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THE FALTERING EAGLE: Speech made in 1970
MIAMI KEYNOTE: Public Financial Management, 2016
CONFERENCIA: CONTROL INTERNO Y ÉTICA: ESTARÍAN PERTINENTES EN 2025?
CONFERENCIA 6a Conferencia de Auditores Ecuador: El Auditor Interno Frente sus Tres Mayores Desafios
CONFERENCIA CReCER 2015: Empresas Estales en Busca de Etica---State Enterprises in Search of Ethics
CONFERENCIA QUITO HONESTO: Ambiente Etico = Municipio Eficiente: Principios de Conducta Etica, 2014
DOCTORADO HONORIS CAUSA - UNIVERSIDAD INCA GARCILASO DE LA VEGA, LIMA, PERU - 2013
DECORATION BY THE PERUVIAN GOVERNMENT 1972
CONFERENCIA EN HUANUCO, PERU - El Auditor enfrenta la Erupcion de Corrup$ion del Siglo XXI -2013
CONFERENCIAS EN CHILE - 3 Mayores Desafios al Auditor Interno - 2012 - VIDEO y TEXTO
DOLLARCRACY ->>>>>>>>>>>>>>>>>>>>>>>>>>> $$$ COUNT.........PEOPLE DON'T
THE CONTINUING FINANCIAL CRISIS
GEORGIA CORRUPTION ON MY MIND
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ACTIVITIES & EVENTS INITIATED
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AMERICA IN DECLINE? The Life Cycle of a Great Power
ACCOUNTANCY & AUDITING: MY CHOSEN PROFESSION
SERVICE AS PAGE IN US HOUSE OF REPRESENTATIVES 1949-51
SPECIAL INVESTIGATOR OF CORRUPTION IN STATE GOVERNMENT 1959-60
LEGENDS: Georgians Who Lived Impossible Dreams
Wesberry v. Sanders, 376 US 1 Landmark US House Reapportionment Case
POLITICS - MY FIRST CAMPAIGN 1961
POLITICS - ELECTION TO GEORGIA STATE SENATE 1962
The Best Speech I Ever Made
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GRAPHIC DISPLAY OF US DEBT
CALCULATE YOUR DEBT LIABILITY
Fraud-Corruption-Bribery
Collusion Breaks Internal Controls
FORENSIC AUDITING --- AUDITORIA FORENSE
ETHICS
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Think -------- Pensar
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Dawn
Message to Garcia - Mensaje a García
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COLOMBIA VS KLEPTOKAKISTOCRACIA: Presentación para el Día Internacional Anti-Corrupción 2011
LECTURE AT MANILA'S UNIVERSITY OF THE EAST: Integrity & Honor, Corruption & Dishonor VIDEO
MANILA LECTURES AT FAR EASTERN & SANTO TOMAS UNIVERSITIES: Good Governance and Social Responsibility
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SEGUNDA GRAN DEPRESION 2010 (JW presentaciónes en español)
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What the media and others are saying about crises, past, present and future...
 
ECONOMIST ALLEN SINAI: "I'm defining 'depression' as much deeper, sharper declines in major measures of U.S. economic activity, including jobs, than typically have happened in the deep recessions of 1981-82, 1973-75 and 1957-58. What's very striking here and what gives me concern is the speed of the declines, half a million jobs a month." Sinai is founder and chief global economist for Decision Economics, a Boston-area forecasting firm.

uncle_jay_explains_stimulus.jpg

How close is this recession to the Great Depression?

Thursday, April 2nd 2009, 4:00 AM

News media comparisons of the current recession to the Great Depression may stoke fear among consumers while misleading them about the depth of the downturn, according to a study by Charles Gascon, research associate with the  St. Louis Federal Reserve Bank.

“Fortunately,” there is a “vast” difference between saying the current downturn is the worst since the 1930s and saying it’s as bad as the Depression, Gascon wrote in the St. Louis Fed’s “Regional Economist” publication.

Indicators such as declines in employment, income, spending and stock prices match or exceed those reached in the last six recessions, although they are nowhere near the lows of the 43- month Depression that began in 1929, he wrote.

Still, the collapse in housing prices and the turmoil in financial markets that followed have made the recession that began in December 2007 one of the worst of the past 40 years, Gascon found.

Falling home prices wiped out more than $3 trillion in home equity during 2008, Gascon found, while prices were relatively stable during most of the previous five recessions. “The result has been the largest recessionary decline in real consumption in the last 40 years,” he wrote.

“By understanding the parallels among recessions, it is possible to disentangle the typical recession-period bad news from the truly unexpected bad news that might signal unusual problems,” Gascon wrote.

The current recession would have to last another 2 1/2 years to match the length of the 1929-1933 Depression. During the first year of the current downturn, total employment fell 2.2 percent from the peak of the expansion. While that matches the previous low during the first 12 months of the last six recessions, it’s nothing like the 5.6 percent drop in the first year of the Great Depression.

Personal income less transfer payments fell 0.7 percent in the 12 months that began in December 2007, close to the average of the other recessions, and much less than the 11.7 percent drop in the first year of the 1929-33 Depression, Gascon found.

________________________________________

Girding for a Depression

By PETER MORICI

Today, the Labor Department reported the economy lost 663,000 payroll jobs in March. The economy is shifting to permanently lower levels of production and employment, as the recession nears turns into a depression.

Unemployment reached 8.5 percent, and adding in discouraged adults who have left the labor force and part-time workers who would prefer to work full time, the real unemployment rate is closer to 17 percent.

Simply, investors and employers lack confidence in the overall likely effects of Treasury Secretary Geither’s plans to stabilize banks and President Obama’s stimulus package and budgets proposals.

Lacking confidence that the demand for what Americans make and sell will recover significantly, anytime soon, businesses are girding for a long siege—slashing employment and dividends and other hunkering down. They are preparing for a depression and the eclipse of American leadership.

The economy has shed 5.1 million jobs since December 2007, as the full weight of the banking crisis and trade deficit on oil and with China punish employment in autos, other manufacturing, construction and the broader economy. This drives down employment, wages and consumer spending and is creating a negative feedback cycle that threatens to cast the U.S. economy into something akin to Japan’s lost decade or worse.

Fundamental structural problems—poorly managed banks, wasteful uses for imported oil and the lopsided rules for competition with China and other Asia mercantilists—have come home to roost and threaten to topple American prosperity.

Unemployment increased to 8.5 percent in March and is headed for 10 percent. In 2009, unemployment and the trade deficit are reducing GDP by some $400 billion or about $2500 per worker.

Factoring in discouraged workers, unemployment is about 11 percent. Add workers in part time positions that cannot find full time employment and the hidden unemployment rate is about 16.7 percent.

A Permanent Contraction and Double Digit Unemployment

The economy contracted at about a 6.3 percent annual rate in the fourth quarter of 2008, and will contract further through most of 2009. The huge stimulus package will lift GDP a few percentage points in 2010 and 2011, but it will likely not prove enough to halt contraction over all. Even if the economy grows for a time, thanks to stimulus spending, it will fall back into recession.

The stimulus package will temporarily add about 2 to 2.5 million jobs, and only slow the pace of job losses. Unemployment will shoot past 10 percent once the effects of stimulus spending wears off in 2012, and perhaps sooner.

Increasingly, the economic slowdown looks more like a depression than a recession. Recessions are like stock market corrections—after a time, equity prices rebound without government intervention.

Federal Reserve interest rate cuts and stimulus spending and tax rebates shorten recessions and ease their impact. However, those policies will not end the current slump, because it is grounded in fundamental structural dysfunctions in U.S. banking, energy and trade policies.

A depression is not self-correcting. The economy shifts down to permanently lower levels of production and sales, high unemployment rates become chronic, and federal deficits become narcotic—federal deficits dull the senses but don’t cure the disease.

Employers in high tech, retailing, manufacturing, publishing, and elsewhere are not temporarily furloughing workers; rather they are restructuring employment downward, permanently, for what they expect to be smaller markets for their products for several years.

Without systemic reforms, the more than six million jobs lost in 2008 and 2009 will not be regained for many years. The crisis requires quick and bold action, and it requires more than a politically conceived stimulus package. It also compels radical changes in how Washington regulates banks and fosters international competition and wealth creation.

Unfortunately, the stimulus package is poorly structured and will prove too expensive for the 2 to 2.5 million jobs it creates for two years and then again disappear. The banking and trade policies President Obama is pursuing will drive the U.S. economy deeper in debt to Middle East oil exporters, China and other foreign creditors, throw the economy deeper into recession and destroy as many as 10 million jobs before the calamity has completely run its course by the middle of the next decade.

The Face of a Modern Depression

The economy need not reach the depths of the Great Depression to encounter permanent stagnation and evoke the pathos of vanished dreams—leaving older Americans without retirement incomes and scrounging for menial jobs and young workers without hope of promising careers.

Yet, without systemic reforms, unemployment will soar well above 10 percent, many college graduates will not find meaningful work, high school graduates will be trapped in low wage jobs and dependent on federal government largess, and older workers, abandoned by companies without adequate health care and pensions, will accept low wage jobs to supplement social security and work beyond the age of 70. Retirement will be for government workers and a few otherwise fortunate private sector workers but more generally, retirement will be the stuff of history books.

Roosevelt Administration stimulus spending—huge deficit spending—eased the pain but failed to end the Great Depression. Roosevelt’s policies did not put the U.S. economy on a track for growth, and President Obama’s policies will force Americans to relieve those frustrations.

In the 1930s, the economy suffered three false recoveries only to fall back into depression, because New Deal policies worsened structural problems that pulled the economy down in the first place. For example, the New Deal proliferated monopoly pricing, extended the life of undersized farms, raised structural savings rates, and created a system of home lending too dependent on federally sponsored banks—a system that ultimately contributed to the current crisis.

