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
How close is this recession to
the Great Depression?
Thursday, April 2nd 2009, 4:00 AM
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 byCharles Gascon, research associate with the St. Louis Federal Reserve Bank.
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.
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.
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.
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.
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.
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.
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
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
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
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
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.
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
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
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
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.
a Professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International
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.
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,"
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,"
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
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.
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:
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.
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 DiplomaticAcademy
— 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 CarnegieMoscowCenter
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
The man who predicted the current financial crisis said the US recession could drag on for years without drastic
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,
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."
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.
Right: Union propagandists
poison both their economiesandtheir kids' minds.
While free trade yields
a net positive to every nation that participates in it to any degree, tough economic times call for even more robust worldwide
trade. With a failing economy it becomes all the more important for a country to maximize the use of its own resources and
minimize the cost of the resources it brings in. But, following the shining example of the Great Depression, things are once
again going the other way -according to aNew York Timesarticle.
pledges by world leaders to avoid erecting trade barriers, protectionism is on the march, provoking nasty trade disputes and
undermining efforts to plot a coordinated response to the deepest global economic downturn since World War II.
From a looming battle with China over tariffs
on carbon-intensive goods to a spat over Mexican trucks using American roads, barriers are going up around the world. As the
recession’s grip tightens, these pressures are likely to intensify, several experts said.
For a little history on
how well protectionism works, especially in an economic downturn, we need just look at the Hawley-Smoot Tariff Act of 1930.
In all, 890
tariffs were increased, compared with the previous Tariff Act, of 1922, which had itself raised duties dramatically (for examples,
see table); 235 were cut. The bill squeezed through the Senate, by 44 votes to 42, and breezed through the House.
Of all the calls on Hoover not to sign the bill,
perhaps the weightiest was a petition signed by 1,028 American economists. A dozen years later Frank Fetter, one of the organisers,
recalled their unanimity. “Economic faculties that within a few years were to be split wide open on monetary policy,
deficit finance, and the problem of big business, were practically at one in their belief that the Hawley-Smoot bill was an
iniquitous piece of legislation.”
The economist's calls went
unheeded and the Tariff Act became law, with predictable effects.
of American imports had already dropped by 15% in the year before the act was passed. It would fall by a further 40% in a
little more than two years.
Other, bigger forces were at work. Chief among
these was the fall in American GDP, the causes of which went far beyond protection. The other was deflation, which amplified
the effects of the existing tariff and the Smoot-Hawley increases. In those days most tariffs were levied on the volume of
imports (so many cents per pound, say) rather than value. So as deflation took hold after 1929, effective tariff rates climbed,
discouraging imports. By 1932, the average American tariff on dutiable imports was 59.1%; only once before, in 1830, had it
been higher. Mr Irwin reckons that the Tariff Act raised duties by 20%; deflation accounted for half as much again.
Smoot-Hawley did most harm by souring trade
relations with other countries. The League of Nations, of which America was not a member, had talked of a “tariff truce”;
the Tariff Act helped to undermine that idea. By September 1929 the Hoover administration had already noted protests from
23 trading partners at the prospect of higher tariffs. But the threat of retaliation was ignored: America’s tariffs
were America’s business.
Yet the author remains hopeful.
Surely, this is a lesson that America and the world has learned, right?
of course, is history. There are plenty of reasons to think that the terrible lesson of the 1930s will not have to be learnt
again. Governments have reaffirmed their commitment to open trade and the World Trade Organisation (WTO).
Yeah, not so much. Diplomacy's
fatal flaw, the inability to enforce its results, rides again. Back to theTimesarticle.
sooner was the G-20 statement issued than it was breached,” said Daniel M. Price, an official in the Bush administration
who helped negotiate the agreement. “Instead of just talking about trade liberalization, countries need to take immediate
steps to show they mean it.”
Far from heeding their pledge not to erect new
barriers for 12 months, many countries have raised import duties or passed stimulus measures with trade-distorting subsidies...
17 members of the Group of 20 had adopted 47 measures aimed at restricting trade.
Russia has raised tariffs on used cars. China
has tightened import standards on food, banning Irish pork, among other things. India has banned Chinese toys. Argentina has
tightened licensing requirements on auto parts, textiles and leather goods. And a dozen countries, from the United States
to Australia, are subsidizing embattled automakers or car dealers.
It's not just other nations,
of course. President Obama and our Democrat-controlled Congress has already stepped their feet into the mess.
vivid example of that policy is the “Buy America” provision in the stimulus package, intended to ensure that only
American manufacturers benefited from public-spending projects. The Obama administration persuaded Congress to water it down,
and Mr. Obama has taken up Mr. Bush’s warnings about the dangers of protectionism.
But pressures are building on other fronts.
Last week, the energy secretary, Steven Chu, said he favored tariffs on Chinese goods if China did not sign on to mandatory
reductions in greenhouse gas emissions — underscoring how the “green economy” could be the next trade battleground.
Mr. Obama signed a $40 billion spending bill
that scrapped a program enabling Mexican trucks to haul cargo over long distances on American roads. Mexico retaliated by
imposing duties on $2.4 billion worth of American goods — everything from pencils to toilet paper.
We keep repeating
the bad lessons of history, expecting different results
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.
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.
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.
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.
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.
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.
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.
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
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.
GM and GE are dragging corporate America through the mud
General Motors and General Electric Company used to
be the most highly respected names in corporate America. Now their reputations and stock prices are shot. So is the credibility
of their CEOs. And since their boards -- whose legal role is to protect the shareholders -- have protected these CEOs instead
of the shareholders, the loss of credibility extends to the entire system of American corporate governance.
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.
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
Company Told U.S. Its Collapse Would Cause Worldwide 'Chain Reaction'ByBrady Dennis
Washington Post Staff Writer Tuesday, March 10,
On the eve of its latest bailout,American International Groupwarned 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 theLehman [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
Federal officials themselves expressed frustration but insisted, as AIG did in its presentation, that
the company was too large and important to fail.
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
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, asChristina Romer, head of President Obama'sCouncil of Economic Advisers, noted recently ina 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
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 historianBarry Eichengreenof the University of California at Berkeley. "I never thought
I'd say that in my lifetime." Argues economistGary Richardsonof 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 lendingby the International Monetary Fundto 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.
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 theFinancial Timesand author of the recently-released bookFixing
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
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.
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.
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
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
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 ofThe
New York Timesthat 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
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.
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 Thorntonlast 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.’
forKPMG, 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 & Youngsaid: ‘As
with all well-managed organisations, Ernst & Young continually reviews its business and staffing structures. We continue
to recruit across the firm.’
Shohet ofKato 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.’
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
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
"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.
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.
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.
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
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.
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
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