Gordon Brown has been accused of launching a "class war" against Middle Britain as he introduced a new 50 per cent top rate of tax to make the wealthy pay for the catastrophic state of public finances.
Casting aside more than a decade of New Labour ideology, the government broke a key election manifesto promise by announcing an increase in income tax for those earning more than £150,000.
Alistair Darling, the Chancellor, also announced that the highest earners will lose valuable tax breaks on pension savings, as part of a package of measures that will see the tax grab from high earners raising up to £5.5 billion a year - an average of £18,333 annually per person.
The surprise new measures - which mean Britain will have the highest top rate of any major economy in the developed world - came as Mr Darling was forced to lay bare the true extent of Britain's levels of borrowing in his Budget.
In the worst economic forecast since the Second World War, he said he planned to borrow another £700 billion over the next five years, taking the national debt to £1.4 trillion.
Mr Brown and Mr Darling were accused of indulging in party politics at a time of national crisis by seeking to exploit the divide the Tories' on tax policy.
It was also suggested that the Prime Minister was returning to Old Labour policies designed to shore up Labour's core vote ahead of an election next year that he is on course to lose.
Labour MPs in the party's heartlands will welcome the move and ministers will argue that taxing those on very high salaries is popular among many voters.
But in raising the top rate of tax the government risk alienating the middle class voters that swept Tony Blair to power in 1997.
Michael Fallon, the senior Conservative MP and member of the Treasury Select Committee, said: "This is undoubtedly a bit of class war from Gordon Brown. He is stoking up Labour MPs and the party faithful before the election but there is no doubt this is the end of New Labour.
"The higher rate of tax was a compact between both main parties. It was agreed that the certainty that the 40p rate gave was good, but that has now been shattered once and for all."
The new top rate of income tax will be brought in next April, before the likely May election. Gordon Brown had promised in the 2005 election manifesto not to raise to the top level of tax.
It led to fears that there will be a "brain drain" from Britain as higher earners are driven away by punitive levels of tax.
Mr Brown has consistently claimed to have ended "boom and bust". But the true state of public finances and the amount of government borrowing needed to repair them shocked many.
The Government first borrowed money in 1692. It took 300 years for the level of Public Debt to reach £165 billion in 1992, and yet is £175 billion this year alone. When Labour took office in 1997, debt was £350 billion.
Mr Darling - whose second budget co-incided with the release of figures showing unemployment had risen to 2.1 million - claimed that the government's books would be balanced within a decade.
But the Chancellor was accused of painting a rosy picture of how quickly Britain would return to growth. He told the Commons the country would be out of recession by the end of this year.
A report by the International Monetary Fund (IMF) suggested the British economy would continue to decline next year.
As a result it is feared the final borrowing figures could be even higher, since Mr Darling based his plans on an assumption that the UK economy will recover much more sharply than other economists believe.
After Mr Darling's 50 minute speech to the Commons failed to rouse the Labour benches, David Cameron, the Conservative leader, said Mr Brown was leading a "government of the living dead".
George Osborne, the shadow chancellor, said: "Labour is relying on optimistic growth forecasts that have been contradicted by the IMF, and their tax rises fall on the many, not just the few.
"Britain is being overtaxed to pay for Gordon Brown's incompetent overspending."
The Confederation of British Industry, the country's leading business group, also attacked the Budget for failing to grasp how Britain was going to recover from the recession. Richard Lambert, the CBI director general, said: "The key question for this Budget was whether it set out a credible and rigorous path for restoring the public finances to health. The CBI's preliminary judgement must be that it does not."
He said the Treasury had missed an opportunity to look at curbing public sector pay and pensions.
The move to a 50 per cent top rate of tax - which also effects income from share dividends - marks a departure from the era of New Labour in which Tony Blair and Mr Brown sought to woo Middle Britain by keeping the top rate of tax low. The 40 per cent rate was a staple of consecutive Labour manifestos.
Yvette Cooper, the Chief Secretary to the Treasury, tried to defend the move. She said it was the right response to "exceptional circumstances".
Asked whether the hike represented a breach of the 2005 General Election commitment not to raise the "basic or top rates of income tax in the next parliament", she said: "Well, it is. We never expected that we would have this kind of global financial crisis on a scale not seen for almost a century.
"In those circumstances, what we need to do is to make sure we are being fair."
Mr Darling hopes that the measure will raise £7 billion a year in five or six years time. But financial experts questioned whether the hikes would bring in the revenue predicted by the Treasury.
Robert Chote, director of the independent Institute for Fiscal Studies, said that the tax hike may actually lose the Exchequer money.
He said: "If you look at what happened when higher rates were last changed in the 1980s, that might lead you to suggest that such a move might actually lose you revenue, rather than gain it, as people actually declare less income for tax."
Sean Drury, of accountants PricewaterhouseCoopers, warned that the wealthy might decide to leave the country. He said that from next Spring the UK would rank 18th among the G20 economies in terms of income tax and social security rates for senior executives.
He added: "Countries like Switzerland will look increasingly attractive to some of the people in the key industries needed to lead the UK out of the recession.
Mr Darling had told MPs that he wanted the City of London to retain its status as a centre of financial services, but Stuart Fraser, policy chairman of the City of London Corporation, said the new higher rate could put the Square Mile at a disadvantage compared with financial centres overseas.
He said: "The new top rate of income tax at 50 per cent may damage the City's competitiveness - we operate in a global market for talent, and that talent is expensive."
David Cameron will now come under pressure from his own MPs to oppose the new 50p rate. The Tory leader attacked the move in the Commons, but he will not agree to reverse the measure if he wins the election.
Mr Osborne wants to make sure the next lection is fought on tax rises for the many - the proposed national insurance rise that his scheduled for after the election - and not tax rises for the few.
Source: The Telegraph
Thursday, 23 April 2009
Traders Mounting "Speculative Attack" on U.S. Banks
After six horrific quarters, several major U.S. banks finally reported profits. So is it time to celebrate?
No, says Simon Johnson, a senior fellow at the Peterson Institute, professor at MIT’s Sloan School of Management, and co-founder of the popular economics blog, BaselineScenario. In fact, if we're not careful, we'll find ourselves in another Great Depression.
What it is time to do, says Johnson, is look at the credit markets, which are telling us that the major U.S. financial institutions are being hit with a "speculative attack":
No, says Simon Johnson, a senior fellow at the Peterson Institute, professor at MIT’s Sloan School of Management, and co-founder of the popular economics blog, BaselineScenario. In fact, if we're not careful, we'll find ourselves in another Great Depression.
What it is time to do, says Johnson, is look at the credit markets, which are telling us that the major U.S. financial institutions are being hit with a "speculative attack":
Monday, 20 April 2009
Obama Heads the Largest Criminal Enterprise in History
Submitted by Stephen Lendman
Since taking office, Obama, wittingly or otherwise, has headed the largest criminal enterprise in history - the mass looting of national wealth to enrich his Wall Street benefactors. He assembled a rogue economic team of Clinton/Robert Rubin retreads - to fix the current crisis they engineered.
In a March 13 article, (author and former Republican strategist) Kevin Phillips called them "recycled senior (Clinton administration) Democrats (responsible for the) tech mania, deregulation binge and (1997 - 2000) stock market bubble and crash. (Obama) extend(ed) the (disastrous) mismanagement and pro-Wall Street bias of the 2008 Bush regime bailout."
He called Geithner and Bernanke "hapless," the result of their ruinous misjudgments (and, along with Alan Greenspan, complicit) with finance-sector malfeasance."
He said Summers will be "remembered for helping to block federal regulation of financial derivatives and orchestrat(ing) the 1999" Glass-Steagall repeal, among his other "achievements." He went down the list of key economic officials and trashed them all as the very types to be avoided, not appointed.
He noted that Bernanke was chairman of George Bush's Council of Economic Advisers and added: "Imagine if FDR had retained Herbert Hoover's chief economic advisor and loyal Republican Fed Chairman in 1933....To think that the pussycat Fed (would become) a saber-toothed tiger is a deception." Worse still, ruinous economic policies "could prove fatal" if White House policies favor "Wall Street but not the national economy or American people" - the very direction they've now taken.
In a follow-up April 7 article, Phillips highlighted "The Disaster Stage of US Financialization....a much grander-scale disaster than anything that happened in 1929 - 1933. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland."
Today's crisis represents "the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the US economy by a rabid financial sector...." It's realigning global power with America losing its economic leadership won in WW II.
"The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the US financial sector and its political and regulatory allies deserve this time." Financialized America radically transformed the country, now "doubly staggering because of the crushing burden of its collapse."
Yet major media pundits and reporters barely noticed and now claim relief is just a few quarters away - ignoring a metastasizing cancer, a national disaster, while policy makers heap fuel on a raging blaze now consuming us, yet too little public rage confronts them.
A Former Insider Speaks Out
Economics Professor William Black is a former senior bank regulator and Savings and Loan prosecutor, currently teaching economics and law at the University of Missouri. In an April 13 Barrons interview, he referred to "failed bankers (advising) failed regulators on how to deal with failed assets" they all had a hand in creating and proliferating.
His conclusion: "How can it result in anything but failure." He called the scale of financial fraud "immense," and said "Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency," besides what it's doing to the country, global economies, and many millions of people here and abroad.
He scathed Summers and Geithner, both "important architects of (today's) problems," and the latter as a failed and dishonest regulator, yet "numbering himself among those who convey tough medicine when he's really pandering to the interests of a select group of banks." No need to mention which ones.
The law mandates corrective action, the kind FDR took in the 1930s. He, Bernanke and Summers flout the law, "in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent." They've turned taxpayers into "suckers" who'll pay dearly for decades, maybe generations.
His refusal to put insolvent banks into receivership, resorting to deceptive language like "legacy assets," and pursuing the worst of Chicago School economics "is positively Orwellian....If cheaters prosper, (they'll) dominate. It's like Gresham's law: Bad money drives out the good. Well, bad behavior" does the same thing "without good enforcement."
His bailout plans are disastrous. They prop up zombie banks by "mispricing toxic assets....The last thing we need is a further drain on our resources....by promoting this toxic asset market (and notions of) too-big-to-fail."
With most, perhaps all, the big banks insolvent (a polite term for bankrupt), what's going on is "a multi-trillion dollar cover-up by publicly traded (enterprises), which amounts to felony securities fraud on a massive scale."
Ultimately, these firms will be forced into receivership, their "managements and boards stripped of office, title, and compensation." What's needed is a 1930s-style Pecora investigation to get to the bottom of their fraud, deceit, and cover-up, along with government complicity to hide it. More on that below.
Black cited billions to AIG as the single worst abuse so far - to bail out their counterparties like Switzerland's UBS at the same time we were prosecuting it for tax fraud. As bad was following Goldman Sachs' advice to direct a $13 billion counterparty windfall to itself.
The whole process reeks of corruption. It must be stopped, and a new direction instituted under a reformist economic team - one that will admit the nature and depth of the problem, cut the tie to Wall Street, and take corrective action the law mandates. That's "precisely what isn't happening."
Washington is "wedded to the bad idea of bigness" and power of Wall Street. In today's America, financialization is predominant. It's a cancer eating away at the fabric of the nation and many millions affected, the result of the grandest of grand thefts.
A good start would be to break up the financial giants into more effectively managed and less powerful units - maybe the way Standard Oil was dismantled through a simple share spinoff. In addition, "a new seriousness must be put into regulation," and a new resolve to enforce it.
Today, the whole system encourages fraud, one based on results at any cost, so "fudging the numbers" becomes de rigueur and global bigness the holy grail. It sends the wrong message - play or pay with your job and future on Wall Street. "The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that." It's been decades since we've been there and high time we took it seriously. Job one is a thorough housecleaning and new direction, much like what's described below.
On April 3, Black appeared on Bill Moyers Journal on PBS and explained what's briefly enumerated below. From his experience as a regulator and prosecutor, he said:
-- fraud is initiated in boardrooms and CEO offices by making "really bad loans, because they pay better;"
-- then grow them like a Ponzi scheme multiplied through leverage; it's hugely profitable early on, then inevitably creates "disaster down the road;"
-- dismantling regulation makes it possible;
-- one scheme was subprime, Alt-A , and even prime "liars' loans" - meaning no checks are made on income, jobs, ability to repay, and the more they're inflated the more profitable they are; the amount of them was enormous - for one company alone, they generated as many losses as the entire S & L scandal;
-- toxic products were willfully created to scam borrowers for big profits;
-- rating agencies went along by appraising junk as AAA instead of doing it honestly;
-- in September 2004, the FBI warned about a mortgage fraud epidemic, but nothing was done to stop it; so now we have a crisis hundreds of times greater than the S & L one and bad policy in play to address it;
-- as in Barrons, he accused top Bush and Obama officials of a cover-up - to conceal the insolvency of all major banks and by so doing broke the law established after the S & L crisis, the Prompt Corrective Action Law that mandates insolvent banks be shut down and/or placed in receivership; and
-- this is the greatest financial scandal in history - swept under the rug by top government officials of both parties; it's legally and morally indefensible, and it's wrecking the country.
In an April 6 article, Black calls ongoing "stress tests a complete sham....to fool people....make us chumps" and essentially say 'If we lie and they believe us, all will be well" when, in fact, it's not. It's part of the giant cover-up and greatest ever criminal fraud - by bankers and complicit government officials.
On April 13, Nouriel Roubini shared Black's view. He cited the stress test "spin machine" leaking stories to the press that all 19 banks in question will pass. None will fail. If more "exceptional assistance" is needed, Washington will provide it.
However, Q 1 macro data tells another story as growth, unemployment, and falling home prices alone "are worse than those in FDIC's baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless" as worsening data are outdistancing "the worst case scenario."
In other words, test results "are not worth the paper (they'll be) written on" as their assumptions are fraudulently based. They're "fudge tests....blatantly rigged" to put a brave face on a very bleak economic picture.
They're in addition to other changes, including the recent Financial Accounting Standards Board (FASB) ruling. It's responsible for developing "generally accepted accounting principles" known as GAAP. On April 3, it changed so-called "mark-to-market" standards to "mark-to-make believe" ones. It also voted to allow banks to book smaller impaired asset losses to paint a brighter profits picture. It let Wells Fargo, for example, claim a Q 1 profit when it's drowning in losses, ones it can hide and not take.
Also likely coming is restoration of the "uptick rule" that prohibited short-selling in a down market. Established in 1938 to prevent disorderly selling, it allows shorts only when shares trade up. In June 2007, it was removed. Re-introductory proposals are now being considered to artificially boost prices.
Roubini calls it "a form of legalized manipulation of the stock market by regulators....to prevent short-sellers (from doing) their job, i.e. make stock prices reflect fundamentals and prevent bubbles."
Overall, alarm bells should be warning about reckless monetary and fiscal policies, but perverse market reaction was relief that's wildly premature according to some like Roubini. Others see a protracted downturn, a prolonged winter, and if conditions deteriorate enough perhaps a nuclear one, unlike anything before seen, and why not:
-- world economies are plummeting at depression-level speed by all key measures - production, consumption, trade, profits, asset values, capital flows, and more;
-- unemployment is soaring; in America close to 20% with all excluded and understated categories included;
-- pensions have been lost along with benefits;
-- homelessness is rising sharply, the result of over six million foreclosures; tent cities are appearing across the country;
-- recent data shows soaring foreclosures up 24% in Q 1 2009; in March alone, 46% higher than a year earlier - alone providing clear evidence of serious trouble; and
-- desperation is fueling anger and despair as conditions keep deteriorating absent sound policies to address them.