World War II and the Vietnam wars gave the U.S. economy reprieves from repeated downturns, but President Truman endured two recessions, President Eisenhower two recessions, Kennedy one recession and Nixon two recessions. Then surging oil prices created the Great Inflation. Only when President Carter began deregulation of the economy with the airlines, and Presidents Reagan, Bush and Clinton continued this process culminating with repeal of Glass-Steagall in 1999, did the economy enjoy the Great Moderation—an unprecedented, sustained period of growth with fewer recessions and less inflation.

During the Administration of George W. Bush, the abuse of free markets by the banks, domestically, and China, internationally through currency manipulation, high tariffs on imports and export subsidies, created the present crisis. George W. Bush ignored these threats to the benefits of free markets and open trade. Now President Obama is repeating his predecessor’s mistakes by not altering approaches to banking reform and trade and appears poised to the blunders of President Roosevelt by reregulating the economy and pushing out the frontiers of the state.

It is important to remember that the U.S. economy is built on industry and innovation and doubling the Department of Education or beefing up municipal bureaucracies does little to expand manufacturing or R&D. Making the Federal Reserve the systemic regulatory does nothing to dismantle the destructive compensation practices on Wall Street.

President Obama’s stimulus package is too weighed down with political baggage that will not boost employment—a bigger budget for the National Endowment for the Arts, extended welfare benefits, unemployment insurance for part-time workers—or create private sector jobs—extensive expansion of the Department of Education and fiscal relief for state and local governments that have added employment during the current contraction. Virtually all the jobs the stimulus package will create will not be permanent and those that are permanent will overwhelmingly be in government. In the end, someone has to pay taxes, but President Obama’s stimulus package won’t create many new taxpayers—in fact, it may leave us with few of them.

Many of the reforms proposed by President Obama, such as more welfare for the banks, restrictions on carbon emissions that apply to U.S. manufacturers but not their Chinese competitors, and the Employee Freedom of Choice Act which will eliminate secret ballots to select unions, threaten to strangle private initiative much as did the Roosevelt era reforms.

The challenges facing President Barack Obama could not be clearer. The current economic slowdown has two structural causes—bad management practices at the large money center banks and the huge foreign trade deficit. Either address those or preside over economic decline.

Courting Armageddon

The stimulus package will give the economy a temporary lift, but after the money is spent, unemployment will rise again and continue at unacceptable levels indefinitely without successively larger stimulus packages and huge federal borrowing from China and Middle East oil states. The economy is in a depression, not a recession.

To accomplish lasting prosperity, President Obama will have to fix the banks and the trade deficit. Obama must create a bad bank to work out perform triage on mortgages—work out mortgages for homeowners that are in trouble but can be saved, foreclose on those that can’t be reasonably assisted, and let mature those that will be otherwise repaid. Then the banks can sell new shares, repay their TARP assistance and once again make new loans to worthy homebuyers and businesses. Obama must make certain that banks do not continue to squander federal largess by paying outsized executive salaries and bonuses, acquiring other banks and pursuing new high-return, high-risk lines of businesses in merger activity, carbon trading and complex derivatives.

Questionable mortgage and other loan-backed securities must be completely removed from the books of commercial banks, and commercial banks must be separated in their ownership and control from other financial services, such as riskier investment banking, securities trading and hedge fund operations. Freed of these distractions, commercial banks could again raise private capital and repay TARP funds to the Treasury—essentially, purchase back the Treasury’s preferred shares in the commercial banks.

The yet unspent TARP money could be used to capitalize a “bad bank” or “aggregator bank” that would provide assistance to those distressed homeowners that can be reasonably assisted, undertake necessary foreclosures where homeowners simply cannot repay even with reasonable assistance, and service the vast majority of mortgages that left alone will be repaid. This would limit foreclosures to manageable numbers and put a floor under the decay in housing values. The bad bank would likely turn a profit, as did the Resolution Trust Corporation during the Savings and Loan Crisis and the Home Owners’ Loan Corporation during the Great Depression.

Instead, Secretary Geithner proposes a scheme to further enrich hedge funds and bankers instead of reforming the banking system.

Money spent on imported oil and imports of Chinese goods cannot be spent in the United States. Quite simply, those dollars don’t come back to purchase U.S. exports in sufficient amounts, and the resulting trade deficits are a huge structural drag on the demand for U.S. goods and services. That is why huge federal deficits are needed to keep the economy going but can’t be sustained indefinitely. Ultimately, trade deficits on oil and with China must be dramatically reduced to achieve adequate demand for U.S. production and employment and accomplish sustainable economic growth.

Most of President Obama’s energy proposals entail generating, transmitting and using electricity more efficiently. However most electricity is generated using domestic coal, natural gas and nuclear power; and reducing the oil import bill will require higher mileage standards for automobiles. Carmakers can build more efficient internal combustion engines and alternative propulsion vehicles; however, with cars lasting more than 15 years, incentives must be provided to get the gas guzzlers off the road sooner. A clunker subsidy based on the age of the vehicle and miles-per-gallon gained could encourage the rapid replacement of low mileage trucks, and SUVs; incentives to purchase fuel efficient vehicles could do more to stimulate the economy than tax rebates, increasing the budget of the National Endowments to the Arts and similar agencies, and hiring more local government bureaucrats.

China continues to print yuan and sell those for U.S. dollars in foreign exchange markets to keep the value of its currency artificially low. This makes exports artificially cheap in U.S. markets, U.S. exports artificially expensive in China, and causes U.S. manufacturers to shift production to China in industries where its low-cost labor provides little advantage, like automobiles and advanced automotive components.

If China refuses to stop currency manipulation to prop up its exports and to shut out imports, the Obama Administration should tax dollar-yuan conversion in direct proportion to China’s currency market intervention.

At his confirmation hearing Treasury Secretary Geithner acknowledged China is manipulating its currency and promised to work toward a realignment of currency values. But since then, Vice President Bidden backed off this position, much as did Democratic Senator Charles Schumer from his bill to take action against currency manipulation during the Bush presidency.

Near term, a stimulus package focused on infrastructure is critical for resuscitating growth. The recent round of tax rebate checks ended up in savings accounts or spent at the Wal-Mart on Chinese goods, and did little to create jobs or accelerate growth. Whereas projects to repair roads, rehabilitate schools and refurbish public buildings would create high-paying jobs at home and provide a legacy in capital improvements that assist growth now and in the future.

However, stimulus spending, alone, won’t fix what’s broke. Without fixing the banks, energy and trade with China, the stimulus package will give the economy a temporary lift, but then unemployment will rise again. Keeping Americans employed would then require progressively larger stimulus packages and foreign borrowing. Eventually, the foreign line of credit would run out, and widespread unemployment, depression and economic decline would follow.

Wages and Unemployment

In March, wages rose three cents per hour, or less than 0.2 percent. Wage pressures pose little threat to accelerate inflation.

The unemployment rate was 8.5 percent in March, up from 8.1 percent in February. However, these numbers belie more fundamental weakness in the job market. Discouraged by a sluggish job market, many more adults are sitting on the sidelines, neither working nor looking for work, than when George Bush became president. Factoring in discouraged workers, who have left the workforce, and those forced into part time employment owing to the lack of full time work, the unemployment rate is about 16.7 percent. 

Manufacturing, Construction and the Quality of Jobs

Going forward, the economy will add some jobs for college graduates with technical specialties in business, health care, education, and engineering. However, for high school graduates without specialized technical skills or training and for college graduates with only liberal arts diplomas, jobs offering good pay and benefits remain tough to find. For those workers, who compose about half the working population, the quality of jobs continues to spiral downward.

Historically, manufacturing and construction offered workers with only a high school education the best pay, benefits and opportunities for skill attainment and advancement. Troubles in these industries push ordinary workers into retailing, hospitality and other industries where pay often lags.

Construction employment fell by 126,000 in March. This is a terrible indicator for future GDP growth. Retailing shed 48,000 jobs, and financial services lost 25,000 jobs.

Manufacturing lost 161,000 jobs, and over the last 108 months, manufacturing has shed 5.0 million jobs. The trade deficit with China and other Asia exporters are the major culprits.

Adding Up the Costs

The dollar is too strong against the Chinese yuan, Japanese yen and other Asian currencies. The Chinese government intervenes in foreign exchange markets to suppress the value of the yuan to gain competitive advantages for Chinese exports, and the yuan sets the pattern for other Asian currencies. Similarly, Beijing subsidizes fuel prices and increasingly requires U.S. manufacturers to make products in China to sell there.

Ending Chinese currency market manipulation and other mercantilist practices are critical to reducing the non-oil U.S. trade deficit, and instigating a recovery in U.S. employment in manufacturing and technology-intensive services that compete in trade. Neither Presidents Bush and Obama nor Congressional leaders like Charles Rangel and Charles Schumer have been willing to seriously challenge China on this issue.

Either President Obama must get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they derive primarily from currency practices that make Chinese products artificially cheap in U.S. and other markets and Chinese restrictions on imports. These Chinese policies deprive Americans of jobs in industries where they are truly internationally competitive.

Each dollar spent on imports that is not matched by a dollar of exports reduces domestic demand and employment, and shifts workers into activities where productivity is lower. Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.

Were the trade deficit cut in half, the movement of workers and capital into more productive export and import-competing industries would increase by at least $400 billion or about $2500 for every working American. Workers’ wages would not be lagging inflation, and ordinary working Americans would more easily find jobs paying higher wages and offering decent benefits.

Put another way, the trade deficit is reducing 2009 GDP by $400 billion or about $2000 billion per worker.

Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 5.0 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2.5 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing.

Longer-term, persistent U.S. trade deficits are a substantial drag on productivity growth. U.S. import-competing and export industries spend three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces U.S. investments in new methods and products, and skilled labor.

Cutting the trade deficit in half would boost U.S. GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.

Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.

The Eclipse of American Leadership

In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to job and real income losses Americans will suffer during the Obama years.

Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending.

The damage grows larger each month, as the Administration and Congress dally and ignore the corrosive consequences of the trade deficit.

