Economy > Economy
8 November 2010
Doctor = G.O.P leader John A. Boehner
19 October 2008
British Prime Minister (2007-2010)
economic might USA
The America Donald
Trump Is Inheriting, By The Numbers
USA January 19, 2017
downbeat economic reports
handling of the financial crisis
causes of the financial crisis
- broken link
hard economic times
How the financial crisis
affecting public services UK
inequality / economic
inequality / inequalities
the economic ladder USA
the state of the economy
informal economy USA
The Fear Economy
permanent temp economy
world economy USA
in a tough economy USA
New York Times > Topics > United States Economy
cartoons > Cagle > Economy
the economy's strength
bellwether for the American economy
have a significant
effect on the economy
President Bush's handling of the
"the great moderation"
http://www.reuters.com/article/politicsNews/idUSN1041396220080410 - 2008
economic cycle USA
the ebbs and flows of our economy
sustained economic weakness
Economic Stimulus (Jobs Bills)
economic stimulus package
USA > budget
USA > Commerce Department
- items like food and paper
durable goods / durables
- goods lasting three
years or more
U.S. Securities and Exchange Commission
The Federal Reserve / Fed
traces its history back to the tumult
of the opening days of the
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
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
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
to cut spending and raise taxes
during an economic downturn;
after World War II,
Henry Morgenthau, Jr.,
a new system of
by leading the conference that created
the International Monetary Fund
House of Representatives Financial Services Committee
White House Council of Economic Advisers
angel investor USA
When Wealth Disappears
October 6, 2013
The New York Times
By STEPHEN D. KING
LONDON — AS bad as things in Washington are — the federal
government shutdown since Tuesday, the slim but real potential for a debt
default, a political system that seems increasingly ungovernable — they are
going to get much worse, for the United States and other advanced economies, in
the years ahead.
From the end of World War II to the brief interlude of prosperity after the cold
war, politicians could console themselves with the thought that rapid economic
growth would eventually rescue them from short-term fiscal transgressions. The
miracle of rising living standards encouraged rich countries increasingly to
live beyond their means, happy in the belief that healthy returns on their real
estate and investment portfolios would let them pay off debts, educate their
children and pay for their medical care and retirement. This was, it seemed, the
postwar generations’ collective destiny.
But the numbers no longer add up. Even before the Great Recession, rich
countries were seeing their tax revenues weaken, social expenditures rise,
government debts accumulate and creditors fret thanks to lower economic growth
We are reaching end times for Western affluence. Between 2000 and 2007, ahead of
the Great Recession, the United States economy grew at a meager average of about
2.4 percent a year — a full percentage point below the 3.4 percent average of
the 1980s and 1990s. From 2007 to 2012, annual growth amounted to just 0.8
percent. In Europe, as is well known, the situation is even worse. Both sides of
the North Atlantic have already succumbed to a Japan-style “lost decade.”
Surely this is only an extended cyclical dip, some policy makers say. Champions
of stimulus assert that another huge round of public spending or monetary easing
— maybe even a commitment to higher inflation and government borrowing — will
jump-start the engine. Proponents of austerity argue that only indiscriminate
deficit reduction, accompanied by reforming entitlement programs and slashing
regulations, will unleash the “animal spirits” necessary for a private-sector
Both sides are wrong. It’s now abundantly clear that forecasters have been too
optimistic, boldly projecting rates of growth that have failed to transpire.
The White House and Congress, unable to reach agreement in the face of a fiscal
black hole, have turned over the economic repair job to the Federal Reserve,
which has bought trillions of dollars in securities to keep interest rates low.
That has propped up the stock market but left many working Americans no better
off. Growth remains lackluster.
The end of the golden age cannot be explained by some technological reversal.
From iPad apps to shale gas, technology continues to advance. The underlying
reason for the stagnation is that a half-century of remarkable one-off
developments in the industrialized world will not be repeated.
First was the unleashing of global trade, after a period of protectionism and
isolationism between the world wars, enabling manufacturing to take off across
Western Europe, North America and East Asia. A boom that great is unlikely to be
repeated in advanced economies.
Second, financial innovations that first appeared in the 1920s, notably consumer
credit, spread in the postwar decades. Post-crisis, the pace of such borrowing
is muted, and likely to stay that way.
Third, social safety nets became widespread, reducing the need for households to
save for unforeseen emergencies. Those nets are fraying now, meaning that
consumers will have to save more for ever longer periods of retirement.
Fourth, reduced discrimination flooded the labor market with the pent-up human
capital of women. Women now make up a majority of the American labor force; that
proportion can rise only a little bit more, if at all.
Finally, the quality of education improved: in 1950, only 15 percent of American
men and 4 percent of American women between ages 20 and 24 were enrolled in
college. The proportions for both sexes are now over 30 percent, but with
graduates no longer guaranteed substantial wage increases, the costs of
education may come to outweigh the benefits.
These five factors induced, if not complacency, an assumption that economies
could expand forever.
Adam Smith discerned this back in 1776 in his “Wealth of Nations”: “It is in the
progressive state, while the society is advancing to the further acquisition,
rather than when it has acquired its full complement of riches, that the
condition of the labouring poor, of the great body of the people, seems to be
the happiest and the most comfortable. It is hard in the stationary, and
miserable in the declining state.”
The decades before the French Revolution saw an extraordinary increase in living
standards (alongside a huge increase in government debt). But in the late 1780s,
bad weather led to failed harvests and much higher food prices. Rising
expectations could no longer be met. We all know what happened next.
When the money runs out, a rising state, which Smith described as “cheerful,”
gives way to a declining, “melancholy” one: promises can no longer be met,
mistrust spreads and markets malfunction. Today, that’s particularly true for
societies where income inequality is high and where the current generation has,
in effect, borrowed from future ones.
In the face of stagnation, reform is essential. The euro zone is unlikely to
survive without the creation of a legitimate fiscal and banking union to match
the growing political union. But even if that happens, Southern Europe’s
sky-high debts will be largely indigestible. Will Angela Merkel’s Germany accept
a one-off debt restructuring that would impose losses on Northern European
creditors and taxpayers but preserve the euro zone? The alternatives —
disorderly defaults, higher inflation, a breakup of the common currency, the
dismantling of the postwar political project — seem worse.
In the United States, which ostensibly has the right institutions (if not the
political will) to deal with its economic problems, a potentially explosive
fiscal situation could be resolved through scurrilous means, but only by
threatening global financial and economic instability. Interest rates can be
held lower than the inflation rate, as the Fed has done. Or the government could
devalue the dollar, thereby hitting Asian and Arab creditors. Such “default by
stealth,” however, might threaten a crisis of confidence in the dollar, wiping
away the purchasing-power benefits Americans get from the dollar’s status as the
world’s reserve currency.
Not knowing who, ultimately, will lose as a consequence of our past excesses
helps explain America’s current strife. This is not an argument for immediate
and painful austerity, which isn’t working in Europe. It is, instead, a plea for
economic honesty, to recognize that promises made during good times can no
longer be easily kept.
That means a higher retirement age, more immigration to increase the working-age
population, less borrowing from abroad, less reliance on monetary policy that
creates unsustainable financial bubbles, a new social compact that doesn’t
cannibalize the young to feed the boomers, a tougher stance toward banks, a
further opening of world trade and, over the medium term, a commitment to
sustained deficit reduction.
