Former Federal Reserve
Chairman Alan Greenspan said that
the financial crisis that triggered our current recession was "by far the greatest financial crisis, globally, ever." That's
right, even worse that the collapse of the stock market in 1929, because for the first time short-term credit was "literally
withdrawn." And with housing starts and car sales till "dead in the water," Greenspan said, we may not see a real recovery
any time soon.
Greenspan is not alone in
his dire pronouncements. Naked Capitalism has a long
list of
economists and bankers who think our current economic crisis could compare to the Great Depression, including current Federal
Reserve Chairman Ben Bernanke, former Federal Reserve Chairman Paul Volcker, Nobel Prize-winning economist Joseph Stiglitz,
and billionaire investor George Soros. While this downturn has not been as painful as the Great Depression, in part because
we avoided some of the policy mistakes we made after the 1929 crash, this economic crisis itself may have been more severe.
And it may take a long time for us to recover.
A large part of the problem is that, as Greenspan says—putting it
mildly—the economic recovery is "extremely unbalanced."
o - the Commerce Department reportedthat January new-home sales dropped 11.2 percent from December,
plunging to their lowest level in nearly 50 years.
o - the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey's "present situation
index" -- how confident consumers feel right now -- which hit its lowest mark since the 1983 recession...the Reuters/University
of Michigan consumer sentiment survey also showed a falloff from January to February.
o -the Reuters/University
of Michigan consumer sentiment survey also showed a falloff from January to February...the government's report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted. Forecasters
expected new jobless claims to drop by about 20,000.
Strauss-Kahn said such an asset could be similar to but distinctly different from the IMF's
special drawing rights, or SDRs, the accounting unit that countries use to hold funds within the IMF. It is based on a basket
of major currencies.
He said having other alternatives to the dollar "would limit the extent to which the international
monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country."
Strauss-Kahn, a former finance minister of France, said that during the recent global financial
crisis, the dollar "played its role as a safe haven" asset, and the current international monetary system demonstrated resilience...
Several countries, including China and Russia, have called for an alternative
to the dollar as a reserve currency and have suggested using the IMF's internal accounting unit.
A secretive group of Wall Street hedge fund bosses are said to be behind
a plot to cash in on the decline of the euro.
Representatives of George Soros's investment business were among an all-star
line up of Wall Street investors at an 'ideas dinner' at a private townhouse in Manhattan, according to reports.
A spokesman for Soros Fund Management said the legendary investor did not
attend the dinner on February 8, but did not deny that his firm was represented.
At the dinner, the speculators are said to have argued that the euro is
likely to plunge in value to parity with the dollar.
The single currency has been under enormous pressure because of Greece's
debt crisis, plus financial worries in Portugal, Italy, Spain and Ireland.
But, it has also struggled because hedge funds have been placing huge bets
on the currency's decline, which could make the speculators hundreds of millions of pounds.
The euro traded at $1.51 in December, but has since fallen to $1.34. Details
of the secretive dinner emerged days after Mr Soros, chairman of Soros
Fund Management, warned in a newspaper article that the euro could 'fall
apart' even if the European Union can agree a deal to shore up support for stricken Greece.
Mr Soros, who made more than $1billion by currency speculation when the pound was ejected from
the Exchange Rate Mechanism on Black Wednesday in 1992, believes the structure of the euro is 'patently flawed'.
The mainstream economics profession is guilty of dereliction of duty. They should be telling
people that this ‘recovery’ is a scam. They should be warning investors that the markets could fall apart any
day. They should be buying gold and selling US Treasuries…and explaining to the politicians that you can’t buy
your way out of a depression with phony dollars squandered on wasteful projects!
Instead, the dopes are patting each other on the back…praising themselves for saving the
planet from destruction...
Prices are vulnerable to sharp, unannounced drops until they finally get down to real depression
levels. Since that hasn’t quite happened yet…we figure it’s still to come.
On the employment front,
this depression has put more than 6 million people out of work. And every month, more people join the unemployment ranks...the
worst thing about a depression is that it holds jobless people prisoner for so long. Many of them will become lifers…they’ll
never work again...
Bank credit is still falling. Households cut back because
they need to get out of debt…and save money for retirement. Businesses cut back too. New projects typically don’t
do well in a depression. Small businesses struggle…and fail. Big businesses get bailouts and subsidies. Depressions
are times to neither a borrower nor a lender be. Debt is only increasing at the government level.
Greece's debt crisis has plunged the euro into a ‘ difficult situation’,
the German Chancellor Angela Merkel admitted last night, prompting fresh fears about the collapse of the single currency.
In the gravest sign yet of the international threat posed by Greece’s
crippled economy, Mrs Merkel warned for the first time that the eurozone faces a ‘ dangerous’ period.
The beleaguered euro initially fell in the wake of her comments and fresh
speculation that Greece’s international credit rating may be downgraded.
On a dramatic day which also saw money markets around the world fall:
The head of Germany’s leading debt management agency warned the euro
would collapse if any member defaulted on its debt.
U.S. regulators said they would investigate whether investment bank Goldman
Sachs helped Athens disguise its budget deficit.
EU inspectors visiting Athens told authorities they see a deeper than
expected recession.
The US is heading for a debt-driven “financial meltdown”
within five to seven years, according to Judd Gregg, the outgoing Republican senator for New Hampshire...Mr
Gregg also complimented China for showing rising alarm about the US’s mounting levels of public debt...“We have had China say that they are looking for other places to put their reservesand
that is probably a smart decision on their part,” said Mr Gregg, who will not seek re-election in November. “So
the warning signs are pretty clear and the path is unsustainable and, at this point, unless we take different actions, unavoidable.”
Secretary of State Hillary Clinton on Thursday said
"outrageous" advice from former Federal Reserve Chairman Alan Greenspan helped create record U.S. budget deficits that put
national security at risk.