On April 6, Professor Vernon Smith (a 2002 economics Nobel laureate) and research associate Steven Gjerstad headlined a Wall Street Journal op-ed: "From Bubble to Depression?" They asked:
-- what creates bubbles?
-- why does a large one, like the dot.com bubble, do no damage to the financial system while another (housing) caused collapse?
They believe "events of the past 10 years have an eerie similarity to the period leading up to the Great Depression," including rising mortgage debt and speculation, then asked:
Had banking system difficulties "been caused by losses on brokers loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash." But they weren't apparent until fall 1930, a year later.
Further, if money supply contraction caused bank failures, why haven't massive infusions today prevented the crisis? They conclude that conventional wisdom needs reassessing and believe "excessive consumer debt - especially mortgage debt - was transmitted into the financial sector" causing the Great Depression.
Their hypothesis "is that a financial crisis (originating) in consumer debt, concentrated at the low end of the wealth and income distribution (affecting so many households), can be transmitted quickly and forcefully into the financial system....we're witnessing the second great consumer debt crash, the end of a massive consumption binge," but want more study to prove it.
However, much more than that is needed - real reform, a complete reversal from current policy of the kind addressed below. Also, Smith and Gjerstad omitted a crucial fact - how misdirected today's massive infusions have been. Instead of helping beleaguered households, they've gone mostly to bankers for purposes other than economic recovery; namely, recapitalizations, for acquisitions, and big bonuses at the same time they fire thousands of lower level staff.
The 1930s Pecora Commission
On March 4, 1932 (one year to the day before FDR took office), a majority-Republican Senate Banking, Housing, and Urban Affairs Committee established it to investigate the causes of the 1929 crash. It was little more than a fig leaf until Democrats took over, appointed Ferdinand Pecora as special counsel, and made a real effort for banking and regulatory reform.
Straightaway, Pecora looked into Wall Street's seamy underside by placing powerful bankers in the dock, holding them accountable for their actions, and doing through hearings what would have been impossible in open court given their ability to "buy" justice.
He confronted Wall Street's biggest names:
-- Richard Whitney, president of the New York Stock Exchange;
-- noted investment bankers, including Thomas Lamont, Otto Kahn, Charles E. Mitchell, Albert Wiggin, and JP Morgan, Jr., scion of the man who dominated the Street for decades as its boss and de facto Fed chairman before the central bank was established; and
-- market speculators like Arthur Cutten.
He got Morgan to admit that he and his 20 partners paid no income taxes in 1931 and 1932. Neither did its Philadelphia operation, Drexel and Co., in the same years and way underpaid them in previous ones. It made headlines, was stunning, and galvanized critics to demand reform.
Pecora went further. He questioned Morgan and others on various matters, including sweetheart deals for political figures and insider ones for Wall Street cronies, similar shenanigans to today but not on the same scale, and under a president then who cared once Roosevelt took office. He directed "pitiless publicity" on Street corruption, what they easily got away with under Republicans.
Pecora was a former New York district attorney, an Eliot Spitzer-type with a reputation for toughness and fearlessness, but one serving at the behest of the President. He established straightaway that some of Wall Street's most powerful lied to their shareholders, manipulated stocks to their advantage, and profited hugely through malfeasance.
Roosevelt encouraged him in his March 4, 1933 inaugural address saying:
"there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency....the rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men...."
"They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The money changers have fled their high seats in the temple of our civilization. We must now restore that temple to the ancient truths. (Doing it requires) apply(ing) social values more noble than mere monetary profit."
Imagine Obama saying this, followed by strong policies for enforcement under Roosevelt-style officials. Men like Pecora who asked tough questions and demanded answers, including on the House of Morgan's operations, something unimaginable today under any leadership. Morgan's counsel, John W. Davis, called Pecora's questions outrageous, but Morgan had to answer in detail enough to shake the "secret government's" foundations.
Pecora's staff examined company records that revealed financial manipulations among the Street's powerful to reap enormous profits - enough for Morgan to gain control of most US industry, buy politicians and diplomats, and effectively control the most powerful banks in the country.
Years later in his book, Wall Street Under Fire, Pecora wrote:
"Undoubtedly, this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States." Morgan called it performing a "service" and exercising no more control than through "argument and persuasion."
His managing partner, Thomas Lamont, told the committee that the firm only offered advice that clients could accept or reject. Pecora learned otherwise as he peeled away the layers of company power and influence. He discovered "preferred clients" and friends of the bank lists in two tiers - special allies, operatives, and cronies and a "fishing list" from which new ones were recruited. In total, it showed Morgan was more powerful than Washington - that the firm effectively controlled a network of companies that made US financial policy for over three decades plus leading politicians and much of the federal bench.
Pecora discovered what's as true today - that a select group of giant banks run things. They set policy, rig the game to their advantage, buy politicians the way Morgan did, and pretty much run the country and the world.
Again Pecora from his book:
Morgan's power was "a stark fact. It was a great stream that was fed by many sources; by its deposits, by its loans, by its promotions, by its directorships, by its pre-eminent position as investment bankers, by its control of holding companies which, in turn, controlled scores of subsidiaries, and by its silken bonds of gratitude in which it skillfully enmeshed the chosen ranks of the 'preferred lists.' It reached into every corner of the nation and penetrated in public, as well as business affairs. The problems raised by such an institution go far beyond banking regulation in the narrow sense. It might be a formidable rival to the government itself."
Pecora proceeded from Morgan to others, powerful bankers in their own right like Kuhn, Loeb's Otto Kahn. Roosevelt championed the hearings and from them came legislative reforms, the kinds so desperately needed now but nowhere in sight by an administration totally subservient to money and power and thoroughly corrupted by them - after a scant three months in office.
Congressional Oversight Panel (COP) Calls for Sweeping Changes
Its head, Elizabeth Warren, called on the Treasury to get tough on TARP recipients, including:
-- questioning the "dangers inherent" in its strategy; the idea of "open-ended subsidies (to giant institutions) without adequately weighing potential pitfalls;"
-- acknowledging that it has no historical precedent and faint hope of succeeding;
-- leveraging the $700 billion in TARP funds well beyond what Congress appropriated - to an amount exceeding $4 trillion and smacking of high-level corruption;
-- firing top executives of failed institutions like Citigroup, Bank of America and AIG; "the very notion that anyone would infuse money into a financially troubled entity without demanding (management) changes is preposterous;"
-- shareholders to be wiped out; "it is crucial (for this) to happen;"
-- choosing among three alternatives for insolvent banks: "liquidation, receivership, or subsidization;" Geithner's plan is none of the above and essentially unworkable; it fails to acknowledge the decline's depth and degree to which troubled assets low valuations accurately reflect their worth;
-- if the downturn gets greater than forecast, "very different actions" will be needed "to restore financial stability."
Given the extent and long-term nature of today's crisis, it's shocking that bad policy practically assures the worst outcome. Maybe a government/Wall Street cabal prefers it to capitalize on the wreckage at fire sale prices, at home and globally, as part of a long-term process of sucking wealth to the top while ignoring its fallout, both human and economic. Those calculations don't enter their sophisticated models, only bottom line ones they can bank on.
Other Bank Bailout Critics
Willem Buiter was a former member of the Bank of England's Monetary Policy Committee (1997 - 2000). He's now has a Maverecon blog and is a Financial Times (FT) regular. He's also a fierce critic of bank bailouts, a policy he says wastes good time and money and is destined to fail.
"The good bank solution and slaughter of the unsecured creditors should have been pursued actively as soon as it became clear that most (US international banks were) insolvent." Soon enough it will be apparent anyway, before year end. "At that point, (their) de facto insolvency will be so self-evident that even the joint and several obfuscation of banks and Treasury will be unable to deny the obvious." And they'll be no fiscal resources to the rescue. "The likelihood of Congress voting even a nickel in additional financial support for the banks is zero."
Joseph Stiglitz was even blunter in an April 17 Bloomberg interview headlined: "Stiglitz Says White House Ties to Wall Street Doom Bank Rescue." He accused the administration of bailing out bankers at the expense of the economy. "All the ingredients they have so far are weak, and there are several missing" ones. The people who created this monster are "either in the pocket of the banks or they're incompetent."
"We don't have enough money, they don't want to go back to Congress, they don't want to do it in an open way, and they" won't act responsibly and place the banks in receivership where they belong and let shareholders, not taxpayers take the pain. This policy guarantees failure. It's "an absolute mess." It's a strategy to re-inflate a bubble that will do nothing to speed recovery. "It's a recipe for Japanese-style malaise."
Financial expert and investor safety advocate Martin Weiss is most critical of all. He calls bank stress tests "FLIM-FLAM" in accusing Washington of hiding the true condition of the nation's 19 largest banks.
Key economic indicators like GDP contraction and unemployment are far worse than stress test parameters. "Our own government is clearly cooking the books - using (false) criteria to deceive you; hoping you'll trust banks that are clearly hanging by a thread."
On May 4, they'll announce the results - jerry-rigged to present an illusion of solvency, but clearly a deceptive lie. The economy is sinking, not stabilizing, let alone recovering. The administration is bailing out bankers while wrecking the economy and millions of households. Why isn't Washington addressing the tough questions, he asks. Because the answers have them "terrified," so they play for time while home foreclosures are exploding, factories are sitting idle, consumption keeps falling, yet they hope conditions will improve.
No one asks:
-- what if states and cities can't provide vital services;
-- hospitals have to close down "due to disruptions in insurance payments;"
-- "supermarket shelves are emptied because trucking companies can't get short-term loans to stay in business;"
-- utilities "are crippled as the crisis kills the revenues they count on from corporations;" and
-- "soaring deficits drive interest rates sky-high and gut the dollar, driving the cost of living through the roof."
What if one day we discover America is no longer America. What if we realize that day is today.
Another Day, Another Scheme
The latest one lets ordinary people participate in Geithner's Public-Private Partnership Program (PPIP) that sounds suspiciously like "liars' loan" fraud, except this time "investments" in worthless junk are involved that will separate fools from their money.
The New York Times headlined the plan by comparing it to WW I Liberty Bonds that helped the country win the war. Now it's "to come to the aid of their banks - with the added inducement of possibly making some money...." The idea is for "large investment companies to create the financial-crisis equivalent of war bonds: bailout funds" to sucker the unwary to "invest" and, simultaneously, quiet opposition to the handouts.
According to money management firm BlackRock director Steven Baffico: "It's giving the guy on Main Street an equal seat at the table next to the big guys." Pimco's Bill Gross called it a "win-win-win policy." Absolutely for him so he loves it.
Plans are still being discussed. They won't likely be announced for several months, but already the scheme is apparent. It's to offload toxic junk on the public, let unwary investors take losses, relieve troubled banks of more of them, and arrange for investment fund issuers (like Pimco and BlackRock) to reap healthy fees if enough suckers can be enlisted to go along.
As troublesome is FDIC's role in the scam - through its transformation from insuring depositors to a much greater one guaranteeing over $1 trillion in junk assets, way over its charter $30 billion limit by twisting the rules to arrange it.
Its charter allows extraordinary steps to be taken when an "emergency determination by secretary of the Treasury" is made to mitigate "systemic risk." However, its Section 14 Borrowing Authority states:
"The Corporation is authorized to borrow from the Treasury....for insurance purposes (not speculation, bailouts, or other schemes, an amount) not exceeding in the aggregate $30,000,000,000 outstanding at any one time....Any such loan shall be used by the Corporation solely in carrying out its functions with respect to such insurance (of bank deposits, then up to $5000, now temporarily at $250,000)...."
"Before issuing an obligation or making a guarantee, the Corporation shall estimate the cost of such obligations (as well as market value)....the Corporation may not issue or incur any obligation, if, after (so doing) the aggregate amount of obligations of the Deposit Insurance Fund (exceeds) the total of the amounts authorized ($30 billion under) section 14(a)."
PPIP violates FDIC rules. If it's opened to the public, greater fraud will result with ordinary people hit hardest as usual, the best reason to avoid this and alert others to be as prudent. It's another dubious scheme to separate the unwary from their money and redirect it to the top - to the same fraudsters responsible for the crisis and their investment company partners going along with the scam.
The Treasury extended the deadline for PPIP participants (to April 24) and loosened some of its guidelines - suggesting that investor support has been less than expected.
However, on April 2, the Financial Times (FT) headlined: "Bailed-out banks eye toxic asset buys." Giants like JP Morgan Chase, Citigroup, Bank of America, and Goldman Sachs "are considering buying (each other's) toxic assets," and why not when it's a win-win way to offload each other's junk, do it at inflated prices, and stick taxpayers with the risk. New York University's Stern School of Business Professor Lawrence White put it this way:
"I'm worried about the following scenario: You and I have troubled assets, I buy assets from you, you buy them them from me, and at the end of the day it (looks) suspiciously like you bought assets from yourself" with Treasury funds.
PPIP prohibits banks from buying their own assets but lets them do it from other firms, either directly or through investment funds set up for that purpose, and according to Treasury: "It's an open program designed to get markets going."
On April 3, Reuters reported that "US regulators may be open to letting TARP recipients participate in the new program," and already Goldman Sachs and Morgan Stanley suggested they'll do it. Others expressed interest in what some observers call a giant money laundering scheme compounding the colossal flimflam that in the end most likely won't work - except to extract multi-trillions from the public to banksters with Washington acting complicitly as transfer agent.
Meanwhile economic fundamentals are deteriorating at depression-level speed and depth while Obama remains in denial. On April 2 at the G 20, he cited "a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery" when, in fact, it produced nothing beyond the usual hype - plus this time the quadrupling of the IMF's budget to inflict debt bondage on its willing partakers.
We're clearly in early stage unchartered waters of what Michel Chossudovsky calls "The Great Depression of the 21st Century" heading America for "fiscal collapse" because of policies amounting to "the most drastic curtailment in public spending in American history" - directing most of it for militarism and foreign wars, Wall Street bailouts, and half a trillion for public debt service.
In an April 12 commentary, longtime, well-respected Chicago financial journalist Terry Savage headlined "Social Security Myth" in reporting on some of the fallout. Someone has to pay for "fixes" and militarism, that someone is us, and target one is Social Security. According to Savage:
"Most likely, Social Security will become a "needs-based" payout to low income, elderly recipients - not a return of the 'investments' you made with all those FICA deductions from your pay check every month over your working career." In other words, Washington intends to renege on the 74-year old promise FDR announced to the nation on August 14, 1935:
"Today a hope of many years' standing is in large part fulfilled....This social security measure gives at least some protection to thirty millions of our citizens (now over 56 million, including Supplement Security Income recipients) who will reap direct benefits....This law represents a cornerstone in a structure....by no means complete. (It) will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness. (The passage of this bill marks) a historic (achievement) for all time."
It's now in jeopardy, so here's what Savage advises. Prepare. "Save more money, (and) start from an honest assessment" of what's coming. What FDR gave will be taken away. "And that's The Savage Truth." A disturbing and outrageous one as well as all the other ways we've been betrayed.
