"Sovereign defaults--when a country stops paying its bills--go in waves, often following global financial crises, wars
or the boom-bust cycles of commodities. Some countries, like Spain and Austria, mend their ways; others, like Argentina, are
repeat offenders. The combination can be fatal for investors holding bonds issued by financially shaky countries like Argentina
or Greece, which sell a lot of their debt outside their own borders (as does the U.S.--45% of all publicly held debt). As
a nation's finances deteriorate, foreign investors sell their bonds, putting upward pressure on interest rates. That usually
sets off a spiral including a deteriorating currency, which, if the bonds are denominated in foreign currencies, makes it
impossible for the country to pay its debt."
Hammered by Republicans for billions of dollars in spending that added
to the deficit, Obama outlined steps he said would rein in spending. They include rules requiring that spending or tax cuts
be offset by cuts to other programs or tax increases, a freeze on most discretionary spending and a presidentially appointed
commission to recommend ways to reduce the deficit.
Economists are encouraged that business investments appear to be coming
back even though the job market continues to drag. New U.S. Commerce Department data shows orders for durable goods, not including
transportation equipment, rose 0.9% in December, surpassing forecasts. The Labor Department reported that weekly unemployment
applications fell to 470,000 in the week ending Jan. 23, exceeding the median estimate of 450,000 predicted by 42 economists
polled by Bloomberg.
“A strong, healthy financial market makes it possible
for businesses to access credit and create new jobs. It channels the savings of families into investments that raise
incomes. And that can only happen if we guard against the same recklessness that nearly brought down our entire economy.” Essential
reforms include measures to protect consumers and investors from financial abuse; close loopholes, raise standards, and create
accountability for supervision of major financial firms; restrict the size and scope of financial institutions to reign in
excesses and protect taxpayers and address the ‘too big to fail’ problem; and establish comprehensive supervision
of financial markets.
So, what did we get for all that dough? Unfortunately, more questions than answers.Indeed, many of the factors that helped cause the previous crisis -- a sustained period of low
interest rates, high levels of consumer debt in the West and excessive risk-taking by financial institutions -- remain in
place. Atthe same time, supersized government
bailouts could have created the conditions for future financial crises that will be larger and even more expensive than the
one the world has just suffered. Despite the protestations
by politicians that such a large-scale rescue should never be allowed to happen again, their actions over the past two years
suggest the opposite...For central bankers, politicians and policymakers...the challenges are immense.
They must withdraw the financial support that has been provided to the financial sector without triggering a collapse, but
before new risk-taking creates the conditions for another collapse. They must overhaul regulation to make banks safer while
reversing the moral hazard that has characterized the current round of bailouts. They must manage a controlled
reduction of government debt. And they must attempt to rebalance the world economy without withdrawing into conflict and protectionism.
There is little doubt that the authorities' swift response to
the crisis prevented an even more severe economic collapse. But the global financial system is far from being fixed.
The global economic recovery could lose pace later this year, dashing
hopes for a rapid escape from the deepest downturn of the postwar era, economists and investors said at the World Economic
Forum's annual meeting
Markets are ultimately about people, which is what George Akerlof and
Robert Shiller talk about in Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism
(Princeton University Press, £16.95). It deals with that relatively new field, “behavioural economics”, or
how the economy really works. As they put it in the Introduction, “it accounts for how it works when people really are
human, that is, possessed of all-too-human animal spirits”, or human frailties.
According to the authors, there are five ways in which “animal spirits”
manifest themselves in economic behaviour:
The state of the economy depends upon the “feel-good” factor
or the level of confidence about how the future will pan out. This is not a rational prediction but based on instinct, which
is the most crucial feature of “animal spirits”.
A sense of fairness can overrule rational economic motivations. For example,
the demand for shovels can rise after a snowstorm, but raising prices at such a juncture would be considered unjust by the
majority and, therefore, desisted.
The action of monopoly capitalism — multinationals or predatory
corporations can impact the entire economy. For instance, the actions of energy giant Enron led many to lose faith in financial
markets as a whole.
Many people make their economic decisions without taking into account
inflation: instead of maximising their real (inflation-adjusted) income, they succumb to “money illusion”.
Finally, human behaviour is heavily influenced by stories and narratives
with logic that drive people to action. We’re all gullible idiots at the time and only later wake up to realise we’ve
been conned.
If you put all the five factors together, the conclusion is obvious: “animal
spirit” forces other than reason guide our actions. If you look back, none of them are based on rational grounds and
this “irrationality” must be taken into account to understand how economies actually work. If economists have
failed to explain repeated crises, it is because they have interpreted economic activity through an unreal model. Economists
have based their studies on mathematical models of human behaviour whereas they should have been based on human psychology
and practical politics of the times.
The global recovery is off to a stronger start than anticipated earlier but is proceeding at different
speeds in the various regions. Following the deepest global downturn in recent history, economic growth solidified and
broadened to advanced economies in the second half of 2009. In 2010, world output is expected to rise by 4 percent. This represents
an upward revision of ¾ percentage point from the October 2009 World Economic Outlook. In most advanced economies, the recovery
is expected to remain sluggish by past standards, whereas in many emerging and developing economies, activity is expected
to be relatively vigorous, largely driven by buoyant internal demand. Policies need to foster a rebalancing of global demand,
remaining supportive where recoveries are not yet well sustained.
Leading experts brought together by the
World Economic Forum developed proposals to help tackle corruption. Their reportRaising Our Game: Next Steps for Business, Government and
Civil Society to Fight Corruptionrecommends
the following: • For Businesses– empower
ethics officers to prevent bribery through anti-corruption programmes, such as the Partnering Against Corruption Initiative
(PACI) • For Governments– create a level
playing field by ratifying and fully implementing the United Nations Convention Against Corruption into national law • For
Civil Society– strengthen its “watchdog” role to
promote ethical practices with business and government
The rapid expansion of
the European Union in the past decade parallels that of the United States just before the Civil War. In both cases, the unions
seemed strong until the economic environment soured. Could the EU be headed for a civil war?
Perhaps not war, but “divorce”
(civil or otherwise) may be imminent for Europe, claims the Socionomic Institute.
“Both unions appeared
to be strong when markets were rising. But once stocks reversed, the stress of a bear market severed those bonds quickly,”
explains study author Brian Whitmer, editor of Elliott Wave International’s EUROPEAN FINANCIAL FORECAST. “War
eventually broke out among the U.S. states, and I believe that an equally perilous period is coming for the countries of the
EU.”
Thinking of counting to a trillion
one second per number? Better get started. It will take 31,688 years.
And tack on a few more years if
you want to go for 1.35 trillion, the dollar estimate for the federal deficit in the current budget year.
The whole sum could be taken care
of if every American, all 300 million of them, forked over $4,500.
Back in 1981, President Ronald
Reagan, characterizing the national debt as it approached $1 trillion, commented that "a trillion dollars would be a stack
of $1,000 bills 67 miles high." The debt, the accumulation of annual deficits, now stands at more than $12 trillion.
Put another way, the $1.35 trillion
could pay for 40,000 players like Alex Rodriguez, whose $33 million salary in 2009 made him baseball's richest man.
Or think the $6.25 billion paid
out by Goldman Sachs in salaries and bonuses in 2009 was a lot of money? The federal deficit could support the payroll of
216 such financial firms.
A trip around the world at the
equator is about 25,000 miles. So 1.35 trillion miles would be a dizzying 54 million circuits around the globe.
A trillion is one followed by 12
zeros.
The Washington Monument, overlooking
the deficit debate in the Capitol, stands about 555 feet high. Stacked end to end, it would take more than 2.4 billion monuments
to reach 1.35 trillion feet. That's well more than double the distance from the Earth to the sun.
Being sat on by a 10,000-pound
bull elephant would be a crushing experience. What about if 135 million pachyderms were piled up?
The Earth has been around for about
4.5 billion years. A long time until you consider that 1.35 trillion years equals 300 Earth lives. Looking at more modern
history, 1.35 trillion seconds would take us back more than 40,000 years, when Neanderthals were using stones to make tools.
By Jim Abrams ASSOCIATED
PRESS in The Washington Times
.
What Is Wrong With the Job MarketAnd
How to Fix It
CONCLUSION: The Great Recession is over, but the recovery will be a difficult
slog through much of this year. The risks are also uncomfortably high that the economy will backtrack into recession. This
would be an especially dark scenario, almost certainly involving a deflationary spiral of falling wages and prices. The Federal
Reserve and fiscal policymakers would also have fewer options and resources with which to respond.
A range of problems suggest that such a scenario cannot be easily dismissed.
Most obvious are high and rising unemployment and weak wage growth, the mounting foreclosure crisis, rising commercial mortgage
loan defaults and resulting small bank failures, budget problems at state and local governments, and dysfunctional structured-finance
markets that restrict credit to consumers and businesses.
Policymakers should provide more help to the economy to ensure the recovery
becomes self-sustaining. The Federal Reserve must not raise interest rates too soon or end its credit easing efforts too quickly.
Congress must provide more resources to unemployed workers whose benefits are running out, to state governments unable to
balance their budgets, and to small businesses looking for credit and all businesses that expand payrolls.
All this help comes at significant cost. While the fiscal stimulus has
been vital, it has helped produce a $1.4 trillion budget deficit this past fiscal year and will lead to another similarly
sized deficit in the current one. Yet the cost to taxpayers would have been measurably greater if policymakers had not acted
aggressively. The recession would still be in full swing, undermining tax revenues and driving up government spending on Medicaid,
welfare, and other income support for distressed families.
It is a tragedy that the nation has been forced to spend so much to tame
the financial crisis and end the Great Recession. Yet it has been money well spent.
The Budget and Economic Outlook: Fiscal Years 2010 to 2020
January 2010
The Congressional Budget Office projects that
if current laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year
2010. That amount would be slightly smaller than the 2009 deficit but, as a share of the economy as a whole (measured by gross
domestic product, or GDP), it would still be the second largest since World War II. The budget picture remains daunting beyond
this year, with deficits averaging about $600 billion annually from 2011 through 2020.
Those estimates are not intended to be a prediction
of actual budget outcomes; rather, they indicate what CBO estimates would occur if current laws and policies remained in place.
Toward that end, CBO’s projections presume no changes in current tax laws or spending programs. Any new legislation
that reduced revenues (such as indexing the alternative minimum tax for inflation) or boosted spending (such as providing
supplemental funding for military operations in Afghanistan) would increase projected deficits. For example, if all tax provisions
that are scheduled to expire in the coming decade were extended and the AMT were indexed for inflation, deficits over the
2011–2020 period would be more than $7 trillion higher. (See the above chart for details on the budgetary impact of
some alternative policy actions and see the sidebar for more information on CBO’s baseline.)
Accumulating deficits are pushing federal
debt to significantly higher levels. CBO projects that total debt will reach $8.8 trillion by the end of 2010. At 60 percent
of GDP, that would be the highest level since 1952. Under current laws and policies, CBO’s projections show that level
climbing to 67 percent by 2020. As a result, interest payments on the debt are poised to skyrocket; the government’s
spending on net interest will triple between 2010 and 2020, increasing from $207 billion to $723 billion.
Economic growth will probably remain muted
for the next few years. The deep recession that began in 2007 appears to have ended in the middle of 2009. The economy grew
during the third quarter, and early signs suggest that the labor market strengthened slightly late in 2009. CBO expects that
the economy will continue to grow, although at a slower pace than in past recoveries. Hiring rates remain very low, and CBO
projects that the unemployment rate will average more than 10 percent during the first half of 2010, before beginning a gradual
decline. That pattern is typical of recent recessions, where hiring continues to fall for 6 to 12 months after the economy
begins to grow.
Beyond the 10-year projection period, growth
of spending for Medicare, Medicaid, and Social Security will speed up from its already rapid rate. To keep federal deficits
and debt from reaching levels that would substantially harm the economy, lawmakers would have to significantly increase revenues,
decrease projected spending, or enact some combination of the two.
DAVOS
DATOS
Bubblechology
Robert J. Shiller, a well-known Yale economist, suggested that bubbles
could be diagnosed using the same methodology psychologists use to diagnose mental illness.
After all, a bubble is a form of psychological malfunction. And like mental
illness there’s a tricky gray area between being really sick and just having a few problems, Shiller said during a panel
discussion at the World Economic Forum in Davos, Switzerland.
The solution: a checklist like psychologists use to determine if someone
is suffering from, say, depression. So here is Shiller’s checklist.