Appearing before congressional panels to defend
the State Department's $52.8 billion budget request for 2011, Clinton said the massive U.S. foreign debt had sapped U.S. strength
around the world.
"It breaks my heart that 10 years ago we had a balanced
budget, that we were on the way of paying down the debt of the United States of America," Clinton said.
"I served on the budget committee in the Senate,
and I remember as vividly as if it were yesterday when we had a hearing in which Alan Greenspan came and justified increasing
spending and cutting taxes, saying that we didn't really need to pay down the debt -- outrageous in my view," she said...
Clinton urged lawmakers to tackle the federal budget
deficit, which reached a record $1.4 trillion for the fiscal year that ended last September.
"We have to address this deficit and the debt of
the United States as a matter of national security not only as a matter of economics," Clinton said. "I do not like to be
in a position where the United States is a debtor nation to the extent that we are."
Having to rely on foreign creditors hit "our ability
to protect our security, to manage difficult problems and to show the leadership that we deserve," she said.
Anybody
who looks carefully at the world economy will recognise that a degree of monetary and fiscal stimulus unprecedented in peacetime
is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom
is that it will also be possible to manage a smooth exit. Nothing seems less likely...
So
what happens next? We can identify two alternatives: success and failure. By “success”, I mean reignition of the
credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy
appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending
fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares
to imagine. This would be post-bubble Japan on a far wider scale.
Unhappily,
the result of what I call success would probably be a still biggerfinancial crisisin future, while
the results of what I call failure would be that the fiscal rope would run out, even though reaching the end might take longer
than worrywarts fear. Yet the big point is that either outcome ultimately leads us to a sovereign debt crisis. This, in turn,
would surely result in defaults, probably via inflation. In essence, stretched balance sheets threaten mass private sector
bankruptcy and a depression, or sovereign bankruptcy and inflation, or some combination of the two....
Most
people hope...that the world will go back to being the way it was. It will not and should not. The essential ingredient of
a successful exit is, instead, to use the huge surpluses of the private sector to fund higher investment, both public and
private, across the world...
With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke
warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that
the central bank will not help legislators by printing money to pay for the ballooning federal debt.
Recent events in Europe, where Greece and
other nations with large, unsustainable deficits like the United States are having increasing trouble selling their debt to
investors, show that the U.S. is vulnerable to a sudden reversal of fortunes that would force taxpayers to pay higher interest
rates on the debt, Mr. Bernanke said.
"It's not something that is 10 years away. It affects the markets currently," he told the House
Financial Services Committee. "It is possible that bond markets will become worried about the sustainability [of yearly deficits
over $1 trillion], and we may find ourselves facing higher interest rates even today."
It was some of the toughest rhetoric to date about the nation's fiscal
and budgetary woes from the Fed chief, who faces a second round of questioning Thursday before a Senate panel.
"Now, our first
and most immediate task is to complete the economic recovery by taking additional steps to bolster demand and keep credit
flowing. Along with our efforts to unfreeze credit and stabilize the housing market, the Recovery Act helped to do this, and
it's one of the main reasons our economy has gone from shrinking by 6 percent to growing by nearly 6 percent. But
we need to do more. We should make it easier for small businesses to get loans, and give them a tax credit for hiring new
workers or raising wages.We should invest in infrastructure projects that lead to new jobs in the construction industry and
other hard-hit businesses. And we should provide a tax incentive for large businesses like yours to invest in new plants and
equipment.That would make a difference now. And we need businesses
to support these efforts. ..
At a time of such economic anxiety, it's tempting, and maybe it's easier,
to turn against one another and to find scapegoats to blame. So politicians can rail against Wall Street or against each other,
and businesses can fault Capitol Hill, and all of it makes for easy talking points and good political theater. But it doesn't
solve our problems. It doesn't move us forward. It just traps us in the same debates and divides that have held us back for
a very long time and forced us to keep on punting down the road the same problems we've been facing for decades. And
I believe we can't afford that kind of politics anymore. Not now. But we know the way forward, and we know what the future
can be. And I am confident we can get there. And I'm confident because we have the hardest-working, most productive
citizens in the world. I'm confident because our universities and research facilities are second to none. And I'm confident
because of the caliber of the leaders and businesses represented in this room. We're
not going to agree on every single issue, we're not going to support the same policies every time, but I promise I will never
stop listening to your concerns and your ideas, and I will never stop rooting for your success -- because we are in this together.
And whether we rise or fall as a nation doesn't depend on some economic forces that are beyond our control. It depends on
us -- on the ingenuity of our entrepreneurs, the determination of our workers, and the strength of our people."
Administration officials, independent government analysts and
private forecasters have said the fiscal measures put in place by Democrats have boosted the overall economic growth of the
country and added jobs to the economy.
Still, the need to show economic gains by November is palpable
among Democrats, who are racing to pass additional fiscal measures. The $15 billion package passed in the Senate on Wednesday
would be a modest measure following the $787 billion stimulus package enacted in early 2009.
“We have much more to do to boost employment and put Americans
back to work,” Rep. Carolyn Maloney (D-N.Y.), chairwoman of the Joint Economic Committee, said this week.
The economic risks span the labor market, housing, bank lending
and general concerns about deficits and uncertainty surrounding future regulations.
The
proposal, dubbed the "Volcker rule" after former Federal Reserve Chairman Paul Volcker, would have essentially prevented any
commercial bank with federally insured deposits from owning a division that makes speculative bets with its own capital.
Getty Images
Former Fed Chairman Paul Volcker, left, with Mr. Obama last month.
But
after resistance from lawmakers from both parties, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and other
legislators are expected to introduce a plan next week that would give regulators more discretion to limit and potentially
ban risky trading at banks, especially if it poses a risk to the broader economy. The measure would stop short of banning
such trading outright.
Former Federal Reserve Chairman Alan
Greenspan said
the financial crisis was “by far” the worst in history and called the recovery from the global recession “extremely
unbalanced.”
