Anglonautes > English > Vocabulary

Les anglonautes

Schrank

The Independent

16 November 2008
http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=13

L to R: French President Nicolas Sarkozy,
US President George W. Bush, British Prime Minister Gordon Brown

Schrank

The Independent

19th October 2008
http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=41

British Prime Minister Gordon Brown

capital

capitalism
http://www.guardian.co.uk/capitalismincrisis
http://www.timesonline.co.uk/tol/comment/columnists/daniel_finkelstein/article5391267.ece

'ethical capitalism' 2009
http://www.independent.co.uk/news/uk/politics/cameron-urges-ethical-capitalism-after-crunch-1222122.html

capitalisation

primary capital

venture capital
http://topics.nytimes.com/topics/reference/timestopics/subjects/v/venture_capital/index.html
http://www.nytimes.com/2005/05/07/technology/07vonage.html

venture capitalism

venture capitalist
http://www.nytimes.com/2009/07/07/technology/start-ups/07venture.html
http://www.nytimes.com/2005/05/22/business/yourmoney/22venture.html

capitalist system

business
http://business.guardian.co.uk/0,,519528,00.html
http://www.independent.co.uk/news/business/

Cartoonist Kipper Williams gives his take on the day's business news 2008-2006
http://www.guardian.co.uk/business/series/kipperwilliams
http://business.guardian.co.uk/kipper/0,,1844441,00.html

big business
http://society.guardian.co.uk/children/story/0,,2108439,00.html

philanthropy
http://www.usatoday.com/news/nation/2007-02-26-big-donations_x.htm

charity
http://www.usatoday.com/money/economy/services/2008-10-26-fundraising-crisis-donations-charities_N.htm

sponsor
http://society.guardian.co.uk/children/story/0,,2108439,00.html

NYT

7.6.2008

economics
http://topics.nytimes.com/top/reference/timestopics/subjects/d/deflation_economics/index.html
http://www.guardian.co.uk/business/2008/oct/20/governmentborrowing-economics
http://property.timesonline.co.uk/tol/life_and_style/property/article3165056.ece
http://politics.guardian.co.uk/economics/0,,604659,00.html

behavioral economics
http://www.nytimes.com/2010/07/16/business/economy/16fed.html
http://www.nytimes.com/2010/07/15/opinion/15loewenstein.html

John Maynard Keynes 1883-1946
http://www.independent.co.uk/news/business/analysis-and-features/
john-maynard-keynes-can-the-great-economist-save-the-world-994416.html
http://www.guardian.co.uk/politics/2008/oct/20/economy-recession-treasury-energy-housing
http://www.time.com/time/time100/scientist/profile/keynes.html

Keynesian economics / policy
http://www.guardian.co.uk/commentisfree/2008/oct/27/recession-creditcrunch

Keynesians
http://www.guardian.co.uk/business/2008/dec/14/keynesian-economic-recovery-brown-germany

Bretton Woods 1944
http://www.guardian.co.uk/politics/2008/nov/14/bretton-woods-1944-keynes-imf

gold standard 1946-1971
http://news.bbc.co.uk/2/hi/business/337802.stm
http://www.house.gov/paul/congrec/congrec2006/cr021506.htm
http://www.youtube.com/watch?v=iRzr1QU6K1o

Bubblenomics USA
http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html

Barack Obama > Obamanomics USA
http://opinionator.blogs.nytimes.com/2009/02/27/has-obamanomics-vanquished-reaganomics/

Ronald Reagan > Reaganomics USA
http://www.guardian.co.uk/business/2004/jun/08/usnews.economicdispatch
http://www.guardian.co.uk/business/2003/apr/20/globalrecession.globalisation
http://www.time.com/time/magazine/article/0,9171,924952,00.html

'freeconomics'
http://www.independent.co.uk/life-style/gadgets-and-tech/features/
how-can-youtube-survive-1734267.html

economic policy USA
http://www.nytimes.com/2009/06/15/opinion/15krugman.html

downbeat economic reports

economic growth GDP
http://www.guardian.co.uk/business/interactive/2008/oct/22/creditcrunch-recession
http://www.guardian.co.uk/business/economicgrowth

slow growth
http://www.guardian.co.uk/business/2010/jul/12/economic-growth-recession-uk

UK GDP since 1948
Gross Domestic Product is the output of Britain.
Find out how this recession compares to the others
http://www.guardian.co.uk/news/datablog/2009/nov/25/gdp-uk-1948-growth-economy

Gross Domestic Product GDP USA
http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/gross_domestic_product/index.html

economic data USA
http://www.nytimes.com/2008/06/07/business/07oil.html

sagging economy USA
http://www.nytimes.com/2008/12/07/business/07leon.html

economic woes

economic pain USA
http://www.nytimes.com/2008/12/08/us/politics/08obama.html

hard economic times USA
http://www.nytimes.com/2008/11/21/washington/21lameduck.html

economy forecast
http://www.guardian.co.uk/business/2008/apr/09/creditcrunch.economy1

dire forecast USA
http://www.nytimes.com/2008/12/10/opinion/10turow.html

forecaster USA
http://www.nytimes.com/2009/01/03/business/economy/03econ.html

economy 2008
http://www.telegraph.co.uk/news/uknews/3934412/
Economy-must-be-driven-by-moral-obligation-says-Archbishop-of-Westminster.html
http://business.timesonline.co.uk/tol/business/economics/article4363962.ece

economy USA
http://www.nytimes.com/reuters/business/business-us-usa-economy.html
http://www.nytimes.com/2008/06/07/business/07econ.html
http://www.reuters.com/article/topNews/idUSN2060561020080320
http://www.usatoday.com/news/washington/2008-03-17-bush-economy_N.htm
http://www.usatoday.com/money/topstories/2008-01-12-1690152503_x.htm

global economy 2008
http://www.reuters.com/article/GCA-Economy/idUSTRE4A966O20081110

real economy
http://www.reuters.com/article/GCA-CreditCrisis/idUSTRE51C09P20090213

faltering economy
http://www.nytimes.com/2010/07/04/opinion/04econintro.html

New York Times > Topics > United States Economy
http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/index.html

economy > Cagle cartoons USA 2008
http://www.cagle.com/news/Economy08/main.asp

the economy's strength

buoyant economy

be considered a bellwether for the American economy
http://www.nytimes.com/2010/04/17/business/17bank.html

have a significant effect on the economy

fundamentals
http://www.reuters.com/article/politicsNews/idUSWBT00802120071205

"the great moderation"
http://www.nytimes.com/2008/01/23/business/23leonhardt.html
http://www.nytimes.com/2008/01/23/business/23leonside.html
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm
http://ksghome.harvard.edu/~JStock/pdf/stock&watson_macroannual.pdf

stimulus
http://www.nytimes.com/2010/08/29/opinion/29tyson.html

Economic Stimulus (Jobs Bills)
http://topics.nytimes.com/top/reference/timestopics/subjects/u/united_states_economy/economic_stimulus/index.html

economic stimulus package
http://www.usatoday.com/money/economy/2008-01-22-paulson_N.htm

economic indicator
http://www.nytimes.com/2010/07/04/opinion/04econintro.html
http://www.nytimes.com/2009/09/05/opinion/05sat1.html

economic fears USA 2008
http://www.reuters.com/article/politicsNews/idUSN1041396220080410

economic growth

economic outlook
http://www.nytimes.com/2008/11/26/business/economy/26housing.html
http://www.reuters.com/article/ousiv/idUSTRE49J5EE20081020
http://www.nytimes.com/2008/10/16/business/economy/16data.html
http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

bleak

gloomy outlook
http://business.timesonline.co.uk/tol/business/economics/article5196112.ece

dire
http://www.nytimes.com/2008/11/26/business/economy/26housing.html

shrinking economy

stalled economies
http://business.timesonline.co.uk/tol/business/economics/article5349277.ece

ailing economy
http://www.nytimes.com/2008/12/17/business/economy/17econ.html

failing economy
http://www.nytimes.com/2009/01/25/business/25safe.html

thrift economy
http://www.nytimes.com/2008/10/25/us/25garage.html

informal economy / grey economy / underground economy / parallel economy
http://www.usatoday.com/tech/webguide/internetlife/2009-02-25-barter_N.htm
http://www.economist.com/finance/displayStory.cfm?story_id=2766310

black economy
http://www.timesonline.co.uk/tol/news/uk/crime/article1811214.ece

money laundering
http://www.guardian.co.uk/crime/article/0,,2030804,00.html
http://www.guardian.co.uk/crime/article/0,,2030804,00.html
http://www.guardian.co.uk/crime/article/0,,1944571,00.html

sustained economic weakness

economist
http://www.nytimes.com/2010/08/06/business/economy/06deflation.html
http://www.guardian.co.uk/business/2008/oct/15/unemploymentdata-workandcareers

economist > Paul A. Samuelson
http://krugman.blogs.nytimes.com/2009/12/13/paul-samuelson-rip/
http://www.nytimes.com/2009/12/14/business/economy/14samuelson.html

Stephen Stanley, chief economist with RBS Greenwich Capital

Simon Hayley, senior international economist for Capital Economics

monetarist guru > Milton Friedman 1912-2006
http://business.guardian.co.uk/story/0,,1950327,00.html
http://business.guardian.co.uk/story/0,,1950303,00.html
http://business.guardian.co.uk/story/0,,1949904,00.html

business cycle
http://www.nytimes.com/interactive/2008/10/18/business/20081019-metrics-graphic.html

bubble 2008
http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html

crisis
http://www.usatoday.com/money/economy/2008-11-03-economy-depression-recession_N.htm
http://www.nytimes.com/2008/10/25/opinion/25herbert.html

crises (plur)
http://www.nytimes.com/2009/10/05/opinion/05adouthat.html

handling of the financial crisis
http://www.guardian.co.uk/politics/2008/oct/20/polls-economy

causes of the financial crisis 2008
http://topics.nytimes.com/top/news/business/series/the_reckoning/index.html

Hard times: How the financial crisis is affecting public services 2008
http://www.guardian.co.uk/society/series/hard-times

Pat Bagley

Salt Lake Tribune, Utah Cagle

1.11.2008

manufacturing
http://www.guardian.co.uk/business/interactive/2008/oct/07/interestrates.creditcrunch

service sector USA
http://www.nytimes.com/aponline/2010/02/03/us/AP-US-Economy.html

service sector
http://www.guardian.co.uk/business/interactive/2008/oct/07/interestrates.creditcrunch

housing market
http://www.guardian.co.uk/business/interactive/2008/oct/07/interestrates.creditcrunch

American dream USA
http://www.nytimes.com/pages/national/class/index.html

the state of the economy

President Bush's handling of the economy USA

economic data

global financial system

anti-globalisation group

Financial Times FT
http://news.ft.com/home/europe

trade
http://www.nytimes.com/2008/12/10/opinion/10turow.html

trade

trademark
http://media.guardian.co.uk/site/story/0,,2006471,00.html

fair trade

global trading system

trade gap
http://www.economist.com/agenda/displayStory.cfm?story_id=2784281

Dave Brown

The Independent

13 November 2008
http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=16

British Prime Minister Gordon Brown

Jerry Holbert

Boston, MA The Boston Herald Cagle

5 February 2009

L to R: Vice-President Joe Biden, President Barack Obama.

public finances 2008
http://www.guardian.co.uk/business/2008/oct/20/governmentborrowing-economics
http://image.guardian.co.uk/sys-files/Guardian/documents/2008/09/12/13.09.08.Public.spending.pdf

public spending 2008-2009
http://image.guardian.co.uk/sys-files/Guardian/documents/2008/09/12/13.09.08.Public.spending.pdf

public spending cuts

overhead

national debt 2008
http://www.guardian.co.uk/politics/2008/oct/20/gordonbrown-economy

public borrowing 2008
http://business.timesonline.co.uk/tol/business/economics/article4976992.ece

government borrowing
http://www.guardian.co.uk/business/government-borrowing

government borrowing 2010
http://www.guardian.co.uk/business/2010/apr/22/government-borrowing-now-highest-since-1940s

government borrowing 2008
http://business.timesonline.co.uk/tol/business/economics/article5021543.ece
http://www.guardian.co.uk/politics/2008/oct/27/economy-gordonbrown

Government borrowing, receipts and expenditure November 2008
http://www.guardian.co.uk/business/interactive/2008/nov/24/pre-budget-report1

British public debt November 2008
http://www.independent.co.uk/opinion/commentators/hamish-mcrae/
hamish-mcrae-a-monumental-debt-that-takes-us-back-to-the-70s-1033792.html

budget deficit
http://www.guardian.co.uk/business/budget-deficit

deficit
http://www.guardian.co.uk/world/2010/jun/28/g20-commits-to-halving-budgets
http://www.nytimes.com/aponline/2010/06/28/world/AP-World-Summit-Analysis.html
http://www.telegraph.co.uk/finance/financetopics/budget/7846749/
Budget-2010-VAT-rise-and-benefits-cuts-to-tackle-Britains-deficit.html
http://www.guardian.co.uk/politics/2009/dec/13/budget-report-labour-tories-pain
http://www.guardian.co.uk/business/2008/oct/20/governmentborrowing-economics

halve deficit
http://www.guardian.co.uk/world/2010/jun/28/g20-commits-to-halving-budgets

balance books
http://www.guardian.co.uk/uk/2010/jun/22/budget-2010-vat-rise-osborne

VAT rise
http://www.guardian.co.uk/politics/2010/jun/27/liberal-democrat-mps-vat-poor
http://www.guardian.co.uk/commentisfree/cartoon/2010/jun/27/martin-rowson-coalition-budget-cuts
http://www.guardian.co.uk/uk/2010/jun/22/budget-2010-vat-rise-osborne

VAT hike
http://www.guardian.co.uk/commentisfree/2010/jul/13/george-osborne-hold-hike-double-dip

Trillion-Dollar Deficits USA
http://www.nytimes.com/2009/06/10/business/economy/10leonhardt.html

Congressional Budget Office USA
http://topics.nytimes.com/topics/reference/timestopics/organizations/c/congressional_budget_office/index.html

balloon to £4.6bn

owe
http://www.guardian.co.uk/business/2009/jan/25/uk-recession

Brown's guarded giveaway:
• £200 council tax rebate for pensioners
• Moves on stamp duty, inheritance tax
• Vote now pay later jibe from Tories
• £200 council tax rebate for pensioners
• Moves on stamp duty, inheritance tax

The Guardian p. 1

17.3.2005
http://money.guardian.co.uk/Budget2005/story/0,15838,1439840,00.html

Dave Brown

The Independent

Monday 24 November 2008
http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=2

Chancellor Alistair Darling

The Guardian p. 36

4 December 2008
http://digital.guardian.co.uk/guardian/2008/12/04/pdfs/gdn_081204_ber_36_21369296.pdf

Chancellor of the Exchequer
http://www.hm-treasury.gov.uk/chancellors_of_the_exchequer.htm

http://www.guardian.co.uk/business/2008/nov/24/pre-budget-report-alistairdarling2
http://business.timesonline.co.uk/tol/business/economics/budget_2007/article1548726.ece

Chancellor's speeches: index
http://www.hm-treasury.gov.uk/5516.htm

11 Downing Street
http://www.hm-treasury.gov.uk/downing_street_11_about_us.htm

the Treasury / HM Treasury
The Treasury is the United Kingdom's economics and finance ministry.
http://www.hm-treasury.gov.uk/

http://business.timesonline.co.uk/tol/business/economics/article4976992.ece
http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.banking1
http://www.hm-treasury.gov.uk/about/about_downingst/about_downingst_intro.cfm
http://www.guardian.co.uk/business/2008/feb/17/northernrock.nationalisation

budget

budget deficit
http://www.guardian.co.uk/business/2008/dec/18/budget-deficit-record

Eleven years of budget from Gordon Brown
http://politics.guardian.co.uk/flash/0,,2037555,00.html
http://www.guardian.co.uk/slideshow/page/0,,2039444,00.html

pre-budget report PBR
http://www.guardian.co.uk/business/pre-budget-report
http://www.ft.com/indepth/prebudget2007
http://business.guardian.co.uk/prebudgetreport2007/story/0,,2187051,00.html
http://www.ft.com/indepth/prebudget2006

Budget glossary 2008
http://www.ft.com/cms/s/47a1478c-eec6-11dc-97ec-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html

Budget 2010
http://www.guardian.co.uk/uk/2010/mar/24/budget-2010-darling-shortsighted-cuts
http://www.guardian.co.uk/uk/2010/mar/24/budget-2010-key-points
http://www.guardian.co.uk/business/2010/mar/24/budget-2010-tax-havens-belize
http://www.guardian.co.uk/uk/2010/mar/24/budget-green-investment-bank
http://www.guardian.co.uk/uk/2010/mar/24/budget-2010-bank-bonus-tax
http://www.guardian.co.uk/uk/interactive/2010/mar/24/budget-2010-state-britain-finances

Budget 2010: The state of Britain's finances
This graphic shows Britain's income, expenditure and debt, as laid out in today's budget.
http://www.guardian.co.uk/uk/interactive/2010/mar/24/budget-2010-state-britain-finances

A decade of Budgets: key points
Review the major changes made in Budgets since 1998 in the following areas:
Business Direct Taxation Indirect Taxation Transport Elderly
http://www.ft.com/cms/s/0/39a8c022-e47d-11dc-a495-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html

Budget 2009
http://www.ft.com/indepth/budget-2009
http://www.ft.com/cms/s/0/9b91c700-2f60-11de-a8f6-00144feabdc0.html?nclick_check=1
http://business.timesonline.co.uk/tol/business/economics/article6155378.ece
http://www.guardian.co.uk/uk/2009/apr/22/budget-2009-alistair-darling-speech
http://www.guardian.co.uk/uk/2009/apr/22/budget-2009-darling-glance
http://www.guardian.co.uk/uk/2009/apr/22/budget-2009-tax-rich-alistair-darling

Budget 2008
http://business.timesonline.co.uk/tol/business/economics/budget_2008/
http://www.guardian.co.uk/politics/budget
http://www.guardian.co.uk/politics/audio/2008/mar/12/guardian.daily.budget.special
http://uk.reuters.com/news/globalcoverage/budget2008
http://uk.reuters.com/article/domesticNews/idUKL1244846920080312
http://uk.reuters.com/article/topNews/idUKMOL25001620080312
http://www.ft.com/cms/s/abb2fc44-ee9d-11dc-97ec-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html
http://www.ft.com/cms/s/3e9d54d4-f02c-11dc-ba7c-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html
http://www.ft.com/cms/s/87f35ee4-f022-11dc-ba7c-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html
http://www.ft.com/cms/s/0/c1539c26-f02c-11dc-ba7c-0000779fd2ac,dwp_
uuid=14a3abee-c8e8-11dc-b14b-0000779fd2ac.html?nclick_check=1
http://media.ft.com/cms/b937c8ec-f044-11dc-ba7c-0000779fd2ac.pdf

Budget 2007
http://www.ft.com/indepth/budget2007
http://business.guardian.co.uk/budget2007/0,,2028552,00.html
http://business.guardian.co.uk/budget2007/story/0,,2039555,00.html
http://business.timesonline.co.uk/tol/business/economics/budget_2007/article1548484.ece
http://business.guardian.co.uk/budget2007/story/0,,2039269,00.html
http://business.guardian.co.uk/budget2007/story/0,,2039286,00.html
http://education.guardian.co.uk/policy/story/0,,2039297,00.html
http://money.guardian.co.uk/budget2007/story/0,,2039277,00.html
http://politics.guardian.co.uk/economics/story/0,,2039280,00.html

Budget 2006
http://www.guardian.co.uk/budget2006
http://www.ft.com/indepth/budget2006

Budget 2005
http://www.guardian.co.uk/budget2005
http://www.ft.com/indepth/budget2005

Budget 2004
http://money.guardian.co.uk/thebudget2004/0,,,00.html
http://www.ft.com/indepth/ukbudget2004

Budget 2003
http://www.guardian.co.uk/budget2003

Budget 2002
http://www.guardian.co.uk/budget2002

Budget 2001
http://www.guardian.co.uk/budget2001

Budget 2000
http://www.guardian.co.uk/budget2000

Budget 1999
http://www.guardian.co.uk/budget99

public borrowing forecasts

prediction

government borrowing

further increases in borrowing costs

Obama’s 2011 Budget Proposal: How It’s Spent
http://www.nytimes.com/interactive/2010/02/01/us/budget.html

2008 federal budget blueprints USA
http://www.usatoday.com/news/washington/2007-03-29-budget-questions_N.htm

Tom Schierlitz
In Gold We Trust: A gold ingot weighing 99.362 troy ounces (6.8 pounds) --
to "gold bugs," paper money is just paper without it.
Believing (and Believing and Believing) in Bullion
By STEPHEN METCALF NYT

Published: June 5, 2005
http://www.nytimes.com/2005/06/05/magazine/05GOLD.html?hp

Kipper Williams
http://www.guardian.co.uk/business/series/kipperwilliams

The Guardian

Thursday November 13 2008 08.37 GMT
http://www.guardian.co.uk/business/cartoon/2008/nov/13/
inflation-bankofenglandgovernor

supply

demand

outstrip

deflation
http://topics.nytimes.com/top/reference/timestopics/subjects/d/deflation_economics/index.html

http://www.nytimes.com/2010/08/06/business/economy/06deflation.html
http://www.nytimes.com/2010/07/15/business/economy/15econ.html
http://www.nytimes.com/2010/07/12/opinion/12krugman.html
http://business.timesonline.co.uk/tol/business/economics/article6317766.ece
http://www.guardian.co.uk/business/2009/feb/18/inflation-global-recession
http://www.guardian.co.uk/business/2008/nov/13/inflation-deflation-interest-rates-recession
http://www.guardian.co.uk/business/cartoon/2008/nov/13/inflation-bankofenglandgovernor
http://www.nytimes.com/2008/11/20/business/economy/20econ.html
http://www.guardian.co.uk/business/2008/nov/12/inflation-interest-rates-recession
http://www.nytimes.com/2008/11/01/business/economy/01deflation.html
http://online.wsj.com/article/SB122429102715046695.html
http://www.nytimes.com/1982/04/18/business/inflation-hurts-but-deflation-could-be-worse.html

inflation
http://www.guardian.co.uk/business/inflation

inflation rate
http://www.guardian.co.uk/business/2009/jun/16/inflation-remains-above-target
http://www.usatoday.com/money/economy/inflation/2006-10-31-inflation-usat_x.htm

UK inflation since 1948
http://www.guardian.co.uk/news/datablog/2009/mar/09/inflation-economics

The retail prices index (RPI), the broadest measure of inflation
http://www.guardian.co.uk/money/2009/mar/24/inflation-deflation-cpi-index
http://www.guardian.co.uk/business/interactive/2009/mar/24/rpi-inflation

The government's preferred measure of inflation, the consumer prices index CPI
http://www.guardian.co.uk/business/2009/mar/24/rpi-inflation-zero

Q&A: Inflation and deflation
http://www.guardian.co.uk/money/2009/mar/24/inflation-deflation-cpi-index

wholesale inflation USA
http://www.nytimes.com/aponline/2009/06/16/business/AP-Economy.html

drop
http://www.guardian.co.uk/business/2008/nov/18/inflation-cpi-falls

pace of inflation

the specter of inflation

tame inflation data

a spike in inflation

surge in inflation
http://www.guardian.co.uk/business/2010/jan/19/inflation-surges-in-december

soaring inflation
http://www.guardian.co.uk/news/datablog/2009/mar/09/inflation-economics

stagflation > Stagflation is a period when economic growth is stagnant but when prices rise.
Recession is at least two quarters of negative economic growth.
http://www.independent.co.uk/news/business/news/the-spectre-of-stagflation-827745.html
http://www.usatoday.com/money/economy/2008-02-28-bernanke-senate_N.htm
http://www.nytimes.com/2008/02/21/business/21stagflation.html
http://www.reuters.com/article/newsOne/idUSN1450696720080215
http://www.economist.com/opinion/displayStory.cfm?story_id=3941024

Commerce Department USA
http://www.commerce.gov/

Chicago Board of Trade USA
http://www.cbot.com/

Chicago Mercantile Exchange CME USA
http://www.cme.com/

counterfeit

counterfeiter

counterfeit money
http://www.usatoday.com/money/2007-02-27-counterfeit-usat_x.htm

counterfeit goods / fake goods

fake branded product

black market in counterfeit goods
http://film.guardian.co.uk/news/story/0,12589,1125753,00.html

smuggle into

pirated media

fake CD

piracy
http://www.fact-uk.org.uk/

commercial piracy

anti-piracy trade body

Federation Against Copyright Theft Fact
http://www.fact-uk.org.uk/

buy
http://business.guardian.co.uk/story/0,,1931210,00.html
http://www.usatoday.com/money/industries/retail/2006-10-16-walmart-china_x.htm

buyer

buyout
http://www.usatoday.com/money/autos/2006-11-29-ford-buyouts_x.htm

sell

break even

book

public expenditure

provide

provider

competition

competitive
http://www.usatoday.com/money/autos/2006-11-10-ford-ceo-interview_x.htm

anti-competitive behaviour
http://business.guardian.co.uk/story/0,,1783435,00.html

compete

hot up

global economy

lacklustre global economy

slowdown

suffer a sharp slowdown in activity and employment

federal deficit USA 2006
http://www.usatoday.com/news/washington/2006-10-11-budget-deficit_x.htm
http://www.usatoday.com/news/washington/2006-08-02-deficit-usat_x.htm

market

markets
http://www.usatoday.com/money/economy/2007-11-08-bernanke-economy_N.htm

stock
http://www.usatoday.com/tech/techinvestor/stocknews/2007-10-08-google-stock_N.htm

stock market

the course of the stock market

car market

art market
http://arts.guardian.co.uk/art/news/story/0,,2109454,00.html

commodity markets
http://business.timesonline.co.uk/tol/business/economics/article3174754.ece

black market

market valuation
http://media.guardian.co.uk/site/story/0,,1927649,00.html

value
http://media.guardian.co.uk/site/story/0,,1927649,00.html

market rally

market research
http://books.guardian.co.uk/review/story/0,12084,1069731,00.html

rapidly expanding market

increase market share

lose market share

weak market conditions

flexible labour markets
http://www.guardian.co.uk/business/story/0,3604,1481879,00.html

indicator

emerging-market indicator

economic and financial indicators

remain in doldrums
http://business.guardian.co.uk/story/0,,1745867,00.html

bear

bull
http://markets.usatoday.com/custom/usatoday-com/html-story.asp?markets=
Domestic&guid=%7B0AE18C7A-B8F7-42BB-A121-953EC219D69E%7D

bull run
http://business.guardian.co.uk/story/0,,1733634,00.html

buoyant

buoyed by

plunge
http://www.usatoday.com/money/markets/us/2006-06-05-stocks_x.htm
http://business.guardian.co.uk/story/0,,1780842,00.html

plunge into
http://www.guardian.co.uk/business/story/0,3604,1463897,00.html

Robust consumer spending on cars, furniture and food helped the U.S. economy
advance faster than first thought in the third quarter,
a government report showed, while underlying inflation was the tamest in decades.
The Commerce Department said on November 30, 2004 that gross domestic product,
the measure of all goods and services produced within U.S. borders,
grew at a 3.9 percent annual pace in the three months from July through September,
up from 3.7 percent estimated a month ago. Photo by Reuters Graphic.

Consumers Fuel Faster Economic Growth
R

Tue Nov 30, 2004 04:27 PM ET
http://www.reuters.com/newsArticle.jhtml;jsessionid=
SYSME0UT5CG4KCRBAELCFEY?type=businessNews&storyID=6958311

the City
http://www.guardian.co.uk/business/2009/jun/24/financial-crisis-city-banking-money
http://money.guardian.co.uk/news_/story/0,1456,1334281,00.html

11 Downing Street
http://www.hm-treasury.gov.uk/about/about_downingst/about_downingst_intro.cfm

U.S. gross domestic product GDP USA

the widest measure of all goods and services produced in the United States /
the measure of all goods and services produced within U.S. borders USA

http://www.guardian.co.uk/business/2009/feb/27/us-economy-gdp-recession
http://www.nytimes.com/2009/02/28/business/economy/28econ.html
http://www.nytimes.com/reuters/business/reuters-gdp.html
http://bea.gov/bea/newsrelarchive/2006/gdp206a.pdf
http://bea.gov/bea/newsrel/gdpnewsrelease.htm

nondurable goods - items like food and paper products

durable goods / durables - goods lasting three years or more

http://www.nytimes.com/reuters/2009/03/25/business/business-us-usa-economy-durables.html

U.S. Department of Commerce > Bureau of Economic Analysis USA

http://bea.gov/bea/newsrelarchive/2006/gdp206a.pdf

U.S. Securities and Exchange Commission USA

http://www.sec.gov/index.htm

The Federal Reserve / Fed USA
http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_reserve_system/index.html

Treasury Department USA

The Treasury Department traces its history back to the tumult of the opening days of the Revolutionary War,
when a cash-strapped Continental Congress decided in 1775 to issue paper money
backed by nothing more than the promise of eventual repayment in coin,
and enlisted residents of Philadelphia to number and count the bills.
The department was formally created by Congress in 1789.
The first Secretary of the Treasury was Alexander Hamilton,
who shortly after being appointed took the bold move of proposing that the federal government
assume the wartime debt of the states and pay them off in full.

In the more than 200 years since,
Hamilton's heirs have at times been among the most powerful figures in government, for better or worse.
During the Civil War, Salmon P. Chase created the "greenback" paper currency that fueled the North's victory;
Andrew W. Mellon helped bring on the Great Depression by his advice to President Hebert Hoover
to cut spending and raise taxes during an economic downturn;
after World War II, Henry Morgenthau, Jr., helped create a new system of international finance
by leading the conference that created the International Monetary Fund and the World Bank.

http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html

http://www.ustreas.gov/
http://topics.nytimes.com/top/reference/timestopics/organizations/t/treasury_department/index.html
http://www.nytimes.com/aponline/business/AP-Meltdown-Treasury.html
http://www.nytimes.com/2008/09/29/business/29bill.html
http://www.treasury.gov/press/releases/hp1149.htm

Treasury Secretary USA

http://www.nytimes.com/2008/11/26/us/politics/26paulson.html
http://video.nytimes.com/video/2008/11/25/business/economy/
1194833897260/paulson-answers-questions-part-1.html
http://video.nytimes.com/video/2008/11/25/business/businessspecial6/
1194833900695/paulson-on-new-moves-in-rescue-plan.html
http://www.nytimes.com/2008/04/01/business/01regulate.html

House of Representatives Financial Services Committee USA

http://financialservices.house.gov/

Federal Reserve / The Fed USA

http://www.federalreserve.gov/

http://www.nytimes.com/2010/08/28/business/economy/28fed.html
http://www.nytimes.com/2010/02/25/business/economy/25fed.html
http://www.nytimes.com/2009/06/24/business/economy/24fed.html
http://www.nytimes.com/2009/03/11/business/economy/11fed.html
http://www.federalreserve.gov/newsevents/speech/bernanke20090310a.htm
http://www.reuters.com/article/idUSTRE4AO69T20081125
http://www.usatoday.com/money/economy/2008-11-25-fed-bailout_N.htm
http://www.usatoday.com/money/markets/2008-10-07-commercial-paper_N.htm
http://www.nytimes.com/2008/10/08/business/08fed.html

White House Council of Economic Advisers USA

http://topics.nytimes.com/topics/reference/timestopics/organizations/w/white_house_council_of_economic_advisers/index.html

http://topics.nytimes.com/top/reference/timestopics/people/r/christina_d_romer/index.html

growth

economic growth

economic outlook
http://www.federalreserve.gov/newsevents/testimony/bernanke20071108a.htm

earnings
http://www.nytimes.com/business/businessspecial3/

strong earnings outlooks

double-digit earnings growth

better-than-expected earnings

deal

outlook

investor

investment guru

recoup

thinktank

drop

boost

asset

contract

debt

debt yields

Bank of England / The Central Bank of the United Kingdom
http://www.bankofengland.co.uk/

http://www.guardian.co.uk/business/2008/dec/05/interest-rates
http://www.guardian.co.uk/business/2008/nov/19/interest-rates-bank-of-england-cbi
http://www.guardian.co.uk/business/2008/nov/06/interestrates-interestrates2

Bank of England > Monetary policy committee
http://business.guardian.co.uk/flash/0,,2076686,00.html

cost of borrowing

interest rates
http://www.guardian.co.uk/business/interestrates

interest rates and inflation
Interest rates influence spending and saving
in the economy and the prices we pay for goods and services.
Low inflation helps to maintain a stable economy and the value of our money

level

cut

base rate cut
http://www.guardian.co.uk/money/2008/dec/04/interest-rates-mortgages-savings

rate cut
http://www.guardian.co.uk/money/2008/dec/04/mortgages-property
http://www.guardian.co.uk/business/2008/dec/04/interest-rates-bank-of-england1

cut

ease rates

pass on to the consumer
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5292173.ece

set

interest rates through the ages
http://www.guardian.co.uk/business/interactive/2008/nov/05/interest-rates-history

production

factory

factory orders
http://www.usatoday.com/money/economy/production/2006-07-05-factory-orders_x.htm

deal

utilities

utility service

personal loan

pay off

lend

lender
http://money.guardian.co.uk/creditanddebt/loans/story/0,,1790469,00.html

borrow

borrower

call in the administrators / the receivers
http://www.guardian.co.uk/car/story/0,7369,1454943,00.html

bankruptcy
http://money.guardian.co.uk/creditanddebt/debt/story/0,,1701543,00.html
http://www.economist.com/agenda/displayStory.cfm?story_id=3860106

file for bankruptcy
http://media.guardian.co.uk/site/story/0,,1923597,00.html

bankruptcy court

Carey Street
http://www.coventgarden.uk.com/careystr.html
http://money.guardian.co.uk/creditanddebt/story/0,1456,1237744,00.html

Dave Brown

The Independent

9 October 2008
http://www.independent.co.uk/opinion/the-daily-cartoon-760940.html?ino=51

L to R: Chancellor Alistair Darling, British Prime Minister Gordon Brown, three 'fat cats'.

