficit, falling exports, stubborn inflation, and a banking sector heavily reliant on short-term debt (interbank and commercial paper problems again). And though they accumulated huge reserves in response to the Asian crisis ten years ago (and the subsequent, masochistic IMF structural adjustment program imposed on it), its position is very fragile, especially given the rapidity with which the crisis is now infecting emerging markets, even ones considered only weeks ago to have "decoupled" from the western world's messes. Also watch Eastern Europe: Ukraine and Hungary now, but possibly Baltic countries which borrowed heavily in euros from Scandinavian and Eurozone banks now feeling the pressure. Labels: Fannie Mae, financial crisis, Financial Times, Freddie Mac, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Obama and the Grand Canyon (Mike Davis)If you've had your fill of bourgeois economists, here's something from the incomparable Mike Davis on the crisis, and the enormous pessimism we must bear about Obama's ability or desire to do anything (constructive) about it. (As far as I can tell, this originally appeared on TomDispatch.)Can Obama See the Grand Canyon? On Presidential Blindness and Economic Catastrophe By Mike Davis Let me begin, very obliquely, with the Grand Canyon and the paradox of trying to see beyond cultural or historical precedent. The first European to look into the depths of the great gorge was the conquistador Garcia Lopez de Cardenas in 1540. He was horrified by the sight and quickly retreated from the South Rim. More than three centuries passed before Lieutenant Joseph Christmas Ives of the U.S. Army Corps of Topographical Engineers led the second major expedition to the rim. Like Garcia Lopez, he recorded an "awe that was almost painful to behold." Ives's expedition included a well-known German artist, but his sketch of the Canyon was wildly distorted, almost hysterical. Neither the conquistadors nor the Army engineers, in other words, could make sense of what they saw; they were simply overwhelmed by unexpected revelation. In a fundamental sense, they were blind because they lacked the concepts necessary to organize a coherent vision of an utterly new landscape. Accurate portrayal of the Canyon only arrived a generation later when the Colorado River became the obsession of the one-armed Civil War hero John Wesley Powell and his celebrated teams of geologists and artists. They were like Victorian astronauts reconnoitering another planet. It took years of brilliant fieldwork to construct a conceptual framework for taking in the canyon. With "deep time" added as the critical dimension, it was finally possible for raw perception to be transformed into consistent vision. The result of their work, The Tertiary History of the Grand Canyon District, published in 1882, is illustrated by masterpieces of draftsmanship that, as Powell's biographer Wallace Stegner once pointed out, "are more accurate than any photograph." That is because they reproduce details of stratigraphy usually obscured in camera images. When we visit one of the famous viewpoints today, most of us are oblivious to how profoundly our eyes have been trained by these iconic images or how much we have been influenced by the idea, popularized by Powell, of the Canyon as a museum of geological time. But why am I talking about geology? Because, like the Grand Canyon's first explorers, we are looking into an unprecedented abyss of economic and social turmoil that confounds our previous perceptions of historical risk. Our vertigo is intensified by our ignorance of the depth of the crisis or any sense of how far we might ultimately fall. Read the rest of the article. Labels: financial crisis, Keynes, Mike Davis, Obama Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Two Nobel Laureates on the CrisisFirst, 2001 winner and regular Guardian correspondent Joseph Stiiglitz. Note especially the difference between the way the sainted Buffet and the US taxpayer are being treated....Paulson tries again Now, also from The Guardian, Kenneth Arrow, the 1972 winner. He's talking about himself in the first part, and of Stiglitz in the second, and touches onthe theoretical issues that were, ahem, exaggerated and manipulated in the creation of the bubbles we've come to know and love...
Labels: financial crisis, Henry Paulson, Joseph Stiglitz, Kenneth Arrow, Warren Buffet Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Spread the WealthFrom Jake Trapper's blog at ABC News:Outside Toledo, Ohio, on Sunday, Sen. Barack Obama, D-Ill., was approached by plumber Joe Wurzelbacher, a big, bald man with a goatee who asked Obama if he believes in the American dream. "I'm getting ready to buy a company that makes 250 to 280 thousand dollars a year," Wurzelbacher said. "Your new tax plan is going to tax me more, isn't it?" Obama said, "First off, you would get a 50% tax credit so you'd get a tax cut for your healthcare costs... if your revenue is above 250—then from 250 down, your taxes are going to stay the same. It is true that from 250 up—from 250—300 or so, so for that additional amount, you'd go from 36 to 39%, which is what it was under Bill Clinton. And the reason why we're doing that is because 95% of small businesses make less than 250. So what I want to do is give them a tax cut. I want to give all these folks who are bus drivers, teachers, auto workers who make less, I want to give them a tax cut. And so what we're doing is, we are saying that folks who make more than 250 that that marginal amount above 250—they're gonna be taxed at a 39 instead of a 36% rate." Responded Wurzelbacher, "the reason I ask you about the American dream, I mean I've worked hard. I'm a plumber. I work 10-12 hours a day and I'm buying this company and I'm going to continue working that way. I'm getting taxed more and more while fulfilling the American dream." "Well," said Obama, "here's a way of thinking about it. How long have been a plumber?" Wurzelbacher said 15 years. Obama says, "Over the last 15 years, when you weren't making 250, you would have been given a tax cut from me, so you'd actually have more money, which means you would have saved more, which means you would have gotten to the point where you could build your small business quicker than under the current tax code. So there are two ways of looking at it—I mean one way of looking at it is, now that you've become more successful through hard work—you don't want to be taxed as much." "Exactly," Wurzelbacher said. Obama continued, "But another way of looking at it is 95% of folks who are making less than 250, they may be working hard too, but they're being taxed at a higher rate than they would be under mine. So what I'm doing is, put yourself back 10 years ago when you were only making whatever, 60 or 70. Under my tax plan you would be keeping more of your paycheck, you'd be paying lower taxes, which means you would have saved…Now look, nobody likes high taxes." "No," said Wurzelbacher. "Of course not," said Obama. "But what's happened is that we end up—we've cut taxes a lot for folks like me who make a lot more than 250. We haven't given a break to folks who make less, and as a consequence, the average wage and income for ordinary folks, the vast majority of Americans, has actually gone down over the last eight years. So all I want to do is—I've got a tax cut. The only thing that changes, is I'm gonna cut taxes a little bit more for the folks who are most in need and for the 5% of the folks who are doing very well - even though they've been working hard and I appreciate that—I just want to make sure they're paying a little bit more in order to pay for those other tax cuts. Now, I respect the disagreement. I just want you to be clear—it's not that I want to punish your success—I just want to make sure that everybody who is behind you—that they've got a chance at success too." Wurzelbacher said it seemed as though Obama might support a flat tax. Obama says, "you know, I would be open to it except here's the problem with a flat tax is that if you actually put a flat tax together, in order for it to work and replace all the revenue that we've got, you'd probably end up having to make it like about a 40% sales tax. I mean that's the value added, making it up. Now some people say 23 or 25, but in truth when you add up all the revenue that would need to be raised, you'd have to slap on a whole bunch of sales taxes on. And I do believe for folks like me who have worked hard, but frankly also been lucky, I don't mind paying just a little bit more than the waitress that I just met over there who's things are slow and she can barely make the rent." Obama said, "My attitude is that if the economy's good for folks from the bottom up, it's gonna be good for everybody. If you've got a plumbing business, you're gonna be better off if you're gonna be better off if you've got a whole bunch of customers who can afford to hire you, and right now everybody's so pinched that business is bad for everybody and I think when you spread the wealth around, it's good for everybody." That's the key moment McCain is jumping out..."when you spread the wealth around it's good for everybody." "But listen," Obama said, shaking Wurzelbacher's hand, "I respect what you do and I respect your question, and even if I don't get your vote, I'm still gonna be working hard on your behalf, because small businesses are what creates jobs in this country and I want to encourage it." "Guys I gotta get out of here and go prepare for the debate," Obama said, "but that was pretty good practice right there." Labels: Jake Trapper, Joe the Plumber, Joe Wurzelbacher, john mccain, Obama Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AIG Execs Still Living the High LifeIn case you were concerned that company execs at AIG (the failed insurance company that was bailed out by the Fed because it was "too big to fail") would have to tone down their high-flying ways, fear not.Last week we reported how, after begging taxpayers for $85 billion to save their hides, they treated themselves and their top insurance salespeople to a week-long luxury spa retreat to the tune of $440,000. This week, corporate honchos found themselves back in the spotlight after reports surfaced that the company spent $86,000 on a corporate hunting trip in England the same time they got an additional $37.8 billion from taxpayers. While the company is now claiming that it will pare