The world economy has undergone “by far the greatest
financial crisis globally ever,” Greenspan said today in a speech to the Credit Union National Association’s Governmental
Affairs Conference in Washington.
Greenspan said that while the economy was in worse shape
in the Great Depression, the recent financial crisis was potentially more harmful than that in the 1930s because “never
had short-term credit literally withdrawn.”
Greenspan
said that the gross domestic product may recover to the level of previous peaks earlier this year, even though traditional
drivers of growth such as housing starts and motor vehicles were “dead in the water.” He also said small businesses
show few signs of improving because lenders are struggling with commercial real estate mortgages.
Gradually, people are coming to two contradictory realizations. On the one hand, there really does
seem to be a kind of economic renaissance going on…or, at least that is what you might think if you read the business
and investment news.
On the other hand, people are also coming to realize that we’re in a depression.
...a depression is not just a time when people stand in line to get bowls of soup or sell apples
on street corners. It’s a time of adjustment…when mistakes of the previous boom are corrected…and a new
economic model is found for going forward. This doesn’t happen overnight, no matter how much federal money is put to
work helping it. In fact, the government money just gets in the way…distorting the picture and delaying the necessary
changes. Those black-and-white depression days of the ’30s are gone. Now, we have a depression in full Technicolor…with
plenty of shades of gray, too.
A strengthened U.S. central bank offers the best chance for the U.S. to avoid a future financial crisis, St.
Louis Federal Reserve Bank President James Bullard said Tuesday. "As the lender of last resort, the Fed will be at the
center of any future financial crisis," Bullard said in remarks prepared for delivery to the CFA Virginia Society. He said
that argues for the Fed to play a lead role in financial oversight, reasoning that "provides the nation with the best chance
of avoiding a future crisis."
Bullard criticized financial
overhaul bills drafted in the U.S. House of Representatives and the Senate, both for what they contain and what they omit,
and urged lawmakers to consider changes to give the Fed more information and more authority.
For instance, Bullard questioned whether creation of a financial services oversight council would stave off a
future market meltdown. The idea, contained in the House bill, calls for the Fed to be one of several members of the council,
an approach Bullard said might not work well at a time of crisis when decisions "need to be made quickly, not subjected to
long committee debates."
"The Fed would be better at navigating
this type of decision-making," because of its monetary policy expertise and its political independence, Bullard said.
TheInternational Monetary Fundhas long preached
the virtues of keeping inflation low and allowing money to flow freely across international boundaries. But two recent research
papers by economists at the fund have questioned the soundness of that advice, arguing that slightly higher inflation and
restrictions on capital flows can sometimes help buffer countries from financial turmoil.
1 central banks should set target inflation rate much higher — at 4 percent, rather than the 2 percent standard.
2 officials
“reconsidering the view that unfettered capital flows are a fundamentally benign phenomenon.”
Now
we come to the big dilemma: what if private deleveraging and fiscal deficits continue in the US and elsewhere for years, as
they did in Japan? Then triple A-rated countries, including even the US, might lose all fiscal headroom. This has not yet
happened to Japan. It might well not happen to the US. But it could.
So,
yes, high-income countries face huge fiscal challenges. And yes, the crisis-hit countries start from grossly unsustainable
fiscal positions. But the US is not Greece. Moreover, a massive fiscal tightening today would be a grave error.
There is a huge risk – in my view, a certainty – that this would tip much of the world back into recession. The
private sector must heal. That, not fiscal retrenchment, is the priority.
Even if it handles the current crisis, what about the next one?
It is clear what is needed: more intrusive monitoring and institutional arrangements for conditional assistance. A well-organised
eurobond market would be desirable. The question is whether the political will for these steps can be generated
“Those who argued for deregulation—and
continue to do so in spite of the evident consequences—contend that the costs of regulation exceed the benefits. With
the global budgetary and real costs of this crisis mounting into the trillions of dollars, it’s hard to see how its
advocates can still maintain that position. They argue, however, that the real cost of regulation is the stifling of innovation.
The sad truth is that in America’s financial markets, innovations were directed at circumventing regulations, accounting
standards, and taxation … No wonder then that it is impossible to trace any sustained increase in economic growth (beyond
the bubble to which they contributed) to these financial innovations” - Joseph Stiglitz
.
.
First-hand Perspectives on the Global Economy
In this special report, students from the Joseph H. Lauder Institute of Management & International Studies analyze some
of the most exciting economic, business and technology developments helping to shape today's world.
The articles offer new perspectives on the ever-changing global economy, including the growth
of consumer markets in Brazil, Egypt and China, and the impact of the crisis on French luxury goods. The green economy’s
growth worldwide is captured in articles on organic products in Germany, solar energy in Senegal and Japan’s eco-tech
industry. The rise of the Russian gambling industry, sustainable tourism in Egypt and high-end gastronomy in Spain illustrate
new frontiers in the leisure business. China’s coming of age is captured in articles on the development of its venture
capital and mutual fund industries, enhanced awareness of social corporate responsibility, and the growth of second- and third-tier
cities. New developments in infrastructure and financial services are reflected in pieces on the mobile Internet in Latin
America, the rise to prominence of Spanish infrastructure management companies, and a new form of transparent, customer-driven
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Taken together, the 16 articles offer perspectives on a range of dynamic economies and identify
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are part of the Lauder Global Business Insight program.
Fears are growing that the United States will once again resort to printing money and ginning up inflation to resolve its
debt problem.
While accelerating the
printing presses could do irreversible damage to the dollar's international reputation and the U.S. economy, history suggests
that this is the way Washington will go to avoid the political pain of having to raise taxes and cut spending on popular programs
such as Social Security, defense and Medicare.
Some notable economists
argue that such a move would avert a debt crisis like the one confronting Greece and other European countries that have been
unable to reduce spending because of strong public resistance.