Source: MarketOracle
Since taking office, Obama, wittingly or otherwise, has headed the largest criminal enterprise in history - the mass looting of national wealth to enrich his Wall Street benefactors. He assembled a rogue economic team of Clinton/Robert Rubin retreads - to fix the current crisis they engineered.
In a March 13 article, (author and former Republican strategist) Kevin Phillips called them "recycled senior (Clinton administration) Democrats (responsible for the) tech mania, deregulation binge and (1997 - 2000) stock market bubble and crash. (Obama) extend(ed) the (disastrous) mismanagement and pro-Wall Street bias of the 2008 Bush regime bailout."
He called Geithner and Bernanke "hapless," the result of their ruinous misjudgments (and, along with Alan Greenspan, complicit) with finance-sector malfeasance."
He said Summers will be "remembered for helping to block federal regulation of financial derivatives and orchestrat(ing) the 1999" Glass-Steagall repeal, among his other "achievements." He went down the list of key economic officials and trashed them all as the very types to be avoided, not appointed.
He noted that Bernanke was chairman of George Bush's Council of Economic Advisers and added: "Imagine if FDR had retained Herbert Hoover's chief economic advisor and loyal Republican Fed Chairman in 1933....To think that the pussycat Fed (would become) a saber-toothed tiger is a deception." Worse still, ruinous economic policies "could prove fatal" if White House policies favor "Wall Street but not the national economy or American people" - the very direction they've now taken.
In a follow-up April 7 article, Phillips highlighted "The Disaster Stage of US Financialization....a much grander-scale disaster than anything that happened in 1929 - 1933. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland."
Today's crisis represents "the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the US economy by a rabid financial sector...." It's realigning global power with America losing its economic leadership won in WW II.
"The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the US financial sector and its political and regulatory allies deserve this time." Financialized America radically transformed the country, now "doubly staggering because of the crushing burden of its collapse."
Yet major media pundits and reporters barely noticed and now claim relief is just a few quarters away - ignoring a metastasizing cancer, a national disaster, while policy makers heap fuel on a raging blaze now consuming us, yet too little public rage confronts them.
A Former Insider Speaks Out
Economics Professor William Black is a former senior bank regulator and Savings and Loan prosecutor, currently teaching economics and law at the University of Missouri. In an April 13 Barrons interview, he referred to "failed bankers (advising) failed regulators on how to deal with failed assets" they all had a hand in creating and proliferating.
His conclusion: "How can it result in anything but failure." He called the scale of financial fraud "immense," and said "Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency," besides what it's doing to the country, global economies, and many millions of people here and abroad.
He scathed Summers and Geithner, both "important architects of (today's) problems," and the latter as a failed and dishonest regulator, yet "numbering himself among those who convey tough medicine when he's really pandering to the interests of a select group of banks." No need to mention which ones.
The law mandates corrective action, the kind FDR took in the 1930s. He, Bernanke and Summers flout the law, "in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent." They've turned taxpayers into "suckers" who'll pay dearly for decades, maybe generations.
His refusal to put insolvent banks into receivership, resorting to deceptive language like "legacy assets," and pursuing the worst of Chicago School economics "is positively Orwellian....If cheaters prosper, (they'll) dominate. It's like Gresham's law: Bad money drives out the good. Well, bad behavior" does the same thing "without good enforcement."
His bailout plans are disastrous. They prop up zombie banks by "mispricing toxic assets....The last thing we need is a further drain on our resources....by promoting this toxic asset market (and notions of) too-big-to-fail."
With most, perhaps all, the big banks insolvent (a polite term for bankrupt), what's going on is "a multi-trillion dollar cover-up by publicly traded (enterprises), which amounts to felony securities fraud on a massive scale."
Ultimately, these firms will be forced into receivership, their "managements and boards stripped of office, title, and compensation." What's needed is a 1930s-style Pecora investigation to get to the bottom of their fraud, deceit, and cover-up, along with government complicity to hide it. More on that below.
Black cited billions to AIG as the single worst abuse so far - to bail out their counterparties like Switzerland's UBS at the same time we were prosecuting it for tax fraud. As bad was following Goldman Sachs' advice to direct a $13 billion counterparty windfall to itself.
The whole process reeks of corruption. It must be stopped, and a new direction instituted under a reformist economic team - one that will admit the nature and depth of the problem, cut the tie to Wall Street, and take corrective action the law mandates. That's "precisely what isn't happening."
Washington is "wedded to the bad idea of bigness" and power of Wall Street. In today's America, financialization is predominant. It's a cancer eating away at the fabric of the nation and many millions affected, the result of the grandest of grand thefts.
A good start would be to break up the financial giants into more effectively managed and less powerful units - maybe the way Standard Oil was dismantled through a simple share spinoff. In addition, "a new seriousness must be put into regulation," and a new resolve to enforce it.
Today, the whole system encourages fraud, one based on results at any cost, so "fudging the numbers" becomes de rigueur and global bigness the holy grail. It sends the wrong message - play or pay with your job and future on Wall Street. "The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that." It's been decades since we've been there and high time we took it seriously. Job one is a thorough housecleaning and new direction, much like what's described below.
On April 3, Black appeared on Bill Moyers Journal on PBS and explained what's briefly enumerated below. From his experience as a regulator and prosecutor, he said:
-- fraud is initiated in boardrooms and CEO offices by making "really bad loans, because they pay better;"
-- then grow them like a Ponzi scheme multiplied through leverage; it's hugely profitable early on, then inevitably creates "disaster down the road;"
-- dismantling regulation makes it possible;
-- one scheme was subprime, Alt-A , and even prime "liars' loans" - meaning no checks are made on income, jobs, ability to repay, and the more they're inflated the more profitable they are; the amount of them was enormous - for one company alone, they generated as many losses as the entire S & L scandal;
-- toxic products were willfully created to scam borrowers for big profits;
-- rating agencies went along by appraising junk as AAA instead of doing it honestly;
-- in September 2004, the FBI warned about a mortgage fraud epidemic, but nothing was done to stop it; so now we have a crisis hundreds of times greater than the S & L one and bad policy in play to address it;
-- as in Barrons, he accused top Bush and Obama officials of a cover-up - to conceal the insolvency of all major banks and by so doing broke the law established after the S & L crisis, the Prompt Corrective Action Law that mandates insolvent banks be shut down and/or placed in receivership; and
-- this is the greatest financial scandal in history - swept under the rug by top government officials of both parties; it's legally and morally indefensible, and it's wrecking the country.
In an April 6 article, Black calls ongoing "stress tests a complete sham....to fool people....make us chumps" and essentially say 'If we lie and they believe us, all will be well" when, in fact, it's not. It's part of the giant cover-up and greatest ever criminal fraud - by bankers and complicit government officials.
On April 13, Nouriel Roubini shared Black's view. He cited the stress test "spin machine" leaking stories to the press that all 19 banks in question will pass. None will fail. If more "exceptional assistance" is needed, Washington will provide it.
However, Q 1 macro data tells another story as growth, unemployment, and falling home prices alone "are worse than those in FDIC's baseline scenario for 2009 AND even worse than those for the more adverse stressed scenario for 2009. Thus, the stress test results are meaningless" as worsening data are outdistancing "the worst case scenario."
In other words, test results "are not worth the paper (they'll be) written on" as their assumptions are fraudulently based. They're "fudge tests....blatantly rigged" to put a brave face on a very bleak economic picture.
They're in addition to other changes, including the recent Financial Accounting Standards Board (FASB) ruling. It's responsible for developing "generally accepted accounting principles" known as GAAP. On April 3, it changed so-called "mark-to-market" standards to "mark-to-make believe" ones. It also voted to allow banks to book smaller impaired asset losses to paint a brighter profits picture. It let Wells Fargo, for example, claim a Q 1 profit when it's drowning in losses, ones it can hide and not take.
Also likely coming is restoration of the "uptick rule" that prohibited short-selling in a down market. Established in 1938 to prevent disorderly selling, it allows shorts only when shares trade up. In June 2007, it was removed. Re-introductory proposals are now being considered to artificially boost prices.
Roubini calls it "a form of legalized manipulation of the stock market by regulators....to prevent short-sellers (from doing) their job, i.e. make stock prices reflect fundamentals and prevent bubbles."
Overall, alarm bells should be warning about reckless monetary and fiscal policies, but perverse market reaction was relief that's wildly premature according to some like Roubini. Others see a protracted downturn, a prolonged winter, and if conditions deteriorate enough perhaps a nuclear one, unlike anything before seen, and why not:
-- world economies are plummeting at depression-level speed by all key measures - production, consumption, trade, profits, asset values, capital flows, and more;
-- unemployment is soaring; in America close to 20% with all excluded and understated categories included;
-- pensions have been lost along with benefits;
-- homelessness is rising sharply, the result of over six million foreclosures; tent cities are appearing across the country;
-- recent data shows soaring foreclosures up 24% in Q 1 2009; in March alone, 46% higher than a year earlier - alone providing clear evidence of serious trouble; and
-- desperation is fueling anger and despair as conditions keep deteriorating absent sound policies to address them.
On April 6, Professor Vernon Smith (a 2002 economics Nobel laureate) and research associate Steven Gjerstad headlined a Wall Street Journal op-ed: "From Bubble to Depression?" They asked:
-- what creates bubbles?
-- why does a large one, like the dot.com bubble, do no damage to the financial system while another (housing) caused collapse?
They believe "events of the past 10 years have an eerie similarity to the period leading up to the Great Depression," including rising mortgage debt and speculation, then asked:
Had banking system difficulties "been caused by losses on brokers loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash." But they weren't apparent until fall 1930, a year later.
Further, if money supply contraction caused bank failures, why haven't massive infusions today prevented the crisis? They conclude that conventional wisdom needs reassessing and believe "excessive consumer debt - especially mortgage debt - was transmitted into the financial sector" causing the Great Depression.
Their hypothesis "is that a financial crisis (originating) in consumer debt, concentrated at the low end of the wealth and income distribution (affecting so many households), can be transmitted quickly and forcefully into the financial system....we're witnessing the second great consumer debt crash, the end of a massive consumption binge," but want more study to prove it.
However, much more than that is needed - real reform, a complete reversal from current policy of the kind addressed below. Also, Smith and Gjerstad omitted a crucial fact - how misdirected today's massive infusions have been. Instead of helping beleaguered households, they've gone mostly to bankers for purposes other than economic recovery; namely, recapitalizations, for acquisitions, and big bonuses at the same time they fire thousands of lower level staff.
The 1930s Pecora Commission
On March 4, 1932 (one year to the day before FDR took office), a majority-Republican Senate Banking, Housing, and Urban Affairs Committee established it to investigate the causes of the 1929 crash. It was little more than a fig leaf until Democrats took over, appointed Ferdinand Pecora as special counsel, and made a real effort for banking and regulatory reform.
Straightaway, Pecora looked into Wall Street's seamy underside by placing powerful bankers in the dock, holding them accountable for their actions, and doing through hearings what would have been impossible in open court given their ability to "buy" justice.
He confronted Wall Street's biggest names:
-- Richard Whitney, president of the New York Stock Exchange;
-- noted investment bankers, including Thomas Lamont, Otto Kahn, Charles E. Mitchell, Albert Wiggin, and JP Morgan, Jr., scion of the man who dominated the Street for decades as its boss and de facto Fed chairman before the central bank was established; and
-- market speculators like Arthur Cutten.
He got Morgan to admit that he and his 20 partners paid no income taxes in 1931 and 1932. Neither did its Philadelphia operation, Drexel and Co., in the same years and way underpaid them in previous ones. It made headlines, was stunning, and galvanized critics to demand reform.
Pecora went further. He questioned Morgan and others on various matters, including sweetheart deals for political figures and insider ones for Wall Street cronies, similar shenanigans to today but not on the same scale, and under a president then who cared once Roosevelt took office. He directed "pitiless publicity" on Street corruption, what they easily got away with under Republicans.
Pecora was a former New York district attorney, an Eliot Spitzer-type with a reputation for toughness and fearlessness, but one serving at the behest of the President. He established straightaway that some of Wall Street's most powerful lied to their shareholders, manipulated stocks to their advantage, and profited hugely through malfeasance.
Roosevelt encouraged him in his March 4, 1933 inaugural address saying:
"there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency....the rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men...."
"They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The money changers have fled their high seats in the temple of our civilization. We must now restore that temple to the ancient truths. (Doing it requires) apply(ing) social values more noble than mere monetary profit."
Imagine Obama saying this, followed by strong policies for enforcement under Roosevelt-style officials. Men like Pecora who asked tough questions and demanded answers, including on the House of Morgan's operations, something unimaginable today under any leadership. Morgan's counsel, John W. Davis, called Pecora's questions outrageous, but Morgan had to answer in detail enough to shake the "secret government's" foundations.
Pecora's staff examined company records that revealed financial manipulations among the Street's powerful to reap enormous profits - enough for Morgan to gain control of most US industry, buy politicians and diplomats, and effectively control the most powerful banks in the country.
Years later in his book, Wall Street Under Fire, Pecora wrote:
"Undoubtedly, this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States." Morgan called it performing a "service" and exercising no more control than through "argument and persuasion."
His managing partner, Thomas Lamont, told the committee that the firm only offered advice that clients could accept or reject. Pecora learned otherwise as he peeled away the layers of company power and influence. He discovered "preferred clients" and friends of the bank lists in two tiers - special allies, operatives, and cronies and a "fishing list" from which new ones were recruited. In total, it showed Morgan was more powerful than Washington - that the firm effectively controlled a network of companies that made US financial policy for over three decades plus leading politicians and much of the federal bench.
Pecora discovered what's as true today - that a select group of giant banks run things. They set policy, rig the game to their advantage, buy politicians the way Morgan did, and pretty much run the country and the world.
Again Pecora from his book:
Morgan's power was "a stark fact. It was a great stream that was fed by many sources; by its deposits, by its loans, by its promotions, by its directorships, by its pre-eminent position as investment bankers, by its control of holding companies which, in turn, controlled scores of subsidiaries, and by its silken bonds of gratitude in which it skillfully enmeshed the chosen ranks of the 'preferred lists.' It reached into every corner of the nation and penetrated in public, as well as business affairs. The problems raised by such an institution go far beyond banking regulation in the narrow sense. It might be a formidable rival to the government itself."
Pecora proceeded from Morgan to others, powerful bankers in their own right like Kuhn, Loeb's Otto Kahn. Roosevelt championed the hearings and from them came legislative reforms, the kinds so desperately needed now but nowhere in sight by an administration totally subservient to money and power and thoroughly corrupted by them - after a scant three months in office.
Congressional Oversight Panel (COP) Calls for Sweeping Changes
Its head, Elizabeth Warren, called on the Treasury to get tough on TARP recipients, including:
-- questioning the "dangers inherent" in its strategy; the idea of "open-ended subsidies (to giant institutions) without adequately weighing potential pitfalls;"
-- acknowledging that it has no historical precedent and faint hope of succeeding;
-- leveraging the $700 billion in TARP funds well beyond what Congress appropriated - to an amount exceeding $4 trillion and smacking of high-level corruption;
-- firing top executives of failed institutions like Citigroup, Bank of America and AIG; "the very notion that anyone would infuse money into a financially troubled entity without demanding (management) changes is preposterous;"
-- shareholders to be wiped out; "it is crucial (for this) to happen;"
-- choosing among three alternatives for insolvent banks: "liquidation, receivership, or subsidization;" Geithner's plan is none of the above and essentially unworkable; it fails to acknowledge the decline's depth and degree to which troubled assets low valuations accurately reflect their worth;
-- if the downturn gets greater than forecast, "very different actions" will be needed "to restore financial stability."
