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USA > History > 2010 > Economy (III)




F.D.I.C. Gives

a Mixed Report on Banks in Quarter


August 31, 2010
The New York Times


The Federal Deposit Insurance Corporation quarterly report card released Tuesday reflected a banking sector that posted a record profit even as the number of troubled banks continued to rise.

F.D.I.C officials said the list of “problem banks” reached 829 in the second quarter, adding 54 troubled lenders, many of which were small community banks. While that is a smaller increase than in previous quarters, the number of problem banks remains at its highest level in more than 16 years.Not all of those banks are destined to founder, but officials reiterated that they expected the number of failures to peak later this year. So far this year, 118 banks have failed, with 45 closing in the second quarter.

Even so, bank earnings continue to rebound. The banking industry posted a $21.6 billion profit in the scond quarter amid signs that loan losses are stabilizing, the F.D.I.C. reported. That profit was nearly five times larger than the $4.4 billion a year ago, and it was the industry’s best results since the credit card crisis began in the third quarter in 2007. The banks are also setting aside less money to cover future losses than they were before and taking advantage of ultra-low interest rates to improve lending margins.

Fewer borrowers are also falling behind on their loan payments. Across nearly every category, troubled loans started falling for the first time in more than four years. The sole exception was commercial real estate loans, which continued to show signs of weakness.

“The industry has stopped the bleeding, but has not recovered from the wounds,” said Jaret Seiberg, a financial policy analyst in a research note on Tuesday morning. Those glimmers of stability have attracted private investors, who believe they finally have a handle on the depth of the banks’ problems. Investment bankers, meanwhile, are setting their sights on a flurry of small bank deals in 2011.

Still, the nation’s 7,830 banks remain under pressure. The F.D.I.C.’s quarterly report hinted at early signs of strain from the new financial reform regulations as bank cut back on fee income ahead of the new legislation. Fees attached to deposits accounts, for example, was $752 million, about 7.1 percent lower than a year earlier. Lending, meanwhile, showed signs of continued weakness. Total assets for the banking industry fell about 1 percent, amid declines in every major lending category. Although other government reports suggest that banks may be starting to loosen some of their lending standards, a lingering unemployment rate and general nervousness about the economy has crippled demand for new loans. Commercial real estate loan balances fell 8.3 percent, while credit card balances declined by about 2.5 percent in the second quarter.

Sheila C. Bair, the F.D.I.C. chairwoman, warned that the recovery of the banking industry could be hampered by protracted weakness in the economy.

“Without question, the industry still faces challenges,” she said in a news statement. But the banking sector is gaining strength. Earnings have grown, and most asset quality indicators are moving in the right direction.”

The agency expects a “recovery, sluggish and slow,” Ms. Bair said.

With so many banks failing, the deposit insurance fund has been severely depleted. At the end of June, it carried a negative balance of $15.2 billion. The insurance fund is in better shape than such numbers might suggest, however.

Officials have estimated that bank failures would drain about $100 billion from the fund from 2009 through 2013. But of that amount, a total of roughly $80 billion in losses were recognized last year or projected for 2010. By that math, the agency is expecting an additional $20 billion of losses over the next three years.

F.D.I.C. officials said they hoped to recoup those costs through higher premium fees and a special assessment imposed last September. Still, Ms. Bair said the agency had ample resources.

“As we expected, demands on cash have increased this year,” she said. “But our projections indicate that our current resources are more than enough to resolve anticipated failures.”

F.D.I.C. Gives a Mixed Report on Banks in Quarter, NYT, 31.8.2010, https://www.nytimes.com/2010/09/01/






For Many,

a New Job Means Lower Wages,

Studies Find


August 31, 2010
The New York Times


After being out of work for more than a year, Donna Ings, 47, finally landed a job in February as a home health aide, earning about $10 an hour, with a company in Lexington, Mass.

Chelsea Nelson, 21, started two weeks ago as a waitress at a truck stop in Mountainburg, Ark., making around $7 or $8 an hour, depending on tips, ending a lengthy job search that took her young family to California and back.

Both are ostensibly economic success stories, people who were able to find work in a difficult labor market. Ms. Ing’s employer, Home Instead Senior Care, a company with franchises across the country, has been aggressively expanding. Ms. Nelson’s restaurant, Silver Bridge Truck Stop, recently reopened and hired about 20 people last month in an area thirsty for jobs.

Both women, however, took large pay cuts from their old jobs — Ms. Ing worked in the office of a wholesale tuxedo distributor; Ms. Nelson used to be a secretary. And both remain worried about how they will make ends meet in the long run.

With the country focused on job growth and unemployment continuing to hover above 9 percent, there has been comparatively little attention paid to the quality of the jobs being created in this still-struggling economy and what that might say about the opportunities that will be available to workers when the tumult of the Great Recession finally settles. There are reasons, however, for concern, even in the early stages of a tentative recovery that now appears to be barely wheezing along.

For years, long before the recession began, job growth had become increasingly polarized in this country, with high-paid occupations that demand significant amounts of education and training growing rapidly, alongside low-wage, entry-level, service-type jobs that do not require much schooling or special skills, according to David Autor, a labor economist at the Massachusetts Institute of Technology.

The growth of these low-wage jobs began in the 1980s, accelerated in the 1990s and began to really take off in the 2000s. Losing out in the shuffle, according to Dr. Autor, are jobs that he describes as “middle-skill, middle-wage” — entry-level white-collar positions, like office and administrative support work, as well as certain blue-collar jobs, like assembly line workers and machine operators.

