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
Showing posts with label uk economy. Show all posts
Showing posts with label uk economy. Show all posts
Thursday, 23 April 2009
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.
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
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
Monday, 13 April 2009
Economy will be over worst by October, says Alistair Darling
The British economy will be over the worst of the downturn in six months, Alistair Darling will declare in his Budget.
The Chancellor is set to forecast that the economy will halt its fall in the last quarter of the year, which starts in October. He will predict a return to growth at the turn of the year, with a recovery well underway by the time of the next general election.
The outlook will draw political accusations of over-optimism, since some forecasters are much more pessimistic. The National Institute of Economic and Social Research this week suggested that economic growth may not resume until 2012.
However, some independent economists believe the Treasury position is credible: nearly half the City analysts polled this week by Reuters said the UK economy will at least stabilise in the last three months of the year, and some predict growth will resume then.
Despite bleak economic data and rising unemployment, government insiders say there are some reasons for cautious optimism, including last week's Bank of England credit survey suggesting banks are preparing to lend more to families and companies in the months ahead.
Some economists also expect the US economy to pull out of its recession in the second half of the year. President Barack Obama has said he sees "glimmers of hope" for a recovery.
And the Organisation for Economic Co-operation and Development said on Friday that although all major economies are suffering a major contraction, there are some "tentative signs of improvement" in the rate of decline in France and Germany.
The forecast of resumed British growth may be the only optimistic signal in an otherwise gloomy Budget. Mr Darling is set to accept that during a year-long contraction that started last year, the UK economy shrank by more than 3 per cent, the sharpest fall for a generation.
Faced with an ever-growing hole in the public finances, he will also announce long-term tax rises and spending cuts to try to balance his budget over the next six years.
There will be few eye-catching giveaways, although Whitehall discussions are continuing about offering a £2,000 "scrappage fee" to people trading in used cars for new models.
Despite reports that the Treasury has rejected the proposal by Lord Mandelson, the Business Secretary, sources said over the weekend that the plan remains "on the table".
In his last forecast at the pre-Budget report in November, Mr Darling predicted that growth would resume from the third quarter, which begins in July.
Although the Chancellor has since admitted that he understated the severity of the recession and will have to increase his estimate of the depth of the slump, in the Budget he will only move his prediction of renewed growth back by three months.
The Treasury is signalling it believes the British downturn could be 'V'-shaped, a steep fall followed by a relatively quick rebound. Stephen Timms, a Treasury minister this week signalled the Government expects growth to resume this year, adding: "The question is when in the second half of the year."
Signs of economic recovery around the New Year are vital to Gordon Brown's fragile hopes of winning a general election next spring.
Labour strategists also believe the party must appear optimistic about the future, accusing the Tories of "talking Britain down".
However, even if headline figures like gross domestic product are improving by then, unemployment - which lags behind economic growth - may still be rising as the Prime Minister goes to the polls.
Source: The Telegraph
The Chancellor is set to forecast that the economy will halt its fall in the last quarter of the year, which starts in October. He will predict a return to growth at the turn of the year, with a recovery well underway by the time of the next general election.
The outlook will draw political accusations of over-optimism, since some forecasters are much more pessimistic. The National Institute of Economic and Social Research this week suggested that economic growth may not resume until 2012.
However, some independent economists believe the Treasury position is credible: nearly half the City analysts polled this week by Reuters said the UK economy will at least stabilise in the last three months of the year, and some predict growth will resume then.
Despite bleak economic data and rising unemployment, government insiders say there are some reasons for cautious optimism, including last week's Bank of England credit survey suggesting banks are preparing to lend more to families and companies in the months ahead.
Some economists also expect the US economy to pull out of its recession in the second half of the year. President Barack Obama has said he sees "glimmers of hope" for a recovery.
And the Organisation for Economic Co-operation and Development said on Friday that although all major economies are suffering a major contraction, there are some "tentative signs of improvement" in the rate of decline in France and Germany.
The forecast of resumed British growth may be the only optimistic signal in an otherwise gloomy Budget. Mr Darling is set to accept that during a year-long contraction that started last year, the UK economy shrank by more than 3 per cent, the sharpest fall for a generation.
Faced with an ever-growing hole in the public finances, he will also announce long-term tax rises and spending cuts to try to balance his budget over the next six years.
There will be few eye-catching giveaways, although Whitehall discussions are continuing about offering a £2,000 "scrappage fee" to people trading in used cars for new models.
Despite reports that the Treasury has rejected the proposal by Lord Mandelson, the Business Secretary, sources said over the weekend that the plan remains "on the table".
In his last forecast at the pre-Budget report in November, Mr Darling predicted that growth would resume from the third quarter, which begins in July.
Although the Chancellor has since admitted that he understated the severity of the recession and will have to increase his estimate of the depth of the slump, in the Budget he will only move his prediction of renewed growth back by three months.
The Treasury is signalling it believes the British downturn could be 'V'-shaped, a steep fall followed by a relatively quick rebound. Stephen Timms, a Treasury minister this week signalled the Government expects growth to resume this year, adding: "The question is when in the second half of the year."
Signs of economic recovery around the New Year are vital to Gordon Brown's fragile hopes of winning a general election next spring.
Labour strategists also believe the party must appear optimistic about the future, accusing the Tories of "talking Britain down".
However, even if headline figures like gross domestic product are improving by then, unemployment - which lags behind economic growth - may still be rising as the Prime Minister goes to the polls.
Source: The Telegraph
Sunday, 12 April 2009
Lloyds bank staff ‘puts frighteners’ on debtors
Bank staff are harassing customers with talk of home repossessions and blacklists.LLOYDS Banking Group staff are intimidating victims of the recession who have fallen behind on loan payments, an investigation by The Sunday Times has found.
Workers at Lloyds debt recovery department were secretly tape-recorded saying they would “put the frighteners on” and “f***” customers who owed the bank money.
The bank staff are incentivised by bonuses and some claimed to be representing a solicitors’ firm, while others pressured customers with repeated calls that left them in tears. Customers were told they would not even be able to obtain a Blockbuster video shop card if they failed to pay back their debt.
The employees would appear to be in breach of the Banking Code, which pledges to customers that banks “will be sympathetic and positive” when dealing with people in financial difficulties.
The tactics were witnessed by an undercover reporter who worked at the bank’s debt recovery office in Hove, East Sussex, for more than three weeks.
