WASHINGTON, Sept. 28 -- World Bank President Robert B. Zoellick said on Monday that the global economic crisis is contributing to shifts in power relations in the world that will impact currency markets, monetary policy, trade relations and the role of developing countries.
In a speech ahead of the Annual Meetings in Istanbul, Turkey, of the World Bank and International Monetary Fund (IMF), Zoellick said leaders should reshape the multilateral system and forge a "responsible globalization" that would encourage balanced global growth and financial stability, embrace global efforts to counter climate change, and advance opportunity for the poorest.
World Bank President Robert B. Zoellick said on Monday that the global economic crisis is contributing to shifts in power relations in the world that will impact currency markets, monetary policy, trade relations and the role of developing countries.
File photo shows that Robert Zoellick, president of The World Bank, speaks at the International Economic Forum of the Americas conference in Montreal, June 8, 2009. (Xinhua/Reuters Photo)
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"The old international economic order was struggling to keep up with change before the crisis," Zoellick told an audience at the Paul H. Nitze School of Advanced International Studies of the Johns Hopkins University, in Washington, D.C.
"Today's upheaval has revealed the stark gaps and compelling needs. It is time we caught up and moved ahead," he said.
In the speech entitled "After the Crisis?" Zoellick said "Peer review of a new Framework for Strong, Sustainable and Balanced Growth agreed at last week's G20 Summit is a good start, but it will require a new level of international cooperation and coordination, including a new willingness to take the findings of global monitoring seriously. Peer review will need to be peer pressure."
It was also important for the G20 to remember those countries not at the table.
"As agreed in Pittsburgh last week, the G20 should become the premier forum for international economic cooperation among the advanced industrialized countries and rising powers," said the World Bank chief. "But it cannot be a stand-alone committee. Nor can it ignore the voices of the over 160 countries left outside."
China's strong response during the economic crisis and rapid recovery had underscored its growing influence as a stabilizing force in today's global economy, he said.
But its leaders face challenges caused by rapid credit growth and the economy's dependence on exports, he added.
The United States had clearly been hit hard by the crisis. Its prospects depend on whether it will address large deficits, recover without inflation, and overhaul its financial system, according to Zoellick .
The United States has a history of recovering from setbacks. "But the United States would be mistaken to take for granted the dollar's place as the world's predominant reserve currency," Zoellick said, "Looking forward, there will increasingly be other options to the dollar."
The crisis has brought to the attention of lawmakers the significant role played by central banks.
Central banks performed well once the crisis hit but their role in the build-up was less convincing.
"In the United States, it will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority," said Zoellick.
"My reading of recent crisis management is that the Treasury Department needed greater authority to pull together a bevy of different regulators," said the former U.S. Deputy Secretary of State.
"Moreover, the Treasury is an executive department, and therefore Congress and the public can more directly oversee how it uses any added authority," said Zoellick.
Developing countries had already been on the rise before the crisis and their position has been further strengthened because of it. Their growing share of the world economy was a positive development.
"Looking beyond, a more balanced and inclusive growth model for the world would benefit from multiple poles of growth," Zoellick said. "With investments in infrastructure, people, and private businesses, countries in Latin America, Asia, and the broader Middle East could contribute to a 'New Normal' for the world economy."
Thursday, October 1, 2009
Backgrounder: Developments of global financial crisis
ISTANBUL, Sept. 30 -- The International Monetary Fund (IMF) and World Bank annual meetings slated for Oct. 6-7 in the Turkish city of Istanbul will discuss key economic and financial issues on recovery from the worst global recession since the 1930s.
The global financial crisis and the ripples it sent across the world economy have devastated banking systems, erased jobs and stagnated global trade since its beginning last year.
Following are major facts about the crisis and its developments:
The crisis has its roots in the imbalance of the global economic structure, years of freewheeling lending in the United States and loose regulation on financial markets.
The crisis was triggered by a subprime mortgage meltdown that erupted in the United States in the summer of 2007, which forced closure of many companies that largely invested in products related to subprime mortgages and tightened credit around the world.
As the subprime mortgage losses spread, Lehman Brothers' bankruptcy and Merrill Lynch's buyout in September 2008 marked the outbreak of the global financial crisis. Credit malfunction deepened while stocks and commodities plunged.
The U.S. government pledged in October to invest 700 billion U.S. dollars in bailout to cash-stripped financial institutions.
The crisis soon sent shock waves to other parts of the world. As one of the hardest-hit countries, Iceland saw its banking industry collapse within two weeks in October 2008, accompanied by a dive in stock prices and depreciation of the country's currency and had to seek 6 billion dollars of aid from the IMF.
As the crisis caused downturns in European and U.S. economies, exports to those countries tumbled and developing countries were affected. The IMF provided at least 52 billion dollars to Hungary, Serbia, Latvia and Ukraine, which saw severe capital flight and a sharp drop in exports.
The United States, Japan and the European Union (EU) all slipped into economic recessions as demand sagged.
Central banks around the world cut interest rates while governments rolled out stimulus plans to support the economy.
In a swift and strong response to the crisis, the Chinese government announced a 585-billion-dollar stimulus package in November 2008 to be rolled out over the next two years aiming at expanding domestic demand and promoting economic growth.
In February 2009, U.S. President Barack Obama signed a 787-billion-dollar stimulus package in hopes of invigorating the U.S. economy through government investment and tax cuts.
The United States saw a large scale of government intervention into private firms amid the crisis. In March 2009, the U.S. government further announced a "toxic asset plan" that would form public-private partnerships to help cleanse banks of up to 1 trillion dollars in toxic assets.
Between April and June 2009, auto producers Chrysler and General Motors were forced by the government to file for bankruptcy protection.
Stronger role of international financial organizations and better supervision on financial sectors were demanded. The Group of 20 leaders agreed in April to provide up to 1.1 trillion dollars for the IMF and the World Bank as well as to tighten monitoring of financial activities.
To rebuild confidence in their financial systems, the U.S. government in July announced a comprehensive reform plan on financial monitoring and the EU leaders also passed a reform plan aimed at establishing a pan-Europe financial monitoring system.
The financial crisis prompted a cry for transparency of fund flows. Tax havens including Switzerland, Andorra, Liechtenstein and Belgium agreed in March to loosen their confidentiality rules to cooperate with other nations on cracking down on cross-border tax evasion.
High bonuses paid to executives in financial institutions also came under fire amid the crisis in the United States.
President Obama ordered the Treasury Department to prevent the 165 million dollars of executive bonuses from being paid in the insurance giant American International Group in March, while the executives returned part of their bonuses under the pressure of public reprimand.
The global financial crisis and the ripples it sent across the world economy have devastated banking systems, erased jobs and stagnated global trade since its beginning last year.
Following are major facts about the crisis and its developments:
The crisis has its roots in the imbalance of the global economic structure, years of freewheeling lending in the United States and loose regulation on financial markets.
The crisis was triggered by a subprime mortgage meltdown that erupted in the United States in the summer of 2007, which forced closure of many companies that largely invested in products related to subprime mortgages and tightened credit around the world.
As the subprime mortgage losses spread, Lehman Brothers' bankruptcy and Merrill Lynch's buyout in September 2008 marked the outbreak of the global financial crisis. Credit malfunction deepened while stocks and commodities plunged.
The U.S. government pledged in October to invest 700 billion U.S. dollars in bailout to cash-stripped financial institutions.
The crisis soon sent shock waves to other parts of the world. As one of the hardest-hit countries, Iceland saw its banking industry collapse within two weeks in October 2008, accompanied by a dive in stock prices and depreciation of the country's currency and had to seek 6 billion dollars of aid from the IMF.
As the crisis caused downturns in European and U.S. economies, exports to those countries tumbled and developing countries were affected. The IMF provided at least 52 billion dollars to Hungary, Serbia, Latvia and Ukraine, which saw severe capital flight and a sharp drop in exports.
The United States, Japan and the European Union (EU) all slipped into economic recessions as demand sagged.
Central banks around the world cut interest rates while governments rolled out stimulus plans to support the economy.
In a swift and strong response to the crisis, the Chinese government announced a 585-billion-dollar stimulus package in November 2008 to be rolled out over the next two years aiming at expanding domestic demand and promoting economic growth.
In February 2009, U.S. President Barack Obama signed a 787-billion-dollar stimulus package in hopes of invigorating the U.S. economy through government investment and tax cuts.
The United States saw a large scale of government intervention into private firms amid the crisis. In March 2009, the U.S. government further announced a "toxic asset plan" that would form public-private partnerships to help cleanse banks of up to 1 trillion dollars in toxic assets.
Between April and June 2009, auto producers Chrysler and General Motors were forced by the government to file for bankruptcy protection.
Stronger role of international financial organizations and better supervision on financial sectors were demanded. The Group of 20 leaders agreed in April to provide up to 1.1 trillion dollars for the IMF and the World Bank as well as to tighten monitoring of financial activities.
To rebuild confidence in their financial systems, the U.S. government in July announced a comprehensive reform plan on financial monitoring and the EU leaders also passed a reform plan aimed at establishing a pan-Europe financial monitoring system.
The financial crisis prompted a cry for transparency of fund flows. Tax havens including Switzerland, Andorra, Liechtenstein and Belgium agreed in March to loosen their confidentiality rules to cooperate with other nations on cracking down on cross-border tax evasion.
High bonuses paid to executives in financial institutions also came under fire amid the crisis in the United States.
President Obama ordered the Treasury Department to prevent the 165 million dollars of executive bonuses from being paid in the insurance giant American International Group in March, while the executives returned part of their bonuses under the pressure of public reprimand.
Monday, May 4, 2009
Wall Street extends recent gains in early going
NEW YORK – Wall Street is extending its rally as investors wait for the release of readings on housing and construction.
Stocks are trading higher early Monday ahead of the National Association of Realtors' pending home sales index and the Commerce Department's report on construction spending. The two reports for March are to be released at 10 a.m. Eastern time.
This week brings a number of key economic reports, chief among them the April employment report on Friday. Investors are hoping the data will provide further validation that the economy is beginning to heal.
But the market's greatest concern is the release Thursday of results of the government's stress tests of the 19 largest U.S. banks. Some investors are worried that the stress test results could upend the market's stunning advance, which has seen the Dow Jones industrials soar 25.4 percent and the Standard & Poor's 500 index jump 29.7 percent since March 9.
Analysts expect the market to be rather adrift ahead of the week's reports.
"It's going to be hard for the market to commit before they see the results of the stress tests and the unemployment figures on Friday," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
Sprint Nextel Corp. reported a first-quarter loss, but beat expectations. The nation's third largest wireless carrier said its revenue fell and it took a charge related to job cuts. The stock jumped 59 cents, or 12.6 percent, to $5.26.
In the first half-hour of trading, the Dow Jones industrial average rose 90.00, or 1.1 percent, to 8,302.41.
Broader stock indicators also rose. The Standard & Poor's 500 index rose 7.60, or 0.9 percent, to 885.12, and the Nasdaq composite index rose 13.05, or 0.8 percent, to 1,732.25.
The market's spring rally was triggered by word from some of the nation's biggest banks that business conditions were improving, and has since been fortified by those banks' better-than-expected earnings reports.
Many investors anticipate that the stress tests — designed to determine which banks would need more cash if the recession worsens — will show that several banks need more capital.
Investors are particularly concerned about Citigroup Inc. and Bank of America Corp. The Financial Times reported Sunday that the banks are working on plans to raise more than $10 billion each as they negotiate with regulators over the findings of the stress tests.
Despite worries about the health of banks, market sentiment has been improving and an increasing number of reports suggest the economy's slide is slowing. But there is still evidence of pain: Chrysler LLC filed for bankruptcy last week, and many companies continue to report weaker-than-expected first-quarter results.
Stocks gained about 1.5 percent last week despite concerns about a potential swine flu pandemic and Chrysler's bankruptcy filing.
In dealmaking, Italian automaker Fiat confirmed Sunday it is in talks to buy most of General Motors Corp.'s European operations. GM has been trying to find buyers for its noncore, unprofitable businesses to help it avoid bankruptcy. Fiat is in the process of acquiring a stake in Chrysler LLC, which last week filed for bankruptcy protection.
Stocks are trading higher early Monday ahead of the National Association of Realtors' pending home sales index and the Commerce Department's report on construction spending. The two reports for March are to be released at 10 a.m. Eastern time.
This week brings a number of key economic reports, chief among them the April employment report on Friday. Investors are hoping the data will provide further validation that the economy is beginning to heal.
But the market's greatest concern is the release Thursday of results of the government's stress tests of the 19 largest U.S. banks. Some investors are worried that the stress test results could upend the market's stunning advance, which has seen the Dow Jones industrials soar 25.4 percent and the Standard & Poor's 500 index jump 29.7 percent since March 9.