Sharp increases in the price of an asset such as real estate or dot-com
shares
Great public excitement about said increases
An accompanying media frenzy
Stories of people earning a lot of money, causing envy among people who
aren’t
Growing interest in the asset class among the general public
“New era” theories to justify unprecedented price increases
A decline in lending standards
DAVID M. WALKER
EX-COMPTROLLER
GENERAL OF THE US
Political timidity invites financial disaster
In his State of the Union address, President Obama noted that "campaign fever has come
even earlier than usual" this year. Indeed it has. Typically, politicians in campaign mode make big, expensive promises to
voters - new programs, new benefits, new and bigger tax cuts. We will surely see some of that this year; but what is notable
about the conversation in Washington right now - and on the campaign trail - is its focus on deficits and debt. The White
House and members of both parties appear to see political advantage in talking about fiscal discipline. That's a good thing,
but only if they take action - serious action - soon.
America, simply put, is not on a sustainable path. Within two decades, if we haven't dramatically changed the way
we do business in Washington, we'll either see critical social programs going bankrupt, or our tax rates doubling to cover
the shortfall. The dysfunction is not only fiscal but cultural; it is rooted deeply in our political system.
In fact, there are at least four disturbing parallels between the factors related to the recent subprime mortgage
crisis that caused the recession, and the actions of the federal government, which may cause the next financial crisis.
First, consider the chasm between those who bear the burdens of financial risk-taking and those who reap the benefits.
During the subprime mortgage crisis, the people who sold unsound mortgages weren't the same people who held them. Now the
bankers are back in the black, and homeowners are still paying the price. So are the taxpayers.
But is that practice really so different than that of elected leaders who increase spending and cut taxes while
refusing to consider the long-term costs of either? Today's politicians reap short-term, electoral gains; tomorrow's taxpayers
get a long-term, crushing obligation.
Second, remember how impenetrably complicated the subprime securities were? They were almost impossible to explain
to anyone outside the big banks - even to many inside players, as well. That lack of transparency fueled the illusion that
the economy was sound instead of on the brink.
This is uncomfortably similar to the way the government handles its finances. We all know that the federal budget
deficit has spiraled out of control. But fewer people are aware that those annual deficits are understated. If you think the
$12.3 trillion national debt is too high, the federal government has tens of trillions of obligations, commitments and contingencies
that aren't on the federal balance sheet.
Third, most of the corporations crippled by the subprime crisis paid little or no attention to the danger signs,
which included mounting debt, dwindling cash flow and unrealistic credit ratings.
It reminds me of our federal government's cavalier attitude toward debt. By the end of fiscal year 2010, we will
have a total debt approaching 95 percent of our economy - and half of the public debt is held by foreign lenders. To put this
in historical perspective, our Founding Fathers took on debt at a level of 40 percent of the economy to win our independence
and gain agreement on the U.S. Constitution. And at the end of World War II, though we had debt equal to 122 percent of our
economy, we had virtually no foreign debt. There is simply no precedent for today's type of indebtedness.
Fourth, and most important of all, recall how major corporations failed to address the growing risks of the housing
bubble before it burst into a full-blown crisis. Risk managers failed to adequately anticipate the disaster scenario for housing
prices. Corporate overseers, including boards of directors, did an inadequate job of monitoring related risks.
Is that so different than the government's own lax vigilance? Federal regulators allowed too many players on the
field with too few referees. Deregulation led to a general weakening of standards for transparency, accountability and oversight.
When the crisis hit, the government was caught completely off step - and hardly seems to have regained its footing.
As we enter a new decade, and our economy begins to recover, let us hope that our national leaders will take a
step back, recognize the depths of our long-term fiscal challenges and start making the hard choices to avoid the next crisis.
So far, the signs are mixed. A group of senators succumbed to pressure from the extreme right and left and effectively
killed the creation of a commission that would have recommended changes in fiscal policy. Conservatives feared its authority
to raise taxes; progressives feared its authority to cut spending. That's not a promising start. Still, it is encouraging
that a majority of senators favor the idea, and so does the president. As he just announced in his State of the Union address,
he is prepared to establish such a commission by executive order.
Politicians of both parties frequently say that those who caused the nation's economic crisis - by this they mean
Wall Street bankers - need to change the way they do business. In equal measure, that should apply to Washington, too.
David M. Walker is president and CEO of the Peter G. Peterson Foundation, former
comptroller general of the United States (1998-2008) and author of "Comeback America" (January 2010)
CBO DIRECTOR TO CONGRESS: "...accumulating deficits will push federal debt held by the public to significantly
higher levels. At the end of 2009, debt held by the public was $7.5 trillion, or 53 percent of GDP; by the end of 2020, debt
is projected to climb to $15 trillion, or 67 percent of GDP. With such a large increase in debt, plus an expected increase
in interest rates as the economic recovery strengthens, interest payments on the debt are poised to skyrocket. CBO projects
that the government’s annual spending on net interest will more than triple between 2010 and 2020 in nominal terms,
from $207 billion to $723 billion, and will more than double as a share of GDP, from 1.4 percent to 3.2 percent..."
UNEMPLOYMENT RATE
CBO projects, that if current
laws and policies remained unchanged, the federal budget would show a deficit of $1.3 trillion for fiscal year 2010. At 9.2
percent of gross domestic product (GDP), that deficit would be slightly smaller than the shortfall of 9.9 percent of GDP ($1.4
trillion) posted in 2009. Last year's deficit was the largest as a share of GDP since the end of World War II, and the deficit
expected for 2010 would be the second largest. Moreover, if legislation is enacted in the next several months that either
boosts spending or reduces revenues, the 2010 deficit could equal or exceed last year's shortfall.
The
world economic recovery will speed up, the dollar will strengthen and equities and profits improve, according to a panel of
leading experts on Wednesday.
Despite further
consolidation in economic and financial systems and continued volatility in global markets, 2009 was "a year that showed the
first sign of regained optimism and confidence in financial markets," said John Prestbo, editor and executive director of
Dow Jones Indexes, which organized the 2010 Global Economic Outlook panel discussion.
A shift in market sentiment has led to more optimistic forecasts for economic growth.
"Two years after the start of a severe worldwide
recession, a rebound in global economic activity is clearly underway with industrial production and international trade flows
rising briskly," said Kevin Logan, an independent global economist. "By the middle of this year, estimates for global GDP
growth in 2010 are likely to be double what they were in the middle of 2009."
President Obama's plan to restrict banks from making speculative investments is seen as one of his
boldest financial reforms. This Backgrounder reviews the government's regulatory proposals and the debate over their long-term
impact.
The Federal Reserve plans to stop buying securities issued by government housing loan agencies Fannie
Mae and Freddie Mac by the end of the first quarter. This is not only likely to push up mortgage rates; Treasury rates should
rise as well. Throughout 2009, the private sector sold a portion of their agency holdings to the Fed and used those funds
to buy Treasurys. Once the Fed’s agency purchases stop, this private sector portfolio shift will end, removing a major
source of demand in the Treasury market. As the chart shows, since the start of 2009 the Fed has bought or financed the entire
increase in Treasury issuance. As Fed purchases slow and Treasury issuance continues at a high level, interest rates will
have to move up to attract new buyers.
CHINA LENDING TO U.S.
January
22, 2010
Debt
Burden Now Rests More on U.S. Shoulders
THE
United States government borrowed more money than ever before in 2009, but its largest lender — China — sharply
reduced the amount it was willing to lend.
The United States Treasury estimated
this week that during the first 11 months of last year China raised its holdings ofTreasury securitiesby
just $62 billion. That was less than 5 percent of the money theTreasuryhad to raise.
That raised its holdings to $790 billion,
leaving it the largest foreign holder of Treasury securities — Japan is second at $757 billion and Britain a distant
third at $278 billion. But China’s holdings at the end of November were lower than they were at the end of July.
Not since 2001, when China was still a relatively
minor investor in Treasury securities, had the country shown a decline in holdings over a six-month period.
President Obama: "Never
Again Will the American Taxpayer be Held Hostage by a Bank that is 'Too Big to Fail'"
From the White House
The President proposed what he called "the Volcker Rule," named after
one of the fiercest advocates for financial reform over the past year, and who has been particularly focused on addressing
the issue of banks being "too big to fail." He also proposed addressing one of the clearest issues leading to the financial
crisis of the past years, namely banks that stray wildly from their core mission: serving their customer. Having met
with Paul Volcker this morning, and having last week proposed new fees on Wall Street to ensure the taxpayersget their money back, thePresident came with a direct message for banksthat might object to these changes:
I welcome constructive input from folks in the financial
sector. But what we've seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on
Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people.
So if these folks want a fight, it's a fight I'm ready
to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting
reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to
small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing
on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility
that makes clear reform is necessary.
President Barack Obama meets with Economic Recovery Advisory Board Chair Paul Volcker in
the Oval Office January 21, 2010. (Official White House Photo by Pete Souza)
The President went on to explain the reforms he was proposing in more
detail:
First, we should no longer allow banks to stray too
far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer
money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward.
And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.
Our government provides deposit insurance and other
safeguards and guarantees to firms that operate banks. We do so because a stable and reliable banking system promotes
sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.
But these privileges were not created to bestow banks
operating hedge funds or private equity funds with an unfair advantage. When banks benefit from the safety net that
taxpayers provide –- which includes lower-cost capital –- it is not appropriate for them to turn around and use
that cheap money to trade for profit. And that is especially true when this kind of trading often puts banks in direct
conflict with their customers' interests.
The fact is, these kinds of trading operations can create
enormous and costly risks, endangering the entire bank if things go wrong. We simply cannot accept a system in which
hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could
pose a conflict of interest. And we cannot accept a system in which shareholders make money on these operations if the
bank wins but taxpayers foot the bill if the bank loses.
The proposal would:
1. Limit the Scope - The President
and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own,
invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers
for its own profit.
2. Limit the Size - The President
also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will
place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement
existing caps on the market share of deposits.
In the coming weeks, the President will continue
to work closely with Chairman Dodd and others to craft a strong, comprehensive financial reform bill that puts in place common
sense rules of the road and robust safeguards for the benefit of consumers, closes loopholes, and ends the mentality of “Too
Big to Fail.” Chairman Barney Frank’s financial reform legislation, which passed the House in December,
laid the groundwork for this policy by authorizing regulators to restrict or prohibit large firms from engaging in excessively
risky activities.
As part of the previously announced reform program,
the proposals announced today will help put an end to the risky practices that contributed significantly to the financial
crisis.
The rise in joblessness was a sharp change from November, when 36
states said their unemployment rates fell...The rise
in joblessness was a sharp change from November, when 36 states said their unemployment rates fell...Nationally, more than 600,000
people left the labor force in December, according to government data. The large exodus from the labor force indicates that
"unemployment is a lot worsethan the numbers suggest"...
Developing countries facing higher borrowing costs,
lower credit levels, and reduced international capital flows
The global economic recovery that is now underway will slow later this year
as the impact of fiscal stimulus wanes. Financial markets remain troubled and private sector demand lags amid high unemployment,
according to a new report from the World Bank.
Global Economic Prospects 2010, released today, warns
that while the worst of the financial crisis may be over, the global recovery is fragile. It predicts that the fallout from
the crisis will change the landscape for finance and growth over the next 10 years.
Global GDP, which declined by 2.2 percent in 2009, is expected to grow 2.7 percent
this year and 3.2 percent in 2011[1].Prospects
for developing countries are for a relatively robust recovery, growing 5.2 percent this year and 5.8 percent in 2011 -- up
from 1.2 percent in 2009.GDP in rich countries, which declined
by 3.3 percent in 2009, is expected to increase much less quickly—by 1.8 and 2.3 percent in 2010 and 2011. World trade
volumes, which fell by a staggering 14.4 percent in 2009, are projected to expand by 4.3 and 6.2 percent this year and in
2011...
Stronger
fundamentals helped theLatin America and the Caribbeanregion
weather this crisis much better than in the past. Following an estimated 2.6 percent drop in GDP last year, regional output
is projected to increase by 3.1 percent in 2010 and 3.6 percent in 2011, but weaker investment will keep growth from attaining
boom year levels. Remittances and to some extent tourism (both important sources of external finance for Caribbean countries)
are expected to recover only modestly in the 2010–11 period, undermined by weak labor market conditions in the United
States and other high-income countries. Key challenges include the winding down of stimulus measures; providing for the unemployed
in a fiscally sustainable manner; and maintaining openness towards international trade and investment.
$1.900,000,000,000 increase in US debt limit proposed
Senate Democrats...proposed allowing the federal government
to borrow an additional $1.9 trillion to pay its bills, a record increase that would permit the national
debt to reach $14.3 trillion. The unpopular legislation is needed to allow the federal government to issue
bonds to fund programs and prevent a first-time default on obligations.