Given the extent and long-term nature of today's crisis, it's shocking that bad policy practically assures the worst outcome. Maybe a government/Wall Street cabal prefers it to capitalize on the wreckage at fire sale prices, at home and globally, as part of a long-term process of sucking wealth to the top while ignoring its fallout, both human and economic. Those calculations don't enter their sophisticated models, only bottom line ones they can bank on.
Other Bank Bailout Critics
Willem Buiter was a former member of the Bank of England's Monetary Policy Committee (1997 - 2000). He's now has a Maverecon blog and is a Financial Times (FT) regular. He's also a fierce critic of bank bailouts, a policy he says wastes good time and money and is destined to fail.
"The good bank solution and slaughter of the unsecured creditors should have been pursued actively as soon as it became clear that most (US international banks were) insolvent." Soon enough it will be apparent anyway, before year end. "At that point, (their) de facto insolvency will be so self-evident that even the joint and several obfuscation of banks and Treasury will be unable to deny the obvious." And they'll be no fiscal resources to the rescue. "The likelihood of Congress voting even a nickel in additional financial support for the banks is zero."
Joseph Stiglitz was even blunter in an April 17 Bloomberg interview headlined: "Stiglitz Says White House Ties to Wall Street Doom Bank Rescue." He accused the administration of bailing out bankers at the expense of the economy. "All the ingredients they have so far are weak, and there are several missing" ones. The people who created this monster are "either in the pocket of the banks or they're incompetent."
"We don't have enough money, they don't want to go back to Congress, they don't want to do it in an open way, and they" won't act responsibly and place the banks in receivership where they belong and let shareholders, not taxpayers take the pain. This policy guarantees failure. It's "an absolute mess." It's a strategy to re-inflate a bubble that will do nothing to speed recovery. "It's a recipe for Japanese-style malaise."
Financial expert and investor safety advocate Martin Weiss is most critical of all. He calls bank stress tests "FLIM-FLAM" in accusing Washington of hiding the true condition of the nation's 19 largest banks.
Key economic indicators like GDP contraction and unemployment are far worse than stress test parameters. "Our own government is clearly cooking the books - using (false) criteria to deceive you; hoping you'll trust banks that are clearly hanging by a thread."
On May 4, they'll announce the results - jerry-rigged to present an illusion of solvency, but clearly a deceptive lie. The economy is sinking, not stabilizing, let alone recovering. The administration is bailing out bankers while wrecking the economy and millions of households. Why isn't Washington addressing the tough questions, he asks. Because the answers have them "terrified," so they play for time while home foreclosures are exploding, factories are sitting idle, consumption keeps falling, yet they hope conditions will improve.
No one asks:
-- what if states and cities can't provide vital services;
-- hospitals have to close down "due to disruptions in insurance payments;"
-- "supermarket shelves are emptied because trucking companies can't get short-term loans to stay in business;"
-- utilities "are crippled as the crisis kills the revenues they count on from corporations;" and
-- "soaring deficits drive interest rates sky-high and gut the dollar, driving the cost of living through the roof."
What if one day we discover America is no longer America. What if we realize that day is today.
Another Day, Another Scheme
The latest one lets ordinary people participate in Geithner's Public-Private Partnership Program (PPIP) that sounds suspiciously like "liars' loan" fraud, except this time "investments" in worthless junk are involved that will separate fools from their money.
The New York Times headlined the plan by comparing it to WW I Liberty Bonds that helped the country win the war. Now it's "to come to the aid of their banks - with the added inducement of possibly making some money...." The idea is for "large investment companies to create the financial-crisis equivalent of war bonds: bailout funds" to sucker the unwary to "invest" and, simultaneously, quiet opposition to the handouts.
According to money management firm BlackRock director Steven Baffico: "It's giving the guy on Main Street an equal seat at the table next to the big guys." Pimco's Bill Gross called it a "win-win-win policy." Absolutely for him so he loves it.
Plans are still being discussed. They won't likely be announced for several months, but already the scheme is apparent. It's to offload toxic junk on the public, let unwary investors take losses, relieve troubled banks of more of them, and arrange for investment fund issuers (like Pimco and BlackRock) to reap healthy fees if enough suckers can be enlisted to go along.
As troublesome is FDIC's role in the scam - through its transformation from insuring depositors to a much greater one guaranteeing over $1 trillion in junk assets, way over its charter $30 billion limit by twisting the rules to arrange it.
Its charter allows extraordinary steps to be taken when an "emergency determination by secretary of the Treasury" is made to mitigate "systemic risk." However, its Section 14 Borrowing Authority states:
"The Corporation is authorized to borrow from the Treasury....for insurance purposes (not speculation, bailouts, or other schemes, an amount) not exceeding in the aggregate $30,000,000,000 outstanding at any one time....Any such loan shall be used by the Corporation solely in carrying out its functions with respect to such insurance (of bank deposits, then up to $5000, now temporarily at $250,000)...."
"Before issuing an obligation or making a guarantee, the Corporation shall estimate the cost of such obligations (as well as market value)....the Corporation may not issue or incur any obligation, if, after (so doing) the aggregate amount of obligations of the Deposit Insurance Fund (exceeds) the total of the amounts authorized ($30 billion under) section 14(a)."
PPIP violates FDIC rules. If it's opened to the public, greater fraud will result with ordinary people hit hardest as usual, the best reason to avoid this and alert others to be as prudent. It's another dubious scheme to separate the unwary from their money and redirect it to the top - to the same fraudsters responsible for the crisis and their investment company partners going along with the scam.
The Treasury extended the deadline for PPIP participants (to April 24) and loosened some of its guidelines - suggesting that investor support has been less than expected.
However, on April 2, the Financial Times (FT) headlined: "Bailed-out banks eye toxic asset buys." Giants like JP Morgan Chase, Citigroup, Bank of America, and Goldman Sachs "are considering buying (each other's) toxic assets," and why not when it's a win-win way to offload each other's junk, do it at inflated prices, and stick taxpayers with the risk. New York University's Stern School of Business Professor Lawrence White put it this way:
"I'm worried about the following scenario: You and I have troubled assets, I buy assets from you, you buy them them from me, and at the end of the day it (looks) suspiciously like you bought assets from yourself" with Treasury funds.
PPIP prohibits banks from buying their own assets but lets them do it from other firms, either directly or through investment funds set up for that purpose, and according to Treasury: "It's an open program designed to get markets going."
On April 3, Reuters reported that "US regulators may be open to letting TARP recipients participate in the new program," and already Goldman Sachs and Morgan Stanley suggested they'll do it. Others expressed interest in what some observers call a giant money laundering scheme compounding the colossal flimflam that in the end most likely won't work - except to extract multi-trillions from the public to banksters with Washington acting complicitly as transfer agent.
Meanwhile economic fundamentals are deteriorating at depression-level speed and depth while Obama remains in denial. On April 2 at the G 20, he cited "a very productive summit that will be, I believe, a turning point in our pursuit of global economic recovery" when, in fact, it produced nothing beyond the usual hype - plus this time the quadrupling of the IMF's budget to inflict debt bondage on its willing partakers.
We're clearly in early stage unchartered waters of what Michel Chossudovsky calls "The Great Depression of the 21st Century" heading America for "fiscal collapse" because of policies amounting to "the most drastic curtailment in public spending in American history" - directing most of it for militarism and foreign wars, Wall Street bailouts, and half a trillion for public debt service.
In an April 12 commentary, longtime, well-respected Chicago financial journalist Terry Savage headlined "Social Security Myth" in reporting on some of the fallout. Someone has to pay for "fixes" and militarism, that someone is us, and target one is Social Security. According to Savage:
"Most likely, Social Security will become a "needs-based" payout to low income, elderly recipients - not a return of the 'investments' you made with all those FICA deductions from your pay check every month over your working career." In other words, Washington intends to renege on the 74-year old promise FDR announced to the nation on August 14, 1935:
"Today a hope of many years' standing is in large part fulfilled....This social security measure gives at least some protection to thirty millions of our citizens (now over 56 million, including Supplement Security Income recipients) who will reap direct benefits....This law represents a cornerstone in a structure....by no means complete. (It) will take care of human needs and at the same time provide the United States an economic structure of vastly greater soundness. (The passage of this bill marks) a historic (achievement) for all time."
It's now in jeopardy, so here's what Savage advises. Prepare. "Save more money, (and) start from an honest assessment" of what's coming. What FDR gave will be taken away. "And that's The Savage Truth." A disturbing and outrageous one as well as all the other ways we've been betrayed.
Source: MarketOracle
Britain Sleep Walks Into a Police State as Political Dissent is Criminalised
“From foul deeds endless tragedy arises,” the World Socialist Web Site wrote, commenting on the state execution of innocent Brazilian worker, Jean Charles de Menezes, by plainclothes policemen on a London subway train on July 22, 2005.
Events have tragically confirmed that warning. In the years since Menezes’ killing, for which no one has ever been held to account, the legal framework of a police state has been enacted in Britain.
The implications of this have been made clear over the last weeks.
Since the start of April, some 300 people have been arrested and detained in just three police operations. The vast majority of these were rounded up in two of these operations, both focusing on a supposed threat to “public order”.
Maintaining public order is now a pseudonym for the criminalising of political dissent.
Even before the G20 summit of world leaders began in London, five people were arrested in Plymouth under the Terrorism Act, reportedly accused of possessing “material relating to political ideology”.
All were released without charge, but the fact that political activism is considered a criminal offence in 21st century Britain was subsequently writ large on the streets of the capital.
Beginning April 1, a massive police operation was set in place around the G20 summit. Hundreds of people, legally exercising their right to protest, were “kettled”—forcibly held behind police cordons for up to seven hours—in the side streets of central London.
It was behind one of these cordons that Ian Tomlinson—attempting to make his way home after work—was attacked from behind by a baton-wielding masked police officer. He died moments later.
Eyewitness accounts, video footage and photo stills provide conclusive proof that the police’s attack against Tomlinson was par for the course during the protests.
The police actions had nothing to do with ensuring “public safety”. If anything, they constituted a deliberate attempt to provoke disorder as the pretext for further repression. This is underscored by evidence of plain-clothes officers armed with batons striking out at demonstrators, as well as the participation of the Territorial Support Group—a special quasi-paramilitary police unit which was involved in several of the most publicised incidents, and whose identification numbers were concealed.
Downloads of film footage of the police in action at the G20 protests is said to be particularly high in Brazil—Menezes’ birthplace, and a country bitterly familiar with police savagery against political dissidents.
For good reason, the government attempted to ensure that its “public order” policy would not see the light of day. While police now routinely photograph and demand the identification and addresses of people taking part in lawful demonstrations, watching the watchers is illegal in New Labour’s Orwellian dystopia.
Less than one month before the protests, section 76 of the Counter-Terrorism Act 2008 came into force, providing for the arrest and imprisonment of anyone taking photographs of police officers.
In one instance during the G20 protests, recorded on camera, police officers instructed photographers and news crews to leave the vicinity within 30 minutes or face arrest.
This in a country whose population is now one of the most heavily surveilled in the world. The UK has the greatest concentration of closed circuit TV cameras per head of population. Moreover, without any parliamentary debate let alone public consent, recent legislation has compelled all Internet service providers to retain data from emails and website visits for up to one year. Details of phone calls and text messages can be similarly stored, and made available to the government and other official agencies.
As if such powers were not enough for police to be aware of the movements of any potentially “significant” individuals, on April 13, police in Nottingham carried out the unprecedented “pre-emptive” arrests of 114 people. No crime had been committed. The arrests were made purely on the basis that the police “suspected” a plan by environmentalists to target a power station in Nottingham. While no charges have as yet been made, the arrests were used to mount a trawling operation, raiding homes and seizing personal papers and computers.
In between the London and Nottingham operations, police in the north-west of England mounted major “anti-terror” raids, involving dozens of armed officers. Twelve men, mainly foreign students, were detained as part of what was claimed to be an operation against an imminent terrorist attack.
Once again no charges have been made. Under British anti-terror laws, suspects can be held for 28 days without charge. It is widely reported that no evidence has so far been recovered to substantiate claims of a terrorist emergency.
All the recent police operations are predicated on the more than 200 pieces of separate anti-terror legislation enacted by the Labour government over the last years, and consolidated in the Terrorism Act 2006 which criminalises the mere expression of opinion deemed unacceptable by the Home Secretary.
At the time, then Prime Minister Tony Blair defended the measures on the grounds that political exigencies meant the “rules of the game” had changed.
This established a new legal principle—guilty on the say-so of the powers-that-be. The “rules” now in operation are those where armed police swoops and the targeting of political dissent is a matter of routine. In February this year, in a move which received barely any coverage, the Association of Chief Police Officers set up the Confidential Intelligence Unit, targeted at “domestic extremists”. Assuming the “counter-subversion” functions usually conducted by MI5, the CIU is dedicated to the surveillance of radical groups, including placing informers amongst their numbers.
The assault on civil liberties is not specific to Britain. It is a tendency evidenced throughout the so-called “advanced democracies”. Indeed proclamations of “democracy” increasingly function as a thin veneer, behind which the state has abrogated to itself near autocratic powers.
That this finds no principled opposition from within the ruling establishment or its liberal “critics” must serve as a warning.
The essential driving force behind the adoption of such dictatorial methods is not the maintenance of “public order”, but the need to defend the existing order, preserving the wealth and power of a privileged few at the expense of working people under conditions of the greatest breakdown in the world capitalist economy since the 1930s.
The defence of democratic rights requires breaking the monopoly of the financial oligarchy and its representatives over political life. This can only be achieved through the independent initiative of the working class, fighting for the reorganisation of society on a socialist basis.
Source: MarketOracle
Events have tragically confirmed that warning. In the years since Menezes’ killing, for which no one has ever been held to account, the legal framework of a police state has been enacted in Britain.
The implications of this have been made clear over the last weeks.
Since the start of April, some 300 people have been arrested and detained in just three police operations. The vast majority of these were rounded up in two of these operations, both focusing on a supposed threat to “public order”.
Maintaining public order is now a pseudonym for the criminalising of political dissent.
Even before the G20 summit of world leaders began in London, five people were arrested in Plymouth under the Terrorism Act, reportedly accused of possessing “material relating to political ideology”.
All were released without charge, but the fact that political activism is considered a criminal offence in 21st century Britain was subsequently writ large on the streets of the capital.
Beginning April 1, a massive police operation was set in place around the G20 summit. Hundreds of people, legally exercising their right to protest, were “kettled”—forcibly held behind police cordons for up to seven hours—in the side streets of central London.
It was behind one of these cordons that Ian Tomlinson—attempting to make his way home after work—was attacked from behind by a baton-wielding masked police officer. He died moments later.
Eyewitness accounts, video footage and photo stills provide conclusive proof that the police’s attack against Tomlinson was par for the course during the protests.