Analysts expect the market to be rather adrift ahead of the week's reports.
"It's going to be hard for the market to commit before they see the results of the stress tests and the unemployment figures on Friday," said Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati.
Sprint Nextel Corp. reported a first-quarter loss, but beat expectations. The nation's third largest wireless carrier said its revenue fell and it took a charge related to job cuts. The stock jumped 59 cents, or 12.6 percent, to $5.26.
In the first half-hour of trading, the Dow Jones industrial average rose 90.00, or 1.1 percent, to 8,302.41.
Broader stock indicators also rose. The Standard & Poor's 500 index rose 7.60, or 0.9 percent, to 885.12, and the Nasdaq composite index rose 13.05, or 0.8 percent, to 1,732.25.
The market's spring rally was triggered by word from some of the nation's biggest banks that business conditions were improving, and has since been fortified by those banks' better-than-expected earnings reports.
Many investors anticipate that the stress tests — designed to determine which banks would need more cash if the recession worsens — will show that several banks need more capital.
Investors are particularly concerned about Citigroup Inc. and Bank of America Corp. The Financial Times reported Sunday that the banks are working on plans to raise more than $10 billion each as they negotiate with regulators over the findings of the stress tests.
Despite worries about the health of banks, market sentiment has been improving and an increasing number of reports suggest the economy's slide is slowing. But there is still evidence of pain: Chrysler LLC filed for bankruptcy last week, and many companies continue to report weaker-than-expected first-quarter results.
Stocks gained about 1.5 percent last week despite concerns about a potential swine flu pandemic and Chrysler's bankruptcy filing.
In dealmaking, Italian automaker Fiat confirmed Sunday it is in talks to buy most of General Motors Corp.'s European operations. GM has been trying to find buyers for its noncore, unprofitable businesses to help it avoid bankruptcy. Fiat is in the process of acquiring a stake in Chrysler LLC, which last week filed for bankruptcy protection.
Friday, April 24, 2009
Business climate declines again in March
The Business Climate Indicator (BCI) for the euro area fell again in March, to its lowest level since January 1985.
This points to another markedly negative outcome for year-on-year industrial production growth in February, after the record fall registered in January.
Given the current levels, it also suggests that industrial production growth will remain clearly subdued in March.
The drop in the BCI reflects a worsening situation in most of its underlying components, a European Commission media statement said.
Managers' assessment of current overall order books and export order books deteriorated even further from last month's level.
Stocks of finished goods have again risen towards December's record highs, while the production trend observed in recent months improved only marginally from a very low level.
Looking forward, managers remain very negative about their production expectations outlook.
In March, the Economic Sentiment Indicator (ESI) for the EU and the euro area declined again, but more slowly than in the first two months of the year amid signs of stabilisation in some sectors.
It fell by 0.6 points in the EU, and by 0.7 points in the euro area, to 60.3 and 64.6, respectively.
The indicators for both regions now stand at their lowest levels since the current series was launched in January 1985.
The fall in the ESI is attributed to the deteriorating sentiment in the industry and services sectors, which fell by the same amount (-2 points) in both regions. In the other sectors, a mixed picture is emerging.
Consumer sentiment stabilised in the EU, but fell by one point in the euro area.
Retail trade increased by two points in the EU and by one point in the euro area, reinforcing the rebound which started in February. Construction in both regions stabilised at the levels seen in February.
Among the largest EU member states, Italy witnessed the most significant decline in sentiment (-4.5 points), while the fall has been more marginal in France and Poland (-1.0), Germany (-0.8) and the UK (-0.4). Economic sentiment recovered slightly in the Netherlands (1.3) and in Spain (0.8).
The financial services confidence indicator - not included in the ESI - improved by one point in the EU but deteriorated by four points in the euro area, reversing the previous month's gain.
Compared to February, managers' expectation of demand for their services worsened in both areas - significantly in the euro area, but to a much lesser extent in the EU.
This points to another markedly negative outcome for year-on-year industrial production growth in February, after the record fall registered in January.
Given the current levels, it also suggests that industrial production growth will remain clearly subdued in March.
The drop in the BCI reflects a worsening situation in most of its underlying components, a European Commission media statement said.
Managers' assessment of current overall order books and export order books deteriorated even further from last month's level.
Stocks of finished goods have again risen towards December's record highs, while the production trend observed in recent months improved only marginally from a very low level.
Looking forward, managers remain very negative about their production expectations outlook.
In March, the Economic Sentiment Indicator (ESI) for the EU and the euro area declined again, but more slowly than in the first two months of the year amid signs of stabilisation in some sectors.
It fell by 0.6 points in the EU, and by 0.7 points in the euro area, to 60.3 and 64.6, respectively.
The indicators for both regions now stand at their lowest levels since the current series was launched in January 1985.
The fall in the ESI is attributed to the deteriorating sentiment in the industry and services sectors, which fell by the same amount (-2 points) in both regions. In the other sectors, a mixed picture is emerging.
Consumer sentiment stabilised in the EU, but fell by one point in the euro area.
Retail trade increased by two points in the EU and by one point in the euro area, reinforcing the rebound which started in February. Construction in both regions stabilised at the levels seen in February.
Among the largest EU member states, Italy witnessed the most significant decline in sentiment (-4.5 points), while the fall has been more marginal in France and Poland (-1.0), Germany (-0.8) and the UK (-0.4). Economic sentiment recovered slightly in the Netherlands (1.3) and in Spain (0.8).
The financial services confidence indicator - not included in the ESI - improved by one point in the EU but deteriorated by four points in the euro area, reversing the previous month's gain.
Compared to February, managers' expectation of demand for their services worsened in both areas - significantly in the euro area, but to a much lesser extent in the EU.
EU commits to help U.S. stem economic crisis Officials say they have put previous arguments about stimulus behind them
PRAGUE - The European Union said Sunday that it has joined forces with the United States to tackle a "severe and global" economic crisis.
After a meeting Sunday with President Barack Obama, leaders of the European Union's 27 nations said they and the U.S. "are determined to work hand in hand" to put in practice decisions they made at a Group of 20 summit to counter the economic downturn.
This comes after weeks of trans-Atlantic criticism as Europe and the U.S. sniped over how they plan to turn their economies around.
U.S. officials want Europe to spend more to stimulate the economy. Europe claims it is doing enough, and tougher financial rules are needed to solve some of the problems that caused the current crisis of confidence in the financial system.
But after Sunday's meeting in Prague, the bloc said these harsh words were behind them.
Czech Prime Minister Mirek Topolanek, who led the talks, said the summit showed "a new level in EU-U.S. relations."
EU Commission President Jose Manuel Barroso said the meeting focused on "what we can do globally" on common threats such as nuclear proliferation and climate change.
Barroso told reporters that Obama and the EU leaders identified three main areas where the United States and Europe need to show strong leadership: climate change, energy security and trade.
He said the EU's ties with the United States were "by far the most important economic relationship in the world," with $2 billion per day spent trading in goods and services.
The EU leaders said in their statement that they were "particularly pleased that global financial regulation and supervision will be strengthened" as a result of talks Thursday among leaders of the Group of 20 economic powers.
Rich and emerging nations pledged at the G-20 summit to fight economic flashpoints around the world with some $1.1 trillion funding for the International Monetary Fund and World Bank. They will also try to improve global trade with new finance for traders hit by the credit crunch.
The EU said it was "ready to join forces" with the United States to resist protectionism and strengthen trans-Atlantic and international trade and investment.
The EU is particularly keen to restart work on a long-stalled World Trade Organization deal after negotiations broke down last year on U.S. and Indian unwillingness to break down some trade barriers.
After a meeting Sunday with President Barack Obama, leaders of the European Union's 27 nations said they and the U.S. "are determined to work hand in hand" to put in practice decisions they made at a Group of 20 summit to counter the economic downturn.
This comes after weeks of trans-Atlantic criticism as Europe and the U.S. sniped over how they plan to turn their economies around.
U.S. officials want Europe to spend more to stimulate the economy. Europe claims it is doing enough, and tougher financial rules are needed to solve some of the problems that caused the current crisis of confidence in the financial system.
But after Sunday's meeting in Prague, the bloc said these harsh words were behind them.
Czech Prime Minister Mirek Topolanek, who led the talks, said the summit showed "a new level in EU-U.S. relations."
EU Commission President Jose Manuel Barroso said the meeting focused on "what we can do globally" on common threats such as nuclear proliferation and climate change.
Barroso told reporters that Obama and the EU leaders identified three main areas where the United States and Europe need to show strong leadership: climate change, energy security and trade.
He said the EU's ties with the United States were "by far the most important economic relationship in the world," with $2 billion per day spent trading in goods and services.
The EU leaders said in their statement that they were "particularly pleased that global financial regulation and supervision will be strengthened" as a result of talks Thursday among leaders of the Group of 20 economic powers.
Rich and emerging nations pledged at the G-20 summit to fight economic flashpoints around the world with some $1.1 trillion funding for the International Monetary Fund and World Bank. They will also try to improve global trade with new finance for traders hit by the credit crunch.
The EU said it was "ready to join forces" with the United States to resist protectionism and strengthen trans-Atlantic and international trade and investment.
The EU is particularly keen to restart work on a long-stalled World Trade Organization deal after negotiations broke down last year on U.S. and Indian unwillingness to break down some trade barriers.
Cash handouts not best way to stimulate economy: IMF
The International Monetary Fund (IMF) says cash bonus payments are not necessarily a very useful way to stimulate the economy.
The Federal Government has spent just under $21 billion on cash handouts as part of its two economic stimulus packages.
But the IMF's chief economist, Olivier Blanchard, has told ABC1's 7:30 Report that speeding up infrastructure projects is a better way to stimulate economies during a recession.
"If people were to spend it, it would be great. The main problem is basically at this stage, we think if we put money randomly in people's pockets they're going to save most of it," he said.
"They may feel good about it, but in terms of what this does to the economy it's not very good. At this stage what we need is an increase in demand so you basically want to put the money where it's going to be spent."
Speeding up infrastructure
Meanwhile the IMF says the predicted length of the global recession will make infrastructure projects the ideal way to stimulate the economy.
Mr Blanchard says governments should be bringing forward infrastructure projects that are scheduled to begin in several years' time.
"Typically with these type of measures, is that it takes so long to actually get them going that by the time you put them in place, the recession is gone," he said.
"Well we're unlucky that this time we have a long recession, a slow recovery, so even these projects can be thought about and started now."
The Federal Government has spent just under $21 billion on cash handouts as part of its two economic stimulus packages.
But the IMF's chief economist, Olivier Blanchard, has told ABC1's 7:30 Report that speeding up infrastructure projects is a better way to stimulate economies during a recession.
"If people were to spend it, it would be great. The main problem is basically at this stage, we think if we put money randomly in people's pockets they're going to save most of it," he said.
"They may feel good about it, but in terms of what this does to the economy it's not very good. At this stage what we need is an increase in demand so you basically want to put the money where it's going to be spent."
Speeding up infrastructure
Meanwhile the IMF says the predicted length of the global recession will make infrastructure projects the ideal way to stimulate the economy.
Mr Blanchard says governments should be bringing forward infrastructure projects that are scheduled to begin in several years' time.
"Typically with these type of measures, is that it takes so long to actually get them going that by the time you put them in place, the recession is gone," he said.
"Well we're unlucky that this time we have a long recession, a slow recovery, so even these projects can be thought about and started now."
UK economy shrinks at sharpest rate since 1979
Britain's economy shrank at its fastest pace in almost 30 years in the first quarter of 2009, official data shows, suggesting the recession may be deeper than feared.
The Office for National Statistics (ONS) said gross domestic product fell 1.9 per cent on the quarter in the first three months of this year, the biggest fall since the third quarter fo 1979 and below forecasts for a 1.5 per cent contraction.
Most analysts had expected the 1.6 per cent fall seen at the end of last year to mark the worst period of the recession.
On the year, GDP fell by 4.1 per cent, the biggest annual drop since the end of 1980. Analysts had expected a 3.8 per cent contraction.
The figures suggest there are downside risks to finance minister Alistair Darling's forecast for a 3.5 per cent contraction this year - he had expected first-quarter GDP figures to show a similar drop to the final quarter.
The new data also suggest policymakers may need to do more to kick-start the economy, having already slashed interest rates to a record low of 0.5 per cent and started buying assets with newly created money.
The government has also pumped more than 20 billion pounds ($41 billion) into the economy.
The ONS data showed the biggest quarterly fall in manufacturing output since records began in 1948 and the biggest quarterly fall in services output since 1979.