back such extravagances to only those that "maximize revenue," they are still mum on whether any top executives are considering giving back any of the hundreds of millions they received in compensation. NY Attorney General Andrew Cuomo, however, is not amused. Labels: AIG, economic meltdown, financial crisis bailout, Golden Parachutes Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dow Declines 733; S&P Tumbles 9% (WSJ)Recently posted to the Wall Street Journal website:TODAY'S MARKETS | OCTOBER 15, 2008, 5:47 P.M. ET By PETER A. MCKAY Dire economic data knocked stocks sharply lower Wednesday, with the S&P 500 posting its worst single-day percentage decline since Black Monday 1987, as investors braced themselves for an ugly recession. The session's drop rekindled debate on Wall Street about whether last week's lows will hold up. Increasingly, it seems the record 936-point gain registered by the Dow Jones Industrial Average Monday wasn't enough to put the market on sure footing. Read the rest of the article. Labels: Black Monday, financial crisis, recession, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Central Bankers, et al: Supply and, uh, What?This posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, the verdict from the markets is in, and they rejected the new Treasury plan to recpitalize the banking system with almost as much enthusiasm as certain members of the House of Representatves rejected the first Treasury plan in late September. As befits a country with a disgraceful healthcare system, the soggy plaster hurriedly applied by the financial mandarins was washed away by a torrent of bloodletting on Wall Street today, with US indices giving up almost all the enormous gains they made after the unprecedented Central Bank interventions at the weekend. And this in spite of a halving of the cost of credit default insurance, and tentative signs of improvement in the all-important interbank and even commercial paper markets. The reason? A poor monthly retail sales report confirmed evidence from the just published Federal Reserve Beige Book on the health of the economy, and the indications are quite poor. As a consequence, non-financial stocks, which never really got going anyway after the announcement of the plan, fell sharply, particularly in cyclical industries and consumer goods. The (quite sensible) sentiment seems to be: all the corporate liquidity in the world (assuming it becomes truly and safely available) won't help sell to consumers who have nothing to pay for products and services anyway, as they are up to their necks in debt, and facing the prospect of swingeing job cuts, recession and--ahem--paying off the still incalculable debt of the banks anyway. And that goes for overseas consumers, too: the recent export boom, which accounted for a vast part of the otherwise inexplicable growth of the economy for the first half of the year, is bound to tail off, as trading partners find themselves, as the Europeans did, swiftly caught up in recession, or have to concentrate on shoring up domestic economies, as China and other countries still experiencing growth may have to do. Especially if the US dollar retains its position as every speculator's security blanket in time of turmoil. So bad times are on the way. What to do? Well, once Obama is elected (I have no doubt that he will humiliate the hapless McCain and his pathetic sidekick--and I wouldn't be surprised if Obama announces the outline of a semi-ambitious economic program during the presidential debate tonight, in order to consign the economically illiterate McCain to Dole-like irrelevance in the waning days of the election season), and even before, we must be on his case: we need to pressure him to focus oin the demand-side of the economy, replacing the rot of increasing consumer-indebtedness from the outsourcing of good jobs and speculative asset-bubbles that engender increasingly jobless recoveries with public works programs of huge proportions. We can't let him, as was the case with our current economic bureacrats, make the mistake that a crisis of this nature can be solved merely by adding to one side of the equation. And these public works programs must be focused on productive endevors, of which there is no shortage: a single-payer healtcare system, serious, even drastic, environmental reform, and the end to global military adventures: we can't squander the money on favoring the housing sector, or trying to subsidize heavy polluters. But it's not going to be easy. So get out there, or be prepared to feel some serious pain, sucker. It's that simple. Labels: financial crisis, john mccain, Larry Peterson, Obama, recession, stock market Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Conservative Mag: End of Laissez-Faire FinanceA tip from our friend Ian Fletcher:Here's a good article in which the magazine The American Conservative essentially calls for an end to laissez-faire finance, not just a patch to fix current problems. The author is Eamonn Fingleton, a Tokyo-based Irish financial journalist who is one of the most trenchant non-socialist critics of capitalism alive. His book Blindside is probably the most important work of economics you've never heard of. Best Regards, Ian Fletcher Labels: American Conservative, bailout, Eamonn Fingleton, financial crisis, Ian Fletcher Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Misplaced BlameToday's New York Times responds to arguments that the Community Reinvestment Act is responsible for the current financial crisis. We addressed those arguments two weeks ago, when we noticed increased traffic to Jim Campen's 1997 article about the act.In recent weeks, Republicans in Congress have been blaming a lot of things, besides themselves, for the subprime mortgage debacle. And many of these same Republicans have long wanted to abolish the Community Reinvestment Act, a landmark law that helped to rebuild some of the nation's most desolate communities by requiring banks to lend, invest and open branches in low-income areas that had historically been written off. These two goals have converged in a new attempt to blame the law for the financial crisis. The act, passed in 1977, is one of the most successful community revitalization programs in the country's history. According to a recent report by the National Community Reinvestment Coalition, an advocacy group in Washington, the act has encouraged lenders to invest more than $4.5 trillion in minority and low-income areas. This money helped to remake devastated neighborhoods like the South Bronx, helping to finance new housing and businesses. It has helped provide essential services in such neighborhoods, including medical centers and housing for the elderly and disabled—projects that the private sector too often refused to back. But you can hardly pick up a newspaper or turn on the television these days without hearing critics argue that the act created the current mess we're in by forcing banks to lend to people in poor areas who were bad credit risks. Representative Steve King of Iowa has introduced legislation that would repeal the act. The charges do not hold up. First, how could a 30-plus-year-old law be responsible for a crisis that has occurred only in recent years? Then there's the fact that the regulatory guidance issued under the reinvestment act and other banking laws actually impose restraints on the riskiest kinds of subprime lending. In addition, subprime lending was not driven by banks, which are covered by the act. Rather, most subprime lending was driven by independent mortgage lending companies, which the act does not cover, and, to a lesser extent, by bank affiliates and subsidiaries that are not fully covered by the act. By some estimates, nonbank lenders and bank affiliates and subsidiaries may have originated 75 percent or more of the riskiest subprime loans. A study released this week by the Center for Community Capital at the University of North Carolina in Chapel Hill shows that people of similar financial profiles were three to five times more likely to default when they received high-priced subprime mortgages than when they got bank loans made under the Community Reinvestment Act. Labels: Community Reinvestment Act, financial crisis, New York Times Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The death of the Washington consensus?From today's Guardian:Paul Krugman's Nobel prize for economics signals the intellectual tide is turning against unrestricted free trade Kevin Gallagher guardian.co.uk, Tuesday October 14 2008 14.30 BST Last Friday the New York Times quoted the World Bank as saying "There's no question the Washington consensus is dead," indeed it "died at the time of the $700bn bail-out." If the bail-out is death, then awarding Paul Krugman the Nobel prize for economics is the nail in the coffin. Paul Krugman did not win the Nobel for his popular critiques of Bush-era economic policy in his New York Times column, though the column no doubt helped raise his profile outside the economics profession. The Nobel committee cited Krugman's theoretical contributions to the economics of international trade, the policy implications of which fly in the face of the Washington consensus ( where themantra is to free up trade every chance you get). Read the rest of the article. Labels: free trade, Nobel Prize in economics, Paul Krugman, washington consensus Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Keep Your Irony Meters on HighThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, they've finally succumbed to the inevitable. No less a devout free marketer than President Bush announced this morning that the US government will buy stakes amounting to $250 billion in the largest US banks. This followed similar nationalizations carried out in Europe, of the sort the US had initially resisted for itself: but the fear that foreign banks would attain a competitive advantage over their US rivals essentially forced the administration's hand. So a process that started as a beggar-thy-neighbor policy in Ireland (when it guaranteed bank deposits some two weeks ago) has ended with the reluctant signing-on of the sole superpower, a call for a "New Bretton Woods" by the strangely ascendant UK government (it had initially protested vehemently against the Irish move, once again fearing the advantage the deposit guarantee would give Ireland's banks in an atmosphere characterized by bank failures of gargantuan