The choices for the new president are simple. It’s either recovery or depression. Fix the banks, trade with China and energy policy or preside over American decline and the eclipse of American leadership at the hands of China.

Peter Morici is a Professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

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19:29 GMT +00:00

The assumption that almost destroyed finance

IT WAS not a single formula or new-fangled asset that brought Wall Street to its knees. Only a much more complicated set of circumstances could make things go so epically wrong. But if I had to single out one thing, it would be the assumption that housing prices would continue to increase. Most people understand the concept of a bubble, that the price of a class of assets (because of uncertainty or just animal spirits) becomes larger than its fundamental value. Eventually prices fall, often in a sudden and sharp manner under-shooting the true value. Most people agreed that for the better part of this decade we were in a housing bubble. So it defies belief that major financial institutions, full of professionals who should know better, took positions that would make them insolvent if housing prices fell.

For banks, the housing buble differed from other bubbles. While they may have lost money in the tech bubble, they were not so exposed. That may be because banks not only sold mortgage backed securities, but held them on their own balance sheets. This was a fundamental change in their business model. That these banks decided to make such a radical change by betting on an asset in the midst of an enormous bubble is astounding.

reckons finance professionals did believe housing prices could fall, but just not on a national level. The data used to stress test mortgage assets was based on the experience of Texas and other oil-patch states in the 1970s and 80s. It provided an instance of a housing bubble that led to falling house prices. The problem was, since the Depression, house prices had never fallen on a national level. There existed no data that contained a large and positive correlation of home price across different regions and also had prices falling. This is the limitation of historical data; you use the past to predict the future. When you enter a new regime you are left with your own ad-hoc judgement. Rather than take on that sort of responsibility, most prefer to base their assumptions on historical data.

I find it hard to believe everyone honestly thought housing prices would increase forever. The problem is that decisions were made as if they would. Maybe it was a failure of management to look critically at assumptions and realise they did not jive with being in a national housing bubble.

Or maybe the truth was just too terrifying. A hedge-fund manager told me about a conference at Bear Sterns in early 2007. People were in a panic saying housing prices were falling all over the country and their models had not allowed for that. They obsessed and scrutinised oil-patch-state data, but realised they did not provide the answers for the regime we were in. Yet, the same people continued to package and hold these toxic securities on their books for months. 


Download UK Economic Outlook - 2009 by PwC (32 pages in PDF)

How a Modern Depression Might Look -- If the U.S. Gets There

In the wake of the biggest financial shock since 1929, economists say the odds of a depression are less than 50-50 -- though still uncomfortably high. But even if a depression comes to pass, a 21st-century version would look very different from the one 80 years ago.

There is no consensus definition for "depression." Harvard University economist Robert Barro defines it as a decline in per-person economic output or consumption of more than 10%, and puts the odds of a depression at about 20%. Many economic historians say the line between recession and depression is crossed when unemployment rises above 10% and stays there for several years.

The current recession, though severe, is not at depression levels now. Unemployment in February was at 8.1%, not as bad as in the early 1980s -- the last time the idea of a depression was being kicked around seriously, when it remained over 10% for 10 months. In the Great Depression it reached 25%

"When you get an unemployment rate of 25%, it's everywhere," recalls economist Anna Schwartz, who is 94 years old and best known for her analysis of the causes of the Great Depression with the late Milton Friedman. "Everyone is conscious of that and fearful. We're not talking in that league at all."

Using the Barro definition, economists in a Journal poll conducted in early March put the odds of a depression at 15%, on average. But there was wide disagreement. John Lonski, chief economist at Moody's Investors Service, put the depression odds at 30% in early March, but better-than-expected news recently has led him to put it closer to 20%. In contrast, Paul Kasriel of Northern Trust put the odds of a depression at just 1% because of the aggressive lending by the Federal Reserve and the fiscal stimulus just beginning to hit the economy. "There are just too many powerful countercyclical policies in place that will prevent the worst-case scenario," he says.

Today's government response is a far cry from the early 1930s, when the Fed raised interest rates, the infamous Smoot-Hawley Tariff Act crushed trade and Treasury Secretary Andrew Mellon's prescription for the economy was "liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate."

"The Great Depression was a mass of policy errors that made it worse," says historian and investment consultant Peter Bernstein, 90. "This time we have our fill of policy errors, but at least they're not making it worse."

Mr. Bernstein lived on Manhattan's Upper West Side during the Depression. "You were conscious of it all the time when you were out in the street," he says. "People looked so threadbare."

The different structure of today's economy means that a modern depression would differ from the Great Depression of the 1930s. Fewer than 2% of Americans working today have agricultural jobs, compared with one in five in 1930. Three-quarters of today's workers are in service-related jobs, which tend to be more stable than manufacturing, compared with fewer than half in 1930.

And then there are the social-safety-net programs that emerged after the Great Depression to blunt the blows. "There were no unemployment insurance, no food stamps, none of the automatic things that maintain some income for people who are out of work," says former Massachusetts Institute of Technology economist Robert Solow, a Nobel laureate. Mr. Solow, 84, grew up in Brooklyn, N.Y., and remembers his parents' constant worry about the next month's money.

With spending on food accounting for a little less than a tenth of a typical family's disposable income today, compared with a little less than a quarter in 1930, a modern depression wouldn't hit people in the stomach as the Great Depression did. Growing up on a Wisconsin farm, Catherine Jotka, 89, remembers taking dried corn meant for animal feed out of the granary and sifting dirt out of it to make corn bread.

Today's cutbacks would be for more discretionary purchases -- cable television, iTunes songs and restaurant meals. And there's plenty of room for trimming, says Victor Goetz, 81, a retired engineer who lives outside Seattle. "This has a whole different feel than anything we had in the 1930s," he says.

Even if the downturn isn't deep enough to be called a depression, the restructuring that it needs to go through means that even after the economy bottoms out, there could be a "lost" four or five years of sluggish growth, says Nobel laureate Paul Samuelson, 93.

As a University of Chicago student during the Depression, Mr. Samuelson remembers attending economic lectures that seemed completely out of step with the times, based on laissez-faire principles that stopped making sense after the 1929 crash. "I was perplexed because I could not reconcile the assignments I got from these great economists with what I heard out the windows and I heard from the street," he says.

Starting in the 1980s, the U.S. saw an extraordinary period of economic quiescence, where growth was steady and policy makers dealt with financial crises handily. Economists began to doubt the possibility of a financial crisis so severe it would upend the economy. And that left them as blindsided as their counterparts when the crisis came 80 years ago...WSJ 3/30/08

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Senator John Kerry opening hearing of US Senate Foreign Relations Committee:
 
I don’t have to tell you that America is not alone today in confronting economic crisis. What started here has now gone global, and continues to reverberate beyond our financial systems into the daily economic lives of people everywhere. And the reality is, we don’t yet know where this crisis will end.
Today’s hearing grows out of a roundtable discussion last month on this very topic, and we are very glad to have the full, formal participation of the Committee today. 
Dennis Blair, the Director of National Intelligence, recently told Congress that “the primary near-term security concern of the United States is the global economic crisis and its geopolitical implications.” That is an amazing statement given the ongoing risks we face from terrorism, two wars, and rogue nuclear programs in Iran and elsewhere. Blair warned that “time is probably our greatest threat. The longer it takes for the recovery to begin, the greater the likelihood of serious damage to U.S. strategic interests.”
He also warned of “regime threatening instability”—and today’s economic crisis has already brought down governments in Iceland and Latvia, and helped spark riots in Europe. Just this week the Prime Minister of Hungary offered his resignation over the economic situation there. This crisis is likely to be a driving geopolitical force for years to come, and the political ramifications could well become even more serious. If there is one lesson we should take away from the experience of too many countries, it is to never underestimate the severity of these economic challenges, or the urgency of tackling them head-on rather than deferring tough decisions. 
Last week, several of us had the opportunity to speak with Dominique Strauss-Kahn, Managing Director of the International Monetary Fund, and Bob Zoellick, President of the World Bank. We spoke about the snowballing financial crisis that is brewing in Central and Eastern Europe. If we don’t act quickly, we risk replacing an era of promise
and progress with one of soaring unemployment, instability, and a rollback of the influence and ideals we have spent decades building. 
We also spoke about the need to strengthen our international financial defenses, particularly the IMF. I’m to join with Senator Lugar in supporting a dramatic increase in the IMF’s capacity to respond to this crisis, as Treasury Secretary Geithner has proposed. The IMF, along with the World Bank, is the best channel we have to bolster emerging and developing markets as economies, banking systems and political systems collapse around them. 
The upcoming G20 meeting in London will be an important opportunity to enlist global support for decisive action on this issue. Strengthening the IMF, however, must be just one component of a much larger challenge: we simply have to fix our banking systems—not just in America, but in every major financial center.
To be sure, our economy and the global economy have reached a moment of crisis. But as bad as the news has been, if we come up with the right solutions, there will be opportunities going forward. There is a great advantage to being the first to move in global finance. Washington has waited too long already while our financial institutions remain frozen. Lending will not happen until banks have removed their toxic assets from the books, and we are counting on Treasury’s plan announced this week to do just that. 
As we put our own banking system in order, there will also be new challenges waiting for us abroad. We will have to confront the potential for increased political instability; large-scale failures of other countries’ financial systems; escalating financial protection or trade wars that could help to deepen the crisis; increased poverty and hunger in the developing world; and competitors exploiting financial instability in ways that diminish our influence. And these problems are not confined to traditionally unstable corners of the globe: Europe too is in deep financial trouble, and Turkey, Indonesia, and Pakistan, three of our most important partners in the Muslim world, today face acute balance of payments crises. 
We must also confront the fact that there is a great deal of anger out there among people who blame the model we exported. Even as we restore confidence in our markets, we will also need to find a strategy to project leadership, share burdens, and spread stability as this crisis continues to reverberate worldwide. And as we balance the domestic and global demands of this crisis, we should be warned that, in cutting corners for short-term savings, we risk creating far greater costs down the road.
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Stronger Euro Threatens Weak Economy in Europe...the euro is again gaining strongly against the currencies of its main trading partners, further threatening the Continent’s wilting economy...A rising currency typically damps demand for exports, an important component of growth. That in turn slows production in factories, with collateral effects on related industries and on jobs...The main reason for the currency’s rise, analysts said, is that central banks in the United States, Britain and Switzerland are taking radical steps to increase the amount of dollars, francs and pounds in circulation to try to revive lending. But their actions, known as “quantitative easing,” also carry inflationary risks. The European Central Bank, based in Frankfurt, has chosen not to follow this path for now...NYT, 3/20/09
 

A VIEW FROM AUSTRALIA:

Deficit shows why accountants make bad economists

There are very good reasons why recession budgets go into debt.