Political leaders and
the Federal Reserve, which is charged with printing and circulating U.S. dollars, strenuously deny that they have any intent
to "inflate" out of the debt...
But despite
some resistance and wariness at the Fed, a growing number of Wall Street gurus expect the U.S. to adopt at least an unofficial
policy of growing or "inflating" out of the debt in light of Congress' unwillingness to tackle budget deficits running at
more than $1 trillion for the foreseeable future.
Economists fear that the nascent recovery will leave more people behind than in past recessions, failing
to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.
Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying
on public assistance for the first time in their lives — potentially for years to come.
Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will
lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to
extend the payments, according to the Labor Department.
States have $18.8 billion of budget gaps yet to
be closed in fiscal 2010. This comes after they have already imposed measures to eliminate budget imbalances totaling $87
billion in the fiscal year, which for most started last summer.
In the budgets they are drafting for fiscal 2011,
states foresee shortfalls of $53.6 billion and for fiscal 2012 $61.6 billion.
The job market isn't improving
as fast as some analysts had expected.
That was the message Thursday in
a government report that the number of people filing first-time claims for unemployment benefits rose unexpectedly last week.
Jobless claims rose by 31,000 to a seasonally adjusted 473,000.
That followed a drop of 41,000
in the previous week. The earlier figure had raised hopes that the job market was improving steadily.
The four-week average for claims
dipped 1,500 to 467,500, near the lows at the end of last year. The average smooths out week-to-week volatility. But many
economists say the four-week average would need to fall consistently below 425,000 to signal that the economy is close to
generating net job gains. The economy has lost 8.4 million jobs since the recession began in December 2007.
Ben Bernanke, chairman of the Federal Reserve, indicated last
week that the central bank might increase its emergency lending rate to banks to widen the spread between that and the main
policy rate. Still, markets were caught off guard Thursday when the Fed raised the discount rate, prompting officials to say
borrowing costs will remain low. "The modifications are not expected to lead to tighter financial conditions for households
and businesses and do not signal any change in the outlook for the economy or for monetary policy," the Fed said
A mortgage crisis like the one that has devastated homeowners is enveloping
the nation's office and retail buildings, and few places are likely to be hit as hard as Washington.
The foreclosure wave is likely to swamp many smaller community
banks across the country, and many well-known properties, including Washington's Mayflower Hotel and the Boulevard at the
Capital Centre in Largo, are at risk, industry analysts say.
The new round of financial pain, which some had anticipated but
hoped to avoid, now seems all but certain. "There's been an enormous bubble in commercial real estate, and it has to come
down," said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the
financial bailout. "There will be significant bankruptcies among developers and significant failures among community banks."
Bond buyers are thinking about the odds of Greece's debt crisis
spreading to Portugal, Ireland and Spain, then eventually to Britain and the U.S., according to The Economist. While the possibility
of U.S. Treasuries losing their "risk-free" image cannot be rejected, a more likely outcome is higher interest rates on U.K.
and U.S. government debt. "That demands a credible medium-term plan to cut deficits," The Economist notes. "Otherwise Greece's
problems could be the start of something much bigger."
David Rosenberg from Gluskin Sheff
said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis
began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said. Mr Rosenberg said it is tempting fate
for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders
any talk of an exit strategy premature," he said
Paul Ashworth, US economist forCapital Economics,
said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues
to contract" in their latest statement..."The reason the Great Depression became 'great'
was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this,"
The number of U.S. workers filing new applications for unemployment insurance
unexpectedly surged last week, while producer prices increased sharply in January, raising potential hurdles for the economic
recovery.
AP
Initial claims for state unemployment benefits increased
31,000 to 473,000, the Labor Department said on Thursday. That compared to market expectations for 430,000.
Another report from the department showed prices
paid at the farm and factory gate rose a faster than expected 1.4 percent from December after a 0.4 percent gain in December,
as higher gasoline prices and unusually cold temperatures helped boost energy costs.
A
bailout of one (nation) will produce the same outcome as the rescue of Bear Stearns did; moral hazard will kick in, and instead
of allowing economic Darwinism to cleanse the gene pool, the weaker nations will lose any incentive to cut spending and trim
their swollen deficits.
Welcome to “Credit Crunch II.”By stuffing billions
of dollars of taxpayers’ money into the balance-sheet holes of the banking industry, governments have transmogrified
private risk into public liabilities.The
“too-big-to-fail” label just reattaches itself to governments from financial companies.
The
sequel, if the European Union or its members are suckered into some kind of Greek rescue package by buying, guaranteeing or
even repaying its bonds, could end up featuringPortugalas Lehman Brothers
Holdings Inc. andSpainas American International Group Inc.
Last year, Russia's economic performance was the worst among the BRIC economies
by a large measure: For the whole of 2009, its real GDP is expected to have declined by at least 8% and some quarters by more
than 10%. That compares to Brazil's smaller real GDP decline of 5.5%, while China's and India's GDPs grew by 8.3% and 6.5%,
respectively. Russia's performance is even worse when compared to 2008, which takes into account the bursting of the oil-price
bubble in the middle of that year.
Over the past
year alone, the amount the U.S. government owes its lenders has grown to more than half the country's entire economic output,
or gross domestic product.
Even more
alarming, experts say, is that those figures will climb to an unprecedented 200 percent of GDP by 2038 without a dramatic
shift in course...
"Within 12 years…the
largest item in the federal budget will be interest payments on the national debt," said former U.S. Comptroller General David Walker. "[They are] payments for which we get nothing."
Economic
forecasters say future generations of Americans could have a substantially lower standard of living than their predecessors'
for the first time in the country's history if the debt is not brought under control.
Government debt, which fuels the risk of inflation, could make everyday Americans'
savings worth less. Higher interest rates would make it harder for consumers and businesses to borrow. Wages would remain
stagnant and fewer jobs would be created. The government's ability to cut taxes or provide a safety net would also be weakened,
economists say.