Andrew Mackinlay, the Labour MP, said he would be raising this newspaper’s findings in the Commons next week when he is due to speak in a adjournment debate on debt collection. “The current rules on the collection of debt are inadequate and need to be reviewed because they are not being enforced properly,” he said. “There need to be severe financial penalties if companies are found to be harassing customers and treating them badly.”
Lloyds said last week that it would investigate the findings. Sally Jones-Evans, director of collections and recoveries, said: “We do not condone behaviour that breaks our policies and procedures. Our first action is always to gather the facts, but we take action where these [inquiries] substantiate improper behaviour.”
Lloyds is 65%-owned by the taxpayer after receiving billions of pounds of government aid. The bank prides itself on customer service and recently ran television adverts claiming: “Every day we are helping millions of customers get where they want to go in life.”
The undercover reporter began her job as trainee telephone debt collector in mid-March. At the induction, her trainer, Martin, suggested his own bank might share some of the blame for the large number of defaulting customers. They had fallen into debt, he said, because of “bad management of money, a change of circumstances or possibly irresponsible lending”.
The reporter was assigned a mentor, Sebastian, who told her about a recent case of an 85-year-old man who had been granted a £10,000 loan by Lloyds and had only a meagre pension to pay it back. “What were the branch thinking?” he said, before adding: “Bank lending - probably one reason why there’s a bloody recession going on right now.”
The trainers emphasised that the job was not just about retrieving money. They stressed that people should be given realistic repayment targets. But would it work in practice?
The first signs were not encouraging. The salary for a telephone collector is just under £16,000 a year but up to £750 a quarter can be earned from bonuses, awarded for meeting performance targets. Points are given for the amount of money retrieved and the number of calls in an hour. It is in the collector’s interest to make quick calls and persuade customers to pledge large repayments.
The collectors were told to ask for a bank debit or credit card payment for the outstanding amount. The trainer made clear that the credit cards could not be from Lloyds, to ensure the debt would be shuffled away from the bank. The customer, on the other hand, could end up paying higher interest.
Support groups such as National Debtline and the Citizens Advice Bureau (CAB) say it is wrong to shuffle debt in this way. But it appears to be industry practice. Last week the British Bankers’ Association (BBA), which represents the main banks, claimed the customer might have a credit card charging a lower rate of interest.
On the third day of training the reporter and fellow trainees were sent onto the main floor to practise their technique. One of the trainees listened into a call in which a woman was crying on the phone and begging Lloyds to stop calling her.
A collector called Becky was dealing with another distraught woman who said her case was being handled by a debt organisation. She asked Lloyds to approach the organisation. However, after putting down the phone, Becky said she would not deal with anyone else and she would have to keep ringing the woman.
The Banking Code says banks should “liaise with organisations that are giving the customers advice/support”.
The repeat calls were upsetting. Elaine Molloy, a nurse, said she had been called six times a day at work, which she said made her “stressed and upset”. One man said he had been contacted by Lloyds 10 times despite repeatedly telling the callers the person they were seeking was no longer there.
The trainers said a certain amount of pressure could be put on customers. Homeown-ers could be reminded about repossession and others told that they may be credit blacklisted. One line often used by phone operators was: “[You] wouldn’t get a Blockbuster video card, it’s that serious.”
The reporter was training to work in early collections, dealing with people who had defaulted recently. Nearby was late collections, which dealt with people in arrears for five months or more. They used different tactics to get the bank’s money back. Although they are employed by Lloyds, they told customers they were from Sechiari Clark & Mitchell (SCM), the bank’s solicitors. One was overheard saying they would forward details from the conversation to Lloyds.
A spokeswoman for Lloyds said some of the late collection team operated under the SCM name because they were dealing with cases just before legal action was initiated. However, when speaking to our reporter, one phone operative said it was useful to pretend they were not from Lloyds “because we can blame Lloyds for a lot of stuff”.
Last week Nick Pearson, of Baines and Ernst, which helps people organise their finances, said phoning in the name of solicitors was “custom and practice in the industry”.
The early collection department could, if it acts appropriately, put customers on the road to financial recovery. On the other hand, those who fail to keep up their repayments may end up in the recovery department where there are more serious consequences such as court action and credit blacklisting. Because many of the repayment schedules proved unrealistic, customers were more likely to be passed on to recovery, with an impaired record.
This is not helped by the performance target system that is run in the office. Experienced operatives were expected to collect as much as £1,055 an hour.
It gave the operatives an incentive to set monthly repayment plans for higher amounts, which counted towards their target and their bonus. The rush to reach the targets meant that some operatives did not take time to examine customers’ finances to calculate what they could realistically afford.
Martin acknowledged the problem when addressing the new recruits. “It will be tempting because you get bonuses by collecting more money. Some people are stats-driven and do whatever it takes to collect money but that’s what we are trying to get away from,” he said.
The reporter witnessed the results of this system. One woman could barely pay her bills with her benefit payments of £180 a month and yet she had been put on a repayment plan that she could not afford.
The target system made some operatives very pushy. The reporter overheard one operative saying they would “put the frighteners” on a customer who had defaulted on their repayment schedule for the third month running.
One experienced operative explained to the reporter that keeping the phone calls brisk was one of the tricks of the trade. “Short and sharp - the best way to f*** someone, get their money,” he said.
The recipients of his calls were often left bruised. In a five-day period in the run-up to Christmas, five people were reduced to crying down the phone, he said.
Other operatives had clearly worked out their own system for reaching targets. One team leader boasted that he used to collect £7,000 a day before he became a manager. He described how he and a colleague used to block customers’ bank accounts and cards if they looked like they were not going to make the repayments.
“If they’re not going to pay it, then we’ll try and cancel stuff. We used to put blocks on accounts, everything. Loads of times we did that . . . lucky we didn’t get caught.”
One woman regularly collected more than £200,000 a month, according to Sebastian, the mentor. “Some people here tell me that they’ve listened to calls and she was just putting promises [payments] for accounts she wasn’t even agreeing on. I don’t know why they don’t do anything about it,” he said.
Charities and advice groups such as the CAB, the National Debtline and Baines and Ernst say the problem of setting unaffordable repayment plans goes on throughout the industry. “Lloyds are not alone in this,” Pearson said.
Last week Lloyds defended its collection department, saying that it had been scrutinised by an independent body at the end of last year and was found to be complying with the Banking Code.
The review concluded that “customers were treated positively and sympathetically and were not put under pressure to enter unaffordable repayment plans or to increase offers of repayment where they were unable to do so”.
Lloyds also defended its bonus system, saying that money recovered accounted for only a third of the factors making up the award. It said all repayment plans had to be affordable.