TWO big numbers leapt out of this week's budget. One was that the rate of unemployment was expected to reach a peak of 8.5 per cent — equivalent to about a million souls out of work. The other was that the budget deficit for the next financial year was expected to reach a record $58 billion.

If you think the deficit figure is the more worrying of the two, congratulations: you'd make a great accountant. Unfortunately, you'd make a bad economist and a pretty cold fish of a human being.

Because Kevin Rudd and Wayne Swan saw fit to use the budget to focus attention on their plan to return the budget to surplus — their "deficit exit strategy" — we've had a lot of people who know little about the role of the budget carrying on about deficits and debt.

I've lost count of the times I've heard journalists referring to the budget deficit as "the nation's bottom line". Nonsense. It's the Federal Government's monetary bottom line — and the nation is just a bit bigger than its government.

Since for many of us our greatest material need is to have a job by which we can earn the income we need to feed and clothe ourselves, the unemployment rate comes a lot closer to being the nation's bottom line than the Government's budget balance does.

While the maintenance of full employment is an end in itself, the budget balance is merely a means to an end. Which end? The successful management of the economy, particularly the tricky task of keeping unemployment low.

This means there's an important relationship between those two big budget numbers, unemployment and the budget deficit. A lot of people seem to think the deficit is purely the result of all the Rudd Government's "reckless" spending, particularly all the cheques it's been sending out.

No, the primary reason for the budget's rapid transformation from large surplus to huge deficit is the economy's descent into recession, which has greatly reduced the tax revenue the Government now expects to receive. As Rudd and Swan keep saying, the recession has wiped $210 billion off the revenue the Government was hoping to get over next four financial years.

The recession would also be worsening the budget balance by greatly increasing the number of people to whom the Government has to pay unemployment benefits.

So, the first point to note is that the budget balance deteriorates automatically whenever the economy goes into recession. It happens without the Government lifting a finger.

The next thing to note is that, though this sounds like a bad thing, it's actually a good thing. Why? Because it helps to stabilise the economy. At the very time when households and businesses start spending less — and thus threatening jobs — the government starts spending a lot more than it is extracting from the economy in taxation.

The price of the budget's automatic tendency to help stabilise the economy is the incurring of a budget deficit, which has to be covered by borrowing. But this is less worrying when you realise that, once the recession has passed and the economy begins to recover, the budget's stabilisers will automatically change direction and start driving the budget back into surplus.

As people's incomes start rising again, the government's tax collections will rise at an even faster rate and, as employment increases, the number of people to whom the unemployment benefits must be paid will decline.

When the budget gets back into surplus, those surpluses are used to repay the debt incurred during the period of deficits. The budget balance's tendency to move in this way is unavoidable.

But the Government is doing more than merely allowing the automatic stabilisers to do their thing. It is also explicitly increasing its spending — more on capital works than cash bonuses — in an attempt to stimulate spending.

When the financial system fails, everyone suffers. Over the past 22 months the shock has spread from American housing, sector by sector, economy by economy. Some markets have seized up; others are being pounded by volatility. Everywhere good businesses are going bankrupt and jobs are being destroyed. For the first time since 1991 global average income per head is falling. Even as growth in emerging markets has come to a halt, the rich economies look set to shrink. Alan Greenspan, who as chairman of Americas Federal Reserve oversaw the boom, calls the collapse a once-in-a-half-century, probably once-in-a-century type of event. Financial markets promised prosperity; instead they have brought hardship.(Click to continue) Financial services are in ruins. Perhaps half of all hedge funds will go out of business. Without government aid, so would many banks. Britain has suffered its first bank-run since Disraeli was prime minister in the 1870s. America has stumbled from one rescue to the next. The Wall Street grandees have been humbled. Hundreds of thousands of people in financial services will lose their jobs; many millions of their clients have lost their savings.

Russian Scholar Says U.S. Will Collapse Next Year

Wednesday, March 04, 2009

MOSCOW   If you're inclined to believe Igor Panarin, and the Kremlin wouldn't mind if you did, then President Barack Obama will order martial law this year, the U.S. will split into six rump-states before 2011, and Russia and China will become the backbones of a new world order.

Panarin might be easy to ignore but for the fact that he is a dean at the Foreign Ministry's school for future diplomats and a regular on Russia's state-guided TV channels. And his predictions fit into the anti-American story line of the Kremlin leadership.

"There is a high probability that the collapse of the United States will occur by 2010," Panarin told dozens of students, professors and diplomats Tuesday at the Diplomatic Academy — a lecture the ministry pointedly invited The Associated Press and other foreign media to attend.

The prediction from Panarin, a former spokesman for Russia's Federal Space Agency and reportedly an ex-KGB analyst, meshes with the negative view of the U.S. that has been flowing from the Kremlin in recent years, in particular from Vladimir Putin.

Putin, the former president who is now prime minister, has likened the United States to Nazi Germany's Third Reich and blames Washington for the global financial crisis that has pounded the Russian economy.

 Panarin didn't give many specifics on what underlies his analysis, mostly citing newspapers, magazines and other open sources.

He also noted he had been predicting the demise of the world's wealthiest country for more than a decade now.

But he said the recent economic turmoil in the U.S. and other "social and cultural phenomena" led him to nail down a specific timeframe for "The End" — when the United States will break up into six autonomous regions and Alaska will revert to Russian control.

Panarin argued that Americans are in moral decline, saying their great psychological stress is evident from school shootings, the size of the prison population and the number of gay men.

Turning to economic woes, he cited the slide in major stock indexes, the decline in U.S. gross domestic product and Washington's bailout of banking giant Citigroup as evidence that American dominance of global markets has collapsed.

"I was there recently and things are far from good," he said. "What's happened is the collapse of the American dream."

Panarin insisted he didn't wish for a U.S. collapse, but he predicted Russia and China would emerge from the economic turmoil stronger and said the two nations should work together, even to create a new currency to replace the U.S. dollar.

Asked for comment on how the Foreign Ministry views Panarin's theories, a spokesman said all questions had to be submitted in writing and no answers were likely before Wednesday.

It wasn't clear how persuasive the 20-minute lecture was. One instructor asked Panarin whether his predictions more accurately describe Russia, which is undergoing its worst economic crisis in a decade as well as a demographic collapse that has led some scholars to predict the country's demise.

Panarin dismissed that idea: "The collapse of Russia will not occur."

But Alexei Malashenko, a scholar-in-residence at the Carnegie Moscow Center who did not attend the lecture, sided with the skeptical instructor, saying Russia is the country that is on the verge of disintegration.

"I can't imagine at all how the United States could ever fall apart," Malashenko told the AP

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US Recession Could Last Up to 36 Months: Roubini
The man who predicted the current financial crisis said the US recession could drag on for years without drastic action.

Among his solutions: fix the housing market by breaking "every mortgage contract."

"We are in the 15th month of a recession," said Nouriel Roubini, a professor at New York University's Stern School of Business, told CNBC in a live interview. "Growth is going to be close to zero and unemployment rate well above 10 percent into next year."

Echoing a speech he made earlier in the day, Roubini said he sees "no hope for the recession ending in 2009 and will more than likely last into 2010."

Roubini, who is also known as "Dr. Doom," told CNBC that the risk of a total meltdown has been reversed for now but that the economy is going through "a death by a thousand cuts." He also said that "most of the U.S. financial institutions are entirely insolvent." 

"The market friendly view for the banks is nationalization," said Roubini. "Temporarily take over the banks, clean them up and get them working again."

As for the claim that the Treasury Department can't legally take over the banks, Roubini said that most of the banks are already owned by the government and that the government could "put them in receivership" if it had to.

Earlier in the day, Roubini spoke to the CBOE Risk Management Conference and said he believes total losses could peak at $3.6 trillion in the financial system, with half of that being borne by banks and bank dealers and the other half borne by hedge funds and pension funds, among others.

He said that while U.S. GDP next year could be zero, global GDP could dip into negative territory.

"We could end up ... with a 36-month recession, that could be "L-shaped stagnation, or near depression," Roubini said. He puts the chance of a severe U-shaped recession at 66.7 percent, and a more severe L-shaped recession at 33.3 percent.

Roubini listed a litany of negative omens: Capex spending down 20-30 percent for investment grade companies, self-perpetuating deflation, all making a bad situation worse.

"If you expect prices to be lower tomorrow, why would you buy today?", asked Roubini. He says it's easier to break out of am inflationary cycle than a deflationary one, and while a year of deflation "is okay," longer would be "a disaster."

So what can the government do? The easy part is lowering interest rates and buying toxic assets. The hard part, he says, will be tackling housing. Roubini says that the housing market, like a company restructuring in bankruptcy, needs to have "face value reduction of the debt." Rather than go through mortgages one by one, he says reduction has to be "across the board...break every mortgage contract."

Roubini also took issue with the $800 billion stimulus package, saying it's not enough. For one thing, there's only $200 billion upfront, and half of that is a tax cut, which Roubini calls "a waste of money" that is not going to make a difference.

Finally, while he says there will be "a light at the end of the tunnel", it'll probably get worse before it gets better. Those who believe in a second half recovery this year "are delusional" he says.

In fact, based on Roubini's calculations, we could conceivably see the S&P 500 at 500, the Dow at 5000.