The record increase in the so-called debt
limit is required because thebudget deficithas spiraled out of
control in the wake of a recession that cuttax
revenues, theWall
Street bailout, and increased spending by the Democratic-controlled Congress. Last year's deficit hit a phenomenal
$1.4 trillion, and the current year's deficit promises to be as high or higher...Less than a decade ago, $1.9 trillion
wouldhave been enough to finance theoperations
and programs of the federal government for an entire year.
The UK government expects borrowing to come in at £178
billion this year, topping 12% of gross domestic product, but has pledged to halve its deficit over the next four years.
Recorded history covers much less than one trillion seconds
Russia diversifies into Canadian dollars
Russia’s
central bank announced on Wednesday that it had started buying Canadian dollars and securities in a bid to diversify its foreign
exchange reserves.
Analysts
said the move could be a sign of increased diversification of emerging market central bank assets away from the dollar and
into investments denominated in other commodity-linked currencies.
The global economy will suffer the fallout from the financial
crisis for years to come, the World Bank said... in a report warning that growth may wilt later this year as stimulus spending
fades.
The Washington-based bank forecasts the world economy will
grow 2.7 percent this year, and 3.2 percent in 2011. It contracted 2.2 percent in 2009.
"A great deal of uncertainty clouds the outlook for the second
half of 2010 and beyond," the report said.
Though the "acute phase" of the crisis has passed, chronic
weaknesses remain. Much depends on the timing of withdrawal from massive stimulus programs and adjustments to monetary policy,
the bank said.
Mishandling could result in a "double-dip," with a return to
recession in 2011, it warned.
China appears to be on the brink of overtaking beleaguered Japan as the
world's second-biggest economy after another blistering performance in 2009...
Asia's two biggest economies look to have ended 2009 in a tight race but
China, which grew 8.7 percent last year, is soon expected to unseat its neighbour from the position it has held for more than
40 years...
China...reported nominal -- unadjusted for inflation -- gross domestic
product (GDP) for 2009 of 33.5 trillion yuan, or 4.9 trillion US dollars at today's exchange rates...
Japan posted nominal GDP of about 505.1 trillion yen, or 5.5 trillion
US dollars, in 2008 and its economy is expected to have shrunk by roughly six percent last year, reducing the figure to about
5.2 trillion US dollars...
Risk that deteriorating
government finances could push economies into full-fledged debt crises tops a list of threats facing the world in 2010.
Report by the World
Economic Forum says
high debt has become a growing concern for financial
markets. The risk is particularly high for developed nations, as many emerging economies, not least in Latin America, have
already been forced by previous shocks to put their fiscal houses in order (see below on this page for more details on the
WEF report).
Chinawill slow its massive lending spree and
step up monitoring of banks as it tries to prevent speculative bubbles in real estate and other assets while keeping the country's
economic recovery on track
Investment
expert and author Stephen Leeb believes we're entering the beginning of the end when it comes to thecommoditiesthat hold our modern
world together. Resources such as oil, copper and iron are being rapidly depleted -- and with the needs of developing countries,
demands are only increasing.
Five Potential Potholes on the Road to U.S. Recovery
1. Employment continues
to decline...2.Commercial real estate (CRE) foreclosures continue rising, more banks go belly up...3. Residential real estate's advance halts...4. China's real estate bubble
pops...5. U.S. Sales and income taxes keep declining
The U6 unemployment rate counts not only people
without work seeking full-time employment (the more familiar U-3 rate), but also counts "marginally attached workers and those
working part-time for economic reasons."Note that some of these part-time workers
counted as employed by U-3 could be working as little as an hour a week. And
the "marginally attached workers" include those who have gotten discouraged and stopped looking, but still want to work.The age considered for this calculation is 16 years and over
____________________________________________
Moody’s Investors Service
“Latin America and the Caribbean have come out of the crisis with
relatively little new debt, especially when compared to more developed parts of the world, leaving the region in a good position
at the start of 2010...For the first time in years, if not decades, a major crisis has passed without substantial increases
in the regional debt burden or a fall in international reserves.”
THIS WEEK'S REPORTS
Election Finance Reform Report
In addition to extensive new information about the role of
small and large doors in federal and state elections, the fifty-five page report contains this report offers a new vision
of how campaign finance and communications policy can help further democracy through broader participation.
"My resolve to reform the system is only strengthened when
I see a return to old practices at some of the very firms fighting reform and when I see record profits at some of the very
firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers
for the bailout"
___________________________________
Stephen Dinan, Washington Times
"In a decision with profound implications for the role of money in American
campaigns, the Supreme Court on Thursday gave interest groups, unions and corporations the right to pour money into issue
advertising in political races - reigniting the passionate battle over the influence of cash on the electoral process."
“The announcement of an agreement to create a presidentially
appointed fiscal commission that will report to the Congress and be assured a vote on its recommendations is a major step
toward putting our nation’s financial house in order while protecting our social safety net programs.”
_________________________________________
Columbia University
professor and Nobel Laureate, Joseph Stiglitz:
U.S. does not have capitalism..."In old-style 19th Century capitalism, I owned my company, I made
a mistake, Ibore the consequences. Today, (at) most of the big companies you have managers who, when things go well,
walkoff with a lot of money. When things go badtheshareholders bear the costs."...the American systemnow socializes the losses and “privatizesthe gains.”
Premio
Nobel y profesor de la Universidad de Columbia Joseph Stiglitz:
"En EEUU ya no hay
capitalismo...
Una horrible cantidad de gente no está gestionando su propio dinero.
En el viejo capitalismo del Siglo XIX, yo poseía mi empresa y, si cometía un error, sufría las consecuencias. Hoy, en la mayoría
de las grandes empresas, tienes gestores que, cuando las cosas van bien, se llevan muchísimo dinero, y cuando van mal, los
accionistas corren con los costes...Es un sistema en elque se socializan las pérdidas y se privatizan
las ganancias."
_________________________________________
Director general del FMI, Dominique
Strauss-Kahn
"Necesitamos
reformas y una voluntad política...Mi preocupación es que en seis o doce meses todo el mundo retome su actividad como antes
y se olviden las lecciones de la crisis financiera".
___________________________________
Justin Lin, World Bank chief economist
"Unfortunately,
we cannot expect an overnight recovery from this deep and painful crisis, because it will take many years for economies and
jobs to be rebuilt. The toll on the poor will be very real"
THIS WEEK'S POLLS
.
.
.
DR.DOOM SAYS...
"...monetization of...fiscal deficits is becoming a pattern in many advanced economies,
as central banks have started to swell the monetary base via massive purchases of short-and long-term government paper. Eventually,
large monetized fiscal deficits will lead to a fiscal train wreck and/or a rise in inflation expectations that could sharply
increase long-term government bond yields and crowd out a tentative recovery...Fiscal
stimulus is a tricky business...If they remove the stimulus
too soon by raising taxes, cutting spending and mopping up the excess liquidity, the economy may fall back into recession
and deflation. But if monetized fiscal deficits are allowed to run, the increase in long-term yields will put a chokehold
on growth....Americans are deluding themselves that
they can enjoy European-style social spending while maintaining low tax rates....
Monetizing the fiscal deficits...(is)...the
path of least resistance: Running the printing presses is much easier than politically painful deficit reduction.
But if the U.S. does use the
inflation tax as a way to reduce the real value of its public debt, the risk of a disorderly collapse of the U.S. dollar would
rise significantly....A disorderly rush to
the exit could lead to a dollar collapse, a spike in long-term interest rates and a severe double-dip recession.
Will America be the next great
power to fall because of unsound finance?
The question is particularly
pressing in the midst of what is widely seen as the worst financial crisis since the
Great Depression...the
United States may be succumbing to financial overstretch. Deeply in debt to the rest of the world, it has become part of a
“dual country” --- “Chimerica.” “In effect, the People’s
Republic of China has become banker to the United States of America.”... Until the current global financial crisis,
this seemed to be a fairly reliable relationship. American consumers over-bought goods and over-borrowed from China, and the
Chinese in turn accumulated huge dollar surpluses that they plowed back into Wall Street investments, thereby supplying profligate
Americans with the financing we needed to consume and sustain ourselves as the lone superpower. “For a time it seemed
like a marriage made in heaven,”... “The East Chimericans did the saving. The
West Chimericans did the spending..”
Suddenly, however, it’s looking more
like a marriage made in hell...much of the current crisis stems from this increasingly uneasy symbiosis. It turns out “there
was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow.” This
cascade of easy money...“was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts
that Planet Finance witnessed after 2000. . . . And Chimerica — or the Asian ‘savings
glut,’ as Ben Bernankecalled it — was the underlying reason why the U.S. mortgage
market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no job or assets.” Going
forward, the system seems likely to be increasingly unstable, as Treasury Secretary Henry Paulson suggested recently when
he warned that unless fundamental changes are made, “the pressure from global imbalances will simply build up again
until it finds another outlet.”
Previous periods of global stability and peace had relied
on
Extract from book review by Michael Hirsch of...
THE ASCENT OF MONEY
A Financial History of the World
By Niall Ferguson
Illustrated. 442 pp. The Penguin Press. $29.95 Published
November 13, 2008
judicious mechanisms like the Congress of Vienna or the Bretton Woods agreements. Now the international system —
and America’s position within it — has come to depend on what looks more like a global Rube Goldberg machine running
on hot money...the Chinese may now have the upper hand in this chimerical Chimerica. While
so far it’s worked in Beijing’s interest to under write America’s rampant consumerism — because we
buy so many of their goods — the Chinese also have the option of recycling some of their surplus billions into their
own huge population. We, on the other hand, don’t have the option not to borrow from them. Indeed, it’s no secret
on Wall Street and in Washington that the real targets of President Bush’s $700 billion bailout plan were the foreign
funds, including “
sovereign wealth funds,” that keep America’s financial system afloat.
Unless these foreign financiers — principally China and Japan — get reassurance that the global financial system
can function properly again, America’s long period of growth and power may be coming to a close. Perhaps, then, the conclusion should be that Americans
need to flex our muscles less as an empire and fight a little harder for fiscal sobriety and balance in our foreign policy.
Without doubt, the United States is exhibiting some of the classic precursors to out-of-control
inflation. But a deeper look suggests that the story is not so simple...
One basic lesson of economics is that prices rise when the government creates an excessive
amount of money. In other words, inflation occurs when too much money is chasing too few goods.
A second lesson is that governments resort to rapid monetary growth because they face
fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which
essentially print money to cover the budget shortfall.
Those two lessons go a long way toward explaining history’s hyperinflations, like
those experienced by Germany in the 1920s or by Zimbabwe recently. Is the United States about to go down this route?
Recession:As
federal spending and debt soar to new highs, many economists have alarmingly concluded that the dollar will soon collapse
and take the economy with it. But that scenario is far from inevitable.
You don't have to look far to see the red flags flapping. Most recently,
the respected 24-member Committee On the Fiscal Future of the United States warned the U.S. must cut its debt or face a dollar
crisis.
"It has got to be done," said Rudolph Penner, formerly head of the
nonpartisan Congressional Budget Office and the group's co-chair. "It will be done some day. It may be done with enormous
pain. Or it may be done more rationally."
In the same vein, commentator Patrick Buchanan wondered in his latest
column, "Is America's Financial Collapse Coming?" And these concerns are far from isolated. A Google search of "dollar" and
"crisis" yielded 57.5 million hits.
We too have said the government's massive spending and debt pose real
dangers. Average federal spending from World War II through 2008 was about 20% of gross domestic product. Today, it's 26%
— and climbing. Worse, just one year ago total U.S. public debt was $5.8 trillion. Today it's $12 trillion, and rising
literally by the minute.
Even so, we believe a full-blown dollar crisis — involving a
collapse in our currency and an inability to pay our debts — is unlikely.
• Over two-thirds
of people believe the current economic crisis is also a crisis of ethics and values • Report based on opinion
poll of over 130,000 respondents from 10 G20 economies on Facebook • Global religious leaders identify the key
values for a more just and sustainable post-crisis economy
Over two-thirds of people believe the current
economic crisis is also a crisis of ethics and values. But only 50% think universal values exist. These are among the findings
of the World Economic Forum’s Faith and the Global Agenda: Values for the Post-Crisis Economy, an annual report on issues
related to the role of faith in global affairs.
Almost two-thirds of respondents believe that people do not
apply the same values in their professional lives as they do in their private lives
When
asked to identify the values most important for the global political and economic system, almost 40% chose honesty, integrity
and transparency
“The
economic and financial crisis is an opportunity to re-articulate the values that should underpin our global institutions going
forward,” said John J. DeGioia, President of Georgetown University, USA. “The world's religious communities are
critical repositories of those values.
The social sins that Mahatma Gandhi used to instruct his young disciples in his ashram are:
"...there are
those which feature highly on the Global Risks Landscape and which predated the recession
but have been exacerbated by its impact through greater
resources constraints or short-term thinking.