In his “Future of an Illusion,” Sigmund Freud argued that the faithful clung to
God’s existence in the absence of evidence because the alternative — an empty
void — was so much worse. Modern beliefs about economic prospects are not so
different. Policy makers simply pray for a strong recovery. They opt for the
illusion because the reality is too bleak to bear. But as the current fiscal
crisis demonstrates, facing the pain will not be easy. And the waking up from
our collective illusions has barely begun.
Stephen D. King, chief economist at HSBC,
is the author of “When the Money Runs Out:
The End of Western Affluence.”
The New York Times,
Death of a Fairy Tale
April 26, 2012
The New York Times
By PAUL KRUGMAN
This was the month the confidence fairy died.
For the past two years most policy makers in Europe and many politicians and
pundits in America have been in thrall to a destructive economic doctrine.
According to this doctrine, governments should respond to a severely depressed
economy not the way the textbooks say they should — by spending more to offset
falling private demand — but with fiscal austerity, slashing spending in an
effort to balance their budgets.
Critics warned from the beginning that austerity in the face of depression would
only make that depression worse. But the “austerians” insisted that the reverse
would happen. Why? Confidence! “Confidence-inspiring policies will foster and
not hamper economic recovery,” declared Jean-Claude Trichet, the former
president of the European Central Bank — a claim echoed by Republicans in
Congress here. Or as I put it way back when, the idea was that the confidence
fairy would come in and reward policy makers for their fiscal virtue.
The good news is that many influential people are finally admitting that the
confidence fairy was a myth. The bad news is that despite this admission there
seems to be little prospect of a near-term course change either in Europe or
here in America, where we never fully embraced the doctrine, but have,
nonetheless, had de facto austerity in the form of huge spending and employment
cuts at the state and local level.
So, about that doctrine: appeals to the wonders of confidence are something
Herbert Hoover would have found completely familiar — and faith in the
confidence fairy has worked out about as well for modern Europe as it did for
Hoover’s America. All around Europe’s periphery, from Spain to Latvia, austerity
policies have produced Depression-level slumps and Depression-level
unemployment; the confidence fairy is nowhere to be seen, not even in Britain,
whose turn to austerity two years ago was greeted with loud hosannas by policy
elites on both sides of the Atlantic.
None of this should come as news, since the failure of austerity policies to
deliver as promised has long been obvious. Yet European leaders spent years in
denial, insisting that their policies would start working any day now, and
celebrating supposed triumphs on the flimsiest of evidence. Notably, the
long-suffering (literally) Irish have been hailed as a success story not once
but twice, in early 2010 and again in the fall of 2011. Each time the supposed
success turned out to be a mirage; three years into its austerity program,
Ireland has yet to show any sign of real recovery from a slump that has driven
the unemployment rate to almost 15 percent.
However, something has changed in the past few weeks. Several events — the
collapse of the Dutch government over proposed austerity measures, the strong
showing of the vaguely anti-austerity François Hollande in the first round of
France’s presidential election, and an economic report showing that Britain is
doing worse in the current slump than it did in the 1930s — seem to have finally
broken through the wall of denial. Suddenly, everyone is admitting that
austerity isn’t working.
The question now is what they’re going to do about it. And the answer, I fear,
is: not much.
For one thing, while the austerians seem to have given up on hope, they haven’t
given up on fear — that is, on the claim that if we don’t slash spending, even
in a depressed economy, we’ll turn into Greece, with sky-high borrowing costs.
Now, claims that only austerity can pacify bond markets have proved every bit as
wrong as claims that the confidence fairy will bring prosperity. Almost three
years have passed since The Wall Street Journal breathlessly warned that the
attack of the bond vigilantes on U.S. debt had begun; not only have borrowing
costs remained low, they’ve actually fallen by half. Japan has faced dire
warnings about its debt for more than a decade; as of this week, it could borrow
long term at an interest rate of less than 1 percent.
And serious analysts now argue that fiscal austerity in a depressed economy is
probably self-defeating: by shrinking the economy and hurting long-term revenue,
austerity probably makes the debt outlook worse rather than better.
But while the confidence fairy appears to be well and truly buried, deficit
scare stories remain popular. Indeed, defenders of British policies dismiss any
call for a rethinking of these policies, despite their evident failure to
deliver, on the grounds that any relaxation of austerity would cause borrowing
costs to soar.
So we’re now living in a world of zombie economic policies — policies that
should have been killed by the evidence that all of their premises are wrong,
but which keep shambling along nonetheless. And it’s anyone’s guess when this
reign of error will end.
Death of a Fairy Tale, NYT, 26.4.2012,
The Two Economies
April 9, 2012
The New York Times
By DAVID BROOKS
The creative dynamism of American business is astounding and a
little terrifying. Over the past five years, amid turmoil and uncertainty,
American businesses have shed employees, becoming more efficient and more
productive. According to The Wall Street Journal on Monday, the revenue per
employee at S.&P. 500 companies increased from $378,000 in 2007 to $420,000 in
These efficiency gains are boosting the American economy overall and American
exports in particular. Two years ago, President Obama promised to double exports
over the next five years. The U.S. might actually meet that target. As Tyler
Cowen reports in a fantastic article in The American Interest called “What
Export-Oriented America Means,” American exports are surging.
Cowen argues that America’s export strength will only build in the years ahead.
He points to three trends that will boost the nation’s economic performance.
First, smart machines. China and other low-wage countries have a huge advantage
when factory floors are crowded with workers. But we are moving to an age of
quiet factories, with more robots and better software. That reduces the
importance of wage rates. It boosts American companies that make software and
Then there is the shale oil and gas revolution. In the past year, fracking, a
technology pioneered in the United States, has given us access to vast amounts
of U.S. energy that can be sold abroad. Europe and Asian nations have much less
capacity. As long as fracking can be done responsibly, U.S. exports should
Finally, there is the growth of the global middle class. When China, India and
such places were first climbing the income ladder, they imported a lot of raw
materials from places like Canada, Australia and Chile to fuel the early stages
of their economic growth. But, in the coming decades, as their consumers get
richer, they will be importing more pharmaceuticals, semiconductors, planes and
entertainment, important American products.
If Cowen’s case is right, the U.S. is not a nation in decline. We may be in the
early days of an export boom that will eventually power an economic revival,
including a manufacturing revival. But, as Cowen emphasizes, this does not mean
nirvana is at hand.
His work leaves the impression that there are two interrelated American
economies. On the one hand, there is the globalized tradable sector — companies
that have to compete with everybody everywhere. These companies, with the sword
of foreign competition hanging over them, have become relentlessly dynamic and
very (sometimes brutally) efficient.
On the other hand, there is a large sector of the economy that does not face
this global competition — health care, education and government. Leaders in this
economy try to improve productivity and use new technologies, but they are not
compelled by do-or-die pressure, and their pace of change is slower.
A rift is opening up. The first, globalized sector is producing a lot of the
productivity gains, but it is not producing a lot of the jobs. The second more
protected sector is producing more jobs, but not as many productivity gains. The
hypercompetitive globalized economy generates enormous profits, while the
second, less tradable economy is where more Americans actually live.