Business services and finance recorded its biggest drop in output since records began in 1983.
Separate data showed an unexpected rise in retail sales on the month in March driven by strength in clothing and food sales.
The Office for National Statistics (ONS) said gross domestic product fell 1.9 per cent on the quarter in the first three months of this year, the biggest fall since the third quarter fo 1979 and below forecasts for a 1.5 per cent contraction.
Most analysts had expected the 1.6 per cent fall seen at the end of last year to mark the worst period of the recession.
On the year, GDP fell by 4.1 per cent, the biggest annual drop since the end of 1980. Analysts had expected a 3.8 per cent contraction.
The figures suggest there are downside risks to finance minister Alistair Darling's forecast for a 3.5 per cent contraction this year - he had expected first-quarter GDP figures to show a similar drop to the final quarter.
The new data also suggest policymakers may need to do more to kick-start the economy, having already slashed interest rates to a record low of 0.5 per cent and started buying assets with newly created money.
The government has also pumped more than 20 billion pounds ($41 billion) into the economy.
The ONS data showed the biggest quarterly fall in manufacturing output since records began in 1948 and the biggest quarterly fall in services output since 1979.
Business services and finance recorded its biggest drop in output since records began in 1983.
Separate data showed an unexpected rise in retail sales on the month in March driven by strength in clothing and food sales.
Obama Joins Credit Card Reform Debate
President Obama met with representatives of the credit card industry April 23 and outlined core principles that he would like to see included in legislation currently winding its way through Congress.
Obama called for strong and reliable protections for consumers that ban unfair rate increases and forbid abusive fees and penalties. In addition, the president urged an end to confusing terms and conditions and stressed that all forms and statements use “plain language that is in plain sight.”
Credit card companies must also be required to make their contract terms easily accessible and must provide consumers with the necessary information so that they can comparison shop. Firms must also be required to offer at least one simple, straightforward credit card that offers the strongest protections along with the simplest terms and prices, the president said.
Obama also pressed for increased accountability in the system, which he noted would require stronger monitoring and enforcement, and penalties for violations of the law.
Meanwhile, Senate Banking Committee Chairman Christopher Cox, D-Conn., and Sen. Charles Schumer, D-N.Y., have called on federal regulators to implement an emergency freeze on interest rates tied to existing balances on credit cards.
Writing to Federal Reserve Board Chairman Ben Bernanke and other regulators, the senators note that the Fed has already issued a new regulatory rule that would ban the practice of retroactively raising the interest rates on existing credit card balances. However, the rule is not scheduled to take effect until July 2010, giving companies more than a year to raise rates on consumers preemptively to get under the deadline, the senators warn.
Schumer and Dodd said the Fed should invoke its emergency powers to make the rule effective immediately. “Over the past year, the Federal Reserve has cited the financial crisis as one of the reasons for acting quickly to implement new lending facilities and programs to protect financial institutions. It is long past time for the regulatory agencies to act with the same sense of urgency to protect consumers from the behavior of those same financial companies,” the senators wrote.
Obama called for strong and reliable protections for consumers that ban unfair rate increases and forbid abusive fees and penalties. In addition, the president urged an end to confusing terms and conditions and stressed that all forms and statements use “plain language that is in plain sight.”
Credit card companies must also be required to make their contract terms easily accessible and must provide consumers with the necessary information so that they can comparison shop. Firms must also be required to offer at least one simple, straightforward credit card that offers the strongest protections along with the simplest terms and prices, the president said.
Obama also pressed for increased accountability in the system, which he noted would require stronger monitoring and enforcement, and penalties for violations of the law.
Meanwhile, Senate Banking Committee Chairman Christopher Cox, D-Conn., and Sen. Charles Schumer, D-N.Y., have called on federal regulators to implement an emergency freeze on interest rates tied to existing balances on credit cards.
Writing to Federal Reserve Board Chairman Ben Bernanke and other regulators, the senators note that the Fed has already issued a new regulatory rule that would ban the practice of retroactively raising the interest rates on existing credit card balances. However, the rule is not scheduled to take effect until July 2010, giving companies more than a year to raise rates on consumers preemptively to get under the deadline, the senators warn.
Schumer and Dodd said the Fed should invoke its emergency powers to make the rule effective immediately. “Over the past year, the Federal Reserve has cited the financial crisis as one of the reasons for acting quickly to implement new lending facilities and programs to protect financial institutions. It is long past time for the regulatory agencies to act with the same sense of urgency to protect consumers from the behavior of those same financial companies,” the senators wrote.
Thursday, April 23, 2009
Invited to the debate of European Parliamentary Groups' Chairmen organised by the European Policy Centre, the Chairman of the Centre-Right Group (EPP-ED) said he regrets that some political families are using the economic crisis "to build up their electoral strength".
"Yes, capitalism, as it is been working since the 1990s, in particular since the Clinton presidency, this capitalism without any rules, is the cause of the serious dysfunctions that we are suffering today" Joseph Daul said.
"But that very capitalism, that 'Game Boy' capitalism, without any rules or any moral, never was neither Europe's, nor the Centre-Right's capitalism.
The Chairman of the most influential Group in the European Parliament welcomed the impetus that Europe gave, under the French Presidency, to a refoundation of capitalism. He pointed to the protective role of the Euro and defended the social market economy model, which is "Europe's trademark".
Joseph Daul underlined that, when the crisis is behind us, we will count losers and winners. "Losers will be those who will have made populist and short term policies, winners will be those who will not have given in to the first demonstrators. Winners will be those who will have had the courage to reform through solidarity measures which are compatible with a competitive economy."
"Yes, capitalism, as it is been working since the 1990s, in particular since the Clinton presidency, this capitalism without any rules, is the cause of the serious dysfunctions that we are suffering today" Joseph Daul said.
"But that very capitalism, that 'Game Boy' capitalism, without any rules or any moral, never was neither Europe's, nor the Centre-Right's capitalism.
The Chairman of the most influential Group in the European Parliament welcomed the impetus that Europe gave, under the French Presidency, to a refoundation of capitalism. He pointed to the protective role of the Euro and defended the social market economy model, which is "Europe's trademark".
Joseph Daul underlined that, when the crisis is behind us, we will count losers and winners. "Losers will be those who will have made populist and short term policies, winners will be those who will not have given in to the first demonstrators. Winners will be those who will have had the courage to reform through solidarity measures which are compatible with a competitive economy."
Thursday, March 26, 2009
Analysis 2009: The Financial Crisis Hits IT Hard
The recession that started in January 2008 looks to be four phased. The first phase, The housing collapse, actually started in August 2007. The financial meltdown hit in September 2008, and likely will continue through to March 2009 or so. The business firestorm is really just getting underway now, and will be the dominant theme for the next 8-12 months whlie the final phase, currency collapse, will (if it occurs at all) likely not happen for another 12-18 months.
The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession. In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.
The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply. Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed.
The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess. This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.
This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).
The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.
The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummetted in the last few months). This has resulted in a consumer strike, as people save rather than spend.
For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.
One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop. It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two.
At an individual level, this is a rational response. The problem comes when everyone does it. At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods. They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.
Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle. Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean. While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.
Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane). In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling. Yet the real damage comes from factors such as storm surges, where large amounts of water start moving quickly in areas not designed for water. Hurricanes knock out power, making recovery efforts difficult, and paradoxically, raises the possibility that fires will start that can't be reached or put out, causing even more damage.
The same thing is happening now - we are within the eye of the financial hurricane, a kind of false calm where the winds and pressures are at an unstable equilibrium, but this only has the effect of relaxing things that had bent in response to the hurricane force winds. Unfortunately, once we enter the eyewall on the other side the forces are just as strong, but going in the other direction (one of the reason hurricanes are so destructive).
When this plays out, many retail companies (and not a few medium to large sized malls) will be out of business, their buildings sitting vacant and often poorly maintained. There will be a significant exurban flight as people are forced to sell their properties (typically at a loss) because of unmaintainable mortgages and either rent closer in to population cores or move to higher density housing (this trend will be exacerbated by the number of baby boomers who are reaching retirement age and are staring at fixed incomes with oversized mortgages and reduced bank accounts), a trend which will result in many "bedroom communities" becoming squalid slums or just abandoned altogether.
Suppliers to these retailers are already starting to disappear as retailers cut back on their inventories, and in areas such as automotive manufacturing the tremors as these highly centralized, monolithic conglomerates continue to shutter plants are causing the extensive supply chains to fragment as companies that weren't sufficiently diversified lose their primary customers and go out of business.
As this happens, it also makes it harder for these same companies to continue to pay their leases, which are typically financed at a much higher rate than consumer mortgages are as most are fifteen year rather than thirty year paper. This will be the next major pressure that a lot of companies, even those outside of the retail sector, will be facing, and software companies in particular are vulnerable to this particular threat, especially as VC financing continues to decline. Expect by the end of 2009 that office buildings will be even more vacant than they were in 2003 at the bottom of the tech recession.
Venture capital, by the way, is also drying up for much the same reason as credit in general - VCs are investors, and they do not in general want to take a loss on a company, even one with a brilliant idea, if they are concerned that economic pressures will never let it get off the ground. Moreover, those same investors already have extant commitments that they are in many cases having to serve as the primary bank for, and this in turn is reducing their willingness to take on new businesses (and will for some time).
A further process that will accelerate is the disaggregation of conglomerates, as companies shed or spin-off divisions that are not profit centers. It's likely that this will hit the big services companies such as IBM, Fujitsu, Siemens and so forth disproportionately, though it might also affect companies such as Microsoft or Oracle. Many of the newly created spin-offs may not make it once cut off from the sheltering effect of the mothership, but others (most notably those that were already successful companies in their own rights) may very well come out stronger in the process.
The next year will be a poor one for mergers, unless they happen to be pure stock exchange mergers (where the two companies agree to on a common stock conversion rate with little actual money changing hands). Acquisition mergers typically require not only cash on hand, but also require access to bonds or other equities that can be used to leverage this cash on hand. With so much uncertainty right now in terms of equity prices, however, raising such funds becomes difficult, even as it seems like we are awash in a sea of junk bonds.
Toward the end of 2009, expect this trend to reverse. Companies with strong cash positions going into this storm will have a much clearer understanding of the shape of the market by the end of the year, and will be able to buy technically sound but financially distressed software companies at bargain rates. If you're vested in a startup, now is probably a good time to discuss acquisition strategies, though probably not at the premium values that many startups tend to value themselves, with an eye towards that sweet spot in the Q4 2009.
There's currently a running debate among economists about what happens when the recession ends. Some, primarily Keynesians, feel that economic stimulus is a necessity to get us out of the current liquidity trap, and that for the most part the debt that most countries are taking on now will restore us back to a period of economic stability with perhaps at worst only modest inflation (in the 3-4% rate) for a few years thereafter.
Others, especially those of the Austrian school of economics, expect that all of the money being created in order to finance the stimulus will, once the credit crunch eases, result in significant inflation, possibly above 10% per annum, leading to a similar situation (stagflation) that caused the 70s to be so hard (well, that and disco).
My money is on the Austrians, as they were surprisingly accurate in their predictions of the present economic crisis, and as a central part of the problem facing the economy right now is that real interest rates (those charged by banks to their primary customers) continues to remain far higher than the nominal 0.25% percent rate that the current Fed has set the prime lending rate.
In short, even after the storm abates, money may continue to be in short supply for many months (or even years) to come. Expect that government stimulus packages and government works programs may in fact have to substitute for the private economy for some time (more on that in the next section).
The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession. In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.
The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply. Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed.
The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess. This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.
This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).
The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.
The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummetted in the last few months). This has resulted in a consumer strike, as people save rather than spend.
For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.
One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop. It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two.
At an individual level, this is a rational response. The problem comes when everyone does it. At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods. They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.
Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle. Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean. While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.
Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane). In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling. Yet the real damage comes from factors such as storm surges, where large amounts of water start moving quickly in areas not designed for water. Hurricanes knock out power, making recovery efforts difficult, and paradoxically, raises the possibility that fires will start that can't be reached or put out, causing even more damage.
The same thing is happening now - we are within the eye of the financial hurricane, a kind of false calm where the winds and pressures are at an unstable equilibrium, but this only has the effect of relaxing things that had bent in response to the hurricane force winds. Unfortunately, once we enter the eyewall on the other side the forces are just as strong, but going in the other direction (one of the reason hurricanes are so destructive).