The recession appears to have magnified that trend, according to Dr. Autor in a recent paper, released jointly by the Center for American Progress, a left-leaning policy group, and the Hamilton Project, which has a more centrist reputation. From 2007 to 2009, the paper found, there was relatively little net change in total employment for both high-skill and low-skill occupations, while employment plummeted in so-called middle-skill occupations.

A new analysis by the National Employment Law Project, a liberal advocacy group, takes a different approach, identifying industries that have actually experienced job growth in 2010 and examining their median wages. It is a blunter measurement because it focuses on industries, within which there is often great diversity in income. Economists also cautioned that it was still too early to know exactly which sectors would eventually lead the way in a sustained recovery.

Nevertheless, the law project analysis offers a snapshot of where the employment growth has been so far. It found job expansion to this point has been skewed toward industries with median wages that are low to middling, with a disproportionate share of job growth happening in industries whose median wages fall below $15 an hour.

“There’s a striking contrast so far between which industries have lost jobs and which ones are growing,” said Annette Bernhard, policy director for the law project. “If this kind of bottom-heavy job creation continues, it could pose a real challenge to restoring consumer demand and making sure working families have a way to support themselves.”

Both studies are disquieting because of the potential import for many who had once scratched out middle-class livings and are now looking for work. A unifying theme is the stubborn march of labor-intensive, low-paying service jobs, like the ones Ms. Ings and Ms. Nelson found.

There is typically a downward slide during recessions, said Till von Wachter, a Columbia University economist, in which higher-skilled and higher-educated workers are re-employed first, often landing jobs for which they are overqualified, squeezing out the lesser skilled and lesser educated. Indeed, in the current downturn, the unemployment rate has climbed the most for the least-educated workers, suggesting they have been hit the hardest.

However, while researching workers who lost their jobs in California in the 1990s, Dr. Wachter found that people who fall in the middle when it comes to their educational background — possessing high school degrees or some college — and the skills required for their occupation tended to experience larger and longer lasting income losses after job loss than people on both the lower and higher end of the scale.

Ms. Ings had worked in a variety of office and administrative roles in the wholesale tuxedo industry. Her wages of just over $16 an hour were enough to build a relatively comfortable life for her and her daughter, Jillian, now 21 and in college.

“During her whole growing up, I never got child support,” Ms. Ings said. “I always had to try to find a job that paid well to help support her. That’s my job, being a mother.”

When Ms. Ings was laid off in March 2009, she dove into finding another “corporate job.” But she found that nearly everyone seemed to be looking for people with at least a college degree, if not more. She had only a high school diploma.

As a teenager, she had worked in a nursing home and enjoyed it. So, after getting her certified nursing assistant license, she applied at the Home Instead office in Lexington, which has been steadily hiring this year, said Jack Cross, the franchise owner. Nationally, the company has created more than 2,400 jobs this year, and home health aides are one of the country’s fastest growing occupations.

Ms. Ings adores her job, but her finances remain taut, even though she is working 50 hours a week. She had been without health insurance for her first few months, but soon the company will begin deducting for it — a further pinch on her already meager paycheck.

“I’m going to be coming home with nothing,” she said.

In Arkansas, Ms. Nelson has been hampered by her decision to quit college after a semester several years ago. She has worked a variety of jobs, including a three year stint as a secretary, earning about $12 an hour.

Last year, she and her husband, Kenneth, and their son, Riley, now almost 2, moved to Colton, Calif., where they had relatives and believed the job market would be better. They moved back to Arkansas this year, however, after struggling to find steady work.

He quickly accepted a factory job at $8 an hour, but she got rejection after rejection trying to find office work.

She eventually gave up and took up waitressing. The couple is living with her mother, trying to save enough for their own place.

“I don’t know, with the jobs we have, if we’re ever going to be able to make it on our own,” Ms. Nelson said.

For Many, a New Job Means Lower Wages, Studies Find, NYT, 31.8.2010, http://www.nytimes.com/2010/09/01/us/01jobs.html






Banks Grow Wary

of Environmental Risks


August 30, 2010
The New York Times


Blasting off mountaintops to reach coal in Appalachia or churning out millions of tons of carbon dioxide to extract oil from sand in Alberta are among environmentalists’ biggest industrial irritants. But they are also legal and lucrative.

For a growing number of banks, however, that does not seem to matter.

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

In the most recent example, the banking giant Wells Fargo noted last month what it called “considerable attention and controversy” surrounding mountaintop removal mining, and said that its involvement with companies engaged in it was “limited and declining.”

The bank was a small player in the sector, representing about $78 million in bonds and loan financing for such companies from 2008 to April of this year, according to data compiled by the Rainforest Action Network, an environmental group tracking the issue.

But the policy shift by Wells Fargo follows others over the last two years, including moves by Credit Suisse, Morgan Stanley, JPMorgan Chase, Bank of America and Citibank, to increase scrutiny of lending to companies involved in mountaintop removal — or to end the lending altogether.

HSBC, which is based in London, has curtailed its relationships with some producers of palm oil, which is often linked to deforestation in developing countries. The Dutch lender Rabobank has applied a nine-point checklist of conditions for would-be oil and gas borrowers that includes commitments to improve environmental performance and protect water quality.

In some cases, the changing policies represent an attempt to burnish green credentials in areas where the banks had little interest, and there is no indication that companies engaged in the objectionable practices cannot find financing elsewhere.

Still, banking analysts and others suggest that heated debate over climate change, water quality and other environmental considerations is forcing lenders to take a much harder — and often uncomfortable — look at where they extend credit, and to whom.