proportions), and only with the help of tiny Iceland's near-death experience. But the expected surge on Wall Street has, as of one-thirty EST, failed to materialize. It seems investors are now switching their concern to the profit outlook of US corporations (third-quarter reports will be coming in fast and furious for the next few weeks), and the picture there is dire. Consumer activity is dormant, debt levels remain stressed, and employment will probably take a big hit. In addition, corporate bankruptcies are expected to jump, a situation exacerbated by the gumming-up of short-term credit markets, which are still, despite the nationalizations, in an extremely sensitive state. And if that weren’t enough, states (especially the one with the biggest economy, California) and municipalities are finding their sources of borrowing dry up, and their costs skyrocketing. One thing I'd point out as I close this very short post. Inflation figures in the UK chalked up a stunning 5.2% in September, and that while home sales plummeted 55% in August. This alone, for a country with large current account and budget deficits, and a faltering currency, could encourage comparisons with some developing country enmeshed in crisis, and at the mercy of the world. But the UK is now in the forefront of the semi-nationalized recapitalization movement, putting huge sums of public money on the line to save its banks. And it won't have the luxury, as the US does, of borrowing from foreigners in its own currency. Prime Minister Brown's day in the sun may be a short one. Labels: Bretton Woods agreement, george bush, Gordon Brown, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Beware BanktronJust when you thought it was safe to go back to your ATM... Labels: bailout, financial crisis, sinfest.net Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Mom Gets Screwed Over by a Tiny AdvantageHi! This is Barry Deutsch. My cartoon "Ampersand" has been appearing in Dollars & Sense for years. I'm going to occasionally post a cartoon from my archives on this blog, just for the fun of it.For more "Ampersand" cartoons, please visit leftycartoons.com.  Labels: cartoon, feminism, motherhood, pay gap, sexism, wage gap Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Monday's DevelopmentsThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Here's the skivvy on the government interventions that triggered huge stock rallies (as for US stocks, Dow up some 750 points, S&P nearly back at 1,000, with about 15 minutes left in the trading day) worldwide (with the notable exception of Japan), from Reuters. But notice especially the following: That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies. Global bank rescue aims to halt crisis I'll close by citing two blog posts that pick some holes in the new arrangements. From Yves Smith's excellent Naked Capitalism: The reader/investor who sent the link to this Bloomberg story provided the comments below. No, he does not resort to capital letters casually: And this, from the fine Across the Curve: In the previous posting I noted that the German government rescue plan which includes guarantees and capital injections totalled 470 billion euros. Labels: Across the Curve, george bush, Gordon Brown, john mccain, Larry Peterson, Naked Capitalism, Paul Krugman, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Real World NobelistLooks like the Nobel committee in Stockholm is doing another "Amartya Sen" (Sen, a noted Indian maverick, dismissed by some economists as, well, not even an economist, received the Nobel in the wake of the Asian financial crisis), or even another Stiglitz. And though Krugman is being awarded the prize for work in "New Trade Theory," which he did more than twenty years ago, you can be sure that the committee didn't want to look silly in light of the crisis: a major and welcome reversal of their usual academic superiority-complex.From Tim Harford, the "Undercover Economist" at the Financial Times October 13, 2008 Nobel memorial prize in economics goes to Paul Krugman The Nobel memorial prize in economics has been awarded to Paul Krugman, a professor at Princeton University and a prominent columnist for the New York Times. Mr Krugman is one of the great popularisers of economic ideas and a trenchant critic of the Bush administration, but his prize was awarded for work done almost three decades ago in developing what is known as "new trade theory" and "new economic geography". Earlier trade theories suggested that a country would trade with trading partners that were very different--rich would trade with poor, and capital-intensive would trade with labour-intensive. In practice, rich countries tend to trade with other rich countries. Mr Krugman's analysis showed why this was to be expected: many products were most efficiently produced by very large companies, but consumers wanted variety and would thus buy products from foreign giants as well as the dominant domestic corporations. Mr Krugman's ideas on the importance of economies of scale could be traced all the way back to Adam Smith, but the new ingredient was a usable mathematical description of what was going on. Economic geography uses much the same mathematics to explain the location of jobs and businesses. Mr Krugman showed that the forces of globalisation, far from creating a "flat world", could enhance the power of global cities such as New York and London, because those cities could increasingly do business with a global market. Mr Krugman has long been seen as a future Nobel laureate. He won the John Bates Clark medal for young economists in 1991, an award which is often a precursor to a Nobel. Yet if the choice is not surprising, the timing--just before the US Presidential election--might be. Mr Krugman is an influential and partisan political commentator. His columns, first in Slate and then the New York Times, were at first clever refutations of popular misconceptions about trade protection or the "new economy", but they have become far more notable for their stinging attacks on the Bush administration. He has recently criticised Hank Paulson, the US treasury secretary, for mishandling the credit crisis, while praising the British government for being "willing to think clearly about the financial crisis, and act quickly on its conclusions." He also warned of the US housing bubble in the summer of 2005. This is, however, not the first time that the Nobel prize committee has recognised an economist with a public profile and an appetite for political debate. Joseph Stiglitz shared the prize in 2001, after a combative stint as chief economist of the World Bank; Milton Friedman was an early laureate in 1976. Among professional economists, Mr Krugman is admired for his work on currency crises as well as the work on trade that won the prize. A Princeton colleague, Avinash Dixit, once described Krugman's methods: "He spots an important economic issues coming down the pike months or years before anyone else. Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman's model is waiting for other economists to catch up." Mr Krugman's trade model showed that there were circumstances in which trade protection could be in a nation's economic interest. This idea was joyfully embraced by protectionists, and Mr Krugman spent much of the 1990s vigorously defending free trade and arguing that trade protection in practice was almost always harmful. The experience may have fuelled his enthusiasm for economic popularisation, although even his early writing betrayed a wit and clarity not common amongst economists: he wrote, in 1978, "A theory of interstellar trade", commenting that it was "a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics." The economics prize was not one of the original Nobel prizes. It was established in 1968 by the Swedish central bank and is officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The prize money is 10 million Swedish Kronor (810,000 pounds; $1.4m; euro 1m) Labels: Amartya Sen, Joseph Stiglitz, New Trade Theory, Nobel Prize in economics, Paul Krugman, Tim Harford Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Short History of Meltdown ControlFrom The Observer (London):The biggest bet in the world By the time G7 finance ministers met on Friday afternoon, they were staring into the abyss. In a desperate effort to restore calm to the markets, they took decisive action and came up with a five-point plan, which includes spending billions of taxpayers' money to rebuild the global banking system and reopen the flow of credit. This is how the drama unfolded ... * Heather Stewart and Larry Elliott in New York, Ruth Sutherland and Lisa Bachelor in London * The Observer, * Sunday October 12 2008 It was 19 minutes to noon on Wednesday when Gordon Brown took the call from Mervyn King. With the seconds ticking away to the Prime Minister's first Question Time in the Commons since the summer break, the governor of the Bank of England had dramatic news: secret consultations between the world's most powerful central bankers had resulted in the decision to make the biggest co-ordinated cut in interest rates there had ever been. With the world's financial system perilously close to complete meltdown, bankers were determined to show they meant business. The move was to be announced at midday in London and 7am New York time, and King was nervous that Brown might be embarrassed by a backbencher picking up the news via BlackBerry as he stood up to speak. Brown had already been dealing with the financial crisis for more than six hours that morning, having held a 5am summit with Chancellor Alistair Darling at Number 11 to discuss details of a £50bn part-nationalisation of Britain's bombed-out banks, due to be unveiled to the stock exchange that morning. With just 10 minutes to go before world markets heard the news, King's next call was to Darling. Both Prime Minister and Chancellor had been hoping for a rate cut for many weeks as the credit crisis began to take its toll on Britain's cash-strapped borrowers, threatening to tip the economy into a severe recession. Just before Brown stood up to explain his drastic bail-out plan to Parliament, US Treasury Secretary Hank Paulson was appearing before reporters in Washington in an attempt to reassure American voters that their savings were safe. Asked if he planned to emulate Brown's bail-out package, Paulson was sniffy, defending his own $700bn 'troubled asset recovery