When this plays out, many retail companies (and not a few medium to large sized malls) will be out of business, their buildings sitting vacant and often poorly maintained. There will be a significant exurban flight as people are forced to sell their properties (typically at a loss) because of unmaintainable mortgages and either rent closer in to population cores or move to higher density housing (this trend will be exacerbated by the number of baby boomers who are reaching retirement age and are staring at fixed incomes with oversized mortgages and reduced bank accounts), a trend which will result in many "bedroom communities" becoming squalid slums or just abandoned altogether.
Suppliers to these retailers are already starting to disappear as retailers cut back on their inventories, and in areas such as automotive manufacturing the tremors as these highly centralized, monolithic conglomerates continue to shutter plants are causing the extensive supply chains to fragment as companies that weren't sufficiently diversified lose their primary customers and go out of business.
As this happens, it also makes it harder for these same companies to continue to pay their leases, which are typically financed at a much higher rate than consumer mortgages are as most are fifteen year rather than thirty year paper. This will be the next major pressure that a lot of companies, even those outside of the retail sector, will be facing, and software companies in particular are vulnerable to this particular threat, especially as VC financing continues to decline. Expect by the end of 2009 that office buildings will be even more vacant than they were in 2003 at the bottom of the tech recession.
Venture capital, by the way, is also drying up for much the same reason as credit in general - VCs are investors, and they do not in general want to take a loss on a company, even one with a brilliant idea, if they are concerned that economic pressures will never let it get off the ground. Moreover, those same investors already have extant commitments that they are in many cases having to serve as the primary bank for, and this in turn is reducing their willingness to take on new businesses (and will for some time).
A further process that will accelerate is the disaggregation of conglomerates, as companies shed or spin-off divisions that are not profit centers. It's likely that this will hit the big services companies such as IBM, Fujitsu, Siemens and so forth disproportionately, though it might also affect companies such as Microsoft or Oracle. Many of the newly created spin-offs may not make it once cut off from the sheltering effect of the mothership, but others (most notably those that were already successful companies in their own rights) may very well come out stronger in the process.
The next year will be a poor one for mergers, unless they happen to be pure stock exchange mergers (where the two companies agree to on a common stock conversion rate with little actual money changing hands). Acquisition mergers typically require not only cash on hand, but also require access to bonds or other equities that can be used to leverage this cash on hand. With so much uncertainty right now in terms of equity prices, however, raising such funds becomes difficult, even as it seems like we are awash in a sea of junk bonds.
Toward the end of 2009, expect this trend to reverse. Companies with strong cash positions going into this storm will have a much clearer understanding of the shape of the market by the end of the year, and will be able to buy technically sound but financially distressed software companies at bargain rates. If you're vested in a startup, now is probably a good time to discuss acquisition strategies, though probably not at the premium values that many startups tend to value themselves, with an eye towards that sweet spot in the Q4 2009.
There's currently a running debate among economists about what happens when the recession ends. Some, primarily Keynesians, feel that economic stimulus is a necessity to get us out of the current liquidity trap, and that for the most part the debt that most countries are taking on now will restore us back to a period of economic stability with perhaps at worst only modest inflation (in the 3-4% rate) for a few years thereafter.
Others, especially those of the Austrian school of economics, expect that all of the money being created in order to finance the stimulus will, once the credit crunch eases, result in significant inflation, possibly above 10% per annum, leading to a similar situation (stagflation) that caused the 70s to be so hard (well, that and disco).
My money is on the Austrians, as they were surprisingly accurate in their predictions of the present economic crisis, and as a central part of the problem facing the economy right now is that real interest rates (those charged by banks to their primary customers) continues to remain far higher than the nominal 0.25% percent rate that the current Fed has set the prime lending rate.
In short, even after the storm abates, money may continue to be in short supply for many months (or even years) to come. Expect that government stimulus packages and government works programs may in fact have to substitute for the private economy for some time (more on that in the next section).
Tuesday, March 10, 2009
Alistair Darling urges EU to help out poorer economies
The wealthier nations of the EU must step in to prevent their less well off neighbours from going bust, Alistair Darling, the Chancellor, has warned.
Speaking ahead of a meeting of European Union finance ministers, Mr Darling warned that the financial crisis facing some Eastern members was so serious that entire economies were in danger of going under.
And he insisted that it was imperative for nations including as the UK to come forward to help, despite the growing recession and financial difficulties battering our own economy.
Asked how Britain could afford to help other nations when it was itself in crisis, Mr Darling told Radio 4's Today programme: "If we don't sort these problems out and try to resolve them, it will affect us, because our well-being, our wealth as a country, depends on the health of Europe, it depends on the health of the emerging countries in South America and India and China and so on.
"We are all in this together... All politics are global now and that is why we need to take action."
Mr Darling warned that central and eastern European economies faced a 2009 funding shortfall of $100 billion - around £72 billion - and called on the G20 group of leading economies to agree additional support via the IMF.
Finance ministers from the G20 are due to arrive in London at the weekend for talks, while heads of government will gather under Gordon Brown's chairmanship next month.
Mr Darling added: "There is no doubt that the present situation is uncertain. There is a lot of turbulence out there, as people can see, but I am very clear that yes we can play our part in supporting the economy, we can help restore the banking system so that it starts functioning effectively again.
"But we must, must, must act together. That's why today's meeting in Brussels is important. That's why the G20 meeting is very, very important. Acting together will make a real difference.
"One of the things we are discussing at the G20 meeting this weekend is how do we help each other, because if we do that then this downturn will be a lot less painful than would otherwise be the case."
Beyond central and eastern Europe, the countries most vulnerable to drying up of international credit are concentrated in sub-Saharan Africa
The World Bank has estimated that 129 developing countries are facing a financing shortfall of between $270 and $700 billion.
The Chancellor urged his EU counterparts to step support for developing nations, but said that assistance must first go towards hard-hit central and eastern European countries in order to stop the entire Union from getting into serious financial trouble.
Speaking ahead of a meeting of European Union finance ministers, Mr Darling warned that the financial crisis facing some Eastern members was so serious that entire economies were in danger of going under.
And he insisted that it was imperative for nations including as the UK to come forward to help, despite the growing recession and financial difficulties battering our own economy.
Asked how Britain could afford to help other nations when it was itself in crisis, Mr Darling told Radio 4's Today programme: "If we don't sort these problems out and try to resolve them, it will affect us, because our well-being, our wealth as a country, depends on the health of Europe, it depends on the health of the emerging countries in South America and India and China and so on.
"We are all in this together... All politics are global now and that is why we need to take action."
Mr Darling warned that central and eastern European economies faced a 2009 funding shortfall of $100 billion - around £72 billion - and called on the G20 group of leading economies to agree additional support via the IMF.
Finance ministers from the G20 are due to arrive in London at the weekend for talks, while heads of government will gather under Gordon Brown's chairmanship next month.
Mr Darling added: "There is no doubt that the present situation is uncertain. There is a lot of turbulence out there, as people can see, but I am very clear that yes we can play our part in supporting the economy, we can help restore the banking system so that it starts functioning effectively again.
"But we must, must, must act together. That's why today's meeting in Brussels is important. That's why the G20 meeting is very, very important. Acting together will make a real difference.
"One of the things we are discussing at the G20 meeting this weekend is how do we help each other, because if we do that then this downturn will be a lot less painful than would otherwise be the case."
Beyond central and eastern Europe, the countries most vulnerable to drying up of international credit are concentrated in sub-Saharan Africa
The World Bank has estimated that 129 developing countries are facing a financing shortfall of between $270 and $700 billion.
The Chancellor urged his EU counterparts to step support for developing nations, but said that assistance must first go towards hard-hit central and eastern European countries in order to stop the entire Union from getting into serious financial trouble.
Friday, March 6, 2009
Financial crisis calls for deeper RBI rate cuts
NEW DELHI: There’s monetary policy action by the Reserve Bank of India, or so it would seem. The RBI has reduced, yet again, its policy read interest rates, so as to boost the faltering growth momentum. The repo rate, the rate at which the central bank lends short-term to banks, has been reduced by 50 basis points–half a percentage–to 5%. Also, the reverse repo rate, the rate at which the RBI accepts short-term bank deposits, has been lowered by 50 basis points to 3.5%. Yet it appears that the monetary authority is erring on the side of caution.
The latest rate cut is certainly a move in the right direction, and to the extent that it sends the right signals of easier interest rates around the corner, it is clearly welcome. But deeper rate cuts are surely warranted, given the unprecendent global financial crisis, the severe recession abroad and much deceleration on the domestic growth front. Since mid-September, the RBI has reduced the repo rate about five times–from 9 to 5%. And it has revised the reverse repo rate at least thrice, from 6 to 3.5%. In a slowdown, the small reductions in the rates may not quite have sufficient policy impact on the ground.
The latest RBI figures do in fact indicate non-food bank credit has decelerated further to 19.7% year-on-year as on February 13, as compared with 22.7% growth as on February 15, last year. Worse, credit expansion during the period between December 19, 2008 and February 13, `09 at Rs. 8,091 crore–as per RBI data–was sharply lower than that of Rs. 86,978 crore in the corresponding period of the previous year. This is a huge deceleration indeed! It’s telling that the total flow of resources to the commercial sector from banks and non-banks during fiscal 2008-09–up to February 13–at Rs 4,98,136 crore was lower than Rs 6,08,351 crore during the corresponding period of the last fiscal.
The RBI note announcing the reduced policy rates does emphasis that the cumulative amount of "actual or potential primary liquidity" in the financial system, thanks to various measures initiated by it, is "comfortable" at over Rs 3,88,000 crore. Note that the central bank has reduced the cash reserve ratio (CRR) for banks from 9% to 5% of net demand and time liabilities (NDTL), and the statutory liquidity ratio (SLR), the minimum extent to which banks need to invest in government securities, from 25% to 24% of NDTL.
The reduction in SLR by one percentage point of NDTL may have made available liquid funds of the sum of Rs 40,000 crore for the purpose ofcredit expansion. Yet there’s the sharp reduction in credit offtake in recent months.
It does require more proactive and looser monetary policy. In the latest instance of rate cuts, it would have made better policy sense to reduce the repo rate by 100 basis points–a whole percentage point–and similarly lowered the reverse repo rate as well. The point is that given the sharp reduction in the inflation rate, as measured by y-o-y variations in the wholesale price index (WPI), real interest rates–approximately the nominal interest minus the inflation rate–are much too high. The WPI has declined to 3.36% as on February 14, down by almost three-fourths from the high of 12.91% last August.
The fact remains that since the inflation rate over the course of a bank loan is not really known, the volatility in the inflation rate does represent a risk to both banks and borrowers. Actually, credit and interest rate risks are two of the most important sources of risks for commercial banks. Given that the demand for credit does depend on real interest rates, the central bank needs to purposefully indicate lower cost of funds for banks by being proactive on policy rates. In tandem, the objective ought to be to effectively lower the cost of funds for banks, so that there is increased supply of lonable funds at the right rates. Banks do borrow money at short maturities to onlend to households and companies at longer maturities. Hence the real risk for asset liability mismatches, in banks. Also, in the backdrop of a slowdown and increased credit risks, with intereste rates falling and the consequent rise in the prices of government bond portfolios, banks may be all the more chary to lend. The bottom line is that banks need to holistically access both credit and interest rate risks, and better intermediate between savers and borrowers, for the greater good.
The latest rate cut is certainly a move in the right direction, and to the extent that it sends the right signals of easier interest rates around the corner, it is clearly welcome. But deeper rate cuts are surely warranted, given the unprecendent global financial crisis, the severe recession abroad and much deceleration on the domestic growth front. Since mid-September, the RBI has reduced the repo rate about five times–from 9 to 5%. And it has revised the reverse repo rate at least thrice, from 6 to 3.5%. In a slowdown, the small reductions in the rates may not quite have sufficient policy impact on the ground.
The latest RBI figures do in fact indicate non-food bank credit has decelerated further to 19.7% year-on-year as on February 13, as compared with 22.7% growth as on February 15, last year. Worse, credit expansion during the period between December 19, 2008 and February 13, `09 at Rs. 8,091 crore–as per RBI data–was sharply lower than that of Rs. 86,978 crore in the corresponding period of the previous year. This is a huge deceleration indeed! It’s telling that the total flow of resources to the commercial sector from banks and non-banks during fiscal 2008-09–up to February 13–at Rs 4,98,136 crore was lower than Rs 6,08,351 crore during the corresponding period of the last fiscal.
The RBI note announcing the reduced policy rates does emphasis that the cumulative amount of "actual or potential primary liquidity" in the financial system, thanks to various measures initiated by it, is "comfortable" at over Rs 3,88,000 crore. Note that the central bank has reduced the cash reserve ratio (CRR) for banks from 9% to 5% of net demand and time liabilities (NDTL), and the statutory liquidity ratio (SLR), the minimum extent to which banks need to invest in government securities, from 25% to 24% of NDTL.