“It’s one thing if your potential borrower is dumping cyanide in a river,” said Karina Litvack, the head of governance and sustainable investment with F&C Investments, an investment management firm based in London. “But if they’re dumping carbon dioxide into the air, which is not exactly illegal — what do you do? Banks are in kind of a quandary, because they are competing for business, and if they get holier-than-thou and start to play policeman, they risk allowing other banks to take that business.”

Environmental risk has been on the radar for lenders since the 1980s and early 1990s, when courts began forcing some measure of responsibility on banks for the polluting factories, superfund sites and other environmental problems that had, to one degree or another, been facilitated by their financing.

Congress passed a law in 1996 that limited the exposure of lenders on this front, but since then, most major banks have developed environmental risk management divisions as part of their commercial banking due diligence efforts.

Now, the rise of murkier issues like global warming, along with increasing scrutiny by environmental groups of banks’ investments in many other industries — like oil and gas development, nuclear power, coal-fired electricity generation, oil sands, fuel pipeline construction, dam building, forestry and even certain types of agriculture — are nudging lenders into new territory.

“We’re taking a much closer look at a much broader variety of issues, not all of which are captured under state and local laws,” said Stephanie Rico, a spokeswoman for the environmental affairs group at Wells Fargo.

Ms. Litvack, of F&C Investments, pointed to large protests last week by many climate activists outside the Royal Bank of Scotland in Edinburgh. At least a dozen protesters have been arrested in demonstrations against the bank’s financing of oil sands development in Canada.

The Royal Bank of Canada, meanwhile, responding to intense pressure from environmental advocates denouncing the bank’s financing of oil sands projects, hosted 18 international banks in Toronto in February for “a day of learning” on the “regulatory, social and environmental issues” surrounding the oil sands.

Globally, banks and environmental advocates are seeking to make things easier by developing best practices and other voluntary standards. Citigroup, JPMorgan Chase and Morgan Stanley helped initiate the Carbon Principles, which aim to standardize the assessment of “carbon risks in the financing of electric power projects” in the United States. Several international financial institutions — including HSBC, Munich Re and others — have formed the Climate Principles, which aim to encourage the management of climate change “across the full range of financial products and services,” according to the compact’s Web site.

In the United States, mountaintop removal mining has become both increasingly common and contentious, as coal companies vie to feed the nation’s appetite for inexpensive electricity. An expeditious and disruptive form of surface mining, it involves blasting off the tops of mountains and dumping the debris in valleys and streams below.

A report published in May by the Sierra Club and the Rainforest Action Network estimated that nine banks were the primary lenders for companies engaged in mountaintop removal mining in Appalachia, and that they had provided nearly $4 billion in loans and bond underwriting to those companies — chiefly Massey Energy, Patriot Coal, and Alpha Natural Resources — since 2008.

The Rainforest Action Network, which has headed a campaign to highlight financial institutions with connections to the mining, said this month that the policy shifts were chipping away at the financing.

Citing Bloomberg data, for example, the group noted that Bank of America — listed as recently as 2008 as one of the “syndication agents” on a $175 million revolving line of credit to Massey Energy — has eliminated that and all other connections to the company. The group also pointed to JPMorgan, which had previously underwritten $180 million in debt securities to Massey, but no longer has any financial ties to that company. In May, the bank said it would be subjecting all future engagements with companies involved in mountaintop removal mining to “enhanced review.”

Some environmental groups have criticized that and other policies as providing too much wiggle room — and whether any of it has any real impact is an open question. Mining industry representatives say such policies often fail to consider laws already in place requiring coal companies to limit their environmental impact, and to restore former mine sites when they are finished.

Carol Raulston, a spokeswoman for the National Mining Association, an industry group, said that most of the policies in question position the banks to phase out lending over time — and only to companies that primarily engage in mountaintop removal mining. “Companies are still getting financing for their projects,” she said.

Roger S. Hendriksen, the vice president for investor relations for Massey Energy, suggested that environmentalists were overstating things, and that his company was having no trouble securing financing.

“While some banks no longer provide financing for companies conducting surface mining, there are many who will,” Mr. Hendriksen said. “We have and will continue to replace their services with alternate bank providers with little difficulty.”

But Rebecca Tarbotton, the executive director of the Rainforest Action Network, said in a published statement that the banks’ moves nonetheless send “a clear signal that these companies have a high risk profile and that other banks should beware.”

“Bottom line,” she added, “as access to capital becomes more constrained it will be harder for mining companies to finance the blowing up of America’s mountains.”

    Banks Grow Wary of Environmental Risks, NYT, 30.8.2010, http://www.nytimes.com/2010/08/31/business/energy-environment/31coal.html






Obama Weighs

Smaller Measures

on the Economy


August 30, 2010
The New York Times


WASHINGTON — President Obama is weighing new steps to bolster the economy, he said Monday. But any measures he takes seem likely to be small ones, and his options are limited with Congress showing little appetite for more spending in a hotly contested midterm election year.

On his first workday back in Washington after a 10-day vacation on Martha’s Vineyard and a day trip on Sunday to New Orleans, Mr. Obama spent part of the morning huddled with his economic team, then emerged in the Rose Garden for a hastily arranged appearance that was troubled by microphone difficulties.

He chided Senate Republicans for engaging in “pure partisan politics” by holding up a jobs bill that would offer tax breaks to small businesses and ease credit with a $30 billion initiative to channel loans through community banks. “I ask Senate Republicans to drop the blockade,” Mr. Obama said.