Insight: Claire Newell and Jonathan Calvert
‘It’s horrendous, I’ve never been treated so badly’
According to the Banking Code, customers in financial difficulties should approach their bank early. “We will do all we can to help you to overcome your difficulties,” it states.
But that’s exactly what two families say they did with Lloyds Banking Group and they say they were severely let down.
Elaine and Paul Molloy from Cheshire were struggling to pay the mortgage after a temporary rift in their marriage. “When we went into the bank and said we’d got a problem, they said there’s nothing they can do for us until we go five months behind in the mortgage payments,” Paul Molloy said.
Now they are now back together, their debt has grown to arrears of three months, which they can no longer repay and they now fear they will lose their home of 11 years.
Elaine Molloy, a nurse, says she is being harassed by the collection team. She said: “It’s horrendous, I’ve never been treated so badly by the bank and I’ve been with them since I was 17. I get six calls a day [from the collections department]. They were ringing me at work. I get dead stressed out and upset at work when they call, which doesn’t help my job, looking after patients.”
The family of Alan Wells in Swansea suffered a dramatic drop in their income when his overtime was cut because of the economic downtown. Finding himself £900 worse off a month, the construction worker approached Lloyds for help paying back a debt of £350.
“I was told there was nothing they could do for me. They told me it had to be ‘critical’ before they would help me,” he said.
Source: The Times
Thursday, 9 April 2009
London office vacancy rate soars to over 10 million square feet
Approximately 11.9pc of City offices are vacant – equivalent to 10 large city towers – up by a tenth already in 2009 and more than double the 5.2pc prior to the onset of the credit crisis in 2007, as increasing numbers of businesses collapse or downsize.It is first time since 2004 that empty office space has breached the 10m sq ft mark, according to research by property agent NB Real Estate.
The slump is placing immense pressure on rents, which have now fallen 27pc in the past year from an average of £65 per sq ft to £47.50.
Increasing supply through the completion of new developments is hastening the fall in rents, although the situation is even more dire in the West End. The failure of a large number of hedge funds, many of which are based in the area, has pushed rents down 37.5pc to £75 per sq ft.
Alan Dornford, managing director of markets at NB Real Estate, said: "Sentiment-wise this has probably been the toughest quarter in the leasing market.
"Many landlords have been aggressively adjusting the rents they quote but in isolation this will not stimulate a recovery. A broader recovery relies on confidence returning to the employment market."
Source: Telegraph
Wednesday, 8 April 2009
Willem Buiter: "Non-Negligible" Risk of Default by US and UK
Willem Buiter takes no prisoners, In his latest post, "The green shoots are weeds growing through the rubble in the ruins of the global economy", he dispatches the idea that recovery is around the corner (citing Carmen Reinhart and Kenneth's latest paper on the resolution of financial crises) and points out that the fiscal state of affairs in the US and UK will become sufficiently strained (even making the usual allowances for Keynesian stimulus) so as to make default a possibility (but recognize that Buiter is not saying it is likely). The easiest way to default, however is via inflation, but that also has the nasty side effect of "taxing" all domestic savers, not just the unfortunates who owned government paper. So the fact that Buiter even mentions explicit default is telling.
Buiter also believes that the imbalanced nature of stimulus measures – more than is optimal from countries under financial stress like the US and UK, too little from countries with balance of payment surpluses (China, Japan, Germany) means growth once the acute phase of the crisis is past will be lower than it would be with a better response. He is also critical of the Fed's version of quantitative easing and is dubious that the commitments at the G20 to provide $1 trillion to the IMF will come through.
He also, in passing, says (without mentioning his name) that Simon Johnsom may be correct in his view that the government is captured by the finance sector, not merely by subscribing to their world view, as he has argued before, but in the mercenary sense.
From Buiter:
Willem Buiter
Source: Naked Capitalism
Buiter also believes that the imbalanced nature of stimulus measures – more than is optimal from countries under financial stress like the US and UK, too little from countries with balance of payment surpluses (China, Japan, Germany) means growth once the acute phase of the crisis is past will be lower than it would be with a better response. He is also critical of the Fed's version of quantitative easing and is dubious that the commitments at the G20 to provide $1 trillion to the IMF will come through.
He also, in passing, says (without mentioning his name) that Simon Johnsom may be correct in his view that the government is captured by the finance sector, not merely by subscribing to their world view, as he has argued before, but in the mercenary sense.
From Buiter:
Willem Buiter
Source: Naked Capitalism
U.K. GDP Drops 1.5% as Recession Resembles 1979, Niesr Says
The U.K. economy shrank 1.5 percent in the first quarter as the recession increasingly resembled the one that started in 1979 when Margaret Thatcher took power, the National Institute of Economic and Social Research said.
The drop in gross domestic product followed a 1.6 percent decline in the last three months of 2008, Niesr, whose clients include the U.K. Treasury, said in London today. Consumer confidence last month matched the lowest level in at least four years, Nationwide Building Society said in a separate report.
Unemployment is rising at the fastest pace in three decades, pushing Prime Minister Gordon Brown to redouble his efforts to revive economic growth before the next election. The Bank of England will probably keep the benchmark interest rate unchanged at a three-century low of 0.5 percent in its monthly decision tomorrow.
“The output fall so far is very similar to that of the recession that began in the summer of 1979,” Niesr said in a statement. “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”
Niesr still said that there’s no “obvious reason” why the recession will follow the course of the one in the early 1980s.
Thatcher succeeded James Callaghan as U.K. prime minister in May 1979 following the so-called Winter of Discontent, when car workers, truck drivers and trash collectors went on strike.
Job Cuts
Unemployment jumped the most since 1971 in February, the government’s statistics office reported March 18. Royal Bank of Scotland Group Plc said yesterday it will cut up to 4,500 back office jobs in Britain to save money.
“Feelings about the current labor market have weakened,” Nationwide Chief Economist Fionnuala Early said in a statement. “Further reports of job losses are likely to have affected consumers’ views of this.”
Nationwide’s index of consumer confidence slipped to 41 in March, matching January’s four-year low, from 43 the previous month. Two-thirds of Britons said there are few jobs available, the mortgage lender’s survey showed.
The number of permanent staff appointments by job consultants fell further in March, though at the slowest pace in six months, KPMG and the Recruitment and Employment Federation said in a separate report today.
“The availability of permanent and temporary jobs in the U.K. continues to decline, salaries are being reduced and the pool of available candidates is rising further,” Mike Stevens, a partner at KPMG, said in a statement. “Recovery might take longer and be more protracted than many hope.”