The police actions had nothing to do with ensuring “public safety”. If anything, they constituted a deliberate attempt to provoke disorder as the pretext for further repression. This is underscored by evidence of plain-clothes officers armed with batons striking out at demonstrators, as well as the participation of the Territorial Support Group—a special quasi-paramilitary police unit which was involved in several of the most publicised incidents, and whose identification numbers were concealed.
Downloads of film footage of the police in action at the G20 protests is said to be particularly high in Brazil—Menezes’ birthplace, and a country bitterly familiar with police savagery against political dissidents.
For good reason, the government attempted to ensure that its “public order” policy would not see the light of day. While police now routinely photograph and demand the identification and addresses of people taking part in lawful demonstrations, watching the watchers is illegal in New Labour’s Orwellian dystopia.
Less than one month before the protests, section 76 of the Counter-Terrorism Act 2008 came into force, providing for the arrest and imprisonment of anyone taking photographs of police officers.
In one instance during the G20 protests, recorded on camera, police officers instructed photographers and news crews to leave the vicinity within 30 minutes or face arrest.
This in a country whose population is now one of the most heavily surveilled in the world. The UK has the greatest concentration of closed circuit TV cameras per head of population. Moreover, without any parliamentary debate let alone public consent, recent legislation has compelled all Internet service providers to retain data from emails and website visits for up to one year. Details of phone calls and text messages can be similarly stored, and made available to the government and other official agencies.
As if such powers were not enough for police to be aware of the movements of any potentially “significant” individuals, on April 13, police in Nottingham carried out the unprecedented “pre-emptive” arrests of 114 people. No crime had been committed. The arrests were made purely on the basis that the police “suspected” a plan by environmentalists to target a power station in Nottingham. While no charges have as yet been made, the arrests were used to mount a trawling operation, raiding homes and seizing personal papers and computers.
In between the London and Nottingham operations, police in the north-west of England mounted major “anti-terror” raids, involving dozens of armed officers. Twelve men, mainly foreign students, were detained as part of what was claimed to be an operation against an imminent terrorist attack.
Once again no charges have been made. Under British anti-terror laws, suspects can be held for 28 days without charge. It is widely reported that no evidence has so far been recovered to substantiate claims of a terrorist emergency.
All the recent police operations are predicated on the more than 200 pieces of separate anti-terror legislation enacted by the Labour government over the last years, and consolidated in the Terrorism Act 2006 which criminalises the mere expression of opinion deemed unacceptable by the Home Secretary.
At the time, then Prime Minister Tony Blair defended the measures on the grounds that political exigencies meant the “rules of the game” had changed.
This established a new legal principle—guilty on the say-so of the powers-that-be. The “rules” now in operation are those where armed police swoops and the targeting of political dissent is a matter of routine. In February this year, in a move which received barely any coverage, the Association of Chief Police Officers set up the Confidential Intelligence Unit, targeted at “domestic extremists”. Assuming the “counter-subversion” functions usually conducted by MI5, the CIU is dedicated to the surveillance of radical groups, including placing informers amongst their numbers.
The assault on civil liberties is not specific to Britain. It is a tendency evidenced throughout the so-called “advanced democracies”. Indeed proclamations of “democracy” increasingly function as a thin veneer, behind which the state has abrogated to itself near autocratic powers.
That this finds no principled opposition from within the ruling establishment or its liberal “critics” must serve as a warning.
The essential driving force behind the adoption of such dictatorial methods is not the maintenance of “public order”, but the need to defend the existing order, preserving the wealth and power of a privileged few at the expense of working people under conditions of the greatest breakdown in the world capitalist economy since the 1930s.
The defence of democratic rights requires breaking the monopoly of the financial oligarchy and its representatives over political life. This can only be achieved through the independent initiative of the working class, fighting for the reorganisation of society on a socialist basis.
Source: MarketOracle
Friday, 17 April 2009
The Year of Cockeyed Economic Optimism Amidst a Fake Recovery
"The foundations of our economy are strong" - Retail sales fell in March as soaring job losses and tighter credit conditions forced consumers to cut back sharply on discretionary spending. Nearly every sector saw declines including electronics, restaurants, furniture, sporting goods and building materials. Auto sales continued their historic nosedive despite aggressive promotions on new vehicles and $13 billion of aid from the federal government.
The crash in housing, which began in July 2006, accelerated on the downside in March, falling 19 percent year-over-year, signaling more pain ahead. Mortgage defaults are rising and foreclosures in 2009 are estimated to be in the 2.1 million range, an uptick of 400,000 from 2008. Consumer spending is down, housing is in a shambles, and industrial output dropped at an annual rate of 20 percent, the largest quarterly decrease since VE Day. The systemwide contraction continues unabated with with no sign of letting up.
Conditions in the broader economy are now vastly different than those on Wall Street, where the S&P 500 and the Dow Jones Industrials have rallied for 5 weeks straight regaining more than 25 percent of earlier losses. Fed chief Ben Bernanke's $13 trillion in monetary stimulus has triggered a rebound in the stock market while Main Street continues to languish on life-support waiting for Obama's $787 billion fiscal stimulus to kick in and compensate for falling demand and rising unemployment. The rally on Wall Street indicates that Bernanke's flood of liquidity is creating a bubble in stocks since present values do not reflect underlying conditions in the economy. The fundamentals haven't been this bad since the 1930s.
The financial media is abuzz with talk of a recovery as equities inch their way higher every week. CNBC's Jim Cramer, the hyperventilating ringleader of "Fast Money", announced last week, "I am pronouncing the depression is over." Cramer and his clatter of media cheerleaders ignore the fact that every sector of the financial system is now propped up with Fed loans and T-Bills without which the fictive free market would collapse in a heap. For 19 months, Bernanke has kept a steady stream of liquidity flowing from the vault at the US Treasury to the NYSE in downtown Manhattan. The Fed has recapitalized financial institutions via its low interest rates, its multi-trillion dollar lending facilities, and its direct purchase of US sovereign debt and Fannie Mae mortgage-backed securities. (Monetization) The Fed's balance sheet has become a dumping ground for all manner of toxic waste and putrid debt-instruments for which there is no active market. When foreign central banks and investors realize that US currency is backed by dodgy subprime collateral; there will be a run on the dollar followed by a stampede out of US equities. Even so, Bernanke assures his critics that "the foundations of our economy are strong".
As for the recovery, market analyst Edward Harrison sums it up like this:
"This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless." (Edward Harrison, "The Fake Recovery", Credit Writedowns)
The rally in the stock market will not fix the banking system, slow the crash in housing, patch-together tattered household balance sheets, repair failing industries or reverse the precipitous decline in consumer confidence. The rising stock market merely indicates that profit-driven speculators are back in business taking advantage of the Fed's lavish capital injections which are propelling equities into the stratosphere. Meanwhile, the unemployment lines continue to swell, the food banks continue to run dry and the homeless shelters continue to burst at the seams. So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table. The Fed's priorities are directed at the investor class not the average working Joe. Bernanke is trying to keep Wall Street happy by goosing asset values with cheap capital, but the increases to the money supply are putting more downward pressure on the dollar. The Fed chief has also begun purchasing US Treasuries, which is the equivalent of writing a check to oneself to cover an overdraft in one's own account. This is the kind of gibberish that passes as sound economic policy. The Fed is incapable if fixing the problem because the Fed is the problem.
Last week, the market shot up on news that Wells Fargo's first quarter net income rose 50 percent to $3 billion pushing the stock up 30 percent in one session. The financial media celebrated the triumph in typical manner by congratulating everyone on set and announcing that a market "bottom" had been reached . The news on Wells Fargo was repeated ad nauseam for two days even though everyone knows that the big banks are holding hundreds of billions in mortgage-backed assets which are marked way above their true value and that gigantic losses are forthcoming. Naturally, the skeptics were kept off-camera or lambasted by toothy anchors as doomsayers and Cassandras. Regretably, creative accounting and media spin can only work for so long. Eventually the banks will have to write down their losses and raise more capital. Wells Fargo slipped the noose this time, but next time might not be so lucky. Here's how Bloomberg sums up wells situation:
"Wells Fargo & Co., the second biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”
What happened to all those nonperforming loans and garbage MBS? Did they simply vanish into the New York ether? Could Wells sudden good fortune have something to do with the recent FASB changes to accounting guidelines on "mark to market" which allow banks greater flexibility in assigning a value to their assets? Also, Judging by the charts on the Internet, Wells appears to have the smallest "ratio of loan loss reserves" of the four biggest banks. That's hardly reassuring.
Paul Krugman takes an equally skeptical view of the Wells report:
"About those great numbers from Wells Fargo....remember, reported profits aren’t a hard number; they involve a lot of assumptions. And at least some analysts are saying that the Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do have to say that it would be awfully convenient for banks to sound the all clear right now, just when the question of how tough the Obama administration will really get is hanging in the balance."
The banks are all playing the same game of hide-n-seek, trying to hoodwink the public into thinking they are in a stronger capital position than they really are. It's just more Wall Street chicanery papered over with vapid media propaganda. The giant brokerage houses and the financial media are two spokes on the same wheel gliding along in perfect harmony. Unfortunately, media fanfare and massaging the numbers won't pull the economy out of its downward spiral or bring about a long-term recovery. That will take fiscal policy, jobs programs, debt relief, mortgage writedowns and a progressive plan to rebuild the nation's economy on a solid foundation of productivity and regular wage increases. So far, the Obama administration has focused all its attention and resources on the financial system rather than working people. That won't fix the problem.
Deflation has latched on to the economy like a pitbull on a porkchop. Food and fuel prices fell in March by 0.1 percent while unemployment continued its slide towards 10 percent. Wholesale prices fell by the most in the last 12 months since 1950. According to MarketWatch, "Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II"....The capacity utilization rate for total industry fell further to 69.3 percent, a historical low for this series, which begins in 1967." (Federal Reserve) The persistent fall in housing prices (30 percent) and losses in home equity only add to deflationary pressures. The wind is exiting the humongous credit bubble in one great gust.
Obama's $787 billion stimulus is too small to take up the slack in a $14 trillion per year economy where manufacturing and industrial capacity have slipped to record lows and unemployment is rising at 650,000 per month. High unemployment is lethal to an economy where consumer spending is 72 percent of GDP. Without debt relief and mortgage cram-downs, consumption will sputter and corporate profits will continue to shrink. S&P 500 companies have already seen a 37 percent drop in corporate profits. Unless the underlying issues of debt relief and wages are dealt with, the present trends will persist. Growth is impossible when workers are broke and can't afford to buy the things the make.
The stimulus must be increased to a size where it can do boost economic activity and create enough jobs to get over the hump. Yale economics professor Robert Schiller makes the case for more stimulus in his Bloomberg commentary on Tuesday:
"In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. 'Pump- priming' was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t.... In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again.
It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.
It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger." (Robert Schiller, Depression Lurks unless there's more Stimulus, Bloomberg)
A Year of Cockeyed Optimism
"We are starting to see glimmers of hope across the economy." President Barack Obama, April press conference
Even though industrial production, manufacturing, retail and housing are in freefall, the talk on Wall Street still focuses on the elusive recovery. The S&P 500 touched bottom at 666 on March 6 and has since retraced its steps to 852. Clearly, Bernanke's market-distorting capital injections have played a major role in the turnabout. Former Secretary of Labor under Bill Clinton and economics professor at University of Cal. Berekley, Robert Reich, explains it like this on his blog-site:
"All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. ... So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent.... The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.
The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.... yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago....
I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it. And cockeyed optimism can wreak enormous damage on an economy. Haven't we already learned this? (Robert Reich's Blog, "Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning")
If the purpose of Bernanke's grand economics experiment was to create uneven inflation in the equities markets and, thus, widen the chasm between the financials and the real economy; he seems to have succeeded. But for how long? How long will it be before foreign banks and investors realize that the Fed's innocuous-sounding "lending facilities" have released a wave of low interest speculative liquidity into the capital markets? How else does one explain soaring stocks when industrial capacity, manufacturing, exports, corporate profits, retail and every other sector have been pounded into rubble? Liquidity is never inert. It navigates the financial system like mercury in water darting elusively to the area which offers the greatest opportunity for profit. That's why the surge popped up first in the stock market. (so far) When it spills into commodities--and oil and food prices rise--Bernanke will realize his plan has backfired..
Bernanke's financial rescue plan is a disaster. He should have spent a little less time with Milton Friedman and a little more with Karl Marx. It was Marx who uncovered the root of all financial crises. He summed it up like this:
"The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Karl Marx, Capital, vol. 3, New York International publishers, 1967; Thanks to Monthly review, John Bellamy Foster)
Bingo. Message to Bernanke: Workers need debt-relief and a raise in pay not bigger bailouts for chiseling fatcat banksters.
Source: Mike Whitney
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
The crash in housing, which began in July 2006, accelerated on the downside in March, falling 19 percent year-over-year, signaling more pain ahead. Mortgage defaults are rising and foreclosures in 2009 are estimated to be in the 2.1 million range, an uptick of 400,000 from 2008. Consumer spending is down, housing is in a shambles, and industrial output dropped at an annual rate of 20 percent, the largest quarterly decrease since VE Day. The systemwide contraction continues unabated with with no sign of letting up.
Conditions in the broader economy are now vastly different than those on Wall Street, where the S&P 500 and the Dow Jones Industrials have rallied for 5 weeks straight regaining more than 25 percent of earlier losses. Fed chief Ben Bernanke's $13 trillion in monetary stimulus has triggered a rebound in the stock market while Main Street continues to languish on life-support waiting for Obama's $787 billion fiscal stimulus to kick in and compensate for falling demand and rising unemployment. The rally on Wall Street indicates that Bernanke's flood of liquidity is creating a bubble in stocks since present values do not reflect underlying conditions in the economy. The fundamentals haven't been this bad since the 1930s.
The financial media is abuzz with talk of a recovery as equities inch their way higher every week. CNBC's Jim Cramer, the hyperventilating ringleader of "Fast Money", announced last week, "I am pronouncing the depression is over." Cramer and his clatter of media cheerleaders ignore the fact that every sector of the financial system is now propped up with Fed loans and T-Bills without which the fictive free market would collapse in a heap. For 19 months, Bernanke has kept a steady stream of liquidity flowing from the vault at the US Treasury to the NYSE in downtown Manhattan. The Fed has recapitalized financial institutions via its low interest rates, its multi-trillion dollar lending facilities, and its direct purchase of US sovereign debt and Fannie Mae mortgage-backed securities. (Monetization) The Fed's balance sheet has become a dumping ground for all manner of toxic waste and putrid debt-instruments for which there is no active market. When foreign central banks and investors realize that US currency is backed by dodgy subprime collateral; there will be a run on the dollar followed by a stampede out of US equities. Even so, Bernanke assures his critics that "the foundations of our economy are strong".