Jerry Holbert

Boston, MA, The Boston Herald Cagle

1 December 2008

bail out October 2008
http://www.reuters.com/article/ousiv/idUSTRE49A36O20081013

bailout / recapitalisation UK October 2008
http://www.guardian.co.uk/business/2008/oct/13/marketturmoil-creditcrunch
http://www.guardian.co.uk/business/2008/oct/13/banking-banks
http://image.guardian.co.uk/sys-files/Politics/documents/2008/10/13/reutersspeech13102008.pdf

bailout / bail-out USA November 2008
http://www.reuters.com/article/ousiv/idUSTRE4AO4QY20081125
http://www.reuters.com/article/idUSTRE4AO69T20081125

bailout / bail-out USA September / October 2008
http://www.nytimes.com/2008/11/14/opinion/14brooks.html?em
http://www.usatoday.com/news/washington/2008-09-29-bailout-congress_N.htm
http://www.reuters.com/article/politicsNews/idUSTRE48S6BD20080929
http://www.guardian.co.uk/commentisfree/2008/sep/29/wallstreet.useconomy
http://www.reuters.com/article/idINTRE48S01420080929?virtualBrandChannel=10112
http://graphics8.nytimes.com/packages/pdf/business/20080928bailout_text.pdf
http://www.reuters.com/article/ousiv/idUSTRE48R0BP20080928
http://www.usatoday.com/money/economy/2008-09-28-bailout-deal_N.htm
http://www.guardian.co.uk/business/2008/sep/25/wallstreet.banking
http://www.reuters.com/article/ousiv/idUSN1945959820080920
http://www.usatoday.com/news/washington/2008-09-20-financial-rescue_N.htm

keep ... afloat

American International Group Inc. AIG USA

American International Group was the largest insurance company in the United States
before it suddenly collapsed in September 2008 under the weight of bad bets it made insuring mortgage-backed securities.
The company was bailed out by the Federal Reserve, but even after an initial infusion of $85 billion, losses continued to grow.
The later rescue packages brought the total to $182 billion, making it the biggest federal bailout in United States history.
http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html

http://topics.nytimes.com/top/news/business/companies/american_international_group/index.html

trade

export

import

exports

imports

rise in exports
http://www.nytimes.com/2008/01/12/business/11cnd-econ.html

U.S. trade deficit > The gap between what Americans import and export
http://www.nytimes.com/2010/04/14/business/economy/14econ.html
http://www.bea.gov/newsreleases/international/trade/tradnewsrelease.htm
http://www.nytimes.com/2008/04/10/business/worldbusiness/10cnd-trade.html
http://www.nytimes.com/2008/01/12/business/11cnd-econ.html

the USA's trade deficit
http://www.usatoday.com/money/economy/2008-01-11-trade_N.htm
http://www.usatoday.com/money/world/2006-12-12-trade-deficit-oct_x.htm

trade balance report USA
U.S. INTERNATIONAL TRADE IN GOODS AND SERVICES May 2006
U.S. Census Bureau > U.S. Bureau of Economic Analysis
http://bea.gov/bea/newsrelarchive/2006/trad0506.pdf

trade gap USA 2006
http://www.usatoday.com/money/economy/trade/2007-02-13-trade-gap_x.htm

keep the imbalance between exports and imports in check

stabilize / level off

stabilization

trade barriers

rebound in world trade

trend

underlying trend

the third highest shortfall on record

hedge funds

life insurance funds

blue chips

triple

return

slim down

selloff / sell-off

slide

fall

dive
http://business.guardian.co.uk/story/0,,1777279,00.html
http://markets.usatoday.com/custom/usatoday-com/html-story.asp?markets=
Domestic&guid=%7B0AE18C7A-B8F7-42BB-A121-953EC219D69E%7D

burst

turmoil
http://business.guardian.co.uk/markets/story/0,,2171652,00.html
http://business.guardian.co.uk/story/0,,1689541,00.html

panic

jitters

collapse
http://www.ft.com/cms/s/0/f09ec422-6294-11dc-b3ad-0000779fd2ac.html

confidence
http://www.ft.com/cms/s/0/f09ec422-6294-11dc-b3ad-0000779fd2ac.html

state monopoly

nationalisation
http://www.ft.com/cms/s/0/4c6591be-7d3d-11dd-8d59-000077b07658.html
http://www.ft.com/cms/s/ea8005ba-ddff-11dc-9de3-0000779fd2ac.html
http://www.guardian.co.uk/business/2008/feb/18/northernrock

partial nationalisation
http://www.guardian.co.uk/business/2008/oct/08/creditcrunch.banking4

nationalise / nationalize (USA)
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4933657.ece
http://www.ft.com/cms/s/0/1e5b888c-8c06-11dd-8a4c-0000779fd18c.html
http://www.guardian.co.uk/business/2008/feb/17/northernrock.nationalisation

protectionism
http://www.nytimes.com/2009/09/19/opinion/19sat1.html
http://www.reuters.com/article/topNews/idUSTRE51C5DU20090213

regulation USA 2008
http://www.nytimes.com/2008/10/24/business/economy/24panel.html
http://www.nytimes.com/aponline/us/AP-Fed-Overhaul.html
http://online.wsj.com/article/SB120631764481458291.html?mod=hpp_us_pageone

welfare
http://www.guardian.co.uk/politics/2010/jun/28/welfare-incapacity-benefit-claimants-assessment
http://www.guardian.co.uk/commentisfree/2010/jun/28/poverty-yardstick-equality-spirit-level
http://www.guardian.co.uk/commentisfree/2010/jun/27/new-model-welfare-state
http://www.guardian.co.uk/uk/2010/jun/22/budget-2010-vat-rise-osborne

welfare crackdown
http://www.guardian.co.uk/politics/2010/jun/28/welfare-incapacity-benefit-claimants-assessment

welfare state
http://www.guardian.co.uk/politics/welfare
http://www.guardian.co.uk/commentisfree/2010/jun/27/new-model-welfare-state
http://www.guardian.co.uk/politics/2010/may/26/iain-duncan-smith-interview-welfare

nanny state
http://observer.guardian.co.uk/uk_news/story/0,,2165455,00.html

State benefits
http://www.guardian.co.uk/money/statebenefits

Directgov
Public services all in one place
http://www.direct.gov.uk/en/index.htm

deregulation

free-marketeers
http://www.guardian.co.uk/business/2008/dec/14/keynesian-economic-recovery-brown-germany

free trade
http://www.nytimes.com/aponline/2009/02/20/world/AP-Obama-Canada.html

privatise

privatisation
http://business.timesonline.co.uk/tol/business/industry_sectors/support_services/article5342303.ece

partial privatisation
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article5349280.ece

break-up
http://business.timesonline.co.uk/tol/business/industry_sectors/transport/article5349280.ece

sell off
http://business.guardian.co.uk/story/0,,1939402,00.html

sell-off
http://www.timesonline.co.uk/tol/news/politics/article5338121.ece

world economy

wealth
http://www.guardian.co.uk/business/2008/dec/28/uk-economy-recession-gdp-2009
http://society.guardian.co.uk/socialexclusion/story/0,,2128034,00.html

the wealthy countries

poor countries

the world's poorest countries

debt relief

G7 / Group of Seven / the Group of Seven economic powers

at a meeting of the Group of Seven major economic powers

cut / reduce global economic imbalances

G7 / G-7 nations / the world's richest nations / the world's major economies
the U.S., Canada, France, Germany, Italy, Japan and the U.K.
http://topics.nytimes.com/top/reference/timestopics/organizations/g/group_of_seven/index.html
http://www.reuters.com/article/topNews/idUSTRE49A43L20081012
http://blogs.wsj.com/washwire/2008/10/11/bush-statement-on-financial-crisis/
http://www.reuters.com/article/topNews/idUSTRE49992Z20081011
http://www.reuters.com/article/topNews/idUSTRE49999F20081010?virtualBrandChannel=10112

G8
http://news.bbc.co.uk/2/hi/americas/country_profiles/3777557.stm

Group of Twenty G20 2009-2010
http://www.boston.com/bigpicture/2010/06/g20_protests_in_toronto.html
http://topics.nytimes.com/top/reference/timestopics/organizations/g/group_of_20/index.html
http://www.guardian.co.uk/world/2010/jun/28/g20-commits-to-halving-budgets
http://www.nytimes.com/2010/06/28/business/global/28summit.html
http://www.nytimes.com/aponline/2010/06/28/world/AP-World-Summit-Analysis.html
http://www.nytimes.com/2010/06/28/world/americas/28security.html
http://www.nytimes.com/2010/06/27/business/global/27summit.html
http://www.nytimes.com/reuters/2010/06/26/news/news-us-g20.html
http://www.nytimes.com/2009/09/26/world/26summit.html

G-20 / G20 2008
http://topics.nytimes.com/top/reference/timestopics/organizations/g/group_of_20/index.html
http://www.nytimes.com/2008/11/16/business/worldbusiness/16summit.html
http://www.nytimes.com/2008/11/16/washington/summit-text.html?ref=worldbusiness
http://www.reuters.com/article/GCA-Economy/idUSTRE4A966O20081110
http://www.reuters.com/news/factbox?fj=20081110195815.js&fn=The%20Day%20Ahead:%20Tuesday
http://blogs.wsj.com/washwire/2008/10/11/financial-crisis-emphasizes-importance-of-g-20/

the G8 group of industrialised countries
http://www.guardian.co.uk/debt/Story/0,,2064919,00.html

G8 summit
http://www.guardian.co.uk/globalisation/story/0,,743694,00.html

International Monetary Fund IMF
http://www.imf.org/external/index.htm
http://topics.nytimes.com/top/reference/timestopics/organizations/i/international_monetary_fund/index.html

http://www.nytimes.com/2010/07/09/business/global/09imf.html
http://www.reuters.com/article/newsOne/idUSTRE5291O520090310
http://business.timesonline.co.uk/tol/business/economics/article5349277.ece
http://www.guardian.co.uk/world/2008/nov/02/saudiarabia-creditcrunch
http://www.reuters.com/article/topNews/idUKTRE49A45B20081011?virtualBrandChannel=10338
http://www.guardian.co.uk/business/2008/apr/09/creditcrunch.economy1
http://www.guardian.co.uk/globalisation/story/0,,548410,00.html

stall

slacken

gazump

bear the brunt of the increases

Graphic > The Guardian's Leo Hickman and award-winning design agency Grundy Northedge
The Guardian G2 pp. 4-5

26.9.2005

MOUNTAIN OF DEBT: Rising Debt May Be Next Crisis

July 3, 2009
Filed at 11:21 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The Founding Fathers left one legacy not celebrated on Independence Day but which affects us all. It's the national debt.

The country first got into debt to help pay for the Revolutionary War. Growing ever since, the debt stands today at a staggering $11.5 trillion -- equivalent to over $37,000 for each and every American. And it's expanding by over $1 trillion a year.

The mountain of debt easily could become the next full-fledged economic crisis without firm action from Washington, economists of all stripes warn.

''Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,'' Federal Reserve Chairman Ben Bernanke recently told Congress.

Higher taxes, or reduced federal benefits and services -- or a combination of both -- may be the inevitable consequences.

The debt is complicating efforts by President Barack Obama and Congress to cope with the worst recession in decades as stimulus and bailout spending combine with lower tax revenues to widen the gap.

Interest payments on the debt alone cost $452 billion last year -- the largest federal spending category after Medicare-Medicaid, Social Security and defense. It's quickly crowding out all other government spending. And the Treasury is finding it harder to find new lenders.

The United States went into the red the first time in 1790 when it assumed $75 million in the war debts of the Continental Congress.

Alexander Hamilton, the first treasury secretary, said, ''A national debt, if not excessive, will be to us a national blessing.''

Some blessing.

Since then, the nation has only been free of debt once, in 1834-1835.

The national debt has expanded during times of war and usually contracted in times of peace, while staying on a generally upward trajectory. Over the past several decades, it has climbed sharply -- except for a respite from 1998 to 2000, when there were annual budget surpluses, reflecting in large part what turned out to be an overheated economy.

The debt soared with the wars in Iraq and Afghanistan and economic stimulus spending under President George W. Bush and now Obama.

The odometer-style ''debt clock'' near Times Square -- put in place in 1989 when the debt was a mere $2.7 trillion -- ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.

The debt gap is ''something that keeps me awake at night,'' Obama says.

He pledged to cut the budget ''deficit'' roughly in half by the end of his first term. But ''deficit'' just means the difference between government receipts and spending in a single budget year.

This year's deficit is now estimated at about $1.85 trillion.

Deficits don't reflect holdover indebtedness from previous years. Some spending items -- such as emergency appropriations bills and receipts in the Social Security program -- aren't included, either, although they are part of the national debt.

The national debt is a broader, and more telling, way to look at the government's balance sheets than glancing at deficits.

According to the Treasury Department, which updates the number ''to the penny'' every few days, the national debt was $11,518,472,742,288 on Wednesday.

The overall debt is now slightly over 80 percent of the annual output of the entire U.S. economy, as measured by the gross domestic product.

By historical standards, it's not proportionately as high as during World War II, when it briefly rose to 120 percent of GDP. But it's still a huge liability.

Also, the United States is not the only nation struggling under a huge national debt. Among major countries, Japan, Italy, India, France, Germany and Canada have comparable debts as percentages of their GDPs.

Where does the government borrow all this money from?

The debt is largely financed by the sale of Treasury bonds and bills. Even today, amid global economic turmoil, those still are seen as one of the world's safest investments.

That's one of the rare upsides of U.S. government borrowing.

Treasury securities are suitable for individual investors and popular with other countries, especially China, Japan and the Persian Gulf oil exporters, the three top foreign holders of U.S. debt.

But as the U.S. spends trillions to stabilize the recession-wracked economy, helping to force down the value of the dollar, the securities become less attractive as investments. Some major foreign lenders are already paring back on their purchases of U.S. bonds and other securities.

And if major holders of U.S. debt were to flee, it would send shock waves through the global economy -- and sharply force up U.S. interest rates.

As time goes by, demographics suggest things will get worse before they get better, even after the recession ends, as more baby boomers retire and begin collecting Social Security and Medicare benefits.

While the president remains personally popular, polls show there is rising public concern over his handling of the economy and the government's mushrooming debt -- and what it might mean for future generations.

If things can't be turned around, including establishing a more efficient health care system, ''We are on an utterly unsustainable fiscal course,'' said the White House budget director, Peter Orszag.

Some budget-restraint activists claim even the debt understates the nation's true liabilities.

The Peter G. Peterson Foundation, established by a former commerce secretary and investment banker, argues that the $11.4 trillion debt figures does not take into account roughly $45 trillion in unlisted liabilities and unfunded retirement and health care commitments.

That would put the nation's full obligations at $56 trillion, or roughly $184,000 per American, according to this calculation.

------

On the Net:

Treasury Department ''to the penny'' national debt breakdown: http://tinyurl.com/yrxrsh

Peter G. Peterson Foundation independent assessment of the national debt: http://www.pgpf.org/

''Deficits do Matter'' debt clock: http://tinyurl.com/l6mvjb

MOUNTAIN OF DEBT: Rising Debt May Be Next Crisis, NYT, 3.7.2009, http://www.nytimes.com/aponline/2009/07/03/us/politics/AP-US-Mountain-of-Debt.html

Welcome to the inescapable era of no money

For the next ten years
British politics is going to be about living with the consequences of the State being flat broke

March 11, 2009
From The Times
Daniel Finkelstein

We are insolvent. Out of money. Financially embarrassed. Strapped. Cleaned out. We are skint, borassic lint, Larry Flynt, lamb and mint. We are lamentably low on loot. We are maxed out. We are indebted, encumbered, in hock, in the hole. We are broke, hearts of oak, coals and coke. It doesn't matter whether money can buy us love, because we haven't got any.

Welcome to the era of no money. The central fact of British politics in the next ten years, and perhaps longer, is not hard to spot. British politics isn't going to be dominated by interesting debates on the future of capitalism. It isn't going to be the stage for a revival of interest in democratic socialism. It isn't going to play host to the interplay of competing ambitious projects. No. We're in for a hard slog. Because what British politics is going to be about in the next ten years is living with the consequences of the State being broke, of the Government running out of money.

I don't mean to make a meal of this. It's just that sometimes when I listen to the political debate, I wonder if everyone is still connected with reality. They're all busy announcing new schemes and White Papers or dreaming of tax cuts and so forth, and no one seems to talk much about the cash. La la la la (fingers in ears). The Conservatives occasionally bring it up, a little gingerly. They think the problem is going to land on their plate, after all. But they are also worried about being seen as gloomy, so they try not to bang on about it.

Let's look at a few figures. In January the Institute for Fiscal Studies published its 2009 Green Budget. Having described the incredibly painful cuts in projected public spending that have already been announced, the IFS says: “If the public finances evolve as the Treasury hopes, this tightening would have to remain in place until the early 2030s before debt returns below the ceiling of 40 per cent of national income Gordon Brown set as one of his two fiscal rules in 1997.”

Only one thing: the IFS - like most informed observers - does not think the public finances will evolve as the Treasury hopes. Things will be far worse. The Government or its successor will need a further £20billion a year. A further £20billion of tax rises or spending cuts on top of its already very difficult, tough plans. And, adds the IFS, “even if it acts, public sector debt may well not return to pre-crisis levels for more than 20 years”.

Twenty years is a political age. Twenty years ago Tony Blair was Shadow Secretary of State for Energy and George Osborne was studying for his A levels. The era of no money will define politics long into the distance, as far as the eye can see.

If you want to understand what this will mean for the Left then consult the books of the Labour thinker, Tony Crosland. On this point they bear rereading even if some of them are more than 50 years old. Crosland insisted that the future of socialism depended on being able to raise the level of economic growth and state spending. Without growth Labour would not be able to redistribute, or at least it would face a titanic struggle trying to do so. As it pursued equality it would be fiercely resisted by an army of losers.

This has not been a merely theoretical point. Every Labour government has kept its unstable coalition of leftist dreamers, truculent union men and hard-nosed managerialists together by spending money. Money is how the NHS was created as Nye Bevan bought off the doctors and, more than 50 years later, money was how Mr Blair kept his Government afloat.

New Labour was made possible because steadily increasing state spending allowed important choices to be avoided. The Government could give out more in benefits to the low paid, spend cash on the NHS to cover up its failures, buy off the unions and all without alienating the middle class too badly. If it proposed market reforms, to burnish its credentials as a progressive party, it could buy off the left-wing critics with taxpayers' cash. No more. In the era of no money, the Left will have to choose. And choosing will be grim.

But things will be grim for the Right, too. Many Conservatives have lived in a dreamworld. Cutting spending would be easy. Cutting tax is a moral necessity. They are about to find out just how difficult it is even to control the amount Government pays out. Consumers of public services have rising expectations and most of the services are labour intensive. Both these things keep pushing up costs, even if government does nothing.

And Tory ideology robs them of the one escape route that the Left retains. They can't very well start putting up taxes - at least not greatly, at least not for an extended period. The party leadership is going to find it hard enough restraining the demand for tax cuts from activists and newspapers, tax cuts that the era of no money make impossible.

The Tories will aim, of course, to make services more efficient and to get government out of wasteful projects altogether. Yet even this will prove hard. Reform costs money. Making people redundant, moving offices, sending out circulars full of new instructions, keeping interest groups happy while making controversial changes - it all costs money. And (here's a point I may not have mentioned) there is no money.

It will not be open to David Cameron to be the mirror image of Mr Blair - to move gently towards Tory goals while using spending to keep his opponents always, always slightly off balance. In the era of no money a much more bloody clash will prove almost impossible to avoid. The Left will not find themselves, as the Right did in 1997, confused and with little to say. The battle with the Tories over tax and public spending will seem familiar. Then again, they might like to recall that when those were the battlelines, they lost.

Welcome to the inescapable era of no money, Ts, 11.3.2009, http://www.timesonline.co.uk/tol/comment/columnists/daniel_finkelstein/article5883988.ece

Obama Stressing Fiscal Responsibility on Budget

February 23, 2009
Filed at 8:12 a.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- President Barack Obama is bringing together dozens of advisers and adversaries to discuss how to curb a burgeoning federal deficit laden with Social Security, Medicare and Medicaid obligations.

Obama's summit at the White House on Monday is the first meeting toward a strategy to address the long-term fiscal health of the nation. The gathering also comes as Obama prepares ambitious plans to cut the federal deficit by half within four years.

''It will require doing all we can to get exploding deficits under control as our economy begins to recover,'' Obama said in his weekend Internet and radio address. ''That work begins on Monday, when I will convene a fiscal summit of independent experts and unions, advocacy groups and members of Congress to discuss how we can cut the trillion-dollar deficit that we've inherited.''

Even before it began, some of its 130 invited participants cautioned against overinflated expectations.

''It can either be a nice press event. Or it can be a substantive event,'' said Republican Sen. Judd Gregg, whom Obama appointed as commerce secretary before the New Hampshire lawmaker balked. ''History tells us it will be the first. We've had these meetings before. There's always a lot of people willing to point out the problem.''

Yet, he said, there is seldom anyone willing to make the difficult decisions to solve those problems.

As the nation's economy continues its downward spiral, Obama's advisers are keeping their focus on the broader fiscal troubles that have sent millions to unemployment rolls. Taken in context, the summit is but one part of the White House's larger approach to the coming weeks focused on Obama's priorities for a first term, including a State of the Union-style address on Tuesday.

That speech is not likely to include plans to deal with long-crumbling entitlement programs.

The Senate's top Republican, Mitch McConnell of Kentucky, said a solution already exists in legislation written by Gregg and his Democratic counterpart on the Budget Committee, Sen. Kent Conrad of North Dakota.

Their measure would create a bipartisan commission to deal with Social Security, Medicare and Medicaid. The entitlement programs face eventual bankruptcy, although experts differ on how urgently each is threatened.

Many House Democrats, however, remain opposed to a commission, including Speaker Nancy Pelosi. Obama has indicated he's open to the idea -- and many others -- as a way to move toward a viable solution.

McConnell said any movement would be a step toward getting a handle on the unfunded liabilities.

''So I hope what the meeting at the White House is about tomorrow is about sobering up here and beginning to rethink the kind of debt that we're laying on future generations,'' McConnell told CNN's ''State of the Union'' program on Sunday.

That comes hand-in-hand with the president's plans to deal with the deficit.

Obama plans to cut the federal deficit in half by the end of his first term, mostly by scaling back Iraq war spending, raising taxes on the wealthiest and streamlining government. The goal is to halve the federal deficit to $533 billion by the time his first term ends in 2013.

He inherited a deficit of about $1.3 trillion from his predecessor, President George W. Bush.

Meanwhile, Peter Orszag, director of the federal Office of Management and Budget, said Monday he believes the new fiscal plan will lure some Republican support -- in contrast to the stimulus bill that got only three GOP votes in Congress.

He said he thinks some Republicans will back the plan because of proposals to overhaul the expensive U.S. health care system.

''Health care clearly is the key to our fiscal future,'' he said on CNN, ''so we need to get health care costs u nder control and we want to do that this year.''

Obama Stressing Fiscal Responsibility on Budget, NYT, 23.2.2009,http://www.nytimes.com/aponline/2009/02/23/washington/AP-Obama-Economy.html

Q&A: How much does Britain actually owe?

Sunday 25 January 2009
The Observer
Heather Stewart
This article was first published on guardian.co.uk at 00.01 GMT on Sunday 25 January 2009.
It appeared in the Observer on Sunday 25 January 2009 on p27 of the Focus section.
It was last updated at 00.14 GMT on Sunday 25 January 2009.

Official figures from last week showed that the government had run up total debts of £697.5bn, or 47.5% of GDP, by the end of 2008. That includes just over £100bn for the nationalisation of Northern Rock and the recapitalisation of Royal Bank of Scotland.

How does that compare with other countries?

Ranked by our debt-to-GDP ratio, we came 18th of 28 members of the Organisation of Economic Co-operation and Development in 2007, clocking in at 30.4% on the OECD's measure. A number of other major economies had higher levels of borrowing: Japan's debt was worth 85.9% of its GDP, for example, and Italy's well over 100%. Debt levels in many countries are likely to explode in the years ahead, too, as governments spend billions of dollars on recapitalising their financial sectors, and boosting public spending to kick-start the economy.

Is the debt mountain about to get much bigger?

Yes: the Office for National Statistics has said that the liabilities of RBS, thought to be around £1.7tn, will soon have to appear on the government's balance sheet, because its shareholding, of almost 70%, gives it enough managerial control over the battered bank to make it a public institution. However, the minutiae of the statisticians' rules mean that although RBS's liabilities will turn up on the books, many of its assets - such as the homes on which mortgages are secured - will not. So the eye-watering debt figures we are likely to see over the next year are a bit misleading. Even without the banking rescues, though, public debt has already hit 40.4% of GDP, bursting through the 40% limit the prime minister laid down as one of his fiscal rules when Labour came to power. And as recession eats away at tax revenues, and the government spends billions of pounds on Keynesian fiscal stimulus, the chancellor's forecasts show debt peaking at more than £1tn, or 57.4% of GDP by 2012-13.

What about Alistair Darling's latest bank rescue package?

The government announced last Monday that it would introduce a taxpayer-backed insurance scheme, allowing the banks to cap their losses on so-called "toxic" assets, if the loans go sour. That could potentially expose the public to vast losses and the unknown size of the black hole helped to send sterling into a tailspin last week. But the Treasury insists that many of the loans will eventually come good - and the banks are paying the government a fee for its trouble.

Is Britain at risk of "going bankrupt"?

It is highly unlikely. The government currently borrows about 35% of its total debts from foreign investors and there is as yet little evidence of them heading for the door: the German and Greek governments have had more problems borrowing money in the capital markets in the past few weeks than the UK. However, if foreign investors do go off gilts, then yields will be driven up - so, in effect, taxpayers will end up paying higher interest rates to borrow money.

Much of the cash the government needs can continue to be borrowed from taxpayers at home - pension funds such as government bonds, or gilts, because they can match the fixed returns against their liabilities, and cash is pouring into National Savings, which are invested in gilts as nervous savers shun risky looking banks. If overseas investors lose confidence in the UK, we will have to fund the debts ourselves, in effect, borrowing from our own future income. That could prolong the downturn and force the Bank of England to keep interest rates lower, and for longer, than it otherwise might have done, to compensate for the tightening of fiscal policy, but it doesn't mean we are "bust".

Will we have to "call in the IMF", as David Cameron claimed last week?

Again, it's not impossible, but highly unlikely: it would only happen if the government was unable either to meet a debt repayment, or to roll over, or "refinance" the debt with investors, in the capital markets. Ireland, Turkey and Greece all look much closer to that extreme than the UK. The verdict of credit ratings agency Moody's last week was that increasing borrowing in the short-term, in order to limit the length and severity of the recession, is a "calculated risk," which it doesn't think endangers the UK's creditworthiness. Spain and Greece have had their ratings downgraded, however, and Ireland has been warned that it could face the same fate.

If the problem in the first place was too much borrowing, isn't it dangerous to try to fix it by borrowing even more?

Yes, but the government believes the risk of allowing the credit markets to seize up, potentially driving the economy into full-blown depression, is even greater. As Mervyn King, governor of the Bank of England, put it last week: "This is the paradox of policy at present - almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term."

Q&A: How much does Britain actually owe?, O, 25.1.2009, http://www.guardian.co.uk/business/2009/jan/25/uk-recession

Fed Cuts Key Rate to a Record Low

December 17, 2008
The New York Times
By EDMUND L. ANDREWS and JACKIE CALMES

WASHINGTON — The Federal Reserve entered a new era on Tuesday, lowering its benchmark interest rate virtually to zero and declaring that it would now fight the recession by pumping out vast amounts of money to businesses and consumers through an expanding array of new lending programs.

Going further than expected, the central bank cut its target for the overnight federal funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for years in its own fight against deflation.

Though important as a historic milestone, the move to an interest rate of zero from 1 percent is largely symbolic. The funds rate, which affects what banks charge for lending their reserves to each other, had already fallen to nearly zero in recent days because banks have been so reluctant to do business.

Of much greater practical importance, the Fed bluntly announced that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation’s worst economic downturn since World War II.

In effect, the Fed is stepping in as a substitute for banks and other lenders and acting more like a bank itself. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth,” it said. Those tools include buying “large quantities” of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans.

The move came as President-elect Barack Obama summoned his economic team to a four-hour meeting in Chicago to map out plans for an enormous economic stimulus measure that could cost anywhere from $600 billion to $1 trillion over the next two years.

The two huge economic stimulus programs, one from the Fed and one from the White House and Congress, set the stage for a powerful but potentially risky partnership between Mr. Obama and the Fed’s Republican chairman, Ben S. Bernanke.

“We are running out of the traditional ammunition that’s used in a recession, which is to lower interest rates,” Mr. Obama said at a news conference Tuesday. “It is critical that the other branches of government step up, and that’s why the economic recovery plan is so essential.”

Financial markets were electrified by the Fed action. The Dow Jones industrial average jumped 4.2 percent, or 359.61 points, to close at 8,924.14.

Investors rushed to buy long-term Treasury bonds. Yields on 10-year Treasuries, which have traditionally served as a guide for mortgage rates, plunged immediately after the announcement to 2.26 percent, their lowest level in decades, from 2.51 percent earlier in the day.

Yields on investment-grade corporate bonds edged down to 7.215 percent on Tuesday, from 7.355 on Monday. Yields on riskier high-yielding corporate bonds remained in the stratosphere at 22.493 percent, almost unchanged from 22.732 on Monday.

By contrast, the dollar dropped sharply against the euro and other major currencies for the second consecutive day — a sign that currency markets were nervous about a flood of newly printed dollars. Some analysts predict that the Treasury will have to sell $2 trillion worth of new securities over the next year to finance its existing budget deficit, a new stimulus program and to refinance about $600 billion worth of maturing government debt.

For the moment, Mr. Obama and Mr. Bernanke appear to be on the same page, though that could abruptly change if the economy starts to revive. Fed officials have already assumed that Congress will pass a major spending program to stimulate the economy, and they are counting on it to contribute to economic growth next year.

In more normal times, the Fed might easily start raising interest rates in reaction to a huge new spending program, out of concern about rising inflation.

But data on Tuesday provided new evidence that the biggest threat to prices right now was not inflation but deflation.

The federal government reported on Tuesday that the Consumer Price Index fell 1.7 percent in November, the steepest monthly drop since the government began tracking prices in 1947. The decline was largely driven by the recent plunge in energy prices, but even the so-called core inflation rate, which excludes the volatile food and energy sectors, was essentially zero.

Mr. Obama’s goal is to have a package ready when the new Congress convenes on Jan. 6. His hope is that the House and Senate, with their bigger Democratic majorities, can agree quickly on a plan for Mr. Obama to sign into law soon after he is sworn into office two weeks later.

The Fed, in a statement accompanying its rate decision, acknowledged that the recession was more severe than officials had thought at their last meeting in October.

“Over all, the outlook for economic activity has weakened further,” the central bank said.

“Labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment and industrial production have declined.”

The central bank added: “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

With fewer than 10 days until Christmas, retailers from Saks Fifth Avenue to Wal-Mart have been slashing prices to draw in consumers, who have sharply reduced their spending over the last six months. On Tuesday, Banana Republic offered customers $50 off on any purchases that total $125. The clothing retailer DKNY offered customers $50 off any purchase totaling $250.

Ian Shepherdson, an analyst at High Frequency Economics, said falling energy prices were likely to bring the year-over-year rate of inflation to below zero in January.

The Fed has already announced or outlined a range of unorthodox new tools that it can use to keep stimulating the economy once the federal funds rate effectively reaches zero. On Tuesday, Fed officials said they stood ready to expand them or create new ones to relieve bottlenecks in the credit markets.

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

“Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”

Vikas Bajaj contributed reporting from New York.

Fed Cuts Key Rate to a Record Low, NYT, 17.12.2008, http://www.nytimes.com/2008/12/17/business/economy/17fed.html

In Private Equity, the Limits of Apollo’s Power

December 7, 2008
The New York Times
By JULIE CRESWELL

LEON BLACK, one of Wall Street’s buyout kingpins, is having a tough year.

In the spring, the home furnishings retailer Linens ’n Things went bust, costing the Apollo Group, the private equity firm that Mr. Black co-founded 18 years ago, its entire $365 million investment.

Apollo’s attempt to disentangle itself from another potentially bad deal — an acquisition of Huntsman, the chemical company — has resulted in a messy flurry of lawsuits.

The sagging economy and piles of debt, meanwhile, are causing several other companies that Apollo owns, including Harrah’s, Claire’s and a real estate entity that controls Century 21 and Coldwell Banker, to struggle — putting at risk about a third of some $10 billion Mr. Black raised years ago during the buyout boom.

On top of all that, a gymnasium that housed Mr. Black’s indoor tennis courts on his 90-acre Westchester County estate burned to the ground in October. And just last week, in a new twist on the term “frenemies,” Mr. Black’s good buddy and longtime tennis partner Carl C. Icahn sued another Apollo company because he was unhappy with its plans to restructure debt.

So it just ain’t easy being Leon Black — or any other Master of the Universe — these days.

“Traditional private equity is dead and has been for a year,” says Mr. Black, seated at a round conference table in an office once occupied by L. Dennis Kozlowski, who was ousted as chief executive of Tyco International. “It will probably remain so for a couple of years.”

Part of the allure of private-equity honchos like Mr. Black is that they made an art out of making money during the boom years. Their fist-pounding negotiations were legendary. Their corporate turnarounds became Harvard Business School case studies. Their multiple homes, black-tie parties, sports cars and yachts were alternately envied and vilified.

Today, with Wall Street in tatters and the easy money long gone, the question now for Mr. Black and his peers is whether they have enough moves left to turn the bleak outlook for private equity into something rosier for themselves, their companies, their investors and the legions of workers they employ.

Achieving that will hinge on whether Mr. Black and his peers can persuade banks and investors to give their companies more time to make good on their debts, something that Mr. Icahn’s lawsuit suggests is not always easy.

The other parts of the equation — how long the economic malaise lasts and how deep it becomes, as well as its ultimate impact on the companies they own — are something that even the Wall Street power brokers can’t control.

Over the last year, Stephen A. Schwarzman, the co-founder of the Blackstone Group, has watched his company’s high-profile stock plunge 71 percent. And Henry R. Kravis has yanked copycat plans for his storied firm, Kohlberg Kravis Roberts, to go public as well.

Several other superstars in the private-equity universe, including TPG and the Carlyle Group, are scrambling as some of their companies collapse — firms for which they paid top dollar during the recent buyout boom.

Those mounting losses — and the dearth of cheap and easy financing that fueled private equity’s rocketing returns over the years — have some people wondering what the future holds for private-equity firms and the companies they have acquired.

Mr. Black has an answer. His shirt wrinkled and his tie askew, he calmly says that the outlook for him and his competitors is not as bleak as it seems. In fact, he says his firm is poised to take advantage of the turbulence.

Apollo has just raised $20 billion in new money that he says will go, in part, toward buying cheap debt.

“We’ve totally turned into a bond house,” he declares.

MR. BLACK says the big money over the next few years will be made in vast restructurings — the financial, operational and structural changes that companies will need to make if they hope to survive the economic malaise.

Of course, the question is how many of these overhauls will involve Mr. Black’s own companies.

Apollo thought it had a home run with Linens ’n Things. It bought that struggling retailer in 2005 for $1.3 billion — $365 million of its own money, the rest from co-investors and banks — and installed a retail industry veteran as its chief executive.