Chancellor of the Exchequer Alistair Darling presents his next budget on April 22. Brown, whose governing Labour Party trailed the opposition by 13 percentage points in an April 6 poll, must call an election by mid-2010.
Bank of England Governor Mervyn King last month took the unprecedented step of cutting interest rates close to zero and buying government bonds with newly created money to stimulate the economy. All except two of the 62 economists in a Bloomberg survey predict policy makers will keep the key rate unchanged at 0.5 percent tomorrow.
Source: Bloomberg
The drop in gross domestic product followed a 1.6 percent decline in the last three months of 2008, Niesr, whose clients include the U.K. Treasury, said in London today. Consumer confidence last month matched the lowest level in at least four years, Nationwide Building Society said in a separate report.
Unemployment is rising at the fastest pace in three decades, pushing Prime Minister Gordon Brown to redouble his efforts to revive economic growth before the next election. The Bank of England will probably keep the benchmark interest rate unchanged at a three-century low of 0.5 percent in its monthly decision tomorrow.
“The output fall so far is very similar to that of the recession that began in the summer of 1979,” Niesr said in a statement. “If the 1980s profile were followed, output would continue to decline for up to another year and it would take two further years before the level of output enjoyed at the start of 2008 would be reached again.”
Niesr still said that there’s no “obvious reason” why the recession will follow the course of the one in the early 1980s.
Thatcher succeeded James Callaghan as U.K. prime minister in May 1979 following the so-called Winter of Discontent, when car workers, truck drivers and trash collectors went on strike.
Job Cuts
Unemployment jumped the most since 1971 in February, the government’s statistics office reported March 18. Royal Bank of Scotland Group Plc said yesterday it will cut up to 4,500 back office jobs in Britain to save money.
“Feelings about the current labor market have weakened,” Nationwide Chief Economist Fionnuala Early said in a statement. “Further reports of job losses are likely to have affected consumers’ views of this.”
Nationwide’s index of consumer confidence slipped to 41 in March, matching January’s four-year low, from 43 the previous month. Two-thirds of Britons said there are few jobs available, the mortgage lender’s survey showed.
The number of permanent staff appointments by job consultants fell further in March, though at the slowest pace in six months, KPMG and the Recruitment and Employment Federation said in a separate report today.
“The availability of permanent and temporary jobs in the U.K. continues to decline, salaries are being reduced and the pool of available candidates is rising further,” Mike Stevens, a partner at KPMG, said in a statement. “Recovery might take longer and be more protracted than many hope.”
Chancellor of the Exchequer Alistair Darling presents his next budget on April 22. Brown, whose governing Labour Party trailed the opposition by 13 percentage points in an April 6 poll, must call an election by mid-2010.
Bank of England Governor Mervyn King last month took the unprecedented step of cutting interest rates close to zero and buying government bonds with newly created money to stimulate the economy. All except two of the 62 economists in a Bloomberg survey predict policy makers will keep the key rate unchanged at 0.5 percent tomorrow.
Source: Bloomberg
Tuesday, 7 April 2009
Brown Pressed by Unions, Lawmakers to Increase Spending in U.K.
Unions and lawmakers from the U.K.’s ruling Labour Party pressed Prime Minister Gordon Brown to increase spending in the annual budget, countering a warning from the central bank to keep a lid on the deficit.
The Trades Union Congress representing 6.5 million workers called on Brown today to set aside 25 billion pounds ($37 billion) to build and insulate homes, support clean energy projects and renew Britain’s rail network. Five Labour lawmakers led by former Cabinet minister Peter Hain asked for more government measures to stimulate the economy.
“The U.K. fiscal stimulus has not been that generous,” TUC General Secretary Brendan Barber said in a statement in London today. “There is still scope for a carefully targeted second round that can promote a quicker recovery.”
The demands are at odds with the advice of Bank of England Governor Mervyn King and the Institute for Fiscal Studies. Both have warned that the government already is piling up too much debt. Their advice suggests Brown may have to lift taxes or curb spending around the time of the next election, due by mid-2010.
Chancellor of the Exchequer Alistair Darling presents his budget statement to Parliament on April 22 and will have to balance concerns about the deficit against demands from pressure groups for more support for the economy.
Mortgage Rescue
Another lobby group, the Home Builders Federation, said Brown should move more quickly to prop up the market for mortgage-backed securities, which financed a third of home loans before credit markets faltered in 2007.
The Treasury is negotiating with banks about loan guarantees to prop up the market, which hasn’t created any new securities in the U.K. since August 2008.
The lobby group also called for an extension of a tax holiday on the purchase of some homes and for the Treasury to funnel more money into building houses.
Labour lawmakers including Meg Munn, Sally Keeble and Mark Todd joined Hain in calling for more government support for the economy in articles published in Progress magazine.
“More not less public investment is needed to create jobs,” Hain wrote. “Taxes on lower incomes must not rise and should be lowered if possible.”
Darling already has said the recession in Britain is worse than he had forecast in November, suggesting there isn’t much money available.
The Treasury’s deficit this fiscal year will reach 150 billion pounds, or 10.4 percent of gross domestic product, the Institute for Fiscal Studies said yesterday. Earlier this month, the government failed to attract enough investors for an auction of its 40-year bonds. King has said Darling should be “cautious” before spending more.
“In the longer term, we have to have a sustainable position,” Darling said March 26 when questioned about the budget. “A substantial amount of money has gone into the economy” already.
Source: Bloomberg
The Trades Union Congress representing 6.5 million workers called on Brown today to set aside 25 billion pounds ($37 billion) to build and insulate homes, support clean energy projects and renew Britain’s rail network. Five Labour lawmakers led by former Cabinet minister Peter Hain asked for more government measures to stimulate the economy.
“The U.K. fiscal stimulus has not been that generous,” TUC General Secretary Brendan Barber said in a statement in London today. “There is still scope for a carefully targeted second round that can promote a quicker recovery.”
The demands are at odds with the advice of Bank of England Governor Mervyn King and the Institute for Fiscal Studies. Both have warned that the government already is piling up too much debt. Their advice suggests Brown may have to lift taxes or curb spending around the time of the next election, due by mid-2010.
Chancellor of the Exchequer Alistair Darling presents his budget statement to Parliament on April 22 and will have to balance concerns about the deficit against demands from pressure groups for more support for the economy.
Mortgage Rescue
Another lobby group, the Home Builders Federation, said Brown should move more quickly to prop up the market for mortgage-backed securities, which financed a third of home loans before credit markets faltered in 2007.