As for the recovery, market analyst Edward Harrison sums it up like this:
"This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless." (Edward Harrison, "The Fake Recovery", Credit Writedowns)
The rally in the stock market will not fix the banking system, slow the crash in housing, patch-together tattered household balance sheets, repair failing industries or reverse the precipitous decline in consumer confidence. The rising stock market merely indicates that profit-driven speculators are back in business taking advantage of the Fed's lavish capital injections which are propelling equities into the stratosphere. Meanwhile, the unemployment lines continue to swell, the food banks continue to run dry and the homeless shelters continue to burst at the seams. So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the "real" economy where workers are struggling just to keep food on the table. The Fed's priorities are directed at the investor class not the average working Joe. Bernanke is trying to keep Wall Street happy by goosing asset values with cheap capital, but the increases to the money supply are putting more downward pressure on the dollar. The Fed chief has also begun purchasing US Treasuries, which is the equivalent of writing a check to oneself to cover an overdraft in one's own account. This is the kind of gibberish that passes as sound economic policy. The Fed is incapable if fixing the problem because the Fed is the problem.
Last week, the market shot up on news that Wells Fargo's first quarter net income rose 50 percent to $3 billion pushing the stock up 30 percent in one session. The financial media celebrated the triumph in typical manner by congratulating everyone on set and announcing that a market "bottom" had been reached . The news on Wells Fargo was repeated ad nauseam for two days even though everyone knows that the big banks are holding hundreds of billions in mortgage-backed assets which are marked way above their true value and that gigantic losses are forthcoming. Naturally, the skeptics were kept off-camera or lambasted by toothy anchors as doomsayers and Cassandras. Regretably, creative accounting and media spin can only work for so long. Eventually the banks will have to write down their losses and raise more capital. Wells Fargo slipped the noose this time, but next time might not be so lucky. Here's how Bloomberg sums up wells situation:
"Wells Fargo & Co., the second biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.
KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.
“Details were scarce and we believe that much of the positive news in the preliminary results had to do with merger accounting, revised accounting standards and mortgage default moratoriums, rather than underlying trends,” wrote Cannon, who downgraded the shares to “underperform” from “market perform.” “We expect earnings and capital to be under pressure due to continued economic weakness.”
What happened to all those nonperforming loans and garbage MBS? Did they simply vanish into the New York ether? Could Wells sudden good fortune have something to do with the recent FASB changes to accounting guidelines on "mark to market" which allow banks greater flexibility in assigning a value to their assets? Also, Judging by the charts on the Internet, Wells appears to have the smallest "ratio of loan loss reserves" of the four biggest banks. That's hardly reassuring.
Paul Krugman takes an equally skeptical view of the Wells report:
"About those great numbers from Wells Fargo....remember, reported profits aren’t a hard number; they involve a lot of assumptions. And at least some analysts are saying that the Wells assumptions about loan losses look, um, odd. Maybe, maybe not; but you do have to say that it would be awfully convenient for banks to sound the all clear right now, just when the question of how tough the Obama administration will really get is hanging in the balance."
The banks are all playing the same game of hide-n-seek, trying to hoodwink the public into thinking they are in a stronger capital position than they really are. It's just more Wall Street chicanery papered over with vapid media propaganda. The giant brokerage houses and the financial media are two spokes on the same wheel gliding along in perfect harmony. Unfortunately, media fanfare and massaging the numbers won't pull the economy out of its downward spiral or bring about a long-term recovery. That will take fiscal policy, jobs programs, debt relief, mortgage writedowns and a progressive plan to rebuild the nation's economy on a solid foundation of productivity and regular wage increases. So far, the Obama administration has focused all its attention and resources on the financial system rather than working people. That won't fix the problem.
Deflation has latched on to the economy like a pitbull on a porkchop. Food and fuel prices fell in March by 0.1 percent while unemployment continued its slide towards 10 percent. Wholesale prices fell by the most in the last 12 months since 1950. According to MarketWatch, "Industrial production is down 13.3% since the recession began in December 2007, the largest percentage decline since the end of World War II"....The capacity utilization rate for total industry fell further to 69.3 percent, a historical low for this series, which begins in 1967." (Federal Reserve) The persistent fall in housing prices (30 percent) and losses in home equity only add to deflationary pressures. The wind is exiting the humongous credit bubble in one great gust.
Obama's $787 billion stimulus is too small to take up the slack in a $14 trillion per year economy where manufacturing and industrial capacity have slipped to record lows and unemployment is rising at 650,000 per month. High unemployment is lethal to an economy where consumer spending is 72 percent of GDP. Without debt relief and mortgage cram-downs, consumption will sputter and corporate profits will continue to shrink. S&P 500 companies have already seen a 37 percent drop in corporate profits. Unless the underlying issues of debt relief and wages are dealt with, the present trends will persist. Growth is impossible when workers are broke and can't afford to buy the things the make.
The stimulus must be increased to a size where it can do boost economic activity and create enough jobs to get over the hump. Yale economics professor Robert Schiller makes the case for more stimulus in his Bloomberg commentary on Tuesday:
"In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. 'Pump- priming' was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t.... In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again.
It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.
It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger." (Robert Schiller, Depression Lurks unless there's more Stimulus, Bloomberg)
A Year of Cockeyed Optimism
"We are starting to see glimmers of hope across the economy." President Barack Obama, April press conference
Even though industrial production, manufacturing, retail and housing are in freefall, the talk on Wall Street still focuses on the elusive recovery. The S&P 500 touched bottom at 666 on March 6 and has since retraced its steps to 852. Clearly, Bernanke's market-distorting capital injections have played a major role in the turnabout. Former Secretary of Labor under Bill Clinton and economics professor at University of Cal. Berekley, Robert Reich, explains it like this on his blog-site:
"All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. ... So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
Cheap money, you may remember, got us into this mess. Six years ago, the Fed (Alan Greenspan et al) lowered interest rates to 1 percent.... The large lenders did exactly what they could be expected to do with free money -- get as much of it as possible and then lent it out to anyone who could stand up straight (and many who couldn't). With no regulators looking over their shoulders, they got away with the financial equivalent of murder.
The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished.... yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago....
I admire cockeyed optimism, and I understand why Wall Street and its spokespeople want to see a return of the bull market. Hell, everyone with a stock portfolio wants to see it grow again. But wishing for something is different from getting it. And cockeyed optimism can wreak enormous damage on an economy. Haven't we already learned this? (Robert Reich's Blog, "Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning")
If the purpose of Bernanke's grand economics experiment was to create uneven inflation in the equities markets and, thus, widen the chasm between the financials and the real economy; he seems to have succeeded. But for how long? How long will it be before foreign banks and investors realize that the Fed's innocuous-sounding "lending facilities" have released a wave of low interest speculative liquidity into the capital markets? How else does one explain soaring stocks when industrial capacity, manufacturing, exports, corporate profits, retail and every other sector have been pounded into rubble? Liquidity is never inert. It navigates the financial system like mercury in water darting elusively to the area which offers the greatest opportunity for profit. That's why the surge popped up first in the stock market. (so far) When it spills into commodities--and oil and food prices rise--Bernanke will realize his plan has backfired..
Bernanke's financial rescue plan is a disaster. He should have spent a little less time with Milton Friedman and a little more with Karl Marx. It was Marx who uncovered the root of all financial crises. He summed it up like this:
"The ultimate reason for all real crises always remains the poverty and restricted consumption of the masses as opposed to the drive of capitalist production to develop the productive forces as though only the absolute consuming power of society constituted their limit." (Karl Marx, Capital, vol. 3, New York International publishers, 1967; Thanks to Monthly review, John Bellamy Foster)
Bingo. Message to Bernanke: Workers need debt-relief and a raise in pay not bigger bailouts for chiseling fatcat banksters.
Source: Mike Whitney
Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.
IMF warns over parallels to Great Depression
The International Monetary Fund has warned of "worrisome parallels" between the current global crisis and the Great Depression, despite the unprecedented steps already taken by central banks and governments worldwide.
This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.
Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.
"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."
Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.
"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.
While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.
The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely specific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.
The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.
Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.
Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.
Source: Telegraph
This recession is likely to be "unusually long and severe, and the recovery sluggish," said the Fund, releasing two advance chapters from its World Economic Outlook. However, it warned there is a risk that it could spiral down into a full-blown slump unless further action is taken to stop "feedback effects" gathering force.
Dominique Strauss-Kahn, head of the IMF, said millions of people risk being pushed back into poverty as the economic storm ravages the most vulnerable countries. "The human consequences could be absolutely devastating. This is a truly global crisis, and nobody is escaping," he said.
"The free-fall in the global economy may be starting to abate, with a recovery emerging in 2010, but this depends crucially on the right policies being adopted today."
Mr Strauss-Kahn called for a urgent action to "cleanse banks" of toxic assets and for further fiscal stimulus beyond the 2pc of global GDP already agreed. The snag is that high-debt countries may have hit the limits already.
"The impact becomes negative for debt levels that exceed 60pc of GDP," said the Fund.
While no countries were named, this would raise questions about Japan, Germany, France, Italy and ultimately Britain and the US after their bank rescues.
The IMF said the US is at the epicentre of this crisis just as it was in the Depression, setting the two episodes apart from normal downturns. However, the risks are greater this time. "While the credit boom in the 1920s was largely specific to the US, the boom during 2004-2007 was global, with increased leverage and risk-taking in advanced economies and many emerging economies. Levels of integration are now much higher than during the inter-war period, so US financial shocks have a larger impact," it said.
The IMF said the global financial system is still under acute stress, with output tumbling and inflation falling towards zero in key nations. "The risks of debt deflation have increased," it said.
Abrupt halts in capital flows can have "dire consequences" for emerging economies, it said. Eastern Europe has already suffered the effects, with a 17.6pc fall in industrial production in February. The region is highly vulnerable to the credit crunch since it owes more than 50pc of its GDP to Western banks.
Synchronised world recessions striking all major regions are "historically rare" events, the Fund said. They last one and a half times as long typical downturns, and are followed by painfully slow recoveries.
Source: Telegraph
Thursday, 16 April 2009
Alistair Darling poised to slash spending and raise taxes in Budget
Alistair Darling is considering fierce public spending curbs and deferred tax rises to convince the markets that Britain will emerge eventually from its massive debt.
The Chancellor is likely to predict in next Wednesday’s Budget that the economic recovery will start around the turn of the year. But he will have to decide within days how far to go in highlighting deferred spending economies and tax rises after 2011 and how much to save up for the Pre-Budget Report in November.
The Government’s borrowing isexpected to balloon to almost £175 billion a year in each of the next two years as the recession triggers a surge in public spending and a slump in tax payments.
The scale of the Treasury’s slide into the red, expected to be confirmed by the Budget, is set to push the deficit to as much as 12 per cent of GDP — a level not seen since the Second World War and far above an 8 per cent peak reached after the 1990s recession under the Conservatives
The latest Treasury survey of City economists’ forecasts, released yesterday, shows an average prediction that public borrowing will hit £160 billion in 2009-10 (compared with the Chancellor’s £118 billion projection last autumn) and rise to £167 billion in 2010-11.
Mr Darling is expected also to focus on environmental measures as part of the recovery. Today, as the Cabinet meets in Glasgow, ministers will say that discounts as high as £5,000 could be made available to help buyers of electric cars. Gordon Brown has said that there should be a roadside network of charging points for cars and incentives for carmakers.
Treasury insiders say that while the Chancellor is determined to show that his “direction of travel” is towards balancing the books over several years, he will not want to do anything to jeopardise the recovery. Most economists believe that the public finances cannot be restored to health without big spending cuts, tax rises or both.
One Treasury insider said: “There are two fiscal events each year with the Budget and Pre-Budget Report \ and we can use each to make adjustments. There has to be clawback — we know that. The key judgment is when to announce it.”
The extent of these — on top of those already announced, such as the new top rate of income tax of 45 per cent for people earning more than £150,000 — will be determined in discussions between Mr Darling and Mr Brown.
Most of the focus after the last PBR was on future tax rises. But Mr Darling slashed the growth in spending after 2012 from an already painful 1.8 per cent to 1.2 per cent. He could go even farther to show his seriousness about setting the finances straight once the shocks to the world economic system have calmed. That will mean cuts of billions from planned programmes.
Mr Darling will make a drastic revision of his growth and borrowing forecasts from the PBR, arguing that the downturn has been far worse than experts expected. He will admit that his hopes last November that growth might resume by the middle of this year have been dashed and he is likely to say that the economy will contract overall by about 3 per cent this year, the worst performance since the Second World War.
The City forecasts that the economy will shrink by 3.7 per cent this year and grow by just 0.3 per cent in 2010.
Source: The Times
The Chancellor is likely to predict in next Wednesday’s Budget that the economic recovery will start around the turn of the year. But he will have to decide within days how far to go in highlighting deferred spending economies and tax rises after 2011 and how much to save up for the Pre-Budget Report in November.
The Government’s borrowing isexpected to balloon to almost £175 billion a year in each of the next two years as the recession triggers a surge in public spending and a slump in tax payments.
The scale of the Treasury’s slide into the red, expected to be confirmed by the Budget, is set to push the deficit to as much as 12 per cent of GDP — a level not seen since the Second World War and far above an 8 per cent peak reached after the 1990s recession under the Conservatives
The latest Treasury survey of City economists’ forecasts, released yesterday, shows an average prediction that public borrowing will hit £160 billion in 2009-10 (compared with the Chancellor’s £118 billion projection last autumn) and rise to £167 billion in 2010-11.
Mr Darling is expected also to focus on environmental measures as part of the recovery. Today, as the Cabinet meets in Glasgow, ministers will say that discounts as high as £5,000 could be made available to help buyers of electric cars. Gordon Brown has said that there should be a roadside network of charging points for cars and incentives for carmakers.
Treasury insiders say that while the Chancellor is determined to show that his “direction of travel” is towards balancing the books over several years, he will not want to do anything to jeopardise the recovery. Most economists believe that the public finances cannot be restored to health without big spending cuts, tax rises or both.
One Treasury insider said: “There are two fiscal events each year with the Budget and Pre-Budget Report \ and we can use each to make adjustments. There has to be clawback — we know that. The key judgment is when to announce it.”
The extent of these — on top of those already announced, such as the new top rate of income tax of 45 per cent for people earning more than £150,000 — will be determined in discussions between Mr Darling and Mr Brown.
Most of the focus after the last PBR was on future tax rises. But Mr Darling slashed the growth in spending after 2012 from an already painful 1.8 per cent to 1.2 per cent. He could go even farther to show his seriousness about setting the finances straight once the shocks to the world economic system have calmed. That will mean cuts of billions from planned programmes.
Mr Darling will make a drastic revision of his growth and borrowing forecasts from the PBR, arguing that the downturn has been far worse than experts expected. He will admit that his hopes last November that growth might resume by the middle of this year have been dashed and he is likely to say that the economy will contract overall by about 3 per cent this year, the worst performance since the Second World War.
The City forecasts that the economy will shrink by 3.7 per cent this year and grow by just 0.3 per cent in 2010.
Source: The Times
Nine building societies have credit ratings downgraded
Nine of Britain’s biggest building societies, including Nationwide, have had their credit ratings downgraded in anticipation of further pain to come in the UK housing market.
Marjan Riggi, Moody’s lead analyst for UK mortgage lenders, said that the action had been taken after stress-testing scenarios that incorporated a peak-to-trough decline in house prices of 40 per cent. Some building societies have been downgraded by three notches, making it more expensive for them to raise funding in the wholesale markets.
As well as Nationwide, Moody’s downgraded Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry. Some are considering challenging their ratings with Moody’s.