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned:
rising debt...infringing on...central bank’s ability to fulfil...goals
of maintaining pricestability and long-term economic growth.
“Stunning”
deficit projections...putting political
pressure on...Fed to keep interest rates low, infringing on its independence at...risk of inflation
“Without
pre-emptive action, the US risks its next crisis”
the
worst option for the US...a scenario where the government “knocks on the central bank’s door” and asks it
to print more money. Instead, the administration must find ways to cut spending and generate revenue.
If...Fed
succumbed to pressure to increase the money supply...inflation would lead to a loss of confidence in the dollar and in the
economy. Meanwhile, a potential stalemate between the fiscal and monetary authorities that govern the economy could allow
growing imbalances to go unchecked, thus raising the costs of borrowing and of capital for the US.
“dire”
consequences of the central bank prolonging its holdings of mortgage-backed securities, which it purchased in an effort to
prop up the US housing market.
The ongoing Greek financial crisis is the kind of crisis the United States
might face in a few years, if we continue to make the kinds of mistakes that the Greeks have made over the past decade...
aside from our very large budget deficit --9.9 percent of GDP and climbing-- we also have
liabilities that are rarely acknowledged. The costs of Medicare and Medicaid are rising, as is the cost of veterans' care.
Markets assume that the vast debts of Fannie Mae and Freddie Mac are underwritten by the government, and someday the government
might be called upon to pay them. No one is lying about these things, but no one is doing very much about them either.
The good news is that the American government's bankruptcy is not
on the front pages, and it will not be for many years: Our sheer size, our entrepreneurship and our relatively open business
culture will keep us going for a long time. But the Greek crisis shows that the combination of debt and political deadlock
can be deadly.
After decades of warnings that budgetary profligacy, escalating health
care costs and an aging population would lead to a day of fiscal reckoning, economists and the nation’s foreign creditors
say that moment is approaching faster than expected, hastened by a deep recession that cost trillions of dollars in lost tax revenues and higher spending
for safety-net programs...
Many analysts say the president and Congress could send a strong signal
to global markets by agreeing this year to a package of both long-term tax increases and spending reductions, especially in
the popular entitlement programs, that would not take effect until 2012. That is the recommendation of two new studies, one
from a diverse group sponsored by the National Academy of Sciences and a separate joint project of the Peter G. Peterson Foundation, the Pew Charitable Trusts and the Committee for a Responsible Federal Budget.
As debt rises, so do interest costs; by 2014, at a projected $516 billion,
they will exceed the budget for annual appropriations for domestic programs. The government will be competing with the private
sector for credit, forcing interest rates higher and imperiling future prosperity.
Foreign investors now own more than half of the publicly held debt, and
officials for the largest creditor, China, have fretted publicly about the fiscal course of the United States. While few expect
foreigners to dump their assets, since the resulting plunge in values would hurt them as well as everyone else, the fear is
that investors will demand higher interest payments and reduce or stop future debt purchases, threatening the government’s
ability to finance its borrowing.
Lesser financial and fiscal crises have brought the two parties together
to compromise on tough choices about taxes and spending.
A
new joint report from the National Research Council and the National Academy of Public Administration offersU.S.leaders
ways to address the nation's fiscal problems and confront its rapidly growing debt -- a burden that if unchecked will inevitably
limit the nation's future wealth and risk a disruptive fiscal crisis that could lead to a severe recession. The report offers tax and spending options
that would stabilize the debt relative to the size of the economy within a decade.The
report also provides a set of simple tests to determine whether any proposed federal budget would lead to long-term fiscal
stability...The nation's rapidly growing debt now totals more than $12 trillion -- of which
$7.5 trillion is publicly held, about half of it by investors abroad.As
the publicly held debt rises, so does the amount of federal revenue that must be spent on interest payments, leaving less
money for other services and programs.The amount
the government spent on interest was more than $800 per person in 2008 and would roughly double by 2020, even if interest
rates remain at their current low levels.As the debt grows unchecked, so too does the risk
of a crisis; if a loss of investor confidence led interest rates to climb suddenly, the government may be forced into a rushed,
ill-considered response that could deprive people of needed services and hobble the economy for years, the report says.
Marking the anniversary of the $787 billion American Economic Recovery and
Investment Act, Obama aimed his message at people skeptical about the expensive relief measure...
Christina Romer,who heads theWhite House Council of Economic Advisers,said in a separate
interview that one component of the stimulus program had worked especially well. "State fiscal relief really has kept hundreds
of thousands of teachers and firefighters and first responders on the job," she said. "We have seen productivity surge," Romer
said. "And that, at one level, is a good sign out the economy. But absolutely, we've got to translateGDP growthinto employment
growth. Right now, the employmentnumbers look basically stable.
We think we're going to see positivejob growthby spring."
The administration's inspector general: Twenty community agencies that
are slated to receive $45 million are "at risk for fraud, waste and abuse." One example -- Illinois received $242 million
to weatherize 27,000 homes, but the Department of Energy found "significant internal control deficiencies," including one
instance with a "furnace gas leak that could have resulted in serious injury to the occupants."
Investigators at ProPublica, which launched a new "Stimulus Investigations"
page, found that billions in stimulus money could be lost to fraud.
"The biggest problem we're seeing is with questionable contractors who
are receiving stimulus funds despite being under criminal investigation. We've seen several examples of this where a contractor
may be banned from getting federal contracts but still is finding a way to get stimulus money."
The
problems faced by the eurozone have cast a long shadow over the markets over the last two weeks. The prospect of a potential sovereign debt default within the single currency area have concentrated
on Greece, but the prospect of similar dangers in Portugal, Ireland and even Spain have rattled investors around the world.
How real is this perceived danger of a sovereign
debt default? What would the consequences be if occurred, and what would be the implication of any EU-sponsored rescue to
avoid one? How should investors position themselves in the face of these risks?