The Treasury is negotiating with banks about loan guarantees to prop up the market, which hasn’t created any new securities in the U.K. since August 2008.
The lobby group also called for an extension of a tax holiday on the purchase of some homes and for the Treasury to funnel more money into building houses.
Labour lawmakers including Meg Munn, Sally Keeble and Mark Todd joined Hain in calling for more government support for the economy in articles published in Progress magazine.
“More not less public investment is needed to create jobs,” Hain wrote. “Taxes on lower incomes must not rise and should be lowered if possible.”
Darling already has said the recession in Britain is worse than he had forecast in November, suggesting there isn’t much money available.
The Treasury’s deficit this fiscal year will reach 150 billion pounds, or 10.4 percent of gross domestic product, the Institute for Fiscal Studies said yesterday. Earlier this month, the government failed to attract enough investors for an auction of its 40-year bonds. King has said Darling should be “cautious” before spending more.
“In the longer term, we have to have a sustainable position,” Darling said March 26 when questioned about the budget. “A substantial amount of money has gone into the economy” already.
Source: Bloomberg
Monday, 6 April 2009
Bankrupt Britain: 340 people go bust every day
BRITAIN is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year.
Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.
Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.
Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”
He added: “It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible.”
The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.
Critics claim the act created a mood of easy credit with no downside.
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.
The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come.
The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings.
Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.
“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”
The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial,9.
Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession.
Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered “unprecedented” cost-cutting which it said threatened to do long-term damage to the economy.
Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession.
Almost half of large companies plan to reduce headcount by an average of 10% this year.
Source: Times Online
Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.
Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.
Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”
He added: “It feels much worse than the 1990s – there are much fewer options to rescue businesses today. In the past you could go to another bank or small-business owners could remortgage and use equity from their homes – today that is next to impossible.”
The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.
Critics claim the act created a mood of easy credit with no downside.
In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.
The news comes as a report released today by Ernst & Young, the accountancy firm, shows quoted companies in Britain issued 117 profit warnings in the first quarter with worse to come.
The first-quarter figure for warnings was the highest since 2001, and the third consecutive three-month period in which there had been more than 100 warnings.
Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.
“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”
The highest warning sectors were support services, with 22; media, 13; industrial engineering and software & computer services, with 10 each; and general financial,9.
Ernst & Young said the fact that so many different sectors were being affected reflected the spread of the credit crisis into a full-blown recession.
Also today, Hay Group, the consultancy, predicts more than 600,000 job losses as companies retrench. On the basis of a survey of 140 of the top 1,000 firms, it discovered “unprecedented” cost-cutting which it said threatened to do long-term damage to the economy.
Nine in ten firms plan operational cuts in 2009-10, it found, with a high proportion planning job cuts. A fifth of companies intended a big restructuring of their businesses in response to the recession.
Almost half of large companies plan to reduce headcount by an average of 10% this year.
Source: Times Online
Gordon Brown's House Price Boom and Bust
Have a look below at what we all know but Gordon Brown is hoping we forget!
How will Gordon Brown pay back the national debt?
As many economists start to turn vaguely positive on the UK economy we may be on the verge of a recovery in business levels. While this news has, and will continue to be, well received by business leaders and the stock market, there are still severe concerns as to how Gordon Brown will pay back the national debt which is literally crippling the UK budget.
While many are awaiting the announcement of this month's budget, it is the short to medium term situation which is beginning to cause most concern amongst experts. Nobody is quite sure how much UK debt has been accumulated over the last 12 months as Gordon Brown has been literally throwing money at the system and UK banking companies. Despite repeated requests by opposition parties and business leaders, the Treasury has been unable to confirm the exact position and balance sheet of the UK.
Whatever the exact figure may be there is no doubt that UK taxes will increase in the short to medium term with some analysts suggesting this could cause a significant drag on the recovery of the UK economy. Until we know the exact balance sheet of the UK it is impossible to suggest any course of action and when consumers and businesses may be hit by increased tax bombshells.
While many are awaiting the announcement of this month's budget, it is the short to medium term situation which is beginning to cause most concern amongst experts. Nobody is quite sure how much UK debt has been accumulated over the last 12 months as Gordon Brown has been literally throwing money at the system and UK banking companies. Despite repeated requests by opposition parties and business leaders, the Treasury has been unable to confirm the exact position and balance sheet of the UK.
Whatever the exact figure may be there is no doubt that UK taxes will increase in the short to medium term with some analysts suggesting this could cause a significant drag on the recovery of the UK economy. Until we know the exact balance sheet of the UK it is impossible to suggest any course of action and when consumers and businesses may be hit by increased tax bombshells.
PM's Just Saved Apocalypse for Later
HALLELUJAH! Gordon’s saved the world. But what about Britain?To be fair, the Prime Minister pulled off a brilliant propaganda coup — and delivered real help for stricken economies around the world.
The good news is that bankrupt countries in Eastern Europe will not go bust or — more importantly — drag everyone else down with them.
That’s because the International Monetary Fund — the world’s pawn shop — can now print its own money and bail out basket-case economies such as Hungary.
“So, no Apocalypse Now,” says my City analyst.
The bad news is that Britain looks like becoming one of those basket cases.
Taking a begging bowl to the IMF would be a grotesque humiliation for a nation so recently rated as the world’s fourth-largest economy.
Yet in perhaps his most outrageous spin operation ever, Prince of Darkness Peter Mandelson is already smoothing the path.
Britain is not “head of the queue” for IMF money, he told C4 News. But there would be “no stigma” for Britain if we were.
An unnamed minister, who must surely be Mandy, later told a newspaper: “Previously, a country would only go to the IMF if they were in a very bad state. It was a bit like going to Accident and Emergency to get urgent help. This new facility is like getting wellbeing care or going to a spa to recuperate.”
Before you swallow that nonsense, listen to Simon Johnson, the IMF’s former chief economist.
“With all due respect to Gordon Brown and his ministers, they need some help right now,” he told the same C4 programme.
“Your economy — the UK economy — is in big trouble.”
Who do you believe?
I don’t want to rain on Gordon Brown’s parade, but I lean towards Mr Johnson — things are going to get much worse before they get any better.
My “Apocalypse Deferred” City source sees big trouble ahead. Any “green shoots” risk turning sickly yellow under the pall of national debt.
“The IMF is right,” he says. “The UK economy is in trouble and to suggest America is to blame is just daft.
“We are borrowing massively, printing money. We have a higher household debt ratio than America and rely more than anyone else on financial services, which are in trouble.
“As a result, Sterling is a risky currency.