At the same time, there are signs that the cost of borrowing for homeowners may have bottomed out, with Barclays set to increase the cost of fixed-rate mortgages despite the Bank of England leaving interest rates unchanged this month. Other lenders are expected to follow suit.
Barclays is pulling a 3.99 per cent four-year fixed-rate deal for borrowers with a 40 per cent deposit, from tomorrow. It is also increasing the costs of its three- and five-year fixes by up to 0.4 percentage points.
Woolwich, the mortgage arm of Barclays, blamed the decision on a rise in the cost of longer-term wholesale borrowing, which banks use to fund new mortgage lending.
The bank is the first big lender to increase rates since the cost of borrowing hit a historically low level at the beginning of February. Brokers see this as evidence that mortgage rates have no further to fall.
Melanie Bien, of Savills Private Finance, said: “It was only a matter of time before lenders starting edging up their longer-term fixes. Borrowers who have been trying to time the bottom of the market in terms of mortgage rates may be wise to secure a longer-term fix now.”
Source: The Times
Marjan Riggi, Moody’s lead analyst for UK mortgage lenders, said that the action had been taken after stress-testing scenarios that incorporated a peak-to-trough decline in house prices of 40 per cent. Some building societies have been downgraded by three notches, making it more expensive for them to raise funding in the wholesale markets.
As well as Nationwide, Moody’s downgraded Chelsea Building Society, West Bromwich, Principality, Newcastle, Skipton, Yorkshire, Norwich & Peterborough and Coventry. Some are considering challenging their ratings with Moody’s.
At the same time, there are signs that the cost of borrowing for homeowners may have bottomed out, with Barclays set to increase the cost of fixed-rate mortgages despite the Bank of England leaving interest rates unchanged this month. Other lenders are expected to follow suit.
Barclays is pulling a 3.99 per cent four-year fixed-rate deal for borrowers with a 40 per cent deposit, from tomorrow. It is also increasing the costs of its three- and five-year fixes by up to 0.4 percentage points.
Woolwich, the mortgage arm of Barclays, blamed the decision on a rise in the cost of longer-term wholesale borrowing, which banks use to fund new mortgage lending.
The bank is the first big lender to increase rates since the cost of borrowing hit a historically low level at the beginning of February. Brokers see this as evidence that mortgage rates have no further to fall.
Melanie Bien, of Savills Private Finance, said: “It was only a matter of time before lenders starting edging up their longer-term fixes. Borrowers who have been trying to time the bottom of the market in terms of mortgage rates may be wise to secure a longer-term fix now.”
Source: The Times
Wednesday, 15 April 2009
Max Keiser: The British pound is doomed
The British Pound is doomed. Three years ago, while doing our ResonanceFM 104.4 show, “The Truth About Markets,” Stacy and I commented on news that Bradford & Bingley was offering customers 120% mortgages. At the time we pointed out that this was guaranteed to bankrupt B&B and the entire banking sector if they were allowed to continue locking in negative equity deals for customers who were clearly being victimized by predatory lending and banking abuse. Sure enough B&B needed a bailout and that extra 20% on top of the 100% mortgage that the UK tax payer is paying for - is now providing leverage for short sellers to continue to attack the British Pound. The remedy? Halifax just announced 120% re-mortgages for home owners in negative equity. More debt to get out of debt. Reminds me of the woman in Terry Gilliam’s “Brazil” who plastic surgeried herself to death. The British pound, after its recent ‘dead cat bounce’ is a one way bet down as banks are permitted, without any government intervention, to hollow out Britain’s economy unchallenged by law or common sense.
Source: maxkeiser.com
Source: maxkeiser.com
Halifax to rescue borrowers in negative equity with 120pc remortgages
One of Britain's biggest mortgage lenders is offering loans of as much as 120pc of the property value to existing customers coming to the end of their current deal.
HBOS, which is part of Lloyds Banking Group, will consider offering a new mortgage to customers in negative equity whose existing deal, such as a fixed rate, is about to expire.
Normally such borrowers would see the rate they pay revert to the lender's standard variable rate (SVR) and would be unable to remortgage if the new loan were greater than the current value of the property as a result of the decline in house prices.
Lenders are generally restricting loans to 95pc of the property value, while borrowers wanting the most competitive deals need to borrow no more than 75pc or even 60pc.
But Halifax and Bank of Scotland, which are both part of HBOS, are offering the rates on 95pc loans to some remortgage customers needing to borrow more than the property value – up to 120pc of the value in some cases.
"HBOS told us they were doing this [offering 'negative equity' loans] earlier this month for borrowers with up to 120pc LTV [loan to value] deals, although they also said that this would not be publicised anywhere," one mortgage broker told The Telegraph.
Brokers said they believed HBOS to be the only major lender offering this option to customers in negative equity.
Melanie Bien of Savills Private Finance said: "HBOS is doing the decent thing, ensuring that existing customers who are in negative equity can still get a fixed rate.
"With other lenders, such borrowers are stuck on the standard variable rate, which is fine when such borrowing is cheap – as it is at the moment. But rates are likely to rise quickly next year, and those who can't remortgage elsewhere will find they are stuck on a spiralling rate."
She added: "By giving existing customers access to a fixed rate normally available only to those borrowing at 95pc LTV, HBOS is putting borrowers first and treating them fairly. We hope that other lenders follow its good example."
David Hollingworth of London & Country Mortgages, another broker, said: "It's very encouraging to see lenders looking after their existing borrowers by at least giving them some kind of product choice other than standard variable rate when they reach the end of their existing deal.
"With lending so restricted these days, borrowers who have slipped into the higher loan to value brackets as a result of falling house prices will find that options are limited at best and more likely non-existent from other lenders. Halifax is enabling existing borrowers to take advantage of the rates tagged for 95pc LTV even if their current loan to value has increased beyond that and can be up to 120pc. Halifax offers rates fixed for four or five years, currently available from 5.19pc."
He added: "This is a good service for existing borrowers who frankly will not be able to go anywhere else. While many may like the idea of sticking on the lender's SVR while it is currently low, it is good that lenders continue to offer borrowers the ability to protect against future rate rises."
A spokeswoman for Halifax said: "When our borrowers come to the end of their existing product rate, we work with them on a case-by-case basis to determine the product options that are available to them."
Source: Telegraph
HBOS, which is part of Lloyds Banking Group, will consider offering a new mortgage to customers in negative equity whose existing deal, such as a fixed rate, is about to expire.
Normally such borrowers would see the rate they pay revert to the lender's standard variable rate (SVR) and would be unable to remortgage if the new loan were greater than the current value of the property as a result of the decline in house prices.
Lenders are generally restricting loans to 95pc of the property value, while borrowers wanting the most competitive deals need to borrow no more than 75pc or even 60pc.
But Halifax and Bank of Scotland, which are both part of HBOS, are offering the rates on 95pc loans to some remortgage customers needing to borrow more than the property value – up to 120pc of the value in some cases.
"HBOS told us they were doing this [offering 'negative equity' loans] earlier this month for borrowers with up to 120pc LTV [loan to value] deals, although they also said that this would not be publicised anywhere," one mortgage broker told The Telegraph.
Brokers said they believed HBOS to be the only major lender offering this option to customers in negative equity.
Melanie Bien of Savills Private Finance said: "HBOS is doing the decent thing, ensuring that existing customers who are in negative equity can still get a fixed rate.
"With other lenders, such borrowers are stuck on the standard variable rate, which is fine when such borrowing is cheap – as it is at the moment. But rates are likely to rise quickly next year, and those who can't remortgage elsewhere will find they are stuck on a spiralling rate."
She added: "By giving existing customers access to a fixed rate normally available only to those borrowing at 95pc LTV, HBOS is putting borrowers first and treating them fairly. We hope that other lenders follow its good example."
David Hollingworth of London & Country Mortgages, another broker, said: "It's very encouraging to see lenders looking after their existing borrowers by at least giving them some kind of product choice other than standard variable rate when they reach the end of their existing deal.
"With lending so restricted these days, borrowers who have slipped into the higher loan to value brackets as a result of falling house prices will find that options are limited at best and more likely non-existent from other lenders. Halifax is enabling existing borrowers to take advantage of the rates tagged for 95pc LTV even if their current loan to value has increased beyond that and can be up to 120pc. Halifax offers rates fixed for four or five years, currently available from 5.19pc."
He added: "This is a good service for existing borrowers who frankly will not be able to go anywhere else. While many may like the idea of sticking on the lender's SVR while it is currently low, it is good that lenders continue to offer borrowers the ability to protect against future rate rises."
A spokeswoman for Halifax said: "When our borrowers come to the end of their existing product rate, we work with them on a case-by-case basis to determine the product options that are available to them."
Source: Telegraph
Tuesday, 14 April 2009
The Fake Recovery
Submitted by Edward Harrison of the site Credit Writedowns
I last posted on "Credt Writedowns" on Thursday before the Easter Holidays in two posts very much at odds with one another. The overall thrust of the first post was that the financial services industry in the United States was due to gain from some very advantageous circumstances in 2009. Meanwhile, the later re-post pointed out the continued fragility of the U.S. economy and banking system and focused on liquidity and solvency as unresolved issues. I would like to bring these two posts together here because I believe the concept behind the dichotomy is best described as the Fake Recovery.
Why 'Fake'? This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless.
The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:
Now, obviously, if we were to face up to this situation, there would be no chance of recovery as the capital required to recapitalize the banking system would mean a long and deep downturn well into 2010 and perhaps beyond. This is not politically acceptable as 2010 is an election year. Nor is the nationalization of large financial institutions acceptable to the Obama Administration. Moreover, bailing out banks to the tune of trillions of dollars while the economy is in depression is equally unacceptable to the American electorate. The Obama Administration is keenly aware of this fact.
These constraints, some artificial and others very real, leave the Administration with limited options.
Engineer recovery
With the preceding constraints in mind, we should remember that the first priority of elected officials in Washington is not necessarily to make the best long-term choices for the American people, but rather to get re-elected in order to have the opportunity to make those choices. It should be patently obvious that a downturn which began in December 2007 would be fatal to many politicians if allowed to continue well into 2010. This is why recovery of some sort must take place before that time - irrespective of whether it is sustainable.
How to engineer recovery is another question altogether. Here again there are a set of political constraints which make things more challenging. First, there are large swathes of the population that are uncomfortable with the huge debt load and deficit spending that a stimulus-induced recovery creates. Moreover, a government-sponsored nationalisation or recapitalisation plan would only increase this deficit spending and these debts.
As a result, the Obama Administration has crafted a plan to circumvent these obstacles.
The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other 'stimulus' has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government's claims of wanting to increase transparency ring hollow (see my post on Bloomberg's suit against the Fed as an example of what is really happening).
I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.
Other positive economic factors
There are a number of so-called green shoots (a phrase coined by Norman Lamont) of note.
•Jobless claims have plateaued and comparisons to last year are actually declining (see post).
•The U.S. trade deficit is declining significantly as U.S. import demand has fallen off a cliff.
•Inventory liquidation will put U.S. manufacturers in a better position by Q4 and help make quarterly and yearly comparisons favourable.
I linked to the first two bullets of these other factors. And I wanted to spend a little time on factor number three because I think it is important.
Turning my attention to the global economy, after a rather muted beginning, manufacturers around the world have now begun to react aggressively to the economic downturn and inventories are falling aggressively. Chart 5 below depicts US manufacturing inventories as published recently by the Census Bureau. Inventory changes can have a meaningful impact on GDP. There is one example from the 1981-82 recession where the inventory correction subtracted 5% (annualised) from GDP in just one quarter. The current inventory correction is very negative for GDP in Q1 and possibly also in Q2, but it is very difficult to quantify the effect it is going to have. We will have to wait and see.
However, as we must remind ourselves, the stock market is not trading on what is going to happen in Q1 and Q2 of this year. Projecting at least 6-9 months ahead, the stock market is probably already looking ahead to Q4 and possibly even Q1 of next year. And the inventory adjustment currently underway is very bullish for GDP growth later this year and into next. The reason is simple. Manufacturers always overreact. Come Q3 or Q4, they will suddenly sit up and realise that inventories have fallen too much and that they need to produce more. There is no reason to believe that this recession will be any different.
Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 - potentially enough to see positive GDP numbers.
A brief reminder of what lurks beneath
Despite the positives from the previous section, there are significant headwinds which may even preclude a positive GDP number. They include:
•Rising joblessness
•Increased savings as households rebuild balance sheets
•Spending cuts by local and state governments
•Decreased capital spending by companies
•A calamitous GM bankruptcy
Moreover, credit availability --and hence GDP will be constrained by numerous factors including the following:
•Declining home values
•Increasing foreclosures
•Commercial property writedowns
•Credit card-related writeoffs
•Junk bond defaults
All of this means that a cyclical rebound is not a foregone conclusion at all.
Tying the threads together
You should be under no illusion that the coming rebound is permanent. Much of it is not. What we are seeing is the makings of a cyclical recovery that might begin as early as Q4 2009 or Q1 2010. How long or robust that recovery is remains to be seen. Moreover, it is still questionable whether we will get any meaningful recovery at all in spite of the 'green shoots' because the banking system in the United States is severely undercapitalised and more asset writedowns are coming due. This is a fake recovery underneath which many problems remain.
Nevertheless, banks are going to earn a lot of money and that is bullish for their shares - at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
I last posted on "Credt Writedowns" on Thursday before the Easter Holidays in two posts very much at odds with one another. The overall thrust of the first post was that the financial services industry in the United States was due to gain from some very advantageous circumstances in 2009. Meanwhile, the later re-post pointed out the continued fragility of the U.S. economy and banking system and focused on liquidity and solvency as unresolved issues. I would like to bring these two posts together here because I believe the concept behind the dichotomy is best described as the Fake Recovery.
Why 'Fake'? This is a fake recovery because the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks' inherent insolvency becomes a problem. This means the banking system will remain weak even after recovery takes hold. The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off. Note that this does not preclude stocks from large rallies or a new bull market from forming because as unsustainable as the recovery may be, it will be a recovery nonetheless.
The real situation
In truth, the U.S. banking system as a whole is probably insolvent. By that I mean the likely future losses of loans and assets already on balance sheets at U.S. financial institutions, if incurred today, would reveal the system as a whole to lack the necessary regulatory capital to continue functioning under current guidelines. In fact, some prognosticators believe these losses far exceed the entire capital of the U.S. financial system. Witness a recent post by Nouriel Roubini:
The RGE Monitor new estimate in January 2009 of peak credit losses (available in
a paper for our RGE clients) suggested that total losses on loans made by U.S.
financial firms and the fall in the market value of the assets they are holding
would be at their peak about $3.6 trillion ($1.6 trillion for loans and $2
trillion for securities). The U.S. banks and broker dealers are exposed to half
of this figure, or $1.8 trillion; the rest is borne by other financial
institutions in the US and abroad. The capital backing the banks’ assets was
last fall only $1.4 trillion, leaving the U.S. banking system some $400 billion
in the hole, or close to zero even after the government and private sector
recapitalization of such banks and after banks’ provisioning for losses. Thus,
another $1.4 trillion would be needed to bring back the capital of banks to the
level they had before the crisis; and such massive additional recapitalization
is needed to resolve the credit crunch and restore lending to the private
sector.