plan'. Yet within little more than 48 hours, he was signing up to a promise by the G7 finance ministers to pour public cash into struggling banks, buying shares to ease the severe shortage of capital in the world's financial sector. The reason for the volte-face was simple: Wall Street was locked into a vertiginous sell-off as terrified investors dumped stocks, commodities and the dollar, fearing that the mounting financial crisis would turn into a full-blown economic slump. By the time the G7 finance ministers gathered in Washington on Friday afternoon, there was no doubt whatever that they were looking at disaster. The half-point rate cut, unthinkable just a few days before, was greeted with a shrug by investors who had lost their faith in governments' powers to fix the world economy. Wall Street had suffered the worst week in its history, with the Dow Jones index losing an extraordinary 18 per cent of its value, and every major stock market had plunged, day after day. On Friday alone, the Dow hurtled an eye-watering 700 points downwards, then swung up into positive territory, before settling 'only' 128 points down. General Motors, once the proud symbol of America's car industry, was worth less by the end of the week than it was in 1929, and felt obliged to issue a statement saying it was not at risk of bankruptcy. By Saturday, it had announced talks about a merger with its rival Chrysler. Morgan Stanley was in desperate talks to save a proposed cash injection from the Japanese bank Mitsubishi, and on Wall Street the buzz was that Paulson's damascene conversion to state intervention had been triggered by the impending demise of another household name of US banking. Thousands of miles away in Iceland, once a sleepy but prosperous example of the cautious Nordic economic model, a decade of financial excess was ending in tears. Reykjavik has been brought to the edge of national bankruptcy by its overstretched financial firms, and deposits from thousands of British savers, along with money belonging to local authorities and charities, was tied up in Icelandic banks. An IMF team was dispatched to assess its need for an emergency loan. Reports in Washington suggested that other countries were also teetering on the brink of insolvency. G7 ministers were keen to avoid the policy paralysis that had been so evident when Nicolas Sarkozy gathered the leaders of Europe's big four economies in Paris a week earlier. Then, declarations of solidarity were swiftly belied by Germany's unilateral decision to guarantee all bank deposits, an example of the beggar-my-neighbour behaviour that had helped to deepen the Great Depression. The world's financial markets had delivered a clear message about the costs of indecision and disarray. The strain of wrestling with the crisis was clearly visible on the faces of the finance ministers. France's Christine Lagarde, Washington's Hank Paulson and Alistair Darling all looked as if they had been burning the midnight oil - which they had. It didn't help that on Saturday, they all had to be at the White House by 6.45am to get security clearance for their breakfast meeting with George Bush. The President has repeated his mantra that if they work together, the West's biggest economies would get through the crisis. For the first time since the turmoil entered a new and dangerous phase, Bush's remarks did not send share prices tumbling - but only because the market was closed for the weekend. Darling's morning continued with a bilateral with Paulson, and talks with the new chairman of the Financial Services Authority, Lord Turner, over the plans for recapitalising some of Britain's biggest banks, details of which will be announced tomorrow. Around the table at the US Treasury, Darling argued forcefully that recapitalising banks with public cash was the only viable solution to the worldwide crisis. Japanese delegates, rarely the most vehement contributors to G7 debates, argued passionately that the lesson from their country's own catastrophic banking crisis in the 1990s was that taxpayer-backed bail-outs of financial institutions should be carried out without delay. So keen was King to push home the importance of unblocking the credit markets, he summoned up the ghost of Elvis Presley, saying, 'as the King would say - a little less conversation, a little more action'. It was not Elvis but the desperate need to restore calm to the markets that really prodded the G7 into action, however. When civil servants presented a first draft of the communique, several pages long and packed with waffle, finance ministers said they wouldn't sign it - because it wouldn't work. Italian finance minister Giulio Tremonti even went public, saying 'the current draft is too weak', and wouldn't, at first, put his name to anything more than a page long. When the meeting ended, what emerged was a five-point plan, including a promise to buy up stakes in banks, on the British model. Governments also pledged to prevent the failure of 'systemically important' banks, in a bid to avoid unleashing another financial domino effect like the one that followed the collapse of Lehman Brothers; take 'all necessary steps to unfreeze credit and money markets'; ensure that consumers around the world can have confidence in the safety of their savings; and take action to kick-start stalled markets in the mortgage-backed assets and other securities that banks use to help fund their lending. In other words, governments of the world's richest countries will unleash every weapon they have, including billions of pounds of taxpayers' money, to rebuild the global banking system and reopen the flow of credit to consumers and households. Paulson called it 'aggressive,' but that was an understatement - it is financial 'shock and awe'. There are high hopes in Washington that this much concentrated firepower, perhaps combined with more drastic rate cuts from central banks, must eventually work - though European Central Bank governor Jean-Claude Trichet said it might still take time for the markets to respond positively. If this plan does succeed, finance ministers can stop worrying about the risk of total collapse of the world's financial system - and start worrying about the long, grinding recession that most believe will follow this month of extraordinary drama. When Paulson was drafted into Washington from Goldman Sachs in 2006, with his action man demeanour and impeccable Wall Street pedigree he seemed the ideal personification of America's economic invincibility. Two years on, he, and the swashbuckling model of capitalism he represents look like a busted flush. Even even his friends on Wall Street have dramatically lost faith in his power to halt the financial storm. For 50 years, America has been the global economy's uncontested superpower, preaching open markets, financial liberalisation and free trade. Washington confidently believed it had the answer to the world's economic problems, if only the unconverted would listen. But last week showed that the US has no magic recipe to assuage the violent fear that had seized Wall Street, let alone offer a blueprint for other governments to follow. Every time delegates from developing countries thumbed through a newspaper, or glanced at a TV screen, they saw bleak red graphs of plunging stock markets or footage of an earnest-looking Bush using an emergency briefing in the White House rose garden to reassure shell-shocked American voters. The US public are bailing out of mutual funds in their droves and discussing where the hard-earned cash they have saved for retirement or their kids' college funds will be least at risk. Safe-makers are reporting rising sales as a growing number of Americans resort to the old-fashioned method of withdrawing their dollars and locking them up at home. At every press conference within the tight ring of security that surrounds the IMF's HQ, a forest of hands shot up, as journalists from Brazil, the Philippines, Russia, China and a host of other countries asked urgently what impact the crisis would have on their home countries. For the past decade, World Bank and IMF meetings have been dominated by the problems of the world's poorest countries. The crash of 2008 has followed the longest sustained boom in the global economy since the late 1960s and early 1970s, breeding the complacent belief that the only real issue was how to help poverty-stricken countries in Africa catch up. This year, the mood had changed: Africa barely merited a mention, as the West concentrated exclusively on preventing its home-grown crisis dragging the entire world into a slump. The problem is twofold: in the short term, the vital need is to stop the financial virus from infecting every country in the world and having an even bigger impact on global growth. In the longer term it is how to rebuild a world financial system that has so comprehensively failed in the past 14 months. In 12 months' time, when the IMF gathers for its next annual meeting in Istanbul, the world may look very different. There is a palpable sense in Washington that even if the downturn is shorter and sharper than the IMF predicts, the domino effect that began in America's housing market and has rippled throughout the world, is leaving in its wake a powerful momentum for reform. Dominique Strauss-Kahn, the IMF's managing director, stressed that there must be no return to 'business as usual' when the worst of the crisis is over. At the very least, there will be reforms to what the experts call the 'global financial architecture' - in other words, the rules will be tightened. Credit ratings agencies, which assess how likely borrowers are to repay their debts, will find their activities reined in; regulators monitoring the behaviour of international banks across different jurisdictions will be forced to work more closely together; and the IMF is likely to be given stronger powers to issue warnings about the build-up of dangerous financial bubbles in the years ahead. Central bankers who have contented themselves for the past decade with focusing on inflation, may well also be asked to take into account the risk that by cutting interest rates to keep economies out of recession they may be pumping up an unsustainable boom. Alan Greenspan, the former US Federal Reserve chairman, was once lionised as an economic 'maestro', but now appears to be a major architect of the crisis. The IMF said the world economy had been allowed to run