The president also said he and his team were “hard at work in identifying additional measures,” including extending tax cuts for the middle class that are scheduled to expire this year, increasing government investment in clean energy and rebuilding more infrastructure.

None of those steps, however, will come close to the $787 billion stimulus measure that Democrats passed at the outset of the Obama presidency. With voters angry about government spending, and economists divided about just what approach is the correct one, such aggressive steps are by now out of the question.

“There’s a deep frustration among economists that they simply don’t know what to do under these circumstances, at least in terms of fiscal policy,” said Bruce Bartlett, an economist who advised Republican presidents.

“I think there are a lot of economists who, in principle, would support some new fiscal stimulus, perhaps a jobs program where people were directly employed by the government or something of that sort,” Mr. Bartlett said. “But politically it’s simply not possible to do anything remotely like that under the current circumstances.”

The House has already passed a bill offering tax breaks to small businesses, but the measure is not the same as the one being considered in the Senate. The majority leader, Senator Harry Reid of Nevada, has scheduled a series of procedural votes on the Senate bill for when lawmakers return from their recess on Sept. 13.

But passage “is not a foregone conclusion,” said Jim Manley, spokesman for Mr. Reid. “We’re going to need Republican votes.”

Republicans countered that Democrats were the ones holding up the measure, by blocking Republican amendments to the bill and refusing to work with the minority party.

“Instead of growing jobs as promised, Washington Democrats have grown the size of the national debt, the federal government and the unemployment rate,” the Senate Republican leader, Mitch McConnell of Kentucky, wrote in an e-mail.

With unemployment above 9 percent, and some economists warning of a double-dip recession, Mr. Obama and his fellow Democrats have been trying to make the case to voters that while the recovery is slow, the nation is moving in the right direction. But recent economic data have not cooperated: home sales in July dropped to their lowest level in a decade, and experts expect another bleak jobs report on Friday.

In his Rose Garden remarks, Mr. Obama sought to reassure nervous Americans that he is on top of the economy, reminding them that “it took nearly a decade to dig the hole that we’re in” and that it will “take longer than any of us would like to climb our way out.”

But as the president tried to deliver that message, he had to do several retakes, interrupting himself to make certain that his microphone was on. “Can you guys still hear us?” Mr. Obama asked. “O.K. Let me try this one more time.”

    Obama Weighs Smaller Measures on the Economy, NYT, 30.8.2010, http://www.nytimes.com/2010/08/31/us/politics/31obama.html






Technology Aside,

Most People Still Decline

to Be Located


August 29, 2010
The New York Times


Internet companies have appropriated the real estate business’s mantra — it’s all about location, location, location.

But while a home on the beach will always be an easy sell, it may be more difficult to persuade people to start using location-based Web services.

Big companies and start-ups alike — including Google, Foursquare, Gowalla, Shopkick and most recently Facebook — offer services that let people report their physical location online, so they can connect with friends or receive coupons.

Venture capitalists have poured $115 million into location start-ups since last year, according to the National Venture Capital Association, and companies like Starbucks and Gap have offered special deals to users of such services who visited their stores.

But for all the attention and money these apps and Web sites are getting, adoption has so far been largely confined to pockets of young, technically adept urbanites. Just 4 percent of Americans have tried location-based services, and 1 percent use them weekly, according to Forrester Research. Eighty percent of those who have tried them are men, and 70 percent are between 19 and 35.

“Ever since mobile phones and location technology got started, there have been conversations about the potential for doing something really incredible with this for marketers,” said Melissa Parrish, an interactive marketing analyst at Forrester. “But clearly the question is whether it has reached the mainstream, and it looks like the answer is no.”

Foursquare, for example, which lets people “check in” to public places on their phones and let their friends know where they are, has close to three million users, most of them in cities. Loopt, a similar service, has four million users, about a quarter of whom actively use it. Compare that with Twitter, which has 145 million registered users.

This month, Facebook introduced Places, which adds some Foursquare-like features to its social network. If Places catches on with Facebook’s 500 million users, many think it could bring location-sharing to the masses.

“Clearly location is not yet mainstream — it’s still a younger-demographic phenomenon — but if anyone can change it, Facebook will,” said Sam Altman, chief executive of Loopt.

For now, many people say sharing their physical location crosses a line, even if they freely share other information on the Web.

Stephanie Angelucci, who is 30 and lives in North Beach, Md., updates her MySpace page with photos of her babies, news about her health and testaments to her love of sailing. But she won’t use location apps.

“I don’t like broadcasting where we are or when my husband’s gone, just for safety reasons,” she said. And privacy concerns aside, she doesn’t see the need: “We go to playtime, the park and the grocery store. My life isn’t exciting enough to broadcast where I am and what I do.”

Some users of Foursquare like the spontaneous social gatherings it can inspire, or the way it keeps friends informed of one’s nightlife exploits. But people who are not frequent bar-hoppers need other reasons to check in. The companies that make location-based services are working to add incentives that they hope will reel in a bigger audience.

Sharing location becomes a simple cost-benefit analysis for most people, said Matt Galligan, chief executive of SimpleGeo, which sells location technology to companies building apps. “There has to be an incentive for giving away very specific information, like coupons or points.”

Shopkick, which became available this month, offers coupons to people when they walk into stores like Best Buy and Macy’s. The application allows users to share their location just with the store and not with other people, and is making inroads with a broader demographic.

Elizabeth Aley, 38, a volunteer in Nixa, Mo., says she is “kind of addicted” to Shopkick. She uses it when she goes to Wal-Mart, Target and the Price Cutter grocery store, to rack up points for entering the stores and to get coupons that she has exchanged for Tide laundry detergent and a Swiffer.