The deal, however, soured quickly. Sales continued to slide and nervous investors who held its debt started to dump it. In May, a mere two years after Apollo acquired the company, Linens ’n Things filed for bankruptcy.

“It was an incredibly fast implosion,” said Kim Noland, the director of high-yield research with Gimme Credit.

Some point to the collapse of Linens ’n Things as an omen for the private-equity industry and some of the companies these firms acquired during the gold rush.

Armed with cheap bank funding, private-equity firms — just like consumers who bid up home prices on the back of cheap mortgages — paid sky-high prices for troubled companies that they promised they could streamline and make more efficient.

They piled layers and layers of debt — “leverage,” in Wall Street parlance — onto these companies just before the economy came screeching to a halt.

“The idea was that Apollo was going to turn it around and fix whatever was causing the issues, but operations just got worse and worse and then there was the overleverage,” Ms. Noland said of Linens ’n Things. “They just didn’t have too much of a chance.”

Mr. Black calls the Linens collapse “unusual,” saying that Apollo “underestimated the severity of the downturn of the housing market.”

Besides, he says, the Linens bankruptcy barely singed his investors, costing them half a percentage point on returns. (The Apollo fund that held Linens has returned 49 percent to investors, net of fees, since its inception in 2001.)

The promise behind private-equity firms like Apollo is that they can fix broken companies far from the bright glare of the public eye. No longer tied to meeting investors’ quarterly earnings expectations, company management can focus instead on improving operations.

Private-equity firms raise huge sums from investors like pension funds and endowments and then borrow more from banks and other lenders so they can put ever larger sums to work.

During the period when they own a company, private-equity firms pay out some of the company’s profits to their investors — and the buyout firm itself — sometimes recouping several times their original investment in dividends before they either sell the company or take it public again.

One of the longstanding criticisms of buyout firms is that they engorge targets with debt and skim the profits for themselves. That image was reinforced during the boom with stories about buyout executives’ over-the-top birthday parties and other lavish excesses.

The notion that buyout firms were only on the hunt for quick gains was further strengthened by actions of Apollo and some of its peers. Sometimes within just a year of acquiring a company, they issued debt that was used to pay fat dividends to the funds themselves.

Besides layering more debt onto the companies, the move effectively allowed Apollo and its competitors to handily recoup some, if not all, of their initial investments.

Earlier this year, a major ratings agency, Moody’s Investors Service, said that Apollo and a handful of other buyout firms were particularly aggressive about yanking out nearly all of their initial investments.

“We saw some firms taking out a large amount of the equity they put in, and they were doing this less than a year after announcing the buyouts,” said John Rogers, an analyst at Moody’s. “It would be rare that the performance of the business had improved so much during that time.”

Mr. Black defends the payouts.

“In some cases, we took 60 percent, 85 percent or even 100 percent of our investment out,” says Mr. Black, adding that Apollo can put more money into the deals if necessary. “It was the right thing to do for our investors.”

Josh Lerner, a professor at Harvard Business School who has studied private equity, says it is too soon to say whether those debt deals further weakened the affected companies.

“So far,” he said, “I think it’s hard to find any statistical difference between the performance of companies that did the dividend deals and those that didn’t.”

But do these deals remove the incentive that Apollo and others have to stick around and fix troubled companies, when they have already cashed out?

“There is a fundamental conflict in private equity between taking steps that generate a good return for investors and doing things that are in the best interests of the companies,” Mr. Lerner says. “In an ideal world, those are aligned. But in the real world, they aren’t always.”

Some data suggests that that disconnect is causing trouble.

In a report by the ratings agency Standard & Poor’s, 86 companies weren’t meeting their debt obligations through mid-November of this year, with 53 of those, or 62 percent, having ties to private-equity firms at one point in their lives.

The firm’s analysts anticipate that an additional 125 companies could default by next fall, raising the nation’s default rate to 7.6 percent from current levels of 3.2 percent.

Whatever transpires, Mr. Black says he’s not planning to walk away from his stable of companies.

“Most of the companies we own are businesses or industries that we really like,” he says. In the same breath, however, he concedes that that won’t be the case with every company.

“There are going to be cases like Linens ’n Things,” he says. “We didn’t put more money into Linens because it would have been just putting good money after bad.”

That argument could be sorely tested with Apollo’s troubled sixth fund, which raised about $10 billion from investors and went on a spending spree from 2006 through this year.

It acquired a broad range of companies — cruise lines, paper companies and grocery store chains. Mr. Black allows that five of those companies are “cyclically challenged.”

Those five are the hot-tub manufacturer Jacuzzi; the accessories retailer Claire’s; Realogy (which owns Century 21 and Coldwell Banker) and the Countrywide real estate firm in Britain; and a gambling company, Harrah’s.

WHILE Mr. Black remains upbeat about the prospects for those companies, some analysts say most of them are severely indebted and are crumbling quickly because of the economy.

That has had an impact on Apollo’s 2006 fund. The fund has had a net internal rate of return of negative 12.8 percent from its inception through the end of September, according to someone with direct knowledge of its performance who was not authorized to release the data. The fund didn’t disclose its more recent performance to investors in a November letter.

That letter did state that the fund has returned $1.3 billion to investors through dividends, but that it marked down the overall value of its holdings by $789 million.

In an effort to conserve cash and give themselves some breathing room, Harrah’s and Realogy are trying to persuade investors to exchange the securities for new debt that will reduce overall leverage or lengthen maturities. Currently, Harrah’s, Realogy and Claire’s are keeping up with some of their debt payments by issuing more debt to investors rather than paying them in cash — a maneuver made possible by agreements reached during the boom.

Some analysts see these moves as little more than putting off the inevitable.

“What they’re doing is putting more debt on a company at a time when we are in a recessionary environment. Also, the companies that we’re talking about are some of the lowest-rated companies out there, so the margin for error is razor thin,” says Diane Vazza, head of global fixed-income research at Standard & Poor’s. “What this does is buys them a little bit of time, but the day of reckoning is around the corner.”

Mr. Black has one of the financial world’s most interesting and varied pedigrees. And some of his past is rooted in tragedy.

On Feb. 3, 1975, his father, Eli M. Black, strode into his office on the 44th floor of the Pan Am Building in Manhattan. He then used his heavy attaché case to smash through his office window and leapt to his death.

It was later revealed that regulators were investigating whether payments made by the company Mr. Black led, United Brands (predecessor to Chiquita), to a Honduran official were illegal.

Until that moment, Leon Black had led a fairly serene and even gilded life. His mother is an artist and a beloved aunt owned a Manhattan gallery, which he says influenced his early appreciation of the arts.

Today he is one of Manhattan’s best-known collectors. “Art and literature are what differentiate us from barbarians,” he says, adding that he will probably give away most of his collection eventually. Mr. Black and his family have also given or committed more than $150 million to various educational, health care and cultural institutions.

After studying history and philosophy at Dartmouth, Mr. Black envisioned himself someday teaching at Oxford, but his father convinced him to give business school a try. He was in his second year at Harvard Business School when his father died. (Mr. Black has financed chairs at Dartmouth in Shakespearean studies in his own name and Jewish studies in his father’s honor.)

“After my father died, we were pretty much wiped out, financially, as a family,” Mr. Black says. “So I decided to give finance a try.”

AFTER Harvard, Mr. Black landed on the steps of the investment banking firm Drexel Burnham Lambert, where he had a rocky start.

His boss at the time said Mr. Black wanted to jump immediately into big-picture planning, but he believed Mr. Black needed to understand the basics first. He “wasn’t working as hard as we had hoped, so I had some harsh discussions with him,” recalls Frederick H. Joseph, the former head of Drexel.

Not long after that little heart-to-heart, Mr. Black began climbing the ranks at the firm and became an influential financier as Drexel began financing megabuyouts.

“He would work all day, party all night and come back and do it again the next day,” Mr. Joseph says. “But he brought a lot more brains and a lot more strategic capacity to his deals than a lot of other guys on Wall Street at the time.”

Mr. Black and Drexel financed deals orchestrated by the likes of Mr. Icahn, Ted Turner and Kohlberg Kravis Roberts, particularly in its famed takeover of RJR Nabisco.

Although Mr. Black comes across as a quiet, introverted man, he has a famous temper. Mr. Joseph recalls seeing that temper flare a few times at Drexel when he disagreed with co-workers over whether to get involved in deals.

But Mr. Black said that what he loved most in his 13 years at Drexel was the frenetic pace.

“The day they closed the doors was a bad day,” he says, nodding ruefully.

Drexel collapsed in 1990 after investigations into illegal activities in the bond market, driven by one of Mr. Black’s close associates, Michael Milken, who was eventually imprisoned for securities violations.

“I think what happened to the firm was unfair, but we were very politically naïve,” Mr. Black says. “I’m not sure fairness was relevant.”

Mr. Black, who was the head of Drexel’s huge mergers-and-acquisitions group at the time of its demise, walked away from the collapse unscathed. Along with two other Drexel refugees, he started Apollo in 1990.

Armed with the experience he and his team earned at Drexel in tearing apart balance sheets and understanding complex credit structures, Mr. Black and Apollo emerged as one of the shrewdest investors of the 1990s, specializing in distressed companies.

“When we do distressed-debt investing, we have made money in 98 percent of those deals,” he says.

In Apollo’s early days, Mr. Black sought to distance himself and his firm from the bad-boy image of leveraged buyout firms in the 1980s. His message was that he was a long-term investor, not a raider out for short-term gains.

“We want to be like Warren Buffett,” Mr. Black said in an interview with The New York Times in 1993. In that same interview, Mr. Black also eschewed the notion of investing in high-tech companies and said that any future leveraged buyouts would be “more rational” and involve “less leverage, more equity.”

Yet, over time, Mr. Black would venture again into leveraged buyouts — and those buyouts would involve, in more recent deals, gobs of debt.

Over the years, Apollo has built up a strong track record, posting net internal rates of return of 27 percent, on average, after fees, according to filings Apollo made with the Securities and Exchange Commission this summer.

That compares with about 19 percent for Blackstone and 20 percent for Kohlberg Kravis Roberts.

Today, of course, the returns at Apollo are threatened, and the company is also mired in a legal fracas.

In July 2007, the Hexion Specialty Chemicals unit of Apollo offered $28 a share, plus assumption of debt, to buy Huntsman in a deal valued at $10.6 billion. Hexion was buying a company twice its size in a deal financed almost entirely by two banks, Deutsche Bank and Credit Suisse.

But earlier this year when soaring commodity prices and the sharply declining dollar took a huge bite out of Huntsman’s profits, Hexion tried to pull out of the deal, citing earnings declines.

Huntsman’s management said that Apollo merely had cold feet and regretted the bidding war that forced it to pay handsomely to get the deal done. In court, Hexion argued that if the two entities were combined, the resulting company would be insolvent.

The Delaware Chancery Court ordered Hexion to move forward with the merger, but by then nervous banks wanted no part of the deal. Huntsman has sued the banks in Texas to force them to back the deal.

NOW Apollo is stuck trying to figure out how to make an unwanted marriage work out and how to persuade the banks to be a part of the nuptials, analysts say. Mr. Black declined to speak about the deal other than in generalities.

“Sure, I regret where things stand now. But there was originally a very good industrial logic to doing the deal,” he says. “I’m not smart enough to predict how things will turn out.”

As for the rest of the companies he now oversees, Mr. Black acknowledges that the markets have all but written off some of them.

But he’s been in tight corners before, Mr. Black notes, saying that he has overcome previous downturns and produced solid returns.

“I don’t believe in the notion of Masters of the Universe. People either do their job or they don’t,” he says, shrugging. “It’s ultimately all about performance.”

In Private Equity, the Limits of Apollo’s Power, NYT, 7.12.2008, http://www.nytimes.com/2008/12/07/business/07leon.html?hp

Bank of England cuts rates to 2%

Published: December 4 2008 12:00
Last updated: December 4 2008 16:20
The Financial Times
By Norma Cohen

Signs that the economic downturn is gathering pace prompted the Bank of England’s monetary policy committee to cut interest rates on Thursday by a full percentage point to 2 per cent, the lowest level for nearly four decades.

The last time interest rates were at 2 per cent was in the final days of George VI’s reign in 1951 and the previous time lending costs were cut from 3 to 2 per cent was October 26 1939, after Britain entered the second world war.

Explaining its move, the Bank said in a statement that it believed demand was now so weak that “there remained a substantial risk of undershooting the 2 per cent CPI inflation target in the medium term.”

The rate cut, while much larger than the Bank is accustomed to, is smaller than the 1.5 percentage point reduction made at the MPC’s last meeting in November and smaller than the money markets had begun to expect.

The Bank’s move was followed by the European Central Bank which cut its key policy rate by ¾ per cent to 2.5 per cent as central banks around the world attempt to tackle slowing rates of growth. The Riksbank in Sweden cut its interest rates by an unprecendented 175 basis points to 2 per cent and the Reserve Bank of New Zealand cut its main lending rate by 150 basis points to 5 per cent.

The cut by the Bank suggests either that the MPC is less convinced than many private sector economists that deflation is a real possibility, or that it has other concerns about the impact of much lower rates, including worries over the slide in the pound. Sterling on Thursday fell to the lowest level against the dollar for six and a half years and to a record low against the euro.

In its announcement, the Bank pointed to “a number of fiscal measures in train”, both in the UK and abroad, aimed at boosting demand to counteract the current downturn. The minutes of the last MPC meeting showed that some members expressed a desire to see how the fiscal stimulus outlined in the government’s pre-Budget Report might affect demand before making any exceptional moves in interest rates.

The move comes after key purchasing managers’ index readings for the construction, manufacturing and services sectors hit record lows in recent days, with the future orders component of each index predicting that worse is to come.

In making its interest rate decision, the Bank expressed concerns about the flow of credit to businesses and households. “Despite the actions taken to raise bank capital, ease funding and improve liquidity, conditions in money and credit markets remain extremely difficult,” it said.

Ominously, the Bank concluded that it was “unlikely that a normal volume of lending would be restored without further measures.”

Interbank lending markets have seized up again, after a brief breathing spell following the government’s move to provide a £37bn taxpayer-funded lifeline to the nation’s banks. That suggests that the woes of the financial sector are still too great to allow it to resume its normal pattern of lending to households and businesses.

The Bank noted that while CPI inflation remains high at 4.5 per cent, the weaker outlook for activity in the near term and further falls in commodity prices have lowered that profile. The recent decision to cut value-added tax temporarily should also bear down on inflation in the near term, although that effect will be reversed in 2010.

Andrew Smith, chief economist at KPMG, said: ”The battle against deflation is on. Rates are set to fall further, possibly to zero, and soon, as policymakers try to counteract the powerful contractionary forces at work in the economy.

“However, it is unlikely that low interest rates alone will achieve the desired result and the UK may well have to follow the US with unorthodox measures, such as buying up mortgage and commercial debt, to free-up lending and re-liquefy the financial system.”

Ian McCafferty, chief economic adviser to the CBI, the employers’ body, welcomed the cut.

“The economy needs a significant monetary stimulus and the Bank has clearly decided this will be best achieved by another big cut in interest rates. What is critical for business and consumers alike is that this reduction is passed on,” he said.

Stephen Robertson, director general of the British Retail Consortium, said: “This is exactly the type of decisive action we need during these uncertain times. With the threat of inflation fading, the Bank is right to concentrate on jump-starting the economy.

He added: “The Bank’s job is not done. It must continue to cut rates in the new year to get the economy heading in the right direction again.”

Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors, was more guarded. While describing the cut as a “bold move”, he added: “In our opinion it will not on its own be sufficient to bolster confidence given the scale of the current financial crisis.

“Further significant job losses will be announced in the run-up to Christmas and into the first half of 2009, putting pressure on the Bank to cut rates further. We expect rates to fall to 1 per cent by the end of the first quarter of 2009.”

Bank of England cuts rates to 2%, FT, 4.12.2008, http://www.ft.com/cms/s/0/07ee3a02-c1eb-11dd-a350-000077b07658.html

Op-Ed Columnist

All Fall Down

November 26, 2008
The New York Times
By THOMAS L. FRIEDMAN

I spent Sunday afternoon brooding over a great piece of Times reporting by Eric Dash and Julie Creswell about Citigroup. Maybe brooding isn’t the right word. The front-page article, entitled “Citigroup Pays for a Rush to Risk,” actually left me totally disgusted.

Why? Because in searing detail it exposed — using Citigroup as Exhibit A — how some of our country’s best-paid bankers were overrated dopes who had no idea what they were selling, or greedy cynics who did know and turned a blind eye. But it wasn’t only the bankers. This financial meltdown involved a broad national breakdown in personal responsibility, government regulation and financial ethics.

So many people were in on it: People who had no business buying a home, with nothing down and nothing to pay for two years; people who had no business pushing such mortgages, but made fortunes doing so; people who had no business bundling those loans into securities and selling them to third parties, as if they were AAA bonds, but made fortunes doing so; people who had no business rating those loans as AAA, but made a fortunes doing so; and people who had no business buying those bonds and putting them on their balance sheets so they could earn a little better yield, but made fortunes doing so.

Citigroup was involved in, and made money from, almost every link in that chain. And the bank’s executives, including, sad to see, the former Treasury Secretary Robert Rubin, were clueless about the reckless financial instruments they were creating, or were so ensnared by the cronyism between the bank’s risk managers and risk takers (and so bought off by their bonuses) that they had no interest in stopping it.

These are the people whom taxpayers bailed out on Monday to the tune of what could be more than $300 billion. We probably had no choice. Just letting Citigroup melt down could have been catastrophic. But when the government throws together a bailout that could end up being hundreds of billions of dollars in 48 hours, you can bet there will be unintended consequences — many, many, many.

Also check out Michael Lewis’s superb essay, “The End of Wall Street’s Boom,” on Portfolio.com. Lewis, who first chronicled Wall Street’s excesses in “Liar’s Poker,” profiles some of the decent people on Wall Street who tried to expose the credit binge — including Meredith Whitney, a little known banking analyst who declared, over a year ago, that “Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust,” wrote Lewis.

“This woman wasn’t saying that Wall Street bankers were corrupt,” he added. “She was saying they were stupid. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of borrowed money, and imagine what they’d fetch in a fire sale... For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.”

Lewis also tracked down Steve Eisman, the hedge fund investor who early on saw through the subprime mortgages and shorted the companies engaged in them, like Long Beach Financial, owned by Washington Mutual.

“Long Beach Financial,” wrote Lewis, “was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, Calif., a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.”

Lewis continued: Eisman knew that subprime lenders could be disreputable. “What he underestimated was the total unabashed complicity of the upper class of American capitalism... ‘We always asked the same question,’ says Eisman. ‘Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.’ He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S.& P. couldn’t say; its model for home prices had no ability to accept a negative number. ‘They were just assuming home prices would keep going up,’ Eisman says.”

That’s how we got here — a near total breakdown of responsibility at every link in our financial chain, and now we either bail out the people who brought us here or risk a total systemic crash. These are the wages of our sins. I used to say our kids will pay dearly for this. But actually, it’s our problem. For the next few years we’re all going to be working harder for less money and fewer government services — if we’re lucky.

Maureen Dowd is off today.

All Fall Down, NYT, 25.11.2008, http://www.nytimes.com/2008/11/26/opinion/26friedman.html?ref=opinion

FACTBOX: Fed launches $200 billion consumer credit facility

Tue Nov 25, 2008
11:42am EST
Reuters

WASHINGTON (Reuters) - The Federal Reserve, with the backing of the Treasury, launched a $200 billion lending facility to support the market for consumer debt securities.

Following are details of the plan, called the Term Asset-backed Securities Loan Facility (TALF):

* Federal Reserve Bank of New York will lend up to $200 billion on non-recourse basis to holders of certain triple-A rated asset backed securities backed by newly originated and recently originated consumer and small business loans.

* ABS issuance in consumer categories such as auto loans, student loans and credit cards were roughly $240 billion in 2007 but essentially ground to a halt in October, according to the U.S. Treasury Department.

* The new Fed facility is intended to assist credit markets by facilitating issuance of ABS and improving ABS market conditions.

* The Treasury will provide $20 billion in credit protection to the New York Fed for the program. The Treasury will purchase subordinated debt issued by a New York Fed special purpose vehicle to finance the first $20 billion of asset purchases. The New York Fed will fund any purchases above that amount by lending additional funds to the vehicle up to $200 billion.

*The Treasury funds will come from the unallocated portion of the first tranche of its $700 billion financial rescue fund, known as the Troubled Asset Relief Program (TARP). The action leaves the Treasury just $20 billion in unallocated funds before it must seek Congressional approval to access the TARP's second $350 billion.

* All cash flows from assets in the program will be used to first repay principal and interest to the New York Fed, and second, to repay principal and interest on the $20 billion from the Treasury TARP fund. Any residual returns will be shared between the New York Fed and the Treasury.

* The New York Fed will apply a "haircut" to the value of the securities used as collateral for loans under the program, based on the rpice volatility of each class of eligible collateral.

* The New York Fed will offer a fixed amount of loans from the facility on a monthly basis. These loans will be awarded to borrowers each month based on a competitive, sealed bid auction process and the bank will set minimum interest rate spreads for bidding.

(Reporting by David Lawder, Editing by Chizu Nomiyama)

FACTBOX: Fed launches $200 billion consumer credit facility, R, 25.11.2008, http://www.reuters.com/article/idUSTRE4AO5A720081125

Billions coming for mortgages, credit cards, student, car loans

25 November 2008
USA Today
By Sue Kirchhoff and Barbara Hagenbaugh

WASHINGTON — The Federal Reserve on Tuesday unveiled $800 billion in programs designed to relieve severe pressures in financial markets, and ensure that mortgages, student loans, car loans and other forms of consumer credit remain available at reasonable prices.

"Millions of Americans cannot find affordable financing for their basic credit needs," Treasury Secretary Henry Paulson said, announcing the moves jointly with the Federal Reserve. "This lack of affordable consumer credit undermines consumer spending and as a result weakens our economy."

In the latest in a series of increasingly dramatic announcements, the Federal Reserve said Tuesday that it would buy up to $600 billion in mortgage-related assets, including $100 billion in bonds or other debt issued by Fannie Mae and Freddie Mac and the Federal Home Loan Banks, and $500 billion in other mortgage-backed securities guaranteed by the government entities, including Ginnie Mae, which oversees Federal Housing Administration mortgages.

The move is intended to pump cash back into the mortgage lending process and increase the availability and affordability of mortgage financing. Paulson said "nothing is more important" to housing and the overall economy than making mortgages easier and more affordable to obtain.

The Fed also said it would lend up to $200 billion to securities dealers and other financial firms that hold Triple-A rated securities backed by "newly and recently originated" consumer loans, such as credit cards and auto loans. The program will also cover loans originated by the government's Small Business Administration.

The Treasury will provide $20 billion from the recently enacted $700 billion financial rescue package to cover potential losses from the program. The first losses will be borne by borrowers under criteria yet to be determined.

Paulson called the $200 billion a "starting point," and said the amount could be increased and the program expanded to other kinds of securities, such as commercial mortgage-backed securities.

The program will "enable a broad range of institutions to step up their lending, enabling borrowers to have access to lower cost consumer finance and small business loans," Paulson said. He declined to say when consumers might see the effect of the programs, arguing the USA is currently in a "twice in a hundred years historic situation" marked by "unpredictability."

A secondary effect of the programs announced Tuesday is that they will pump cash into the financial system, increasing bank reserves. That could help inflate the economy at a time when officials are increasingly worried about possible deflation — widespread falling prices that can cripple economic activity.

Officials said larger bank reserves are a side effect of the program, however, not a central aim. The program will essentially be financed by having the government increase the money supply.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the Fed said.

The announcements came amid fresh evidence the economy is rapidly deteriorating, despite aggressive Fed efforts the past year, including sharp interest rate cuts and expanded lending to financial firms.

The government issued revised data showing the economy contracted at a faster pace than initially thought in the July-September quarter, while a key measure of housing in 20 major markets found prices down a sharper-than-expected 17.4% from last year. Consumer confidence improved modestly this month after hitting the lowest on record in October but it points to continued pessimism.

Paulson said he had worked through the weekend on the proposal with officials including New York Fed President Timothy Geithner, who was nominated by Obama Monday to be his Treasury secretary. Paulson said Geithner is "very well-positioned" for the job because he has worked with Treasury officials throughout the crisis.

A main goal of the sweeping initiatives announced Tuesday is to reduce market risk so investors will be more willing to buy securities and consumers will have access to loans at rates and under conditions closer to those before the financial crisis.

The Fed noted that the level of asset-backed securities being issued to provide cash for consumer loans "declined precipitously in September and came to a halt in October." At the same time, consumer interest rates rose as the interest-rate risk premiums for the asset-backed products soared.

Credit is essential to consumer spending, which accounts for more than two-thirds of economic activity. In the July-September quarter, consumer spending fell at the fastest pace in 28 years, the Commerce Department said.

Fed officials said the program announced Tuesday is different from the $700 billion financial rescue package passed by Congress, which was originally designed so the government would buy troubled assets and take them off lenders' balance sheets.

The government is seeking to bolster quality assets through the new programs, making up for a lack of balance sheet capacity and lack of buyers in the financial system, due to continuing stresses and the fact some major financial players are no longer in business, such as some securities lenders and bank affiliates.

The $100 billion in Fannie and Freddie debt will be purchased by the Fed via the mortgage-backed securities through money managers.

With nearly all of the first $350 billion in the $700 billion program spoken for, speculation has risen that the Bush administration will need to ask Congress for the rest of the money. But Paulson said Treasury has "no timeline" to seek congressional approval. "When the time is right, we will avail ourselves," he said.

Lawmakers may try to attach strings to the second $350 billion, such as requiring Treasury to lend money to automakers or force Paulson to use government money to help prevent mortgage foreclosures.

Paulson said the administration is continuing to work on a foreclosure mitigation program, but noted the challenge is to avoid using government money to help homeowners who do not need help or whose mortgages could have been reworked without government aid.

"It's a challenging area," Paulson said.

Rebuffing criticism that the administration was going to pass off the issue to the Obama administration in January, he said, "I am going to run right until the end."

Billions coming for mortgages, credit cards, student, car loans, UT, 25.11.2008, http://www.usatoday.com/money/economy/2008-11-25-fed-bailout_N.htm

Consumer Price Drop Prompts Fear of Deflation

November 20, 2008
The New York Times
By JACK HEALY

In another sign that the struggling economy continues to slow, consumer prices tumbled by a record amount in October, carried lower by skidding energy and transportation prices, raising the specter of deflation.

The Consumer Price Index, a key measure of how much Americans spend on groceries, clothing, entertainment and other goods and services, fell by 1 percent in October compared with prices in the previous month, the Labor Department reported Wednesday morning.

It was the steepest single-month drop in the 61-year history of the pricing survey and raised concerns about deflation as the economy contracts and demand for goods and services plunge. Another report released Wednesday indicated that new home construction continued to fall. “This month it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”

A continued decline in prices could worsen the economic slowdown by making it harder to pay off debts and would negate the impact of interest-rate cuts by the Federal Reserve.

Even excluding volatile food and energy prices, prices dropped 0.1 percent in October, the first such decline in more than two decades. Mr. O’Sullivan said that he expected core prices, which are up 2.2 percent this year to continue to fall back, but he does not expect them to slip into negative territory..

“You’re going to see huge declines in a month’s time in the November reports,” Mr. O’Sullivan said. “That’s the biggest part of the weakness.”

Energy prices led the decline in October, falling 8.6 percent as the price of gasoline continued its steady slide from highs of more than $4 a gallon. The costs of transportation fell 5.4 percent while clothing prices fell 1 percent.

“It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

“The dominant and common factor is the plunge in gasoline prices, which drove the bulk of the weakness,” Mr. Sullivan said.

In a speech Wednesday at a Washington conference, the vice chairman of the Federal Reserve, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.

But economists said the Federal Reserve had limited its options after repeatedly cutting interest rates in recent months. The target rate for the federal funds rate is now 1 percent after a cut of half a percentage point in October. Still, many are expecting another cut at the next meeting in December.

A report on the beleaguered real estate market showed that housing starts fell 4.5 percent in October, to a seasonally adjusted 791,000. Housing starts last month were 38 percent lower than their October 2007 levels.

Shares on Wall Street were sharply lower Wednesday morning following the reports

Economists said the tumbling consumer prices offered more evidence that companies ranging from boutiques to airlines to car dealerships were beginning to offer deep discounts to compete for a shrinking pool of disposable cash. Americans have tightened their spending as job losses mounted and easy credit dried up, and retailers are bracing for a punishing holiday shopping season.

“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a sudden, any pricing power that companies might have had is gone. You’re going to see discounting like crazy going on. All kinds of sales. You’re going to see all kinds of prices being slashed.”

With consumers pulling back, many analysts are expecting a difficult Christmas shopping season. Retail sales, for example, were down 2.8 percent in October from September, and 4.1 percent from October 2007 as consumers pared their spending.

The price of food and beverages edged up in October, and was still 6.1 percent higher than the same period last year. Alcohol, cereal, meat, fish and desserts were all more expensive in October while the price of produce and dairy products dipped slightly.

And while energy prices fell sharply in October, they were still an unadjusted 11.7 percent higher than a year ago, thanks to a long run-up in oil and energy costs. The decline in consumer prices was just the latest symptom of an ailing economy. On Tuesday, the government reported that wholesale prices dropped a record 2.8 percent last month as commodities prices plummeted on slumping worldwide demand. Crude oil prices, which peaked near $150 a barrel this summer, are now hovering at $55 a barrel, and the prices for gold, silver and other metals have collapsed.

Consumer Price Drop Prompts Fear of Deflation, NYT, 20.11.2008, http://www.nytimes.com/2008/11/20/business/economy/20econ.html

Op-Ed Columnist

Bailout to Nowhere

November 14, 2008
The New York Times
By DAVID BROOKS

Not so long ago, corporate giants with names like PanAm, ITT and Montgomery Ward roamed the earth. They faded and were replaced by new companies with names like Microsoft, Southwest Airlines and Target. The U.S. became famous for this pattern of decay and new growth. Over time, American government built a bigger safety net so workers could survive the vicissitudes of this creative destruction — with unemployment insurance and soon, one hopes, health care security. But the government has generally not interfered in the dynamic process itself, which is the source of the country’s prosperity.

But this, apparently, is about to change. Democrats from Barack Obama to Nancy Pelosi want to grant immortality to General Motors, Chrysler and Ford. They have decided to follow an earlier $25 billion loan with a $50 billion bailout, which would inevitably be followed by more billions later, because if these companies are not permitted to go bankrupt now, they never will be.

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

If ever the market has rendered a just verdict, it is the one rendered on G.M. and Chrysler. These companies are not innocent victims of this crisis. To read the expert literature on these companies is to read a long litany of miscalculation. Some experts mention the management blunders, some the union contracts and the legacy costs, some the years of poor car design and some the entrenched corporate cultures.

There seems to be no one who believes the companies are viable without radical change. A federal cash infusion will not infuse wisdom into management. It will not reduce labor costs. It will not attract talented new employees. As Megan McArdle of The Atlantic wittily put it, “Working for the Big Three magically combines vast corporate bureaucracy and job insecurity in one completely unattractive package.”

In short, a bailout will not solve anything — just postpone things. If this goes through, Big Three executives will make decisions knowing that whatever happens, Uncle Sam will bail them out — just like Fannie Mae and Freddie Mac. In the meantime, capital that could have gone to successful companies and programs will be directed toward companies with a history of using it badly.

The second part of Obama’s plan is the creation of an auto czar with vague duties. Other smart people have called for such a czar to reorganize the companies and force the companies to fully embrace green technology and other good things.

That would be great, but if Obama was such a fervent believer in the Chinese model of all-powerful technocrats, he should have mentioned it during the campaign. Are we really to believe there exists a czar omniscient, omnipotent and beneficent enough to know how to fix the Big Three? Who is this deity? Are we to believe that political influence will miraculously disappear, that the czar would have absolute power over unions, management, Congress and the White House? Please.

This is an excruciatingly hard call. A case could be made for keeping the Big Three afloat as a jobs program until the economy gets better and then letting them go bankrupt. But the most persuasive experts argue that bankruptcy is the least horrible option. Airline, steel and retail companies have gone through bankruptcy proceedings and adjusted. It would be a less politically tainted process. Government could use that $50 billion — and more — to help the workers who are going to be displaced no matter what.

But the larger principle is over the nature of America’s political system. Is this country going to slide into progressive corporatism, a merger of corporate and federal power that will inevitably stifle competition, empower corporate and federal bureaucrats and protect entrenched interests? Or is the U.S. going to stick with its historic model: Helping workers weather the storms of a dynamic economy, but preserving the dynamism that is the core of the country’s success.

Bailout to Nowhere, NYT, 15.11.2008, http://www.nytimes.com/2008/11/14/opinion/14brooks.html

Dodging another Great Depression

Sun Nov 2, 2008
3:02pm EST
Reuters
By Emily Kaiser

WASHINGTON (Reuters) - Starbucks is starting to sell more coffee. Companies are once again finding buyers for their short-term debt. Money is beginning to flow back into emerging markets.

Maybe this is not the second Great Depression after all.

While there is no doubt the global economy is hurting -- perhaps sliding into the worst recession since the 1970s -- investors seem to be concluding that comparisons to the dark days of the 1930s are a bit overdone.

A news database search turned up 16,095 articles that included the phrase "Great Depression" in the past three months, nearly triple the number of times it appeared in the previous three months.

But there are promising signs central banks are gaining some traction with their efforts to stabilize financial markets and reopen the lending taps, and the panic-selling that gripped stock markets for much of October seems to be abating.

Since October 7, the day before major central banks announced coordinated interest rate cuts, the rates banks charge each other for overnight lending have fallen dramatically.

On October 7, the London interbank offered rates for U.S. dollars jumped to nearly 4 percent. As of Friday, it was down to 0.4 percent. Libor is the benchmark used to set borrowing costs on trillions of dollars worth of lending worldwide.

"It's certainly moving in the right direction," Jay Bryson, global economist with Wachovia, said on a conference call as he discussed the bank's economic outlook. Bryson expects a global recession, probably deeper than the most recent one in 2001.

"Our underlying assumption is that the steps that the governments around the world have taken to date, and potentially ones that haven't been announced yet ... will ease the global credit crunch. There could be hiccups along the way but you won't see a complete lock-down in credit markets."

PERKING UP

On Thursday, both the European Central Bank and the Bank of England hold interest rate-setting meetings, and both are expected to reduce short-term borrowing costs. The U.S. Federal Reserve, Bank of Japan and People's Bank of China all lowered interest rates last week.

With the rate cuts, government steps to shore up banks and guarantee loans, and programs to get hard currency into emerging markets, credit is starting to flow again.

Issuance of commercial paper, a form of debt that companies use to finance day-to-day business, grew last week after six consecutive weeks of declines. To be sure, that was largely because the Federal Reserve launched a new program to buy the paper, and private investors have yet to show much enthusiasm.