“Big investors looking for safe havens for their clients’ billions are worried about the Pound. If they switch to another currency, Britain is in trouble.
“There is a 25-per-cent chance of a run on the Pound in the next six months. That’s a shockingly high probability.”
Some optimists say America will start recovering next year — but not debt-laden Britain.
After his G20 triumph, the Prime Minister will be pleased by a three-per-cent bounce in share prices — and in Labour’s poll ratings.
He will also welcome dodgy claims that house prices are rising again. All three are likely to be “blips”.
Indeed, the Halifax have already trashed the evidence of a housing revival, with figures showing a 1.9 per cent FALL in prices last month.
In a remarkable outburst of candour, Chancellor Alistair Darling blames predecessor Gordon Brown for castrating the watchdogs who might have saved our banks.
Now, on the eve of this month’s crucial Budget, he warns we are nowhere near recovery.
“It’s worse than we thought,” he says.
Mr Darling says the economy will shrink in its worst performance since World War II. Unemployment will keep soaring — perhaps even doubling to 4million.
Asked if there was any reason for cheer, the Chancellor confessed: “There is some way to go yet.
“We have to be realistic. You cannot — you must not — build up false hope.”
This bleak scenario is a million miles from the PM’s beaming optimism.
As the G20 packed up, he claimed a “new world order”, backed by a mythical trillion dollars in spending money. Don’t believe it. As Chancellor, Gordon Brown was famous for his thimble-and-pea tricks.
As in so many of his smoke-and-mirror budgets, these numbers simply don’t add up.
FRANCE and Germany were pleased with their G20 pincer attack on the “Anglo-Saxon economies” – Britain and America.
Pint-sized egotist Nicolas Sarkozy resents popular Barack Obama almost as much as he does First Lady Michelle for eclipsing his wife Carla Bruni.
America will ignore him. But he and Germany’s Angela Merkel have forced concessions out of Britain on the way we do business.
In return for his “triumph” last week, just how many economic levers has Mr Brown surrendered to Brussels?
Source: TREVOR KAVANAGH
Friday, 3 April 2009
Brown's illusory G20 deal
Britain has as its Prime Minister a master of political illusion. He may not be much of an orator, but there is no one better at dressing up old money as new. If the G20 nations wanted to fake progress, to spin a $1.1 trillion figure while committing no new money at all, then Gordon Brown is their man. “This is the day that the world came together to fight the global recession, not with words but with a plan,” said our Dear Leader. Well, let’s have a closer look at this supposed plan…1) “Making available an extra $1 trillion”. Ahh, those Brown verbal tricks. What does “make available” mean? Is it guarantees, promises, statement of intent? Real spending? Not a penny of cold hard cash has been pledged by anyone. The sum is concocted by taking the IMF’s pre-existing $500bn target for its bailout fund (a target it still hasn’t met), adding another $250bn to the target. And, then, we add a $250bn fund which the IMF would create by printing its own special money.
2) IMF Funds “treble to $750 billion”. Very fishy. We heard from the IMF on Valentine’s Day that it wanted double its rescue fund to $500 billion – then it said it wanted even more. So where has the extra $250bn come from? Who has stumped it up? No one, it appears - it's just a target. And then the IMF will print its own money, in its own pretend “currency” (called Special Drawing Rights or SDR), and then allow its members to swap this for real money. The idea was once rejected by US Congress, but Obama thinks he won’t need congressional approval now the limit is kept to $250bn. But to be clear: no one has stumped up any new cash. It’s a little quantitative easing for the world – aimed, I suspect, at Eastern Europe. China will be happy as it wants SDRs to replaced the US dollar as a reserve currency.
3) Old pledges dressed as new. Brown gave a breakdown of who had stumped up: Japan, he said, contributed $100bn to the IMF. Yes it did: in January. The EU has agreed to contribute $100bn, he added. We know: this was announced at the last EU summit. Brown said China has chipped in just $40bn, and this appears to be new. But given the size of Beijing’s $2 trillion piggy bank, that is a rather derisory amount (and won’t buy it a seat on the IMF board). The Brazilians had thought China was good for $100bn.
4) Double counting. The Dear Leader has good news. “We are going to act decisively to kickstart international trade” But how? “We will ensure availability of at least $250 billion over the next two years." Note that “over two years” means that this is $125bn, double counted. Why not make it four years, and whack up an extra $1 trillion? It’s just a joke. Nor is this real cash – it comes from trade insurance schemes to protect importers and exporters. It’s not money being spent by governments. Pure Brown-style fiscal conjuring.
5) Tax havens. “We have agreed there will be an end to tax havens that do not transfer secrecy on request.” This is a piggybacking on the long-running OECD campaign against tax havens – this is not a G20 initiative. Brown solemnly announced the OECD would publish a list of non-compliant nations, as if this were a breakthrough. It has been doing this for the last year – here is a list of the most recent such announcements.
6) “The Washington consensus is over”. A curious aside from Brown – and a dog whistle to the Soros/Naomi Klein school of economics. The so-called “Washington Consensus” doesn’t refer to any formal economic protocol. It is used by the likes of Soros to denote what he calls ‘free market fundamentalism’. The academic who coined the term talks about its abuse here.
7) Ban on new trade barriers. Yeah, right. They agreed this in November and, since then, 17 of the 20 countries have increased trade barriers.
8) Brown’s gold advice: “I’ve been proposing this to the IMF for ten years”. He was certainly proposing in 1999 that the IMF sold gold – then priced at $278 an ounce. Luckily, the IMF ignored Brown and gold is now $890 an ounce. Shame he didn’t take the IMF’s advice when it was warning his borrowing would end in tears.
9) “For the first time, we have come together to set principles for the global finance system.” As far as I can determine, all they have agreed is that banks and hedge funds should be regulated – but don’t say how. Ergo, it’s meaningless.
10) No fiscal stimulus. It’s mentioned twice in the 3,080 word document – there wasn’t one. Both Brown and Obama wanted the world to contribute new money. They failed. There was none of the big agreement that Brown led us to believe. There was a split, as evidenced by the Franco-German minority report yesterday. But still it’s a big summit, a deal was done (albeit a fairly nebulous one) and the threatre was fine.
On a presentational basis, this his has worked out well for Brown. I suspect the G20 will be written up well tomorrow, just as his Budgets are always written up well – “2p tax reduction!” – before we all realise we’ve been swindled. So look out for triumphant declarations of “$1.1 trillion to save the world” in tomorrow’s papers. Listening to Brown today, it was as if he were giving a Budget for the world. And I suspect the world is about to learn how illusory a Brown promise.