In politics, we are beginning to see conflicts between those who live in Economy
I and those who live in Economy II. Republicans often live in and love the
efficient globalized sector and believe it should be a model for the entire
society. They want to use private health care markets and choice-oriented
education reforms to make society as dynamic, creative and efficient as Economy
Democrats are more likely to live in and respect the values of the second
sector. They emphasize the destructive side of Economy I streamlining — the huge
profits at the top and the stagnant wages at the middle. They want to tamp down
some of the streamlining in the global economy sector and protect health care,
education and government from its remorseless logic.
Republicans believe the globalized sector is racing far out in front of
government, adapting in ways inevitable and proper. If given enough freedom,
Economy I entrepreneurs will create the future jobs we need. Government should
prepare people to enter that sector but get out of its way as much as possible.
Democrats are more optimistic that government can enhance the productivity of
the global sectors of the economy while redirecting their benefits. They want to
use Economy I to subsidize Economy II.
I don’t know which coalition will gain the upper hand. But I do think today’s
arguments are rooted in growing structural rifts. There’s an urgent need to
understand the interplay between the two different sectors. I’d also add that
it’s not always easy to be in one of those pockets — including the media and
higher education — that are making the bumpy transition from Economy II to
The Two Economies, NYT, 9.4.2012,
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
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
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,
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
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
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.
“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
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
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
“Over all, the outlook for economic activity has weakened further,” the central
“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
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
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,
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
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
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 —
“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
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
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
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
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
“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
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
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
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
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
“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
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
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
“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
“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
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
In Private Equity, the
Limits of Apollo’s Power, NYT, 7.12.2008,
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
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,
$200 billion consumer credit facility
Tue Nov 25, 2008
WASHINGTON (Reuters) - The Federal Reserve, with the backing of the Treasury,
launched a $200 billion lending facility to support the market for consumer debt
Following are details of the plan, called the Term Asset-backed Securities Loan
* 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
* 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,
Billions coming for mortgages,
credit cards, student, car
25 November 2008
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
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
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
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
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'
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
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
Billions coming for
mortgages, credit cards, student, car loans,
Brown in the Middle East
hopeful of Saudi cash for IMF
November 02 2008 15.30 GMT
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.
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
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
Brown hopeful of Saudi cash for IMF, G, 2.11.2008,
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
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
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
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
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,
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
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
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
“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
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
“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.
amid demand fears, FT, 27.10.2008,
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
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
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
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,
Loathing Over Economy Spreads
Filed at 1:01 a.m. ET
The New York Times
By THE ASSOCIATED PRESS
(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
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
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
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
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
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,
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
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
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
“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
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
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.
Tumble, NYT, 14.10.2008,
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
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
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
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
“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
Intervention Is Bold,
but Has a Basis in History, NYT, 14.10.2008,
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
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
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
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
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,
Across the Country,
Fear About Savings,
the Job Market and
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
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
“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
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
“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
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
“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
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
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,
Economy Does Not Compute
The New York Times
By MARK BUCHANAN
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.
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
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,
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,
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
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
“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
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
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
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,
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
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
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
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
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,
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
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
“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
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
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
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
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
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
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
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,
President Bush’s Speech to the Nation
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
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
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
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
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
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
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
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
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
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,
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,
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
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
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.
History of Public Aid During Crises
The New York Times
By NELSON D. SCHWARTZ
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
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
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
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
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,
economy heads for ‘horror movie’
July 20, 2008
From The Sunday Times
David Smith and Dominic O’Connell
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
Also, Sir Win Bischoff, chairman of Citigroup, the American financial giant,
believes that house prices in Britain and America will keep falling for another
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
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
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’,
Uncomfortable Answers to Questions
on the Economy
July 19, 2008
The New York Times
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
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
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
“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
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
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
“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.
to Questions on the Economy, NYT, 19.7.2008,
Hard Times Heighten Long
- Felt Unease
February 17, 2008
Filed at 12:21 p.m. ET
The New York Times
By THE ASSOCIATED PRESS
Even when experts were declaring the economy healthy, many Americans voiced a
vague, but persistent dissatisfaction.
True, jobs were relatively plentiful over the last few years. It was easy to
borrow and very cheap. The sharp rise in the value of homes and plentiful credit
cards encouraged a nation of consumers to get out and buy. But to many people,
something didn't feel right, even if they couldn't quite explain why.
Now the economic tide is receding, and the undertow that was there all along is
Take away the easy credit and consumers are left with paychecks that, for most,
haven't nearly kept pace with their need and propensity to spend.
The frustration of $3 gas and $4 milk, the worries about health care costs that
have risen four times the rate of pay, become much more real. The retirement
security that is only as good as the increasingly volatile stock market seems
much less certain.
Americans' declining confidence in their economy is triggered by a storm of very
recent pressures, including plunging home prices, tightening credit, and heavy
debt. But it is compounded by anxiety that was there all along, the result of a
long, slow drip of worries and vulnerabilities.
''The economy is currently in recession or arguably close to recession and
that's certainly weighing on the collective psyche,'' says Mark Zandi, chief
economist of forecaster Moody's Economy.com. ''But ... I do think there is an
increasing level of angst that is more fundamental and is not going to go away
even when the economy improves.''
Much of that anxiety is the uncomfortable, but expected jolt of the economic
roller coaster. During a downturn, people become less confident about keeping
their jobs or being able to find new ones, meeting household expenses and about
the prospects for the future.
But there may be more to it than just cyclical ups and downs.
What does the economic future hold? Many Americans feel increasingly unable to
answer that question with assurance, and they appraise it with a sense that they
are less in control of the outcome.
In Westminster, Colo., a Denver suburb, George Apodaca hears that uncertainty
from the maintenance workers, drivers and others enrolled in the home budgeting
class he teaches. Most have steady jobs, but are just getting by. They talk
about challenges like the rising cost of getting to work or medical bills, not
as new problems but as a continuing struggle.
''People in my class, they don't know what a recession means or what a boom
means,'' says Apodaca, a counselor for Colorado Housing Enterprises. ''They're
worried about buying the groceries, buying the gas.''
A year ago -- months before economic alarms went off -- nearly two of three
Americans polled by The Rockefeller Foundation said that they felt somewhat or a
lot less economically secure then they did a decade ago. Half said they expected
their children to face an economy even more shaky.
Other polls have registered similar unease in the past few years, showing large
numbers of Americans dissatisfied with the economy, and worried about retirement
security, health care costs, and a declining standard of living.
The surprising thing about many of these readings isn't that they've recently
skyrocketed. It's that in recent years they've registered consistently high
levels of worry without ever seeming to ease.
''This has just been a period of great disconnect between what the aggregate
economic statistics show and what leading politicians talk about and what
ordinary Americans are feeling,'' said Jacob Hacker, a Yale University professor
and author of ''The Great Risk Shift,'' which charts increased economic
insecurity. ''I think people are saying, where did the gains go? Where did the
boom go? And now that it's gone, what are we going to do?''
Those uncertainties have been submerged for the past few years. The war in Iraq
and the threat of terrorism dominated, drawing attention away from day-to-day
economic concerns. With employers adding workers, people's appraisal of the
economy focused less on jobs, the long-standing measure of financial security.