UK Economic Outlook by PwC

  • UK GDP is projected in our main scenario to fall by just over 3% in 2009 and then be broadly flat on average in 2010, with a gradual recovery becoming evident over the course of that year. But the recession seems likely to persist throughout 2009 and will affect all regions of the country.
  • Consumer spending growth is also expected to turn negative at -3% in 2009 due to the severe squeeze on consumer spending from high debt levels, tighter credit conditions, falling housing wealth and rising unemployment. We also expect a further small decline in consumer spending in 2010 and only a gradual recovery thereafter as households seek to reduce their debt burdens and return their savings ratios to more normal levels.
  • Business investment growth is expected to fall sharply in 2009 as a result of the continuing credit crunch, while housing investment will also continue to decline as we expect house prices to fall by around 15-20% further during 2009.
  • Public spending growth may be boosted in the short term, but is likely to need to be cut back sharply in the medium term to bring under control a budget deficit that is projected to rise to around 10% of GDP in 2009/10.
  • Slower global growth is likely to dampen exports, although this will be offset in part by the weaker pound. Import growth is expected to slow markedly, so enabling net exports to make a positive contribution to overall GDP growth in 2009, but this will be far too small to offset the projected decline in domestic demand growth over this period.
  • Risks around growth in our main scenario are significant and remain weighted to the downside. We therefore recommend that businesses should stress test their plans and valuations against an alternative ‘prolonged recession’ scenario in which GDP falls by around 5% in 2009, with negative growth continuing into 2010.
  • Inflation is projected to fall back significantly during 2009 as the economy slows, but there are still considerable uncertainties around this relating to the path of global commodity prices and sterling.
  • Interest rates are assumed to be cut to close to zero later in 2009 in our main scenario. There will be an increasing focus on quantitative easing by the Bank of England to ease liquidity and credit conditions in key financial markets
  • This issue includes a detailed assessment of the potential exposure of different industry sectors to the economic downturn, as summarised in the PwC Sector Vulnerability Index. The metal products, financial services, and hotels and restaurants sectors emerge as the most vulnerable according to this index, followed by engineering, transport and construction. The pharmaceuticals, food retailing and utilities sectors appear least vulnerable, although no sector will be entirely immune from the effects of the recession.

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GM and GE are dragging corporate America through the mud

Why the loss of credibility? Until the 1970s, GM was the dominant player in the global automobile industry. But thanks to its failure to respond effectively to competition which offered better quality and service, GM has suffered a steady decline, interrupted for a few years here and there with prosperity driven by cheap gas and an appetite for SUVs and trucks.

For the last year, GM has said that bankruptcy was off the table. Now GM says bankruptcy is imminent -- in GM's 10K its auditor says there is "substantial doubt" about GM as a going concern. With $82 billion in losses since 2006 and a 95% collapse in its stock price, why has GM's CEO kept his job?

Meanwhile, GE was an American icon for generations right up to the end of Jack Welch's tenure as CEO. Under the current CEO Jeff Immelt, GE stock has lost 83% of its value, but at least GE was committed to keeping its $1.24 a share quarterly dividend until February 5, 2009. Of course, all that changed 22 days later when GE announced it was slashing that dividend 68% to save $4.2 billion. And after touting its commitment to keeping the AAA rating, its recent 10K declared GE might need to pay out $8.2 billion if its AAA credit rating drops four notches, below AA-.

It makes no sense to me that a public company's stock price would drop over 80% and the board would continue to support the CEO. In the case of GM, where the company is officially on the brink of bankruptcy, is the board protecting shareholders by keeping in charge the CEO who led the company to that point? Or is GM's board just protecting itself?

For those who build American business, the question is whether the CEOs need to go or whether the system in which they operate is fundamentally flawed. I'd say both. What about you?...Peter Cohan 

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AIG Warned of 'Catastrophic' Failure

Company Told U.S. Its Collapse Would Cause Worldwide 'Chain Reaction'By Brady Dennis

Washington Post Staff Writer 
Tuesday, March 10, 2009

On the eve of its latest bailout, American International Group warned U.S. government officials that it needed more help from the Treasury Department and the Federal Reserve to prevent "potentially catastrophic unforeseen consequences."

In a 21-page draft presentation, dated Feb. 26 and labeled "strictly confidential," company officials painted a grim set of possible scenarios, cautioning that its failure would cause a "chain reaction of enormous proportion."

The collapse, for instance, would strain the global insurance industry, hurt the value of the dollar and damage money-market funds, AIG warned. The company's failure, it added, would also erase taxpayers' existing investment in the firm and foster "doubts about the ability of the U.S. to support its banking system."

On March 2, the government announced that it would ease the terms of its existing loans to AIG and give the struggling company access to an additional $30 billion, raising the total rescue package to an estimated $170 billion. That same day, AIG posted a $61.7 billion loss for the fourth quarter of 2008, the largest such loss in U.S. corporate history.

The presentation "reflects months of dialogue between the company and various people in the government, really trying to understand the systemic risk," said an AIG official, who was not authorized to speak on the record.

Fed spokeswoman Michelle Smith said the central bank had "made its decision on its own analysis." Treasury spokesman Isaac Baker declined to comment.

In the presentation, AIG warned that its failure could provoke a "run on the bank" from its 74 million insurance customers around the world, causing other insurance firms to fail and leading to massive unemployment in numerous countries. It could also put "retirement savings significantly at risk" and cause "a loss of confidence in the private pension system in the U.S.," according to the document.

In addition, AIG said its demise could force European banks that bought exotic derivatives from the company's Financial Products division to have to raise $10 billion in capital and would put them at risk of ratings downgrades. Because AIG insures nearly every commercial activity -- from aviation to health-care providers to cargo shipping -- its failure could lead to a domino effect that "would cause turmoil in the U.S. economy and global markets," according to the company.

A collapse of AIG, the document stated, "could have similar or worse consequences on the global financial markets as that of the Lehman [Brothers] bankruptcy." Lehman, a once-powerful global investment bank, filed for bankruptcy protection in September after it failed to win a bailout from the federal government.

"What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means," says the presentation, which was circulated among numerous federal and state regulators. "Permitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government. Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce."

Lawmakers have expressed renewed ire after the government's latest bailout of AIG, ripping into Fed Chairman Ben S. Bernanke, Treasury Secretary Timothy F. Geithner and other federal officials during congressional hearings last week and demanding to know which AIG trading partners have benefited from taxpayer money. Members of the Senate Banking Committee criticized the company as "a bottomless pit," "a lost cause," and "a very disturbing story of malfeasance, incompetence and greed."

Federal officials themselves expressed frustration but insisted, as AIG did in its presentation, that the company was too large and important to fail.

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Latin America and the financial crisis

If the first half of 2008 was characterised by expressions of bravado, as national leaders across Latin America sought to dismiss the potential impact of the global economic crisis, the second half was marked by hurried efforts to avert its implications. In a similar vein, 2009 will be dominated by the leaders’ responses to the challenges the crisis throws their way. These responses will inevitably vary according to each country’s exposure, as well as the political conditions at home and throughout the region. The main question will be whether the crisis simply alters a country’s patterns of growth or whether it precipitates a local political or economic crisis. Countries with high exposure and limited policy flexibility will struggle to emerge unscathed.

Latin American countries will be exposed on several fronts. Most countries have over the last two decades increased their integration into the world economy; trade as a percentage of GDP has consistently grown and now accounts for a significant portion of government income and economic growth. A global recession would hamper demand for goods and services from Latin America, especially if its two largest trade partners, the US and Europe, face a sharp contraction. Of particular concern is trade in commodities, especially in countries where state-led companies play a prominent role, such as Venezuela or Ecuador, or where export taxes represent a large percentage of government revenue, as in Argentina.

Nonetheless, Latin America’s exposure differs from other regions. Unlike Asia and parts of Eastern Europe, direct financial contagion from the crisis will be relatively limited. This is partly because of a lack of sophistication in the region’s financial systems, with a low degree of involvement in credit derivatives, but also because the lessons of previous crises have resulted in healthier balance sheets. Moreover, though the region contains several major commodities exporters, some, such as Brazil and Chile, have relatively diversified economic bases and functioning internal markets that mitigate the impact of falling commodity prices.

Significantly, 2009 may see a reckoning in a contest that has emerged in the region over the last three years between two different models of socio-economic development. The ‘liberal’ model, adopted by Brazil, Mexico, Colombia, Peru and Chile, among others, is defined by liberal economics with a central role for the private sector. The ‘statist’ model, followed by Venezuela, Ecuador, Bolivia, Nicaragua and to some extent Argentina, is a state-centred developmental approach, often with little regard for democratic norms, good governance or economic orthodoxy.

Both liberal and statist countries are likely to experience a marked rise in social unrest as unemployment and discontent rise, but we believe that statist countries will bear the brunt of the crisis for a number of reasons. First, they have opted to make the state the centre of economic development and the engine of growth. This was relatively easy while windfall export revenues provided enough funds to sustain large networks of political patronage. But as the global economy sinks into recession and prices for some commodities fall – especially in the extractive sector – government income will be slashed, significantly curtailing their ability to sustain elevated spending. The problem will be compounded by the fact that these regimes’ hostility towards foreign companies has eroded investor confidence to the point that turning to the private sector to stimulate growth will not be a realistic option. Moreover, courting foreign companies could represent a costly political U-turn for some governments.

For liberal countries, the main impact is likely to manifest itself in adjustments to growth patterns, with efforts to enhance international competitiveness emerging as a positive by-product. They might suffer in some ways, such as small increases in social unrest and crime because of rising unemployment. However, this will only reinforce the need to seek new markets, diversify and pursue investment treaties, especially for countries with small internal markets. Moreover, painful but ultimately beneficial reforms will gain urgency and may be more easily enacted in the name of economic survival. Ultimately, the crisis will provide the perfect litmus test for the liberal economies of Latin America to demonstrate that they can be reliable players in the global economy and trustworthy destinations for investment...from Foco by Control Risks Group

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The Shadow of Depression

By Robert J. Samuelson, Monday, March 16, 2009

We live in the shadow of the Great Depression. Americans' gloom does not reflect just 8.1 percent unemployment or the loss of $13 trillion worth of housing and stock market value since mid-2007. There is also an amorphous anxiety that we are falling into a deep economic ravine from which escape will be difficult. These worries may prove ill-founded. But until they do, they promote pessimism and the hoarding of cash, by consumers and companies alike, that further weaken the economy.