The European Union has
asked Greece to explain reports that it engaged in derivatives trades with US investment banks that may have allowed it to
mask the size of its debt and deficit from EU authorities.Goldman Sachs made up an exchange rate that allowed the Greeks to
look as though they were only engaging in a currency swap when, in effect, they were getting more than a billion more than
they should have from the trades in credit.
The Federal Reserve is scheduled at the end of March to halt its
purchases of mortgage-backed securities, a move that could drive up the low interest rates that have helped the housing market
show new signs of life. The Fed is gambling that private investors will step in to buy the securities, helping to keep rates
from spiking. Senior officials in the Obama administration and at the Fed say they are counting in part on foreigners to keep
the housing market funded.
But financial analysts and advisers familiar with foreign government
funds, known as sovereign wealth funds, predicted that the United States will get limited relief from abroad.
It's logical
to assume that there will be some kind of steps taken after the Chinese New Year to revalue the currency higher. That is probably
at least a few percentage point revaluation of the rate higher against the dollar.
Currency pressure is undermining Chinese influence with it's neighbors
as many struggle to find an export market against a currency undervalued by as much as 40%.
El
sorpresivo aumento de la inflación a través de Latinoamérica en enero generó expectativas de mayores presiones de precios
y puso en evidencia que la era de las tasas históricamente bajas podría terminar antes de lo esperado.
Brasil,
Chile, Colombia y México informaron en las últimas semanas cifras de inflación más sólidas de lo anticipado para enero. En
particular, los analistas sugieren que muchos de los repuntes no son hechos aislados, ya que las cifras de inflación básica
también aumentaron.
The
New York Times revealed that Wall Street’s elaborate financial schemes made Greece escalating debt reach today’s
breaking point by allowing the Greek government to borrow above its means since 2001. One deal created by Goldman Sachs helped
hide billions in debts contracted by Greece from the EU budget authorities in Brussels...
If
The New York Times’ report is confirmed, firms such as Goldman Sachs, which has offices in London, will be in the cross
air of the EU for running financial practices which amount to nothing less than a global elaborate Ponzi scheme, not very
different in nature from the one which got Bernard Madoff behind bars. If the paper’s report is corroborated
by other sources, it is likely that international prosecutions will follow soon against Goldman Sachs’ top executives.
Consumers within the euro zone are not spending enough and the strong
currency is making it hard to tap demand in the rest of the world. The best hope for a home-grown stimulus is Germany, where
firms and consumers had practised thrift when the rest of the world indulged in a spending boom. Sadly Germany still relies
too heavily on exports.
Once a small membership organization
comprisingFannie MaeandFreddie Mac, the mortgage finance giants, and the occasional
troubled auto company, the Future Bailouts of America Club now includes a long list largely populated by financial institutions.
We can’t be sure who the specific members
of this club are — regulators simply say they know ’em when they see ’em. But this much is certain: They’ve
seen a lot of them lately...
“If we are extending
the safety net, extending the implied guarantee to the debts of a lot of other financial institutions, and we know those guarantees
are valuable and costly, then we ought to start budgeting for it. We can’t reduce the costs of these subsidies if we
can’t recognize them.”
Rich countries saw FDI inflows plunge by 41%, and foreign investment
into developing countries fell by more than a third...Despite FDI plunging by 57% last year, America remained the world’s
top investment destination.
The business cycle is composed
of events and processes. Some descriptions of the business cycle confuse these two things...The business cycle could be much better defined if the recovery and expansion
phases were identified as two individual steps...
They are linked
by an event, the surpassing of the prior peak. The expansion does not begin until new highs are achieved; gains from the trough
simply recover what had been produced in the previous expansion until the prior peak is equaled. The following table shows
these relationships:
The following graph shows the type of illustration that would give a better
representation of the business cycle.
Hace
una década, con sus conocimientos de sofisticados de productos financieros y operaciones con derivados, Wall Street -encabezado
por el mega banco de inversiones estadounidense Goldman Sachs- ayudó a gobiernos europeos como Grecia e Italia a aprovechar
la "contabilidad creativa" con el fin de cumplir con los criterios de convergencia y entrar en la Unión Monetaria Europa.
Ahora, -según se puede desprender de investigaciones en elNew York Times yDer Spiegel- en la primera grave crisis de la zona euro, Wall Street ofrece otros
instrumentos financieros para posponer el coste disparado de la deuda hasta otro dia. Los bancos saben de eso porque es precisamente
la clase de producto financiero de elevada innovación que provocó la primera fase de la crisis global de capitalismo financiero,
el colapso de los mercados de crédito bancario debido a la imposibilidad de medir el riesgo de productos esotéricos financieros
y derivados que nadie entendía. Año y medio después, se transforma en una crisis de deuda soberana.
With theanniversary of the stimulus upon us, politicians are likely tobombard us with numbers: 1.5 million to 2 million jobs created or saved, $272 billion out thedoor,
another $333 billion in the pipeline. The Democratic Policy Committee keeps alist of success storieswhile Sen. Tom Coburn, R-Okla., has publishedtworeportsof 100 “wasteful” projects.
One number that’s been especially hard to pin down: the cost of waste, fraud and abuse.
Already there have been scattered reports about stimulus contractors that are under investigation
or that have had serious violations in their past. Using estimates from fraud experts, the government’s stimulus watchdog,
Earl Devaney, has said as much as $55 billion could be lost.
But no one knows for sure. So to get at the big picture, we at ProPublica decided tostart trackinginspector general reports, auditor
investigations and news accounts about questionable contractors. We’ll be updating our stimulus investigations list
regularly—so if you have new information about a case or one we should add, e-mail it tosuggestions@propublica.org.
VIDEO: Nobel Prize-winning economist Joseph Stiglitz on the Obama administration's economic policies in the midst
of a "sick" economy.