Many people gauged their well-being in wealth -- looking at the stock market,
and much more broadly, the rise of real estate prices, said Susan Sterne,
president of Economic Analysis Associates.
Americans borrowed freely against the value of their homes. But now there is
nothing left to shield them from the insecurities rooted in the old measures of
Except for the late 1990s, pay has been stagnant for more than a generation,
barely keeping pace with inflation. In 1973, the median male worker earned
$16.88 an hour, adjusted for inflation. In 2007, he earned $16.85.
For many families, the stagnation has been moderated by the addition of a second
paycheck as more women went to work, and their pay rose over the same period.
But the largest gains went to workers at the top of the pay scale. Now, economic
worries are rising fastest in households with smaller paychecks, and that chasm
''Over the past decades, whether inflation was much higher or lower, or incomes
grew faster or more slowly, there has never been such a wide divergence in the
experiences'' separating richer households from poorer ones, Richard Curtin, the
director of the University of Michigan's consumer survey said in summing up the
most recent figures.
That insecurity shows in small, but telling ways. Shoppers at drug store chain
Walgreens Inc. are increasingly bypassing name-brand cough syrups and pain
relievers and choosing cheaper store brands. Wal-Mart Stores Inc noticed that
many people who received its gift cards for the holidays used them in January to
buy food and other necessities instead of extras.
The pullback by consumers contrasts with years of continued spending that long
seemed to contradict mounting worries.
Worker optimism, which soared in the late 1990s, never fully rebounded after the
last, brief recession. Although jobs again were plentiful, it became clear the
new economy's opportunities came with few of the old assurances.
Rennie Sawade, the son of a Michigan auto worker, majored in computer science
because he saw no future on the assembly line. He was rewarded with a job at
Oracle Corp., but lost it in late 2005 when the company shifted his department's
work to India. Sawade, who lives in Woodinville, Wash. near Seattle, has been
unable to find a full-time replacement, instead jumping from contract job to
The contractor offers a 401(k), but contributions are entirely up to workers.
When Sawade's wife was diagnosed with thyroid cancer last year he missed the
equivalent of two weeks work -- and pay -- to take care of her. The job has
health insurance but still left the family with a bill for more than $2,000.
Contractors call to offer other jobs, but the pay is frequently disappointing,
''It was pretty well known when I was working on my bachelor's degree that the
auto industry was going to move overseas,'' he says. ''Everybody said get into
technology because you'll have a career. Now it looks like the same thing is
happening to technology.''
Cutbacks and changes by employers also have pushed heavy responsibilities on to
workers, many who find themselves unprepared.
In the past decade, scores of companies have frozen or eliminated benefit plans
providing a guaranteed pension. Many have replaced them with 401(k) plans whose
future worth depends on workers' investment skill. Almost half of all households
are at risk of coming up short in retirement, according to the Center for
Retirement Research at Boston College.
Worry also grew about the cost of health care, with good reason. Since 2001, the
cost of health insurance has gone up 78 percent -- about $1,500 more per year
for the average family, according to the Kaiser Family Foundation. Over the same
period, wages rose about 19 percent, and inflation about 17 percent. About four
in 10 people polled by the group say they are worried about paying more for
health care or insurance.
Even the consumption made possible by easy credit has helped turn up the
financial pressure. The number of products -- from air conditioners to cell
phones -- that Americans say they can't live without has grown substantially in
recent years, according to the Pew Research Center. About 6 in 10 working
Americans polled by the group say they don't earn enough to lead the life they
Economic confidence is, largely, a self-fulfilling prophecy. The more consumers
believe the economy is heading downhill, the more likely they'll rein in
spending that will contribute to a downturn.
''I think if people were generally more satisfied and less anxious perhaps they
would be more resistant to thinking things were deteriorating rapidly,'' says
Andrew Kohut, president of the Pew Research Center.
Maybe the downturn in optimism is temporary. Americans are voracious consumers
and persistent optimists.
But some believe a fundamental change in behavior and mind-set is taking place.
Since the early 1980s, consumers' contribution to the economy has risen from 63
percent, near where it had long hovered, to 70 percent. Baby boomers spent
generously on growing families. Interest rates and inflation dropped, making
homes and other assets worth more and cutting borrowing costs. The spread of
easy credit promoted spending.
Now, those are drying up and the population is aging. Older households don't
spend as much, and often assess the economy more conservatively. Over the next
generation, that could drive consumers' contribution to the economy back down to
the low-60 percent range, Zandi said.
''There were tail winds behind'' the growth in consumer spending over the last
25 years, he says. ''Now there are headwinds.''
Hard Times Heighten Long
- Felt Unease, NYT, 17.2.2008,
Top Officials See
Bleaker Outlook for the Economy
February 15, 2008
The New York Times
By EDMUND L. ANDREWS
WASHINGTON — With the credit markets once again deteriorating, the nation’s
two top economic policy makers acknowledged Thursday that the outlook for the
economy had worsened, as both came under criticism for being overtaken by events
and failing to act boldly enough.
In testimony to Congress, Ben S. Bernanke, the chairman of the Federal Reserve,
signaled that the Fed was ready to reduce interest rates yet again, pointing out
that problems in housing and mortgage-related markets had spread more widely and
proved more intractable than he predicted three months ago.
His sobering assessment was echoed by Treasury Secretary Henry M. Paulson Jr.,
who appeared with him. Both continued to avoid predicting a recession but said
they were scaling back the more optimistic forecasts they had issued in
Ethan S. Harris, chief United States economist for Lehman Brothers, said that
both policy makers had “come clean” about the economy’s problems but that
investors were not impressed.
Stock prices, which normally rally when the Fed hints it will lower borrowing
costs, tumbled instead. The Dow Jones industrial average dropped 175 points, or
1.4 percent; broader stock indexes dropped by similar amounts.
Anxiety is escalating among institutional lenders and major borrowers, as the
panic over soaring default rates on subprime mortgages that began last summer
continues to spread, freezing up credit for municipalities, hospitals, student
loans and even investment funds holding the most conservative bonds.
On Capitol Hill, the economic policy makers found themselves in the line of
fire. Senator Robert Menendez, Democrat of New Jersey, accused both Mr. Bernanke
and Mr. Paulson of having “hit the snooze button.”
Senator Christopher J. Dodd of Connecticut, chairman of the Banking Committee,
told reporters after the hearing that “it just seems as if they aren’t as
concerned about the magnitude of the problem.”
Testifying before the committee, Mr. Bernanke said he still expected the economy
to grow at a “sluggish” pace over the next few months and to pick up speed later
in the year. But he said “the downside risks to growth have increased,” noting
that spiraling losses in home mortgages have dragged down the credit markets and
shaken the broader economy.
While trying to be optimistic, Mr. Paulson said that the administration’s
forecast “would be less, but I do believe we’ll keep growing.”
Many Wall Street economic forecasters, however, are already estimating that the
risks of a recession are at least 50-50, and a growing number of analysts
contend that an economic contraction may have already begun.
Fed policy makers will release their newest forecasts on Wednesday, and Mr.
Bernanke said they would be more in line with those of private-sector
The Fed has reduced its benchmark interest rate, called the federal funds rate,
five times since September, including two cuts within eight days last month. The
rate has fallen to 3 percent; as recently as late summer of last year it was
Mr. Bernanke assured lawmakers that the Fed would “provide adequate insurance”
against a downturn in the form of cheaper money.