Our only frame of reference for this sort of breakdown is the Great Depression. Superficially, the comparison seems absurd. We are a long way from the 1930s, as Christina Romer, head of President Obama's Council of Economic Advisers, noted recently in a useful talk. Unemployment peaked at 25 percent in 1933. At its low point, the economy (gross domestic product) was down 25 percent from its 1929 high. So far, U.S. GDP has dropped only about 2 percent.

What's more, the Depression changed our thinking and institutions. The human misery of economic turmoil has diminished. "American workers [in the 1930s] had painfully few of the social safety nets that today help families," Romer said. Until 1935, there was no federal unemployment insurance. At last count, there were 32 million food stamp recipients and 49 million on Medicaid. These programs didn't exist in the 1930s.

Government also responds more quickly to slumps. Despite many New Deal programs, "fiscal policy" -- in effect, deficit spending -- was used only modestly in the 1930s, Romer argued. Some of Franklin Roosevelt's extra spending was offset by a tax increase enacted in Herbert Hoover's last year. The federal deficit went from 4.5 percent of GDP in 1933 to 5.9 percent in 1934, not a huge increase.

Contrast that with the present. In fiscal 2009, the budget deficit is projected at 12.3 percent of GDP, up from 3.2 percent in 2008. Some of the increase reflects "automatic stabilizers" (in downturns, government spending increases and taxes decrease); the rest stems from the massive "stimulus program." On top of this, the Federal Reserve has cut its overnight interest rate to about zero and is lending directly in markets where private investors have retreated, including housing.

Government's aggressive actions should reinforce some of the economy's normal mechanisms for recovery. As pent-up demand builds, so will the pressure for more spending. The repayment of loans, lowering debt burdens, sets the stage for more spending. Ditto for the runoff of surplus inventories.

So, are Depression analogies far-fetched, needlessly alarmist? Probably -- but not inevitably. Even some Depression scholars, who once dismissed the possibility of a repetition, are less confident.

"Unfortunately, the similarities [between then and now] are growing more striking every day," says economic historian Barry Eichengreen of the University of California at Berkeley. "I never thought I'd say that in my lifetime." Argues economist Gary Richardson of UC Irvine: "This is the first business downturn since the 1930s that looks like the 1930s."

One parallel is that it's worldwide. In the 1930s, the gold standard transmitted the crisis from country to country. Governments raised interest rates to protect their gold reserves. Credit tightened, production and trade suffered, unemployment rose. Now, global investors and banks transmit the crisis. If they suffer losses in one country, they may sell stocks and bonds in other markets to raise cash. Or as they "deleverage" -- reduce their own borrowing -- they may curtail lending and investing in many countries.

The consequences are the same. In the fourth quarter of 2008, global industrial production fell at a 20 percent annual rate from the third quarter, says the World Bank. International trade may "register its largest decline in 80 years." Developing countries need to borrow at least $270 billion; if they can't, their economies will slow and that will hurt the advanced countries that export to them. It's a vicious circle.

Just as in the 1930s, there's a global implosion of credit. What's also reminiscent of the Depression are quarrels over who's to blame and what should be done. The Obama administration wants bigger stimulus packages from Europe and Japan. Europeans have rebuffed the proposal. The United States has also proposed greater lending by the International Monetary Fund to relieve stresses on poorer countries. Disputes could fuel protectionism and economic nationalism.

No one knows how this epic struggle will end -- whether the forces pushing down the global economy will prevail over those trying to pull it up. "Depression" captures a general alarm. The vague fear that something bad is happening, by whatever label, causes consumers and business managers to protect themselves by conserving their cash and slashing their spending. They hope for the best and prepare for the worst. When people stop worrying about depression, when the shadow lifts, the crisis will be over.

 

 

Economy Falling Years Behind Full Speed

As the recession grinds on, more and more of the nation’s means of production — its workers, its factories, its retail outlets, its freight lines, its bank lending, even its new inventions — are being mothballed.

This idled capacity, like baseball players after a winter off, takes time to bring back into robust use. So even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

While stock market investors have embraced tentative signs of improvement in the mortgage market and elsewhere, even a sharp pickup in demand for products and services will take considerable time to play out.

Click here to read full above article.

Repairing the World's Financial System

For globalization to endure, poor nations must stop lending, start borrowing.

In a recent poll, 60% of U.S. respondents said they believed an imminent economic depression was “likely.” Retirement accounts have lost more than $2 trillion in value over the past year, and the Dow Jones Industrial Average has dropped more than 30% from its apex in the fall of 2007.

Where do we go from here? Martin Wolf, chief economics commentator of the Financial Times and author of the recently-released book Fixing Global Finance, has some surprising answers.

Futurist: Everyone is terribly concerned about the global economy. Investors have seen their stock portfolios decrease by 30 and 40%. What do you see the global economy doing in the next five years?

Wolf: The only honest thing one can say is that one doesn’t know. There are two or three very powerful reasons we don’t know. First, we really can’t forecast economies. Forecasters always miss turning points. They can tell you what will happen only if things remain as they are. Turning points are inherently unpredictable. The consequences when things do change are always unpredictable for the same reason, because a lot of other things are likely to change at the same time. That’s the first point.

Second point is that the forces now at work are unbelievably rare and, in this combination, have never been seen before. Ever. That makes looking back on anything that’s happened in history almost useless. It gives you some guidance; there are better and worse guides. But there is no clear guide that will give you more than a conceptual idea of what’s going on. 

Third reason is that it really depends on what people, policy makers above all, actually do. There are choices to be made. So far, in the run up to the crisis and through this crisis, most of the choices made have turned out to be bad choices. Because they’ve been made they’ve been bad choices. We ended up with the worst of all possible worlds at the moment. If people go on making bad choices, we’re going to wind up with a depression lasting many years. If they make what I think are the right choices, we may still end up with a severe recession but we may avoid a severe depression. Those are, I think, the most important things to understand. Anyone who claims to know what’s going to happen is lying.

The forces at work, however, are at least moderately clear. We’ve got three gigantic things happening at the same time that are forcing the world in the direction of recession, or worse. First, for a very long period, household consumption in the United States and a number of other smaller developed counties, particularly the United Kingdom, Australia, Spain, played a very large role in supporting demand around the world, at home and abroad, because these households were spending much more than their incomes consistently and borrowing, consistently, to make up the difference in an era of easy credit. This was supported by a series of asset-price bubbles, far-and-away the most important in this regard was the house price bubble in the recent years, which has ended in these countries starting in the United States in 2006. Because households are losing wealth, or have been losing wealth, reinforced by the collapse in equity markets, they are cutting back on their spending very quickly. If they do that, that guarantees an enormous recession. To give you a relevant example, the U.S. consumer has been spending all his or her income, borrowing a lot more besides, and savings rates have hit zero. The consumption has been a little over GDP, so it’s the principal source of demand in the U.S. economy. If households go back to saving at a more normal rate of their income, which will be somewhere in the neighbor of 6% to 8% of disposable income, that alone, if it happens quickly, will reduce GDP on the demand side by about 5 %. That will feel like a depression. It will certainly be worse than any recession since the war. The first thing that is happening is immense pressure on the high-spending households. 

The second thing happening is an extraordinary expansion of the credit system and the financial sector in the world, particularly in these developed countries. By extraordinary, I really mean extraordinary. Over the last 25 years or so the balance sheet of the financial sector of the United States has grown about six times faster than GDP, generating an extraordinary increase in income for the people in the financial sector, and this has led to a massive increase in leverage and low capital ratios. This expansion of the balance sheet of the financial sector financed enormous indebtedness in household sectors in the United States and United Kingdom. Household indebtedness has doubled in relation to disposable income over the last decade.

 As a result of the decline in asset prices and the losses associated with that, the feared losses given the very slow capitalization and the very small expertise-base of much of the sector, the financial sector is effectively decapitalized, i.e. bankrupt. And if it were properly, rigorously, evaluated, a large part of it would look bankrupt, and government would recapitalize. As a result, today’s financial sector wants to lend less, reduce its balance sheet, get people to payback the money it lent, and that leads to the third problem, which is that credit is much more difficult to obtain than it used to be as a result of what happened in the financial system. 

You add these three things together and you have an enormous contractionary force operating in the countries that generated very large and buoyant demand growth over the course of the last decade. You have to ask yourself, if they save more and spend less what is going to offset it? What might offset it to get us out? When you think about that, you realize it can’t be investment. Companies invest less in recession. Companies will follow households. That leads you with two sources of demand, one is government, which will spend upwards. It might be financed by the printing press, even by the central bank. That is part of the short term solution in my view. Governments are credit worthy, everybody wants to lend to them. Government spending is a temporary solution. It’s a good one. It will help households to go through a period when they’re saving more, improving their balance sheet. It will take a long time. Household wealth is declining at the same time. The other thing that will help these countries is export growth. You look at U.S. growth in the last year or so, most of it has been generated by exports. That leads you to the final big problem; for exports to grow form the economies that are so big, you need very strong and rigorous demand from the countries which are not heavily burdened by debt. Unfortunately, most of these counties have shown no willingness to increase their spending at large rates, with the marginal exception of China, again, only marginal.


For all these reasons, we can expect a deep and self-fulfilling recession--prevented from becoming a depression--by enormous increases in fiscal deficits to levels like 10% of GDP or more. This will be financed perhaps by borrowing from the central bank. It’s going to take a long time before demand grows in the private sector of these debt-afflicted economies, and I don’t see anything very strong coming from the rest of the world.