Ms. Aley has chosen to use the app to also reveal her location to her Facebook friends and Twitter followers. The rewards make using the app worthwhile, she said, and the privacy trade-off “really never crossed my mind.”

Gowalla bills itself as a travel game that lets users stamp digital passports at places they visit, find virtual objects in real-world places in a kind of scavenger hunt, or follow trip itineraries in new cities.

“Connecting with friends is nice, but I don’t know that it alone will be enough of a driver” to make a location service widely popular, said Josh Williams, a Gowalla founder.

Foursquare hit upon the idea of allowing people to become “mayor” of places they visit most frequently, touching off competitions among users. Now it is teaming up with big companies and small stores so people see special offers when they check in, whether they are in Brooklyn or Milwaukee.

The company has signed promotional deals like a recent one with the History Channel, which sends users historical facts when they check in at a landmark.

“It’s a misconception that the service is just for city kids,” said Dennis Crowley, a Foursquare founder. “Cities have the densest use, of course, but it happens in the Midwest and all over the world.”

Still, wariness about broadcasting one’s location extends to city dwellers, too. Marsha Collier lives in Los Angeles and writes “For Dummies” books on technology. She uses Whrrl and Foursquare as a way to share information about her life with her online fans and followers — but instead of checking in when she arrives at a place, she checks in as she leaves, to avoid alerting people that she is away from home.

“If I’m going to go work out at the gym, I’ll check in on my way out,” she said. “That way, you’re going to be home soon, so your house won’t be unattended for a long time.”

Others let only a small circle of people see where they are. Ellen Lovelidge, 27, a fishery specialist and D.J. in Washington, carefully chooses who can see her Foursquare updates. She does not plan to use Facebook’s new service, since her Facebook updates go out to a large network of friends, colleagues and family.

“I like Foursquare because I can actually pick who sees where I actually am, compared to Facebook, where I have 1,200 friends,” she said. “I don’t want 1,200 people knowing where I am.” Facebook does let users pick a smaller subgroup of friends who can see location updates, but Ms. Lovelidge said it would be too much trouble to set that up.

Location services are catching on more quickly with young people, who have grown up posting personal information online.

“The magic age is people born after 1981,” said Mr. Altman of Loopt. “That’s the cut-off for us where we see a big change in privacy settings and user acceptance.”

That rings true for Richard Sherer, 65, a freelance writer in Redondo Beach, Calif. “I can’t think of anybody who cares where I am every minute of the day except my wife, and she already knows,” he said. “Maybe it’s a generational thing. As we old fogies die off, maybe this will no longer be an issue.”

    Technology Aside, Most People Still Decline to Be Located, NYT, 29.8.2010, http://www.nytimes.com/2010/08/30/technology/30location.html






Why We Need a Second Stimulus


August 28, 2010
The New York Times


Berkeley, Calif.

OUR national debate about fiscal policy has become skewed, with far too much focus on the deficit and far too little on unemployment. There is too much worry about the size of government, and too little appreciation for how stimulus spending has helped stabilize the economy and how more of the right kind of government spending could boost job creation and economic growth. By focusing on the wrong things, we are in serious danger of failing to do the right things to help the economy recover from its worst labor market crisis since the Great Depression.

The primary cause of the labor market crisis is a collapse in private demand — the same problem that bedeviled the economy in the 1930s. In the wake of the financial shocks at the end of 2008, spending by American households and businesses plummeted, and companies responded by curbing production and shedding workers. By late 2009, in response to unprecedented fiscal and monetary stimulus, household and business spending began to recover. But by the second quarter of this year, economic growth had slowed to 1.6 percent, according to a government estimate issued Friday. Clearly, the pace of recovery is far slower than what is needed to restore the millions of jobs that have been lost.

Households and businesses are on a saving spree to rebuild their balance sheets. Their spending relative to income has fallen more than at any time since the end of World War II. So there is now a substantial gap between the supply of goods and services the economy is capable of producing and the demand for them. This gap is starkly reflected by the 23 million Americans who are looking for full-time jobs and the millions more who have left the labor force because they could not find one.

The situation would be even worse without the $787 billion fiscal stimulus package passed in 2009. The conventional wisdom about the stimulus package is wrong: it has not failed. It is working as intended. Its spending increases and tax cuts have boosted demand and added about three million more jobs than the economy otherwise would have. Without it, the unemployment rate would be about 11.5 percent. Because about 36 percent of the money remains to be spent, more jobs will be created — about 500,000 by the end of the year.

But by next year, the stimulus will end, and the flip from fiscal support to fiscal contraction could shave one to two percentage points off the growth rate at a time when the unemployment rate is still well above 9 percent. Under these circumstances, the economic case for additional government spending and tax relief is compelling. Sadly, polls indicate that the political case is not.

Two forms of spending with the biggest and quickest bang for the buck are unemployment benefits and aid to state governments. The federal government should pledge generous financing increases for both programs through 2011.

Federal aid to the states is especially important because they finance education. Although the jobs crisis is primarily a crisis of demand, it also reflects a mismatch between the education of the work force and the education required for jobs in today’s economy. Consider how the unemployment rate varies by education level: it’s more than 14 percent for those without a high school degree, under 10 percent for those with one, only about 5 percent for those with a college degree and even lower for those with advanced degrees. The supply of college graduates is not keeping pace with demand. Therefore, more investment in education could reduce both the cyclical unemployment rate, as more Americans stay in school, and the structural unemployment rate, as they graduate into the job market.