The U.S. central bank and the International Monetary Fund also opened up new lending channels last week to get dollars and other hard currencies into key emerging economies. That helped to lift stock markets in countries such as Brazil.

There were also some reassuring comments from the corporate world. Starbucks Corp (SBUX.O: Quote, Profile, Research, Stock Buzz) said sales at its established stores edged up in October, and it was hopeful that it had weathered the worst of the slowdown.

UGLY PRICED IN?

As of Friday, nearly two-thirds of the companies in the U.S. Standard and Poor's 500 index had reported quarterly earnings, and 60 percent of them posted results that were better than analysts expected, according to Thomson Reuters data. Of course, earnings were down 11.7 percent on average.

The message from those companies was that the U.S. economy is tilting into a recession that some CEOs say will be the worst since the 1970s. But they do not expect catastrophic job losses and bank failures on a par with the Depression era.

"For the time being, investors appear to be more focused -- and cheerful -- over the slate of global policy announcements and the ensuing impact of breaking the logjam in the money and credit markets than on the continuous set of very weak incoming economic data, not just here but abroad," said Merrill Lynch economist David Rosenberg.

"Either a deep and prolonged recession has already long been discounted, or financial market participants are going to be in for a very big surprise because the economic data, as ugly as they are, are likely to get a lot uglier in coming months and quarters," he said.

The next unpleasant surprises may come this week. Euro-zone retail sales for September are expected to show a decline, and the global manufacturing sector probably contracted last month. U.S. retailers are expected to report weak sales for October, and the U.S. October employment report may show job losses nearing the 200,000 mark.

As depressing as those figures may sound, they are consistent with a recession, not a depression. The commonly cited rule of thumb for determining when a garden variety recession becomes something much worse is a 10 percent drop in GDP. Not even bearish economists are predicting that.

(Editing by Dan Grebler)

Dodging another Great Depression, R, 2.11.2008, http://www.reuters.com/article/ousiv/idUSTRE4A128R20081102

Gordon Brown in the Middle East

Brown hopeful of Saudi cash for IMF

Sunday November 02 2008 15.30 GMT
Guardian.co.uk
Allegra Stratton in Riyadh
This article was first published on guardian.co.uk on Sunday November 02 2008.
It was last updated at 15.30 on November 02 2008.

Gordon Brown said today he was hopeful of success in his attempts to persuade dollar-rich Gulf states to prop up ailing national economies through a massive injection of capital into the International Monetary Fund (IMF).

The prime minister spent three hours in one-to-one talks with Saudi Arabia's King Abdullah, trying to persuade the monarch to invest in a revamped IMF.

On the first leg of a four-day visit to the Middle East, and aiming to secure hundreds of billions of dollars for the fund, Brown called off a planned dinner with business leaders accompanying him so as to allow maximum negotiating time with the Saudi king.

The IMF currently has around $250bn in its emergency reserves but there are fears that, with Hungary, Iceland and Ukraine having already sought assistance and more nations expected to follow, the sum might not be sufficient.

Brown hopes to persuade Gulf leaders to use some of the estimated $1tn they have made from high oil prices in the last few years to boost the reserves, indicating that he would like to see the current sum increased by "hundreds of billions" of dollars.

The prime minister said following the talks that he was hopeful of having secured Saudi backing.

Speaking on the BBC television's Sunday AM programme, Brown said: "I think people want to invest both in helping the world get through this very difficult period of time but I also think people want to work with us so we are less dependent on oil and have more stability in oil prices."

He added: "The Saudis will, I think, contribute, so we can have a bigger fund worldwide."

However, a senior government source party to the negotiations said the Saudis were very sensitive about being regarded as a "cash cow" and that the country, in which two thirds of the population are below the age of 25, would prioritise domestic investment if necessary.

The business secretary, Peter Mandelson, accompanying Brown on the trip, echoed this caution. He played down expectations, indicating that the government was unlikely to learn whether the Saudis would contribute towards the IMF fund until a meeting of 20 countries in Washington on November 15. Mandelson told reporters that talks with the Saudis were a "process not an event".

Both Brown and Mandelson indicated that the Saudis would only buy into the scheme if significant reform of the global institutions was achieved to bring on board rising powers such as Saudi Arabia, India and Brazil.

Business leaders on the trip - described by Brown as the "highest profile group of business leaders ever to accompany a delegation overseas" - said the prime minister was receiving something of a "hero's welcome" for his part in the global response to the recent economic downturn, and that this was softening his dealings with Saudis.

Brown arrived later in the afternoon in Doha, Qatar for the second leg of his tour.

Brown hopeful of Saudi cash for IMF, G, 2.11.2008, http://www.guardian.co.uk/world/2008/nov/02/saudiarabia-creditcrunch

Economy Shrank In Third Quarter as Consumers Retreat

October 30, 2008
Filed at 9:02 a.m. ET
The New York Times
By REUTERS

WASHINGTON (Reuters) - The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, its sharpest contraction in seven years as consumers cut spending and businesses reduced investment in the face of rising fears that recession was setting in.

The Commerce Department said the third-quarter contraction in gross domestic product was the steepest since the corresponding quarter in 2001 though it was slightly less than the 0.5 percent rate of reduction that Wall Street economists surveyed by Reuters had forecast.

The third-quarter contraction was a striking turnaround from the second quarter's relatively brisk 2.8 percent rate of growth. It occurred when financial market turmoil that has heightened concerns about a potentially lengthy U.S. recession.

Consumer spending, which fuels two-thirds of U.S. economic growth, fell at a 3.1 percent rate in the third quarter - the first cut in quarterly spending since the closing quarter of 1991 and the biggest since the second quarter of 1980. Spending on nondurable goods - items like food and paper products - dropped at the sharpest rate since late 1950.

Continuing job losses coupled with declining gains from stocks and other investments have put consumers under severe stress. The GDP report showed that disposable personal income dropped at an 8.7 percent rate in the third quarter - the steepest since quarterly records on this component were started in 1947 -- after rising 11.9 percent in the second quarter when most of economic stimulus payments still were flowing.

Consumers cut spending on durable goods like cars and furniture at a 14.1 percent annual rate in the third quarter, the biggest cut in this category of spending since the beginning of 1987. Car dealers have said that sales have virtually stalled, in part because tight credit makes it hard for even creditworthy buyers to get loans.

Businesses also were clearly wary about the future, cutting investments at a 1 percent rate after boosting them 2.5 percent in the second quarter. It was the first reduction in business investment since the end of 2006. Inventories of unsold goods backed up at a $38.5-billion rate in the third quarter after rising $50.6 billion in the second quarter.

Prices were still rising relatively strongly in the third quarter, with the personal consumption expenditures index up at a 5.4 percent annual rate, the sharpest since early 1990. Even excluding volatile food and energy items, core prices grew at a 2.9 percent rate, up from the second quarter's 2.2 percent rise.

However, many commodity prices in October have begun to ease and the Federal Reserve indicated on Wednesday when it slashed interest rates again that its concern for the future was focused more heavily on weak growth than on inflation.

(Reporting by Glenn Somerville, editing by Neil Stempleman)

Economy Shrank In Third Quarter as Consumers Retreat, NYT, 30.10.2008, http://www.nytimes.com/reuters/business/business-us-usa-economy.html

Cost of crash: $2,800,000,000,000

• Bank of England calls for reform
• Markets jittery after Asian losses
• Brown defends borrowing

Tuesday October 28 2008
The Guardian
Larry Elliott, Phillip Inman and Nicholas Watt
This article appeared in the Guardian on Tuesday October 28 2008 on p1 of the Top stories section.
It was last updated at 08.17 on October 28 2008.

A worker walks past a screen displaying stock market movements at a window of the London Stock Exchange in the City of London, October 27, 2008. Photograph: Alessia Pierdomenico/Reuters

Autumn's market mayhem has left the world's financial institutions nursing losses of $2.8tn, the Bank of England said today, as it called for fundamental reform of the global banking system to prevent a repeat of turmoil "arguably" unprecedented since the outbreak of the first world war.

In its half-yearly health check of the City, the Bank said tougher regulation and constraints on lending would be needed as policymakers sought to learn lessons from the mistakes that have led to a systemic crisis unfolding over the past 15 months.

The Bank's Financial Stability Report, which will be sent to every bank director in Britain, more than doubled the previous estimate of the potential losses faced by all financial institutions since the spring, but said that given time the actual losses could be pared by between a third and a half.

The £50bn pledged by the government had helped underpin the system, the Bank said, and would provide a breathing space for UK banks so that they did not have to sell assets at cut-price values immediately. The report also expressed cautious optimism about the effectiveness of the recent global bail-out plan.

The Bank's estimate exceeds that made by the International Monetary Fund recently. The IMF concentrated on US institutions and did not include losses from the turmoil of recent weeks. Estimated paper losses from UK banks on mortgage-backed securities and corporate bonds are currently £122.6bn, the Bank report said.

Gordon Brown insisted yesterday that it was right for the government to increase borrowing in order to fund investment to help the economy through tough times. But he moved to reassure markets that he would not preside over a reckless increase in borrowing during the recession and said he would reduce it as a proportion of GDP once the economy picks up.

Paving the way for an expected abandonment of the tight fiscal rules he established as chancellor, Brown said: "The responsible course of government is to invest at this time to speed up the economic activity. As economic activity rises, as tax revenues recover, then you would want borrowing to be a lower share of your national income. But the responsible course at the moment is to use the investments that are necessary, and to continue them, and to help people through very difficult times.

"I think that's a very fundamental part of what we are doing."

In another turbulent day yesterday on global markets, there were hefty falls in Asian stockmarkets and a fresh fall in the pound. Japan's Nikkei index closed down more than 6% at a 26-year-low of 7162.9. London's FTSE 100 recovered from an early fall of more than 200 points to close 30 points lower at 3852.6, while the Dow Jones closed down 2.42% at 8,175.77.

Brown and Peter Mandelson, the business secretary, served notice that Britain should brace itself for a downturn when they both warned about rising unemployment. Brown said: "I can't promise people that we will keep them in their last job if it becomes economically redundant. But we can promise people that we will help them into their next job."

Mandelson was more blunt as he warned of the impact of the recession. "We are facing an unparalleled financial crisis," he said during a visit to Moscow. "I don't think yet people have realised what the impact is going to be on our real economy."

The Tories intensified their attacks on the government by depicting Brown as not a man with a plan but a man with an overdraft.

Responding to Brown's remarks, George Osborne, shadow chancellor, said: "What they are talking about is borrowing out of necessity, not out of virtue. Gordon Brown is a man with an overdraft, not a man with a plan. He is being forced into this borrowing. He presents it as a strategy but it is actually a consequence of his great failure that borrowing is already out of control before we even get into the worst of the economic circumstances that we are in."

Brown was speaking as the Treasury finalised plans to rewrite the fiscal rules which have governed his approach to the economy over the past decade. Alistair Darling will use his pre-budget report next month to say that it is time for a more flexible approach in the new economic cycle, which started in 2006-07.

The previous FSR in April envisaged a gradual recovery in global markets and the Bank was careful today not to sound the all-clear despite the coordinated action in Britain, the US and the eurozone this month to recapitalise banks and provide extra liquidity to markets. "In recent weeks, the global banking system has arguably undergone its biggest episode of instability since the start of the first world war," it said.

Sir John Gieve, the Bank's deputy governor for financial stability, added: "With a global economic downturn under way, the financial system remains under strain. But it is better placed as a result of the exceptional package of capital, guaranteed funding and liquidity support. That is helping to underpin the banking system both directly and by demonstrating the authorities' determination to do whatever is needed to restore confidence.

"Looking further ahead, we need a fundamental rethink of how to manage systemic risk internationally. We need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy.

"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical growth of risk in the system more broadly. Counter-cyclical policy of that sort should complement regulation of companies and broader macroeconomic policy."

The Bank believes that the capital injection from the taxpayer will also prevent banks from slashing their lending too aggressively over the coming months, relieving the recessionary pressure on the economy.

Figures released yesterday, however, from financial data provider Moneyfacts showed banks were failing to pass on interest rate cuts to mortgage borrowers despite making severe cuts in savings rates. It said most institutions had already passed on the last half-point base rate cut to savers while holding back on cuts in home loan interest rates.

"Some providers are using the base rate cut as a way of increasing their margin for risk, by not passing on the full cut to mortgage customers but passing the cut on in full to savings customers," it said.

A separate study last week marked a new low in the number of mortgage products available.

Concerns at widespread job losses across the finance sector prompted unions to demand a "social contract" to protect jobs. Derek Simpson, Unite's joint general secretary, said: "Workers in the financial services are facing insecurity as the world is gripped by economic turmoil. The Unite 'social contract' sets out the principles which employees expect the government and finance companies to now sign up to.

"Unite is calling for the protection of jobs, pensions, the end to short-term remuneration policies and an overhaul of the regulatory structures in the financial services sector. There must be a recognition of the importance of employment in the financial services sector, as many communities now depend on the sector since being decimated by the collapse of the manufacturing industry.

"Workers in the financial services industry are not the culprits of the credit crunch and we are not prepared to allow them to become the victims. The taxpayer must now get firm assurances that the financial lifeline extended to these large organisations will be used to protect jobs and the public. It is not acceptable for the government to socialise the risk without allowing the wider society to capitalise on the rewards in the finance industry."

How much is that?

The Bank of England may have put the paper cost of the global crisis at a staggering $2.8 trillion, but how does one come to grips with such a sum? Think of it like this: it could pay for 46 bail-outs of the kind the Treasury handed to the banks RBS, HBOS group and Lloyds TSB; or pay off the last quarter's public debt 45 times. It is more than three times the sum of UK annual public spending, and also equivalent to the wealth of 100 Oleg Deripaskas - before the credit crunch anyway. It's equal to 138m bottles of 1947 Petrus Pomerol, the bankers' favourite vintage; or, if it's your turn in the coffee round, 773bn lattes - nearly 13,000 each for every UK citizen.

Cost of crash: $2,800,000,000,000, G, 28.10.2008, http://www.guardian.co.uk/business/2008/oct/28/economics-credit-crunch-bank-england

Commodities slide amid demand fears

Published: October 27 2008 10:35
Last updated: October 27 2008 10:35
The Financial Times
By Javier Blas in London

Commodities prices continued to fall sharply on Monday, with oil prices falling to a fresh 17-month low just above $60 a barrel, on growing concern that a potential global recession was unavoidable, raising further fears for raw materials demand.

The fall in oil prices came in spite of last week’s Opec oil cartel agreement to cut its production official limit by 1.5m barrels a day in an effort to put a floor on dropping oil prices. Opec officials said they were monitoring the fall in prices.

Iran said Opec was ready to cut further its production if last week’s reduction does not stop the slide, the country’s Opec governor was quoted as saying in the local media.

“In case the reduction in production does not stabilise the oil market, Opec will again reduce its production ceiling,” Mohammad Ali Khatibi Khatibi was quoted as saying by Farhang-e Ashti newspaper.

In London morning trading, Nymex December West Texas Intermediate fell by a further $1.45 a barrel to $62.82 a barrel having earlier hit a fresh 17-month low of $61.30 a barrel. Heating oil and gasoline in New York also fall sharply.

In London, ICE December Brent crude futures lost $3 to hit an intraday low of $59.05 a barrel, its lowest level since February 2007.

Opec’s decision to cut production sparked criticism from the US and UK governments but the continuing fall for oil prices led to talk that the cartel would try to reduce output further before the end of the year.

Robert Laughlin at MF Global in London said whilst many will not shed a tear for oil producers at present it should be noted that several countries may well be running into a ” nil-margin ” production scenario with oil prices sub $ 60 a barrel

The key signal for prices in the medium term will be Opec’s adherence to its agreement. Many traders doubt that it will fully implement the cuts, noting that historically the group has managed about a 60 per cent adherence rate.

But Chakib Khelil, Algeria’s energy minister and Opec’s president, insisted that the group had “no other choice” and it was having trouble selling its oil as buyers stayed away or were unable to secure letters of credit.

Other commodity prices also fell sharply on Monday as investors continued to unwind positions in what now is seen as a risky asset class.

Oliver Jakob, of Swiss-based Petromatrix consutants, said that financial flows were overall dominated by the closing of bets of raising prices in commodity indices.

“With volatility indices at levels of systemic breakdowns it should be expected that more risk is still to be taken off the table, meaning that the waves of indiscriminate selling across asset classes are not yet necessarily over and will dominate in the near term over fundamental considerations,” he said in a note to clients.

Gold prices also came under pressure, as the strengthening dollar reduced the metal’s appeal as a currency hedge. Spot gold slipped nearly 3 per cent to $717.80 a troy ounce, having hit a low of $712 an ounce.

Base metals were also hampered by the spectre of a global recession and its likely implications for demand. Copper continued its fall under the $4,000 mark, losing almost 5 per cent to $3,645 a tonne on the London Metal Exchange.

Agriculture commodities were also down, with CBOT December corn falling 7 cents to $3.65 ¾ a bushel, its lowest in 11 months.

Commodities slide amid demand fears, FT, 27.10.2008, http://www.ft.com/cms/s/0/aefd7198-a402-11dd-8104-000077b07658.html

Economy shrinks as Britain enters recession

October 25, 2008
From The Times
Gary Duncan, Economics Editor

Britain’s economy is shrinking for the first time in 16 years, official figures showed yesterday, confirming that the country is in recession.

The toll from the credit crisis and housing crash has ended Britain’s longest unbroken run of growth since quarterly records began in 1955. City analysts gave a warning that the economy could shrink at an even faster pace in coming months.

Figures for gross domestic product revealed a worse-than-expected fall of 0.5 per cent over the past three months. A recession is defined as two consecutive quarters of negative growth, but a further contraction is inevitable.

The response on the financial markets was swift and brutal. The pound plummeted against the dollar and nearly £49 billion was wiped off the value of Britain’s leading companies. Alistair Darling, the Chancellor, sought to shore up confidence among fearful families and businesses. “It’s obvious now that our economy, other economies across the world, are moving into recession,” he said. “Yes, it’s going to be difficult, yes it’s going to be tough, but we can get through it.”

Charlie Bean, the deputy governor of the Bank of England, said that Britain was only “in the early days” of the fallout from unprecedented global financial convulsions. “This is a once-in-a-lifetime crisis, and possibly the largest crisis of its kind in human history,” Professor Bean said.

Shares in London slumped in response. The FTSE 100 closed down a further 204.5 points, or 5 per cent.The pound suffered one of its worst batterings since it was floated in 1971. At one point it was down by 8 cents against the dollar, before closing a little over 3.5 cents down on the day at $1.5837. In Europe, leading shares also fell by 5 per cent, while US blue-chips fell almost 4 per cent in a day of wild swings in financial markets.

Currencies and commodity prices also suffered. Oil prices continued to fall despite a decision by Opec to cut production by 1.5 million barrels a day. Benchmark Brent crude fell $3.94 to $61.98 per barrel – from a high of $146 in July.

Even gold, the traditional safe haven in times of panic, fell sharply, although it later rcovered. Pressure is growing on the Bank to deliver drastic cuts in interest rates. Its rate-setting committee is expected to order a half-point cut at the start of next month.

Economy shrinks as Britain enters recession, Ts, 25.10.2008, http://business.timesonline.co.uk/tol/business/economics/article5010581.ece

Op-Ed Columnist

Crises on Many Fronts

October 25, 2008
The New York Times
By BOB HERBERT

The closer you look at the current economic crisis, the more harrowing it becomes.

The focus in the presidential campaign has been almost entirely on the struggles faced by the middle class — on families worried about their jobs, their mortgages, their retirement accounts and how to pay for college for their kids.

Each nauseating plunge in the Dow heightens their anxiety. Each company that goes under and each government report showing joblessness on the rise intensifies their fear.

No one knows how to quell the uncertainty. And no one is even talking about the poor.

Alan Greenspan, uncharacteristically befuddled, went up to Capitol Hill on Thursday and lamented that some sort of fissure had erupted in his previously impregnable worldview. For Mr. Greenspan (“I still do not understand exactly how it happened”), this is a moment of intellectual anxiety.

But if we are indeed caught up in the most severe economic crisis since the Great Depression, the ones who will fare the worst are those who already are poor or near-poor. There are millions of them, and yet they remain essentially invisible. A step down for them is a step into destitution.

Listen to Dr. Irwin Redlener, president of the Children’s Health Fund, which he founded with the singer-songwriter Paul Simon to bring health services to poor and homeless children:

“First of all, at least in the short term, we can expect more families will become homeless as foreclosures continue to mount and jobs become harder to hold and more difficult to find. As jobs disappear and employers begin trimming expenses, we can foresee people losing health insurance, swelling the ranks of the medically uninsured.

“I don’t think the health care system can bear another five million or more people uninsured and economically fragile. More people without insurance will crowd into the nation’s hospital emergency rooms when medical problems become too severe to ignore or there is no other access to basic health services. Such a trend will have a seismic impact on our health care system.”

Few Americans have noticed, but a tremendous number of hospitals, from Boston to Los Angeles, are in serious, even dire, financial trouble. A survey of 4,500 hospitals by the New York consulting firm Alvarez & Marsal found that more than half were technically insolvent or at risk of insolvency.

The current economic downturn, combined with an anticipated surge in patients without health insurance, will only worsen what is already a crisis.

The nation’s financial system was all-but-overwhelmed by the mortgage crisis because none of the nation’s leaders paid serious enough attention to the widespread symptoms of what turned out to be a metastasizing disease.

A similar situation exists on a number of important fronts right now: the deteriorating national infrastructure, the woefully inadequate public school system, our self-defeating energy policies, health care. Symptoms of serious trouble are staring us in the face, but no one is mounting an adequate response.

When a new president takes office in January, the temptation will be to delay bold action on these fronts until the overall economic situation improves. That is the kind of mistake (like ignoring the housing and credit bubbles until it was too late or refusing to heed the pre-Katrina warnings in New Orleans) that opens the door to additional crises.

The Alvarez & Marsal study noted that at many community hospitals the physical plant itself is in bad shape because capital funding had to be curtailed because of budget shortfalls. “There are scores of hospitals that are slowly asphyxiating and slipping into insolvency,” the report said, “as they divert capital dollars to fund operations.

“For most of these hospitals, it is only a matter of time before they hit a ‘sudden’ liquidity crisis and cannot make payroll without entering insolvency and being forced into restructuring their finances and operations.”

Dr. Redlener, who is also a professor at Columbia University’s Mailman School of Public Health, said: “The federal government currently strains to pay hospitals more than $35 billion each year to cover the costs of the uninsured. That money comes from general tax revenue, and it is a budget line that will need to be increased if we don’t want to see an epidemic of hospital closures.”

Most important, of course, is a revamping (in a sane way) of the health insurance system.

There are no good scenarios in the offing. The markets are in turmoil. Banks are being nationalized. The U.S. auto industry has the look of a jalopy with four flat tires.

The evidence of decline and decay is everywhere around us. There has never been a time since World War II when the nation was more in need of a presidential administration with a comprehensive vision and the ability to lead on several fronts at once.

Crises on Many Fronts, NYT, 25.10.2008, http://www.nytimes.com/2008/10/25/opinion/25herbert.html

Financial crisis

Pound falls to five-year low as Bank head admits recession is here

• Sterling drops 4% against the US dollar
• King says banking turmoil 'almost unimaginable'
• FTSE 100 drops 2% in early trading

Wednesday October 22 2008
10.15 BST
Guardian.co.uk
Graeme Wearden and Ashley Seager
This article was first published on guardian.co.uk on Wednesday October 22 2008.
It was last updated at 10.18 on October 22 2008.

Sterling was hammered down to a five-year low against the dollar this morning after Mervyn King admitted for the first time that the UK is entering a recession.

The pound began tumbling last night as the Bank of England governor told business leaders in Leeds that the economy is shrinking and hinted at fresh interest rate cuts.

By this morning it had fallen by seven cents to $1.6209, a drop of more than 4%. Traders reported frantic selling as investors rushed to cut their losses by selling the UK currency.

Sterling also fell against the euro, losing around 2% to a low of €1.2636 this morning. The euro itself fell sharply against other currencies, hitting a four-and-a-half-year low against the yen, and its lowest value against the dollar since November 2006.

Shares fell sharply in London this morning, with the FTSE 100 shedding over 100 points, or 2.3%, in early trading to 4127.29.

The pound had already been hit yesterday by unexpectedly gloomy manufacturing data showing that confidence has collapsed, and King's comments appear to have added to concern over quite how weak the British economy now is.

Describing the banking system turmoil of recent weeks as "extraordinary, almost unimaginable," he said the financial system had come closer to collapse two weeks ago than at any time in the past 90 years.

"The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand. Indeed, it now seems likely that the UK economy is entering a recession," King said.

"It is surely probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally."

His fears were confirmed yesterday as the CBI reported that confidence among British manufacturers had tumbled to its lowest since July 1980, with output and orders also collapsing.

The thinktank the National Institute for Economic and Social Research said today that Britain entered a recession in the third quarter of the year and warns the slump will probably last for a year or more, making it every bit as painful as the recessions of the early 1990s or early 1980s.

City commentator David Buik said that King's speech has "put sterling to the sword for the time being".

The Bank of England cut the cost of borrowing by half a point to 4.5% earlier this month, as part of coordinated global action, and King hinted that rates may come down again soon.

"During the past month, the balance of risks to inflation in the medium-term shifted decisively to the downside," he said.

CMC Markets analyst James Hughes said that the possibility of interest rate cuts across Europe have made the greenback more attractive - after months in which traders bet against the dollar.

"Investors continue to flock to the dollar as speculation mounts that central banks elsewhere will continue with aggressive rate cuts in an attempt to stimulate growth in the near term," said Hughes.

Official data out on Friday will almost certainly show that the economy contracted in the July to September period, having not grown at all in the second quarter. A "technical" recession is defined as two consecutive quarters of contraction, which experts say is the least Britain can expect this time round.

Pound falls to five-year low as Bank head admits recession is here, G, 22.10.2008, http://www.guardian.co.uk/business/2008/oct/22/pound-recession-interest-rates

Fear and Loathing Over Economy Spreads

October 16, 2008
Filed at 1:01 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- Fear and loathing is spreading as signs mount that the economy is in danger of losing its balance.

And a fresh batch of economic reports due out Thursday is likely to show more problems for the already stumbling economy.

Industrial production is expected to have dropped in September, underscoring the plight of troubled auto makers as well as manufacturers of furniture, construction materials and other goods that have been hard hit by the collapse of the housing market.

The number of new people signing up for unemployment benefits last week may dip slightly but is still expected to top 400,000, a level that usually points to an ailing labor market.

Consumer prices probably will nudge up in September, but will be up sharply over the past year, further pinching Americans already smarting from dwindling nest eggs and sinking home values.

''Given the likely drawn-out nature of the prospective adjustments in housing and financial markets, I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010,'' Donald Kohn, vice chairman of the Federal Reserve, concluded Wednesday evening.

Worries about the economy sent the Dow Jones industrials down a staggering 733 points earlier Wednesday, erasing any hopes that the convulsions that have shaken Wall Street for a month were over.

The selling spree carried over to Asia, where stocks fell sharply in early trading Thursday. Japan's key stock index plummeted more than 10 percent, South Korean shares shed 7 percent, while in Hong Kong, the Hang Seng Index was down 6 percent.

The plunge in stocks put the nation's economic anxiety front-and-center as the two major presidential candidates, Sens. Barack Obama and John McCain, squared off in their final debate Wednesday night in Hempstead, N.Y.

McCain used the debate to accuse Obama of waging class warfare by advocating tax increases designed to ''spread the wealth around.'' The Democrat denied it, and countered that he favors tax reductions for 95 percent of all Americans.

Wednesday's daylong stock market sell-off came as retailers reported the biggest drop in sales in three years and as a Federal Reserve snapshot showed Americans are spending less and manufacturing is slowing around the country.

Piling up losses in a rough final hour of trading, the Dow ended the day down nearly 8 percent -- its steepest drop since one week after Black Monday in 1987. The Dow has wiped out all but about 127 points of its record-shattering 936-point gain on Monday of this week.

Earlier this week, after governments around the world announced plans to use trillions of dollars to prop up banks, including a U.S. plan to buy about $250 billion in bank stocks, the market had appeared to be turning around -- or at least calming down.

Instead, relentless selling gave the Dow its 20th triple-digit swing in the past 23 trading sessions, an unprecedented run of volatility. The Dow has finished higher on only one day this month. The loss of 733 points is the second-worst ever for the average, topped only by a 778-point decline Sept. 29.

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke have expressed confidence that the government's radical efforts to stabilize the financial system and induce banks to lend again will eventually help the economy.

But Bernanke warned that even if the financial markets level off, the nation will not snap back to economic health quickly.

''Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,'' Bernanke told the Economic Club of New York on Wednesday. He left the door open to further interest rate reductions.

President Bush plans to speak on the financial crisis early Friday -- before the markets open -- at the U.S. Chamber of Commerce headquarters across from the White House. Officials said the speech wasn't intended to put forward new policy actions, but rather would be used by the president to give the nation a more detailed explanation of what the government is doing -- and why -- to combat the crisis.

Some analysts believe the economy jolted into reverse in the recently ended third quarter, while others predict it will shrink later this year or early next. The classic definition of a recession is back-to-back quarters of shrinking economic activity.

Two gloomy economic reports on Wednesday showed that the debate at this point is merely semantic.

The Fed's snapshot of business conditions around the nation, known as the Beige Book, showed economic activity weakening across all of the Fed's 12 regional districts. Consumer spending -- which accounts for more than two-thirds of economic activity -- slumped in most Fed regions. Manufacturing also slowed in most areas.

As shoppers cut back, retail sales dropped sharply in September. The 1.2 percent decline was the biggest in three years.

Leaders of the world's top economic powers, the Group of Eight, said they would meet ''in the near future'' for a global summit to tackle the financial crisis. The group comprises the United States, Japan, Germany, France, Britain, Italy, Canada and Russia.

British Prime Minister Gordon Brown said the meeting could be held as soon as next month. He said the discussions should include not only the world's richest nations but also major emerging economies such as China and India.

''I believe there is scope for agreement in the next few days that we will have an international meeting to take common action ... for very large and very radical changes,'' Brown told reporters before a meeting with other European Union leaders for talks in Brussels on the financial crisis.

German Chancellor Angela Merkel and French President Nicolas Sarkozy also called for a G-8 meeting.

Merkel said reform was needed so that ''something like this can never happen again,'' while Sarkozy said the meeting should be held in New York, ''where everything started.''

The current financial crisis began more than a year ago in the United States when lax lending standards on certain home mortgages came home to roost. Foreclosures skyrocketed, mortgage securities soured and financial companies racked up huge losses.

Fear and Loathing Over Economy Spreads, NYT, 16.10.2008, http://www.nytimes.com/aponline/business/AP-Financial-Meltdown.html

Commodity Prices Tumble

October 14, 2008
The New York Times
By CLIFFORD KRAUSS

HOUSTON — The global financial panic and the economic slowdown have put at least a temporary end to the commodity bull market of the last seven years, sending prices tumbling for many of the raw ingredients of the world economy.

Since the spring and early summer, when prices for many commodities peaked amid fears of permanent shortage, wheat and corn — two cereals at the base of the human food chain — have dropped more than 40 percent. Oil has dropped 44 percent. Metals like aluminum, copper and nickel have declined by a third or more.

The swift turnaround is the brightest economic news on the horizon for consumers, putting money into their pockets at a time they need it badly. Gasoline prices in the United States are falling precipitously — by about 24 cents over the last five days, to a national average of $3.21 a gallon on Monday — and analysts said they could go below $3 a gallon nationally this fall, down from a high of $4.11 a gallon in July.

Prices for most commodities remain elevated by past standards, and they rose a bit on Monday amid the broad market rally. But the trend seems to be downward as traders weigh the prospect that the global economic crisis will lead to sharp drops in demand. The big question is whether prices will drop all the way to long-term norms or whether Asia’s continuing economic boom has set a floor.

The rapid commodity decline has eased fears of inflation, a reason central banks were able to lower interest rates around the world last week in an effort to salvage economic growth. It also represents a fundamental shift of view that is driving markets these days.

A scant few months ago, Americans were seen as participants in a bidding war with the emerging Chinese, Indian, Russian and Brazilian middle classes for a basket full of products. But that was before an extreme slowdown in demand for things as diverse as gasoline and aluminum and the retreat of investment money from commodity futures into safer havens like government bonds.

The commodity bust began before last week’s broad market declines, though the panic has exacerbated the pressure on commodities. Oil dropped by 10 percent on Friday alone, but then recovered some of that loss Monday to settle at $81.19 a barrel, far below its high in July of $145.29.

“Commodities followed the euphoria cycle that we had along with housing,” said Robert J. Shiller, an economist at Yale who specializes in market bubbles. “We had the idea that the world is growing very fast, people are getting very rich and, by the way, we are running out of everything. That theory doesn’t seem so good when the economy is collapsing.”

Some analysts, while welcoming the recent declines, say they believe that prices are likely to remain above long-term norms. Food, in particular, could be a continuing problem: today’s prices are still too high to allow many people in developing countries to afford adequate diets. Nor have the recent declines been passed along in American grocery stores, at least as of yet. The United Nations has projected that global food prices will remain elevated for years.

The price increases of recent years served their economic function, calling forth additional supplies of many commodities — farmers planted every acre they could, mining companies opened new mines and oil companies went to the far corners of the earth to drill wells. In many cases, the prices also caused demand to decline even as supply started rising.

Americans, the world’s largest fuel consumers, have been cutting back on gasoline all year, and the decline is approaching double digits. Motorists pumped 9.5 percent less gasoline for the week ended Oct. 3 compared with the same week a year earlier, according to MasterCard Advisors, which tracks spending. In a report on Friday, the International Energy Agency cut its forecast for global oil consumption yet again, projecting that 2008 would end with the slowest demand growth in 15 years.

Big increases in world wheat production because of increased acreage in the United States, Canada, Russia and much of Europe have brought wheat prices to less than $6 a bushel today from nearly $13 in March.

Soybean prices have dropped to $9 a bushel from $16 since July, in part because of a record crop in China and a slowdown in Chinese imports. Corn prices are also easing amid expanded supply.

A theory among economists is that commodity prices are still at the beginning of a steep fall as the credit squeeze takes the world economy into a deep recession.

“When you have a seven-year bull run, you are going to have more than a four-month correction, and we are just beginning our fourth month,” said Richard Feltes, senior vice president and director of commodity research at MF Global Research. “We have got more deflation coming in the housing sector, in capital assets, and it’s going to continue in commodities as well.”

But many economists say a lasting price collapse is unlikely because the emerging middle class and growing populations in developing economies will continue to have strong appetites for fuels and metals.

Some say that the other commodity bull markets in modern history — approximately spanning 1906 to 1923, 1933 to 1955 and 1968 to 1982 — lasted more than twice as long as the current run. They included some sharp corrections before they ran their course, suggesting that the current drop, however precipitous, could be temporary.