above its 'speed limit' for too long. The banks, which have been forced to beg for public cash to prevent their business model imploding, will find themselves under severe scrutiny from their new shareholder, the taxpayer. In return for rescuing them, governments will insist on limits on bonus payouts and curbs on dividends to shareholders. There are broader changes afoot, too. Robert Zoellick, president of the World Bank and a veteran of the US Treasury, called for seven major emerging economies to join the traditional G7 club of rich countries to provide a better reflection of the new power balance in the world economy. Bringing Brazil, China, India, Mexico, Russia, Saudi Arabia and South Africa on board would create a powerful 'steering group,' representing 70 per cent of the world's GDP and 56 per cent of its population. Zoellick's pointed call for change underlines the mood for reform unleashed by the crisis. Iceland may yet be forced to turn to the IMF for an emergency loan, but the fact that it was given direct financial support first by the Russian government underlines the power that countries which have built up huge financial surpluses - including Russia, but also China and many Middle Eastern economies - could wield in the years ahead. How deep the changes go may depend on how badly the shortage of credit affects the global economy. The IMF believes that, after a grim year, with recessions in most major countries, the green shoots of recovery will be visible beneath the frost. Olivier Blanchard, the IMF's chief economist, insisted that with the right concerted action from governments, the risk that the financial crisis would give way to a full-blown depression on the scale of the 1930s was 'almost nil'. Yet he was also quoted warning that share prices could have another 20 per cent to fall before calm is restored: hardly the sort of thing to reassure investors in the current environment. The governments of the world's largest economies think they've done enough to avert disaster. This week, they will be watching anxiously watching to see if the markets agree. A year of rescues 14 September 2007 Bank of England steps in with emergency funding to support Northern Rock. 17 March 2008 Federal Reserve organises the rescue of Bear Stearns. 7 September US government seizes control of mortgage lenders Fannie Mae and Freddie Mac. 17 September US rescues insurer AIG. 26 September US government takes control of Washington Mutual in the largest-ever American bank failure. 29 September UK government nationalises Bradford & Bingley's loan book. 30 September Ireland guarantees the deposits of all savers. 3 October Biggest ever US government bail-out plan - worth $700bn - clears House of Representatives after being rejected a week earlier. 7 October Iceland asks Russia for €4bn loan to avoid financial meltdown. 8 October Chancellor Alistair Darling announces £450bn rescue plan for Britain's ailing banks. Bank of England cuts interest rates by half a percentage point. 10 October G7 meeting in Washington agrees global rescue plan * guardian.co.uk © Guardian News and Media Limited 2008 Labels: economic meltdown, financial crisis, G7, London Observer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Other Financial CrisisFrom the BBC:Nature loss 'dwarfs bank crisis' By Richard Black Environment correspondent, BBC News website, Barcelona The global economy is losing more money from the disappearance of forests than through the current banking crisis, according to an EU-commissioned study. It puts the annual cost of forest loss at between $2 trillion and $5 trillion. The figure comes from adding the value of the various services that forests perform, such as providing clean water and absorbing carbon dioxide. The study, headed by a Deutsche Bank economist, parallels the Stern Review into the economics of climate change. It has been discussed during many sessions here at the World Conservation Congress. Some conservationists see it as a new way of persuading policymakers to fund nature protection rather than allowing the decline in ecosystems and species, highlighted in the release on Monday of the Red List of Threatened Species, to continue. Capital losses Speaking to BBC News on the fringes of the congress, study leader Pavan Sukhdev emphasised that the cost of natural decline dwarfs losses on the financial markets. "It's not only greater but it's also continuous, it's been happening every year, year after year," he told BBC News. "So whereas Wall Street by various calculations has to date lost, within the financial sector, $1-$1.5 trillion, the reality is that at today's rate we are losing natural capital at least between $2-$5 trillion every year." The review that Mr Sukhdev leads, The Economics of Ecosystems and Biodiversity (Teeb), was initiated by Germany under its recent EU presidency, with the European Commission providing funding. The first phase concluded in May when the team released its finding that forest decline could be costing about 7% of global GDP. The second phase will expand the scope to other natural systems. Read the rest of the article. Labels: BBC, Environment, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It's Going To Be A Fateful WeekendThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.My apologies for the earlier, aborted pre-New York market opening comment: I write some of these posts a bit under pressure, and I pasted material unrelated to the intended post on the site by mistake. My apologies. As I write at nearly 1 pm Eastern Standard time, US markets continue to follow European and British closes downward. The gist of the matter is this: the co-ordinated Central Bank actions and attempts to shore up banking systems in several countries have failed miserably, and equity markets worlwdwide are adding significant losses to horrific and even record losses from yesterday (and from the last two weeks: the Dow was down some 20% in the last ten days--and that was yesterday; so a significant amount of pension fund money has been wiped away as a consequence in very little time). Meanwhile, potential lenders of increasingly scarce capital are paralyzed with fear, worldwide. Hence: look to governments to do something drastic this weekend, especially with all the mandarins gathered in Washington for the annual meeting of the IMF anyway. And, even then, don't expect a quick reversal: too much economic damage has been added to what was already there before the run on commercial paper, and there's still too much inherent uncertainty concering the time and means necessary to begin to sort out the bad investments from the good and get markets to find a floor, and buyers, again. This is the last post I'll make before next week (I'm planning a longer piece for the website, not the blog, that I'd like to see appear early next week, which will concern the historic events since the nationalization of Fannie Mae and Freddie Mac). We'll still be posting newsworthy items from other sources, though, so keep referencing this site during what promises to be an unusual weekend. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). General Motors In a DitchGM shares plunged to their lowest price since 1949 before recovering slightly, reports the Washington Post. Analysts are concerned that the global auto industry is on the verge of "outright collapse." Standard & Poor said on Thursday that it is considering cutting the rating of both GM and Ford to "junk" status, which would sharply increase their cost of borrowing.Both domestic and imported car sales have been plummeting in the wake of the financial market meltdown. According to a company statement "Clearly we face unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets," GM said in a statement on Friday. Somehow this doesn't inspire a lot of confidence. Labels: auto industry, financial crisis, financial crisis bailout, General Motors, GM, Washington Post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Iceland for sale on EbayThe starting price of 99 British pence may have been a little high...Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dow Drops 680--Under 8600From the Wall Street Journal online:By PETER A. MCKAY | OCTOBER 9, 2008, 5:10 P.M. ET The stock market's collapse accelerated Thursday as bank lending remained stubbornly clogged and investors remained unwilling to hold anything except cash and government debt, no matter how tiny the returns for doing so. The Dow Jones Industrial Average declined for a seventh straight day, plunging 678.91 points, or 7.3%, to 8579.19. Blue chips last dipped below the 9000 level five years ago. Thursday's fall was the Dow's third-worst all time in point terms and 11th worst in percentage terms. During its recent losing run, blue chips have fallen by a startling 20.9% and are down 39.4% from their record high, which was hit exactly one year ago. "This is indiscriminate selling," said trader Todd Salamone, of Schaeffer's Investment Research, an analysis and asset-management firm in Cincinnati. "Not until there are massive improvements in the credit markets are we likely to see this really end." Among the Dow's components, General Motors shares plunged 31% after the auto maker's credit ratings and those of its financing unit were put on watch for downgrade by Standard & Poor's. The Dow's financial components suffered as well, with Citigroup dropping 10% and Bank of America falling 11.2%. Exxon Mobil shares fell 11.7% after the front-month crude-oil futures contract settled at $86.59, the lowest settlement since Oct. 23, 2007. Investors worry economic aftershocks from the credit crisis will curb demand for fuel. Investors are generally skeptical that the vast sums of government money that are being pumped into the financial system will do much to unfreeze the credit markets. Economists fear that with companies frozen out of short-term funding sources, a severe recession could result. Markets are beginning to price in such a scenario, analysts say. Read the rest of the article. Labels: Dow Jones Industrial Average, financial crisis, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Hard New Look at Greenspan Legacy (NYT)From today's New York Times, an interesting piece about Alan Greenspan's attitude toward derivatives.By PETER S. GOODMAN Published: October 8, 2008 “Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” —Alan Greenspan in 2004 