But neither investors nor politicians have responded particularly favorably to
Washington’s moves. Yields on asset-backed securities that hold mortgages and
other debt have risen to levels almost as high as they were last August, when
financial markets first seized up in response to soaring default rates on
The Fed’s rate cuts have led to a more modest decline in mortgage rates for
borrowers with good credit, but they have done little to ease the broader credit
Mr. Bernanke agreed that banks and other lenders have been pulling back, both
because of increased aversion to risk and because they have been forced to book
huge losses from soured loans and to repurchase troubled mortgages and loans
they had sold to investors.
The unexpected losses and growing pressures, he continued, have prompted banks
to become more restrictive in their lending and more “protective of their
Mr. Bernanke said the economy would grow slowly but pick up speed later in
response to both the Fed’s lower interest rates and the $168 billion economic
stimulus package that President Bush signed Wednesday.
“At present, my baseline outlook involves a period of sluggish growth, followed
by a somewhat stronger pace of growth starting later this year,” he told
lawmakers. But in cautioning that his outlook could turn out to be wrong, the
Fed chairman left the door open to additional rate reductions.
Mr. Paulson tried to sound less downbeat. “I believe we are going to continue to
grow, albeit at a slower rate,” he told the Banking Committee, insisting that
the plunge in housing and credit markets was a correction rather than a crisis.
Mr. Bernanke said a wide variety of economic indicators had declined in recent
months, as the meltdown in the housing and mortgage markets rippled through the
The Fed chairman said the job market had worsened, noting employment fell by
17,000 jobs in January, according to the Labor Department. That was down from an
average rise of 95,000 jobs a month in the final three months of 2007.
Unemployment, though still comparatively low, at 4.9 percent, has edged up from
4.7 percent a few months ago.
Nationwide, housing prices have declined and show no signs of having hit bottom,
while the stock markets have fallen sharply from their highs late last year.
Mr. Dodd has proposed legislation to create an agency to bail out many
homeowners by buying up and restructuring troubled mortgages. He painted a
particularly bleak picture.
“The current economic situation is more than merely a ‘slowdown’ or a
’downturn,’ ” he said. “It is a crisis of confidence among consumers and
Mr. Paulson and other administration officials staunchly oppose a government
buyout program, arguing that the tax rebates and business tax cuts in the new
stimulus package should keep the nation out of a recession.
But Senator Richard C. Shelby of Alabama, ranking Republican on the Banking
Committee, predicted the bill’s tax rebates and temporary tax cuts for business
would have a negligible impact.
“I have equated it to pouring a glass of water in the ocean and expecting it to
make a difference,” Mr. Shelby said.
Though lawmakers welcomed the Fed’s willingness to lower interest rates,
investors had already been assuming that events would force the Fed’s hand.
Prices in the federal funds futures market, which allows investors to bet on the
coming course of rates, indicate investors expect the central bank to reduce its
benchmark overnight rate another full percentage point, to 2 percent, by the end
Top Officials See
Bleaker Outlook for the Economy, NYT, 15.2.2008,
A black market in minor necessities
From the Guardian archive
February 14 1945
A campaign has been started on a national scale to put an end to black-market
trading in such minor necessities as hair combs, pins, hooks and eyes, hair
grips, hair pins, and narrow elastic.
While most households are aware that these things are scarce and are generally
only come upon by chance in the usual shops, it is not so widely known that they
have been fairly readily obtainable — at a price — in market places and from the
baskets of street traders and pedlars.
The price, however, has generally been flagrantly in excess of the controlled
figure, and an investigation by the Board of Trade through the local Price
Regulation Committees has exposed a "racket" and resulted in concerted action to
Hair pins, for which the fixed ride is 21 for twopence, have sold at a halfpenny
each, hair grips that should be four a penny sell at four a shilling; and
ordinary steel pins at twenty for threepence, which is eight times their
controlled price. Safety pins, instead of being nine a penny, are three
halfpence each in this irregular market, and five penny moulded combs are six
times their proper price.
Mr. F. W. C. Godden, the North-west Regional Price Regulation Committee's
secretary, told a "Manchester Guardian" reporter yesterday that there had been
"a stinking ramp" in such small goods. "Take combs" Mr. Godden added. "There
seem to be two prices only for the usual comb, either two shillings or half a
crown, though the controlled price may be fivepence, eightpence, or tenpence."
The general conclusion is that large quantities of these goods have been
cornered by black-market operators, who pass them to the public, through market
traders and pedlars; and the first step in combating this trade is by the
exhibition of posters in the markets. In the North-west region there are 450
such markets to be warned.
The posters inform the public that the sale of these items of haberdashery is
subject to fixed prices and call on the public not to buy hair pins, hair combs,
hair grips, and like goods from traders who not display the correct price list.
The help of market superintendents and the police is being enlisted so that the
law may be enforced.
The first uses of the phrase "black market" recorded by the Oxford English
Dictionary were about illegal sterling exchanges in the 1930s. By 1943, in
wartime, the term had come to mean all "transactions in foodstuffs etc which …
were also a matter of grave scandal in the country, particularly to those who
could not afford 'black market' prices".
From the Guardian
archive > February 14 1945 >
A black market in minor necessities,
Buy almost anything at the Flat Iron
From the Guardian archive
May 26 1906
Everyone in Manchester knows the
Flat Iron Market, and a very large number do their fancy shopping there by
The market is the hunting-park of the bargain hunters who want, or think they
want, or imagine that they may some day want — a rusty old cavalry sword, or a
pair of skates, or a bunch of curtain rings, or a pair of half-wellington boots,
or a toy engine, or a bank of cord, green or red, or a little round
looking-glass, or a pair of cork soles, or a bunch of old keys, or an old rusty
lock, or a pink ice-cream, or a handful of hot chestnuts, or a small but
cheerfully coloured copy of "The Angelus", or a fuzzy toy animal, or a bottle of
medicine that'll cure anything that can be found in a medical dictionary, or a
"gigantic penny packet" of notepaper, or a pair of stays — for a penny.
The stay merchant said, "The ribs is right," and a little man with a red nose
bought a pair. You can even buy a policeman's helmet. Two heroes got one each,
and after buttoning their jackets up to the chin ran through the market like a
brace of Merry Andrews, startling mer chants by suddenly popping their helmeted
heads round the corners of the stall.
I think I should like to do all my marketing in the Flat Iron. You can swagger
aloof, or you can rub shoulders with the best of company, stopping to pass
old-fashioned chaff. And when you step to buy you plunge immediately into the
old primeval realities of commerce.
Here you do not stand sourly while a pale-faced short-tempered shopman whirls
your purchase into a screw of pale brown paper and sends your money trundling in
a globe along naked wires. No; here you can slap and thump a thing, and abuse
and sneer at it, and the man behind the stall will slap and thump it too, and
praise it; and at last you'll get the price down to near to what he will take
and you will give.
Then perhaps some old split-the-differ of the market rolls up and makes a
bargain between you. Oh, you can enjoy buying in the Flat Iron Market. And you
can buy almost anything that heart could wish, but never a flat iron could I
see. This surprised me, for you can get petticoats in Petticoat Lane.