Though the picture is slightly different for every commodity, prices generally hit a low point for the decade soon after the terrorist attacks of Sept. 11, 2001, then rose as the global economy strengthened in the following years. From late 2001 until mid-2008, the price of oil rose 800 percent, copper rose 700 percent and wheat rose 400 percent.

The decline of recent weeks has taken virtually every major commodity more than halfway back to its late 2001 price, adjusted for inflation. The recent drop has been so rapid that if the pace continued, it would take only a few more weeks to erase the gains of the bull market entirely.

That suggests to some analysts that prices could hit a floor fairly soon. “The underlying fundamentals of strong demand for energy, food and industrial commodities will come back,” said Michael Lewis, global head of commodities research for Deutsche Bank.

Many analysts think oil could fall to $70 a barrel in the next few months, if not sooner. But it is hard for them to believe it will go much lower: oil is not becoming easier to find, as fields in Mexico peter out and suppliers like Iran, Nigeria and Venezuela remain unreliable.

The costs of finding oil in deep waters or mining oil sands in Canada remain high, in the $60 to $70 a barrel range — and since those are now vital sources of supply, they could help put a floor under the oil price. Additionally, the Organization of the Petroleum Exporting Countries could cut production to try to shore up prices, probably at an emergency meeting it will hold Nov. 18. Analysts note that the credit crisis and economic slowdown will inevitably stall new industrial projects, reducing demand for metals. But the falling prices will also discourage new mining and drilling. When economic growth resumes, that could produce metal shortages that would drive prices back up.

The biggest single factor that will decide whether a prolonged bull market in commodities is over, or just in a lull, is the Chinese economy. The industrial development of that country in recent years was responsible for much of the world’s increased consumption of copper, aluminum and zinc, and almost a third of the increase in oil consumption.

Chinese growth has slowed but is still running above 12 percent, and that country is expected to undertake some huge projects in coming months as it repairs damage from earthquakes and storms.

Kevin Norrish, a senior commodities researcher at Barclays Capital, said that in a recent visit to China he found that domestic demand for copper was still strong but that exports were weakening. Chinese copper wire manufacturers, he said, “are very depressed indeed because their export orders have fallen a long way.”

He said that as high as prices for commodities rose in recent years, the bull run in the late 1970s and early 1980s was even more buoyant. Of all the major commodities, only oil at its peak in July traded at a higher price than in the last bull market, adjusted for inflation.

That previous bull run, stimulated by years of high economic growth and inflation, was followed by nearly two decades of weak prices that accompanied the transition in the United States from an industrial to a service economy. Then China and India appeared on the world stage as major economies at the turn of the new century, followed by the oil-driven economy in Russia and greater consumption in the Middle East the last four or five years. Mr. Norrish is one of many commodities analysts who think that the story of China, India and other developing countries’ spurring commodity demand is not over.

“What we are seeing is a pause in what we see as a very, very long bull run,” Mr. Norrish said.

Commodity Prices Tumble, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14commodities.html

Both Sides of the Aisle See More Regulation

October 14, 2008
The New York Times
By JACKIE CALMES

WASHINGTON — For 30 years, the nation’s political system has been tilted in favor of business deregulation and against new rules. But that is about to change, now that the government has been forced to intervene in the once high-flying financial industry to avert an economywide crash.

An expansion of the government’s role in financial markets is certain: on Friday the Treasury Department updated its recommended reforms of the existing regulatory structure, which it will leave to the next president and Congress.

Congressional leaders and both presidential candidates already have their own, more far-reaching ideas, from further restricting executives’ pay to remaking the entire regulatory structure so that it better supervises both traditional activities and newer ones like credit-default swaps that are unregulated.

But the pro-regulation climate will probably spill over into other sectors. That seems especially likely now that the Treasury and the Federal Reserve are pumping money into corporations of all types to shore up their capital and to finance day-to-day operations until credit markets recover, and with the auto industry separately getting billions in government assistance.

That will give impetus to those who seek new emission curbs and energy limits to address climate change; or who want health care mandates to expand insurance coverage and restrain costs; or who are calling for new safeguards for food, prescription drugs and toys from China and other less-regulated trading partners.

“We now have a collective anger, disgust, over our whole financial system and it’s obvious we’re going to get a regulatory backlash,” said Robert E. Litan, an economist at the Brookings Institution who has studied financial and regulatory issues for decades. “And we know it’s going to come in a big way in 2009.”

Mr. Litan predicts a spillover effect to other industries because voters have the perception that “big companies are animals and they need to be put in their cages.”

He added: “The only open question going forward in this new era is, are we going to overdo it? Is the pendulum going to go completely over in the other direction?”

Whatever policies result, the political fallout of this renewed respect for government regulation is evident in the current election campaigns.

Democrats, who typically have been on the defensive in recent decades as the more pro-regulatory party, now are playing offense. Senator Barack Obama, the Democratic presidential nominee, is leading his party’s charge, blaming Republicans and their candidate, Senator John McCain, for the lax oversight that contributed to the financial crisis. Mr. Obama recently charged that Mr. McCain supported an economic theory “that basically says that we can shred regulations and consumer protections.”

Mitch McConnell, the Senate Republican leader, who is unexpectedly fighting for re-election in Kentucky, is the target of a television ad that says, “Wall Street and the big banks gave Mitch McConnell $4.4 million for his campaigns, and he fought for less regulation of Wall Street.”

Yet Republicans, led by Mr. McCain, are promising that they, too, will support toughened government regulations. “I think we’re going to have to see smarter regulation,” Mr. McCain’s chief economic adviser, Douglas Holtz-Eakin, said in an interview.

Others are more cautious about the prospect for a major shift in political attitudes toward regulation. Sam Peltzman, a University of Chicago professor and free-market conservative who is widely considered the intellectual godfather of deregulation, said the outlook did not depend solely on who was elected. “It depends on the economy itself,” he said, adding that the government, under either party’s control, would most likely not impose costly regulations on business in bad times.

For example, Mr. Peltzman noted that Senators McCain and Obama were both committed to action against climate change, through a mix of regulations and market forces. “But I think it will be put off because of a slowdown in the economy,” he said. As for health care, “that depends a lot on how strong the Democrats are in Congress.”

There will be no putting off the action on re-regulating finance. Both of the presidential candidates and Congressional leaders like Christopher J. Dodd of Connecticut, the Senate banking committee chairman, and Barney Frank of Massachusetts, the House Financial Services Committee chairman, would go further than the Bush Treasury. They say they want to overhaul the current system next year to rid it of overlapping regulatory agencies, give other agencies new powers and perhaps create a new overseer for the whole system.

Financial institutions are likely to face tougher rules on maintaining capital and liquidity. Companies and instruments that currently are not regulated could be brought under the government’s thumb; unregulated derivatives, hedge funds, mortgage brokers and credit-rating agencies all have been implicated in the current crisis.

Democrats and Mr. McCain talk of limiting executives’ compensation, while Democrats would also give shareholders more say about who sits on corporate boards. Mr. Obama, if he is elected president, would join with the Congressional Democrats, who are likely to increase their majorities in the House and Senate, to revive their unsuccessful proposals to impose new penalties for predatory lending, including mortgage lending.

There are proposals for a new agency to protect consumers against a variety of financial abuses, involving mortgages, auto and student loans and credit cards. Credit card companies’ marketing, billing and interest rates will very likely be reviewed. The insolvency at the insurance giant American International Group is reviving talk in Congress of federal regulation of the insurance industry, which prefers its current, mostly friendly patchwork system of state oversight.

The financial industry “is not the only area where the deregulation ideology got completely out of hand,” Representative Henry A. Waxman of California, chairman of the House Oversight and Government Reform Committee, said in an interview. While Mr. Waxman is already holding hearings on the financial crisis and possible new regulations, he said, “I’m looking forward to working on” issues like climate change and health care insurance in coming years.

Mr. Waxman, who was first elected from California in 1974, said he did not believe the economic downturn would impede new regulations. “Over the years I’ve heard industry after industry come in and say, ‘We cannot survive economically if we have these regulations,’ ” he said. Instead, he argued, studies showed that their compliance was less costly than predicted, and companies emerged more efficient and competitive.

While political stereotypes portray Democrats as favoring regulation and Republicans as deregulators, recent history is more complicated.

A Republican president, Richard M. Nixon, presided over one of the most active regulatory periods of the last half-century, working with the Democrats who controlled Congress in the early 1970s. His legacy includes the Environmental Protection Agency, the Consumer Product Safety Commission and the Occupational Safety and Health Administration and, for a time, wage and price controls.

Later in that decade, a Democrat, President Jimmy Carter, began the deregulatory era that has continued with notable breaks to the present. While people in both parties associate his Republican successor, Ronald Reagan, with making regulation a dirty word politically, it was the Carter administration that instituted cost-benefit analyses for new regulations and deregulated the airline, railroad and trucking industries.

Mr. Reagan’s record was more antiregulation than deregulatory. He and President George H. W. Bush fought Congressional Democrats’ charges that they were not enforcing environmental regulations, among others.

In political campaigns, the Republicans made gains in part by painting Democrats as the party of big government. Studies showed, however, that the number of federal regulations spiked under the first President Bush, in part because of new rules for banks and thrift institutions after the savings and loan scandals of the late 1980s. Also, Mr. Bush signed into law a new Clean Air Act, a nutrition-labeling law and the landmark Americans With Disabilities Act, among others.

A conservative analyst, Bruce R. Bartlett, a Treasury official at the time, recalled that Mr. Bush was so angered by a 1991 magazine report headlined “The Regulatory President” that he ordered a moratorium on all regulations. Sixteen years later, the same magazine, National Journal, ran a similar article about Mr. Bush’s son, calling George W. Bush “the biggest regulator since the Nixon-Ford years.”

That record, however, mostly reflects the many new homeland-security regulations since the Sept. 11, 2001, terrorist attacks. In other areas, President Bush has moved more aggressively than his father and President Reagan away from enforcing existing regulations, choosing to rely on the financial services industry and manufacturers, among other groups, to regulate themselves.

Both Sides of the Aisle See More Regulation, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14regulate.html?hp

Intervention Is Bold, but Has a Basis in History

October 14, 2008
The New York Times
By STEVE LOHR

After a week of mounting chaos in financial markets around the globe, the United States took a momentous step that shifts power in the economy toward Washington and away from Wall Street.

The government’s plan to prop up banks large and small — along with recent bailouts as well as guarantees to support business loans, money markets and bank lending — represents the most sweeping government moves into the nation’s financial markets since the Great Depression, and perhaps ever, according to economists and finance experts.

The high-stakes program is intended to halt the worst financial crisis since the 1930s. If successful, it could long be studied by historians as a textbook case of the emergency role that government can play to rescue a teetering economy.

“It is profound, and it is something of a shift back to the state,” said Adam S. Posen, an economist at the Peterson Institute for International Economics. “But is this a recasting of capitalism? I think what we’ll see is that the government acts as a silent partner and gets out as soon as it can.”

Indeed, they say, many questions remain. Is the government picking winners in a plan that initially seems tilted toward the nation’s largest banks? What strings are attached to the investment in matters like executive pay? Will the move presage a more forceful government hand to control financial markets or will it be a brief stint as capitalism’s protector?

The package does call for the government investments to be in three-year securities that the banks can repay at any time, when markets settle and conditions improve. “This is clearly a crisis measure in crisis times, but it’s a good thing there is a sunset provision that limits the length of the government’s investment,” said Richard Sylla, an economist and financial historian at the Stern School of Business at New York University.

The United States is acting in step with Europe, where governments often take a more interventionist stance in economies and the financial systems are in the hands of a comparatively small number of banks.

Britain took the lead last week, declaring its intention to take equity stakes in banks to steady them. In the last two days, France, Italy and Spain have announced rescue packages for their banks that include state shareholdings.

The government’s plan is an exceptional step, but not an unprecedented one.

The United States has a culture that celebrates laissez-faire capitalism as the economic ideal, yet the practice strays at times. Over the last century, the federal government has occasionally taken stakes in railways, coal mines and steel mills, and has even taken a controlling interest in banks when it was deemed to be in the national interest.

The corporate wards of the state typically have been returned to private hands after short, sometimes fleeting, stretches under federal stewardship.

Finance experts say that having Washington take stakes in United States banks now — like government interventions in the past — would be a promising move to address an economic emergency. The plan by the Treasury Department, they say, could supply banks with sorely needed capital and help restore confidence in financial markets.

Elsewhere, government bank-investment programs are routinely called nationalization programs. But that is not likely in the United States, where nationalization is a word to avoid, given the aversion to anything that hints of socialism.

In past times of war and national emergency, Washington has not hesitated. In 1917, the government seized the railroads to make sure goods, armaments and troops moved smoothly in the interests of national defense during World War I. After the war ended, bondholders and stockholders were compensated and railways were returned to private ownership in 1920.

During World War II, Washington seized dozens of companies, including railroads, coal mines and, briefly, the Montgomery Ward department store chain. In 1952, President Harry S. Truman seized 88 steel mills across the country, asserting that unyielding owners were determined to provoke an industrywide strike that would cripple the Korean War effort. That nationalization did not last long, though, because the Supreme Court ruled the move an unconstitutional abuse of presidential power.

In banking, the government took an 80 percent stake in the Continental Illinois Bank and Trust in 1984. Continental Illinois failed in part because of bad oil-patch loans in Oklahoma and Texas. As the nation’s seventh-largest bank, Continental Illinois was deemed “too big to fail” by federal regulators, who feared wider turmoil in the financial markets. In the end, the government lost an estimated $1 billion on the bad loans it bought as part of the takeover of Continental, which eventually became part of Bank of America.

The nearest precedent for the Treasury plan, finance experts say, are the investments made by the Reconstruction Finance Corporation in the 1930s. The agency, established in 1932, not only made loans to distressed banks, but also bought stock in 6,000 banks, at a cost of $1.3 billion, said Mr. Sylla, the N.Y.U. economist. A similar effort these days, in proportion to today’s economy, would be about $200 billion.

When the economy stabilized eventually, the government sold the stock to private investors or the banks themselves — and about broke even, Mr. Sylla estimated. The 1930s program was a good one, experts say, but the government moved too slowly to deal with the financial crisis, which precipitated and lengthened the Great Depression. The lesson of history, it seems, is for Washington to move quickly in times of economic crisis with a forceful government intervention in the marketplace. And Ben S. Bernanke, chairman of the Federal Reserve, has studied the Great Depression and the policy miscues in those years.

“The goal is to get the engine of capitalism going as productively as possible,” said Nancy Koehn, a historian at the Harvard Business School. “Ideology is a luxury good in times of crisis.”

The traditional American reluctance for government ownership is not shared in other countries. After World War II, several European countries nationalized basic industries like coal, steel and even autos, which typically remained in government hands until the 1980s, when most Western economies began paring back the state’s role in the economy.

Europe remains far more comfortable with government having a strong hand in business. So when Sweden, for example, faced a financial crisis in the early 1990s, the nationalization of much of the banking industry was welcomed. The Swedish government quickly bought stakes in banks, and sold most of them off later — a model of swift, forceful intervention in a credit crisis, financial experts say.

“In Europe, the concept of the social contract is much more social — that is, socialist — than we’ve been comfortable with in America,” said Robert F. Bruner, a finance expert at the Darden School of Business at the University of Virginia.

“The obvious danger with anything that really starts to look like the government taking ownership or control of a significant piece of an industry is, Where do you stop?” Mr. Bruner said. “The auto industry is in dire straits and the airline industry is in trouble, for example.”

“But the spillover effects from the crisis in the financial system are so great, pulling down the rest of the economy in a way that no other industry can, so that the potential cost of not doing something like this is immense,” Mr. Bruner said.

Intervention Is Bold, but Has a Basis in History, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14nationalize.html

U.S. Investing $250 Billion in Banks

October 14, 2008
The New York Times
By MARK LANDLER

WASHINGTON — The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

And the Federal Deposit Insurance Corporation will offer an unlimited guarantee on bank deposits in accounts that do not bear interest — typically those of businesses — bringing the United States in line with several European countries, which have adopted such blanket guarantees.

The Dow Jones industrial average gained 936 points, or 11 percent, the largest single-day gain in the American stock market since the 1930s. The surge stretched around the globe: in Paris and Frankfurt, stocks had their biggest one-day gains ever, responding to news of similar multibillion-dollar rescue packages by the French and German governments.

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

President Bush plans to announce the measures on Tuesday morning after a harrowing week in which confidence vanished in financial markets as the crisis spread worldwide and government leaders engaged in a desperate search for remedies to the spreading contagion. They are desperately seeking to curb the severity of a recession that has come to appear all but inevitable.

Over the weekend, central banks flooded the system with billions of dollars in liquidity, throwing out the traditional financial playbook in favor of a series of moves that officials hoped would get banks lending again.

European countries — including Britain, France, Germany and Spain — announced aggressive plans to guarantee bank debt, take ownership stakes in banks or prop up ailing companies with billions in taxpayer funds.

The Treasury’s plan would help the United States catch up to Europe in what has become a footrace between countries to reassure investors that their banks will not default or that other countries will not one-up their rescue plans and, in so doing, siphon off bank deposits or investment capital.

“The Europeans not only provided a blueprint, but forced our hand,” said Kenneth S. Rogoff, a professor of economics at Harvard and an adviser to John McCain, the Republican presidential candidate. “We’re trying to prevent wholesale carnage in the financial system.”

In the process, Mr. Rogoff and other experts said, the government is remaking the financial landscape in ways that would have been unimaginable a few weeks ago — taking stakes in the industry and making Washington the ultimate guarantor for banking in the United States.

But the pace of the crisis has driven events, and fissures in places as far-flung as Iceland, which suffered a wholesale collapse of its banks, persuaded officials to act far more decisively than they had previously.

“Over the weekend, I thought it could come out very badly,” said Simon Johnson, a former chief economist of the International Monetary Fund. “But we stepped back from the cliff.”

The guarantee on bank debt is similar to one announced by several European countries earlier on Monday, and is meant to unlock the lending market between banks. Banks have curtailed such lending — considered crucial to the smooth running of the financial system and the broader economy — because they fear they will not be repaid if a bank borrower runs into trouble.

But officials said they hoped the guarantee on new senior debt would have an even broader effect than an interbank lending guarantee because it should also stimulate lending to businesses.

Another part of the government’s remedy is to extend the federal deposit insurance to cover all small-business deposits. Federal regulators recently have been noticing that small-business customers, which tend to carry balances over the federal insurance limits, had been withdrawing their money from weaker banks and moving it to bigger, more stable banks.

Congress had already raised the F.D.I.C.’s deposit insurance limit to $250,000 earlier this month, extending coverage to roughly 68 percent of small-business deposits, according to estimates by Oliver Wyman, a financial services consulting firm. The new rules would cover the remaining 32 percent.

“Imposing unlimited deposit insurance doesn’t fix the underlying problem, but it does reduce the threat of overnight failures,” said Jaret Seiberg, a financial services policy analyst at the Stanford Group in Washington.

“If you reduce the threat of overnight failures,” Mr. Seiberg said, “you start to encourage lending to each other overnight, which starts to restore the normal functioning of the credit markets.”

Recapitalizing banks is not without its risks, experts warned, pointing to the example of Britain, which announced its program last week and injected its first capital into three banks on Monday.

Shares of the newly nationalized banks — Royal Bank of Scotland, HBOS and Lloyds — slumped on Monday, despite a surge in banks elsewhere, because shareholder value was diluted by the government.

The move, analysts said, makes the government Britain’s biggest banker. And it creates a two-tier banking system in which the nationalized banks are run like utilities and others are free to pursue profit growth. As part of the plan, the chief executives of the three banks stepped down.

Still, Mr. Paulson’s strategy was backed by lawmakers, including Senator Charles E. Schumer, Democrat of New York, who said he preferred capital injections to buying distressed mortgage-related assets — a proposal that Treasury pushed aggressively before its turnabout.

In a letter to Mr. Paulson on Monday, Mr. Schumer, chairman of the Joint Economic Committee, urged the Treasury to demand that banks receiving capital eliminate their dividends, restrict executive pay and stick to “safe and sustainable, rather than exotic, financial activities.”

“I don’t think making this as easy as possible for the financial institutions is the way to go,” Mr. Schumer said in a call with reporters. “You need some carrots but you also need some sticks.”

But officials said the banks would not be required to eliminate dividends, nor would the chief executives be asked to resign. They will, however, be held to strict restrictions on compensation, including a prohibition on golden parachutes and requirements to return any improper bonuses. Those rules were also part of the $700 billion bailout law passed by Congress.

The nine chief executives met in a conference room outside Mr. Paulson’s ornate office, people briefed on the meeting said. They were seated across the table from Mr. Paulson; Ben S. Bernanke, chairman of the Federal Reserve; Timothy F. Geithner, president of the Federal Reserve Bank of New York; Federal Reserve Governor Kevin M. Warsh; the chairman of the F.D.I.C., Sheila C. Bair; and the comptroller of the currency, John C. Dugan.

Among the bankers attending were Kenneth D. Lewis of Bank of America, Jamie Dimon of JPMorgan Chase, Lloyd C. Blankfein of Goldman Sachs, John J. Mack of Morgan Stanley, Vikram S. Pandit of Citigroup, Robert Kelly of Bank of New York Mellon and John A. Thain of Merrill Lynch.

Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

As Treasury embarked on its recapitalization plan, it offered some details on the nuts-and-bolts of the broader bailout effort. The program’s interim head, Neel T. Kashkari, said Treasury had filled several senior posts and selected the Wall Street firm Simpson Thacher as a legal adviser.

It named an investment management consultant, Ennis Knupp, based in Chicago, to help it select asset management firms to buy distressed bank assets. And it plans to announce the firm that will serve as the program’s prime contractor, running auctions and holding assets, within the next day.

“We are working around the clock to make it happen,” said Mr. Kashkari, a former Goldman Sachs banker who has been entrusted with the job of building this operation within weeks.

As details of the American recapitalization plan emerged, fears grew over the impact on smaller countries. Iceland is discussing an aid package with the International Monetary Fund, a week after Reykjavik seized its three largest banks and shut down its stock market.

The fund also offered “technical and financial” aid to Hungary, which last week suffered a run on its currency. Prime Minister Ferenc Gyurcsany said the country would accept aid only as a last resort.

In a new report on capital flows, the Institute of International Finance projected that net capital in-flows to emerging markets would decline sharply, to $560 billion in 2009, from $900 billion last year.

In Asia, markets continued to rise on Tuesday, lifted further by the announcement that the Japanese government would inject 1 trillion yen ($9.7 billion) into the financial system.

U.S. Investing $250 Billion in Banks, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14treasury.html

Krugman Wins Economics Nobel

October 14, 2008
The New York Times
By CATHERINE RAMPELL

Paul Krugman, a professor at Princeton University and an Op-Ed page columnist for The New York Times, was awarded the Nobel Memorial Prize in Economic Sciences on Monday.

“It’s been an extremely weird day, but weird in a positive way,” Mr. Krugman said in an interview on his way to a Washington meeting for the Group of 30, an international body from the public and private sectors that discusses international economics. He said he was mostly “preoccupied with the hassles” of trying to make all his scheduled meetings on Monday and answer a constantly ringing cellphone.

Mr. Krugman received the award for his work on international trade and economic geography. In particular, the prize committee lauded his work for “having shown the effects of economies of scale on trade patterns and on the location of economic activity.”

He has developed models that explain observed patterns of trade between countries, as well as what goods are produced where and why. Traditional trade theory assumes that countries are different and will exchange different kinds of goods; Mr. Krugman’s theories have explained why worldwide trade is dominated by a few countries that are similar to each other, and why some countries might import the same kinds of goods that it exports.

“There was something very beautiful about the old existing trade theory and its ability to capture the world in a surprisingly simple conceptual framework,” Mr. Krugman said. “And then I realized that some of the new insights coming through in industrial organization could be applied to international trade.”

Mr. Krugman wrote his dissertation, however, on international finance, and credits his professor at M.I.T., Rudiger Dornbusch, with pushing him to study international trade.

“I went to visit him one snowy day in early 1978 and described to him what I’d been thinking about,” Mr. Krugman said. “He turned to me and said, ‘You’ve got to write about that.’ ”

Mr. Krugman has been an Op-Ed columnist at The New York Times since 1999.

“For economists, this is a validation but not news. We know what each other have been up to,” Mr. Krugman said. “For readers of the column, maybe they will read a little more carefully when I’m being economistic, or maybe have a little more tolerance when I’m being boring.”

He said that he did not expect his critics to let him off any more easily because of his new accolade, though.

“I think we’ve learned this when we see Joe Stiglitz writing,” Mr. Krugman said, referring to the winner of the economics Nobel in 2001. “I haven’t noticed him getting an easy time. People just say, ‘Sure, he’s a great Nobel laureate and he’s very smart, but he still doesn’t know what he’s talking about in this situation.’ I’m sure I’ll get the same thing.”

In 1991 Mr. Krugman received the John Bates Clark medal, a prize given every two years to “that economist under 40 who is adjudged to have made a significant contribution to economic knowledge.” He follows several Clark medal recipients who have gone on to win a Nobel, including Mr. Stiglitz.

“To be absolutely, totally honest I thought this day might come someday, but I was absolutely convinced it wasn’t going to be this day,” Mr. Krugman said. “I know people who live their lives waiting for this call, and it’s not good for the soul. So I put it out of my mind and stopped thinking about it.”

He said he did not participate in any of the economics Nobel betting pools , and that he did not know which day the winner’s name would be released until a colleague told him last week.

Mr. Krugman continues to teach at Princeton. This semester he is teaching a small graduate-level course on international monetary policy and theory, covering such timely subjects as international liquidity crises. In recent years he has also taught courses on the welfare state and international trade, as well as all-freshman seminars on various economic topics.

Monday’s award, the last of the six prizes, is not one of the original Nobels. It was created in 1968 by the Swedish central bank in Alfred Nobel’s memory. Mr. Krugman was the sole winner of the award this year, which includes a prize of about $1.4 million.

Krugman Wins Economics Nobel, NYT, 14.10.2008, http://www.nytimes.com/2008/10/14/business/economy/14econ.html

A Power That May Not Stay So Super

October 12, 2008
The New York Times
By DAVID LEONHARDT

AT the turn of the 20th century, toward the end of a brutal and surprisingly difficult victory in the Second Boer War, the people of Britain began to contemplate the possibility that theirs was a nation in decline. They worried that London’s big financial sector was draining resources from the industrial economy and wondered whether Britain’s schools were inadequate. In 1905, a new book — a fictional history, set in the year 2005 — appeared under the title, “The Decline and Fall of the British Empire.”

The crisis of confidence led to a sharp political reaction. In the 1906 election, the Liberals ousted the Conservatives in a landslide and ushered in an era of reform. But it did not stave off a slide from economic or political prominence. Within four decades, a much larger country, across an ocean to the west, would clearly supplant Britain as the world’s dominant power.

The United States of today and Britain of 1905 are certainly more different than they are similar. Yet the financial shocks of the past several weeks — coming on top of an already weak economy and an unpopular war — have created their own crisis of national confidence.

On Friday, as the stock market finished one of its worst weeks by falling yet again, to roughly half of its level just one year ago, the Gallup Poll reported that Americans were substantially more pessimistic about the economy than they have been in more than two decades of polling. Nearly 60 percent say the economy is in poor shape, and 90 percent say it’s still getting worse.

“One thing seems probable to me,” Peer Steinbrück, the German finance minister, said recently. “The U.S. will lose its status as the superpower of the global financial system.” At another time, that remark might have sounded like mere nationalist bluster. Right now, it doesn’t seem so ridiculous to ask whether 2008 will come to be seen as the first year of a distinctly non-American century.

At the heart of the troubles, both short term and long term, is debt. Debt helped create the housing bubble and has now left almost one of every six homeowners with a mortgage larger than the value of their home. Debt built up, and then laid low, modern Wall Street, where firms borrowed $30 for every $1 they owned. And in the coming years, debt will constrain the United States government, as it copes with the combined deficits created by the Bush administration’s policies, the ever-more expensive financial rescue and the biggest item of all, Medicare for the baby boomers.

In essence, households, banks and the government have already spent some of their future earnings. The current crisis marks the point at which the bills begin to get paid. Whereas Britain lumbered under the weight of imperial overreach, as the historian Niall Ferguson has written, the United States will be shackled primarily by its financial overreach.

“Given the burden of debt that has accumulated, it’s hard to see the U.S. economy growing as fast as it did over the past few decades,” Mr. Ferguson said. “There is a profound mood shift occurring.”

But he added two caveats. The political language of both presidential campaigns makes clear that many voters, for all the current pessimism, still believe in the idea of American pre-eminence. So, apparently, do many of the world’s investors.

In recent weeks, the dollar has held its own. Stocks in every other major country are down about as much over the last year as they are in the United States, if not much more. America may not be a safe haven anymore, but it does seem to be safer haven.

Robert Zoellick, the president of the World Bank, said that he was recently speaking to a senior Chinese economist, who said that people in his home country — today’s rising economic power — don’t see the sky falling on the American economy. “They know its ability to turn around problems is really unmatched, historically,” Mr. Zoellick said, quoting the economist about the United States. “At the same time, they ask themselves, Will the United States get at some of the root causes that could determine its real strength over the next 10 or 20 or 30 years?”

This is not the first time in recent history that the economic position of the United States has appeared precarious. At various points between the mid-1970s and early 1990s, Europe and Japan each looked like the next great power. Neither turned out to be.

Japan suffered through its own burst bubble and spent years denying the depth of its problems. Europe proved unable to create engines of growth that could match the software, biotechnology or entertainment industries in the United States.

Taken to its extreme, the American preference for a faster, riskier capitalism led directly to the current crisis. But that preference also helps explain why America is weathering the crisis at least as well as other countries.

Compared with many banks elsewhere, American banks uncovered their problems fairly quickly. Consider the case of Mr. Steinbrück, the German finance minister. Only two weeks ago, around the time that he was predicting the end of American financial dominance, he rejected calls for a Europe-wide bailout. The crisis, he said, was largely American. Last Sunday, Mr. Steinbrück and Chancellor Angela Merkel had to go before television cameras to assure Germans that their government was guaranteeing their savings.

(On Friday, Paul Volcker, the former Federal Reserve chairman, seemed to deliver a message to the Germans in an op-ed article in The Wall Street Journal: “The days of finger pointing and schadenfreude are over.”)

Policy makers in this country have also seemed behind the curve for much of the last year. On Friday, only a week after Ben S. Bernanke, the current Fed chairman, and Henry M. Paulson Jr., the Treasury secretary, dismissed the idea as unwise, Mr. Paulson said the government would buy stock in financial firms. The British government announced a similar plan on Tuesday.

On the whole, though, American officials have been more aggressive than their overseas counterparts, and that has served as a reminder of the American economy’s durable flexibility.

It is possible, then, that the main legacy of the crisis will be some form of corrective to the country’s recent excesses. The economy looks to be heading into a period of more regulated, but still American-style, capitalism, more along the lines of how it operated in the 1950s, 1960s and 1990s. Those three decades happen to have produced the biggest and most widely shared economic gains since World War II.

But if that outcome is possible, it’s not inevitable, and many economists say it isn’t even likely. The debts run up in recent years are particularly unfortunate, because they stole resources from the future without laying the groundwork for future growth. “If you told me we were spending like crazy to build schools and send everyone to college, that would have infinitely different implications than borrowing like crazy to finance current consumption,” said Christina Romer, an economist at the University of California at Berkeley.

Schools, roads, airports and the medical system, as well as the country’s energy policy, all appear to need significant fixing, and yet there will be less money to fix them than there was 5 or 10 years ago. With the coming explosion in Medicare costs, the federal budget deficit could eventually get so large that foreign investors would get spooked. They might then decide that other economies were safer bets and shift more of their lending there. Were that to happen, and the United States struggled to attract financing, the country would face a whole new crisis.

As it is, the Chinese economy has grown so quickly in recent years that it could overtake the American economy as the world’s largest by 2027, according to Goldman Sachs. Just three years ago, Goldman predicted that China was unlikely to become No. 1 until at least 2040.

Some of this catch-up is inevitable. As in the British Empire’s day, poorer countries are able to attract investment thanks to their low wages and also copy the successes of their richer rivals, notes Benjamin Polak, an economic historian at Yale. China still seems considerably less advanced, relative to its rivals, than the United States was in 1905. China remains a politically insecure, deeply unequal country.

But it is indeed making enormous progress, and that progress has consequences. Economic might translates quite directly into political and military might.

Will that prospect be enough to galvanize a serious response to the long-term economic problems in the United States? Or are there still more crises to come?

“The political system does not deal well with gradual, long-term problems,” Peter Orszag, the director of the Congressional Budget Office, said. “It deals with crises, often imperfectly, but it does deal with them. The current experience makes the case.”

A Power That May Not Stay So Super, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/weekinreview/12leonhardt.html

Amid the Gloom, an E-Commerce War

October 12, 2008
The New York Times
By BRAD STONE

WHEN the e-commerce giant eBay emerged from the last recession seven years ago with an aura of invincibility, its chief executive, Meg Whitman, boasted that “eBay is to some extent recession-proof.”

As the online auctioneer’s revenues and stock price kept climbing, one of its primary rivals, Amazon.com, just limped along.

How times have changed.

Ms. Whitman, now co-chair of Senator John McCain’s presidential campaign, retired from eBay earlier this year as the company struggled with stagnation. Amazon, meanwhile, has emerged as one of the most vibrant and reliable retailers in the country.

And in an unmistakable sign that Internet companies are indeed exposed to the gathering economic storm stemming from the credit crisis, Ms. Whitman’s successor, John J. Donahoe, laid off 10 percent of eBay’s 16,000 employees last Monday.

Mr. Donahoe noted that eBay was already feeling the effects of the downturn. “This looks like it is going to be a more typical economic cycle that impacts consumer spending,” he said. “We are not immune.”

That the economic crisis is washing up on Silicon Valley’s shores shouldn’t, perhaps, come as a surprise. Most tech companies are defenseless against waning advertising, business spending and consumer interest in big-ticket items like computers. Over the last three months, investors have punished tech companies like Google, Microsoft and Apple, extracting a fifth to a half of their market value.

E-commerce, though, was once thought to be a refuge from economic storms. People who stay away from the mall might actually be more tempted to shop online and hunt for deals, or so the thinking went.

But analysts are now revisiting that assumption. Many consumers, citing an uncertain economy, say they will clutch their wallets tightly this holiday season regardless of where they shop: 48 percent surveyed recently by eBillme, an online payment service, said they planned to delay purchases.

Traditional, brick-and-mortar stores had wrenching, double-digit declines in September sales and are bracing for a bleak holiday season. No one is certain to what degree online retailers will feel that same pain, because digital vendors have never endured a deep, protracted economic slump before.