These include:
Fiscal crises and the social and political implications of high unemployment
Underinvestment in infrastructure,
both new and existing, and its consequences for growth, resource scarcity and climate change adaptation
Chronic diseases and their impact on both advanced economies and developing countries
The report also notes how concerns over further asset
bubbles remain strong...
The other risks discussed in this report are equally
systemic in nature and also require better global governance but they currently feature less prominently on the Global Risks
Landscape. The report raises these risks to understand if there is an “awareness gap” around these areas and suggests
that they should not be forgotten in the focus on an integrated and longer term view of risks. These risks include:
transnational crime and corruption;
biodiversity loss; and
cyber-vulnerability."
Economic Risks
Food price volatility - Rising and volatile prices affect poor
consumers globally (those whose consumption basket is more than 50% food)
Oil price spikes - Sharp and/or sustained
oil price increases place further economic pressures on highly oildependent industries and consumers, as well as raising geopolitical
tensions
Major fall in the US dollar - An abrupt, major fall
in the value of the US dollar with impact throughout the global economic and financial systeM
Slowing Chinese economy - Sudden reduction in China’s growth to 6% or less
Fiscal crises - Overstretch of fiscal positions generates unsustainable levels of debt, rising interest rates, inflationary pressures
and sovereign debt crises
Asset price collapse - A collapse of real and
financial assets in advanced and emerging market economies leads to the destruction of wealth, deleveraging, reduced household
spending and demand
Retrenchment from globalization (developed) - Multiple developed economies
adopt policies that create barriers to flows of goods, capital and labour and fail to engage with multilateral governance
structures to address global challenges
Retrenchment from globalization (emerging) - Multiple emerging economies
adopt policies that create barriers to flows of goods, capital and labour and fail to engage with multilateral governance
structures to address global challenges
Burden of regulation - If not balanced, regulation can have
unintended consequences for Industry structures and market competition, distorting the allocation of capital and constraining
investment and the power to innovate
Underinvestment in infrastructure - Failure to invest in
physical or intangible infrastructure hinders growth and development and results in major loss of resilience
Geopolitical Risks - International terrorism, Nuclear
proliferation, Iran, North Korea, Afghanistan
instability, Transnational crime and corruption, Israel-Palestine,
Iraq, Global
governance gaps
Environmental Risks - Extreme weather, Droughts and desertification, Water scarcity, National Catastrofe - Cyclone, Earthquake, Inland
flooding, Coastal flooding, Air pollution, Biodiversity loss
Societal Risks - Pandemics, Infectious diseases, Chronic diseases, spread of US-style liability regimes to other jurisdictions, Migration
Technological Risks - Cyberspace attacks
or system failures, Nanoparticle toxicity, Data fraud/loss
"Leaders now recognize that the world is inadequately equipped to deal with global risks. The context in which
decisionmaking processes happen has shifted radically from one where the immediate prevailed to one where a long-term perspective
is vital. To fight systemic crises effectively we need systemic risk management. This report is a reminder of the urgency
for action at individual, corporate, national and supra-national levels. “Going back to business as usual” is
no longer an option. Behaviour needs to change at all levels: individual, corporate, political, if new, more forwardlooking
models and mechanisms for global governance are to be truly effective in managing the risks the world faces.
(Webmaster comment: I believe this is worth reading and considering. - JW)
Post-Crisis Reforms: Some
Points to Ponder
by MUHAMMAD TAQI USMANI
,
Vice President, Darul-Uloom Karachi
The following is an extract from a paper by Justice Muhammad
Taqi Usmani is an eminent Hanafi Islamic scholar from Pakistan included in the World Economic Forum report "Values for the
Post-Crisis Economy" cited above:
A glance over the present
crisis
Let us now have a glimpse of how the present crisis emerged to find out its root causes in the
light of the principles highlighted above. Until early 2007, there was a boom in US household credit. Financial institutions
raced towards offering house loans at competitive rates of interest. In order to refinance these loans, they were sold to
factoring agencies that securitized them for the general public. Risky loans were packaged in “collateralized debt obligations”
(CDOs) with a claim that pooling these debt obligations according to a mathematical magic erodes their risk to a great extent.
Agencies, therefore, rated them as AAA.These CDOs were then sliced up and exported throughout the
world. This prompted Wall Street to create new CDOs of low-rated corporate bonds. Once CDOs exhausted the available debts,
derivatives in the form of credit default swaps (CDS) came into the picture. By 2008, the credit default swaps market had
grown to US$60 trillion, while the entire world’s GDP was US$60 trillion. During the same time, the size of the derivatives
markets overall had increased to an incredible US$600 trillion—most of this money was unregulated.
When house prices dropped, the obligors of house loans defaulted. Foreclosures were insufficient
to recover the dues. It transpired that these debt-based assets were not safe.This created a panic, and the whole pyramid
of debt-based instruments fell down. Once panic set in, lending was stopped, companies suffered losses, and share prices faced
steep falls.The whole economic setup was in the grip of the crisis that is estimated to have wiped out nearly 45% of the wealth
of the world.
Causes and remedies
This review shows that there were four basic factors responsible for the crisis:
1. Diverting “money” from its basic function as a medium of exchange, and making itself an object
of trade that turned the whole economy into a balloon of debts over debts.
Even in the Depression of 1930s, the Economic Crisis Committee formed by the Southampton Chamber of Commerce,
after discussing the basic causes of the problem, observed that:
In order to ensure that money performs its true
function of operating as a means of exchange and distribution, it is desirable that it should cease to be traded as a commodity.
In order to save the world from such evil consequences, this recommendation must be adhered to.
An exchange of different currencies is, of course, inevitable for the purpose of international trade. So far
as these exchange transactions are carried out for the genuine purpose of cross-border trade, they cannot pose a problem.
The problem is caused by speculative transactions in money itself. At present, the majority of
currency transactions in the market are purely speculative.The volume of global international trade in 2008 was
approximately US$32 trillion, making an average of US$88 billion on a daily
basis; the daily turnover in global foreign exchange markets is estimated at US$3.98 trillion, 9 that is, 45 times more than the volume
of international trade. It means that only 2% of trade in currencies is based on the genuine cross-border trade, while 98%
of currencies transactions account for nothing but speculation in money prices.This artificial use of currencies is the main
cause of the perpetual fluctuations in their prices that has almost stopped the function of money as a store of value.
Moreover, one of the essential requirements for restricting money to its basic function is that
interest should be abolished from financing activities. Serious thought must be given to reshaping our financial system on
the basis of equitable participation in productive activities to minimize debt transactions, which must be backed by real
assets and created only by real trade transactions of sale or lease and so on.
2. Derivatives were one of the basic causes of the financial problems. Frank Partony, a former
derivatives trader, observes:
The mania, panic and crash had many causes. But if you are looking for a single word to use in
laying blame for the recent financial catastrophe, there is only one choice: Derivatives.
The worth of total derivatives was nearly US$741.1 trillion (741,100,000,000,000) in 2008,
11 while the total
GDP of the entire world was only 60.6 trillion—that is, the worth of derivatives was 12 times more than the gross products
of all the countries of the globe.
In order to curb this evil, derivatives must be banned.
3. Sale of debts was one of the most prominent causes of this crisis. Packaging a large amount
of debt in a bundle of CDOs, which was the initial cause of the present crisis, would not be possible if sale of debts was
disallowed.
Since a genuine sale is meant to transfer the sold item to the buyer, it is logical that the seller
should have full control of the sold item to be able to deliver it to the buyer.The same principle is applicable to debts.
Since it is not absolutely certain that the obligors will fulfill their obligations, the creditor should not be allowed to
sell these debts to anyone, thereby transferring the risk of default to the buyer.This is one of the reasons why the sale
of debts is prohibited in Islamic jurisprudence.
4. Short sales in stocks, commodities and currencies is the basic factor that makes speculation
an obstacle in the smooth operation of real commercial activities. Realizing the bad effects of short selling, many regulatory
authorities resorted to a temporary ban on shorting.
In order
to avoid the lethal consequences of speculation, short sales should not be allowed any more.
To sum up: we are in the burning need of a visible change in our economic set-up on the basis of the principles
mentioned above.
To quote
the remarks of the chairman of the World Economic Forum in its last annual meeting:
Today we have reached a tipping point, which leaves us only one choice—change or face continued
decline and misery.
(From a footnote to the above paper: G. William
Domhoff has summarized this concentration in the United States in the following words: “In the United States wealth
is highly concentrated in a relatively few hands. As of 2007, the top 1% of households (the upper class) owned 34.6% of all
privately held wealth, and the next 19% (the managerial, professional and small business stratum) had 50.5%, which means that
just 20% of the people owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage and salary workers).
In terms of financial wealth (total net worth minus the value of one’s home), the top 1% of households had an even greater
share: 42.7%.”)
McKinsey Global Institute Report
"...few things matter more for the world economy than
whether, and how fast, the rich world’s borrowing is cut back. History suggests that severe financial crises are usually
followed by long periods of debt reduction—in which credit falls relative to the size of the economy."
The recent bursting of the great global credit bubble
not only led to the first worldwide recession since the 1930s but also left an enormous burden of debt that now weighs on
the prospects for recovery. Today, government and business leaders are facing the twin questions of how to prevent similar
crises in the future and how to guide their economies through the looming and lengthy process of debt reduction, or deleveraging.
To help address these questions, the McKinsey Global
Institute launched a research effort to understand the growth of debt and leverage before the crisis in different countries,
the economic consequences of deleveraging, and the practical implications for policy makers, financial regulators, and business
executives. In the course of the research, MGI created an extensive fact base on debt and leverage in each sector of ten mature
economies and four emerging economies. In addition, MGI analyzed 45 historic episodes of deleveraging, in which an economy
significantly reduced its total debt-to-GDP ratio, that have occurred since 1930.
This analysis adds new details to the picture of how
leverage grew around the world before the crisis and how the process of reducing it could unfold. MGI finds that:
Leverage levels are still very high in some sectors
of several countries—and this is a global problem, not just a U.S. one.
To assess the sustainability of leverage, one must
take a granular view using multiple sector-specific metrics. The analysis has identified ten sectors within five economies
that have a high likelihood of deleveraging.
Empirically, a long period of deleveraging nearly always
follows a major financial crisis.
Deleveraging episodes are painful, lasting six to seven
years on average and reducing the ratio of debt to GDP by 25 percent. GDP typically contracts during the first several years
and then recovers.
If history is a guide, many years of debt reduction
are expected in specific sectors of some of the world’s largest economies, and this process will exert a significant
drag on GDP growth.
The right tools could have identified the unsustainable
build-up of leverage in pockets of several economies in the years leading up to the crisis. Policy makers should work to develop
a more robust system for tracking leverage at a granular level across countries and over time. One needs to look at specific
metrics such as the growth of leverage, and the borrowers' ability to service debt if there is a disruption to income or rise
in interest rates. MGI found that sufficiently granular data do not exist today.
MGI's analysis provides support for several of the
current regulatory proposals, including improving the quality of bank capital through higher Core Tier I ratios, monitoring
leverage as a proxy for asset bubbles, and creating better macro-prudential regulation to reduce systemic risk. However, the
analysis raises questions about some aspects of the current regulatory agenda, such as limiting gross leverage ratios (which
did not change appreciably in most banks).
Coping with pockets of deleveraging is also a challenge
for business executives. The process portends a prolonged period in which credit is less available and more costly, altering
the viability of some of business models and changing the attractiveness of different types of investments. In historic episodes,
private investment was often quite low for the duration of deleveraging. Today, the household sectors of several countries
have a high likelihood of deleveraging. If this happens, consumption growth will likely be slower than the precrisis trend,
and spending patterns will shift. Consumer-facing businesses have already seen a shift in spending toward value-oriented goods
and away from luxury goods, and this new pattern may persist while households repair their balance sheets. Business leaders
will need flexibility to respond to such shifts.
Summary of Commentary on Current Economic Conditions by Federal Reserve
District
Commonly known as the Beige Book,this report is published eight times per year
Reports from the twelve Federal Reserve Districts indicated that while economic activity remains at a low level,
conditions have improved modestly further, and those improvements are broader geographically than in the last report. Ten
Districts reported some increased activity or improvement in conditions, while the remaining two--Philadelphia and Richmond--reported
mixed conditions. The last Beige Book reported eight Districts with increased activity or improving conditions and four Districts
showing little change and/or mixed conditions...
...Consumer spending in the recent 2009 holiday season was modestly greater
than in 2008 for eight Districts......
...Auto sales were flat or up slightly for some dealers...
...Districts reporting on
nonfinancial services generally indicated an upward trend in activity, although in some areas reports were mixed...
...Manufacturing activity
has improved since the last report in six Districts...