George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.” And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Read the rest of the article. Labels: Alan Greenspan, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). October SurpriseThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.The race is on. And it's going to be a short, but intense race. Central banks throughout the world (including the People's Bank of China) implemented co-ordinated interest-rate hikes today, while huge swathes of banking systems in a number of key countries have been reinforced with large injections of public funds and the extension of deposit insurance guarantees, or even semi-nationalized. But the most important--and timely--development concerned the $1.6 trillion (but falling fast) commercial paper market, that weird little corner of the financial world which regular companies (not banks, or even "shadow-banks") worldwide have been increasingly tapping in the last few decades to meet their everyday expenses, and even payrolls. The Federal Reserve, in conjunction with the Treasury Department, is establishing a fund to buy up these very short-term bonds, in an attempt to breathe some life back into this clinically-dead market. This is unprecedented: it means the Fed will be pretty much lending money directly to private companies. Still, equity prices continued to fall all over the world (though Tokyo's Nikkei has just opened in positive territory, after sustaining major losses over the last few days), in spite of these huge, even historic interventions. But the variable everyone is looking at, the cost of commercial paper, reacted favorably only for overnight transactions: for anything longer-term, it has continued its relentless rise. As did interbank lending rates (though this looks like it's beginning to change, too). So this is where we are: because the commercial paper and interbank markets are dormant, companies are desperately pursuing other funding options: those lucky enough to have (generally when times were very good) been extended emergency credit lines by their banks are taking the banks up on their offers, at a time when the banks are scrambling to conserve capital. But as lending costs increase, and despite interest rate cuts and massive monetary injections (precisely because banks are hoarding the money that gets pumped into the system), the banks are chasing a moving target. This is all the more the case when one remembers that many of the banks started the race well behind the starting line, if you consider the quality of capital they were allowed to book as reserves by regulatory regimes dedicated to, well, deregulation, and that the banks didn't provision properly for much of the bad debt that's coming due now in the lead up to the crisis (in fact, many banks stashed money away in Structured Investment Vehicles--SIVs--to get around reserve provisioning altogether, and when the underlying loans went bad, they had to, as is the case now with the emergency credit lines, take such loans back on their books). And the situation cascades through the whole economy: suppliers, customers, you name it: at virtually every point, short-term but essential funding is something that can no longer be taken for granted. This, on top of expected economic weakness, has contributed to a universal flight from risk. And that means the desperate hoarding of capital, prohibitively higher lending costs, and significantly less equity finance. This is especially destructive for the banks: they have to compensate for falls--sometimes dramatic ones, like Bank of America's, which has lost a third of its value in the last two days--in share prices, but interbank borrowing costs (not to mention insurance against default) rise as equity prices decline: it's a vicious cycle. And that's the cycle governments are trying to break, with all the means they can conjure up at this point. But something has to give, soon. If, somehow, the commercial bank and interbank markets don't stabilize by the end of the month, expect governments to take extremely (even beyond the scope of the historic ones we've seen already) drastic measures. And expect economic damage to expand exponentially for every few weeks this situation isn't resolved. Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It feels good to be an insurance exec too!Executives at insurance behemoth AIG must have been really stressed after getting an $85 billion bailout from the government. That seems to be the logical explanation for why executives at the failed company held a week-long retreat at the luxury St. Regis Resort in Monarch Beach, CA right after the Treasury agreed to stop the company from imploding.Congress's chief curmudgeon, Henry Waxman (D-CA), chided the executives for running up a tab including $200,000 for rooms, $150,000 for meals, and $23,000 for the spa. News reports did not indicate whether anyone took advantage of the resort's "Pamper Your Pooch" package. The package consists of an overnight stay in a Resort view guestroom, a personalized welcome letter to the pet, the exclusive St. Regis doggy bed, pet amenities including “Sniffany & Co.”, “Bark Jacobs”, “Dog Perignon”, or “Jimmy Chew” toys, personalized silver food and water bowls, an array of treats, biscuits, and bones, along with an issue of Hollywood Dog! Pricing for this package begins at $545 per night. (two-night minimum required) As they did yesterday with ex-Lehman Brothers CEO Richard S. Fuld Jr., Waxman and others (seemingly in need of some R&R themselves) taking a careful look at thousands of documents from the failed insurer and raising concerns about what appear to be hastily-crafted golden parachutes for top company executives while the company was in freefall: According to the Washington Post:
But the board agreed to ignore the losses from the financial products division and gave Sullivan a cash bonus of over $5 million. The board also approved a new compensation contract for Sullivan that gave him a golden parachute of $15 million, Waxman said. Joseph Cassano, the executive in charge of the company's troubled financial products division, received more than $280 million over the last eight years, Waxman said. Even after he was terminated in February as his investments turned sour, the company allowed him to keep up to $34 million in unvested bonuses and put him on a $1 million-a-month retainer. He continues to receive $1 million a month, Waxman said. Labels: AIG, bailout, financial crisis bailout, Golden Parachutes, Henry Waxman, Lehman Brothers, Richard Fuld Jr, St. Regis Resort, Washington Post Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Damn It Feels Good to Be a Banksta!Hat-tip to Jordan Hayes on lbo-talk for this gem. See the whole cartoon. Labels: bailout, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Why Fed Policy is Failing (Tom Palley)The Federal Reserve and U.S. Treasury continue to fail in their attempts to stabilize the U.S. financial system. That is due to failure to grasp the nature of the problem, which concerns the parallel banking system. Rescue policy remains stuck in the past, focused on the traditional banking system while ignoring the parallel unregulated system that was permitted to develop over the past twenty-five years.This parallel banking system financed vast amounts of real estate lending and consumer borrowing. The system (which included the likes of Thornburg Mortgage, Bear Stearns and Lehman Brothers) made loans but had no deposit base. Instead, it relied on roll-over funding obtained through money markets. Additionally, it operated with little capital and extremely high leverage ratios, which was critical to its tremendous profitability. Finally, loans were often securitized and traded among financial firms. Read the rest of the article. Labels: bailout, financial crisis, The Fed, Thomas Palley Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Perdition PostponedThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Stocks worldwide suffered huge losses again Monday, after the worst week for US shares since September of 2001. The Dow fell below the psychologically-significant level of 10,000 (as did the Nikkei in Japan), but the final number was a vast improvement on the 700 odd point loss the index showed earlier in the day, with the index closing a mere 389 points down. And it was probably only the prospect that the Fed would be forced to cut interest rates perhaps by half a percentage point in an emergency (i.e. before the scheduled meeting of the Federal Reserve Board of Governors late in the month) that prevented the slide from eclipsing a record slide--which it did only last week. In addition, oil dropped to about $85 a barrel, a level unseen for a year. Clearly the markets are not impressed by the passage of the Treasury plan, passed on Friday, to buy the toxic assets on the books of the banks: instead, they fear worldwide recession, one thing (amongst many) the Treasury plan is singularly ill-equipped to deal with. Meanwhile, bond yields are falling, but, as cash continues to be hoarded by banks, borrowing costs continue their relentless upward advance. It is clear that markets are no longer anywhere near as concerned about the toxic assets on the books of the banks as they are about the possibility--which increases by the day, so long as the crisis remains in its seemingly terminal phase--that bank and even shadow-bank counterparties may go bust before they can meet their short-term obligations. The banks, faced with rapidly increasing costs of capital (and insurance against default), shareholder flight, and paying off agreed emergency credit lines of firms who can't access funds on the wholesale market (due to the jamming up of the commercial paper market), are looking more and more desperately to governments to guarantee deposits beyond the levels they already do. This, of course, was one of the central points of the Troubled Asset Relief Program, which increased deposit insurance in the US from $100,000 to $250,000, and of regulations in the US which guaranteed money market funds, which, though considered risk-free, bore no government guarantee. In Europe, however, Ireland's move to guarantee the deposits of all depositors of its six largest banks has given rise to a kind of race to the bottom, with the initially reluctant Germans now providing a like guarantee, and the positively mortified British poised to do the same at any moment. In the end, though, it seems clearer and clearer that, only a blanket public guarantee of all financial liabilities, even those held by hedge funds and their ilk, can stop the downward spiral. But it's hard to imagine, after the drama of last week, that such an outcome will be politically feasible. Labels: bailout, financial crisis, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Lehman Execs' Golden ParachutesIn Congressional testimony today, former Lehman Brothers CEO Richard S. Fuld Jr. defended the massive salaries and last-minute payouts to himself and other LB executives.Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, asked Fuld if it was true that he took home $480 million in compensation between 2000 and 2008. Fuld responded that he only pocketed $300 million, and that "We had a compensation committee that spent a tremendous amount of time making sure that the interests of the executives and the employees were aligned with shareholders." According to the Associated Press (posted on Yahoo), Waxman read from internal company documents that detailed a request to the compensation committee that three departing executives be given $20 million in "special payments." The request was made on September 11 -- four days before the company went bankrupt. "In other words, even as Mr. Fuld was pleading with Secretary Paulson for a federal rescue, Lehman continued to squander millions on executive compensation," Waxman said before Fuld appeared as a witness. Waxman also read from other internal Lehman documents that described the response of one executive rejecting a suggestion from employees that top executives forgo their bonuses: "I'm not sure what's in the water." Labels: financial crisis, financial crisis bailout, Henry Waxman, Lehman Brothers, Richard Fuld Jr Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dow Drops Below 10,000 (WSJ)Just posted to the Wall Street Journal's website:Dow Drops Under 10000 As Bank Woes Persist By PETER A. MCKAY | OCTOBER 6, 2008, 12:56 P.M. ET Markets continued a fearful downward spiral Monday as investors focused on the weakened state of the global economy, looking past recent steps by government officials around the world to shore up the financial system. The Dow Jones Industrial Average was recently down almost 536 points, or 5.2%, at 9789.83, with all 30 of its components in the red. The move marks the first time since late October 2004 that the measure has fallen below 10000 on an intraday basis. The Dow also appears poised to extend a three-day losing streak in which it had already shed 4.8% coming into Monday's session. Investors around the world are increasingly worried that a deep global economic slowdown is taking hold despite measures like last week's bailout of Wall Street and moves by the Federal Reserve prior to Monday's opening bell to further encourage bank lending. Read the rest of the article. Labels: Dow Jones Industrial Average, financial crisis, Wall Street, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Born-Again Democracy (William Greider)From the current issue of The Nation magazine:Comment By William Greider Our country is at a rare and dangerous juncture. The old order is crumbling, and virtually all the centers of power that govern us have been discredited by events. The president is irrelevant, weak and unbelievable, even to his own party. The Democratic majority controlling Congress is stalled by its own shortcomings. The treasury secretary, given his arrogant approach to the financial crisis, is not to be trusted as a steward of the public interest. Nor are the conservative Federal Reserve and its chairman. The private power of Wall Street is utterly disgraced and desperate. This condition of vulnerability is sure to prevail for at least the next three months, until a new president and new Congress take office. In the meantime, the governing elites are clinging to the old order, trying to salvage it by delivering massive amounts of relief from taxpayers to the failing financial institutions. The American people correctly see this approach as a historic swindle that rewards the villains at the expense of the victims. A Nevada real estate broker asked the Washington Post, "Instead of having a bailout, why don't we have indictments?" Indictments can wait, along with fundamental reforms. Right now the country needs to confront the fire raging through the financial system and engulfing people and productive assets in the real economy. Aroused and angry, the public, for a change, can play a decisive role in the political arena, as it did when the House rejected the bailout package. That shock to the system was valuable therapy. People can drive politicians to begin facing reality and to develop a more forceful strategy for national recovery, an approach that serves the country as a whole and has a far better chance of succeeding. The sooner our leaders recognize that the old order is gone, the sooner Americans can begin reconstructing a more viable and equitable economy. The calamitous unwinding of financial institutions in recent months has an ominous resemblance to events that unfolded after the stock market crash of 1929, when three years of recurring waves of bank failures and economic contraction led to massive suffering. The government, led by the Federal Reserve, was scandalously derelict during that crisis. This time Washington has reacted more aggressively but still hasn't found a strategy to stabilize finance or reverse the gathering recession. Read the rest of the article. Labels: bailout, financial crisis, The Nation, William Greider Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). It's a Great Time to Invest!Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Roll Over or DieThis posting is from D&S collective member and frequent blogger Larry Peterson. To see more of his posts, click here.Well, yet another apocalyptic week has passed on the markets, and the global financial system still appears to have enough life in it to allow for the possibility of more of the same in the weeks ahead. The week has ended with Congress passing, and President Bush signing, the revised revision of the Troubled Asset Relief Program. The bill's passage, however, prospects of which had sustained market advances Friday, could not prevent significant falls on all major US indices by the closing bell on Friday. This is because of two things: first, horrible economic data continued to pour in, with the all-important monthly jobs report for September showing a loss of some 150,000 jobs, far more than was forecast. On top of this the US service sector put in a poor, if slightly positive performance, magnifying concerns about severe economic slowdown given the horrific reports on manufacturing activity and consumer spending that came out earlier in the week. Second and more significantly, though, it is becoming clear that investors are more concerned about the the breakdown of the commercial paper and interbank markets than they are about the various fixes proposed to get them going again. As well they might be. Commercial paper basically consists of short-term bonds issued by companies to meet working capital outlays, including payroll and rent. These loans tend to be for very short periods, and require frequent rollovers, which was no problem in the days before banks started hoarding cash to cover potential losses they couldn't even trace in their books, and money market funds started to become suspect (inasmuch as they invested in some other short-term securities, like, you guessed it, subprime loans, and started to "break the buck", or hold less than they took in from investors). Now, of course, these problems are so great that even huge multinational firms, like GE, are having trouble raising money in the commercial paper market. If this continues, even for a short time, lots of vendors--and even possibly employees--will not be able to be paid. And while GE can borrow for very short periods, other smaller firms are finding it virtually impossible to raise money at all. And this is for working capital requirements: this point cannot be emphasised enough. If this thing shuts down and stays down, the macroeconomic impact will be vast, horrific and extremely sudden. Needless to say, the, the bill's passage didn't do much to sooth the CP market, or the interbank market (which deals with banks lending amongst themselves)--the latter rate actually rose. The markets clearly think the TARP package is too little, too late, at least right now: we'll see what happens next week. But the situation right now is extremely dire, and there isn't much time to get it sorted before, as I noted above, the propect of lots of ordinary people not gettting paid will become a real possibility. And consumer spending, which accounts for a rather bloated 70% of the US economy, is already hitting the skids, and will, regardless of what happens in the CP market, probably take a big hit due to increasing credit card defaults (and that's on top of the bad mortgage situation...). Oh-before I forget: Governor Schwarzenneger of California, the largest state economy in the country (and still fifth largest in the world?), has informed Washington that California, which is one of the states in which the subprime mania really got out of control, of $7 billion within weeks. Finally, to end this post--and I could keep going on about alot of other things), the situation with hedge funds is contuing to deterioirate. Hedge funds has a horrible September, and while few of us have any sympathy for them class-wise, the fact that they are being forced to liquidate their positions so quickly to pay off investors who are heading for the exits (remember, these extremely wealthy investors or well-endowed pension and other--including other hedge--funds pay exorbitant fees and expect massive outperfomrance, and will not tolerate for long the kind of losses so many of the funds are now suffering) means that equities, particularly in financial firms, will continue to be pressured. And that means they'll continue to hoard cash, regardless of the prospect of being able to sell their dud assets to the Fed. This thing has taken on a life of its own, like the proverbial monster. Labels: bailout, financial crisis, Larry Peterson Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Is This the End of US Capitalism? (Gerald Friedman)This is the response that Gerald Friedman, of the UMass-Amherst econ department and the Center for