“We still feel pretty good about this year, but I worry about next year and beyond,” said Brian J. Pitz, an analyst at Banc of America Securities. “Are people going to spend when they can’t get home equity lines of credit, a student loan or a car loan?”

For eBay and Amazon, the twin giants of e-commerce, the financial meltdown has arrived at a particularly crucial time. After years of claiming that their businesses were complementary, not competitive, the companies are now on a collision course.

Amazon has accelerated its courtship of small online vendors, allowing them to sell on its site — becoming more like eBay. And eBay, desperate to revive itself, has decided to emphasize traditional, fixed-price sales of both new and old merchandise — becoming more like Amazon.

AT stake is more than e-commerce bragging rights. On the Internet, size matters. Larger companies can collect more information about consumers, negotiate better deals with partners and use that leverage to expand their dominance (for example, Google versus Yahoo in search).

“This is a pivotal holiday season for eBay,” said Jeffrey Lindsay, a senior analyst at Bernstein Research who has covered the Internet for a decade. “What people fear is that Amazon is basically building a bigger sales base than eBay and will use that knowledge to sell people more and more of the things they want to buy online.”

Indeed, the balance of power in e-commerce seems to be shifting faster than anyone expected. Just three years ago, eBay had 30 percent more traffic than Amazon. Today, its total of 84.5 million active users is barely ahead of the 81 million active customer accounts that Amazon reported in June.

Amazon has exceeded eBay in other measures as well.

EBay’s market capitalization was three times Amazon’s in 2005, back when Wall Street loved the fact that it carried no inventory and generated huge profits. This year, eBay’s stock has lost over half its value and, in July, Amazon’s valuation surpassed eBay’s for the first time.

In a series of interviews, Mr. Donahoe acknowledged that eBay, based in San Jose, Calif., didn’t adapt fast enough to shifting e-commerce winds. He now embraces a “turnaround mind-set” and is refocusing its Web marketplace toward shoppers who don’t want to waste time in online auctions.

“There are times when I wish we can close this store and just open a new store, but we can’t,” he said. “We need to make bolder, more aggressive changes to the eBay ecosystem even if they are unpopular.”

Up in Seattle, meanwhile, Amazon’s chief executive, Jeffrey P. Bezos, says that after years of failed experimentation, third-party vendors — the foundation on which eBay was built — now account for about 29 percent of sales on Amazon. The company has endured and outlasted critics who long complained about its high fixed costs.

Last year, it impressed investors with accelerating growth, and its stock price revisited the highs of the dot-com boom, before waning euphoria and market pessimism erased more than half of those gains this year. Mr. Bezos credits Amazon’s tolerance for risky, expensive bets like the Kindle electronic reading device.

“Our willingness to be misunderstood, our long-term orientation and our willingness to repeatedly fail are the three parts of our culture that make doing this kind of thing possible,” he said.

EBay’s recent problems have made Mr. Bezos and his team look like shrewd and patient stewards of the Amazon franchise. And Amazon’s second wind is making eBay look as if it has missed one of the greatest opportunities in the Internet’s short history.

“EBay could have closed the door to Amazon back when Amazon was mostly just a platform to sell books and music,” said Scott Devitt, an analyst at Stifel, Nicolaus & Company, the investment bank. “But what eBay did in those days was to take a very hands-off approach and let the marketplace control itself. And that ended up being the downfall of the business relative to others that have succeeded.”

OVER the summer of 2004, at the annual executive retreat that eBay insiders call “Telluride,” a product strategy team argued that eBay needed to break into the promising world of digital media. Pointing to the popularity of services like Napster and the new iTunes music store from Apple, the group predicted that media like books, music and movies would inevitably be distributed digitally, over the Web.

EBay, they argued, needed to ride that wave.

That insight — which did catch on at Amazon and is now responsible for high-profile efforts like the Kindle and Amazon’s MP3 store and video-on-demand service — went nowhere at eBay.

“Nobody really shut it down. The process shut it down,” says a former eBay executive who was on the product strategy team but requested anonymity to avoid alienating former colleagues. “The company was obsessed with making quarterly numbers.”

Whether passing on digital media was a mistake at eBay is still an open question. But the anecdote illustrates larger problems. More than a dozen current and former eBay executives, from all levels of management, say eBay routinely failed to reorient its core business.

They say eBay avoided fiddling with its auction model because it was wary of disrupting a long-profitable equilibrium between buyers and sellers.

EBay has known for years that some Web buyers were looking for a different experience. Surveys suggested that auction participants were alienated by untrustworthy sellers and hidden shipping fees, and increasingly preferred the certainty of instantly buying items at a fixed price.

Although eBay executives recognized and routinely acknowledged the problem, they never took bold, direct steps to address it.

In 2005, the company acquired Shopping.com, a comparative shopping site that catalogs products for sale elsewhere on the Web. But for years eBay did not promote the company’s listings, primarily because its vocal community of sellers — the ones paying fees to eBay — protested whenever eBay sent buyers to other retailers.

Josh Koppelman, who founded the e-commerce site Half.com and sold it to eBay in 2001, says that there was an understandable cultural reluctance inside eBay to alienate sellers. “We got paid a fee to provide a service to a community,” he said. “Hurting members of that community was difficult.”

Instead of imposing critical fixes to its slowing model, eBay searched for high-growth businesses elsewhere, acquiring Skype, the online calling service; StubHub, the ticketing site; and a series of classified-advertising Web sites.

The company did create a whole new site, called eBay Express, where it tried to satisfy buyer interest in a simpler shopping experience. EBay Express automatically amassed all the fixed-price, non-auction listings on eBay properties and presented them in an organized way with only one payment system, PayPal — also owned by eBay.

But in the two-year life of eBay Express, eBay never directed any meaningful traffic to it, fearing that it would interfere with the more profitable and popular auction-oriented site. The company shuttered eBay Express this year and has said it will move some of its innovative features to eBay.com.

Contributing to intransigence, according to several former executives, were deep divisions and constant hand-wringing among its managers over the most fundamental question: What is eBay?

One camp believed that eBay was a discount palace and that it had to continually offer deals to buyers in whatever shopping format they wanted.

But another group, resistant to change even as late as last year when eBay was clearly losing ground, believed that the brand was tied up in the excitement of auctions. Emphasizing traditional shopping destroyed what made eBay special, they argued.

“Today online shopping is mainstream, but it’s also becoming boring,” Bill Cobb, then the president of eBay North America, wrote in a June 2007 blog entry that typified this thinking. “We’re investing in the quintessential eBay experience of buying and selling — person to person — in an auction format.”

Ms. Whitman seemed to moderate this constant debate while never actually settling it. At times, she also seemed unwilling to leave auctions behind.

In an interview last week, while on a break from traveling with the Republican vice-presidential candidate Sarah Palin, Ms. Whitman said it was hard for her to reflect on these kinds of divisions within the company, or on missed opportunities.

“There was no shortage of realistic looks in the mirror, where we asked ourselves if we were doing the best job that we could do,” she said.

She also addressed another notion raised by former eBayers, who say executives were dismissive of Amazon but focused obsessively on Google, the search leader whose tentative moves into e-commerce were viewed inside eBay as acts of aggression.

“Google is a disruptive competitor. It’s not a marketplace and it’s not a retailer but has a different way of marrying buyers and sellers,” she said. “I don’t think you can overstate any competitive threats.”

But paranoia about Google, these former executives say, fueled strategic missteps like the Skype acquisition, which Google had also pursued. Ms. Whitman and other eBay managers spent considerable energy trying to integrate Skype, and last year eBay wrote down $1.4 billion of the $3.1 billion acquisition.

As eBay obsessed about Google, the online retailer from Seattle was encroaching on its turf.

CONVERSATIONS with Jeff Bezos of Amazon inevitably provoke two kinds of outbursts. One is that famous, barking laugh that punctuates even seemingly mundane sentences. The other is his paean to the wisdom of long-term thinking.

“We are willing to plant seeds that take five to seven years to grow into reasonable things,” he said in an interview. “You can’t do big, clean-sheet invention unless you are willing to invest for long periods of time.”

Mr. Bezos has delivered these kinds of odes to patience and risk tolerance for nearly a decade. The company’s appetite for enduring short-term pain for long-term gain is clearest when comparing it with its rival, eBay.

While eBay was buying into classified advertising, online payments and Internet telephony, Amazon spent hundreds of millions of dollars building its brand as a trusted retailer — hiring customer service representatives and returning money to customers when transactions went awry.

As eBay took a pass on digital media, Amazon dove in and frustrated investors for years with margins that were diminished by a bulky R.& D. budget — but produced promising businesses like the MP3 store.

Compensation at the two companies also reflects core differences. Amazon evaluates its executives annually and gives performance-based stock grants. Until this year, when Mr. Donahoe became chief executive, eBay gave cash and stock bonuses based on quarterly performance, rewarding managers for meeting Wall Street’s short-term expectations.

Similarly, Amazon’s push to recruit the small sellers who orbited eBay was marked, at first, by patience and often-embarrassing experimentation.

In 1999, five years after Mr. Bezos first plunged his stake into the ground as an online bookseller, Amazon invaded eBay’s territory, introducing Amazon Auctions and a way for retailers to set up stores on the site, called zShops. The efforts tanked.

The problem then “was that nobody came,” Mr. Bezos said. “Actually, sellers came, but the customers didn’t care and didn’t shop there.”

Amazon tried to promote this siloed merchandise on its site by linking to it on its more popular product pages. These so-called “smart links” were hotly controversial inside Amazon and became the subject of a rivalry between its retail and technology groups.

Fearful that sending visitors to other pages would cut into their sales, retailing executives at Amazon took to removing them from the page at every opportunity, according to one senior Amazon executive who was there at the time.

SEVERAL years ago, the company introduced Amazon Marketplace, laying the groundwork for its current path by listing new and used items from third-party sellers alongside its own merchandise.

If Amazon didn’t stock a particular item, or if independent sellers could offer better prices, they would become the featured retailer on the page.

Amazon settled internal tensions by giving its retail managers credit for any products sold on their pages, even by third-party sellers. But Mr. Bezos says the arrangement still produces anxiety.

“Put yourself in place of our retail buyers,” he said. “You just purchased 10,000 units of a particular digital camera and you are told, if any third party anywhere in the world can offer a better price, we are going to give them the buy box and you are going to get stuck with the inventory. That causes some angst.”

Over the last five years, Amazon has lowered hurdles for independent vendors to sell on its site and recruited new groups of merchants as it has expanded into other countries and product categories — automotive parts in 2006 and office supplies this year, for example.

Amazon executives say they don’t specifically pursue top eBay sellers, but some merchants suggest otherwise.

David Duong, founder of Shoe Metro, a Web retailer based in San Diego, says Amazon representatives called him shortly after Amazon.com introduced a shoe category in 2005 and asked him to begin selling on the site.

“I guess they found us on eBay,” he said. “We were actually going to talk to them, but they beat us to the punch.”

Lately, small merchants and their trade organizations say, the outreach has become even more direct. The Professional EBay Sellers Alliance said that Amazon recently offered to waive some fees for the 800 members of the group, an organization of eBay power sellers, to woo them to its platform.

Because Amazon also sells many of the same products as its merchants, executives at eBay predict that competitive tensions will emerge as the Amazon Marketplace grows. Maybe so. It’s happened before.

Amazon once ran the Web operations of large traditional retailers like Borders, Circuit City and Toys “R” Us. One by one, those retailers concluded that outsourcing such a crucial feature of 21st-century retailing to a competitor was a bad idea.

But some of its newer deals with sellers indicate that Amazon is finding ways around those tensions, at least with small merchants.

Andrew and Deb Mowery of Fort Collins, Colo., who started selling home, garden and pet supplies on eBay in 1999, now make 60 percent of their sales on Amazon and about 20 percent on eBay. In addition to listing items for sale on the Amazon Marketplace, they are also a wholesale supplier to Amazon, providing it with products like heated pet beds.

Mr. Mowery is essentially competing with himself, but the arrangement works. “If they run out, I’ve got their back,” he said. “If I run out, they’ve got my back.”

Amazon wants to forge these kinds of close ties with other small sellers. A program called Fulfillment by Amazon, introduced in 2006, allows retailers to store their inventory in Amazon’s warehouses. When someone buys an item from that seller, Amazon ships it out of its warehouse in an Amazon box.

Integrating small merchants into its operations also allows Amazon to learn more about whom it can trust to sell on its site. Compared with eBay, the company says it exerts a far greater measure of control over its marketplace, calling certain vendors “featured sellers” and vetting others in product categories that are sensitive to fraud.

“At the end of the day, we believe it’s good for all of our sellers to make sure we are protecting the consumer experience first,” Mr. Bezos said. “Our first and foremost goal is to earn trust with consumers. If there are no consumers buying, nothing else matters.”

DESPITE Amazon’s success in courting independent sellers, its selection is still just a fraction of what eBay offers, and in some cases its prices are higher.

For example, there are hundreds of new, used and refurbished Trek racing bikes on eBay; as of last week, Amazon had three for sale. Acquisitive parents can buy a $90 Deux Par Deux baby sweater dress on eBay for under $30. But only a few of this French designer’s items are listed on Amazon, and for close to full price.

And that Lehman Brothers 150th-anniversary collectible tote bag, which every irony-obsessed stock market fan wants under the Christmas tree? It is available for purchase only on eBay, in auctions.

This is where Mr. Donahoe talks about a vision to fix eBay, and to create a Web discount store that offers a wide variety of new and old merchandise in auction and fixed-price formats. To get there, he must administer the sweeping, painful fixes that eBay has previously shunned.

“It was increasingly clear to me in 2007 that what felt like bold changes, and to the community felt like bold changes, were not bold enough,” he said.

His attempted fixes have started internally. In addition to making executive bonuses annual instead of quarterly, to keep employees from leaving and reward longer-term thinking, he moved the company’s focus to buyers instead of sellers.

He canceled the annual eBay Live conference next year with merchants — this year, it turned into an unwieldy complaint session — and began making eBay executives read weekly surveys that ask shoppers whether they would recommend eBay to a friend.

THE eBay facade is also undergoing its most significant renovation in its 14-year history as Mr. Donahoe tries to adjust eBay fees to tempt sellers to list more of their products at fixed prices.

EBay has also added a new 30-day listing at a fixed price that is more economical to many sellers than auctions. It has also disabled the feedback mechanism that allowed sellers to rank buyers and introduced a new “best match” search engine that promotes trusted sellers and good deals.

In another controversial change, eBay has struck special deals with large merchants like Buy.com, which pays no listing fees and offers more than half a million products on eBay.com.

The point of the arrangement is to ensure that eBay stays fully stocked in basics like batteries and printer cartridges. Other eBay sellers are enraged, though, arguing that the deal violates the sacred eBay tenet of the “level playing field.”

These sellers have vented their frustrations online about eBay’s changes. It’s hard to gauge whether the vitriol represents the majority view, but some less vocal, larger sellers on eBay say they have actually benefited.

“EBay has told all bad sellers to shape up,” said Jordan Insley, an electronics merchant who lives near Seattle. “I’ve seen a lot of sellers that used to sell a lot of product fall off the charts.”

Although he worries that buyer traffic on eBay is slowing, Mr. Insley says he will sell $13 million in gadgets this year on eBay alone. “I think eBay is moving in the right direction. We are sticking around.”

Still, Mr. Donahoe can’t count on that sentiment to carry the day. Few of his changes are expected to deliver any immediate results, other than alienating certain sellers.

Yet for eBay, the changes may be a matter of survival. The company need only look across Silicon Valley at Yahoo to see what can happen to wounded Internet companies with depressed stock prices.

In the meantime, he faces tough choices. He is weighing a possible sale of Skype by next year, and analysts think he will almost certainly make that move, since the company now acknowledges that Skype has little synergy with eBay’s other businesses.

That would free eBay to focus on its core marketplace, on getting through the torrential economic downpour, and on combating a challenger that is making greater incursions every day.

“I respect Jeff Bezos a lot as a leader and Amazon and what they’ve done,” Mr. Donahoe said. “But it is still early days in this industry. E-commerce is 7 percent of retail. I don’t think anyone thinks it’s going to end there. We think there is plenty of room for both Amazon and eBay to be successful.”

Amid the Gloom, an E-Commerce War, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/12giants.html

Across the Country, Fear About Savings, the Job Market and Retirement

October 12, 2008
The New York Times
By LAURA M. HOLSON

A year ago, Robert Paynter was comfortably retired and looking forward to years of refurbishing old cars and boating from his dock on Lake Norman in North Carolina. Over a 17-year career at Wachovia, he amassed a pile of stock and options from the bank that he had assumed would be worth more than $600,000.

But now the options are worthless, and he watched the value of his Wachovia shares shrink to about $15,000 before he sold all of them this week after the bank succumbed to the financial crisis and its stock fell to fire-sale prices. The rest of his investments are in free fall.

“It’s like having an out-of-body experience,” said Mr. Paynter, 61. “It’s like being in a hospital bed and watching yourself dying. Whatever the bottom is going to be, I wish it would just get there. It’s the every day, watching the blood drain out of it, that’s hard to take.”

To be sure, he has enough savings to not worry about missing any meals. But Mr. Paynter is resetting his plans for retirement, and has already canceled a trip with friends to Europe next year. “Today I’m O.K.,” he said. “But a year ago I felt like I was in great shape.”

Across the country, Americans are tallying their many losses from the relentless rout in the markets. Financial message boards on the Internet are filled with confessions of fear — about hits to savings, job security and scuttled retirement plans.

“My plan was to never work again,” wrote one person who posted a comment on Bogleheads.org, a Web site for investors who follow the long-term investing advice of John Bogle, founder of the Vanguard funds. “But somebody called me yesterday to see if I was interested in a job, and I am thinking maybe I will go back to work.”

It is not just the declines in savings that people are feeling, reflected in the shrinking balances on quarterly banking statements now arriving in mailboxes.

Based on interviews around the country last week as the market continued its steep slide, many people say they are sensing losses beyond the short-term hits to their portfolios. Some feel a loss of faith in the United States and its government. Others are lowering their sights for the kinds of lives they expect to lead in coming years.

“Maybe we have to readjust our expectations,” said Nicholas Gaffney, a partner in a San Francisco public relations firm. “No one is entitled to anything.”

Mr. Gaffney describes himself as a buy-and-hold investor, and he has been sensing good opportunities of late. He has plowed more than $10,000 into his funds. The value of his portfolio, now at several hundred thousand dollars, has dropped more than a quarter.

He confesses he has been fighting with himself over how closely he should follow the market’s gyrations. One day, he checked the market on his Treo cellphone about 200 times. “I thought to myself, ‘What am I doing?’ ” he said. “I had to stop because I was driving myself crazy. I think everything is going to be fine if people don’t panic.”

That is wishful thinking at this point. Investors have withdrawn more than $81 billion from stock mutual funds since the beginning of the year, with nearly 40 percent of that coming in the last six weeks, according to AMG Data Services, an industry research firm.

Not everyone is panicking, of course. Some are able to see the big picture or find ways to distance themselves from the crush of news about the market.

“Maybe a shrink would have a field day with me,” said Beth Sparks, 40, a self-employed lawyer in Colorado Springs. “But I have an ability to not think about it.”

A week ago, Ms. Sparks reviewed her investments for the first time since January. All are down roughly 30 percent. But Ms. Sparks said she was not concerned because she and her husband did not have a lot of debt. When her husband inherited $50,000 last year, they used it to pay off their mortgage. Vacations typically mean drives to Arizona to spend time with her parents. “I’m just happy me and my family are healthy,” she said.

Peter Schade, 49, who runs his own ad design firm in Farmington Hills, Mich., said each day of bad news was a blow to the idea that he would ever be able to retire.

“I’ve kind of resigned myself to the fact that I’m going to be working for the rest of my life,” he said.

For the last few weeks, Mr. Schade said, he has been closely monitoring the news on the CNN satellite radio network in his car. “I just feel numb,” he said. “The news is changing every half hour.”

Mr. Schade said he and others in the Detroit area were accustomed to weathering downturns in the economy.

“It doesn’t make it any easier, but we’ve sort of fortified ourselves,” he said. In many ways, he said, the rest of the county is just now starting to feel what Detroit has been going through for years, giving people here a head start in coping. “Detroit was the canary in the mine for this. We started this at least three years ago.”

Tom Drooger, 56, of Grand Haven, Mich., is president of a chapter of BetterInvesting, an investment club affiliated with the National Association of Investors Corporation.

Usually, Mr. Drooger is the type to study stocks closely and track the market’s movement throughout the day. By Friday, he was no longer even paying attention. He has decided to stop watching the market news on CNBC for now and instead puts on easy-listening music.

“There’s nothing you can do about it after a while,” he said.

He compared the financial crisis to a house on fire and said he was merely waiting until the flames die down.

“Once the fire’s out, you go in and do the repairs,” he explained. “To start to try to move things around until the market wrings itself out is pointless. I’m just sitting on the sidelines, leaving everything where it’s at.”

College students are watching from the sidelines, too, since they typically are more concerned about jobs at this stage of their lives than the nest eggs.

Matthew Ehrlich, 23, a second-year law student at Wayne State University in Detroit, is worried about whether the economy will improve before he graduates in 2010.

“If things don’t get better in the next two years, I’m going to have a real tough time,” he said. “My hope is that I can just ride it out until the financial markets get back on track.”

Mr. Ehrlich is still debating what type of law to specialize in and said this crisis might ultimately influence his decision.

“The way things are going, bankruptcy law seems to be pretty hot,” he said.

Beyond the personal toll to their savings, some people said they were concerned about what the financial crisis said about the United States.

“All I can tell you is it is a lack of faith in America,” said Pat Emard, 65, of Aptos, Calif., who now worries she may have to go back to work. “People have lost faith in our government. I don’t know what happens now.”

That sense of uncertainty is also troubling to Renee Snow, 73, a retired teacher who taught in the Chicago public schools for 38 years.

Born during the Depression, Ms. Snow said it was in her DNA to save, save, save. Over her career as a teacher, she did just that, and Ms. Snow, now a widow, lives off her teachers’ pension and income from her tax-exempt savings plan. She says she has always put her money in insured products when she could.

“I never watch the stock market, and now I’m watching it every day,” she said.

She has money socked away in savings accounts in different banks but recently began researching whether her banks were solid.

The economy is a frequent topic of conversation among friends at the Jane Addams Senior Caucus, an organization in Chicago where she volunteers as a board member.

Over the last couple of weeks, a general malaise has taken over, Ms. Snow said. “It’s very hard to have much faith in what the government is doing when they change it every day,” she said. “As you read more and more about how we got into this situation, you have less and less faith of how we’re going to get out of it.”

She has an ominous feeling about the future, she said. “You don’t go through life thinking the bank I do business with could go belly up tomorrow,” she said. “This is a new feeling people are living with.”

Nick Bunkley and Crystal Yednak contributed reporting.

Across the Country, Fear About Savings, the Job Market and Retirement, NYT, 12.10.2008, http://www.nytimes.com/2008/10/12/business/economy/12voices.html

Bailout Plan Wins Approval; Democrats Vow Tighter Rules

October 4, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — After the House reversed course and gave final approval to the $700 billion economic bailout package, President Bush quickly signed it into law on Friday, authorizing the Treasury to undertake what could become the most expensive government intervention in history.

But even as Mr. Bush declared that the measure would “help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Congressional Democrats said that it was only a first step and pledged to carry out a sweeping overhaul of the nation’s financial regulatory system.

The final tally in the House was 263 to 171, with 91 Republicans joining 172 Democrats in favor. That was a wider bipartisan majority than vote-counters in both parties had expected, completing a remarkable turnabout from Monday, when the House defeated an earlier version of the bill by 228 to 205.

The financial markets, however, were not enthusiastic. Already weighed down by another round of bleak economic data, including a report showing that 159,000 jobs were lost in September, the Dow fell 157 points to close at 10,325, or nearly 818 points lower than when the week began, before the House’s initial rejection of the bailout.

Some measures of the credit markets improved after the bill was approved, but only modestly. Analysts said it was too soon to tell whether borrowing rates — the interest rates banks charge each other for loans, and a key indicator of the flow of credit — would fall.

The change in course by the House was prompted by fears of a global economic meltdown, and by old-fashioned political inducements added by the Senate: a portfolio of $150 billion in popular tax provisions, including credits for the production of solar, wind and other renewable energy, and an adjustment to spare middle-class families from paying the alternative minimum tax.

In the end, 33 Democrats and 24 Republicans who had voted no on Monday switched sides on Friday to support the plan. Both Mr. Obama and his Republican rival, Senator John McCain, voted for the measure when the Senate approved it on Wednesday, and both hailed Friday’s outcome.

Mr. McCain said that lawmakers had acted “in the best interests of the nation,” while Mr. Obama warned that “a long and difficult road to recovery” might still lie ahead.

In a sign of the urgency surrounding the economic rescue effort, Congressional staff rushed the newly printed legislation into a news conference where Democratic leaders gathered after the vote. Speaker Nancy Pelosi, of California, signed it at 2 p.m., and it was sent to the White House for Mr. Bush’s signature.

Appearing in the Rose Garden, Mr. Bush praised Congress for acting just two weeks after the Treasury secretary, Henry M. Paulson Jr., requested the emergency bailout legislation with a warning that the American economy was at risk of the worst economic collapse since the Depression.

“We have shown the world that the United States will stabilize our financial markets and maintain a leading role in the global economy,” Mr. Bush said.

But it was a hollow victory for the administration, which after long favoring a hands-off approach toward the financial industry has found itself interceding repeatedly this year to avert one calamity after another.

Ms. Pelosi and other Democrats, who expect to widen their majority in Congress in the November elections, said they intended to tighten controls.

“High-fliers on Wall Street will no longer be able to jeopardize that personal economic security of Americans,” Ms. Pelosi said, “because of the bright light of scrutiny, accountability and the attention given under regulatory reform.”

Representative Barney Frank, Democrat of Massachusetts and chairman of the Financial Services Committee, said: “We will be back next year to do some serious surgery on the financial structure.”

The Republican leader, Representative John A. Boehner of Ohio, had urged his colleagues to vote yes. “We know if we do nothing this crisis is likely to worsen and put us in an economic slump the likes of which we have never seen,” he said. “I am going to vote for this bill because I think it’s in the best interests of the American people.”

Opponents of the bailout called it a costly Band-Aid that did not address the core problems in the financial system. “Some things have changed in this bill but taxpayers will still be picking up the tab for Wall Street’s party,” said Representative Marilyn Musgrave, Republican of Colorado. “I am voting against this today because it’s not the best bill. It’s the quickest bill. Taxpayers for generations will pay for our haste and there is no guarantee that they will ever see the benefits.”

Among House Democrats as well as Republicans, many lawmakers facing the toughest challenges for re-election remained in the no column. Those with easier races were more likely to switch.

Many said they agonized over the decision amid a torrent of calls from constituents. Several who switched to yes cited a provision added by the Senate increasing the amount of savings insured by the Federal government to $250,000 per account, from $100,000.

Fears about the economy also motivated support. “Nobody in East Tennessee hates the fact more than me that I am going to vote yes today after voting no on Monday,” Representative Zach Wamp, a Republican, said.

“Monday I cast a blue-collar vote for the American people,” he continued. “Today I am going to cast a red, white and blue-collar vote with my hand over my heart for this country, because things are really bad and we don’t have any choice.”

Several Democrats in the Congressional Black Caucus said they were persuaded to support the bill by Mr. Obama.

Representatives Elijah E. Cummings and Donna F. Edwards, both of Maryland, said they had each spoken to Mr. Obama who helped persuade them to support the bill, in part by assuring them that he would work to achieve a goal that Democrats gave up during negotiations: a change in bankruptcy laws to let judges modify first mortgages.

Mr. Obama, speaking in Abington, Pa., said he had urged lawmakers from both parties to “not make the same mistake twice.” But he warned that passage of the measure should be just “the beginning of a long-term rescue plan for our middle class.”

Mr. McCain, speaking in Flagstaff, Ariz., warned that the bill was not perfect and there was more to be done. “It is an outrage that it’s even necessary,” Mr. McCain said. “But we must stop the damage to our economy done by corrupt and incompetent practices on Wall Street and in Washington.” Mr. McCain said he spoke to House Republicans before Friday’s vote and urged them to approve the bill.

Friday’s vote capped an extraordinary two-week final stretch for the 110th Congress. Lawmakers, eager to get home for the fall campaign season, had intended to wrap up by adopting a budget bill to finance government operations through early March.

Instead, after dealing with the budget, they found themselves still in Washington, just five weeks before Election Day, facing the most important vote of the year — the most important vote of their lives, many lawmakers said — and under extreme pressure by the White House, the presidential nominees, and Congressional leaders of both parties to make a quick decision.

Supporters said the bailout was needed to prevent economic collapse; opponents said it was hasty, ill conceived and risked too much taxpayer money to help Wall Street tycoons, while providing no guarantees of success. The rescue plan allows the Treasury to buy troubled securities from financial firms in an effort to ease a deepening credit crisis that is choking off business and consumer loans, the lifeblood of the economy, and contributing to a string of bank failures.

Officials say the final cost of the bailout will be far less than $700 billion because the government will resell the assets that it buys.

The final agreement disburses the money in parts, with Congress able to block the second $350 billion. It also provides for tighter oversight of the program by two boards, and requires the government to do more to prevent home foreclosures. Lawmakers also included efforts to restrict so-called golden parachute retirement plans for some executives whose firms seek help, and a provision allowing the government to recoup any losses after five years by assessing the financial industry.

Reporting was contributed by Robert Pear and Carl Hulse in Washington; Steven Lee Myers in Abington, Pa.; and Michael Cooper in Flagstaff, Ariz.

Bailout Plan Wins Approval; Democrats Vow Tighter Rules, NYT, 4.10.2008, http://www.nytimes.com/2008/10/04/business/economy/04bailout.html

Op-Ed Contributor

This Economy Does Not Compute

October 1, 2008
The New York Times
By MARK BUCHANAN

Notre-Dame-de-Courson, France

A FEW weeks ago, it seemed the financial crisis wouldn’t spin completely out of control. The government knew what it was doing — at least the economic experts were saying so — and the Treasury had taken a stand against saving failing firms, letting Lehman Brothers file for bankruptcy. But since then we’ve had the rescue of the insurance giant A.I.G., the arranged sale of failing banks and we’ll soon see, in one form or another, the biggest taxpayer bailout of Wall Street in history. It seems clear that no one really knows what is coming next. Why?

Well, part of the reason is that economists still try to understand markets by using ideas from traditional economics, especially so-called equilibrium theory. This theory views markets as reflecting a balance of forces, and says that market values change only in response to new information — the sudden revelation of problems about a company, for example, or a real change in the housing supply. Markets are otherwise supposed to have no real internal dynamics of their own. Too bad for the theory, things don’t seem to work that way.

Nearly two decades ago, a classic economic study found that of the 50 largest single-day price movements since World War II, most happened on days when there was no significant news, and that news in general seemed to account for only about a third of the overall variance in stock returns. A recent study by some physicists found much the same thing — financial news lacked any clear link with the larger movements of stock values.

Certainly, markets have internal dynamics. They’re self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market’s optimism or pessimism. It’s these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up.

Really understanding what’s going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings.

Surprisingly, very few economists have actually tried to do this, although that’s now changing — if slowly — through the efforts of pioneers who are building computer models able to mimic market dynamics by simulating their workings from the bottom up.

The idea is to populate virtual markets with artificially intelligent agents who trade and interact and compete with one another much like real people. These “agent based” models do not simply proclaim the truth of market equilibrium, as the standard theory complacently does, but let market behavior emerge naturally from the actions of the interacting participants, which may include individuals, banks, hedge funds and other players, even regulators. What comes out may be a quiet equilibrium, or it may be something else.

For example, an agent model being developed by the Yale economist John Geanakoplos, along with two physicists, Doyne Farmer and Stephan Thurner, looks at how the level of credit in a market can influence its overall stability.

Obviously, credit can be a good thing as it aids all kinds of creative economic activity, from building houses to starting businesses. But too much easy credit can be dangerous.

In the model, market participants, especially hedge funds, do what they do in real life — seeking profits by aiming for ever higher leverage, borrowing money to amplify the potential gains from their investments. More leverage tends to tie market actors into tight chains of financial interdependence, and the simulations show how this effect can push the market toward instability by making it more likely that trouble in one place — the failure of one investor to cover a position — will spread more easily elsewhere.

That’s not really surprising, of course. But the model also shows something that is not at all obvious. The instability doesn’t grow in the market gradually, but arrives suddenly. Beyond a certain threshold the virtual market abruptly loses its stability in a “phase transition” akin to the way ice abruptly melts into liquid water. Beyond this point, collective financial meltdown becomes effectively certain. This is the kind of possibility that equilibrium thinking cannot even entertain.

It’s important to stress that this work remains speculative. Yet it is not meant to be realistic in full detail, only to illustrate in a simple setting the kinds of things that may indeed affect real markets. It suggests that the narrative stories we tell in the aftermath of every crisis, about how it started and spread, and about who’s to blame, may lead us to miss the deeper cause entirely.

Financial crises may emerge naturally from the very makeup of markets, as competition between investment enterprises sets up a race for higher leverage, driving markets toward a precipice that we cannot recognize even as we approach it. The model offers a potential explanation of why we have another crisis narrative every few years, with only the names and details changed. And why we’re not likely to avoid future crises with a little fiddling of the regulations, but only by exerting broader control over the leverage that we allow to develop.

Another example is a model explored by the German economist Frank Westerhoff. A contentious idea in economics is that levying very small taxes on transactions in foreign exchange markets, might help to reduce market volatility. (Such volatility has proved disastrous to countries dependent on foreign investment, as huge volumes of outside investment can flow out almost overnight.) A tax of 0.1 percent of the transaction volume, for example, would deter rapid-fire speculation, while preserving currency exchange linked more directly to productive economic purposes.

Economists have argued over this idea for decades, the debate usually driven by ideology. In contrast, Professor Westerhoff and colleagues have used agent models to build realistic markets on which they impose taxes of various kinds to see what happens.

So far they’ve found tentative evidence that a transaction tax may stabilize currency markets, but also that the outcome has a surprising sensitivity to seemingly small details of market mechanics — on precisely how, for example, the market matches buyers and sellers. The model is helping to bring some solid evidence to a debate of extreme importance.

A third example is a model developed by Charles Macal and colleagues at Argonne National Laboratory in Illinois and aimed at providing a realistic simulation of the interacting entities in that state’s electricity market, as well as the electrical power grid. They were hired by Illinois several years ago to use the model in helping the state plan electricity deregulation, and the model simulations were instrumental in exposing several loopholes in early market designs that companies could have exploited to manipulate prices.

Similar models of deregulated electricity markets are being developed by a handful of researchers around the world, who see them as the only way of reckoning intelligently with the design of extremely complex deregulated electricity markets, where faith in the reliability of equilibrium reasoning has already led to several disasters, in California, notoriously, and more recently in Texas.