...Homes
sales increased toward the end of 2009 in most Federal Reserve District...
...Nonresidential
real estate conditions remained soft in nearly all Districts...
...Loan
demand continued to decline or remained weak in most Districts...
...A number of Districts reported that credit quality continued to deteriorate. Financial
institutions in the New York District reported ongoing increases in delinquencies for all types of loans....
...Federal Reserve District Banks reporting on agricultural conditions generally indicated that cold weather at the turn of the year had adversely affected crops and stressed
livestock...
...Production of energy-related
materials has risen moderately...
...Labor market conditions
remained soft in most Federal Reserve Districts, although New York reported a modest pickup in hiring...
...Pricepressures remained
subdued in nearly all Federal Reserve Districts, although increases in metals prices were noted
in Boston, Cleveland, Minneapolis, Dallas, and San Francisco. Raw materials prices, other than metals, were reported to be
mostly steady...
...Most Districts reported
that retail prices have been steady....
prices
start to spiral into the stratosphere once the deficits as a share of government expenditure rises above a third and stays
there for several years.
InWinnie-the-Pooh, there is a significant moment when the bear is asked whether
he wants honey or condensed milk with his bread. He replies “both”. You can get away with this sort of thing if
you are a much loved character in children’s literature. But it is more problematic when great nations start behaving
in a childish fashion. When Americans are asked what they want – lower taxes, more lavish social spending or the world’s
best-funded military machine – their collective answer tends to be “all of the above”.
The result is that the US is piling up debt. A budgetdeficitof
about 12 per cent of gross domestic product is understandable as a short-term reaction to a huge financial crisis. What should
worry Americans is that, with entitlement spending set to surge, there is no credible plan to bring the budget deficit under
control over the medium term.
The
US has formidable strengths that will allow its government to be profligate for far longer than other nations could get away
with. But if the US keeps running huge deficits, sooner or later the country will start flirting with bankruptcy. Oddly, it
might be best if the crisis came sooner rather than later. For a surprising number of countries, running out of money has
been the prelude to national renewal.
The
two biggest and most beneficial geopolitical stories of the past 30 years – the spread of democracy and of globalisation
– were driven by a succession of states finding their coffers empty.
Focus on Beating Inflation and on Genuinely Productive Enterprise
...too much of the GDP is really just the velocity of
money and not real production, and there are too many jobs in the U.S. that are not productive work.
Nearly
$5 trillion of the total U.S. GDP of $14 trillion is legal fees, consultants' fees, and payments to financial-transaction
facilitators, reflecting the overlawyered nature of the country and the excessive preoccupation with deal-making (with insufficient
attention to whether the deals are wise or not). Medical activities consume another $2.5 trillion, at least $1 trillion of
that traceable to the fact that the recipient of coverage is usually not the person who pays for it, and the fact that the
legal-preventive component is excessive...
U.S. Chamber warns of 'double-dip' recession because of Dem policies
U.S. Chamber of Commerce President Tom Donohue warned
the U.S. faces a double-dip recession because of the taxes and regulations under consideration by the Democratic Congress
and President Barack Obama.
“Congress, the administration and states must recognize that our weak economy simply
could not sustain all the new taxes, regulations and mandates now under consideration. It’s a sure-fire recipe for a
double-dip recession, or worse,” Donohue said in a speech providing the Chamber's outlook for 2010.
America slides deeper into depression as Wall Street revels
December was the worst month for US unemployment since the Great
Recession began
History
repeating itself? President Obama has been accused by some economists of making the same mistakes policymakers in the US made
in the Great Depression, which followed the Wall Street crash of 1929, picturedPhoto: AP
The labour force
contracted by 661,000. This did not show up in the headline jobless rate because so many Americans dropped out of the system.
The broad U6 category of unemployment rose to 17.3pc. That is the one that matters.
Wall Street rallied.
Bulls hope that weak jobs data will postpone monetary tightening: a silver lining in every catastrophe, or perhaps a further
exhibit of market infantilism.
The home foreclosure
guillotine usually drops a year or so after people lose their job, and exhaust their savings. The local sheriff will escort
them out of the door, often with some sympathy –– just like the police in 1932, mostly Irish Catholics who tithed
1pc of their pay for soup kitchens.
Realtytrac says defaults
and repossessions have been running at over 300,000 a month since February. One million American families lost their homes
in the fourth quarter. Moody's Economy.com expects another 2.4m homes to go this year. Taken together, this looks awfully
like Steinbeck'sGrapes of Wrath.
Judges are finding
ways to block evictions. One magistrate in Minnesota halted a case calling the creditor "harsh, repugnant, shocking and repulsive".
We are not far from a de facto moratorium in some areas.
This is how it ended
between 1932 and 1934, when half the US states declared moratoria or "Farm Holidays". Such flexibility innoculated America's
democracy against the appeal of Red Unions and Coughlin Fascists. The home siezures are occurring despite frantic efforts
by the Obama administration to delay the process.
It
takes heroic naivety to think the US housing market has turned the corner ... The fuse has yet to detonate on the next
mortgage bomb, $134bn (£83bn) of "option ARM" contracts due to reset violently upwards this year and next...
The Fed's own Monetary Multiplier crashed to an all-time low of 0.809 in mid-December.
Commercial paper has shrunk by $280bn ($175bn) in since October. Bank credit has been racing down a hair-raising black run
since June. It has dropped from $10.844 trillion to $9.013 trillion since November 25. The MZM money supply is contracting
at a 3pc annual rate. Broad M3 money is contracting at over 5pc...
China becomes biggest exporter, edging out Germany
Already the biggest auto market and steel maker, China edged past Germany
in 2009 to become the top exporter, yet another sign of its rapid rise and the spread of economic power from West to East.
Total 2009 exports were more than $1.2 trillion, China's customs agency
said Sunday. That was ahead of the 816 billion euros ($1.17 trillion) forecast for Germany by its foreign trade organization,
BGA.
China's new status is mostly symbolic but highlights its growing presence
as an industrial power, major buyer of oil, iron ore and other commodities and, increasingly, as an investor and key voice
in managing the global economy.
China supplanted the U.S. as the world’s
largest auto market after its 2009 vehicle sales jumped 46 percent, ending more than a century of American dominance that
started with theModel TFord.
The nation’s sales of passenger cars, buses and
trucks rose to 13.6 million, the fastest pace in at least 10 years, according to the China Association of Automobile Manufacturers.
In the U.S., sales slumped 21 percent to 10.4 million, the fewest since 1982, according to Autodata Corp.
China’s vehicle sales have surged since
1999 as economic growth averaging more than 9 percent a year has helped automakers includingGeneral Motors Co.andVolkswagen AGcompensate
for slumping demand in the U.S. and Europe. The market will likely remain the world’s largest, even as sales slow this
year on a reduction in tax cuts, according to Booz & Co.
“China is becoming the center stage
of development for the 21st century global auto industry,” saidBill Russo, a Beijing- based senior adviser at Booz &
Co., which advises automakers. “Economic growth has directly translated into growth in automobile sales.”
December sales of passenger cars, trucks and buses rose
92 percent to 1.4 million. For the whole of 2009, passenger-car sales rose 53 percent to 10.3 million...
Stock futures are rising, pointing to a higher opening Monday,
following strong gains in overseas markets.
Stocks are getting a lift globally after a new report
showed Chinese exports jumped by nearly 18 percent in December. The bigger-than-expected increase follows 13 straight months
of declines. The increase in exports has added confidence to investors who believe a global economic rebound is well under
way...
Chinese
banks have cemented their position as the most highly valued financial institutions, taking four of the top five slots in
a ranking of banks’ share prices as a multiple of their book values.
Over
the past six years, the average price-to-book value of the biggest 50 banks has halved from two to one.
This
means that investors believe the average bank is worth no more than the value of its balance sheet. Most western banks are
trading at well below their book value.
But
investors are attaching a growing premium to emerging markets banks, led by China Merchants, the most highly rated of the
biggest 50 banks by market capitalisation, on a multiple of 4.3, according to Bloomberg data.
People looked at cars
for sale Saturday in China’s Liaoning Province. China passed the United States as the largest car market.
New high points, it seems, are reached daily.Chinasurged past the United States to become the world’s
largest automobile market — in units, if not in dollars, figures released Monday show. It also toppled Germany as the
biggest exporter of manufactured goods, according to year-end trade data.World Bankestimates suggest that China — the world’s
fifth-largest economy four years ago — will shortly overtake Japan to claim the No. 2 spot.
The shift of economic gravity to China has occurred partly because growth here remained robust even
as the world’s developed economies suffered the steepest drop in trade and economic output in decades.
But that did not happen by chance: China’s decisive government intervention in the economy, combined
with the defiant optimism of its companies and consumers, has propelled an economy that until recently had seemed tethered
to the health of its major export markets, including the United States.
With property prices soaring in key cities,
many investors and bankers worry that China has the next great real estate bubble waiting to be popped.
The Chinese government is worried, too. On Sunday,
the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop
overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second
home must make a down payment of at least 40 percent.
For investors, many of the usual bubble warning
signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled
again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to
pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements
for bank loans...
Thousands of officials have fledChinaover the past 30 years with some 50 billion dollars
in public funds, state media said Monday, as the government scrambles to stem the tide of corruption.
As many as 4,000 officials have disappeared, using criminal gangs, mainly in theUnited StatesandAustralia,to launder their ill-gotten gains, buy real estate
and set up false identities, theGlobal Timessaid.
A joint task force involving 15 Chinese ministries has been set up to choke off graft in government
ranks, the paper said.
In 2009, authorities investigated 103 cases involving the outbound travel of more than 300
officials, the paper said, citing a party official tasked with disciplinary issues...
Latin America's surprise rising
economic star: Peru
Often overlooked as a player in the global economy, Peru is determined to prove that it’s more than just llamas, bowler hats, and Macchu Picchu.
And these days, the Andean nation has quite a case to make.
Its 9.8 percent growth rate last year was one of the world’s fastest. And record commodities
prices, coupled with China’s insatiable demand for raw materials, are helping the mineral-rich nation weather
the financial crisis better than most other countries in the region.
Now, Peru predicts that the construction of a new road between its Pacific coast
and Brazil will replace the Panama
Canal as the main passage for trade between rising superpower China and the agricultural juggernaut
– adding a full percentage point to Peru’s gross domestic product. Add to that new oil and gas
projects worth billions of dollars, and you’ve got a country poised for a giant leap..,
A disputed plan
by PresidentCristina Fernández de KirchnerofArgentinato
use billions of dollars in foreign currency reserves to repay debt has inflamed political tensions in that country, Latin
America’s third-largest economy. Mrs.
Kirchner’s cash-poor government is seeking to use $6.5 billion of Argentina’s nearly $48 billion in central bank
reserves to help cover $13 billion in international debt that is due this year. She has not explained in detail how the central
bank reserves would be replenished. But
after her central bank president, Martín Redrado, refused to support the plan, Mrs. Kirchner fired him by decree on Thursday.
One day later a federal judge, María José Sarmiento, blocked Mrs. Kirchner’s plan to tap the reserves and ordered Mr.
Redrado reinstated, saying that only Congress could remove him. On
Saturday the government appealed the two court rulings...
American employers eliminated 4.2 million jobs in 2009 and sent unemployment soaring into double digits
for the first time in more than a quarter century.
Since the fall of last year, the official jobless rate has been over ten percent, while the unofficial
rate (taking in the severely underemployed and those who have given up looking) has been over 17 percent.
And, despite the ridiculous "green-shoots" speculation of the Obama administration and overblown "recovery"
fantasies of the financial media that has blown every major economic story of recent years, the situation is getting worse.
Analysts had predicted that December layoffs would number around 8,000.
Unemployment held steady at 10 percent – not because the job market is stabilizing but because
tens of thousands of Americans gave up looking for work and are no longer counted among the unemployed.
The sharp drop in the labor force is not merely an indicator of the real unemployment rate. It is a
confirmation of themounting hopelessness in vast stretches of the United States– particularly in California, southern New
England and the Upper Midwest and Great Lakes States, where communities are being devastated by a federal auto-industry "bailout"
that continues to encourage carmakers to shutter factories in U.S. cities and to relocate production to Mexico and China.
The new unemployment numbers are devastating, and they should send up red flares in Washington, a city
where officials have so far has been absurdly neglectful of the most serious social, economic and political crisis facing
the country.
Is America going to hell? After a year of economic calamity that many fear has sent us into irreversible
decline, the author finds reassurance in the peculiarly American cycle of crisis and renewal, and in the continuing strength
of the forces that have made the country great: our university system, our receptiveness to immigration, our culture of innovation.