An increase in government investment in roads, airports and other kinds of public infrastructure would be cost-effective, too, as measured by the number of jobs created per dollar of spending. And it would help reduce the road congestion, airport delays and freight bottlenecks that reduce productivity and make the United States a less attractive place to do business. The American Society of Engineers has identified more than $2.2 trillion in public infrastructure needs nationwide, and a 2008 study by the Congressional Budget Office found that, on strict cost-benefit grounds, it would make sense to increase annual spending on transportation projects alone by 74 percent.

Over the next five years, the federal government should work with state and local governments and the private sector to finance $1 trillion worth of additional investment in infrastructure. It should extend the Build America Bonds stimulus program, which in the past year has helped states finance $120 billion in infrastructure improvement.

The federal government should also create and capitalize a National Infrastructure Bank that would provide greater certainty about the level of infrastructure financing over several years, select projects based on rigorous cost-benefit analysis, invest in things like interstate high-speed rail that require coordination among states and attract private co-investors in projects like toll roads and airports that generate dedicated future revenue streams.

But can the government afford this additional spending? The answer is yes. Despite the large federal deficit, global savers, including savings-hungry American households, are snapping up United States government securities at very low interest rates. And they will continue to do so as long as there is ample slack in the economy and inflation remains subdued. Over the next few years, there is little risk that federal deficits will crowd out private investment or precipitate a crisis of confidence in the American government, a spike in American interest rates or a sudden drop in the dollar.

On the other hand, as long as private demand remains weak, the risk is uncomfortably high that trying to reduce the deficit — by cutting spending or increasing taxes — will tip the economy back into recession or condemn it to years of faltering growth and debilitating unemployment. In fact, either outcome would depress tax revenue and could mean larger deficits.

Faced with these risks, as long as the economy is operating far below potential, policy makers should do two seemingly contradictory things. First, they should provide additional fiscal support for job creation and growth. And, second, they should enact a credible multiyear plan now to stabilize the ratio of federal debt to gross domestic product gradually as the economy recovers.

By easing capital market concerns about the government’s future borrowing needs, such a plan would permit larger deficits and slower debt reduction while unemployment is still high. The long-run debt problem — the result of imprudent fiscal decisions before the recession, escalating health care costs and an aging population — must be addressed once the economy has recovered. But for now the priorities of fiscal policy should be jobs and investment.

Laura Tyson, a professor at the Haas School of Business at the University of California, Berkeley, was chairwoman of the Council of Economic Advisers and the National Economic Council in the Clinton administration. She is a member of President Obama’s Economic Recovery Advisory Board.

    Why We Need a Second Stimulus, NYT, 28.8.2010, http://www.nytimes.com/2010/08/29/opinion/29tyson.html






Bernanke Tries to Manage

Expectations of Fed Role


August 29, 2010
The New York Times


JACKSON HOLE, Wyo. — Federal Reserve officials and economists appear increasingly united in their view that the partisan gridlock on fiscal policy in Washington has clouded the prospects for a faster and stronger recovery.

The Fed chairman, Ben S. Bernanke, who has assiduously avoided taking sides in fiscal debates, said on Friday that the central bank stood ready to use a variety of tools to forestall deflation, a broad decline in prices. But he made it clear that the Fed could not simply conjure up a recovery by manipulating interest rates and the money supply.

“Central bankers alone cannot solve the world’s economic problems,” Mr. Bernanke said in what became a theme of the annual Fed policy symposium here, organized by the Federal Reserve Bank of Kansas City.

Mr. Bernanke has told Congress that some additional fiscal stimulus could be helpful in supporting the recovery, as long as it was accompanied by a credible plan to gradually bring deficits under control and stabilize the ratio of debt to gross domestic product, the broadest measure of economic output.

He has not weighed in on specifics — like the Obama administration’s proposal to spur lending to small businesses, or the call by some Republicans to extend all of the Bush-era tax cuts — but has instead expressed hope that a bipartisan fiscal commission appointed by Mr. Obama will deliver specific and meaningful proposals.

But the commission is not scheduled to deliver its report until December, and the likelihood of additional Congressional action to support the economy before the midterm elections in November seems to be shrinking by the day.

So even as Mr. Bernanke outlined the Fed’s options and credited stimulus packages with helping the global recovery, he appeared to be tamping down expectations for a government-led fix. “For a sustained expansion to take hold, growth in private final demand — notably, consumer spending and business fixed investment — must ultimately take the lead,” he said.

He added, optimistically, “On the whole, in the United States, that critical handoff appears to be under way.”

Mr. Bernanke’s reluctance to weigh in on fiscal policy — a departure from his predecessor, Alan Greenspan, who endorsed the tax cuts of 2001 and 2003 but now supports letting all of them expire — is partly a reflection of his personality but also stems from the Fed’s delicate political position.

“The Fed has in many ways been left holding the bag while fiscal policy has fallen short,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan group that has urged an immediate commitment to reduce the deficit in the medium term. “There is excessive pressure on the Fed, because of the uncertainty about fiscal policy.”

Thomas D. Gallagher, a senior managing director at the research firm International Strategy and Investment, said it was wise of Mr. Bernanke to lay out the potential costs of additional actions the Fed could take, like resuming large-scale purchases of government debt.

“None of them is an unambiguously positive, no-brainer option,” he said. “The Fed should try to limit expectations about how much monetary policy can accomplish in this post-crisis period.”