Sadly, the academic economics profession remains reluctant to embrace this new computational approach (and stubbornly wedded to the traditional equilibrium picture). This seems decidedly peculiar given that every other branch of science from physics to molecular biology has embraced computational modeling as an invaluable tool for gaining insight into complex systems of many interacting parts, where the links between causes and effect can be tortuously convoluted.

Something of the attitude of economic traditionalists spilled out a number of years ago at a conference where economists and physicists met to discuss new approaches to economics. As one physicist who was there tells me, a prominent economist objected that the use of computational models amounted to “cheating” or “peeping behind the curtain,” and that respectable economics, by contrast, had to be pursued through the proof of infallible mathematical theorems.

If we’re really going to avoid crises, we’re going to need something more imaginative, starting with a more open-minded attitude to how science can help us understand how markets really work. Done properly, computer simulation represents a kind of “telescope for the mind,” multiplying human powers of analysis and insight just as a telescope does our powers of vision. With simulations, we can discover relationships that the unaided human mind, or even the human mind aided with the best mathematical analysis, would never grasp.

Better market models alone will not prevent crises, but they may give regulators better ways for assessing market dynamics, and more important, techniques for detecting early signs of trouble. Economic tradition, of all things, shouldn’t be allowed to inhibit economic progress.

Mark Buchanan, a theoretical physicist, is the author, most recently, of “The Social Atom: Why the Rich Get Richer, Cheaters Get Caught and Your Neighbor Usually Looks Like You.”

This Economy Does Not Compute, NYT, 1.10.2008, http://www.nytimes.com/2008/10/01/opinion/01buchanan.html

Hedge Funds Are Bracing for Investors to Cash Out

September 29, 2008
The New York Times
By LOUISE STORY

First, the money rushed into hedge funds. Now, some fear, it could rush out.

Even as Washington reached a tentative agreement on Sunday over what may become the largest financial bailout in American history, new worries were building inside the nearly $2 trillion world of hedge funds. After years of explosive growth, losses are mounting — and so are concerns that some investors will head for the exits.

No one expects a wholesale flight from hedge funds. But even a modest outflow could reverberate through the financial markets. To pay back investors, some funds may be forced to dump investments at a time when the markets are already shaky.

The big worry is that a spate of hurried sales could unleash a vicious circle within the hedge fund industry, with the sales leading to more losses, and those losses leading to more withdrawals, and so on. A big test will come on Tuesday, when many funds are scheduled to accept withdrawal requests for the end of the year.

“Everybody’s watching for redemptions,” said James McKee, director of hedge fund research at Callan Associates, a consulting firm in San Francisco. “And there could be a cascading effect, where redemptions cause other redemptions.”

What happens at hedge funds, those loosely regulated private investment vehicles, matters to just about every investor in America. Hedge funds are not just for the rich anymore. Since 2002, the industry has roughly tripled in size, as pension funds, endowments and foundations piled in, hoping for market-beating returns.

Now, the heady returns of the industry’s glory days are over, at least for now. This is shaping up to be the industry’s worst year on record, with the average fund down nearly 10 percent so far, according to Hedge Fund Research. Famous traders like Steven A. Cohen, who runs SAC Capital Advisors, are losing money, and even Kenneth C. Griffin, the head of Citadel Investment Group, is down in one of his funds.

And they are the lucky ones. A growing number of hedge funds are closing down. About 350 were liquidated in the first half of the year. While hedge funds come and go all the time, if the trend continues, the number of closures would be up 24 percent this year from 2007.

Many funds are bracing for trouble. The industry has set aside $600 billion in cash, according to Citigroup analysts, partly because of the uncertainty hanging over the markets but also because of possible redemptions. If redemptions do pour in, hedge funds can freeze the process by not paying investors for a certain period of time, slowing the pace of withdrawals.

One little-known hedge fund barometer is pointing to trouble, however. The alphabet soup of complex investments that Wall Street created in recent years — R.M.B.S.’s, C.D.O.’s and the like — includes C.F.O.’s, short for collateralized fund obligations. Virtually unknown outside the industry, these investments are the hedge fund equivalent of mortgage-backed securities: securities backed by hedge funds.

But last week, credit ratings agencies warned that they might lower the ratings of several C.F.O.’s, in part because of the concern that investors would withdraw money from the funds backing the investments. Standard & Poor’s downgraded parts of nine C.F.O. deals, Fitch placed five on a negative rating watch, and Moody’s put one on a downgrade review.

“The concern is over the redemptions that are happening,” said Jenny Story, an analyst with Fitch Ratings. “The gates are being closed.”

While few in number, C.F.O.’s represent a broad swath of the industry. The vehicles were created by funds of funds, which invest in hedge funds. Each C.F.O. includes stakes in dozens and sometimes hundreds of hedge funds with a variety of investment strategies.

Coast Asset Management, a $5.6 billion fund of funds in Santa Monica, Calif., created three C.F.O.’s in the last few years. The three vehicles raised a total of $1.85 billion, according to Dealogic, and they have a seven-year lock-up on the money. It was that lock-up that appealed to David E. Smith, the firm’s chief executive, who ran into trouble borrowing in 1998, after the collapse of the giant hedge fund Long Term Capital Management.

Coast executives said they were not particularly concerned about the C.F.O.’s, because they had not seen many hedge funds putting limits on redemptions, or “closing the gates,” as the industry calls it.

“It’s clearly been a very tough year for investors in general,” Mr. Smith said. “But I think hedge funds have done a good job of navigating very tough markets and don’t get the type of recognition that they should.”

Two of the C.F.O.’s put on watch or downgraded by the ratings agencies are run by two units of the British hedge fund Man Group. One is run by Glenwood Capital in Chicago, which saw its multi-strategy fund lose more than 4 percent through July, according to an investor. A spokesman for the funds declined to comment.

Returns are not in yet for September, but hedge fund managers say this month is even worse than the summer. Some funds were hurt by new rules from the Securities and Exchange Commission on short-selling, a tactic for betting against stock prices. The commission made it more difficult to short all stocks and temporarily banned the strategy in more than 800 financial stocks. In particular, this hurt convertible-bond managers, who often buy bonds that can be converted into shares and short the underlying stocks.

The short-selling ban lasts until Thursday evening, but it is widely expected to be extended.

John P. Rigas, the chief executive of Sciens Capital Management, knows firsthand how difficult it can be to get money out of troubled hedge funds. He spotted problems at Amaranth Advisors a year before that fund collapsed because of wrong-way bets in the energy markets, but it took him eight months to retrieve all of his fund of funds’ investment. Mr. Rigas’ firm runs a C.F.O. that is invested in 41 hedge funds, but he said he had put more than 25 percent of his funds’ capital into cash to weather the storm.

He predicts further liquidations in the industry.

“How can I say that the environment is not bad?” Mr. Rigas said. “It’s difficult with hedge funds because they are very fragile. By their nature they’re fragile instruments because investors can ask for their money.”

Hedge Funds Are Bracing for Investors to Cash Out, NYT, 29.9.2008, http://www.nytimes.com/2008/09/29/business/29hedge.html

Treasury Would Emerge With Vast New Power

September 29, 2008
The New York Times
By FLOYD NORRIS

During its weeklong deliberations, Congress made many changes to the Bush administration’s original proposal to bail out the financial industry, but one overarching aspect of the initial plan that remains is the vast discretion it gives to the Treasury secretary.

The draft legislation, which will be put to a House vote on Monday, gives Treasury Secretary Henry M. Paulson Jr. and his successor extraordinary power to decide how the $700 billion bailout fund is spent. For example, if he thinks it wise, he may buy not only mortgages and mortgage-backed securities, but any other financial instrument.

To be sure, the Treasury secretary’s powers have been tempered since the original Bush administration proposal, which would have given Mr. Paulson nearly unfettered control over the program. There are now two separate oversight panels involved, one composed of legislators and the other including regulatory and administration officials.

Still, Mr. Paulson can choose to buy from any financial institution that does business in the United States, or from pension funds, with wide discretion over what he will buy and how much he will pay. Under most circumstances, banks owned by foreign governments are not eligible for the money, but under some conditions, the secretary can choose to bail out foreign central banks.

Under the bill, the Treasury is to buy the securities at prices he deems appropriate. Mr. Paulson may set prices through auctions but is not required to do so.

Rarely if ever has one man had such broad authority to spend government money as he sees fit, with no rules requiring him to seek out the lowest possible price for assets being purchased.

The secretary is supposed to do what he can to maximize the profit or minimize the eventual loss to the federal government as a result of its purchase of mortgages and other financial instruments. But in the case of mortgages controlled by the government, he is required to approve “reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write-downs” and other possible changes. Such requests could help homeowners at the expense of the government.

Congress forced the Bush administration to agree to a provision requiring financial institutions that sell securities to the program to give an equity or debt stake to the government. But Mr. Paulson will have wide latitude in deciding how large a stake is needed. His discretion in setting those limits could have a major impact on how many institutions choose to participate.

The limits on executive pay in the bill, also added in response to pressure from legislators, appear unlikely to be used very often. The secretary could take such steps if he bought substantial assets “from an individual financial institution where no bidding process or market prices are available.”

Presumably, if there is some kind of bidding process, those limitations, over which the secretary also has considerable discretion, will not apply. However, institutions that receive $300 million or more from the program would face limitations on executive pay.

One of the most important decisions the secretary will make is the price the government pays for securities. Here again, there is wide discretion. He is directed to “make such purchases at the lowest price” that is “consistent with the purposes of this act.”

Those purposes, however, are expansive and leave him room to pay well over the lowest price available if he wishes to do so. The act is designed to “restore liquidity and stability to the financial system of the United States” and protect homeownership, home values and economic growth. If he concludes that a higher price is needed to provide stability in the financial markets, that is evidently acceptable.

When the Bush administration submitted its original proposal, there was an uproar over the lack of oversight of the secretary’s actions. This bill requires frequent reports to Congressional committees, including a Congressional oversight panel; audits by the comptroller general; and appointment of an inspector general for the program.

The bill also sets up an oversight board, which is directed to “ensure that the policies implemented” by Mr. Paulson are proper. Mr. Paulson is to be one of the five members of the board watching over his actions, joined by the chairman of the Federal Reserve, the chairman of the Securities and Exchange Commission, the Housing Secretary and the director of the Federal Home Finance Agency.

If Mr. Paulson wishes to use his authority to buy financial assets not linked to mortgages, he can do so after consulting the Fed chairman. But he does not need the approval of the Fed chairman or the oversight board.

The bill does allow legal challenges, but attempts to assure they are quickly handled and that the most important decisions can be challenged only on constitutional grounds, not on the ground that they conflict with some other law.

While the bill does not drop the accounting rule that requires banks to report on the market value of their assets — a rule that some banks believe has forced them to report excessive losses — it gives the S.E.C. permission to suspend the rule for any individual company if it thinks that is in the public’s interest. That is likely to lead to intensive lobbying of the commission.

Treasury Would Emerge With Vast New Power, NYT, 29.9.2008, http://www.nytimes.com/2008/09/29/business/29bill.html

President Issues Warning to Americans

September 25, 2008
The New York Times
By SHERYL GAY STOLBERG and DAVID M. HERSZENHORN

WASHINGTON — President Bush appealed to the nation Wednesday night to support a $700 billion plan to avert a widespread financial meltdown, and signaled that he is willing to accept tougher controls over how the money is spent.

As Democrats and the administration negotiated details of the package late into the night, the presidential candidates of both major parties planned to meet Mr. Bush at the White House on Thursday, along with leaders of Congress. The president said he hoped the session would “speed our discussions toward a bipartisan bill.”

Mr. Bush used a prime-time address to warn Americans that “a long and painful recession” could occur if Congress does not act quickly.

“Our entire economy is in danger,” he said.

On Capitol Hill, Democrats said that progress toward a deal had come after the White House had offered two major concessions: a plan to limit pay of executives whose firms seek government assistance, and a provision that would give taxpayers an equity stake in some of the firms so that the government can profit if the companies prosper in the future. Details of those provisions, and many others, were still under discussion.

Mr. Bush’s televised address, and his extraordinary offer to bring together Senator Barack Obama, the Democratic presidential nominee, and Senator John McCain, the Republican, just weeks before the election underscored a growing sense of urgency on the part of the administration that Congress must act to avert an economic collapse.

It was the first time in Mr. Bush’s presidency that he delivered a prime-time speech devoted exclusively to the economy. It came at a time when deep public unease about shaky financial markets and the demise of Wall Street icons such as Lehman Brothers has been coupled with skepticism and anger directed at a government bailout that could become the most expensive in American history.

The administration’s plan seeks to restore liquidity to the market and restore the economy by buying up distressed securities, many of them tied to mortgages, from struggling financial firms.

The address capped a fast-moving and chaotic day, in Washington, on the presidential campaign trail and on Wall Street.

On Capitol Hill, delicate negotiations between Treasury Secretary Henry M. Paulson Jr. and Congressional leaders were complicated by resistance from rank-and-file lawmakers, who were fielding torrents of complaints from constituents furious that their tax money was going to be spent to clean up a mess created by high-paid financial executives.

On Wall Street, financial markets continued to struggle. The cost of borrowing for banks, businesses and consumers shot up and investors rushed to safe havens like Treasury bills — a reminder that credit markets, which had recovered somewhat after Mr. Paulson announced the broad outlines of the bailout plan last week, remain under severe stress, with many investors still skittish.

Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the banking committee, said a deal could come together as early as Thursday. “Working in a bipartisan manner, we have made progress,” the House speaker, Nancy Pelosi, and Representative John A. Boehner, the Republican leader, said in a joint statement.

“We agree that key changes should be made to the administration’s proposal. It must include basic good-government principles, including rigorous and independent oversight, strong executive compensation standards and protections for taxpayers.”

Mr. Bush used his speech to signal that he was willing to address lawmakers’ concerns, including fears that tax dollars will be used to pay Wall Street executives and that the plan would put too much authority in the hands of the Treasury secretary without sufficient oversight.

“Any rescue plan should also be designed to ensure that taxpayers are protected,” Mr. Bush said. “It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars. It should establish a bipartisan board to oversee the plan’s implementation. And it should be enacted as soon as possible.”

The speech came after the White House, under pressure from Republican lawmakers, opened an aggressive effort to portray the financial rescue package as crucial not just to stabilize Wall Street but to protect the livelihoods of all Americans.

But the White House gave careful thought to the timing; aides to Mr. Bush said they did not want to appear to have the president forcing a solution on Congress.

On Capitol Hill, Mr. Paulson, facing a second day of questioning by lawmakers, this time before the House Financial Services Committee, tried to focus as much on Main Street as Wall Street.

“This entire proposal is about benefiting the American people because today’s fragile financial system puts their economic well being at risk,” Mr. Paulson said. Without action, he added: “Americans’ personal savings and the ability of consumers and business to finance spending, investment and job creation are threatened.”

But it was the comments of Mr. Paulson, a former chief of Goldman Sachs, about limiting the pay of executives that signaled the biggest shift in the White House position and the urgency that the administration has placed in winning Congressional approval as quickly as possible.

“The American people are angry about executive compensation, and rightly so,” he said. “No one understands pay for failure.”

Officials said the legislation would almost certainly include a ban on so-called golden parachutes, the generous severance packages that many executives receive on their way out the door, for firms that seek government help. The measure also is likely to include a mechanism for firms to recover any bonus or incentive pay based on corporate earnings or other results that later turn out to have been overstated.

Democrats were also working to include tax provisions that would cap the amount of an executive’s salary that a company could deduct to $400,000 — the amount earned by the president.

At the same time, Congressional Democrats said they were prepared to drop one of their most contentious demands: new authority for bankruptcy judges to modify the terms of first mortgages. That provision was heavily opposed by Senate Republicans.

In addition, Democrats also are leaning toward authorizing the entire $700 billion that Mr. Paulson is seeking but disbursing a smaller amount, perhaps only $150 billion, to start the program, with future funds dependent on how well it is working.

Representative Barney Frank of Massachusetts, the lead negotiator for Congressional Democrats, said they also planned to insert a tax break to aid community banks that have suffered steep losses on preferred stock that they own in the mortgage finance giants Fannie Mae and Freddie Mac.

That change is in addition to others that already have been accepted by Mr. Paulson that would create an independent oversight board and require the government to do more to prevent foreclosures.

Mark Landler and Carl Hulse contributed reporting.

President Issues Warning to Americans, NYT, 25.9.2008, http://www.nytimes.com/2008/09/25/business/economy/25bush.html

Transcript

President Bush’s Speech to the Nation on the Economic Crisis

September 24, 2008
The New York Times

Following is a transcript of President Bush's address to the nation Wednesday evening, as recorded by by CQ Transcriptions:

Good evening. This is an extraordinary period for America's economy.

Over the past few weeks, many Americans have felt anxiety about their finances and their future. I understand their worry and their frustration.

We've seen triple-digit swings in the stock market. Major financial institutions have teetered on the edge of collapse, and some have failed. As uncertainty has grown, many banks have restricted lending, credit markets have frozen, and families and businesses have found it harder to borrow money.

We're in the midst of a serious financial crisis, and the federal government is responding with decisive action.

We boosted confidence in money market mutual funds and acted to prevent major investors from intentionally driving down stocks for their own personal gain.

Most importantly, my administration is working with Congress to address the root cause behind much of the instability in our markets.

Financial assets related to home mortgages have lost value during the house decline, and the banks holding these assets have restricted credit. As a result, our entire economy is in danger.

So I propose that the federal government reduce the risk posed by these troubled assets and supply urgently needed money so banks and other financial institutions can avoid collapse and resume lending.

This rescue effort is not aimed at preserving any individual company or industry. It is aimed at preserving America's overall economy.

It will help American consumers and businesses get credit to meet their daily needs and create jobs. And it will help send a signal to markets around the world that America's financial system is back on track.

I know many Americans have questions tonight: How did we reach this point in our economy? How will the solution I propose work? And what does this mean for your financial future?

These are good questions, and they deserve clear answers.

First, how did our economy reach this point? Well, most economists agree that the problems we're witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.

BUSH: Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

See, in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.

Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.

Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt.

With the situation becoming more precarious by the day, I faced a choice, to step in with dramatic government action or to stand back and allow the irresponsible actions of some to undermine the financial security of all.

I'm a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America's financial system are at risk of shutting down.

The government's top economic experts warn that, without immediate action by Congress, America could slip into a financial panic and a distressing scenario would unfold.

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically.

And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs.

Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And, ultimately, our country could experience a long and painful recession.

Fellow citizens, we must not let this happen. I appreciate the work of leaders from both parties in both houses of Congress to address this problem and to make improvements to the proposal my administration sent to them.

There is a spirit of cooperation between Democrats and Republicans and between Congress and this administration. In that spirit, I've invited Senators McCain and Obama to join congressional leaders of both parties at the White House tomorrow to help speed our discussions toward a bipartisan bill.

I know that an economic rescue package will present a tough vote for many members of Congress. It is difficult to pass a bill that commits so much of the taxpayers' hard-earned money.

I also understand the frustration of responsible Americans who pay their mortgages on time, file their tax returns every April 15th, and are reluctant to pay the cost of excesses on Wall Street.

But given the situation we are facing, not passing a bill now would cost these Americans much more later.

Many Americans are asking, how would a rescue plan work? After much discussion, there's now widespread agreement on the principles such a plan would include.

It would remove the risk posed by the troubled assets, including mortgage-backed securities, now clogging the financial system. This would free banks to resume the flow of credit to American families and businesses.

Any rescue plan should also be designed to ensure that taxpayers are protected. It should welcome the participation of financial institutions, large and small. It should make certain that failed executives do not receive a windfall from your tax dollars.

BUSH: It should establish a bipartisan board to oversee the plan's implementation, and it should be enacted as soon as possible.

In close consultation with Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox, I announced a plan on Friday.

First, the plan is big enough to solve a serious problem. Under our proposal, the federal government would put up to $700 billion taxpayer dollars on the line to purchase troubled assets that are clogging the financial system.

In the short term, this will free up banks to resume the flow of credit to American families and businesses, and this will help our economy grow.

Second, as markets have lost confidence in mortgage-backed securities, their prices have dropped sharply, yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.

The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal.

And when that happens, money will flow back to the Treasury as these assets are sold, and we expect that much, if not all, of the tax dollars we invest will be paid back.

The final question is, what does this mean for your economic future? Well, the primary steps -- purpose of the steps I've outlined tonight is to safeguard the financial security of American workers, and families, and small businesses. The federal government also continues to enforce laws and regulations protecting your money.

The Treasury Department recently offered government insurance for money market mutual funds. And through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.

The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change.

Once this crisis is resolved, there will be time to update our financial regulatory structures. Our 21st-century global economy remains regulated largely by outdated 20th-century laws.

Recently, we've seen how one company can grow so large that its failure jeopardizes the entire financial system.

Earlier this year, Secretary Paulson proposed a blueprint that would modernize our financial regulations. For example, the Federal Reserve would be authorized to take a closer look at the operations of companies across the financial spectrum and ensure that their practices do not threaten overall financial stability.

There are other good ideas, and members of Congress should consider them. As they do, they must ensure that efforts to regulate Wall Street do not end up hampering our economy's ability to grow.

In the long run, Americans have good reason to be confident in our economic strength. Despite corrections in the marketplace and instances of abuse, democratic capitalism is the best system ever devised.

It has unleashed the talents and the productivity and entrepreneurial spirit of our citizens. It has made this country the best place in the world to invest and do business. And it gives our economy the flexibility and resilience to absorb shocks, adjust, and bounce back.

Our economy is facing a moment of great challenge, but we've overcome tough challenges before, and we will overcome this one.

I know that Americans sometimes get discouraged by the tone in Washington and the seemingly endless partisan struggles, yet history has shown that, in times of real trial, elected officials rise to the occasion.

And together we will show the world once again what kind of country America is: a nation that tackles problems head on, where leaders come together to meet great tests, and where people of every background can work hard, develop their talents, and realize their dreams.

Thank you for listening. May God bless you.

President Bush’s Speech to the Nation on the Economic Crisis, NYT, 24.9.2008, http://www.nytimes.com/2008/09/24/business/economy/24text-bush.html

Punctured

Bubblenomics

September 21, 2008
The New York Times
By DAVID LEONHARDT

The past week, by any standard, has been an extraordinary one for America’s economy and its financial system. Merrill Lynch, which was founded during Woodrow Wilson’s administration, agreed to be bought for a bargain-basement price, while Lehman Brothers, which dates back to John Tyler’s presidency, simply collapsed.

By the end of the week, the federal government was preparing to buy hundreds of billions of dollars in securities that no bank wanted. It appears to be the government’s biggest fiscal intervention since the Great Depression, designed to get the financial markets working again and keep a credit freeze from sending the economy into a deep recession.

The announcement of the plan changed the mood on Wall Street and sent stocks soaring at the end of the week. But even if the economy avoids a tailspin, the next couple of years aren’t likely to feel especially good. It’s been a long period of excess, and the hangover could be long, as well. For the near future, the most likely outcome remains slow economic growth, scant income gains for most workers and, for investors, disappointing returns from stocks and real estate. If consumers begin to cut back on their debt-fueled spending things could get worse.

On Friday morning, the economists at Lehman Brothers sent out their usual weekly roundup of the news, but it came this time with a short, italicized note, explaining that the report would be the final one to appear under the Lehman banner. That bit of understatement preceded some more: “This episode of financial crisis,” Lehman’s economists explained, “appears to be much deeper and more serious than we and most observers thought it likely to be. And it is by no means clear that it is over.”

Yet, historic though this week has been, there is something familiar about what is happening. Once again, we are seeing the puncturing of a speculative bubble that was the result of asset prices soaring high above the underlying value of the assets. For as long as markets have existed, bubbles have formed. And whenever one of those bubbles begins to leak, it typically needs years to deflate, causing enormous economic damage as it does.

Only now, for instance, are the bubbles of the past decade and a half, first in the stock market and then in real estate, starting to go away. It’s easy to think of the turmoil of the past 13 months as being unconnected to the stock bubble of the 1990s, which appeared to end with the dot-com crash of 2000 and 2001. That crash brought down the overall stock market by more than a third, its worst drop since the 1970s oil crisis. Corporate spending on new equipment then plunged and employment fell for three straight years.

But dramatic though it was, the dot-com crash did not actually come close to erasing the excesses of the 1990s. Indeed, by some of the most meaningful measures, Wall Street after the crash looked a lot more like it was in a bubble than a bust.

As late as 2004, financial services firms earned 28.3 percent of corporate America’s total profits, according to Moody’s Economy.com. That was somewhat lower than it had been over the previous few years, but still almost double the financial sector’s average share of profits throughout the 1970s and ’80s. By 2007, the share had fallen only marginally, to 27.4 percent.

Meanwhile, the share of wages and salaries earned by employees of financial services firms continued to climb and reached a peak last year. Of every dollar paid to the American work force in 2008, almost 10 cents went to people working at investment banks and other finance companies, up from about 6 cents or 7 cents throughout the 1970s and ’80s.

How did this happen? For one thing, the population of the United States (and most of the industrialized world) was aging and had built up savings. This created greater need for financial services. In addition, the economic rise of Asia — and, in recent years, the increase in oil prices — gave overseas governments more money to invest. Many turned to Wall Street.

Nonetheless, a significant portion of the finance boom also seems to have been unrelated to economic performance and thus unsustainable. Benjamin M. Friedman, author of “The Moral Consequences of Economic Growth,” recalled that when he worked at Morgan Stanley in the early 1970s, the firm’s annual reports were filled with photographs of factories and other tangible businesses. More recently, Wall Street’s annual reports tend to highlight not the businesses that firms were advising so much as finance for the sake of finance, showing upward-sloping graphs and photographs of traders.

“I have the sense that in many of these firms,” Mr. Friedman said, “the activity has become further and further divorced from actual economic activity.”

Which might serve as a summary of how the current crisis came to pass. Wall Street traders began to believe that the values they had assigned to all sorts of assets were rational because, well, they had assigned them.

Traders sliced mortgages into so many little pieces that they forgot what they were really trading: contracts based on increasingly shaky loans. As the crisis has spread, other loans have started going bad as well. Hyun Song Shin, an economist at Princeton, estimates that banks have thus far absorbed only about one-third to one-half of the losses they will eventually be forced to take.

One of the few pieces of good news is that Wall Street finally seems to be coming to grips with the depth of its problems. You can see that most clearly, perhaps, in stock prices, which have at long last fallen from the stratospheric levels of the past decade.

The classic measure of whether the stock market is overvalued is the price-earnings ratio, which divides stock prices by annual corporate earnings. At the height of the bubble, in 2000, companies in the Standard & Poor’s 500 Index were trading at 36 times their average earnings over the previous five years. It was the highest valuation since at least the 1880s, according to the economist Robert Shiller.

By 2004, surprisingly enough, the ratio had dropped only to about 26, still higher than at any point since the 1930s. At the start of last year, it was still 26.

But after the market closed on Friday, the ratio was down to roughly 17, which happens to be about its post-World War II average. At least by this one measure, stocks are no longer blatantly overvalued.

This doesn’t necessarily mean they are done falling. For one thing, corporate profits could decline, particularly if households begin pulling back on spending. The unusually rapid rise of consumer spending over the past two decades is arguably the third bubble confronting the economy. It has happened thanks in part to a huge increase in debt, which may now be coming to an end, just as Wall Street’s love affair with debt appears to be ending as well.

And even if the economy does better than expected, investors may still turn pessimistic. “We tend to go through pendulum swings,” said Joel Seligman, the president of the University of Rochester, a longtime Wall Street observer. There are long periods of overexuberance, in which investors worry that they are missing the next great thing, followed by crises that make those same investors fear that the world as they know it is coming to an end.

That seemed to be the case last Wednesday, when share prices of Goldman Sachs and Morgan Stanley plunged even though the firms were still making money. Glenn Schorr, a UBS analyst, wrote an e-mail message to clients saying, “Stop the Insanity.”

But bubbles inevitably produce insanity, both on the way up and the way down. On Friday, the formerly laissez-faire Bush administration, along with the Federal Reserve, announced that the only way to restore sanity to the markets was for the government to buy an enormous pile of mortgage-related securities. Theoretically, the government could turn a profit on the securities if they can be sold for higher prices when normal conditions return.

But few expect that outcome. Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, estimated that the ultimate cost to taxpayers could be in the range of $1 trillion, or about two-and-a-half times as large as this year’s federal budget deficit.

A guiding principle of economic policy in recent years has been that nobody is smart enough to diagnose a bubble until it has already deflated. This was one of Alan Greenspan’s mantras during his tenure as the chairman of the Fed. His successor, Ben Bernanke, said much the same thing when he took office in 2006. As they saw it, no matter how high stock prices rose relative to profits, or no matter how high house prices rose relative to rents, regulators deferred to the collective wisdom of the market.

The market is usually right, after all. Even when it isn’t, Mr. Greenspan maintained, pricking a bubble before it grew too large could stifle innovation and hurt other parts of the economy. Cleaning up the aftermath of a bubble is easier and less expensive, he argued. We’re living through that cleanup now.

Bubblenomics, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/weekinreview/21leonhardt.html

$700 Billion Is Sought for Wall Street in Vast Bailout

September 21, 2008
The New York Times
By DAVID M. HERSZENHORN

WASHINGTON — The Bush administration on Saturday formally proposed a vast bailout of financial institutions in the United States, requesting unfettered authority for the Treasury Department to buy up to $700 billion in distressed mortgage-related assets from the private firms.

The proposal, not quite three pages long, was stunning for its stark simplicity. It would raise the national debt ceiling to $11.3 trillion. And it would place no restrictions on the administration other than requiring semiannual reports to Congress, granting the Treasury secretary unprecedented power to buy and resell mortgage debt.

“This is a big package, because it was a big problem,” President Bush said Saturday at a White House news conference, after meeting with President Álvaro Uribe of Colombia. “I will tell our citizens and continue to remind them that the risk of doing nothing far outweighs the risk of the package, and that, over time, we’re going to get a lot of the money back.”

After a week of stomach-flipping turmoil in the financial system, and with officials still on edge about how global markets will respond, the delivery of the administration’s plan set the stage for a four-day brawl in Congress. Democratic leaders have pledged to approve a bill but say it must also include tangible help for ordinary Americans in the form of an economic stimulus package.

Staff members from Treasury and the House Financial Services and Senate banking committees immediately began meeting on Capitol Hill and were expected to work through the weekend. Congressional leaders are hoping to recess at the end of the week for the fall elections, after approving the bailout and a budget measure to keep the government running.

With Congressional Republicans warning that the bailout could be slowed by efforts to tack on additional provisions, Democratic leaders said they would insist on a requirement that the administration use its new role, as the owner of large amounts of mortgage debt, to help hundreds of thousands of troubled borrowers at risk of losing their homes to foreclosure.

“It’s clear that the administration has requested that Congress authorize, in very short order, sweeping and unprecedented powers for the Treasury secretary,” the House speaker, Nancy Pelosi of California, said in a statement. “Democrats will work with the administration to ensure that our response to events in the financial markets is swift, but we must insulate Main Street from Wall Street and keep people in their homes.”

Ms. Pelosi said Democrats would also insist on “enacting an economic recovery package that creates jobs and returns growth to our economy.”

Even as talks got under way, there were signs of how very much in flux the plan remained. The administration suggested that it might adjust its proposal, initially restricted to purchasing assets from financial institutions based in the United States, to enable foreign firms with United States affiliates to make use of it as well.

The ambitious effort to transfer the bad debts of Wall Street, at least temporarily, into the obligations of American taxpayers was first put forward by the administration late last week after a series of bold interventions on behalf of ailing private firms seemed unlikely to prevent a crash of world financial markets.

A $700 billion expenditure on distressed mortgage-related assets would roughly be what the country has spent so far in direct costs on the Iraq war and more than the Pentagon’s total yearly budget appropriation. Divided across the population, it would amount to more than $2,000 for every man, woman and child in the United States.

Whatever is spent will add to a budget deficit already projected at more than $500 billion next year. And it comes on top of the $85 billion government rescue of the insurance giant American International Group and a plan to spend up to $200 billion to shore up the mortgage finance giants Fannie Mae and Freddie Mac.

At his news conference, Mr. Bush also sought to portray the plan as helping every American. “The government,” he said, “needed to send a clear signal that we understood the instability could ripple throughout and affect the working people and the average family, and we weren’t going to let that happen.”

A program to help troubled borrowers refinance mortgages — along with an $800 billion increase in the national debt limit — was approved in July. But financing for it depended largely on fees paid by Fannie Mae and Freddie Mac, which have been placed into a government conservatorship.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

“There are going to be federal tax dollars buying up some of the bad paper,” Mr. Frank said. “They should accept some compensation guidelines, particularly to get rid of the perverse incentives where it’s ‘heads I win, tails I break even.’ ”

Mr. Frank said Democrats were also thinking about tightening the language on the debt limit to make clear that the additional borrowing authority could be used only for the bailout plan. And he said they might seek to revive a proposal that would give bankruptcy judges the authority to modify the terms of primary mortgages, a proposal strongly opposed by the financial industry.

Senator Charles E. Schumer, Democrat of New York, who attended emergency meetings with the Treasury secretary, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, on Capitol Hill last week, described the proposal as a good start but said it did little for regular Americans.

“This is a good foundation of a plan that can stabilize markets quickly,” Mr. Schumer said in a statement. “But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”

Ms. Pelosi’s statement made clear that she would push for an economic stimulus initiative either as part of the bailout legislation or, more likely, as part of the budget resolution Congress must adopt before adjourning for the fall elections. Such a plan could include an increase in unemployment benefits and spending on infrastructure projects to help create jobs.

Some Congressional Republicans warned Democrats not to overreach.

“The administration has put forward a plan to help the American people, and it is now incumbent on Congress to work together to solve this crisis,” said Representative John A. Boehner of Ohio, the Republican leader.

Mr. Boehner added, “Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors and small businesses deserve.”

Aides to Senator Barack Obama of Illinois, the Democratic presidential nominee, said he was reviewing the proposal. In Florida, Mr. Obama told voters he would press for a broader economic stimulus.

“We have to make sure that whatever plan our government comes up with works not just for Wall Street, but for Main Street,” Mr. Obama said. “We have to make sure it helps folks cope with rising prices, and sparks job creation, and helps homeowners stay in their homes.”

Senator John McCain of Arizona, the Republican nominee, issued a statement saying he, too, was reviewing the plan.

“This financial crisis,” Mr. McCain said, “requires leadership and action in order to restore a sound foundation to financial markets, get our economy on its feet, and eliminate this burden on hardworking middle-class Americans.”

If adopted, the bailout plan would sharply raise the stakes for the new administration on the appointment of a new Treasury secretary.

The administration’s plan would allow the Treasury to hire staff members and engage outside firms to help manage its purchases. And officials said that the administration envisioned enlisting several outside firms to help run the effort to buy up mortgage-related assets.