The reduction in SLR by one percentage point of NDTL may have made available liquid funds of the sum of Rs 40,000 crore for the purpose ofcredit expansion. Yet there’s the sharp reduction in credit offtake in recent months.
It does require more proactive and looser monetary policy. In the latest instance of rate cuts, it would have made better policy sense to reduce the repo rate by 100 basis points–a whole percentage point–and similarly lowered the reverse repo rate as well. The point is that given the sharp reduction in the inflation rate, as measured by y-o-y variations in the wholesale price index (WPI), real interest rates–approximately the nominal interest minus the inflation rate–are much too high. The WPI has declined to 3.36% as on February 14, down by almost three-fourths from the high of 12.91% last August.
The fact remains that since the inflation rate over the course of a bank loan is not really known, the volatility in the inflation rate does represent a risk to both banks and borrowers. Actually, credit and interest rate risks are two of the most important sources of risks for commercial banks. Given that the demand for credit does depend on real interest rates, the central bank needs to purposefully indicate lower cost of funds for banks by being proactive on policy rates. In tandem, the objective ought to be to effectively lower the cost of funds for banks, so that there is increased supply of lonable funds at the right rates. Banks do borrow money at short maturities to onlend to households and companies at longer maturities. Hence the real risk for asset liability mismatches, in banks. Also, in the backdrop of a slowdown and increased credit risks, with intereste rates falling and the consequent rise in the prices of government bond portfolios, banks may be all the more chary to lend. The bottom line is that banks need to holistically access both credit and interest rate risks, and better intermediate between savers and borrowers, for the greater good.
Corporate Borrowing Costs Surge to Record on Depression Scare
Corporate borrowing costs surged to a record in Europe on concern the credit crisis will deepen into a global depression.
Investors are demanding the highest yields relative to government debt to buy European investment-grade corporate bonds. The spread widened 20 basis points to 442 basis points this week, beating the previous record of 438 basis points on Dec. 26, according to Merrill Lynch & Co. data.
“Investors are scared that a 1930s style depression is no longer a mere tail-end risk,” said Georg Grodzki, head of credit research at Legal & General Group Plc, which manages more than 110 billion pounds ($156 billion) of assets. “It is easy to see why even some real-money investors are running for the exit because of waning confidence in the effectiveness of the measures being taken.”
Governments from the U.S. to Australia have sought to introduce policies to bolster their economies as a deepening global recession sent stocks in the MSCI World Index to a 24 percent plunge this year, the worst start to a year since the gauge was created in 1970. A Labor Department report today may show employers in the world’s largest economy cut payrolls by 650,000 and the unemployment rate surged to a 25-year high of 7.9 percent, according to a Bloomberg News survey.
The cost of protecting bonds sold by European banks and insurers from default surged to records on concern they will have to add to the almost $1.2 trillion of losses and writedowns financial companies worldwide have taken since the start of the credit crisis.
Financial Index
The benchmark Markit iTraxx Financial index of credit- default swaps linked to the senior debt of 25 banks and insurers jumped 7 basis points to a record 202, according to JPMorgan Chase & Co. prices. The subordinated index surged 20 basis points to an all-time high 385.
“Investors in financial companies feel like they’ve gone 10 rounds with Mike Tyson, they’re so beaten up,” said Gary Jenkins, a strategist at Evolution Securities in London. “If you can’t restore confidence in financials, you can’t restore confidence in the economy. We’re in the middle of a crisis of the global financial system.”
A Merrill Lynch & Co. index showing the yield premium investors demand to hold the lowest-rated debt issued by European insurers had its biggest gain this year, soaring 92 basis points to 2150. A gauge showing the spreads on similar debt at banks jumped 90 basis points to 3426.
Default Concern
Investor concern that defaults among companies with high- risk, high-yield credit ratings will soar as economies slow drove the benchmark Markit iTraxx Crossover index of credit-default swaps on 50 sub-investment grade companies in Europe 12 basis points higher to a record 1,165. The index traded as low as 189 basis points at the start of the credit crisis in June 2007.
The default rate on speculative grade companies rose to 5.2 percent in February, up from 4.8 percent a month earlier, Moody’s Investors Service said yesterday. The default rate will rise to 22.5 percent in Europe and 13.8 percent in the U.S. by the end of the year, Moody’s said, the highest since the 1930s.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.
A basis point on a credit-default swap contract protecting 10 million euros ($12.7 million) of debt from default for five years is equivalent to 1,000 euros a year.
EU worry over inter-bank lend limits
The ECB raised concerns about EU plans for bank-to-bank lending limits today, saying it could make it harder for banks to cope with a repeat of the credit crunch.
The EU plans included a recommendation to impose a limit on inter-bank exposures of 25 percent of the credit institution's own funds or the amount of E150 million, regardless of their maturity.But the ECB said the idea may not be a good one, as banks could find it harder to cope with a repeat of the credit crisis.
"Internal quantitative analysis by the ECB suggests that a non-negligible share of banks would have been constrained in their overnight lending activities in a substantial number of transactions if the limit had been in place before the start of the financial market turmoil in August 2007," it said in legal opinion published on its Web site.
"This constitutes a substantial and undesirable change when compared to the current EU legal framework." The ECB went further in its criticism, saying it could hamper its own monetary policy role.
"From a monetary policy implementation perspective, the ECB is of the view that the above proposed limit would constrain the smooth flow of liquidity within the inter-bank market and could be detrimental to the smooth functioning of the euro money market."
EU states have already reached a preliminary agreement on the plans. The European Parliament, which has a joint say on the measures, holds a committee vote on Monday before a final deal with EU states in April.Monday, March 2, 2009
Growing Economic Crisis Threatens the Idea of One Europe
PARIS — The leaders of the European Union gathered Sunday in Brussels in an emergency summit meeting that seemed to highlight the very worries it was designed to calm: that the world economic crisis has unleashed forces threatening to split Europe into rival camps.
An urgent call from Hungary for a large bailout for newer, Eastern members was bluntly rejected by Europe’s strongest economy, Germany, and received little support from other countries. Chancellor Angela Merkel of Germany, facing federal elections in September, said countries must be dealt with on a case-by-case basis.
“Saying that the situation is the same for all Central and Eastern European states, I don’t see that,” Mrs. Merkel told reporters. She spoke after Prime Minister Ferenc Gyurcsany of Hungary warned, “We should not allow that a new Iron Curtain should be set up and divide Europe.”
With uncertain leadership and few powerful collective institutions, the European Union is struggling with the strains this crisis has inevitably produced among 27 countries with uneven levels of development.
The traditional concept of “solidarity” is being undermined by protectionist pressures in some member countries and the rigors of maintaining a common currency, the euro, for a region that has diverse economic needs. Particularly acute economic problems in some newer members that once were part of the Soviet bloc have only made matters worse.
Europe’s difficulties are in sharp contrast to the American response. President Obama has just announced a budget that will send the United States more deeply into debt but that also makes an effort to redistribute income and overhaul health care, improve education and combat environmental problems.
Whether Europe can reach across constituencies to create consensus, however, has been an open, and suddenly pressing, question.
“The European Union will now have to prove whether it is just a fair-weather union or has a real joint political destiny,” said Stefan Kornelius, the foreign editor of the German newspaper Süddeutsche Zeitung. “We always said you can’t really have a currency union without a political union, and we don’t have one. There is no joint fiscal policy, no joint tax policy, no joint policy on which industries to subsidize or not. And none of the leaders is strong enough to pull the others out of the mud.”
Thomas Klau, Paris director of the European Council on Foreign Relations an independent research and advocacy group, said, “This crisis affects the political union that backs the euro and of course the E.U. as a whole, and solidarity is at the heart of the debate.”
The crisis also has implications for Washington, which wants a European Union that can promote common interests in places like Afghanistan and the Middle East with financial and military help.
“All of that is in doubt if the cornerstone of the E.U. — its internal market, economic union and solidarity — is in question,” said Ronald D. Asmus, a former State Department official who runs the Brussels office of the German Marshall Fund.
The problems are basically twofold: within the inner core of nations that use the euro as their common currency, which together have an economy roughly the size of the United States’; and within the larger European Union.
The 16 nations that use the euro — introduced in 1999, and one of the proudest European accomplishments — must submit to the monetary leadership of the European Central Bank. That keeps some members hardest hit by the economic downturn, like Ireland, Spain, Italy and Greece, from unilaterally taking radical steps to stimulate their economies.
Germany once vowed never to bail out weaker members in return for giving up its strong national currency, the deutsche mark. But German leaders are now faced with the unpalatable prospect of having to put German money at risk to bail out less responsible partners that do not adhere to European fiscal rules.
Within the larger European Union, fissures are growing between older members and newer ones, especially those that lived under the yoke of Soviet socialism. Some countries of Central Europe, like the Czech Republic and Poland, are doing relatively well. Others, including Hungary, Romania and the Baltic states, are in a state of near-meltdown.
But only two newer members — tiny Slovenia and Slovakia — are protected by being among the countries that use the euro, and there was little support on Sunday for changing the rules to allow more to join quickly.
Many new members have seen their currencies plummet against the euro. That has made their debt repayments to European banks, their primary lenders, a much greater burden even as the global recession has meant a plunge in orders from consumers in the West. Some countries are asking for aid, both from their European partners and from the International Monetary Fund, to prop up their currencies and the banks.
While Western European countries are reluctant, with their own problems both at home and among the countries using the euro, there is a deep interconnectedness in any case.
Much of the debt at risk in Eastern Europe is on the books of euro zone banks — especially ones in Austria and Italy. The same is true of problems farther afield, in Ukraine, which is not yet a member.Having watched the Soviet Union collapse, the countries of Central and Eastern Europe embraced the liberal, capitalist model as the price of integration with Europe. That model is now badly tarnished, and the newer members feel adrift.
Before the larger European summit meeting on Sunday, the Poles called an unprecedented meeting of nine of the new member nations in the East to discuss common grievances.
Prime Minister Mirek Topolanek of the Czech Republic, which holds the rotating presidency of the European Union, tried to ease tensions, insisting that no member would be left “in the lurch.”
“We do not want any dividing lines; we do not want a Europe divided along a north-south or east-west line, pursuing a beggar-thy-neighbor policy,” Mr. Topolanek said.
But his Hungarian colleague, Mr. Gyurcsany, called for a special European Union fund of up to $241 billion to protect the weakest members. His government circulated a paper on Sunday suggesting that Central Europe’s refinancing needs this year could total $380 billion.
“Failure to act,” the paper said, “could cause a second round of systemic meltdowns that would mainly hit the euro zone economies.”
Mrs. Merkel opposed an undifferentiated package, although she suggested on Thursday that targeted help might be offered to specific countries, like Ireland.
Governments of the countries of the European Union have already spent a total of $380 billion in bank recapitalizations and put up $3.17 trillion to guarantee banks’ loans and try to get credit moving again.
On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they would jointly provide $31.1 billion to support Eastern European nations, but much more will be needed.
Mr. Klau, of the European Council on Foreign Relations, sees a worrying loss of faith in a certain brand of capitalism. “It’s politically dangerous there since they’ve just emerged from an ultraregulated and stifling system, were confronted with shock therapy that created great hardship, and are just beginning to recover and stabilize,” he said. “Now they’re thrown back into an economic and political cauldron.”
The new members are finding that their European partners are putting their own national interests ahead of “collective and necessary solidarity,” Mr. Klau said.
Charles Grant, director of the Center for European Reform, a research group in London, is more sanguine, however. “My expectation is that the euro zone countries, out of pure self-interest, will bail each other out,” he said. “For Central and Eastern Europe it is too early to say there won’t be solidarity. But non-E.U. countries in the east — particularly Ukraine — seem to be the No. 1 worry.”Economic Crisis Makes 90,000 Bulgarians Jobless
Nearly 90,000 Bulgarians suffered from the large scale layoffs the global financial and economic crisis caused end last year, according to data of the National Statistical Institute. The number of employed in Bulgaria in July 2008 was 2.52 million while in December 2008 it went down to 2.43 million. The number of workers under regular labour contracts decreased particularly sharply in the last three months of 2008 - from October to December - when 2.4 percent of all working Bulgarians remained jobless. Construction was among the most heavily affected sectors as it had to part with 7.2 percent of its workers. Hotels and restaurants suffered even greater: they parted with 13,8 percent of their staff. Agriculture laborers decreased by 12,3 percent.
Sunday, March 1, 2009
The man who has lost £3bn in the recession admits: 'I did some dumb things in 2008'
Warren Buffett, one of America's richest men, has lost £3bn in the recession, it emerged last night.