There are two other elements, one of which is promising, the other is sort of interesting. The promising one is we no longer have any inflation concern. Commodity prices are collapsing. That’s shifting income back to households, making it easier to save and spend more without cutting back on their consumption. But their real incomes are higher. It’s also removing income from the high-saving countries, which is helpful. It’s lowering inflation; that’s allowing banks to be aggressive in their interest rate policy, which should help households. That is really quite a positive element. The second element is what’s happening in the stock markets.

 You’ve seen that we’ve been in a structural bear market at least since 2000. We had an enormous overvaluation, particularly the developed world in 2000, this foresees a long recovery because of the aggressive monetary policy of the fed which had the consequences we now see in terms of the balance sheet of the financial sector.

Their collapse is now leading to a further collapse in the value of stocks. But I do believe that on a fundamental basis, if you look at long-term underlying valuations, stock markets are beginning to look fairly valued or even cheap--not incredibly cheap, but cheap given the proper understanding of the risks. There was a reason there was an equity risk premium. So that may, in time, once we start stabilizing and the economy becomes better, induce people to start buying stocks, supporting them, giving some stability to stocks. Getting out of this will require aggressive action by governments to prevent total collapse in demand and a total collapse in the financial system. They’ve taken dramatic actions on the later. No body can reasonably think that core financial institutions... they have not done enough on the former to get demand growing again, To get much bigger fiscal boosts in my view to get it growing the deficit in the short run and much more aggressive action to make sure newly re-capitalized institutions at least provide financing to business.

So if those things all go well, ALL go well, I think we can avoid a depression, have just a very deep recession, and see weak recovery of some kind in 2010 or 2011. But this is bound to be the deepest global recession since the war, the first one on which all the developed countries are in recession. It’s going to be a very slow process.

Futurist: This issue of stimulating demand and what government can do to do it; one view says don’t increase the deficit too much it harms the national balance. Others say if you have to stimulate demand through stimulus and not issuing tax rebates. Is there some way government might work against the psychology a little more, like send out a stimulus of hundreds of billions but then say, in order to fight deflation, we’re going to institute a sales tax particularly on commodities and we may even experiment with wealth taxation, to prevent hording of stimulus, the way the government is now considering mandating that the banks lend the money they received as part of the bailout package? What else can government do to stimulate demand?

Wolf: There are some interesting points of view as to how to use the combination of monetary and fiscal stimulus in these situations. It should be understood that once you get into the current U.S. situation when interest rates are so low, you can’t separate monetary and fiscal policy. The best ways monetary policy can support the economy is not by lowering interest rates anymore, because they’re already so low, but either by directly lending to the business sector, which increasingly the FED is doing, or by lending to the government to spend. The government can avoid accumulating large debt by the simple expedient of financing its additional borrowing by borrowing short term from the banking system or borrowing from the federal reserve. In the present situation of extreme liquidity preference, where everyone wants to hold cash, there is no inflation risk associated with that whatsoever. In the long run, that may be different. It’s perfectly reasonable for the government to borrow short term and give it to people and things where they know it will be spent. They can spend on investment and projects that can be done quickly. That would be a good thing to do. They can finance the poor, who always spend money, employment compensation, that will be spent. There are plenty of things you can give money to people for that will be spent. Generalized income tax cuts, where most tax is paid by the well of, won’t be a useful way to lend to the economy. But it would at least give strength to the balance sheet of the household sector. The government should do all of theses things on an exceptionally large scale.

It’s important to remember that we got out of the Great Depression essentially by a huge public works project called the Second World War. I‘m not recommending war, but it’s a reminder of what can be done. There are some risks with such projects. If a country with a large current account deficit prints money like this, maybe the currency will be dumped. It would be better therefore if everyone does it at once. But in a deflationary situation like this, I think the United States, perhaps a bit less the United Kingdom, can get away with substantial increases in domestic liquidity money, because I don’t think other countries would dump U.S. currency; it would destroy their own competitiveness. If it forces them to destroy their own money supply, it would not be a very good thing. Now then there are lots of details you could start discussing. There are many ways to provide money to get it spent. Once we get the household sector back in shape, the stock market at a reasonable price, and people again start buying stocks and finance companies through the stock market or through debt, then you will want to see the government deficit start to diminish. That’s why I think the best forms of stimulating the economy have to be things the government wouldn’t ever do.

For instance, unemployment compensation is related to the Great Depression. Similarly, funding large scale investment programs which, once they’re finished, they’re finished. If you’re’ talking about large, permanent spending increases, say a reform to universal health-care systems, those must be funded by permanent increases in taxation or some reduction in spending. Not part of this package. In the long run, when everything gets back to being healthy, you would expect deficits to shrink. You would expect the private sector to spend more, revenue to improve. The government’s need to spend diminishes. It will all go away again.

In the end, it would be sensible to move back into surplus, withdraw the money you’ve printed, or you can start selling bonds to mop up the money. Clearly, at the very end of the process, government deficits will be higher than they are now but household indebtedness will be smaller, with luck. It’s important to understand this clear borderline between private and government indebtedness doesn’t work at the macroeconomic level. There’s a relationship between the two. When households have large amounts of debt they can’t pay, they stop servicing. It is the government that comes in by printing its own debt, which everyone will then want, and that’s what’s happening now. So I think the process will be reversible later on. It has always been possible to reduce deficits and debt provided the policy is reasonably discipled. Right now, it’s a question of spending and financing by borrowing from the system in the short term, and not worrying about bond finance and just making sure we get through the next two or three years without a total self-fullfing and reinforcing collapse in the economy.

Futurist: Looking ahead even more long-term, one of the thing I like about your book, you write that the United States is as much a victim of others’ misfortuntes. You talk about global savings and how developing nations in particular have fallen into this strange habit of giving surplus money to the United States in the form of loans, but really they should be spending it domestically, and developed nations should be spending more in developing nations. This is a much more healthy flow of capital. Did I sum up the point correctly?

Wolf: I think you’ve done it admirably. It is a central theme of my book. It’s an interesting point that nearly all serious professional economists--there are exceptions--would agree completely with me, yet this is seen as a controversial view. There are two big points in this book. The first is the United States is embedded in the global economy.  It’s the biggest economy but its still smaller than the rest of the world. It’s roughly 1.4 of the economy and the rest is 3.4. What the rest of the world does actually has an enormous effect on the United States. It’s not just one way. It so happens that for reasons I lay out at length in my book, the rest of the world undertook a series of actions. In response to a financial crisis of an earlier decade, they pushed up deficits and gave themselves large export services and large export capital, to sustain large export surpluses particularly in the case of China but not only China. That, in my view, created strong deflationary and recessionary pressure in the United States You think about it, the import surpluses are withdrawal from a country, domestic demand going abroad. The U.S. Federal Reserve, not totally consciously, chose to offset this deflationary pressure by greatly expanding domestic demand; it was purely accidental. The same thing followed from the Bush tax cuts in the early part of his administration. The United States was responding to these external pressures. I don’t think it responded intelligently, unfortunately. It allowed this later financial mismanagement. And so, in the end, a large part of the domestic U.S. counterpart of this lending turned out to be borrowing by fundamentally insolvent households by assets that were fundamentally overpriced, intermediated by a financial system that turned out to be undercapitalized.

If you think of that combination, it was the worst way to do it. It would have been better for the United States to run bigger fiscal deficits in this period and invested the proceeds in bridges and roads and railroads and whatever capital investment makes sense. The investment it did undertake was to build houses that nobody needs. It’s a sad story. The big macro-picture is, as you describe it, an important indication of the way the United States is not master of its own fate.

 This gets to the second big point, if--and I’ve already made this point--if we are going to get out of this cleanly, the U.S. economy needs to rebalance. We don’t have to go back to a big borrowing binge. We can’t run fiscal deficits of 8%-10% of GDP forever. That’s clearly unsustainable and will sooner or later destroy the credit and the currency. So the United States has to save more at home and it has to have a balance in the current account and reduce its debt that way. But the United States and the other countries can only do that without having a huge depression if other countries in the world voluntarily expand demand in relation to their financial supply and move into current account deficits themselves. These things have to work out.

The big question now is whether other countries with large surpluses understand that they are going to have to adjust to and expand demand because in fact, what is really happened here is the world has run out of large-scale, willing, and solvent debtors. Because it’s run out of them, except governments, there has to be adjustment everywhere. What’s not clear to me is that people around the world in China, Japan, Germany fully understand this. There’s a danger they won’t do enough. We’ll be reducing demand anyway. We’ll have a vicious downward spiral. It’s a big danger on the macroeconomic level, which could push us to a very deep and long recession or even a depression. It’s not just about financial system or expanding fiscal deficits, it’s also about having a view of how the longer-term adjustments in the world economy are going to happen. That will take American intellectual and political leadership, which has been totally lacking in this respect to the Bush administration. I do hope the people who take over will have a better appreciation. I know many of the economists on both sides and the economists who have been advising the Democratic side and I do think they appreciate this much better than their counterparts in the current [Bush] administration, though not in all respects. But if you don’t get a more balanced world economy, it may prove impossible to sustain a world with open capital; close it all and we will go back to the more self-sufficient financial systems and economies of fifty or sixty years ago. WFS...http://www.wfs.org.

Former SEC Chief Accountant Blames FASB for Meltdown

He credits auditors and financial statement preparers for successfully fighting fraud.

Former Securities and Exchange Commission chief accountant Lynn Turner says accounting standards-setters "deserve an F" for allowing companies to incorrectly move assets off their balance sheets and for caving in to political pressure to alter rules.

Speaking at a panel discussion in New York this morning, Turner disputed a suggestion from moderator Floyd Norris of The New York Times that the accounting profession should shoulder part of the blame for the financial crisis. Instead, he criticized the Financial Accounting Standards Board for writing rules enabling companies to inappropriately dump securitized assets into qualified special-purpose entities.