In most significant ways, the U.S. remains the envy of the world. But here’s the alarming problem: our governing system
is old and broken and dysfunctional. Fixing it—without
resorting to a constitutional convention or a coup—is the key to securing the nation’s future.
The United Kingdom is careening toward a possible currency and credit
crisis that would make the world's investors even more leery of the United States
Extracts:
..."Here's the problem: The financial and economic
collapse in the United Kingdom
was even worse than in the United States. And the country, despite huge bailouts and stimulus spending,
looks like it will be the last developed economy to return to economic growth.
Without growth, only scorched-earth budget cuts can bring the United Kingdom's deficit under control
-- even within five years. And with an election looming, neither the government nor the opposition is laying out a budget-cutting
plan capable of convincing global financial markets that the country is committed to a solution.
That has sent the pound sterling plunging, interest rates on government debt climbing and investors
fleeing U.K. assets. The country is edging toward the point where the financial markets take control of the crisis out of
the hands of the government."...
..."Projections built on the current budget call for the United Kingdom to borrow an additional $1.13
trillion (or 707 billion pound sterling) over the next five years -- impressive when you remember the U.K. economy is only
about one-fifth as large as the U.S. economy.
That borrowing would bring the U.K. national debt to about 98% of gross domestic product by 2014, according to the International
Monetary Fund. In comparison, the United States, based on current trends, will finish 2014 with a debt-to-GDP ratio of 108%,
according to the IMF. See why I'm worried that a U.K. crisis could easily become a U.S. crisis?"...
..."a second recession would leave the country still facing a huge budget deficit and the stark choice of raising taxes
in a recession or having investors flee the pound and U.K. government bonds.
A crisis wouldn't be the end of the United Kingdom. The country has been through horrible financial
implosions in the past 40 years...But this time the crisis is more serious because it's not just a crisis for the United Kingdom
but for the developed economies of the United States, Japan, Spain, Italy. . ."
Grim
jobs market reports on both sides of the Atlantic on Friday highlighted the ongoing human cost of the credit crisis and kept
alive concerns over the sustainability of the recovery.
In
the US, news that the economy shed another 85,000 jobs in December dashed hopes that a quickening labour market turnround
could add momentum to the rebound and make it more robust...
Meanwhile, eurozone data showed unemployment hit 10 per cent in November – matching the jobless rate in
the US. It was the first time that eurozone unemployment has hit double digits since the introduction of the single currency
a decade ago. Both the US and the eurozone economies grew in the second half of 2009. But the jobs market continues to lag
behind the recovery in output, with businesses reluctant to hire...The US has now lost
7.2m jobs since the startof the recession, while the eurozone has lost more than 4m, despite extraordinary
measures to protect labour markets by the 16 countries that use the euro.
Employers once again slashed a substantial number jobs off their payrolls in December, according to the latest labor report
from the government Friday. But there was a small glimmer of hope as well. The payroll number for November was revised to
a net gain of 4,000 jobs. That's the first increase in jobs in nearly two years. The government had previously indicated that
11,000 jobs were lost in November.
Still, the government reported a loss of 85,000 jobs in December -- much worse than expected. Economists
surveyed by Briefing.com had expected no net gain or loss in payrolls in December. The economy has lost 7.2 million jobs since
the start of 2008. The unemployment rate stayed at 10% in the December, in line with economists' forecasts.
Recovering 7.2 million jobs expected to be long, slow process The economy
may have stopped shedding jobs but the unemployment rate could remain considerably high for some time to come, some experts
say. The economy has lost 7.2 million jobs since the beginning of 2008 and national unemployment is hovering around 10%. "The
problem is recovery doesn't mean recovered," said Lakshman Achuthan, managing director of Economic Cycle Research Institute.
"We need a long recovery to get back 7 million jobs."
Previous recessions were followed by strong job growth. But with so many jobs lost in this
recession, economists are not sure that robust gains are in the cards.
"...public debt is soaring and most of it has come from G7 countries intent on
stimulating their respective economies. Over the past two years their sovereign
debt has climbed by roughly 20% of respective GDPs, yet that is not the full
story. Some of governments’ mystery money showed up in sovereign budgets funded
by debt sold to investors, but more of it showed up on central bank balance
sheets as a result of check writing that required no money at all. The latter
was 2009’s global innovation known as “quantitative easing,” where central banks
and fiscal agents bought Treasuries, Gilts, and Euroland corporate “covered”
bonds approaching two trillion dollars. It was the least understood, most
surreptitious government bailout of all, far exceeding the U.S. TARP in
magnitude. In the process, as shown in Chart 1, the Fed and the Bank of England
(BOE) alone expanded their balance sheets (bought and guaranteed bonds) up to
depressionary 1930s levels of nearly 20% of GDP. Theoretically, this could go on
for some time, but the check writing is ultimately inflationary and central
bankers don’t like to get saddled with collateral such as 30-year mortgages that
reduce their maneuverability and represent potential maturity mismatches if
interest rates go up. So if something can’t keep going, it stops – to paraphrase
Herbert Stein – and 2010 will likely witness an attempted exit by the Fed at the
end of March, and perhaps even the BOE later in the year.
Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our
fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of
new debt to finance it. The Chinese bought a little ($100 billion) of that,
other sovereign wealth funds bought some more, but as shown in Chart 2, foreign
investors as a group bought only 20% of the total – perhaps $300 billion or so.
The balance over the past 12 months was substantially purchased by the Federal
Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries,
but PIMCO and others sold them those mortgages and bought – you guessed it –
Treasuries with the proceeds. The conclusion of this fairytale is that the
government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much
of it to private investors, and lived happily ever – ever – well, not ever
after, but certainly in 2009. Now, however, the Fed tells us that they’re “fed
up,” or that they think the economy is strong enough for them to gracefully
“exit,” or that they’re confident that private investors are capable of
absorbing the balance. Not likely. Various studies by the IMF, the Fed itself,
and one in particular by Thomas Laubach, a former Fed economist, suggest that
increases in budget deficits ultimately have interest rate consequences and that
those countries with the highest current and projected deficits as a percentage
of GDP will suffer the highest increases – perhaps as much as 25 basis points
per 1% increase in projected deficits five years forward. If that calculation is
anywhere close to reality, investors can guesstimate the potential consequences
by using impartial IMF projections for major G7 country deficits as shown in
Chart 3.
Using 2007 as a starting point and 2014 as a near-term destination, the IMF
numbers show that the U.S., Japan, and U.K. will experience “structural” deficit
increases of 4-5% of GDP over that period of time, whereas Germany will move in
the other direction. Germany, in fact, has just passed a constitutional
amendment mandating budget balance by 2016. If these trends persist, the simple
conclusion is that interest rates will rise on a relative basis in the
U.S., U.K., and Japan compared to Germany over the next several years and that
the increase could approximate 100 basis points or more. Some of those increases
may already have started to show up – the last few months alone have witnessed
50 basis points of differential between German Bunds and U.S. Treasuries/U.K.
Gilts, but there is likely more to come...."
--- Investment Outlook, Bill Gross, January 2010
. "...if the Great Recession has indeed relaxed its grip on American life, it has been replaced by something
that might be called the Great Ambiguity — a time of considerable debate over the clarity of economic indicators and
the staying power of apparent improvements."
"Americans are saturated in debt and nervous about job prospects,
prompting many to hunker down in a mode of thrift; businesses still spooked by dysfunction in the financial system are reluctant
to hire more workers until recovery proves real; and a cataclysmic drop in home prices has diminished spending power in millions
of households, with another decline possible as foreclosed properties surge onto the market."
A dismal job market, a crippled real estate
sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation's leading economists
said on Sunday.
Speaking at American Economic Association's mammoth yearly gathering, experts from a range of political
leanings were in surprising agreement when it came to the chances for a robust and sustained expansion: They are slim.
Many predicted U.S. gross domestic
product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath
of other steep economic downturns, which have usually elicited a growth surge in their wake.
1. Faber: The
'American Empire' has peaked, is on a decline
Hong Kong economist Marc Faber says
"the average life span of the world's greatest civilizations has been 200 years ... Once a society becomes successful it becomes
arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions
increase; and society enters a secular decline."
2. Grantham:
Learned nothing, doomed to repeat past, only bigger
Money manager Jeremy Grantham warns
that our irrational nightmare will repeat. A year ago we came dangerously close to the "Great Depression 2." Unfortunately,
we've "learned nothing ... condemning ourselves to another serious financial crisis in the not too-distant future."
We had our bear-market rally. Next,
historical cycles plus our irrational behavior guarantees another, bigger global meltdown. We "learned nothing."
3. Stiglitz:
Wall Street creating short respite before next crash
Nobel economist Joseph Stiglitz
recently warned: Unless Wall Street's incentive system is drastically reformed, "the financial sector will only try to circumvent
whatever new regulations we put in place. We will simply have a short respite before the next crisis." Warning, nothing's
changed, it's worse: Lobbyists run Obama, Congress and the Fed.
4. Johnson: Running
out of time before Great Depression 2
Yes, "we're running out of time
... to prevent a true depression," warns former IMF chief economist Simon Johnson. The "financial industry has effectively
captured our government" and is "blocking essential reform," and unless we break Wall Street's "stranglehold" we will be unable
prevent the Great Depression 2.
5. Ferguson:
Fed's easy money fuels new bubbles, meltdowns
In the 400-year history of the stock
market "there has been a long succession of financial bubbles," says financial historian Niall Ferguson. Who's the culprit?
The Fed: "Without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins
of omission and commission of central banks."
Another bubble (and crash) is virtually
certain, thanks to Washington's $23.7 trillion explosion in debt, the Fed's support for the $670 trillion shadow banking system
and Wall Street lobbyists getting superrich thanks to Wall Street's insatiable greed.
6. Taleb: Fed
haunted by ghost of Greenspan's failed Reaganomics
When Obama reappointed Bernanke,
Nassim Taleb, risk-management professor and author of "The Black Swan," warned of a new disaster: "The world has never, never
been as fragile," yet Obama reappoints an economist who "doesn't even know he doesn't understand how things work." New proof?
At last week's American Economic Association, Bernanke was still shifting the blame: "The best response to the housing bubble
would have been regulatory, not monetary."
Wrong: He conveniently forgets he
was advising Bush earlier, did nothing. Now Obama's stuck with a Greenspan clone and an insane ideology focused solely on
saving a failed banking system by flooding the world with inflated dollars guaranteed to trigger another meltdown
7. Soros: Dollar
dead as a reserve currency, nest eggs dying
Billionaire investor George Soros'
"New Paradigm:" America's 25-year "superboom ... led to massive deregulation ... blindly chasing free markets ... unleashed
excessive greed ... created the dot-com and credit meltdowns" and a "shadow banking system" of derivatives.
"The system is broken. The current
crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency," warns Soros.
"We're now in a period of wealth destruction. It is going to be very hard to preserve your wealth in these circumstances."
8. Hedgers: make
billions shorting stupid politicians, bankers
Soros isn't alone. Lots of hedge
fund buddies made hundreds of millions and billions betting on the stupidity of Washington with the Fed's cheap-money policies.
Alpha magazine reports that four hedgers made more than $1 billion each in 2008. The top-25 "managers made $464 million each
on average last year ... a kingly sum, especially during a year of global recession, stock market wipeouts and vanishing wealth."
9. Shiller: Dot-com,
subprime meltdowns, 'third episode' next
Economist Robert Shiller a "Dr.
Doom?" Remember a decade ago with "Irrational Exuberance?" Now he's warning: "Bubbles are primarily social phenomena. Until
we understand and address the psychology that fuels them, they're going to keep forming. We recently lived through two epidemics
of excessive financial optimism, we are close to a third episode, only this one will spread irrational pessimism and distrust
-- not exuberance."
Henry Kaufman was Salomon's chief
economist and "Dr. Doom" for 24 years: "Why are we so poor at managing our key economic institutions while at the same time
so accomplished in medicine, engineering and telecommunications? Why can we land men on the moon with pinpoint accuracy, yet
fail to steer our economy away from the rocks? Why do our computers work so well, except when we use them to manage derivatives
and hedge funds?"
Kaufman warns: "The computations
were correct, but far too often the conclusions drawn from them were not." Why? Selfish, myopic politicians and bankers.
11. Biggs: Sell
everything, buy guns, food, head for the hills
In his 2008 bestseller "Wealth,
War and Wisdom" former Morgan Stanley research guru Barton Biggs warns us to prepare for a "breakdown of civilization ...
Your safe haven must be self-sufficient and capable of growing some kind of food ... It should be well-stocked with seed,
fertilizer, canned food, wine, medicine, clothes, etc ... A few rounds over the approaching brigands' heads would probably
be a compelling persuader that there are easier farms to pillage." Biggs sounds like an anarchist militiaman.