Buffett, who started his working life selling fizzy drinks door-to-door, is nicknamed the Sage of Omaha for his legendary financial acumen, but even he cannot escape the carnage.
His investment company Berkshire Hathaway yesterday reported that profits fell 62% last year, reducing its value by £8bn and making it the worst year for Buffett since he took control 44 years ago.
Buffett's losses flow from his 40% stake in Berkshire, which invests in property and insurance companies, but also has holdings in household names such as Coca Cola, American Express and the Washington Post
In his annual letter to shareholders Buffett says investors finished 2008 "bloodied and confused" because of the dysfunctional credit market and other financial turmoil. Berkshire was particularly damaged by losses from derivatives, investments tied to the stock market, which Buffett once described as "weapons of mass financial destruction".
He says the recent credit boom made many people adopt a creed he used to see on restaurant walls years ago. It read: "In God we trust, all others pay cash." Now, Buffett is certain that "the nation's economy will be in a shambles throughout 2009, and for that matter, probably well beyond".
But he is not entirely gloomy: America has faced bigger challenges in the past, including two world wars and the Great Depression. "America's best days lie ahead," he said.
Buffett, a close friend of the Microsoft founder Bill Gates, has seen his shares in Berkshire halve in value since the summer of 2007. In his letter to investors, he admits that "in 2008, I did some dumb things". The dumbest was buying a large holding in energy company Conoco Phillips when oil prices were near their peak. "In no way did I anticipate the dramatic drop in prices that occurred."
Buffett says he also spent $244m on stock in two Irish banks that appeared cheap. But since then, he has written down the value of those purchases to $27m.
He has described the credit crunch as akin to "an economic Pearl Harbor" and has predicted that the recession will be "long and deep".
Buffett, a congenial 78, is still worth tens of billions of dollars, but shareholders in Berkshire worry about who will take over. "He is irreplaceable," says one.
EU 'consensus' to tackle crisis
EU leaders have ended an emergency summit in Brussels saying they are determined to avoid protectionist moves in response to the economic crisis.
"There was consensus on the need to avoid any unilateral protectionist measures," European Commission president Jose Manuel Barroso said.
He spoke after the summit aimed at heading off a new east-west rift.
Hungary earlier called for a 180bn-euro (£160bn) aid package for Central and Eastern Europe - but that was rejected.
Germany's Chancellor Angela Merkel said the former communist countries - the newest EU member states - were not all in the same situation.
'Just and fair Europe'
The summit followed the French president's pledge to help his nation's car industry if jobs were safeguarded in France.President Nicolas Sarkozy's move raised fears that national protectionism could scupper hopes of recovery within the EU. The Czech Republic, current holder of the EU presidency, condemned his comments.
UK Prime Minister Gordon Brown said "today was the start of a European consensus on all these major issues that are facing the world community", including "no to protectionism".
After chairing the talks on Sunday, Czech Prime Minister Mirek Topolanek said: "We need a Europe without barriers but also a just and fair Europe."
"I think that it was perfectly clear that the European Union isn't going to leave anybody in the lurch," he told a news conference.But there was no announcement of any new EU aid package for the badly-hit economies of Central and Eastern Europe.
Mr Topolanek also said US President Barack Obama would visit Prague on 5 April.
East-west differences
Hungary's Prime Minister Ferenc Gyurcsany warned earlier against allowing a "new Iron Curtain" to divide the continent.
Many of the newer EU members in Central and Eastern Europe have seen their financial institutions and economies battered by the downturn. They are faced with plunging currencies, factory closures and in some cases social unrest.
Hungary and Latvia especially are facing serious liquidity problems. They are already receiving billions of euros from an EU emergency fund.
Commission president Barroso said agreement was reached on a framework for dealing with the toxic assets on bank balance sheets that have crippled lending.
He also stressed that the EU was putting substantial funding into Central and Eastern Europe. He said 7bn euros of structural funds would go to the new member states his year, including 2.5bn for Poland.
Another 8.5bn euros from the European Investment Bank would help small and medium-sized firms in the region this year, he said.
The summit, called by the Czech Republic, came just a week after the same EU leaders met to discuss reforming the region's financial system.
President Sarkozy denied accusations of protectionism levied at his 3bn-euro bail-out plan, which aims to keep French carmakers manufacturing in France.
However, he said that if the US defended its own industries, perhaps Europe should do the same.
Prime Minister Brown - who will become the first European leader to hold talks with President Obama this week - said the G20 talks next month represented an opportunity to agree "a new deal".
"Only by working together will we deliver the EU and international recovery we need."Saturday, February 28, 2009
Wall St dumps film deals on Hollywood investors
LOS ANGELES (Reuters) - The financial crisis is forcing Wall Street banks and hedge funds to pull out of billions of dollars worth of film deals, opening the door for specialty investors to scoop up Hollywood assets at discount prices.
From 2005 to 2008, hedge funds partnered with all the major banks from Merrill Lynch to Lehman Brothers to pump an estimated $15 billion into films, taking on risks formerly absorbed by studios like Sony (6758.T) Pictures and News Corp's (NWSA.O) 20th Century Fox in return for a share of profits.
Typically, investors help finance "slates" of as many as a dozen movies and collect their returns after the films are released, or start to generate DVD and television revenue, which could be years from their initial investment.
But after some box office duds, such as Tom Cruise's "Lions for Lambs," and the credit freeze, most banks with the exception of JPMorgan (JPM.N) have reduced their presence in Hollywood. Some are trying to sell off their positions in slate deals for discounts of 30 percent to 70 percent.
"Because of the credit crisis, banks and hedge funds have been writing down securities, including those backed by film assets, and are willing to sell them at lower prices," said Stephen Prough, founder of Salem Partners, which advises investors on how to maximize film investments.
Prough and others cited strong interest and deep pockets for movie assets at current, reasonable prices from seasoned entertainment investors who specialize in the industry, know it well and take a longer-term view on returns.
For example, Content Partners LLC backed by Mark Cuban and Todd Wagner is a pioneer in acquiring films in the secondary market from hedge funds, private equity firms and banks.
"Not only are we buying from financial sellers but we're also looking at transactions for the first time with studios and networks for participations in TV shows and film profits," said Content Partners President Steven Kram.
"We've already purchased 34 films and over 200 hours of television. We can provide a new source of financing for studios and networks who are being squeezed for every penny."
Another investor swooping in on slates of movie deals in Hollywood is David Molner, managing director of Beverly Hills, California-based Screen Capital International.
"I'm five times as busy as I used to be. We launched a $500 million fund that is financing the acquisition of assets in studio slate deals," said Molner. "We are taking the participants in finance deals out of their capital positions in studio slate deals."
FEWER FILMS
With these deals, many studios have enough financing to make movies through 2010 and are cutting costs while waiting out the credit freeze to thaw before seeking further funding.
Nonetheless, the number of films released by major studios are expected to continue to decrease to correct an oversupplied market. Less than 200 films are slated to hit theaters in 2009, down from about 219 major studio releases in 2008 and 236 in 2007, according to industry estimates.
"There was too much money and too many films. The market couldn't sustain it and the competition was too great to provide the returns the equity and hedge funds were looking for," said PriceWaterhouseCoopers Managing Director Ron Cushey.Some studios like The Weinstein Co and DreamWorks Studios, led by Steven Spielberg and Stacey Snider, are seeking financing.
Others like Viacom Inc's (VIAb.N) Paramount ditched efforts to raise $450 million for a slate of films, and instead will co-finance on a picture-by-picture basis, after many of the big slate deals of recent years did not deliver as expected.
In some cases, investors racked up hundreds of millions of dollars in losses and complained the studios tilted terms to keep sure-fire hit movies out of the slates.
Moody's Investors Services analysts Neil Begley said about $80 million in debt tied to Paramount's so-called Melrose I slate, covering films released from 2003 to 2005, including "Get Rich or Die Tryin,'" may soon default.
"Based on the expected cash flows for the film assets, the Class A notes will not be paid in full by their legal final maturity," said Begley. Paramount declined to comment.
Bankers told Reuters that investors in Paramount's subsequent Melrose II film slate, with titles like "Blades of Glory," are now unloading their stakes.
"There are numerous film securitization deals being shopped around right now," said Ken Schapiro, managing partner at media investment firm Qualia Capital. He declined to say which deals his firm was exploring.
Other studios like Sony Pictures adjusted terms of their revenue-sharing agreements after films in a $600 million slate deal called Gun Hill Road I underperformed.
The next big round of financing for Hollywood will likely come from overseas or via deals that are backed by assets, such as film libraries, to minimize risk, bankers say.
Prough cited one situation where a studio's film assets were worth much less than the $500 million it had raised in a private equity financing. "Eventually, they either have to find new money to keep going or sell the assets to get investors their money back," he said.
Independent film and television studio Lions Gate Entertainment Corp (LGF.N) has attracted interest from activist investor Carl Icahn, who raised his stake in the company to 14.28 percent even after it reported disappointing earnings and underperforming films.
Molner, Schapiro and Prough all said film assets generate good returns over the long term.
"The good thing about investing in film is that you have an asset that continues to generate revenue on pay TV, free TV and in every country around the world," Schapiro said.
Denmark, Finland officially in recession
Denmark and Finland officially joined the ranks of recession-hit countries on Friday with the release of figures showing their economies contracting, while Sweden saw its economy sink further.
The Nordic countries' traditionally robust, export-driven economies were long believed to have escaped the worst effects of the global economic crisis.
But they are now struggling to overcome dramatic drops in demand from abroad, and in consumer confidence and industrial production at home.
Denmark, which became the first European country to enter recession last year after its economy contracted for two quarters running, briefly returned to growth in the second quarter of 2008 before falling back in the hole.
The Scandinavian country officially dived back into recession after its gross domestic product (GDP) contracted 2 per cent in the fourth quarter, according to numbers released by the national statistics agency. Its economy shrank by 0.8 per cent in the third quarter of 2008.
"Investments and private consumption fell clearly in the fourth quarter, while there was little increase in public spending. The fourth quarter was also impacted by large declines in both imports and exports," Statistics Denmark said.
"Denmark is perhaps experiencing its worst crisis since World War II," Anders Matzen, chief analyst at Nordea bank, told AFP. "But it is only natural that a small economy that is heavily dependent on exports finds itself in this position."
Finland meanwhile saw its fourth quarter GDP shrink 1.3 per cent after slipping 0.3 per cent in the previous three-month period, according to revised figures.
"Finland's economy can be considered as being in recession," said the national statistics office, which had previously said Finland's economy had grown 0.1 per cent in the third quarter.
"Demand in the national economy diminished in the last quarter: private consumption decreased by 1.2 per cent and investments by 2.1 per cent from 12 months back," Statistics Finland said. "Exports and imports contracted exceptionally strongly, by over 14 per cent."
Home to the world's largest mobile phone maker, Nokia, Finland for years enjoyed sky-high economic growth, with its GDP expanding 4.5 per cent in 2007.
Last year however, the Nordic country's economy grew just 0.9 per cent, according to the latest statistics.
Neighbouring Sweden's predicament is even more dire, with its economy plunging 2.4 per cent in the fourth quarter compared to the previous three-month period, according to data released by the national statistics bureau.
And compared to the fourth quarter of 2007 the figures are even worse, showing that Sweden's GDP plummeted 4.9 per cent in the last quarter last year.
Statistics Sweden spokeswoman Sofia Runestav also told AFP revised figures showed the country had in fact entered recession in the second quarter of 2008 and not in the third as previously stated.
Sweden, especially hard-hit by the troubles plaguing car makers worldwide, saw its exports fall 7.2 per cent, imports decrease 5.4 per cent, and industrial production shrink 6.1 per cent in the fourth quarter.
"We are in the midst of a long, cold and dark winter," Swedish finance minister Anders Borg said after the numbers were released. "Sweden is obviously experiencing a very dramatic economic slowdown."
Norway meanwhile said last week its economy as a whole grew 1.3 per cent in the fourth quarter, largely due to its position as one of the world's leading oil and gas exporters.
Excluding its oil, gas and shipping industries however, the country's mainland GDP tumbled 0.2 per cent during the period.
Recession has been predicted across the region for 2009.
Australia signs ASEAN free trade agreement
AUSTRALIA and New Zealand have signed a major free trade agreement with 10 Southeast Asian countries in a deal aimed at curbing the effects of the global economic crisis.
The pact is the most wide-ranging ever signed by the Association of Southeast Asian Nations (ASEAN), while it gives the two Pacific nations access to a market of nearly 600 million people.Australian Trade Minister Simon Crean and his New Zealand counterpart Tim Groser signed the agreement along with their ASEAN counterparts at the grouping's annual summit in the Thai beach resort of Hua Hin.