UK Campaign video by Richard Curtis and Bill Nighy,
about the Robin Hood Tax, a tiny tax on bank transactions that could raise hundreds of billions for public services and to
tackle poverty and climate change at home and around the world
MICHAEL SHULMAN
BEST
BOOKS ON THE CRISIS
The Two Trillion Dollar Meltdown -
By far the most powerful book on the crisis because it was written before the real meltdowns rushed to market.
This book should be required reading for every man and woman on Capitol Hill and in the White House for current proposals
on bank reform do nothing to stop the next trillion dollar meltdown - problems in the financial system are very obvious but
are also hidden from most due to their ideological biases and optimism. The author, Charles Morris, is a successful, award
winning financial writer and he outdid himself with a brief book that, among other things, de-mystifies derivatives and their
impact on the financial system. This is the must-read book about the underlying foundation of the crisis.
Too Big To Fail -Almost too big too read, this will probably be viewed as the standard treatment of the crisis due to the clarity
of the writing and the objective stance of the writer, New York Times reporter Andrew Ross Sorkin. Mr. Sorkin does a terrific
job pacing inside the board rooms and with the major players as the crisis unfolds; parts of it almost read like a novel,
but do not let this undermine the credibility of the author or the material. This is a fine overview of who did what and when
to whom. If you have the patience, it is quite good - and if you read multiple books, read it last and you will be able to
skip over some paragraphs here and there.
House of Cards -On one hand, the book is uneven, clearly written in two parts - a contemporary, blow by blow account of the
failure of Bear Stearns and another, the history of the firm. This gives the book an uneven quality that many readers do not
like. So what? The book's mastery of the ten days leading up to J.P. Morgan's (JPM) acquisition of Bear is all you need to read - it is more compelling than many novels I have read and
depicts the behavior of senior executives beyond surreal; for example, during the last week before the fall, the Chairman
refuses to come back to New York because he is playing in a bridge tournament. The book also peeks behind J.P. Morgan's curtain
and that of the New York Fed (Tim Geithner was head of that bank at the time) to show their view of the deal - and better
than anything, shows, day to day, the impact of the derivatives market on share prices and the ability of Bear to borrow money
overnight and continue its operations. A wonderful read, if perhaps too long.
Fool's Gold -Gillian
Tett, a brilliant columnist with the Financial Times, wrote this book on the financial engineers who blew up the financial
world with their invention, the CDO or credit derivative obligation and what we now call credit default swaps. This financial
invention re-defined leverage and when applied to poorly rated RMBS - residential mortgage back securities - well, the world
went boom. Her narrative goes back to the early 1990s and walks the reader through the evolution of the product - explaining
their utility when invented and their decreasing relationship to anything understandable over time as they became more and
more complex and fed the greed of all the players. A wonderful read that, with a little help, could be a novel or a movie.
In Fed We Trust -The second best or must-read by a Wall Street Journal reporter, David Wessel, focuses on Bernanke and the Fed
and how their role unfolded during the crisis. The book has been overlooked - maybe it came out too early - but it is the
best treatment of how various agencies and individuals evolved their thinking and actions during the crisis. What I remember
most from the book is the recurring mantra presented by the author about the actions of the Fed - "whatever it takes" - and
if you accept the facts as presented, as I do, Ben Bernanke will someday be the first face on Mt. Rushmore Two.
On the Brink -Hank Paulson is what the nation now lacks - a hard nosed, savvy, center right Republican leader who views ideology
as an impediment to getting things done. And when in office, understanding the responsibility to get things done, not work
from a playbook. This is a great read - it was the last book I read and it greatly changed my view of Paulson as a man, not
as a Treasury Secretary; if you want one historical treatment of the crisis on your bookshelf, this is it (sorry Mr. Sorkin).
It simply is better at pushing day to day details of the crisis into perspective, juxtaposing them against government policy,
attitudes on Wall Street and so on. And, since I believe what Mr. Paulson wrote, I find him a very appealing public figure,
a leader unlike anyone else in the Bush cabinet, and the right man in the right place at, well, the wrong time for all of
us.
Chain of Blame -This was the most fun book - an inside look at the birth through death of the subprime mortgage industry. The
authors, Paul Muolo and Mathew Padilla, do a great job showing how the mortgage industry ran out of customers so created subprime
mortgages just as Wall Street needed new mortgages to bundle, slice, dice and re-sell. This book brings the reader closest
to how Main Street and Wall Street contributed to the crisis -- Main Street mortgage brokers prompting customers, creating
customers to feed Wall Street's need for products and, alas, commission. An interesting twist in the book is the very positive
treatment of industry poster boy Angelo Mozilo of Countrywide Mortgage (now Bank of America (BAC)). He hated the thought of lending to subprime customers because of the lack of historical data to properly
gauge risk - smart man - but hated giving up market share even worse. The rest is history.
A Colossal Failure of Common Sense -Authors Lawrence G. McDonald and Patrick Robinson do to a bang up job describing the almost surreal behavior
of Lehman Brothers executives as the firm melted down. McDonald is a former Lehman vice president and he focuses on a small
group of executives who pushed Lehman further and further, with leverage, into higher and higher risk positions to generate
profits. The book has prompted some nasty responses - check out some customer reviews on Amazon.com - for it is forceful and
pulls no punches on assigning blame, most it going to Dick Fuld, the CEO of Lehman who comes off poorly in virtually everything
written about the crisis. The value of the book is its ability to portray the gambling mentality that dominated Lehman - a
mentality that led to too much leverage everywhere and is at the very center of the crisis. A very good read, but the book
does not approach the crisis as a whole and is a secondary read if you are trying to get a handle on other things going on
during the crisis apart from Lehman.
It's bad enough that Greece's
debt problems have rattled global financial markets. In the world's largest economic and military power, there's a far more
serious debt dilemma.