Officials said that details were still being worked out but that one idea was for the Treasury to hold reverse auctions, in which the government would offer to buy certain classes of distressed assets at a particular price and firms would then decide if they were willing to sell at that price, or could bid the price lower.

Mindful of a potential political fight, Mr. Paulson and Mr. Bernanke held a series of conference calls with members of Congress on Friday to begin convincing them that action was needed not just to help Wall Street but everyday Americans as well.

Republicans typically supportive of the administration said they were in favor of approving the plan as swiftly as possible.

Senator Mitch McConnell of Kentucky, the Republican leader, said in a statement, “This proposal is, and should be kept, simple and clear.” The majority leader, Senator Harry Reid, Democrat of Nevada, said that the bailout was needed but that Mr. Bush owed the public a fuller explanation.

Some lawmakers were more critical or even adamantly opposed to the plan. “The free market for all intents and purposes is dead in America,” Senator Jim Bunning, Republican of Kentucky, declared on Friday.

It is far from clear how much distressed debt the government will end up purchasing, though it seemed likely that the $700 billion figure was large enough to send a reassuring message to the jittery markets. There are estimates that firms are carrying $1 trillion or more in bad mortgage-related assets.

The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise.

Lehman Can Sell to Barclays

A federal bankruptcy judge decided early Saturday that Lehman Brothers could sell its investment banking and trading businesses to Barclays, the big British bank, the first major step to wind down the nation’s fourth-largest investment bank.

The judge, James Peck, gave his decision at the end of an eight-hour hearing, which capped a week of financial turmoil.

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman’s office tower in Midtown Manhattan.

Lehman Brothers Holdings Inc. on Monday filed the biggest bankruptcy in United States history, after Barclays PLC declined to buy the investment bank in its entirety.

Reporting was contributed by Jeff Zeleny from Daytona Beach, Fla., and Michael Cooper, Carl Hulse, Stephen Labaton and David Stout from Washington.

$700 Billion Is Sought for Wall Street in Vast Bailout, NYT, 21.9.2008, http://www.nytimes.com/2008/09/21/business/21cong.html

Clive Crook: Nationalisation in all but name

Published: September 8 2008 03:00
Last updated: September 8 2008 03:00
The Financial Times
By Clive Crook

The "conservatorship" that Hank Paulson, Treasury secretary, has announced for Fannie Mae and Freddie Mac is nationalisation by another name. Give the man some credit for this. It is not an easy thing for a Republican administration to take two such colossal undertakings on to the public sector's balance sheet two months after promising not to.

Recall that Fannie and Freddie - hybrids that are privately owned but "government sponsored" - own or guarantee more than $5,000bn (€3,500bn, £2,825bn) of mortgage-backed securities. Britain's nationalisation of Northern Rock brought some £100bn of loans on to the public sector's balance sheet, and was the biggest in the nation's history. The nationalisation of Fannie and Freddie, in a country less well disposed to public ownership, is more than 25 times bigger.

Under the new plan the Treasury will directly support the housing market by buying mortgage-backed securities. That too requires an ideological flexibility not usually associated with this administration. Two months ago Mr Paulson emphasised the importance of supporting Fannie and Freddie so that they could carry on - as they must, he said - as privately owned entities. So much for that.

It would have been possible to muddle through a while longer. Recent suggestions of new accounting issues, indicating that the agencies' capital was even thinner than supposed, helped bring the announcement forward. The continuing deterioration in their ability to borrow - let alone raise new equity - pushed the same way.

Now that it has decided to move, the Treasury cannot plausibly be attacked for trying to patch and mend. The comprehensive character of the plan contrasts favourably with the evasions and hesitations of the British government's handling of Northern Rock.

The eventual cost to taxpayers is unknown. If the housing market rallies before long, it could be in the low tens of billions of dollars. If things keep getting worse, it could be in the hundreds of billions. But Fannie and Freddie have made themselves indispensable to any housing market recovery: the cost, whatever it is, will have to be paid.

Bearing in mind the staggering scale of this intervention, yesterday's move was surprisingly uncontroversial. Both presidential campaigns back it, recognising the need to keep mortgage finance flowing. Differences are likely to arise over the terms of the nationalisation, however.

Shareholders in the entities are expected to recover almost nothing: rightly so. Both boards (not just the chief executives) should be dismissed.

The plan calls for the agencies' portfolios to be downsized from 2010, but the next administration should aim beyond that to get the government as far as possible out of the housing market. This means breaking Fannie and Freddie into pieces small enough to fail, and privatising them. If the function they discharged - that of providing liquidity to the mortgage market - cannot be profitably undertaken without an implicit public subsidy, then it should not be undertaken at all.

Clive Crook: Nationalisation in all but name, FT, 8.9.2008, http://www.ft.com/cms/s/0/4c6591be-7d3d-11dd-8d59-000077b07658.html

News Analysis

A History of Public Aid During Crises

September 7, 2008
The New York Times
By NELSON D. SCHWARTZ

Despite decades of free-market rhetoric from Republican and Democratic lawmakers, Washington has a long history of providing financial help to the private sector when the economic or political risk of a corporate collapse appeared too high.

The effort to save Fannie Mae and Freddie Mac is only the latest in a series of financial maneuvers by the government that stretch back to the rescue of the military contractor Lockheed Aircraft Corporation and the Penn Central Railroad under President Richard M. Nixon, the shoring up of Chrysler in the waning days of the Carter administration and the salvage of the savings and loan system in the late 1980s.

More recently, after airplanes were grounded because of the terrorist attacks of Sept. 11, 2001, Congress approved $15 billion in subsidies and loan guarantees to the faltering airlines.

Now, with the federal government preparing to save Fannie and Freddie only six months after the Federal Reserve orchestrated the rescue of Bear Stearns, it appears that the mortgage crisis has forced the government to once again shove ideology aside and get into the bailout business.

“If anybody thought we had a pure free-market financial system, they should think again,” said Robert F. Bruner, dean of the Darden School of Business at the University of Virginia.

The closest historical analogy to the Fannie-Freddie crisis is the rescue of the Farm Credit and savings and loan systems in the late 1980s, said Bert Ely, a banking consultant who has been a longtime critic of the mortgage finance companies.

The savings and loan bailout followed years of high interest rates and risky lending practices and ultimately cost taxpayers roughly $124 billion, with the banking industry kicking in another $30 billion, Mr. Ely said.

Even if the rescue of Fannie and Freddie ends up costing tens of billions of dollars, the savings and loan collapse is still likely to remain the costliest government bailout to date, said Lawrence J. White, a professor of economics at the Stern School of Business at New York University.

“The S.& L. debacle cost upwards of $100 billion, and the economy is more than twice the size today than it was in the late 1980s,” he said. “I don’t think this will turn out to be as serious as that, when over 2,000 banks and thrifts failed between the mid-1980s and mid-1990s.”

Most of those losses were caused by the shortfall between what the government paid depositors and what it received by selling the troubled real estate portfolios it acquired after taking over the failed thrifts.

In the Chrysler case, President Jimmy Carter and lawmakers in states with auto plants helped push through a package of $1.5 billion in loan guarantees for the troubled carmaker, while also demanding concessions from labor unions and lenders.

While Chrysler is remembered as a major bailout, Mr. White says it was minor compared with the savings and loan crisis or the current effort to shore up Fannie and Freddie.

In fact, the government did not have to give money directly to Chrysler, and it actually earned a profit on the deal because of stock warrants it received when the loan guarantees were provided. At the time, Chrysler had a work force of more than 100,000 people.

Still, Mr. Ely makes a distinction between the rescue of Fannie and Freddie and the thrifts versus the aid packages for Chrysler and other industrial companies. “They didn’t have a federal nexus,” he said. “They weren’t creatures of the federal government.”

This effort is also different from the others because of the potential fallout for the broader economy and especially the beleaguered housing sector if it does not succeed.

Unlike a particular auto company or even a major bank like Continental Illinois National Bank and Trust, which was bailed out in 1984, “we depend on Fannie and Freddie for funding almost half of our mortgage market,” said Thomas H. Stanton, an expert on the two companies who also teaches at Johns Hopkins University.

“The government,” he added, “has many less degrees of freedom in dealing with these companies than in the earlier bailouts.”

A History of Public Aid During Crises, NYT, 7.9.2008, http://www.nytimes.com/2008/09/07/business/07bailout.html

UK economy heads for ‘horror movie’

July 20, 2008
From The Sunday Times
David Smith and Dominic O’Connell

BRITAIN is facing an “economic horror movie” because of a “toxic mixture” of a moribund credit market and volatile oil prices, according to a leading forecasting group.

The Ernst & Young Item club, which uses the Treasury’s economic model, will argue in a report tomorrow that the economy will struggle to avoid recession. This comes as a survey by the Institute of Directors shows that business confidence has slumped to the lowest level ever recorded, with company chiefs increasingly gloomy about the investment climate.

These reports follow an interview with Alistair Darling in which the chancellor admitted the downturn would be more “profound” and last longer than he had expected.

Also, Sir Win Bischoff, chairman of Citigroup, the American financial giant, believes that house prices in Britain and America will keep falling for another two years.

The Ernst & Young Item club predicts growth of only 1.5% this year, slowing to 1% in 2009. It says consumer spending will slow to a standstill, rising by only 0.2%, and forecasts a two-year drop in investment.

It also warns that the chancellor’s budget strategy has been thrown into “turmoil” by the downturn and an unplanned £2.7 billion tax giveaway. It predicts the budget deficit will top £50 billion and the “current” budget deficit, used to determine the golden rule, will remain in the red for at least the next three years.

Peter Spencer, chief economist at the Item club, said: “Both on the high street and in the housing market it is going to get a great deal worse before it gets better. We have already seen a housing crisis that has morphed from a credit crunch to a general collapse in confidence as prices have tumbled.

“Our worry is that without the usual medication from the Bank of England - which would have nasty inflationary side-effects in this environment - consumers will follow suit, moving from their current state of denial into a state of despair.”

Meanwhile, the Institute of Directors’ quarterly business opinion survey shows business optimism at its lowest level since the survey began in 1996. The proportion of company directors “more versus less” optimistic about their company’s prospects fell to -25%, compared with -17% three months ago.

Two-thirds of bosses think their own business is still performing well, though this was down on 74% last time.

Graeme Leach, chief economist at the institute, said that while the fall in business confidence was worrying, the survey’s results were mixed.

“Company directors seem to be saying we are doing okay at present but ask us again in three to six months and it could be hell out there,” he said.

“There are real difficulties in interpreting business confidence at the moment because there is a record gap between actual performance and future perceptions.”

Among the more optimistic signs in the survey, a net 12% of firms plan to increase employment and a balance of 8% think profits will go up. Asked about their investment plans rather than the general climate, a net 11% planned a rise. There was also a small rise in pricing intentions, with a balance of 15% of firms intending rises, against 12% three months ago.

“The sharp fall in overall business optimism is very worrying and points towards a recession,” said Leach. “Other results in the survey suggest we can still escape with a sharp slowdown over 2008-9. The survey suggests the pressure on the corporate sector for a labour shake-out is muted. Whether this situation will hold is the key uncertainty.”

The credit crunch is forcing more businesses into difficulty, according to research by the insolvency specialist Begbies Traynor. It monitors the number of firms reporting “critical” problems - those facing winding-up petitions or more than £5,000 in county-court judgments against them. The figure ballooned in the second quarter to 4,258, nearly seven times more than in the same period last year. The figure is up 30% on the first quarter of this year, with retail, construction and IT firms hit hardest.

Mark Fry at Begbies said the figures reflected companies’ increased willingness to pursue money owed to them. “It shows the general increase in financial pressure. Anyone with a big exposure to property has been severely affected - it has gone into freefall,” he said.

The Federation of Small Businesses is tomorrow expected to say that large groups have extended payment terms to their suppliers in an effort to ease their financial difficulties.

One company likely to be singled out is Alliance Boots, which changed its payment terms at the start of the year. It now takes 75 days to settle invoices, and applies a 2.5% settlement fee. The move has infuriated suppliers.

Justine Thompson, director of MTA International, which supplies staff-training packages, said: “It says on the Boots website that they are committed to treating their suppliers ethically and fairly, but these bully-boy tactics amount to a kind of theft. I think it’s absolutely outrageous.”

UK economy heads for ‘horror movie’, STs, 20.7.2008, http://business.timesonline.co.uk/tol/business/economics/article4363962.ece

THE INTELLIGENT INVESTOR

By JASON ZWEIG

How to Control Your Fears In a Fearsome Market

Scientists Are Showing How to Erase Your Fright So Your Portfolio Survives

July 19, 2008
The Wall Street Journal
Page B1

What goes on inside your head when your portfolio implodes?

One of the fear centers in your brain, the amygdala, can respond to upsetting stimuli in 12 milliseconds, or one-25th the time it takes to blink your eye. These brain cells fire when an attack dog snarls at you, a spider drops down your shirt or the Dow Jones Industrial Average takes a dive.

Merely reading the words "market crash" in this sentence can instantaneously jack up your pulse and your blood pressure, the output of your sweat glands and the tension in your muscles. Stress hormones will flood your bloodstream. Your eyes will widen and your nostrils flare, making you hypersensitive to any further danger. All this occurs automatically, involuntarily and unconsciously. You can't be an intelligent investor if, without even knowing it, you are thinking with the panic button in your brain.

The countless people who bailed out of the market in the horrifying plunge of October 2002 missed out on the generous returns of 2003 through 2007, when stocks returned 12.8% annually. The same is likely to be true of those who cut and run in today's turbulent market.

Fortunately, you can train your brain to stay calm when the markets are gripped by panic. Last week, I spent an afternoon in Kevin Ochsner's neuroscience lab at Columbia University in New York, practicing what he calls "cognitive reappraisal."

I sat at a computer and viewed a series of photographs, each preceded by one of two words: look or reappraise. look was my cue to respond naturally without trying to change my feelings. reappraise told me I should "actively reinterpret" the photo, using my imagination to spin another, less emotional scenario that could have resulted in the same image.

Dr. Ochsner had warned me to eat an early, light lunch, and I immediately realized why: I gasped at the sight of a man's hand from which most of the fingers had been freshly hacked off. But my instruction had been to reappraise, so I forced myself to ask whether this image might actually be a still from a horror movie. Magically, the moment I imagined it was a film prop, the raw flesh seemed to look a bit like plastic, and I felt myself exhale.

If I can think away blood, you can calmly face the red arrows on a market Web site. "Emotions are malleable," Dr. Ochsner said, "but people often don't realize how much [of what you feel] is under your own control."

Here are some ways you can control your fears.

Reappraise. Forget what you paid for that stock or fund; instead, imagine it was a gift. Now that it is priced, say, 20% more cheaply than in December, should you want to return the gift? Or should you buy more while it is on sale? (If rethinking a fallen price this way doesn't make you feel better, maybe you should sell.)

Step outside yourself. Imagine that someone else has suffered these losses. Think of questions you might ask to give that person advice: Other than the price, what else has changed? Is your original rationale for this investment still valid?

Control your cues. Even witnessing someone else's pain, or glancing into another person's frightened eyes, can fire up your amygdala. Because fear is as contagious as the flu, quarantine yourself from anyone who obsesses over the momentary twitching of the Dow. Tear yourself away from the computer or television; better yet, while the market is closed, make an advance date with friends or family to get your mind off stocks during market hours.

Track your feelings. Fill in the blanks in this sentence: "Today the Dow closed down [or up] ___ points, and that made me feel __________." Your emotions shouldn't be hostage to the actions of the roughly 100 million other people who compose the collective beast that Benjamin Graham called "Mr. Market." You need not be miserable just because Mr. Market is.

Finally, if the market is open, your portfolio should be closed. Sleep on any sell decision until the next day, when your fears may have faded. Intelligent investors act out of patience and courage, not panic.

How to Control Your Fears In a Fearsome Market, WSJ, 19.7.2008, http://online.wsj.com/article/SB121642720591866951.html?mod=home_we_banner_left

Uncomfortable Answers to Questions on the Economy

The New York Times
July 19, 2008
By PETER S. GOODMAN

You have heard that Fannie and Freddie, their gentle names notwithstanding, may cripple the financial system without a large infusion of taxpayer money. You have gleaned that jobs are disappearing, housing prices are plummeting, and paychecks are effectively shrinking as food and energy prices soar. You have noted the disturbing talk of crisis hovering over Wall Street.

Something has clearly gone wrong with the economy. But how bad are things, really? And how bad might they get before better days return? Even to many economists who recently thought the gloom was overblown, the situation looks grim. The economy is in the midst of a very rough patch. The worst is probably still ahead.

Job losses will probably accelerate through this year and into 2009, and the job market will probably stay weak even longer. Home prices will probably keep falling, shrinking household wealth and eroding spending power.

“The open question is whether we’re in for a bad couple of years, or a bad decade,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, now a professor at Harvard.

Is this a recession?

Officially, no. The economy is not in recession until a panel at a private institution called the National Bureau of Economic Research says so. Unofficially, many economists think a recession started six or seven months ago, even as the economy has continued to expand — albeit at a tepid pace.

Many assume that if the economy expands at all, then it isn’t a recession, but that’s not true. The bureau defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months.” If enough people lose their jobs, factories stop making things, stores stop selling things, and less money lands in people’s pockets, it is probably a recession.

Whatever it is called, it is a painful time for tens of millions of people. Indeed, this may turn out to be the most wrenching downturn since the two recessions in the early 1980s; almost surely worse than the recession that ended the technology bubble at the beginning of this decade; perhaps worse than the downturn of the early 1990s that followed the last dip in real estate prices.

But, despite what some doomsayers now proclaim, this is not the Great Depression, when unemployment spiked to 25 percent and millions of previously working people woke up in shantytowns. Not by any measure, even as your neighbors make cryptic remarks above dusting off lessons passed down from grandparents about how to turn a can of beans into a family meal.

How bad is housing?

Bad in many markets, awful in some, and still O.K. in a few.

The downturn has its roots in the real estate frenzy that turned lonely Nevada ranches into suburban ranch homes and swampland in Florida into condominiums. Speculators drove home prices beyond any historical connection to incomes. Gravity did the rest. After roughly doubling in value from 2000 to 2005, home prices have fallen about 17 percent — and more like 25 percent in inflation-adjusted terms — according to the widely watched Case-Shiller index.

Even so, most economists think house prices must fall an additional 10 to 15 percent to get back to reality. One useful measure is the relationship between the costs of buying and renting a home. From 1985 to 2002, the average American home sold for about 14 times the annual rent for a similar home, according to Moody’s Economy.com. By early 2006, home prices ballooned to 25 times rental prices. Since then, the ratio has dipped back to about 20 — still far above the historical norm.

With mortgages now hard to obtain and speculation no longer attractive, arithmetic has replaced momentum as the guiding force for housing prices. The fundamental equation points down: Even as construction grinds down, there are still many more houses on the market than there are people to buy them, and more on the way as more homeowners slip into foreclosure.

By the reckoning of Economy.com, enough houses are on the market to satisfy demand for the next two-and-a-half years without building a single new one.

The time it takes to sell a newly completed house has expanded from an average of four months in 2005 to about nine months, according to analysis by Dean Baker, co-director of the Center for Economic and Policy Research.

And many sales are falling through — more than 30 percent in some parts of California and Florida — as buyers fail to secure financing, exacerbating the glut of homes, Mr. Baker said.

No wonder that in Los Angeles, San Francisco, Phoenix and Las Vegas, house prices have in recent months declined at annual rates of more than 33 percent.

When will banks revive?

So far, they have written off more than $300 billion in loans. Many experts now predict the toll will rise to $1 trillion or more — a staggering sum that could cripple many institutions for years.

Back when home prices were multiplying, banks poured oceans of borrowed money into real estate loans. Unlike the dot-com companies at the heart of the last speculative investment bubble, the new gold rush was centered on something that seemed unimpeachably solid — the American home.

But the whole thing worked only as long as housing prices rose. Falling prices landed like a bomb. Homeowners fell behind on their loans and could not qualify for new ones: There was no value left in their house to borrow against. As millions of people defaulted, the banks confronted enormous losses in a bloody period of reckoning.

In March, the Federal Reserve helped engineer a deal for JPMorgan Chase to buy troubled investment bank Bear Stearns. Many assumed the worst was over. But, this month, the open distress of Fannie Mae and Freddie Mac — two huge, government sponsored institutions that together own or guarantee nearly half of the nation’s $12 trillion in outstanding mortgages — sent a signal that more ugly surprises may lie in wait.

To calm markets, the government last weekend hurriedly put together a rescue package for Fannie and Freddie that, if used, could cost as much as $300 billion. The urgent need for a rescue — together with another round of billion-dollar write-offs on Wall Street — has unnerved economists and investors.

“I was a relative optimist, but I’ve certainly become more pessimistic,” said Alan S. Blinder, an economist at Princeton, and a former vice chairman of the board of governors at the Federal Reserve. “The financial system looks substantially worse now than it did a month ago. If the Freddie and Fannie bailout were to fail, it could get a hell of a lot worse. If we get more bank failures, we have the possibility of seeing more of these pictures of people standing in line to pull their money out. That could really scare consumers.”

In one respect, Mr. Blinder added, this is like the Great Depression. “We haven’t seen this kind of travail in the financial markets since the 1930s,” he said.

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining — credit cards, auto loans, corporate and municipal debt.

Mr. Roubini says the cost of the financial system’s losses could reach $2 trillion. Even if it’s closer to $1 trillion, he adds, “we’re not even a third of the way there.”

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot?

The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill.

“We’re in a dangerous spot,” said Andrew Tilton, an economist at Goldman Sachs. “The big threat is more capital losses.”

Banks are a crucial piece of the economy’s arterial system, steering capital where it is needed to fuel spending and power growth. Now, they are holding tight to their dollars, starving businesses of loans they might use to expand, and depriving families of money they might use to buy houses and fill them with furniture and appliances.

From last June to this June, commercial bank lending declined more than 9 percent, according to an analysis of Federal Reserve data by Goldman Sachs.

“You have another wave of anxiety, another tightening of credit,” said Robert Barbera, chief economist at the research and trading firm ITG. “The idea that we’ll have a second half of the year recovery has gone by the boards.”

Is my job safe?

Economic slowdowns always mean job losses. Unemployment already has risen, and almost certainly will increase more.

The first signs of distress emerged in housing. Construction companies, real estate agencies, mortgage brokers and banks began laying people off. Next, jobs started being cut at factories making products linked to housing, from carpets and furniture to lighting and flooring.

But as the real estate bust spilled over into the broader economy, depleting household wealth, the impacts rippled out to retailers, beauty parlors, law offices and trucking companies, inflicting cutbacks throughout the economy, save for health care, farming and energy. Over the last six months, the economy has shed 485,000 private sector jobs, according to the Labor Department. Many people have seen hours reduced.

The unemployment rate still remains low by historical standards, at 5.5 percent. And so far, the job losses — about 65,000 a month this year — do not approach the magnitude of those seen in past downturns, particularly the twin recessions at the beginning of the 1980s, when the economy shed upward of 140,000 jobs a month and the unemployment rate exceeded 10 percent.

But Goldman Sachs assumes unemployment will reach 6.5 percent by the end of 2009, which translates into several hundred thousand more Americans out of work.

These losses are landing on top of what was, for most Americans, a remarkably weak period of expansion. From 1992 to 2000 — as the technology boom catalyzed spending and hiring — the economy added more than 22 million private sector jobs. Over the last eight years, only 5 million new jobs have been added.

The loss of work is hitting Americans along with an assortment of troubles — gasoline prices in excess of $4 a gallon, over all inflation of about 5 percent, and declining wages.

“In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist.

Are consumers done?

That is a major worry.

The fate of the economy now rests on the shoulders of the American consumer, whose spending amounts to 70 percent of all economic activity.

When people go to the mall and buy televisions and eat out, their money circulates through the economy. When they tighten their belts, austerity ripples out and chokes growth.

Through the years of the housing boom, many Americans came to treat their homes like automated teller machines that never required a deposit. They harvested cash through sales, second mortgages and home equity lines of credit — an artery of finance that reached $840 billion a year from 2004 to 2006, according to work by the economists James Kennedy and Alan Greenspan, the former Federal Reserve chairman. That allowed Americans to live far in excess of what they brought home from work.

But by the first three months of this year, that flow had constricted to an annual rate of about $200 billion.

Average household debt has swelled to 120 percent of annual income, up from 60 percent in 1984, according to the Federal Reserve.

And now the banks are turning off the credit taps.

“Credit is going to remain tight for a time potentially measured in years,” said Mr. Tilton, the Goldman Sachs economist.

This is the landscape that has so many economists convinced that consumer spending must dip, putting the squeeze on the economy for several years.

“The question is, will it get as bad as the 1970s?” asked Mr. Rogoff, recalling an era of spiking gas prices and double-digit inflation.

Long term, Americans may have no choice but to spend less, save more and reduce debts — in short, to live within their means.

“We’re getting a lot of the adjustment and it hurts,” said Kristin Forbes, a former member of the Council of Economic Advisers under President George W. Bush, and now a scholar at M.I.T.’s Sloan School of Management. “But it’s an adjustment we’re going to have to make.”

Who’s to blame?

There is plenty to go around.

In the estimation of many economists, it starts with the Federal Reserve. The central bank lowered interest rates following the calamitous end of the technology bubble in 2000, lowered them more after the terrorist attacks of Sept. 11, 2001, and then kept them low, even as speculators began to trade homes like dot-com stocks.

Meanwhile, the Fed sat back and watched as Wall Street’s financial wizards engineered diabolically complicated investments linked to mortgages, generating huge amounts of speculative capital that turned real estate into a conflagration.

“At the end of this movie, it’s clear that the Fed will have to care about excesses,” Mr. Barbera said.

Prices multiplied as many homeowners took on more property than they could afford, lured by low introductory interest rates that eventually reset higher, sending many people into foreclosure.

Mortgage brokers netted commissions as they lent almost indiscriminately, offering exotically lenient terms — no money down, no income or job required. Wall Street banks earned billions selling risky mortgage-linked securities around the world, aided by ratings agencies that branded them solid.

Through it all, a lot of ordinary Americans borrowed a lot more money then they could afford to pay back, running up enormous credit card bills and borrowing against the value of their homes. Now comes the day of reckoning.

Uncomfortable Answers to Questions on the Economy, NYT, 19.7.2008, http://www.nytimes.com/2008/07/19/business/economy/19econ.html

The spectre of 'stagflation'

It was the curse of the 1970s – rampant inflation and stagnant economic growth.
Now there are fears that Britain could once again be haunted by the spectre of 'stagflation'

Wednesday, 14 May 2008
The Independent
By Sean O'Grady, Economics Editor

A combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come.

Even with the credit crunch, the housing market at its lowest ebb in 30 years, high street sales at their most miserable in half a decade, and industry reporting a collapse in orders, prices are still rising – and at an ever-faster rate. The Chancellor, Alistair Darling, did not admit as much in his mini-Budget yesterday, but his injection of £2.7bn of spending power into the economy may be designed to prevent a catastrophic collapse in demand as Bank of England policy makers find their room for manoeuvre to reduce interest rates constrained by record inflation.

In April, we discovered yesterday, consumer price inflation hit 3 per cent, well above the official target rate of 2 per cent, and a whisker away from the level at which the Governor of the Bank of England, Mervyn King, is obliged to write an open letter to the Chancellor of the Exchequer explaining the failure of policy.

The jump, from 2.5 per cent last month, is the most dramatic since 2002, and the rise in the cost of living is unusually broadly based. The retail price index, which includes housing costs, rose to 4 per cent, up from 3.8 per cent the previous month. Increases in the sort of basic items that families have to buy were the highest. Food is 7.2 per cent up on a year ago, with analysts expecting 10 per cent inflation in a few months. And it's the essentials that are up the most – bread by 13 per cent, butter by 32. 2 per cent and eggs by a third. The increase in food prices is the fastest since 1990.

The twin effects of the credit crunch and the commodities crunch have sucked purchasing power out of the economy while increasing the cost of housing, food, energy and almost everything else. Global food prices are up 40 per cent in a year and oil is up by 70 per cent – a barrel costs four times what it did in 2004. With the American property market still in freefall and the sub-prime crisis as acute as ever, little seems to ease the credit crunch. Propelled ever higher by an insatiable demand from China and other fast-growing emerging economies there also seems little end in sight to the rise in commodity prices.

The 15 per cent decline in the value of sterling – as steep as when the pound was forced out of the ERM on "Black Wednesday" in 1992 – has exacerbated inflationary pressures. The fall is hitting living standards, especially for pensioners and the poorest.

Electricity bills are 8.3 per cent higher and gas up 3.7 per cent. Heating oil is a staggering 59.4 per cent more expensive than this time last year. Yesterday British Gas became the latest energy supplier to threaten yet more price rises by the end of the year, having raised its tariffs by 15 per cent in January. Average household gas bills could top £1,000 in 2008. The average price of petrol rose by 1.9p per litre between March and April this year, with diesel up by 4.2p a litre.

During the past few years or so, the Bank of England's Monetary Policy Committee (MPC) would have a simple remedy for such an increase in prices – a rise in interest rates. During the "Great Stability", a decade of generally low inflation, low interest rates and rapidly rising living standards, policy makers could expect to influence the economy relatively easily. Now their task is more difficult, as they are pulled between the need to fight inflation and avoid a slump.

The Bank of England recognised the danger of inflation this time last year, and began a programme of interest-rate rises to rein it in. Then came the credit crunch, the risk of recession, and the plan was abandoned. The fear was of a slump, one that would damage the economy so badly that, if anything, the longer-term danger would be of inflation undershooting the target as demand and confidence collapsed. The need to prevent this happening while tolerating a "temporary spike" in inflation has been the Bank of England's rationale for a series of interest-rate cuts since last autumn. However, after a quarter percentage point cut to 5 per cent in April, the Bank has chosen to keep rates on hold this month. It could mark the end of that plan, and a return to a keener watch on rising prices.

Tellingly, the MPC knew how bad the new inflation figures would be when members met last Thursday. Economists now believe that a rate cut that had been predicted for June will also be cancelled. The Inflation Report, due from the Bank today, will tell us more about how they see the likely "path" of rates over the next year or so.

Matters are made more complicated because the Bank's "policy rate" is almost irrelevant when market interest rates remain stubbornly high, thanks to the credit crunch. Almost as fast as the Bank of England has been reducing rates the commercial lenders have been raising them and putting up their fees for arranging a mortgage, cutting the flow of funds into the housing market by a half.

Attempts to "inject liquidity" into the banks by swapping government securities for unwanted mortgage-backed securities have been only partially successful. At least for now, the Bank seems more concerned about inflation. Even so, there is little chance of the MPC raising rates to address this danger. Mr King said as recently as two weeks ago that "it doesn't make sense to raise interest rates at this stage to induce a recession to keep inflation below 3 per cent".

Yet a recession may be just what Mr King gets – no matter what he and his colleagues do. The British economy is growing at its slowest rate for three years, with expansion in the first quarter of this year just 0.4 per cent, compared with a rise of 0.6 per cent in the previous quarter. Bank officials have admitted that its forecast for growth is consistent with the possibility of a brief, shallow recession, that is negative growth. Few now expect the Government's official estimate of growth in a 1.75 per cent to 2.25 per cent range to be achieved. Most independent observers put the growth rate much lower, some as low as 1 per cent this year. Even the bottom range of the Treasury's own projection would be consistent with a quarter or two of virtually no growth, as close to a recession as makes no difference. Some sectors are already in, or close to, recession.

Most ominously, this week saw a sharp rise in the number of "forced sales", consistent with last week's poor news on repossessions. The accidental leak by the Housing minister, Caroline Flint, of an expectation of a 5 to 10 per cent decline in house prices looks optimistic by some standards.

This time next year, on the conventional four-year cycle, the country should be in the middle of a general election campaign. Gordon Brown may find himself haunted not only by the spectre of stagflation, but by the infinitely more terrifying spectre of humiliation and defeat.

The spectre of 'stagflation', I, 14.5.2008, http://www.independent.co.uk/news/business/news/the-spectre-of-stagflation-827745.html

U.S. Trade Deficit Grows Unexpectedly

April 10, 2008
The New York Times
By MICHAEL M. GRYNBAUM

The gap between what Americans import and export unexpectedly widened in February as domestic demand appeared to increase for automobiles and capital goods.

The trade deficit grew 5.7 percent, to $62.3 billion, its highest reading since November and the second consecutive month of increases. The estimate for January was revised up to $59 billion from $58.2 billion, the Commerce Department said on Thursday.

The increase came as a surprise to economists who had expected the economic downturn to suppress domestic demand for foreign goods. Instead, import sales jumped 3.1 percent, the biggest gain in almost a year, to $213.7 billion from $206.4 billion in January.

Americans bought up more foreign motor vehicles, clothing, household appliances and industrial equipment.

The appetite for foreign goods even outpaced the first decline in oil imports in nearly a year. Foreign petroleum sales fell in February, though the figure will probably climb back in March, when the price of crude oil reached to a record high.

“The trend in import growth is slowing as domestic demand softens and we fully expect a sharp correction next month,” wrote Ian Shepherdson, a London-based economist at the forecasting firm High Frequency Economics.

Sales of exports increased 2 percent to $151.4 billion from $148.2 billion in January. Foreign demand for motor vehicles, agricultural products and heavy machinery all increased.

Export sales, which have advanced over the last year, were likely to bolster again as the dollar fell to new lows against other world currencies.

Thursday’s report may not bode well for the economy as a whole. With consumer spending on the home front falling, many economists — including those at the Federal Reserve — have said that demand from foreign customers has propped up the ailing American economy, keeping many businesses afloat even as the housing slump and a weakening job market dampen domestic demand.

If imports outpace exports, that means more money may be moving out of American businesses than coming in. But economists said the deficit would probably narrow in coming months.

“We expect a reversal of the numbers soon as households continue grappling with falling home prices, plunging payrolls and financial market turmoil,” wrote Dimitry Fleming, an economist at ING Bank, in a note to clients.

U.S. Trade Deficit Grows Unexpectedly, NYT, 10.4.2008,http://www.nytimes.com/2008/04/10/business/worldbusiness/10cnd-trade.html

Financial Regulation Plan Proposed

March 31, 2008
Filed at 3:11 a.m. ET
By THE ASSOCIATED PRESS
The New York Times

WASHINGTON (AP) -- The Bush administration is proposing the biggest overhaul of financial regulation since the Great Depression. The sweeping plan is already drawing intense criticism -- a debate unlikely to be settled until a new president takes office.

The 200-page document, which was to be released Monday by Treasury Secretary Henry Paulson, proposes giving broad new powers to the Federal Reserve to combat the type of severe credit crisis currently gripping financial markets.

It would designate the Fed as a ''market stability regulator'' and give it the power to examine the books of any financial institution, not just banks, that might