In one of five research papers delivered at the symposium, which ended Saturday, Eric M. Leeper, an economist at Indiana University, challenged monetary economists to focus more attention on large fiscal deficits. In an analogy that stirred debate, he said that monetary policy had been honed to a science, and he likened fiscal policy to medieval alchemy.

“In normal times, fiscal policy doesn’t pose insurmountable problems for monetary policy,” said Mr. Leeper, a former Fed researcher. “These normal times may be coming to an end. Demographic shifts in most of the advanced economies are putting ever-increasing demands on government spending. We’re heading toward an era of fiscal stress.”

Public confidence in the Fed’s ability to maintain price stability relies in part on expectations that government debts will not rise to unsustainable levels, Mr. Leeper said, suggesting that such expectations were eroding.

Douglas W. Elmendorf, director of the nonpartisan Congressional Budget Office and a former Fed researcher, said Mr. Leeper’s paper “greatly overstates the potential for fiscal policy to be made in a scientific way.”

“Fiscal policy is intrinsically about distributional choices,” he said, adding, “There is no scientific basis for saying how large the government deficit should be — any more than what my level of savings should be.”

Robert B. Zoellick, president of the World Bank, said that while the scientific precision of monetary policy had perhaps been overstated, he wished that Mr. Bernanke had mentioned the role fiscal policy could play in spurring the recovery. “The fiscal policy challenges that I see are at a different order of magnitude than anything I have either observed or dealt with over the last 25 years,” he said.

Not all countries leave every debt and deficit question to politicians: Sweden and Hungary use fiscal policy councils, while Israel and Chile use fiscal rules that cap growth in government spending. “Things like the White House budget commission are just alchemy as usual,” Mr. Leeper said.

Another paper that drew considerable discussion here, presented by Charles R. Bean, deputy governor of the Bank of England, suggested that asset purchases to lower long-term interest rates — like the Fed’s purchase of $1.25 trillion in mortgage-backed securities in 2009-10 — have been successful in responding to the recession but “are probably best kept in the locker marked ‘For emergency use only.’ ”

Mr. Bean, like Mr. Bernanke, argued forcefully against the idea of raising medium-term inflation targets in response to recession.

“The thing I’m most worried about with some of the current discussion is that monetary policy is going to be asked to do more than it’s capable of,” he said. “It’s useful for stabilizing prices, but if we expect it do multiple things simultaneously, I think we are going to be stirring up trouble for ourselves in the future.”

Or as Jacob A. Frenkel, chairman of JPMorgan Chase International and a former governor of the Bank of Israel, put it: “We all know that the main gorilla in the room is fiscal policy.”

    Bernanke Tries to Manage Expectations of Fed Role, NY, 29.8.2010, http://www.nytimes.com/2010/08/30/business/economy/30fed.html






Bankers Told Recovery May Be Slow


August 28, 2010
The New York Times


JACKSON HOLE, Wyo. — The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.

That finding, contained in a new paper by Carmen M. Reinhart, an economist at the University of Maryland, generated considerable debate during an annual policy symposium here, organized by the Federal Reserve Bank of Kansas City, which concluded on Saturday.

The gathering, at a historic lodge in Grand Teton National Park, brought together about 110 central bankers and economists, including most of the Federal Reserve’s top officials. In 2008, the symposium occurred weeks before the Lehman Brothers bankruptcy nearly shut down the financial markets. At the symposium last year, officials congratulated themselves on weathering the worst of the crisis.

But the recent slowing of the recovery cast a pall on this year’s gathering. As economists (some wearing jeans and cowboy boots) conferred on a terrace with a sweeping view of the 13,770-foot peak of Mount Teton, or watched a horse trainer tame an unruly colt at a nearby ranch, they anxiously discussed research like Ms. Reinhart’s. (Participants pay to attend the event, which is not financed by taxpayers, a Kansas City Fed spokeswoman emphasized.)

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.

Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.

The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”

Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”

The Reinharts’ paper was not the only one to offer somber implications for policy makers.

Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.

Inflation has been running well below the Fed’s unofficial target of about 1.5 percent to 2 percent. Ben S. Bernanke, the Fed chairman, reiterated on Friday that the central bank would “strongly resist deviations from price stability in the downward directions.”

Mr. Stock and Mr. Watson noted that recessions in the United States were associated with declines in inflation, with an exception being an increase in inflation in 2004, which occurred despite a “jobless recovery” from the 2001 recession. The authors said they could not explain the anomaly but also could not “offer a reason why it might happen again.”

    Bankers Told Recovery May Be Slow, NYT, 28.8.2010, http://www.nytimes.com/2010/08/29/business/economy/29fed.html






Neighborly Borrowing,

Over the Online Fence


August 28, 2010
The New York Times


THE first time I unboxed my gleaming Roomba, I beamed like a proud new parent as I placed it gently on my hardwood floor.

That evening, I watched it putter around my apartment, sweeping and inhaling dust bunnies. When it gamely bumbled around bulky pieces of furniture, I dashed about, too, lifting the obstacles out of its way. After the Roomba finished its chaotic dance, I put it back into its case and patted the sweet little machine good night. The next morning, I returned it to its rightful owner.

The Roomba was mine for only 24 hours. I had rented it through a service called SnapGoods, which allows people to lend out their surplus gadgetry and various gear for a daily fee.

SnapGoods is one of the latest start-ups that bases its business model around allowing people to share, exchange and rent goods in a local setting. Among others are NeighborGoods and ShareSomeSugar. Other commercial services are springing up, too, including group-buying sites like Groupon, the peer-to-peer travel site Airbnb and Kickstarter, which allows people to invest small sums in creative ventures.