12. Diamond:
Nations ignore obvious till it's too late, then collapse
The end will be swift. In our age
of short-term consumerism and instant gratification, few hear the warnings of our favorite evolutionary biologist, Jared Diamond.
Societies fail because they're unprepared, will be in denial till it's too late: "Civilizations share a sharp curve of decline.
Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."
Harvard’s Feldstein: Economy Might Run Out of Steam in 2010
Veteran economist Martin Feldstein, of Harvard University, is not sure the U.S. economy will escape a second
trip back into recession in the new year. Feldstein, who is also the emeritus president of the business cycle dating organization
the National Bureau of Economic Research, tied this risk of a renewed downturn after the worst recession in decades to a poorly
conceived government stimulus effort. “I supported the idea we needed to have a fiscal stimulus, somewhat to the dismay
of my conservative friends,” Feldstein said Sunday at a meeting of the American Economic Association in Atlanta. But
the design of the stimulus was put in the hands of congress and it was poorly done, which meant it “delivered much less”
in actual stimulus than its nearly $800 billion price tag suggested it should. While the stimulus has helped push the economy
out of recession so far, other negative forces still at play raise questions about the effort’s ultimate durability.
“There is a significant risk the economy could run out of steam sometime in 2010,” Feldstein warned. In his comments,
Feldstein was also worried about the longer run U.S. fiscal situation, which contains a rising and worrisome tide of U.S.
debt. But his worry was countered by James Galbraith, of the University of Texas-Austin. The academic agreed with Feldstein
that the fiscal stimulus had underdelivered, but said the remedy to that was to do even more government stimulus. Galbraith
downplayed the budget implications of this new borrowing. “You pay too much attention to those voices” who worry
about rising debt-to-GDP ratios. “Those numbers are financial artifacts,” and “the problem to focus on is
the 14 million unemployed,” Galbraith said. He noted that the debt-to-GDP ratio hit 100% of GDP after World War II,
and that period was followed by a huge period of U.S. economic growth. In a later session, Joseph Stiglitz, the Nobel laureate.
warned against “deficit fetiishism,” and said government spending could go to productivity-improvement investments,
such as environmental technology. But Olivier Blanchard, chief economist of the International Monetary Fund, countered that
prospective investments in green projects were too small to have a macro-economic impact.
American Economic Association
stand in sharp contrast to rising optimism in banking sector
America's financial crisis is nowhere
near over, according to top economists who largely contradicted the growing chorus of Wall Street bankers and government officials
who say the worst has passed.
“The recession is not over,” said Michael Intriligator, professor of economics at
the University of California, Los Angeles.
He predicted economic output would not return to precrisis levels until 2013, while the job market
would not fully recover until 2016.
The views expressed at the annual meeting of the American Economic Association here stand in
sharp contrast to rising optimism in the banking sector, which analysts say has benefited disproportionately from government
bailout efforts.
U.S. gross domestic product expanded 2.2 per cent in the third quarter, but the sustainability
of the recovery remains the subject of fierce debate.
Talk is rife of “upside risks” to economic growth, which, on median, is predicted
to climb over 3 per cent during 2010, according to Reuters polls.
But Simon Johnson, an economist at MIT's Sloan School of Business, said that by propping up the
financial sector, government efforts to date are only delaying another inevitable crash.
By giving large financial institutions the assurance that they are too big to fail, and thereby
offering an implicit guarantee to excess risk-taking, the administrations of Presidents George W. Bush and Barack Obama have
made the problem worse.
U.S. Economy Likely
to Perform Poorly Over Next Decade
The U.S. economy is this decade likely to perform as poorly as the one that just ended due to
higher savings by more cautious Americans and a less qualified labor force, several top economists said Sunday.
The world’s largest economy is expected to see between 2009 and 2019 growth in gross domestic
product - a broad measure of economic activity - close to the annual average of 1.9% seen between 1999 and 2009, economists
said. That marked the worst performance since the 1930s, the decade of the U.S. Great Depression.
The economic recovery seen from the second half of 2009 has been driven by a government stimulus
that will be fading in 2010, warned Martin Feldstein, a Harvard University economist and former Reagan administration economist.
“It’s easy to be dismal about the U.S. economy,” said Dale Jorgenson, an expert
on productivity who sees a deterioration in the quality of the labor force causing productivity growth to fall to 1.5% a year
this decade from 2% a year in the last 10 years.
Following a financial crisis that was partly a result of Americans spending beyond their means,
Nobel-laureate economist Joseph Stiglitz said the U.S. savings rate could go markedly higher in the coming years.
Do you think that the economy could fall into another recession
in 2010 without a new stimulus plan from government?
Yes: 40% No: 28% Unsure: 30%
PAUL KRUGMAN
That 1937 Feeling
Here’s what’s coming in economic news: The
next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely
to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing
for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow
even louder.
But if those calls are heeded, we’ll be repeating
the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that
it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the
economy promptly plunged back into the depths.
Joseph Stiglitz believes that markets lie at the heart of every successful economy, but do not work well without
government regulation. InFreefallhe
explains how flawed perspectives and incentives led to the 'Great Recession' of 2008, and brought mistakes that
will prolong the downturn.
Between 1996-2006, Americans used over
$2 trillion in home equity to pay for home improvements, cars, medical bills, etc., largely because real income had been stagnant
since the early 1990s. Economic recovery requires that we repay the remainder of these amounts, overcome stock
market losses (10%between
2000-2009), the loss of some 10 million jobs, make reductions in credit card balances, and find an equivalent amount
to the former home-equity sourced financing ($975 billion in 2006 alone - about 7% of GDP) to finance another consumer-driven GDP
upturn -- without the prior boom in housing and commercial building.
Stiglitz
also points out that the Great Depression coincided with the decline of U.S. agriculture (crop prices were falling
before the 1929 crash), and economic growth resumed only after the New Deal and WWII. Similarly, today's recovery
from the Great Recession is also hampered by the concomitant shift from manufacturing to services, continued automation and
globalization, taxes that have become less progressive (shifting money from those who would spend to those who haven't),
and new accounting regulations that discourage mortgage renegotiation.
Stiglitz is particularly critical of the
U.S. finance industry - its size (41% of corporate profits in 2007), avarice (maximizing revenues
through repeated high fees generated by over-eager and over-sold homeowners needing to refinance adjustable-rate mortgages
that repeatedly reset), and 'sophisticated ignorance' (using complex computer models to evaluate risk that failed
to account for high correlation within and between housing markets; 'eliminating risk' through buying credit default
swaps from AIG - blind to the likelihood AIG could not make good in a housing downturn), and excessive risk (banks
leveraged up to 40:1 with increasingly risky mortgage assets -- 'liar's loans,' 2nd mortgages, ARMs, no-down-payments; taking
advantage of the 'too-big-to-fail' and 'Greenspan/Bernanke put' phenomena).
Much
of this behavior was driven by lopsided personal financial incentives (bonuses) - if bankers win, they walk off with
the proceeds, and if they lose, taxpayers pick up the tab. However, to be fair, any firm that failed to take advantage
of every opportunity to boost its earnings and stock price faced the threat of a hostile takeover.
The impact
of mortgage defaults is greater than one would otherwise expect because financial wizards found that the highest tranches
of securitized mortgages would still earn a AAA rating if some income was provided to the lowest tranches in the 'highly unlikely'
event of eg. a 50% overall default, thus boosting the ratings and saleability of lower tranches. (Fortunately for the U.S.,
many of these mortgages ended up overseas, spreading the disaster.) Another problem is that mortgage speculators make more
profit from foreclosure than partial settlements. Meanwhile, investors worried that mortgage servicers might be too soft on
borrowers, required restrictions that make renegotiation more difficult and led to more foreclosures. Similarly, those with
2nd-mortgages often found that those holding the second were unwilling to accept a principal write-down as their share of
assets would be wiped out.
Finally,
new government regulations aimed at making banks seem healthier than otherwise allowed, changing from 'mark-to-market' valuation
of mortgages to long-term 'mark-to-hope' valuation - thus, writing down assets in a renegotiation, would generate the
very mortgage write-downs the new regulations avoided, and thus increased bank reluctance to do so. Freefallalso
does an excellent job refuting many of the simple explanations, alibis, and remedies for the 2008 Great Recession.
For example, Greenspan's 'nothing he could do' alibi is countered by Stiglitz's 'require higher down payments or margin
requirements' (or increase interest rates). To those blaming Community Reinvestment Act requirements for increased
mortgages to those with low incomes, Stiglitz says the default rates on those loans was less than in other areas; as for Fannie
and Freddie being responsible, they came late into the sub-prime game. Responding to claims that increased regulation would
stifle innovation and its role in economic growth, Stiglitz asserts that it is impossible to trace any sustained economic
growth to those 'innovative' mortgages. (A 'real' contribution could have been made by less profitable innovative mortgages
that helped homeowners stay in their homes.) On the other hand, he also admits that just giving more regulatory power to the
Federal Reserve is not a solution - the Federal Reserve didn't use what it did have prior to late 2008; similarly,
the SEC boosted leverage limits from 12:1 to 30:1 and higher in 2004 - exactly the wrong move. Banks suggest banning
short sales in the future as a preventive measure - Stiglitz, however, points out that the incentive provided short-sellers
to discover fraud and reckless lending may actually play a more important role in curbing bad bank behavior than government
regulators have.
Other factors, especially government actions, also
receive attention from the author. Overall, global supply exceeds demand - thus, the recovery focus needs to be on boosting
demand. Stiglitz points out that growing inequality shifts money from those who would have spent it to those who didn't
- weakening overall consumer demand. High oil prices have also impacted most those with low incomes, and probably encouraged
Greenspan to hold down interest rates to counteract the negative impact. On a broader level, Stiglitz contends that IMF encouragement
of national self-discipline and 'rainy-day' funds also weaken consumer demand. As for recommendations for more tax cuts and
rebates, Stiglitz says these won't have much impact on consumers saddled with debt and anxiety, and as long as there's
excess capacity, businesses will be reluctant to invest (Laffer's supply-curve tax-curve is an irrelevant theory, at
best). Stiglitz even suggests elsewhere that the failure of Bush's 2001 tax cuts to stimulate the economy may have also
influenced Greenspan to hold down interest rates for too long.
AIG, once bailed out, paid off billions to Goldman
Sachs at 100% (Secretary Paulson's former firm), while defunct credit-default-swaps elsewhere were settled at only 13
cents on the dollar, says Stiglitz. Overall, he is very negative on the financial-sector bailout (TARP), believing that the
money would much better have been used to capitalize new banks at 12:1 leverage, or not spent at all. The resulting bank subsidies
were unfair to taxpayers (Treasury put up most of the money and got short-changed on potential benefits), and implementation
was inconsistent - some institutions and stockholders were bailed out, others were not. (The reason lending 'froze up' is
that banks didn't know whether they or their peers ere underwater.) The stimulus package, on the other hand, was too
small (aimed at 3.6 million jobs, vs. 10 million lost plus 1.5 million new workers/year needing jobs), and was delegated to
Congress without clear guidance. The result was a failure to provide mortgage insurance for those losing jobs, while instead
creating the 'cash-for-clunkers' (mostly just moved sales from one period to another - Edmonds.com estimated only 18% were
added sales, costing taxpayers $24,000 apiece; eight of the top ten purchases came from Asian manufacturers), ineffectual
tax cuts, putting money into a failing auto industry, and increased road construction (greater global warming) instead
of giving even more money to high-speed rail.
The
stimulus emphasis should have been on fast implementation, high-multiplier impact, and addressing long-term problems (eg.
global warming). The employment situation now is worse than just the unemployment rate suggests - there are a record 6 applicants
for every opening, the average work week is at 34 hours - the lowest since data was first collected in 1964, many have turned
to disability instead of unemployment and are not counted.
Overall, Stiglitz believes there is far too much short-term
thinking driving decision-makers, that business lobbies are too strong, and that markets are not naturally efficient. (Other
inefficient market areas besides finance include health care, energy, manufacturing.) Meanwhile, we have done nothing
to correct the underlying problems (big banks are even bigger) and Stiglitz also fears (reported elsewhere) the U.S.
economy faces a “significant chance” of contracting again.
Interesting side-notes:
1)
Stiglitz suggests that banks 'too-big-to-fail' should pay higher rates of deposit insurance, and incur restraints on executive
incentives. In 1995 our five largest banks' market share was 11%, 40% now. Regardless, the world's largest three banks
are now Chinese - #5 is American. (Not to worry - scale economics are no longer a factor for any of those banks, says
Stiglitz.)