The larger priced things, like clothes and oilcloth, are sold by Dutch auction,
the auctioneer wheedling or with winks setting the women giggling and the men
roaring, or browbeating until he has them at his mercy.
Jack B Yeats
From the Guardian archive,
Buy almost anything at the Flat Iron,
Republished 26.6.2007, p. 36,
number and prospectus,
Aug 5th 1843
Economist print edition
“If a writer be
conscious that to gain a reception for his favourite doctrine he must combat
with certain elements of opposition, in the taste, or the pride, or the
indolence of those whom he is addressing, this will only serve to make him the
more importunate. .”—CHALMERS.
IT is one of
the most melancholy reflections of the present day, that while wealth and
capital have been rapidly increasing, while science and art have been working
the most surprising miracles in aid of the human family, and while morality,
intelligence, and civilization have been rapidly extending on all hands;—that at
this time, the great material interests of the higher and middle classes, and
the physical condition of the labouring and industrial classes, are more and
more marked by characters of uncertainty and insecurity. In vain has the hand of
ART (led on and guided by a complete glare of SCIENCE, aided by INDUSTRY of
unsurpassed intelligence and perseverance, nurtured and fertilized by CAPITAL
almost without limit) developed the resources of the human mind and the material
creation in a manner which has at once astonished and exalted the world;—in vain
have all parts of the earth been brought nearer and nearer to us;—our Indian
territory within forty days’ journey, the great American continent within ten
days’ sail, our continental neighbours and every part of our own country
separated only by a brief space of a few hours;—in vain the producers and
consumers of the whole world, the administrators of mutual wants, the
encouragers of mutual industries, have been brought in easy and close collision
and contact, and thus facilitated the supply of every want, and the demand for
every exertion of human skill and industry;—in vain do we acknowledge all these
unequalled and undoubted elements of national prosperity: for at this moment the
whole country—every interest without exception,—the owner and occupier of the
soil, the explorer of our great mineral world, the manufacturer who gives form,
shape, and utility to the produce of nature, the artisan, the labourer of every
description, the merchant and shipowner (the great links of exchange), and the
capitalist who facilitates the operations of all,—every one of these interests
stand at this moment CONFESSEDLY in a condition of the most unprecedented
depression, anxiety, and uneasiness. And what rather adds to this anomaly than
in any way accounts for it, is, that our population has been rapidly increasing,
not only in numbers, but also in great skill and productive ability.
But while Art, Science, Intelligence and Enterprise have been thus engaged the
last half century in behalf of our country and the human race, in what manner
has legislation been occupied? Let cool and calm deliberation determine this
question. In the early part of that period the little time which could be spared
by the legislature from the excitement of political strife, the struggle for
political power and place, was occupied with the stirring events attendant on
the long and continued wars in which we were engaged, and the principles of
commercial and industrial legislation attracted little of its attention. Under
such circumstances it was not difficult for those interests who possessed great
political influence to obtain enactments which they supposed would be beneficial
to themselves. Unfortunately, however, both governments, and classes, and
individuals have been too apt to conclude that their benefit could be secured by
a policy injurious to others; and too often the benefit proposed has even been
measured by the injury to be inflicted: hence all the laws which were framed
under this influence had a tendency to raise up barriers to intercourse,
jealousies, animosities, and heartburnings between individuals and classes in
this country, and again between this country and all others; and thus, under the
plea of protecting individuals or classes against each other, and the whole
against other countries, was the system of COMMERCIAL RESTRICTION completed by
the enactment of the corn and provision laws, passed in 1815; amid the utter
forgetfulness on the part of the legislature, that it had no power or privilege
which could enable it to confer a favour or wealth on any part of the community,
without abstracting as much from others; in fact, that it possessed no inherent
source of productiveness which could enable it to be generous.
The policy of England, always, but especially at this particular time, looked up
to by all the world as the highway to greatness, was eagerly followed in her
commercial regulations by other countries; navigation laws, hostile tariffs,
prohibition of English manufactures, were resorted to by other governments, each
in a way according to the notions they had of their own interests, in imitation
of, or opposition to, the policy of England, each country inflicting on itself
as much mischief and injury as England had done by similar policy.
It was thus while Art, Science, Capital, Commercial Enterprise, and Labour were
eagerly demanding a greater arena to multiply and extend their benefits to ALL,
that legislation, ignorance, and prejudice associated with short-sighted
selfishness, were actively engaged in frustrating all these nobler efforts and
designs. And so far had they succeeded in creating a war among the material
interests of the world, that in 1819 the collision occasioned thereby threatened
the most serious consequences to our Social and Commercial existence. This
crisis caused reflecting men to turn their attention to the hitherto neglected
science of Political and Commercial Economy. The philosophy of Adam Smith found
a clear and able enunciator in Ricardo. The political and legislative
application of these great principles, so eloquently put forth to a wondering
but ignorant audience by Burke, found an ardent, warm and able echo in
Huskisson. The philosopher wrote, and was not refuted. The legislator debated,
and by his earnestness, industry, and eloquence, aided no doubt by the pressing
exigencies of the time, gained a partial triumph over the ignorance and
prejudice which ruled; and shadowed out for the first time the principles of
Political Economy into the embodyment of FREE TRADE as their practical result.
He saw that our interests and commerce had far out-grown the narrow limits which
ignorant legislation had assigned them: that all the up-heavings and convulsions
in the country were but the external symptoms of the fierce struggle which was
going forward between our rapidly-advancing productive power, earnestly
demanding a larger field of exchange, and the principles of restriction and
monopoly, blindly and vainly attempting to confine them to their ancient and
narrow limit: that it was a severe contest between intelligence, which pressed
forward, and an unworthy, timid ignorance obstructing our progress.
He commenced his commercial reform by revising our truly Anti-Commercial
Navigation laws; he followed that effort by revising the import duties on the
raw materials of manufactures of silk, wool, flax, &c.; he reduced the
differential duty on coffee and wine, and by these and various other changes,
but far more by the bread, intelligent, and enlightened arguments by which he
supported his policy, gave great and cheering hopes that the emancipation of
industry and commerce was at hand. Under the salutary influence of these reforms
the country recovered, and with returning prosperity, discontent was
dispelled—peace was restored. Every measure was attended with eminent success.
With reduction of duties he increased the revenue; with protection, removed or
lowered, he increased the competition and import, without injury to the producer
at home. Increased supply only tended to stimulate demand. The Minister and his
principles became equally popular. The silk weavers in Macclesfield, who
declared themselves ruined by his policy in 1825, drew his carriage triumphantly
into the town in 1830, on his last and fatal journey to Liverpool. The
Free-Trade Minister died and left no successor. The progress of his policy was
thus arrested at its outset, and was soon forgot in the stormy political events
In 1831 commenced the great Reform struggle: fascinated with the excitement,
intoxicated with the success, the country totally forgot the ends of good
government in the struggle for its means:—its means were obtained, its ends were
neglected. The Corn Laws and Commercial restrictions were denounced on the
hustings, but unheard of in Parliament; and it is a serious reflection on the
intelligence and wisdom of the times, that the greatest popular political
influence which ever existed in this country, scarcely achieved one important
act of liberation to commerce and industry; that it left the Corn Laws and all
the great glaring monopolies and restrictions as it found them: it spent its
whole strength in things good, but good only as a means to an end. A succession
of a few good harvests, and the development of Huskisson’s then neglected
principles, sustained our onward progress for some years,—until we reached the
end of 1838,—when the occurrence of a single bad harvest, proved to all thinking
men the critical point at which we had arrived. Wealth abounded, useful
productions were multiplied beyond all precedent, but the field of exchange had
become so narrowed, that the most serious national sacrifices were required to
supply the deficiency of the first necessary of life during the three following
Twenty years had passed away: six millions had been added to our population:
art, science, ingenuity, and industry had been working their miracles—but
legislation still sought to confine the country in the same swaddling clothes in
which it had been wrapt a quarter of a century before: and, with the exception
of the few acts of Huskisson, no means had been taken to afford a wider field
for our increasing numbers and powers.