Popular Economics, gave to Al Jazeera English in response to the question, "Is This the End of US Capitalism?" They also asked Jamie Galbraith (UT-Austin), Mark Weisbrot (CEPR), John Berlau (Competitive Enterprise Institute), and James S. Henry (author of The Blood Bankers.The end of US capitalism? I really doubt it. This is a very serious financial crisis and if mishandled could become a serious recession even a depression, but it is unlikely to be as bad as the Great Depression of 1929-40 as the authorities have learned to co-operate in crises. More importantly, a capitalist system - or any social system - can only be brought down by an opposing system supported by a rising economic class. There is no such contender on the horizon right now to challenge capitalism. So, we'll continue to muddle along. Still, it will be bad all around unless we change direction. An effective anti-depression strategy would help those with bad mortgages so that they will be able to make payments on their mortgages and keep their houses; such a policy would help the banks by allowing for a "trickle-up" effect. Instead, the Federal Reserve is trying to hold back the tide of defaults and foreclosures by helping the top. At best, this will transfer the costs to average Americans, who lose their homes, watch their neighbours lose their homes, and will in many cases lose jobs when construction and other businesses fail. Foreigners will be hurt too because many banks and other financial institutions outside the US have invested heavily in US securities including mortgages and stocks and bonds in US investment banks. Helping the people We need a trickle-up strategy: Help the financial barons by helping the people. The US should provide major help to people holding mortgages to renegotiate these and to make some payments so that people can stay in their homes and banks will be able to continue to carry these mortgages on their books. There should also be a major increase in unemployment benefits so laid-off workers are protected and can continue to buy things and make payments on their debts. This, too, will help the banks. We should also have a major public works programme to employ laid-off construction workers in overdue infrastructure building and have strict new transparency requirements on banks and other financial institutions. The Fed, the Treasury, and foreign central banks (especially the European Central Bank and the Bank of Japan) should announce that they will stand behind every major bank and financial institution so that average investors will be absolutely protected. This will end panic selling and allow the markets to stabilise. At the same time, the Fed and others should take an equity stake in these institutions to to pry open the accounting records and to enforce new regulations that would clearly separate normal business operations from the speculative activities of the last decade. Read the whole article. Labels: Al Jazeera, bailout, financial crisis, Gerald Friedman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bush Signs Bailout After House Passage (WSJ)By MICHAEL R. CRITTENDEN and COREY BOLESWASHINGTON -- President George W. Bush signed the biggest government intervention in the financial markets since the Great Depression after U.S. House of Representatives lawmakers wary of growing signs of the nation's economic distress voted Friday in favor of a $700 billion Wall Street rescue package. Mr. Bush welcomed the passage of a rescue plan, saying it will help the nation's economy withstand the financial turmoil. The legislation is "essential to helping America's economy weather the financial crisis," said the president, giving a brief statement outside the White House. Mr. Bush acknowledged widespread concern about using taxpayer money to bail out wealthy bankers, but said the ultimate cost will be "far less" than the initial government outlay, since the plan is to sell the toxic assets back into the market once it recovers. But he warned that "Americans should also expect that it will take some time for this legislation to have its full impact on our economy." Read the rest of the article. Labels: bailout, financial crisis, george bush, Henry Paulson, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). California Credit Access Terminated?The NYT reports that California may soon be asking the federal government for a $7 billion loan in the next few weeks. This would equal about $192 for each resident of the state.The state has been locked out of credit markets during the recent turmoil, and could face much higher borrowing costs when the crunch eventually eases up. California is hardly alone. On Wednesday, the Times reported that cities and states across the nation are being shut out of bond markets, forcing them to shelve major projects and essential services, from highway and bridge repair to expanded cancer centers. Credit that is out there will most likely be much more expensive than municipal and state governments have been used to for the past ten years. Labels: bond market, credit crisis, economic meltdown, financial crisis, financial crisis bailout Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The '1979 Moment' for Casino Capitalism (FT)From the Financial Times:By John Monks | Published: October 2 2008 18:43 At its congress in Seville in 2007, the European Trade Union Confederation resolved to expose “casino capitalism” and short-termism and press for them to be fought by taxation, regulation and worker involvement. Now, as the subprime crisis unravels around the world, casino capitalism has exposed itself. Everyone is learning that a powerful financial sector has crowded out other industries and made the economy dependent on short-term, fast buck-making deals that are rarely in the interest of sustainable business or improved long-term growth. Today’s dark economic reality has exposed the financial world’s claims to have increased world liquidity and reduced investment risk. Decision-making has centred on personal enrichment and even now, with honourable exceptions, most of those responsible have ensured that they will not be the ones to suffer the consequences. There is absolutely no evidence that these huge fortunes have been linked to record levels of company or business performance. Top business leaders have grabbed a larger share of the cake themselves. The “trickle down” effect peters out very quickly as you descend the income ladder. The share of wages and salaries in national income in many countries has fallen sharply in the past 30 years while the already affluent are taking larger shares of the slice that goes to wages and salaries. This is not a story of trade union success. We have not been able to prevent this transfer of money from the ordinary to the very affluent. We have, in Europe at least (but not in the US), generally improved average living standards. But we are losing the equality battle. Now is the time to expose the titans of the world based in New York, London and other major financial centres, who have patronised us with the message that there is no alternative to a world run by Goldman Sachs and the others. To express even mild doubts about the way the system was developing was to invite, from City of London financiers and leading UK ministers alike, the accusation of being incorrigibly Old Labour. To question executive pay in Wall Street and the City invited the accusation of stirring the politics of envy. An excellent Trades Union Congress paper answers these points and exposes the Bourbon-style carelessness about others that was on display in City boardrooms and trading floors. But make no mistake, just as 1979 was a turning point for British trade unions when the accusations of over-mighty unions stuck in the public mind to devastating political effect, so will 2008 be seen as a turning point for those in the banking system who have contributed to the present mess. In the London declaration on the crisis, issued by European trade union leaders last weekend, we are urging that publicly funded bail-outs should carry with them public influence and, if necessary, control. We want banks to have higher capital requirements and we must end the “off balance sheet practices” that developed to avoid regulation and tax. How was that allowed to happen by the authorities? We are calling, too, for a European-level response to be developed urgently before national rescue plans such as the one announced in Ireland become “beggar thy neighbour” schemes. From a trade union point of view, we know the risks of inflation as much as anyone else. We have been experiencing cuts in purchasing power due to the rising prices of energy and food. But real wage growth in Europe has been moderate and limited, often lagging behind prices, economic growth and productivity. Germany has been a striking example since 2000. This is why we will not be deterred by present circumstances from looking for a better deal for the working people of Europe. In the 1930s, wages were cut and reinforced deflation with disastrous consequences. We are now looking for a boost to growth through lower interest rates and public investment. We cannot tolerate rising levels of poverty and inequality. The golden age for the rich should end. Those who have led us into this mess must pay heavily towards the price of recovery. At the moment, to take one example, the bill for each UK taxpayer for bank rescues is around £5,500 and rising. The message to those taxpayers and those in other countries affected must be “never again”. Our system must be rebalanced towards financial institutions providing capital for productive investments in sustainable development and towards greater equality. The writer is general secretary of the European Trade Union Confederation. Labels: Britain, credit crisis, financial crisis, Financial Times, unions Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The SEC and Paulson in 2004In today's New York Times, an interesting piece about a deal struck between the SEC and five investment banks to provide them with "an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments." One of the banks was Goldman Sachs, headed by Henry Paulson.The Reckoning Here's the really interesting bit: In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves. Read the rest of the article. Labels: bailout, financial crisis, Goldman Sachs, Henry Paulson, SEC Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