2)
President Reagan made a major mistake in removing Paul Volcker as Chairman of the Federal Reserve Board and appointing
Alan Greenspan in his place. Volcker had brought down inflation from more than 11 percent to under 4 percent, which should
have assured his reappointment. But Volcker believed financial markets need to be regulated, and Reagan wanted
someone who did not. Thus, Stiglitz believes regulations must be mandated, and enforced by a neutral, not political, source.
3)
Repealing the Glass-Steagall Act in 1999 changed the culture of banking from conservative to high-risk, and also encouraged
even larger institutions.
4)
It is ironic that the Bush/Greenspan efforts to minimize government involvement in the economy resulted in our becoming de
facto owners of the world's largest auto and insurance companies, and some of the largest banks.
5)
Stock options are doubly damaging - they undermine stockholder wealth while remaining largely hidden from stockholders, and
they encourage maximum short-term accounting manipulation to move stock prices up.
6)
The U.S. national debt will reach 70% of GDP by 2019, and when it hits 90%, paying 5% interest on that debt will consume
one-fifth of federal taxes.
Bottom-Line: Most books on current economic issues written for the public are superficial, or
even worse, mere demagoguery. Stiglitz's qualifications - Nobel prize-winner in economics (2001), former Chairman of the President's
Council of Economic Advisors (1995-97), and former World Bank Chief Economist help provide an important, interesting and credible alternative.Freefallwas a pleasure
to read.
The financial crisis prompted vows from regulators, investors, Wall Street
executives, lawmakers and others that they will not allow the system to again undergo such a meltdown. However, few significant changes have been made, as this article notes. "We've been successful in identifying, appreciating
and debating the big systemic issues. But we've done precious little to effect measures that reliably protect the future of
our global financial system," said Daniel Alpert, managing partner of Westwood Capital.
Supported by government rescue efforts worldwide, financial markets rebounded
in 2009. The Dow Jones industrial average fell 25.4% in March, hitting a 12-year low. Then, the index rallied to finish up
18.8%, while the Standard & Poor's 500 soared 23.5%.Investors are faced with the question of whether
markets will be able to stand on their own.
U.S. Treasuries Post Worst Performance Among Sovereign Markets
Treasuries were the worst performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion
of notes and bonds to fund extraordinary efforts to bolster the economy and financial markets.
Investors in U.S. debt lost 3.5 percent on average through Dec. 30, according
to Bank of America Merrill Lynch indexes, the biggest annual slide since at least 1978. The 10-year Treasuryyieldreached
its highest level in six months yesterday before a Labor Department report next week forecast to show payrolls were unchanged
in December after the U.S. economy lost jobs in every month since January 2008.
From the American Economics Association Annual Meeting Papers
Foreign Lenders in Emerging Economies
In recent decades, after liberalizing
their credit markets emerging economies have frequently
experienced sustained output growth but also large volatility of output and asset (e.g., real estate) prices. This paper studies an economy where
firms
face credit constraints tied to the pledgeable returns
- output and collateralizable assets - of their investments
and domestic and foreign lenders have different comparative advantages in obtaining investment returns. Building on evidence from emerging economies, we postulate that foreign lenders are more efficient than domestic ones in monitoring the output of specialized assets but have less information in the local market where assets are traded. The analysis reveals that opening the economy to foreign lenders can raise average productivity and output but also the volatility of output and of the price of collateral assets over the business cycle. These effects appear more pronounced the lower is the degree of contract enforceability in the economy.
"According to the International Monetary Fund, the United States began the century producing 32 percent
of the world's gross domestic product. We ended the decade producing 24 percent. No nation in modern history, save for the
late Soviet Union, has seen so precipitous a decline in relative power in a single decade.
The
United States began the century with a budget surplus. We ended with a deficit of 10 percent of gross domestic product, which
will be repeated in 2010. Where the economy was at full employment in 2000, 10 percent of the labor force is out of work today
and another 7 percent is underemployed or has given up looking for a job.
Between
one-fourth and one-third of all U.S. manufacturing jobs have disappeared in 10 years, the fruits of a free-trade ideology
that has proven anything but free for this country. Our future is being outsourced -- to China.
While the median income
of American families was stagnant, the national debt doubled.
The dollar lost half its value against the euro. Once
the most self-sufficient republic in history, which produced 96 percent of all it consumed, the U.S.A. is almost as dependent
on foreign nations today for manufactured goods, and the loans to pay for them, as we were in the early years of the republic."
- Patrick J. Buchanan
.
Economic Forecasts for 2010 and the Coming Decade
ByHEATHER HORN
Economistsaren't too hoton the success of the last decade, and are now
raising questions about whether the next one will be better. Will the American economy recover, or are we in for rough years
of instability, stagnation, or crisis? Will the Fed start to raise interest rates again in anticipation of recovery? Will
new regulatory reforms prevent a repeat of the housing and financial crises? The annual meeting of the American Economic Association
this week is giving top economists and policymakers a chance to take a crack at these puzzles. Here's what they see coming:
Rough Ride Ahead--Don't Pull Stimulus YetIn
The New York Times,Paul Krugmancontinues his rebuttal of "bullish commentary--and the calls we're already hearing for an end
to the stimulus." He warns the Fed and Obama administration against "repeating the great mistake of 1937, when ... spending
was cut back, monetary policy was tightened--and the economy promptly punged back into the depths."
The Role of the FedWorrying over the regulatory
failures that helped lead to "a deep global recession from which we are only now beginning to recover," Fed chairmanBen Bernankesays that while "financial regulation and supervision"
are not necessarily "ineffective for controlling emerging risks, ... their execution must be better and smarter." He argues
that monetary policy is, compared to regulatory policy, "a blunt tool" for controlling the economy. "Clearly, we still have
much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining
flexibility and an open mind will be essential for successful policymaking as we feel our way forward."
We'll Have to Tighten Before Full RecoveryWhile
Krugman remains concerned at the prospect of the Fed raising interest rates too soon, Fed vice chairmanDonald Kohnargues in his address that "we will need to begin
withdrawing extraordinary monetary stimulus well before the economy returns to high levels of resource utilization," and says
they will rely on forecasts. Though asserting that the Fed has "no shortage of tools" for aiding economic policy, he echos
Bernanke's caution:
it is well to remember that we are still in uncharted waters. We do not
have any recent experience with financial disruptions of the breadth, persistence, and consequences of those that we have
experienced over the past several years. And we have no experience with most of the sorts of actions the Federal Reserve has
taken to counter the shock. The calibration of our exit from these policies is complicated by a paucity of evidence on how
unconventional policies work. We will need to be flexible and adjust as we gain experience.
Full Recovery in Next Decade, with DifficultiesHarvard
economist and Reagan economic adviserMartin Feldstein, while not denying the "serious cloud over the near-term economic outlook" says he "will make
the plausibly optimistic assumption that the economy will fully recover over the next ten years." He predicts that growth
in output will get an extra boost from economic recovery, though that will be "offset by the likely effect of the falling
dollar and the shrinking trade deficit." That means the economy will grow, in the next ten years, at about the same rate as
it did in the past ten years, although he also predicts slower growth of capital accumulation, "multi-factor productivity,"
and the labor force.
U.S. consumers and businesses are filing for bankruptcy at a pace that made 2009 the seventh-worst
year on record, with more than 1.4 million petitions submitted, an Associated Press tally showed Monday.
The AP gathered data from the nation's 90 bankruptcy districts and found 1.43 million filings,
an increase of 32% from 2008. There were 116,000 recorded bankruptcies in December, up 22% from the same month a year before.
Global Economy's Next Threat: China's Real
Estate Bubble
We might be tempted to envy China's spectacularly resilient real estate
boom: After sagging in the global financial meltdown of 2008, property values in China's urban centers skyrocketed in 2009.
Shanghai's Pudong district, for example, experienced a 57% rise in a matter of months.
By comparison, residential real estate in the U.S. is up 3.4% on average from its bottom in May, but still almost 30% below its peak in April 2006. housing bubble might
be careful what they wish for, as the new real estate bubble in China is even more precarious than the one which imploded
in 2008.
The popping of China's current housing bubble -- considered inevitable by regional experts such as Andy Xie -- could have widespread consequences. If housing turns down in China, China's
growth could slow or even decline. And since the entire world is looking to China to lead global growth, then that could spell
major trouble for the "global economy is recovering" story.
La crisis financiera de Estados Unidos está lejos de terminar, indicaron importantes economistas,
en una visión que contradice en gran medida a la creciente idea entre banqueros de Wall Street y funcionarios del gobierno
respecto a que lo peor quedó atrás.
"La recesión no ha terminado", dijo Michael Intriligator, profesor de economía en la Universidad
de California en Los Angeles.
Según él,la producción
económica no retornará a sus niveles previos a la crisis antes del 2013, mientras que el mercado laboral no se recuperaría
completamente hasta el 2016.
Las opiniones expresadas durante la reunión anual de la Asociación Económica Estadounidense marcan
un fuerte contraste con el creciente optimismo en el sector bancario, que según los analistas se ha beneficiado desproporcionadamente
de los esfuerzos de rescate del gobierno.
El Producto Interno Bruto estadounidense se expandió 2.2% en el tercer trimestre, pero la estabilidad
de la recuperación sigue siendo objeto de un encendido debate.
Las proyecciones están plagadas de "riesgos al alza" para el crecimiento económico, que se espera registre
una expansión de 3.0% en el 2010, según la mediana
de un sondeo de Reuters.
No obstante, Simon Johnson, economista de la escuela de negocios del MIT, dijo que al apuntalar
al sector financiero, los esfuerzos realizados por el gobierno hasta el momento sólo demoran otra crisis inevitable.
Al dar la seguridad a las grandes instituciones financieras de que son demasiado grandes para
quebrar, ofreciendo por tanto una garantía implícita a la toma de riesgo, los gobiernos de George W. Bush y Barack Obama han
empeorado el problema, consideró.
Una regulación más fuerte debe ser la primera línea de defensa contra las burbujas especulativas que
podrían sumir la economía estadounidense en una nueva crisis, afirmó el domingo el presidente de la Reserva Federal, Ben Bernanke.
Empero, el presidente de la Fed no descartó tasas de interés más elevadas para evitar la creación de
burbujas peligrosas, como la de la vivienda.
Los comentarios del presidente del banco central estadounidense fueron los más extensos desde el estallido
de la llamada "burbuja del ladrillo", que creó la peor crisis financiera desde la Segunda Guerra Mundial _ y en su opinión
_ quizá la peor en la historia contemporánea de Estados Unid
Bernanke
Blames Weak Regulation for Financial Crisis
Regulatory failure, not lax monetary policy, was responsible for the housing bubble and subsequentfinancial crisisof the last decade,Ben S. Bernanke, theFederal Reservechairman, said in a speech on Sunday. “Stronger regulation and supervision aimed at problems with underwriting practices and lenders’
risk management would have been a more effective and surgical approach to constraining the housing
bubble than a general increase in interest rates,” Mr. Bernanke, whose nomination for a second
term awaits Senate confirmation, said in remarks to the American Economic Association.
Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued
that the interest rates set by the central bank between 2002 and 2006 were appropriately low. He was a member of the board
of governors of the Federal Reserve System for most of that period.
Helped by growing exports and local demand, Latin America is poised for a solid
recovery in 2010.
2009 was not a good year for Latin America—but it was a lot better than most other regions,
namely, North America, Europe, Africa, and some parts of Asia.
Although GDP shrunk 2.6 percent, Latin America fortuitously was cushioned from the harshest
blows of the global economic recession thanks to responsible macroeconomic policies. Unlike previous downturns, this time
around many countries in the region entered the crisis in a position of relative strength, with large stocks of foreign exchanges
reserves, flexible exchange rate regimes, low inflation, and healthy banks.
It is not surprising, therefore, thatLatin
America is poised for a solid recovery in 2010, with an expected growth rate of over 4 percent.
The principal drivers of Latin America’s improved economic growth will be recovery in
the world economy and the increased demand for the region’s exports—especially commodities—as well as a
boost in consumer spending in domestic markets.
Inflation may besubdued today, but the debate over inflation
is anything but tame. Pessimists, such as hedge-fund manager Julian Robertson of Tiger Management, say rampant inflation is
a looming threat. "I ask anyone to give me an example of an economy beefed up by huge amounts of fiscal and monetary stimulus
that did not inflate tremendously when the economy improved," he recently told us.
Optimists such as David Herro, co-manager of the Oakmark International
fund, disagree. "The global economy is soft, and there's excess capacity, so I believe inflation is still preventable," Herro
says.
Whenever you find you
are on the side of the majority, it is time to pause and reflect
--- Mark Twain
We have never observed
a great civilization with a population as old as the United States will have in the twenty-first century; we have never observed
a great civilization that is as secular as we are apparently going to become; and we have had only half a century of experience
with advanced welfare states...Charles Murray
Kella
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January 25-31, 2010
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