The fierce struggle for more room, for wider markets, for free exchange, visible
in 1819, was now again, as before, exhibited by new upheavings and
convulsions—productive energy and intelligence were again in keen antagonism
with monopoly and restriction. The great manufacturing population was the first
to suffer, but that sympathy between all the different parts of the state, the
existence of which has always been overlooked in framing restrictive and
protecting laws, gradually extended the mischief, until it reached every
interest in the country: the lessened means of consumption on the part of the
artisans of one class reacted generally on the demand for the produce of their
fellow artisans of other classes; which again reacted more strongly on the
shopkeepers and small dealers; again affecting the wholesale dealer and
importer;—the consumption of articles of foreign growth being thus curtailed in
quantity and price, the power of our foreign customers to consume our
manufactures was again, in their turn, lessened; and thus reacted once more on
the producing classes at home; trade had a constant tendency to contraction; the
shipping interest became deeply depressed; capital became profitless; the
revenue suffered; new taxes became needful; consumption was thus once more
lessened; and at last, though not with less certainty, the agricultural
interest, that interest which is most strongly protected by law, but far more
strongly by the stern necessity which exists for their produce in priority to
all other articles, was involved in the common lot of increased charges,
diminished demand, and lower prices: and thus the narrow policy of restriction
and protection worked mischief to all, benefit to none; for where is the
interest which does not at this moment confess itself in a state of depression
without parallel?—It is no longer complaints of a class, or of classes, it is a
universal national embarrassment;—an embarrassment which has disturbed and
complicated our commercial relations over the whole world.
WHERE IS THE REMEDY?—who is the man that would remain as he is?—who is the man
that would go back into greater restrictions, into a narrower field; into less
demand? All now begin to feel and acknowledge that want of consumption is the
true cause of depression and low prices,—that the real cause of all our evils is
found in the want of employment for the labour, energy, and capital of the
country as it now is: but how is that to be remedied? Only by extending our
markets abroad, by increasing our exports: but we can only increase our exports
by being willing to INCREASE OUR IMPORTS, and this can only be done from those
large productive countries, the produce of which, at this time, is practically
prohibited. No revision of the tariff will be of any practical benefit which
will not admit in the greatest abundance all the first necessaries of life, and
which does not open the markets of those great countries which produce them. It
is of no avail to open freely our ports for articles of small and trifling
consumption, to open our trade to small and comparatively unimportant specks on
the ocean;—if we will really extend our trade, we must be willing to take freely
and regularly articles of extensive consumption from countries of wide and rich
territory, having great wants. We must be willing to take the corn of Prussia,
Poland, and America; the sugar and coffee of Brazil, Cuba, and Java, and by the
acts indicated in these two lines give to our great population, round whose
well-being we have discovered all other interests revolve,—the two-fold
blessings of ABUNDANCE and EMPLOYMENT.
We must retrace the whole of that narrow and ignorant legislation which seeks
falsely and in vain to prop up and protect individual interests—which has only
deceived and misled; we must rely alone on the great principles of public good
for public prosperity. We must relieve industry and capital from all
restrictions; we must know that there is no safety for our great active
population but in the freest intercourse with the producers and consumers of all
the world; in short, as the only true guarantee for prosperity and peace, we
must honestly and fearlessly carry into practice those principles which all
parties are ready to advocate in theory involved in FREE TRADE.
To no country in the world that ever did or does exist are these principles of
the same first importance that they are to us, for in no country does so large a
portion of the population and property depend on commerce and industry alone, in
order that they shall have any value. We believe that this important and
critical fact has been entirely overlooked, or has never been considered in one
tithe of its importance. Let us consider what a huge portion of our property and
reliance for employment consists of, and depends upon, the vast variety of
factories, mills, and other manufacturing establishments, and their numberless
aiders, assistants, contributors, and ministers, found in every variety in
manufacturing districts; our extensive and rich kingdom of minerals; our canals,
railroads, and various facilities or internal transport; our endless variety of
public companies; our huge and splendid commercial marine; our docks, basins,
and public warehouses; and our great cities attached to and dependent on the
Now the important fact to which we wish to draw attention is, that the labour
and property thus involved, not only depend on trade, but on a SUFFICIENT EXTENT
OF TRADE, to retain any value whatever. As long as they are profitably employed
they represent their full amount of cost in the sum of national wealth; and are
of their full amount of utility in affording employment, to the population: but
with an increasing population and ingenuity always at work, supply must have a
constant tendency to increase. If the demand for the produce of our factories be
not correspondingly increased, but on the contrary, diminished, competition must
become greater and greater, until all profit ceases; the capital is sunk, and
until there is a loss competitors will persevere. When that period arrives, when
the price of the goods will not repay the labour and cost of the raw material,
then the whole of this property vanishes, and its means of giving employment to
labour, and its various contributors, ceases: for of what value or utility is a
factory, and all its magnificent and complicated machinery and arrangement, with
its steam-engine still and motionless? As long as our mines of iron and of coal
yield a profit, they represent at least the whole value of the labour employed
in exploring them, and generally much more in the form of rent or royalty; but
increase the quantity of iron or coal without an increase of demand, and
competition will lower the prices, so that first all rent will vanish, and as
soon as the price does not pay the expense and labour of raising the mineral, we
are no richer with coal or iron fields than if they were beds of quicksand:
their power of employing labour is at an end, and all the money invested ceases
to be national wealth. As long as railways and canals are profitable, they truly
represent in real wealth the capital invested: but diminish the amount of
traffic only so much as pays the profit—until the receipts do not cover the
necessary wear and tear and expenses—and they are no longer wealth. Increase our
number of ships, without proportionably increasing the consumption of articles
of foreign growth—first the competition will destroy the merchant’s profit and
yield only freight, but next competition will reduce freight, until the wages
and expenses are not covered, and then all wealth in ships ceases: and the
capital invested in them is so long an absolute abstraction of national wealth.