"This agreement is a significant agreement for the region," Crean told a press conference after the signing.
"It's the most comprehensive FTA (free trade agreement) that ASEAN has ever signed and the largest FTA that Australia and New Zealand have ever signed in terms of two-way trade."
The deal was also the first of its kind that Australia had signed "since the onset of the global financial crisis", he said in a statement before the ceremony.
"It powerfully demonstrates... the region's strong commitment to opening up markets in the face of this crisis," he added in a statement.
"This will keep trade flows open in the region, increase growth and give a much-needed boost to confidence."
Australia and New Zealand agreed on the pact with the Southeast Asian regional bloc in August last year following talks that began in 2005.
ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. It has a combined gross domestic product of more than 1.4 trillion dollars.
The accord covers trade in merchandise, services, investment, financial services, telecoms, electronic commerce, movement of people, intellectual property, competition policy and economic cooperation.
Australia and New Zealand's combined two-way trade with ASEAN was worth 100 billion Australian dollars (65 billion US dollars) and Australia's alone was worth 80 billion Australian dollars, Crean said.
With the new agreement, the Southeast Asian bloc has forged free-trade links with all its key regional economies. It earlier signed deals with China, Japan and South Korea.
ASEAN plans to establish a single market and manufacturing base by 2015 in a bid to remain competitive, especially with the rise of India and China.
Friday, February 27, 2009
Financial crisis tests European Commission authority
EU economy commissioner Joaquin Almunia will this week name the first group of states to receive disciplinary action by Brussels for breaching the rules underpinning the euro.
Ahead of Wednesday's (18 January) move, the commissioner insisted that member states adhere to the Stability and Growth Pact, which requires that countries keep their budget deficits below three percent of GDP.
"The rules were established for everybody and must be respected," he said before a debate in the European Parliament on Monday.
"What they say as far as budget discipline is concerned is clear: In the case where countries have recorded or plan deficits above the three percent barrier, we must launch procedures established in the [EU] treaty," he added.
Of the countries up for review on Wednesday, France, Spain and Greece are expected to attract excessive deficit action from the commission, according to draft documents seen by Reuters.
The Irish deficit for 2009 is also predicted to exceed the three percent ceiling, according to the commission's interim forecast published last month.
But the biggest question is whether the commission's actions will have any bite as member states grapple with the effects of the economic crisis at home.
Karel Lannoo, head of the Centre for European Studies, a Brussels-based think-tank, thinks the pact is already on its last legs.
"Today, it is almost entirely dead," he said of the pact, noting that it went into decline after 2005 when it was reformed to accommodate France's deficit.
Speaking about Europe's reaction to the global economic downturn, Mr Lannoo said that the bloc made mistakes from the very start.
"The fault was already made in October when there was no willingness to consider this as a European problem but rather as national problems," he said, adding that the European Economic Recovery Plan signed by EU leaders in December seemed more of an afterthought than a genuine attempt at co-ordination.
Since then, the EU has witnessed a barrage of unilateral actions to save national banks and prop-up structurally flawed industries, with scant regard paid to potential negative consequences for other member states.
French President Nicolas Sarkozy has attracted the most attention by calling on French car companies to relocate back to France, but he is by no means alone is seeking national solutions for his constituents.
"The same has been happening in the financial sector for four months and who is shouting about it? Almost nobody. But it's enormously distorting," says Mr Lannoo. "I'm surprised by the degree to which there is almost no willingness to challenge this."
With new initiatives being announced on an almost daily basis, the commission is struggling to deal with the rising number of protectionist attacks to the internal market.
Writing in the Financial Times last week, former Italian Prime Minister Giuliano Amato and former EU commissioner Emma Bonino outlined a credible alternative to the current approach.
Both the financial and car sectors should be declared in a state of crisis, they argue. Then, two task forces of national officials should be set up and chaired by the commission.
"Their mandate would be to co-ordinate state aid, making sure that national measures re-inforce each other to the greater benefit of the sectors concerned and avoid bending competition rules," they said.
It is doubtful whether member state governments would agree to such a project, however.
Eurozone problems
The single market is not the only EU pillar currently under threat. While the euro celebrated its 10th anniversary last month and welcomed Slovakia as its newest member, the eurozone itself has been put under great pressure by the unfolding crisis.
One of the biggest issues is spread in rates offered on government bonds. Markets have grown increasingly uneasy over ballooning government deficits in recent weeks, prompting investors to demand higher yields when buying sovereign debt from EU states whose finances are perceived as vulnerable.
The subsequent rise in borrowing costs increases the threat of a national default, prompting the question of whether such an event could cause a current member to leave the eurozone.
"The probability of this split is zero. The list of members to join the euro is very long," Mr Almunia told MEPs on Monday in an apparent attempt to quash such speculation.
Mr Lannoo has a more nuanced approach. "Every country will ask itself: 'Is it better that I stay inside [the eurozone] or is it better that I go outside?'" he said, referring to the cheaper financing of public debt enjoyed by euro members versus the option of currency devaluation enjoyed by non-members.
Euro-bond idea
In the meantime, calls for a "euro-bond," first suggested by Italian finance minister Giulio Tremonti, are likely to go unanswered, with Germany baulking at the idea of picking up the bill.
Yields on a common "euro-bond" used by all eurozone states would be significantly lower than those currently paid by a number of peripheral countries, as the risk of a eurozone default is highly unlikely. However "euro-bond" yields would probably exceed those currently paid by Germany.
Instead, member states could start by co-ordinating their bond issuance calendars to reduce competition between countries attempting to raise capital.
To some, greater co-ordination at the EU level would seem to be a solution for much of the EU's current woes but it is hard to see where this would come from./EUobserver
Eastern Europe banks get bail-out
The banking sectors in Central and Eastern Europe are to get a 24.5bn euro ($31bn; £21.8bn) rescue package to support them in the economic crisis.
The European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB) and the World Bank have pledged the investment.
The funds are particularly aimed at helping small firms survive.
Countries such as Latvia and Hungary have seen their economies particularly hit by the global economic slump.
The two-year joint initiative will include equity and debt financing, and access to credit and risk insurance aimed at encouraging lending, the three groups said in a joint statement.
This initiative is on top of national government responses and was designed to "deploy rapid, large-scale and coordinated financial assistance... to support lending to the real economy through private banking groups, in particular to small-and medium-sized enterprises."
'Diverse challenges'
The EBRD will provide up to 6bn euros for the financial sector, the EIB will put up 11bn euros of lending facilities, while the World Bank will provide about 7.5bn euros.
"The response takes into account the different macroeconomic circumstances in, and financial pressures on countries in Eastern Europe, acknowledging the diversity of challenges stemming from the global financial retrenchment," the groups added.
Founded in 1991, the EBRD aims to assist the transition of former communist nations to market economies - investing across 30 countries including Ukraine, Moldova and Russia.
"The institutions are working together to find practical, efficient and timely solutions to the crisis in eastern Europe," said EBRD President Thomas Mirow.
"We are acting because we have a special responsibility for the region and because it makes economic sense.
"For many years the growing integration of Europe has been a source of prosperity and mutual benefit, and we must not allow this process to be reversed."
Exposure outgrown?
Earlier this week, ratings agency Moody's said that faltering economic conditions in Eastern and Central Europe would hit the local subsidiaries of Western banks.
Austria, whose banks have large exposure to Eastern Europe, has seen the cost of insuring its debt rocket.
On Friday, the country's Erste Group Bank signed a long-expected deal to get up to 2.7bn euros of government support.
But the talks to secure the funding have been going on since October, with some analysts saying that the mounting problems in emerging Europe meaning Erste's exposure may already have outgrown the government injection.Japan says suffering worst economic crisis since WWII
TOKYO: Japan warned yesterday it was in the deepest economic crisis since World War II, after Asia’s biggest economy suffered its worst contraction in almost 35 years.
The economy shrank for a third straight quarter in the three months to December as the global slowdown crushed demand for Japanese exports, a key pillar of the world’s number two economy.
The government said the slump was even worse than the recession of the 1990s when the country’s economic bubble burst, ushering in a decade of economic stagnation and deflation.
Japan’s economy contracted 3.3% in the fourth quarter of 2008 - 12.7% on an annualised basis, official data showed.
It was the weakest performance since 1974 when the country was reeling from the first oil crisis, and the government said this slump would be even more severe.
“This is the worst ever crisis in the post-war era. There is no doubt about it,” Economic and Fiscal Policy Minister Kaoru Yosano said, warning that a rebound is impossible before the global economy improves.
The figures were even more dismal than analysts had expected and marked a sharp deterioration compared with the third quarter’s 0.6% contraction.
The current recession will be Japan’s “longest, deepest and most severe in the post-war period,” said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong.
The deepening gloom came as Finance Minister Shoichi Nakagawa faced calls to be sacked over his performance at key talks on the world economy at the weekend in Rome, where he appeared drowsy and slurred his words.
Nakagawa apologised yesterday for his behaviour but denied being drunk, blaming cold medicine.
Japanese exports plunged a record 13.9% in the fourth quarter as demand for Japanese cars, electronics and other goods slumped in recession-hit overseas economies.
“Exports absolutely collapsed,” BNP Paribas economist Hiroshi Shiraishi said.
“The first quarter could be even worse. Exports continued to fall very sharply in January and producers are planning to cut production very, very aggressively,” he said.
Business investment slumped as companies scrambled to reduce their costs to cope with the recession, while household spending slipped as consumers tightened their belts following a wave of layoffs.
Japanese firms including Sony, Nissan Motor and Hitachi have announced massive job cuts in response to the country’s deepening economic woes.
The government estimates at least 125,000 temporary contract workers have been laid off or will be fired by March when the fiscal year ends.
As the growth data was released, hundreds of sacked workers protested outside the headquarters of major companies, calling for better social security.
Temporary worker Hideo Yamamoto, 34, who said he was suddenly dismissed in December from truck maker Isuzu Motors, said his meagre savings were now stretched thin.
“I don’t know if I can continue to survive in the coming months,” he said. “It’s unfair that companies treat regular and non-regular workers separately. I have lost trust in companies.”
Before the global financial crisis erupted, Japan had been enjoying its longest economic expansion in post-war times.
But the recovery from the recession of the 1990s was driven almost entirely by soaring exports. With demand now cooling rapidly overseas, Japan’s economy has seen a dramatic deterioration in its fortunes.
The economy should bottom out in the third quarter of 2009, Barclays Capital analysts predicted.
“With the US and China hammering out fiscal measures centered on infrastructure, the Japanese economy should benefit through an increase in exports,” they wrote in a note. - AFP
The economy shrank for a third straight quarter in the three months to December as the global slowdown crushed demand for Japanese exports, a key pillar of the world’s number two economy.
The government said the slump was even worse than the recession of the 1990s when the country’s economic bubble burst, ushering in a decade of economic stagnation and deflation.
Japan’s economy contracted 3.3% in the fourth quarter of 2008 - 12.7% on an annualised basis, official data showed.
It was the weakest performance since 1974 when the country was reeling from the first oil crisis, and the government said this slump would be even more severe.
“This is the worst ever crisis in the post-war era. There is no doubt about it,” Economic and Fiscal Policy Minister Kaoru Yosano said, warning that a rebound is impossible before the global economy improves.
The figures were even more dismal than analysts had expected and marked a sharp deterioration compared with the third quarter’s 0.6% contraction.
The current recession will be Japan’s “longest, deepest and most severe in the post-war period,” said Glenn Maguire, chief Asia economist at Societe Generale in Hong Kong.
The deepening gloom came as Finance Minister Shoichi Nakagawa faced calls to be sacked over his performance at key talks on the world economy at the weekend in Rome, where he appeared drowsy and slurred his words.
Nakagawa apologised yesterday for his behaviour but denied being drunk, blaming cold medicine.
Japanese exports plunged a record 13.9% in the fourth quarter as demand for Japanese cars, electronics and other goods slumped in recession-hit overseas economies.
“Exports absolutely collapsed,” BNP Paribas economist Hiroshi Shiraishi said.
“The first quarter could be even worse. Exports continued to fall very sharply in January and producers are planning to cut production very, very aggressively,” he said.
Business investment slumped as companies scrambled to reduce their costs to cope with the recession, while household spending slipped as consumers tightened their belts following a wave of layoffs.
Japanese firms including Sony, Nissan Motor and Hitachi have announced massive job cuts in response to the country’s deepening economic woes.
The government estimates at least 125,000 temporary contract workers have been laid off or will be fired by March when the fiscal year ends.
As the growth data was released, hundreds of sacked workers protested outside the headquarters of major companies, calling for better social security.