Actually, Turner said he gives credit to "practicing accountants" — financial-statement preparers and auditors — for overseeing a dramatic falloff in financial fraud cases compared to the years immediately following the Enron and WorldCom scandals. "There's a change from 10 years ago, and accountants do deserve some credit," he said. "Certainly some of the audit firms get a lot of credit for what they've done in standing behind fair value and trying to get the numbers right."

He had no such praise for FASB. Although the board is currently rewriting FAS 140 to eliminate QSPEs, it has "done an absolutely miserable, abysmal job, especially in the balance sheet area."

The other panelist, Conrad Hewitt, the SEC's immediate past chief accountant, gave the accounting profession a pass as well. He assigned blame for the financial meltdown to the greed of mortgage companies and brokers, as well as banking regulators for poorly scrutinizing banks with numerous off-balance-sheet entities. "I never did like off-balance-sheet items," he said. "You own something or you don't."

There was markedly less harmony between the two panelists when it came to International Financial Reporting Standards. Hewitt said there's no doubt that creating a single worldwide set of accounting rules is the correct thing to do. It reflects the reality that nations depend on one another for imports and exports, and that U.S. companies would have greater access to overseas capital.

Turner, though, cuffed the International Accounting Standards Board for bowing to pressure from France president Nicolas Sarkozy and other European Union leaders to relax fair-value accounting rules. Since last October, IASB has come under fire for sidestepping due process to rush out a rule allowing financial institutions to reclassify some loans as a way of avoiding marking those assets to market and avoid losses generated by a drop in asset value.

"IASB has not shown that it can develop high-quality standards without political interference," Turner said. "Until it can, IFRS is not ready for prime time."

Turner indicated that even then he would not support IFRS for U.S. companies, rejecting Hewitt's notion that the nature of international business today demands it. In fact, IFRS would make American companies less competitive, he insisted.

"If we make our markets look like everyone else's, and they're only as transparent as everyone else's, there's no reason for [investors] to allocate their money to U.S. markets," he said. "But if our markets have, as they always have had, greater transparency, and investors get the information to make better decisions, then there is a reason."

Drawing an analogy to U.S. automakers, he went on, "If your product doesn't turn out better than the next guy's product, just like GM or Ford or Chrysler, you don't end up being one of the winners."

For his part, Hewitt pointed out that the SEC commissioners voted 5-0 last August to move forward with a plan to eventually make IFRS mandatory for U.S. public companies — and that four of those five remain on the commission today.

The single new commissioner, though, is Mary Schapiro, the commission's new chair. At her Senate confirmation hearings, she testified that she has concerns about the pace of the IFRS timeline, the independence of IASB, and the quality of the standards themselves. IFRS is not as detailed as U.S. generally accepted accounting principles and gives more room for interpretation, she said.

______

Accounting Firms across the UK are planning to slash hundreds of jobs in one of the first clear signs that the profession is bracing itself for falling revenues in 2009.

But a recruitment expert has warned that slashing jobs could backfire on firms. He said the firms that cut too many jobs risk being understaffed for a couple of years when the economy recovers.

Grant Thornton last week said up to 225 of its staff could be sacked, including more than 40 partners, blaming an expected fall in fee income for next year. And other leading firms have said they are making similar moves. A source close toPricewaterhouseCoopers, for example, said the firm plans to cut at least 100 jobs across most service lines by offering staff voluntary redundancies.

A PwC spokeswoman said: ‘From time to time we offer voluntary severance terms such as this. Despite difficult economic conditions, however, we are continuing to invest and recruit in growth areas and take long-term investment decisions for the benefit of our clients, our people and our business.’

Deloitte, which posted £2bn in annual UK revenues, is also planning job cuts but refused to say how many. A spokesman said: ‘We have offered voluntary [redundancy] options to leave with generous packages to some staff in selected business areas. This has primarily resulted from reduced attrition rates and build up of numbers to levels inconsistent with business volumes.’

A spokesman for KPMG, which cut 90 jobs in its corporate finance division in May, said this week: ‘Like any business, we have to link our staffing levels to business requirements and economic conditions. This is being kept under constant review, though there are currently no plans to actively reduce headcount. We also continue to recruit in key business areas where there is a strategic or business need.’

Ernst & Young said: ‘As with all well-managed organisations, Ernst & Young continually reviews its business and staffing structures. We continue to recruit across the firm.’

Phil Shohet of Kato Consultancy, advisers specialising in the accountancy profession, voiced concerns about mass job cuts: ‘I hope they don’t get rid of lots of managers like they did in the last downturn. The larger firms sacked lots of people in corporate finance and then took two to three years to build it up again.’

Grant Thornton said it will try to redeploy staff affected by any job cuts...Best Practice Magazine (UK) 

_____________________________

 


Ecuador plans tougher sham penalties after Stanford

Fri Feb 20, 2009 11:23pm GMT

By Alonso Soto

Ecuador plans tougher

penalties on people who trick investors in

financial schemes only a day after the

 Andean nation seized two units of Stanford

Financial Group charged with fraud in the

United States.

The banking regulator's office said on Friday

 it was proposing a bill to penalize as money

laundering the transfer of funds abroad by

 people and firms not allowed to do so by

 law.

"This way authorities can sanction the o

nes behind pyramid schemes that has resulted in millions of dollars worth of losses for the public," the regulator said in a statement, adding that penalties include higher fines.

Ecuador is investigating if Stanford's local units illegally sold financial instruments linked to a bank in Antigua owned by Texas billionaire Allen Stanford. The total exposure of Ecuadorean investors is not yet clear.

Regulators on Thursday took over Stanford's local brokerage and fiduciary, trying to calm investors who flooded the firms' offices in Quito's posh business district.

The fraud scandal engulfing Allen Stanford and his companies rippled through Latin America where well-off investors placed their money overseas in fears of political and economic instability in their countries.

Ecuadorean President Rafael Correa, a U.S. educated economist, often lambastes Wall Street bankers as "greedy vultures" and blames them for a global financial crisis that is hurting his OPEC nation's economy.

Ecuadoreans are not new to financial scams.

An angry mob dug up the body of man accused of a pyramid scheme in 2005 that left thousands of mostly poor Ecuadoreans without their savings. They exhumed his body to make sure he was dead and had not fled the country with their money.

________________________

 

It’s a complete surprise, says Allen Stanford's accountant’s daughter

 

The accountant responsible for auditing Allen Stanford’s international banking empire carries out her duties in her spare time. Celia Hewlett-Ola’s main job is in the accounts department at the Royal College of Art, in Knightsbridge, Central London.

Mrs Hewlett-Ola, 46, of Palmers Green, North London, said yesterday that she had been surprised by the allegations that Mr Stanford was responsible for a $9.2 billion (£6.4 billion) fraud. She admitted that she had not had time to study Mr Stanford’s financial documents at length.

She took control of the accountancy firm of CAS Hewlett & Co after the death of her father, who had checked Mr Stanford’s accounts for the past decade. Charlesworth Hewlett died last month at the age of 73.

American financial regulators have questioned why such a small firm was used to audit a business that claimed to control more than $50 billion of assets. They have claimed that Mr Stanford’s main business was a “massive ongoing fraud” and that many of its financial figures were exaggerated.

Mrs Hewlett-Ola said that she had received no request from the American or British authorities to help to untangle the mystery surrounding Mr Stanford’s web of companies. There is no suggestion of any wrongdoing by Mrs Hewlett-Ola.

“All of this has come as a complete surprise,” she said. “I don’t know anything and have nothing to do with the fraud. I have never had dealings with Mr Stanford, although my deceased father, the founder and owner of CAS Hewlett & Co, had dealings with him.

“I had nothing to do with my father and Stanford’s arrangements. I have never worked for them so I don’t know anything about it.”

Mrs Hewlett-Ola is a member of the Association of International Accountants, based in Newcastle. She is currently on unpaid compassionate leave.

Her father gave Stanford International Bank an unqualified audit opinion in signing off its annual report last April. Mrs Hewlett-Ola said that she did not know whether the firm would continue as the bank’s auditor.

“I am doing it to help my family as any daughter would,” she said. “I am helping but I am not in charge. We don’t know if we are going to continue with Mr Stanford’s business. There are no papers here. All the papers are in Antigua.”

Eugene Parry, office manager for the firm in Antigua, said: “We are in a transition period. Everything is being handled out of London. I’m not too sure what is happening with existing clients.”

Charlesworth Hewlett and his wife, Delvine, 69, lived in a £500,000 home in Enfield, North London. Until about four years ago Mr Hewlett worked at a two-room office above a hair saloon in Enfield before transferring the business operations to his home.

Outlining the civil case against Mr Stanford, the US Securities and Exchange Commission (SEC) said: “The commission attempted several times to contact Hewlett by telephone. No one ever answered.”

The Serious Fraud Office in London said yesterday that it was monitoring the situation around Mr Stanford and was liaising with other authorities but that it had not yet started a formal investigation.

Although Mr Stanford’s businesses do not appear to have any offices in Britain it has become clear that they have been attempting to attract wealthy British customers.

A City stockbroker and investment house has confirmed that it had a deal to distribute research by a Stanford-owned company.

Jonathan Evans, of Blue Oak Capital, said: “Nothing ever came of it, the whole thing was a complete waste of time. That’s why at the end of last year we stopped.”

The scandal surrounding Mr Stanford emerged as his European subsidiary was planning to open a London office.

Jack Stanley, president of Stanford Group (Suisse) AG, based in Zurich, said last year that the group planned to extend its European operation. “We are currently looking to open offices in London, the region’s other great financial centre,” he said.

The subsidiary has recruited a number of influential British bankers to sell products to wealthy clients.

There is no allegation of wrongdoing against the bank’s employees. The SEC has said that Mr Stanford and two senior executives carefully concealed their fraud from employees...The Times, February 20, 2009

 

 

 

.

Whenever you find you are on the side of the majority, it is time to pause and reflect

                     --- Mark Twain

We have never observed a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience with advanced welfare states...Charles Murray

Kella
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