Source: Fraser Nelson @ Spectator
Wednesday, 1 April 2009
UK has run out of money to pump into economy, OECD warns
**Thinktank urges Bank of England to hold interest rates near zero until end of 2010 **Predictions include UK economy shrinking by 3.7% this year and unemployment hitting 10%
**Quantitative easing plan wins backing
The UK government cannot afford to pump more money into Britain's struggling economy, the Organisation for Economic Cooperation and Development warned today, piling further pressure on Gordon Brown ahead of the G20 summit in London.
Echoing comments made by the Bank of England governor, Mervyn King, the OECD said Britain's worsening budget deficit meant the government had little room to cushion the impact of the recession if it turned out to be deeper than expected.
The government is already expected to have to borrow at least £118bn in 2009 to balance the books - equal to 9% of gross domestic product, an all-time record.
"The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans in order to ensure that confidence is not eroded," the OECD said.
The Paris-based thinktank urged the Bank of England to hold interest rates near zero until the end of next year to support the economy.
Until last week, the prime minister, Gordon Brown, appeared determined to announce a new stimulus package in the 22 April budget, but he was forced to backtrack after King warned against a giveaway.
Opposition politicians seized on King's warning to intensify the pressure on Brown, who is chairing the G20 summit to coordinate international steps to tackle the global economic crisis.
For now, Britain is implementing a discretionary fiscal stimulus worth 1.4% of GDP, on top of increased spending on social benefit payments.
The Bank is also creating £75bn to buy government bonds through a quantitative easing programme to boost growth and stave off deflation, which the OECD said could turn out to be more successful than expected.
"Monetary and fiscal policy could provide a stronger stimulus to growth, although the magnitude of their impacts, especially that of quantitative easing, are currently difficult to gauge," the body said.
The OECD is predicting the UK economy will shrink by 3.7% this year, the sharpest rate of decline since the second world war, and by 0.2% next year, although a recovery should start later that year. Unemployment is likely to peak at 10%, up sharply from the current 6.5% rate.
"While the OECD projections make depressing reading, we suspect they may even be a little on the optimistic side," said Howard Archer at IHS Global Insight, who thinks the economy could suffer a 4% contraction this year and a further one of 0.4% next year.
The OECD's forecast for British growth is slightly less grim than that for other big economies. It predicts the United States will contract by 4%, the eurozone by 4.1% and Japan by 6.6%.
It said that governments may be able to justify more spending in certain circumstances. "If economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted," it said in the report.
The OECD fears the world's 30 richest countries face a combined jump in unemployment of 25 million people in the current economic crisis, by far the biggest and swiftest rise in the post-war period.
Ratings agency Fitch also issued a grim forecast today. It downgraded its previous forecasts for economic growth in 2009 and is now predicting the "widest and deepest global recession" since the second world war.
Source: Guardian
**Quantitative easing plan wins backing
The UK government cannot afford to pump more money into Britain's struggling economy, the Organisation for Economic Cooperation and Development warned today, piling further pressure on Gordon Brown ahead of the G20 summit in London.
Echoing comments made by the Bank of England governor, Mervyn King, the OECD said Britain's worsening budget deficit meant the government had little room to cushion the impact of the recession if it turned out to be deeper than expected.
The government is already expected to have to borrow at least £118bn in 2009 to balance the books - equal to 9% of gross domestic product, an all-time record.
"The room for additional fiscal manoeuvre to respond to worse-than-expected activity developments is therefore limited and new measures would need to be accompanied by detailed and credible fiscal consolidation plans in order to ensure that confidence is not eroded," the OECD said.
The Paris-based thinktank urged the Bank of England to hold interest rates near zero until the end of next year to support the economy.
Until last week, the prime minister, Gordon Brown, appeared determined to announce a new stimulus package in the 22 April budget, but he was forced to backtrack after King warned against a giveaway.
Opposition politicians seized on King's warning to intensify the pressure on Brown, who is chairing the G20 summit to coordinate international steps to tackle the global economic crisis.
For now, Britain is implementing a discretionary fiscal stimulus worth 1.4% of GDP, on top of increased spending on social benefit payments.
The Bank is also creating £75bn to buy government bonds through a quantitative easing programme to boost growth and stave off deflation, which the OECD said could turn out to be more successful than expected.
"Monetary and fiscal policy could provide a stronger stimulus to growth, although the magnitude of their impacts, especially that of quantitative easing, are currently difficult to gauge," the body said.
The OECD is predicting the UK economy will shrink by 3.7% this year, the sharpest rate of decline since the second world war, and by 0.2% next year, although a recovery should start later that year. Unemployment is likely to peak at 10%, up sharply from the current 6.5% rate.
"While the OECD projections make depressing reading, we suspect they may even be a little on the optimistic side," said Howard Archer at IHS Global Insight, who thinks the economy could suffer a 4% contraction this year and a further one of 0.4% next year.
The OECD's forecast for British growth is slightly less grim than that for other big economies. It predicts the United States will contract by 4%, the eurozone by 4.1% and Japan by 6.6%.
It said that governments may be able to justify more spending in certain circumstances. "If economic circumstances deteriorate significantly more than projected, further fiscal measures would be warranted," it said in the report.
The OECD fears the world's 30 richest countries face a combined jump in unemployment of 25 million people in the current economic crisis, by far the biggest and swiftest rise in the post-war period.
Ratings agency Fitch also issued a grim forecast today. It downgraded its previous forecasts for economic growth in 2009 and is now predicting the "widest and deepest global recession" since the second world war.
Source: Guardian
Sunday, 22 March 2009
Coming to a bank near you: the 9% mortgage
If, like me, you’re holding out for cheaper fixed mortgage deals, last week’s review of the global banking crisis by Lord Turner, chairman of the Financial Services Authority, showed just how long a waiting game it could be. Buried in the report was a startling figure: mortgage rates can stay high for six to nine years after the onset of a banking crisis.
Turner wants banks to hold much more capital to prevent the failures of Northern Rock, Bradford & Bingley and Halifax Bank of Scotland from being repeated.
A laudable aim, of course, but this being the banking sector, customers will ultimately pay. Holding more capital increases banks’ costs, which are in turn passed on to you and me in the form of a wider spread between the rates paid on our savings and the rates charged on our debt.
Its two-year deal for those with a deposit of at least 15% is 4.58 percentage points above Bank rate, or 5.08%; its three-year deal has a margin of 4.53 points, or 5.03%.