For the U.S., the crushing
weight of its debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial
scenario -- a full recovery and a return to prerecession employment levels..
The U.S. debt crisis also
raises the question of how long the world's leading power can remain its largest borrower.
Moody's Investors Service
recently warned that Washington's credit rating could be in jeopardy if the nation's finances didn't improve.
Despite election-year political
pressure from voters for lawmakers to restrain spending, some recent votes suggests that Congress, left to its own devices,
probably isn't up to the task of trimming deficits.
Claims that the euro could be headed for total collapse are particularly
striking when they come from one of the oldest and largest banks in France - a core founder-member...
In a note to investors, SocGen strategist Albert Edwards said: 'My own view is that there is
little "help" that can be offered by the other eurozone nations other than temporary, confidence-giving "sticking plasters"
before the ultimate denouement: the break-up of the eurozone.'
He added: 'Any "help" given to Greece merely delays the inevitable break-up
of the eurozone.'
The alarming claim came a day after European Union leaders promised 'determined
and co-ordinated' action to shore up Greece's tattered public finances, but disappointed traders by failing to provide specifics...
The French bank's warning was echoed by Mats Persson, Director of the Open
Europe think-tank, which campaigns for reforms in Brussels.
He said: 'The eurozone is facing a fully-fledged crisis. The Greece episode
has made it painfully clear how flawed the euro project was from the very beginning.
'Even if Greece receives a one-off bailout it would not solve the
real problem, which is the huge differences in competitiveness between the eurozone's richest and poorest members. 'If these differences are to be evened out, the EU would need a single budget andcommon taxes so it can redistribute resources...
Harvard University Professor Martin Feldstein, a long-standing sceptic on
the euro, yesterday said the single currency 'isn't working' because member governments have no incentive to keep their public
debts under control. 'There's too much incentive for countries to run up big deficits as there's no feedback until a crisis,'
he said.
Germany drags
EU back towards recession - The eurozone faces
the danger of a 'doubledip' recession after Germany's economy retreated into stagnation.
"If a big non-bank institution gets in trouble and
threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it
or merge it -- not save it," Volcker said on CNN.
"It's called euthanasia, not a rescue."
As Congress debates financial reform in the wake
of the worst financial crisis since the 1930s, Volcker has argued for fencing off investment firms primarily engaged in market
speculation from commercial, deposit-taking banks.
With Wall Street’s help, the nation engaged in a decade-long
effort to skirt European debt limits. One deal created byGoldman Sachshelped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching
for ways to help Greece forestall the day of reckoning.
The U.S. economy is now expected to grow 3% this year and next
-- more than expected a month ago, according to the median estimate of 62 economists polled this month by Bloomberg News. Equally important, those same
economists now expect the U.S. unemployment rate to fall to 9.5% by the end of 2010. The significance of this news? If the
economists surveyed by Bloomberg are accurate about a 3% GDP growth, that would lend credence to Obama administration Council of Economic Advisors Chair Christina Romer's
forecast that the U.S. economy will average monthly job growth of 116,000
jobs per month, or about 1.4 million jobs created in 2010.
Further, if the 1.4 million job forecast
pans out, this will be, arguably, the best economic news Americans have heard in a long time...
Annual investment in public and quasi-public infrastructure systems of 4 to 6 per cent of GDP ($500 - $700 Billion)
will probably be necessary for the foreseeable future but in an era of trillion dollar deficits, no funding source is projected
to have the capacity to generate funds sufficient for infrastructure investment at these levels. At the same time, there is
a clear and immediate need for public and institutional pension funds to invest in instruments that can generate stable, long-term
and low-risk returns on equity.
Theideais that a US
sovereign wealth* fund would dip into public and private pension savings and invest the money in much-needed infrastructure.
If it worked, the economy would benefit, infrastructure would benefit, pensions would receive a healthy return and savings
would be made for the next generation.
“The
core idea of the proposal is to utilize a combination of public and institutional pension funds, individual retirement accounts,
and other private investment capital, together with Social Security Trust Funds to capitalize a National Infrastructure Bank
(NIB) that would provide senior debt to fund projects and programs supported by user fees or other reliable and sustainable
revenue streams.”
Richard G. Little of the University
of Southern California’s School of Policy Planning and Development has an interestingnew paper outentitled,
“Towards a New Federal Role in Infrastructure Investment: Using U.S. Sovereign Wealth to Rebuild America.” The paper’s premise is that the US has to address
years of chronic under-investment in infrastructure. In order to do this, Little want’s to tap into the public
pension and social security savings in order to match long-term investment capital with long-term investments in infrastructure.
So long as this new entity remains commercially oriented, it’s a reasonable
idea; public pension funds have indeed been moving into infrastructure at an increasing rate, driven in large part by the
desire to find assets that better match their long-term liabilities.
Our government has taken extraordinary
steps to head off a feared depression and to stimulate a deflating economy. All well and good. But who has seriously weighed
the unintended consequences of such actions? Where are the long-term forecasts that reflect the consequences of our short-term
remedies? You won't hear answers from the politicians and bureaucrats mainly concerned with staying in office.
A research report by Blanchard and associates at the IMF said policymakers became too complacent during the period
of expansion known as "the Great Moderation" about issues such as inflation and debt. He said that while the financial sector was the source of the recent crisis, "large adverse shocks" could come from
elsewhere in the future such as a pandemic or major terrorist attack. Against
this backdrop, he said aiming for a higher inflation rate could provide more room for policymakers to grapple with crises.
"Maybe policymakers should therefore aim for a higher target inflation
rate in normal times, in order to increase the room for monetary policy to react to such shocks," Blanchard said in a report
"Rethinking Ma
.
In this special report, students from the Joseph H. Lauder Institute of Management & International Studies analyze some
of the most exciting economic, business and technology developments helping to shape today's world.
Fears are growing that the United States will once again resort to printing money and ginning up inflation to resolve its
debt problem.
.