Temporary worker Hideo Yamamoto, 34, who said he was suddenly dismissed in December from truck maker Isuzu Motors, said his meagre savings were now stretched thin.
“I don’t know if I can continue to survive in the coming months,” he said. “It’s unfair that companies treat regular and non-regular workers separately. I have lost trust in companies.”
Before the global financial crisis erupted, Japan had been enjoying its longest economic expansion in post-war times.
But the recovery from the recession of the 1990s was driven almost entirely by soaring exports. With demand now cooling rapidly overseas, Japan’s economy has seen a dramatic deterioration in its fortunes.
The economy should bottom out in the third quarter of 2009, Barclays Capital analysts predicted.
“With the US and China hammering out fiscal measures centered on infrastructure, the Japanese economy should benefit through an increase in exports,” they wrote in a note. - AFP
Global banking reshaped
This multimedia snapshot brings together coverage of the mounting crisis and its impact on the markets through links to in depth packages, interactive maps, audio, video and blogs.
The rising defaults on subprime mortgages in the US triggered a global crisis for the money markets. Many of the world’s leading investment banks have collapsed as a result and the US government has proposed a massive bail-out.
The crisis has become one of the most radical reshapings of the global banking sector, as governments and the private sector battle to shore up the financial system following the disappearance of Lehman and Merrill as independent entities and the $85bn government rescue of AIG.
The rising defaults on subprime mortgages in the US triggered a global crisis for the money markets. Many of the world’s leading investment banks have collapsed as a result and the US government has proposed a massive bail-out.
The crisis has become one of the most radical reshapings of the global banking sector, as governments and the private sector battle to shore up the financial system following the disappearance of Lehman and Merrill as independent entities and the $85bn government rescue of AIG.
What Went Wrong With Our Financial System?
The whole thing was one big scheme. Everything was great when houses were selling like hot cakes and their values go up every month. Lenders made it easier to borrow money, and the higher demand drove up house values. Higher house values means that lenders could lend out even bigger mortgages, and it also gave lenders some protection against foreclosures. All of this translates into more money for the lenders, insurers, and investors.
Unfortunately, many borrowers got slammed when their adjustable mortgage finally adjusted. When too many of them couldn’t afford to make their payments, it causes these lenders to suffer from liquidity issue and to sit on more foreclosures than they could sell. Mortgage-backed securities became more risky and worth less causing investment firms like Lehman Brothers to suffer. Moreover, insurers like AIG who insured these bad mortgages also got in trouble.
The scheme worked well, but it reverses course and is now coming back to hurt everyone with a vengeance.
Wednesday, February 25, 2009
Who Caused the Economic Crisis?
MoveOn.org blames McCain advisers. He blames Obama and Democrats in Congress. Both are wrong.
Summary
A MoveOn.org Political Action ad plays the partisan blame game with the economic crisis, charging that John McCain’s friend and former economic adviser Phil Gramm “stripped safeguards that would have protected us.” The claim is bogus. Gramm’s legislation had broad bipartisan support and was signed into law by President Clinton. Moreover, the bill had nothing to do with causing the crisis, and economists – not to mention President Clinton – praise it for having softened the crisis.
A McCain-Palin ad, in turn, blames Democrats for the mess. The ad says that the crisis “didn’t have to happen,” because legislation McCain cosponsored would have tightened regulations on Fannie Mae and Freddie Mac. But, the ad says, Obama "was notably silent" while Democrats killed the bill. That’s oversimplified. Republicans, who controlled the Senate at the time, did not bring the bill forward for a vote. And it’s unclear how much the legislation would have helped, as McCain signed on just two months before the housing bubble popped.
In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.
A McCain-Palin ad, in turn, blames Democrats for the mess. The ad says that the crisis “didn’t have to happen,” because legislation McCain cosponsored would have tightened regulations on Fannie Mae and Freddie Mac. But, the ad says, Obama "was notably silent" while Democrats killed the bill. That’s oversimplified. Republicans, who controlled the Senate at the time, did not bring the bill forward for a vote. And it’s unclear how much the legislation would have helped, as McCain signed on just two months before the housing bubble popped.
In fact, there’s ample blame to go around. Experts have cited everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan.
Analysis
As Congress wrestled with a $700 billion rescue for Wall Street's financial crisis, partisans on both sides got busy – pointing fingers. MoveOn.org Political Action on Sept. 25 released a 60-second TV ad called "My Friends’ Mess," blaming Sen. John McCain and Republican allies who supported banking deregulation. The McCain-Palin campaign released its own 30-second TV spot Sept. 30, saying "Obama was notably silent" while Democrats blocked reforms leaving taxpayers "on the hook for billions." Both ads were to run nationally.And both ads are far wide of the mark.
Blame the Republicans!
The MoveOn.org Political Action ad blames a banking deregulation bill sponsored by former Sen. Phil Gramm, a friend and one-time adviser to McCain's campaign. It claims the bill "stripped safeguards that would have protected us."
That claim is bunk. When we contacted MoveOn.org spokesman Trevor Fitzgibbons to ask just what "safeguards" the ad was talking about, he came up with not one single example. The only support offered for the ad's claim is one line in one newspaper article that reported the bill "is now being blamed" for the crisis, without saying who is doing the blaming or on what grounds.
The bill in question is the Gramm-Leach-Bliley Act, which was passed in 1999 and repealed portions of the Glass-Steagall Act, a piece of legislation from the era of the Great Depression that imposed a number of regulations on financial institutions. It's true that Gramm authored the act, but what became law was a widely accepted bipartisan compromise. The measure passed the House 362 - 57, with 155 Democrats voting for the bill. The Senate passed the bill by a vote of 90 - 8. Among the Democrats voting for the bill: Obama's running mate, Joe Biden. The bill was signed into law by President Clinton, a Democrat. If this bill really had "stripped the safeguards that would have protected us," then both parties share the blame, not just "John McCain's friend."
The truth is, however, the Gramm-Leach-Bliley Act had little if anything to do with the current crisis. In fact, economists on both sides of the political spectrum have suggested that the act has probably made the crisis less severe than it might otherwise have been.
Last year the liberal writer Robert Kuttner, in a piece in The American Prospect, argued that "this old-fashioned panic is a child of deregulation." But even he didn't lay the blame primarily on Gramm-Leach-Bliley. Instead, he described "serial bouts of financial deregulation" going back to the 1970s. And he laid blame on policies of the Federal Reserve Board under Alan Greenspan, saying "the Fed has become the chief enabler of a dangerously speculative economy."
What Gramm-Leach-Bliley did was to allow commercial banks to get into investment banking. Commercial banks are the type that accept deposits and make loans such as mortgages; investment banks accept money for investment into stocks and commodities. In 1998, regulators had allowed Citicorp, a commercial bank, to acquire Traveler's Group, an insurance company that was partly involved in investment banking, to form Citigroup. That was seen as a signal that Glass-Steagall was a dead letter as a practical matter, and Gramm-Leach-Bliley made its repeal formal. But it had little to do with mortgages.
Actually, deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.
Observers as diverse as former Clinton Treasury official and current Berkeley economist Brad DeLong and George Mason University's Tyler Cowen, a libertarian, have praised Gramm-Leach-Bliley has having softened the crisis. The deregulation allowed Bank of America and J.P. Morgan Chase to acquire Merrill Lynch and Bear Stearns. And Goldman Sachs and Morgan Stanley have now converted themselves into unified banks to better ride out the storm. That idea is also endorsed by former President Clinton himself, who, in an interview with Maria Bartiromo published in the Sept. 24 issue of Business Week, said he had no regrets about signing the repeal of Glass-Steagall:
Bill Clinton (Sept. 24): Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. ...You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into.
No, Blame the Democrats!
The McCain-Palin campaign fired back with an ad laying blame on Democrats and Obama. Titled "Rein," it highlights McCain's 2006 attempt to "rein in Fannie and Freddie." The ad accurately quotes the Washington Post as saying "Washington failed to rein in" the two government-sponsored entities, the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), both of which ran into trouble by underwriting too many risky home mortgages to buyers who have been unable to repay them. The ad then blames Democrats for blocking McCain's reforms. As evidence, it even offers a snippet of an interview in which former President Clinton agrees that "the responsibility that the Democrats have" might lie in resisting his own efforts to "tighten up a little on Fannie Mae and Freddie Mac." We're then told that the crisis "didn't have to happen."
It's true that key Democrats opposed the Federal Housing Enterprise Regulatory Reform Act of 2005, which would have established a single, independent regulatory body with jurisdiction over Fannie and Freddie – a move that the Government Accountability Office had recommended in a 2004 report. Current House Banking Committee chairman Rep. Barney Frank of Massachusetts opposed legislation to reorganize oversight in 2000 (when Clinton was still president), 2003 and 2004, saying of the 2000 legislation that concern about Fannie and Freddie was "overblown." Just last summer, Senate Banking Committee chairman Chris Dodd called a Bush proposal for an independent agency to regulate the two entities "ill-advised."
But saying that Democrats killed the 2005 bill "while Mr. Obama was notably silent" oversimplifies things considerably. The bill made it out of committee in the Senate but was never brought up for consideration. At that time, Republicans had a majority in the Senate and controlled the agenda. Democrats never got the chance to vote against it or to mount a filibuster to block it.
By the time McCain signed on to the legislation, it was too late to prevent the crisis anyway. McCain added his name on May 25, 2006, when the housing bubble had already nearly peaked. Standard & Poor's Case-Schiller Home Price Index, which measures residential housing prices in 20 metropolitan regions and then constructs a composite index for the entire United States, shows that housing prices began falling in July 2006, barely two months later.
The Real Deal
So who is to blame? There's plenty of blame to go around, and it doesn't fasten only on one party or even mainly on what Washington did or didn't do. As The Economist magazine noted recently, the problem is one of "layered irresponsibility ... with hard-working homeowners and billionaire villains each playing a role." Here's a partial list of those alleged to be at fault:
- The Federal Reserve, which slashed interest rates after the dot-com bubble burst, making credit cheap.
- Home buyers, who took advantage of easy credit to bid up the prices of homes excessively.
- Congress, which continues to support a mortgage tax deduction that gives consumers a tax incentive to buy more expensive houses.
- Real estate agents, most of whom work for the sellers rather than the buyers and who earned higher commissions from selling more expensive homes.
- The Clinton administration, which pushed for less stringent credit and downpayment requirements for working- and middle-class families.
- Mortgage brokers, who offered less-credit-worthy home buyers subprime, adjustable rate loans with low initial payments, but exploding interest rates.
- Former Federal Reserve chairman Alan Greenspan, who in 2004, near the peak of the housing bubble, encouraged Americans to take out adjustable rate mortgages.
- Wall Street firms, who paid too little attention to the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral.
- The Bush administration, which failed to provide needed government oversight of the increasingly dicey mortgage-backed securities market.
- An obscure accounting rule called mark-to-market, which can have the paradoxical result of making assets be worth less on paper than they are in reality during times of panic.
- Collective delusion, or a belief on the part of all parties that home prices would keep rising forever, no matter how high or how fast they had already gone up.
–by Joe Miller and Brooks Jackson
Sources
Benston, George J. The Separation of Commercial and Investment Banking: The Glass-Steagall Act Revisited and Reconsidered. Oxford University Press, 1990.
Tabarrok, Alexander. "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers." The Quarterly Journal of Austrian Economics 1:1 (1998), pp. 1 - 18.
Kuttner, Robert. "The Bubble Economy." The American Prospect, 24 September 2007.
"The Gramm-Leach-Bliley Act of 1999." U.S. Senate Committee on Banking, Housing and Urban Affairs. Accessed 29 September 2008.
Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain and Hillary." Business Week, 24 September 2008.
Standard and Poor's. "Case-Schiller Home Price History." Accessed 30 September 2008.
"Understanding the Tax Reform Debate: Background, Criteria and Questions." Government Accountability Office. September 2005.
Bianco, Katalina M. "The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown." CCH. Accessed 29 September 2008.
Tabarrok, Alexander. "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers." The Quarterly Journal of Austrian Economics 1:1 (1998), pp. 1 - 18.
Kuttner, Robert. "The Bubble Economy." The American Prospect, 24 September 2007.
"The Gramm-Leach-Bliley Act of 1999." U.S. Senate Committee on Banking, Housing and Urban Affairs. Accessed 29 September 2008.
Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain and Hillary." Business Week, 24 September 2008.
Standard and Poor's. "Case-Schiller Home Price History." Accessed 30 September 2008.
"Understanding the Tax Reform Debate: Background, Criteria and Questions." Government Accountability Office. September 2005.
Bianco, Katalina M. "The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown." CCH. Accessed 29 September 2008.
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