Now, obviously, if we were to face up to this situation, there would be no chance of recovery as the capital required to recapitalize the banking system would mean a long and deep downturn well into 2010 and perhaps beyond. This is not politically acceptable as 2010 is an election year. Nor is the nationalization of large financial institutions acceptable to the Obama Administration. Moreover, bailing out banks to the tune of trillions of dollars while the economy is in depression is equally unacceptable to the American electorate. The Obama Administration is keenly aware of this fact.
These constraints, some artificial and others very real, leave the Administration with limited options.
Engineer recovery
With the preceding constraints in mind, we should remember that the first priority of elected officials in Washington is not necessarily to make the best long-term choices for the American people, but rather to get re-elected in order to have the opportunity to make those choices. It should be patently obvious that a downturn which began in December 2007 would be fatal to many politicians if allowed to continue well into 2010. This is why recovery of some sort must take place before that time - irrespective of whether it is sustainable.
How to engineer recovery is another question altogether. Here again there are a set of political constraints which make things more challenging. First, there are large swathes of the population that are uncomfortable with the huge debt load and deficit spending that a stimulus-induced recovery creates. Moreover, a government-sponsored nationalisation or recapitalisation plan would only increase this deficit spending and these debts.
As a result, the Obama Administration has crafted a plan to circumvent these obstacles.
1.Moderate fiscal stimulus. The Obama Administration decided not to seek massive stimulus earlier this year because they deemed it non-viable politically.This clears the first obstacle: deficit hawks. Most economists understand that the output gap that has opened up in the American economy is $2 trillion or more whereas the Obama stimulus package was only $800 billion. That leaves a massive hole in output in the U.S. Moreover, the immediate effective stimulus is less. Much of this 'stimulus' will be saved or will not come into play until months from now. Obviously, this is not going to meet the grade (See my comments on this from February).
2.Quasi-fiscal role for the Fed. Having partially assuaged deficit hawks, Obama still needed to close the output gap. Enter the Federal Reserve. You will have noticed that the Federal Reserve has added legacy assets as eligible for the TALF program. In effect, this allows banks to slip tens or even hundreds of billions of dollars in so-called toxic assets off their balance sheets. Mind you, these are assets already on the books impairing banks' ability to loan money. Under normal circumstances, one would expect the Federal Government to take these assets out of the system (bad bank, good bank, nationalization) after being given legislative approval to do so. However, as I have previously stated this approval is not going to be forthcoming. This is why the Federal Reserve is taking these assets on. In so doing, the Federal Reserve is taking on a quasi-fiscal role that re-capitalizes the banking system in order to stimulate the economy by increasing credit availability.
3.Quasi-fiscal role for the FDIC. The new PPIP is a similar end-run around Congress. After all, the role of the FDIC is that it "maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships." Meanwhile, the PPIP has the FDIC guaranteeing dodgy assets in a massive transfer of wealth from taxpayers to banks and select investors. (See my previous comments on this issue).
4.End of mark-to-market as we knew it. You should have noticed that most of the assets written down in the past two years have been marked-to-market. Securities traded in the open market are marked to market. Loans held to maturity are not. This is one reason that large international institutions which participate in the securitisation markets have taken the lion's share of writedowns, despite the low percentage that marked-to-market assets represent on bank balance sheets. But, this should end because of new guidelines in marked-to-market accounting. However, the new guidelines do have two major implications. First,there are still many distressed loans on the books of U.S. banks that if marked to market would reveal devastating losses. Second, there will also now be many distressed securities on bank balance sheets that if marked-to-market would reveal yet more losses. In essence, the new guidelines are helpful only to the degree that it prevents assets being marked down due to temporary impairment. If much of the impairment is real, as I believe it is, we are storing up problems for later.
5.Interest rate reductions. One reason often given for a large increase in writedowns at financial institutions had been the coming reset of Alt-A adjustable-rate mortgages in 2009. With the subprime writedowns mostly accounted for, a souring of the much larger pool of Alt-A and Prime residential mortgage loans is the real Armageddon scenario. Well, part of this problem has been temporarily relieved because the Federal Reserve has reduced short-term interest rates to near zero and has begun trying to manipulate long-term interest rates lower by buying long-dated treasury securities.
6.Bank margin increases. Key to the whole program is banks' ability to earn massive amounts of money and re-capitalize themselves through retained earnings as opposed to shedding assets or receiving additional paid-in capital (see post from last April on these three methods of recapitalizing). The market for bank assets is distressed and few banks can get enough capital from private sources or investors. Therefore, Obama's plan hinges on the ability to allow these banks to earn shed loads of money as quickly as possible. If the banks cannot do this, we are going to have a big problem very quickly (Of course, I think the can).
The stimulus to come from these measures is still in the pipeline and, by the end of this year, will probably add a big kick to the economy. You should note that only the fiscal stimulus required legislative approval. All of the other 'stimulus' has been done without Congressional approval and largely without Congressional oversight. These activities have been specifically designed to be opaque. The government's claims of wanting to increase transparency ring hollow (see my post on Bloomberg's suit against the Fed as an example of what is really happening).
I should also mention that the Federal Reserve has been a large factor here. It is acting in concert with the executive branch in a non-arms length fashion which I believe will have consequences regarding Fed independence down the line.
Other positive economic factors
There are a number of so-called green shoots (a phrase coined by Norman Lamont) of note.
•Jobless claims have plateaued and comparisons to last year are actually declining (see post).
•The U.S. trade deficit is declining significantly as U.S. import demand has fallen off a cliff.
•Inventory liquidation will put U.S. manufacturers in a better position by Q4 and help make quarterly and yearly comparisons favourable.
I linked to the first two bullets of these other factors. And I wanted to spend a little time on factor number three because I think it is important.
Turning my attention to the global economy, after a rather muted beginning, manufacturers around the world have now begun to react aggressively to the economic downturn and inventories are falling aggressively. Chart 5 below depicts US manufacturing inventories as published recently by the Census Bureau. Inventory changes can have a meaningful impact on GDP. There is one example from the 1981-82 recession where the inventory correction subtracted 5% (annualised) from GDP in just one quarter. The current inventory correction is very negative for GDP in Q1 and possibly also in Q2, but it is very difficult to quantify the effect it is going to have. We will have to wait and see.
However, as we must remind ourselves, the stock market is not trading on what is going to happen in Q1 and Q2 of this year. Projecting at least 6-9 months ahead, the stock market is probably already looking ahead to Q4 and possibly even Q1 of next year. And the inventory adjustment currently underway is very bullish for GDP growth later this year and into next. The reason is simple. Manufacturers always overreact. Come Q3 or Q4, they will suddenly sit up and realise that inventories have fallen too much and that they need to produce more. There is no reason to believe that this recession will be any different.
Obviously, this means that U.S. Q1 and perhaps even Q2 GDP will be very low due to the subtraction of inventories now being purged. However, when we get to Q3 and Q4, this effect will be gone and quarterly and yearly comparisons will look favourable. So the inventory purge may mean a huge upside surprise to GDP in the second half of the year and early 2010 - potentially enough to see positive GDP numbers.
A brief reminder of what lurks beneath
Despite the positives from the previous section, there are significant headwinds which may even preclude a positive GDP number. They include:
•Rising joblessness
•Increased savings as households rebuild balance sheets
•Spending cuts by local and state governments
•Decreased capital spending by companies
•A calamitous GM bankruptcy
Moreover, credit availability --and hence GDP will be constrained by numerous factors including the following:
•Declining home values
•Increasing foreclosures
•Commercial property writedowns
•Credit card-related writeoffs
•Junk bond defaults
All of this means that a cyclical rebound is not a foregone conclusion at all.
Tying the threads together
You should be under no illusion that the coming rebound is permanent. Much of it is not. What we are seeing is the makings of a cyclical recovery that might begin as early as Q4 2009 or Q1 2010. How long or robust that recovery is remains to be seen. Moreover, it is still questionable whether we will get any meaningful recovery at all in spite of the 'green shoots' because the banking system in the United States is severely undercapitalised and more asset writedowns are coming due. This is a fake recovery underneath which many problems remain.
Nevertheless, banks are going to earn a lot of money and that is bullish for their shares - at least in the medium-term. Yes, the stock market is overbought right now. However, if banks put together some decent earnings reports over the next few quarters, their shares will rise.
Furthermore, if the banks can earn enough, this cyclical recovery will have legs as banks will then have enough capital to resume lending and that is supportive of the broader market as well. It is still too early to tell how this will play out over the longer-term. For now, I am much more positive on financials, and somewhat positive on the broader market as well.
Retailers call for action to prevent 'ghost towns'
Retailers have urged the Government to provide them with more assistance to keep shops occupied, as Whitehall unveils a £3m initiative today to try to prevent high streets from becoming ghost towns during the recession.
Hazel Blears, the Community Secretary, will also unveil provisions to help local people or entrepreneurs temporarily convert empty shops into community projects or businesses, such as local art displays, to avoid high streets being boarded up. The provisions include special planning application waivers, standard interim-use leases, and temporarily leasing shops to councils that will allow the shops to get makeovers.
Experian, the information services company, believes that 15 per cent of high street shops, or 135,000 outlets, could be left empty by the end of the year, as retail administrations and financial woes force retailers to close stores.
But the British Retail Consortium (BRC) said the way to prevent high streets becoming ghost towns is to remove burdens and help retailers survive in them. Stephen Robertson, director general of the BRC, said: "Art displays are not the answer for empty shops. We agree that vacant premises blight town centres. But contriving schemes to fill them with other users is tackling the symptom while ignoring the cause." He singled out property costs as a key burden. Mr Robertson said: "Rather than offering empty shops for uses that are rates-free, wouldn't it be better to reduce the rates burden for struggling retailers?"
The BRC won a victory for its members on 31 March when the Chancellor, Alistair Darling, modified plans to introduce a 5 per cent increase in business rates. As a result, business rates increased by only 2 per cent from 1 April, with the remaining 3 per cent rise being spread over the next two years, under new legislation unveiled by the Government.
However, prior to Mr Darling's U-turn, the BRC had called for the Government to freeze new business rates and reverse its policy on empty property relief, which was scrapped in April last year.
At a seminar in Stockport today, Ms Blears will say: "Empty shops can be eyesores or crime magnets. Our ideas for reviving town centres will give communities the know-how to temporarily transform vacant premises into something innovative for the _community ... and stop the high street being boarded up."
Entrepreneurs have begun many successful businesses from empty premises, such as Romy Fraser who started Neal's Yard Remedies from a disused warehouse in 1981.
Source: The Independent
Hazel Blears, the Community Secretary, will also unveil provisions to help local people or entrepreneurs temporarily convert empty shops into community projects or businesses, such as local art displays, to avoid high streets being boarded up. The provisions include special planning application waivers, standard interim-use leases, and temporarily leasing shops to councils that will allow the shops to get makeovers.
Experian, the information services company, believes that 15 per cent of high street shops, or 135,000 outlets, could be left empty by the end of the year, as retail administrations and financial woes force retailers to close stores.
But the British Retail Consortium (BRC) said the way to prevent high streets becoming ghost towns is to remove burdens and help retailers survive in them. Stephen Robertson, director general of the BRC, said: "Art displays are not the answer for empty shops. We agree that vacant premises blight town centres. But contriving schemes to fill them with other users is tackling the symptom while ignoring the cause." He singled out property costs as a key burden. Mr Robertson said: "Rather than offering empty shops for uses that are rates-free, wouldn't it be better to reduce the rates burden for struggling retailers?"
The BRC won a victory for its members on 31 March when the Chancellor, Alistair Darling, modified plans to introduce a 5 per cent increase in business rates. As a result, business rates increased by only 2 per cent from 1 April, with the remaining 3 per cent rise being spread over the next two years, under new legislation unveiled by the Government.
However, prior to Mr Darling's U-turn, the BRC had called for the Government to freeze new business rates and reverse its policy on empty property relief, which was scrapped in April last year.
At a seminar in Stockport today, Ms Blears will say: "Empty shops can be eyesores or crime magnets. Our ideas for reviving town centres will give communities the know-how to temporarily transform vacant premises into something innovative for the _community ... and stop the high street being boarded up."
Entrepreneurs have begun many successful businesses from empty premises, such as Romy Fraser who started Neal's Yard Remedies from a disused warehouse in 1981.
Source: The Independent
Is This the Bottom? (Jim Rogers Video)
Jim Rogers is a legendary investor known for his ability to predict major long term trends in financial markets. Jim trades and invests in commodities, stocks, futures and currencies in stock exchanges in 5 continents.
Jim Rogers discusses the state of the world economy and looks ahead in this April 13th interview with Bloomberg.
Part 1 of 3
Part 2 of 3
Part 3 of 3
Jim Rogers discusses the state of the world economy and looks ahead in this April 13th interview with Bloomberg.
Part 1 of 3
Part 2 of 3
Part 3 of 3
HSBC faces crisis over US credit cards
HSBC faces a meltdown at its US credit card operations where around $50bn (£34bn) has been lent to people with poor credit histories, say analysts.
Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet.
Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.
Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red.
HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".
There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value.
Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.
Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products.
At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets.
Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.
Source: Guardian
Write-offs at the credit card arm of HSBC Finance Corporation (HFC), formerly Household, a sub-prime lender, could double to $10bn in 2009, according to brokers. Fears are growing that the bank could be forced to ask shareholders for more cash, on top of the £12.5bn it raised during its recent rights issue designed to bolster its balance sheet.
Analysts at Société Générale said that the strong take-up of the share offer did not necessarily "translate into smooth sailing for HSBC over the next couple of years" as it faced the prospect of rising bad debt and sour loans. The bank is not yet out of the woods, added SocGen.
Of particular concern are loans outstanding at HFC's credit card business, which stood at $49.6bn last year - representing around two-thirds of all HSBC credit card loans. The HFC credit card operation wrote off $5.4bn in bad or doubtful loans in 2008, according to the annual report, but made a profit of $520m. But analysts say that the profit will be wiped out this year and the offshoot will plunge into the red.
HSBC refused to comment on the speculation but said the HFC provisions "would be impacted by factors such as US unemployment and wage growth".
There is no suggestion that HFC's problems will push HSBC as a whole into loss - its businesses outside the US are highly profitable. But the bank, led by Stephen Green, has admitted that its purchase of Household for $15bn in 2003 has destroyed about $10bn of shareholder value.
Last month, the company unveiled a rights issue, slashed the dividend and disclosed that group profits had more than halved to $9.3bn. At the time, HSBC insisted that the proceeds of the cash call were not designed to plug an existing capital shortfall, but would give the bank a competitive advantage over rivals. But two weeks later it announced 1,200 redundancies as part of a review of operations to make it more efficient.
Leigh Goodwin, an analyst with Fox-Pitt, Kelton, said the job cuts were in response to a decline in demand for mortgage and savings products.
At the time of its annual results in March, HSBC chief executive Mike Geoghegan said HFC would stop making loans to new customers. It is also shutting 800 HFC branches in a move to shrink its exposure to the US housing and sub-prime markets.
Dissident shareholder Knight Vinke has demanded that the bank walk away from its HFC investment. It has also flagged up concern that the $34bn difference between the book and market value of HFC would have to be closed at some point, as it doesn't believe that US house prices will recover in the near future. But HSBC has queried Knight Vinke's assessment of the financial strength of HFC.
Source: Guardian
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