With a given amount of trade all this wealth is secure, with a little less it
vanishes. And let us well consider that it is not the mere surplus of these
various interests that thus suffers, for no man will consent voluntarily to be
the surplus:—no man will close his factory, blow out his furnace, lay by his pit
or lay up his ship, until they become a source of loss. It is true the weakest
must go first: the worst factory must be closed, the poorest mines must be laid
by, and the worst ship must be laid up first; and then follow the next in
degree; but the moment a little diminution of supply lessens the loss, a portion
of the idle start afresh into competition. It may be coolly said, this state of
things must cure itself in time, if it were only by a course of ruin; but, be it
remembered, the population still goes on increasing, ingenuity and invention are
still at the highest pressure of necessity, and as one class of competitors are
destroyed, another class are immediately in their place. We can safely refer to
each and all of these interests, if this is not a literal description of their
present condition. The want of more trade prevents that trade we have being
profitable: the excess of produce beyond the demand lessens the value of the
whole producing ability; and this must continue as long a demand keeps not pace
with production, as long as no effort is made to extend our markets as our
population and productive ability increase. But inasmuch as consumption is only
created by production, the two should always in a natural state of things keep
pace with each other; the demand for productions should always increase as they
become abundant and cheap, for abundance implies great production, and great
production an extensive means of consumption. Then why do we find this country
so great an exception to this natural law? Because by our RESTRICTIVE SYSTEM we
limit the supply of one great class of productions, and thus practically limit
the demand for all others, however much we affect to encourage our commerce.
During the last thirty years one great class of producers at home has been
limited by the nature of the country and Acts of Parliament. The land has given
employment to no portion of the increase of the population: the whole additional
six millions of our people, since 1821, have been thrown upon other employments.
In 1821, 4,790,000 of the population were engaged in producing food for, and
consuming the products of, the remaining 9,600,000: in 1842 the number of
4,790,000 of producers of food and consumers of manufactures is somewhat
reduced, while the consumers of food, irrespective of the producers, are
increased to 14,400,000; but the law practically enacts that the 14,400,000 in
1842 shall be fed by the same means that fed the 9,600,000 in 1821; and
moreover, for such is the effect, that in 1842, 14,400,000 manufactures,
dealers, various producers, professions, &c., shall only have the same number of
customers with whom to exchange for the first great necessaries of life as the
9,600,000 had twenty years ago; and thus there has been a constant tendency for
the produce of the rapidly-increasing number to exchange for a smaller quantity
of the produce of the stationary number, or, in other words, while agricultural
produce has all along maintained a high price, all other kinds of goods have
fallen rapidly during the period; and the demand being thus far stationary,
while the supplies were increasing so much, there was a constant tendency during
the whole period to an excess of production on one hand, only because the same
constant tendency existed to a limited and deficient production on the other
hand. Had the producers of food kept in the same proportionate increase of
numbers and quantity as the other class, there had remained the same relative
value and demand for the produce of each, and excess or over-production would
not have arisen in the one case nor deficiency in the other. This excess, or
what is termed over-production, is precisely that surplus which we have before
shown has been so long, and still is, undermining the commercial and industrial
existence of the country;—for however great the struggle may be among farmers to
occupy, or of labourers to cultivate, this fixed quantity of land, their numbers
do not increase: they only require the same number of ploughshares, the same
quantity of saddlery, the same number is still only to be shod and booted, still
only the fixed number of backs to be clothed, still only the same number of
consumers of colonial produce; while the class who depend for food on this fixed
number, and who seek to minister their wants of ploughshares, of saddlery, of
shoes, of clothing, who import and supply foreign produce, and have other
occupations, are six millions more since 1821, and still increase at the rate of
one thousand per day. In another eight years, if the increase goes on in the
same proportion, in 1851, while the food producers remain at 4,790,000, the
other classes will have increased to 17,000,000; and if it be possible that
suicidal restriction and monopoly still prevail, it must require a still larger
portion of the conflict of the large class to obtain the produce and minister to
the wants of the smaller class; and it is an important fact, that the great
competition to occupy, and to labour upon, this fixed quantity of land, has a
constant tendency to keep the largest portion of even this smallest class in the
utmost poverty and depression.
Thus far as regards the power of exchange in the home trade for the first great
article of food:—next as to the greatest foreign article of consumption, and
therefore of exchangeable ability, SUGAR. Here again the same principle has been
acted upon, the same result has followed. Restriction and monopoly have again
here attempted to confine the supply of the 27,000,000, which we now are, to the
same means which supplied 21,000,000, twenty years ago. In 1821, the quantity of
sugar available for the consumption of 21,000,000 of people was 4,176,178
cwts.—in 1842 the quantity similarly available for the consumption of 27,000,000
was only 4,082,312 cwts., being actually 93,866 cwts. less. The competition,
therefore, of 27,000,000 to obtain only the same or a less quantity in exchange
for their articles of produce, has had the constant tendency to cause a smaller
quantity of sugar to exchange for a larger quantity of goods. The same quality
of sugar which exchanged, twenty years ago, for a given quantity of
manufactures, iron or hardware, will now command at least three times the
quantity of those articles. Thus, while the supply of these great necessaries is
limited to a given quantity, the chief effect of increased production at home is
to lower its exchangeable value for the article of which the quantity is fixed.
If the producers of our sugar increased in the same proportion as the consumers
have, the same relative value would be always maintained between the goods of
this country and that article, because the demand would always increase in
proportion to the supply; but the restriction affects us in two ways; first, by
making sugar dear, and secondly, by making our goods cheap, inasmuch as we limit
our market in other sugar growing countries in consequence of the practical
prohibition to consumer their produce. And thus it is, with these restrictions,
that we have a constant tendency to that surplus or excess of one class of
productions, which weighs down and depresses the great industrial interests of
the country; that we have every day a greater tendency to that little trade,
which makes trade profitless, and which brings about the exact state of things
which at present exist.
There is no cure, there is no remedy, for all these evils but increased demand;
there can be no increased demand without increased markets; and we cannot secure
larger markets without an unrestricted power of exchange, and by this means add
to our territory of land, as far as productive utility is concerned, the corn
fields of Poland, Prussia, and above all, the rich and endless acres of the
United States; to avail ourselves of the vast and rich productiveness of Brazil,
Cuba, Java, &c.; and thus, at the same time that a plentiful and proportionate
supply of all the great necessaries of life would be maintained, we should
always, in exchange, have a corresponding demand for our increasing productions
at home; the equilibrium of the various classes of producers would be restored
and maintained. With freed trade we might go on increasing our productions
without limit, for in this only natural state of things increased production
could only create the power and means of increased consumption. There is no
other remedy. It is in vain that deputations of distressed interests pass
resolutions merely affirming their distress; seek interviews with Ministers of
the Crown only to repeat their resolutions, without an opinion to offer as to
the cause or cure; all will be in vain until they have this important truth
palpably and at all times before them, that they are increasing by millions,
while the law practically prescribes only a fixed, stationary quantity of the
great necessaries of life for their consumption, only the same number of
customers with whom to exchange their productions, whatever may be the quantity:
until this conviction compels them to demand an unrestricted exchange, until
they demand FREE TRADE as a simple act of justice and policy.
But we may be told these are all only opinion, well enough reasoned and
difficult to answer, and perhaps very like the truth; but the experiment is
great—we want something more than opinions. Well, then, we will endeavour to
prove and illustrate every opinion we have offered to the full; and that by our
own experience in four of the most important articles of the consumption of this
country—Coffee and Sugar, as representing the Colonial interests; Wool and Corn,
as representing the Home or Agricultural interests.
Preliminary number and
prospectus, Aug 5th 1843,
From The Economist print edition,
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