These rates are pretty poor with Bank rate at just 0.5%, so imagine how bad they’d look if interest rates were back at a more “normal” level of, say, 4%. That would give you pay rates of 8.58% and 8.53% respectively.
It may seem odd to be thinking about higher interest rates when the country is set to fall into deflation on Tuesday, but rate rises could be closer than we think.
Investors are at their most optimistic about the global economy since December 2005, according to the latest survey of fund managers from investment bank Merrill Lynch.
For the first time in more than three years, investors are not predicting lower global growth over the next 12 months, thanks largely to renewed optimism about China.
Indeed, last week saw a strong rally in all the assets you would normally associate with stronger growth — and therefore higher interest rates. Oil soared 7% in one day alone, breaking the $50 level, while copper surged to a four-month high.
Having shamelessly widened the spread between mortgage rates and the cost of funding as interest rates have come down, banks are unlikely to close the gap again as rates head back up — as Turner’s report highlighted.
The best two-year fix, from First Direct at 2.99%, is currently 0.8 points above the cost of funding; six months ago, the margin was only 0.24 points, according to figures from Savills Private Finance.
The best tracker — 2.89% from First Direct — is 1.1 points higher than wholesale rates.
So should you be locking into a fix now to protect yourself from these big tracker margins? Melanie Bien at Savills thinks so — but for five years, not two. Abbey, part of Spanish giant Santander, is offering a five-year deal at 3.95% with a £995 fee — if you have 40% equity. “Anything at below 5% for a five-year fix is pretty attractive,” said Bien.
Ray Boulger over at rival John Charcol gives a politician’s answer. If you’re buying a property, he would also lock into a fix now — particularly if you have a relatively small deposit. If you play the waiting game on a tracker and house prices fall further, you may find you don’t have enough equity when you try to switch to a fix in a year or so. If you’re an existing homeowner on your lender’s standard variable rate, however, he says there is no need to rush as the chances are the SVR is lower than the current fixed rates.
There are big dangers with this approach, though — when rates eventually rise, they may do so quickly. “If \ are to avert inflation, interest rates will need to be raised earlier into any upturn and more rapidly than in the 2003-5 period,” said Max King, economist at Investec.
Work out how much more you’d pay on a fix, compare it with what you were paying before interest rates started falling, and if it’s a price you’re willing to pay for long-term security, then it’s time to fix.
Source: Kathryn Cooper Times Online
Friday, 20 March 2009
UK will have the worst deficit in Western world, warns IMF
Britain is now tumbling towards the biggest budget deficit in the Western world, the International Monetary Fund has warned.Next year the Treasury will have to borrow a record 11pc of gross domestic product as it fights the crisis – equating to more than £150bn and far more than has ever been borrowed before in British history, according to a devastating new assessment by the Fund. The assessment coincided with the publication of official figures showing a further deterioration in the public finances during February as the recession ate further into tax revenues.
The IMF also confirmed, as had been leaked earlier this week, that it now expects the world economy to shrink this year for the first time since the Second World War. It also expects the UK to endure a more severe and longer-lasting contraction than almost any other major economy.
However, it is its analysis on the state of Britain's accounts that will cause the most consternation in Whitehall and beyond. The Fund predicted that the UK's government borrowing balance would reach 9.5pc of GDP this year, before rising to 11pc of GDP next year. This is greater even than the US, which is embarking on the biggest fiscal spending spree in history, despite the fact that Gordon Brown has been unable to carry out any major tax cuts or spending increases of his own, save for the temporary cut in VAT.
The parlous state of Britain's finances is due instead to the billions of pounds of taxes lost because of the collapse of the financial services industry, and to the extra costs associated with higher unemployment. The Treasury's figures showed that in February the budget deficit reached £9bn, taking the total deficit for the first 11 months of the fiscal year to a record £75.2bn – more than triple last year's total.
The IMF projections will further increase the resistance within the Treasury to prospective tax cuts which, it is thought, are being pushed for by Number 10. Moreover, they do not take into account losses associated with the various bail-outs of the financial system.
Shadow Chancellor George Osborne said: "These dreadful figures show how the Labour government has given us the worst public finances in the developed world.
"The figures also show Britain simply cannot afford a further discretionary fiscal stimulus – our automatic stabilisers are already amongst the biggest in the world."
Shadow Chancellor George Osborne said: "These dreadful figures show how the Labour government has given us the worst public finances in the developed world.
"The figures also show Britain simply cannot afford a further discretionary fiscal stimulus – our automatic stabilisers are already amongst the biggest in the world."
Updating its forecasts for world economic growth, the Fund said the global economy could shrink by as much as 1pc this year – the biggest contraction in more than 60 years. Britain's recession is expected to last until next year, in contrary to Alistair Darling's forecast that the economy will start to grow as soon as this summer.
Source: Edmund Conway, Telegraph
Wednesday, 18 March 2009
UK Economy to Contract in 2010
BRITAIN is the only major country whose economy will SHRINK next year, a damning forecast said last night.The International Monetary Fund predicts a 0.2 reduction. But it expects the US economy to grow by the same amount, the Eurozone by 0.1 per cent, Asia by 5.8 per cent and Latin America by 2.3 per cent.
The forecast is a blow to PM Gordon Brown. But Ministers will say it shows the UK recovering from this year’s estimated 3.8 per cent shrinkage.
Shadow chancellor George Osborne said: “This forecast is further evidence that Gordon Brown’s economic model is fundamentally broken and his policies on the recession aren’t working.”
Source: GEORGE PASCOE-WATSON
Tuesday, 17 March 2009
$1 Trillion "Run on Britain" Disclosed
The Independent ran a piece that seems to have fallen through the cracks: based on the latest statistical release from bank of England, the period between the end of the spring and the end of 2008 saw a $1 trillion exodus of "monies held in the UK on behalf of foreign investors."Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.
The Independent concludes correctly "The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally compromised by the acute crisis in the banking system and a general trend to financial protectionism internationally."
While one could argue that there is little downside at this point in British capital markets, a full blown downgrade of its sovereign credit rating which many speculate could be mere days away would only perpetuate the capital outflows and terminally destabilize the eurozone (of which the UK along with Germany are unfortunately the strongest members). The article continues:
The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia.
Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.
Of course a strong dollar tends to do miracles for the trade balance of the U.S., however as the last time the U.S. exported any actual relevant products (let alone those fabulous Detroit moving contraptions) was some time in the 20th century, this is likely the last thing on economists minds in a world where the U.S., whose CDS trades at an 8% implied probability of default in 5 years, is considered the safest haven.
Source: Tyler Durden
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