The common thread of all these sites is that access trumps ownership; consumers are offered ways to share goods instead of having to buy them.

Ron J. Williams, co-founder of SnapGoods, based in New York, describes the phenomenon as the “access economy.”

“There may always be certain products that you do need to buy,” says Mr. Williams. “But there is also a growing cultural awareness that you don’t always get enjoyment out of hyperconsumption. The notion of ownership as the barrier between you and what you need is outdated.”

The most obvious reason for all of this is financial. Recession-battered shoppers can test pricey new devices before deciding whether to take the plunge or wait until the next upgrade. (Roombas, for example, can retail for as much as $600 for the newer models. I borrowed mine for a much more palatable $10.)

For all the promise of these new marketplaces, analysts say they aren’t likely to overtake more traditional models anytime soon.

“The holy grails of consumerism are convenience and choice,” says Rachel Botsman, co-author of the forthcoming book, “What’s Mine Is Yours: The Rise of Collaborative Consumption.” “This is not the end of the old consumer way. But they could sit side by side. Peer-to-peer could become the default way to share.”

There’s much evidence that this is already happening. Do-it-yourself home improvers can borrow tools for a weekend project, and hobbyist campers can rent equipment per trip, rather than splurge on all-new gear. Travelers looking for inexpensive accommodations can spend the night in someone’s spare bedroom for a fraction of the cost of a hotel room. For people who lend their stuff, it’s a way to make extra money on possessions that are gathering dust.

“My Roomba is on track to pay for itself,” says Luke Tucker, 31, a software engineer who rented me his robotic vacuum cleaner through SnapGoods.

But some experts think that there may be something bigger than thriftiness at play. These services may be gaining popularity because they reinforce a sense of community.

“It turns out to actually be a good way to meet my neighbors,” says Mr. Tucker, who also lists a jigsaw, a digital camera and a wireless keyboard for rent on SnapGoods.

Charlis Floyd, a 22-year-old student, and Nema Williams, a 30-year-old comedian, who rent out their spare bedroom in Brooklyn on Airbnb, say that while the extra income helps — as any little bit does these days — they’re much more interested in the revolving cast of characters they meet.

“We had a couple from England teach us how to make red curry,” says Ms. Floyd.

“Another guy, an artist, promised to paint a mural in our kitchen,” adds Mr. Williams.

Of course, that doesn’t mean it always goes off without a hitch.“Sometimes people can be weird,” says Ms. Floyd. “One girl drank all our milk and another person broke our toilet handle.”

Even so, Ms. Floyd and Mr. Williams still like being in the rental business.

“It’s a win-win situation,” says Ms. Floyd. “You make some extra money and make new friends.”

For entrepreneurs, there’s a payoff in such commerce. Groupon, for example, says it’s on track to generate $500 million in revenue this year; Airbnb has said it is profitable, though it does not provide exact numbers.

Paul J. Zak, director of the Center for Neuroeconomics Studies at Claremont Graduate University in California, says that participating in a community like SnapGoods, Kickstarter, Groupon or Airbnb can ease social isolation and flesh out our network of friends.

“There is an underlying notion that if I rent my things in my house, I get to meet my neighbor, and if I’m walking the goods over, I get to meet them in person,” he says. “We’re drawing on a desire in a fast-paced world to still have real connections to a community.”

Mr. Zak says he conducted a preliminary experiment indicating that posting messages on Twitter caused the release of oxytocin, a neurotransmitter that evokes feelings of contentment and is thought to help induce a sense of positive social bonding. He is now testing those ideas in research on a group of 40 people.

The social interaction “reduces stress hormones, even through the Web,” he says. “You’re feeling a real physiological relationship to that person, even if they are online.”

MR. ZAK says Web commerce is moving beyond transactions by individuals and companies and embracing models that encourage social contact and interaction — a hallmark of the already robust social media phenomenon and a throwback to the good old days when people actually spent time socializing at local markets.

“The Web is bringing businesses back down to the individual as the average company becomes smaller, more niche and specialized,” he says. “Paradoxically, the Web is moving us back to a human-centric business model.”

Trust is a big factor in all of this. Otherwise, how can you be sure that someone won’t just rip you off?

Marketplaces like eBay have long relied on ratings and user reviews to weed out unreliable participants. But in addition to safeguards like preauthorizing the price of rentals through PayPal, the latest wave of peer-to-peer systems make use of social networks like Facebook and Twitter to engender trust.

If someone wants to rent your iPad or crash on your couch, the person’s online profile leaves a trail of digital bread crumbs that makes it harder to pull off a scam, giving potential lenders and hosts reason to breathe easier.

“This new economy,” says Ms. Botsman, “is going to be driven entirely by reputation, which is part of a new cultural shift — seeing how our behavior in one community affects what we can access in another.”

    Neighborly Borrowing, Over the Online Fence, NYT, 28.8.2010, http://www.nytimes.com/2010/08/29/business/29ping.html






In Hard Times,

One New Bank (Double-Wide)


August 28, 2010
The New York Times


LAKE CHARLES, La. — The only new start-up bank to open in the United States this year operates out of a secondhand double-wide trailer, on a bare lot in front of the cavernous Trinity Baptist Church. A blue awning covers the makeshift drive-through window.

Called Lakeside Bank, it is run by a burly and balding former tackle for Louisiana State’s football team named Hartie Spence, who doles out countrified humor along with deposit slips and the occasional loan.

“This is the one place where the cause of death is mildew,” he quipped, standing outside the trailer in withering heat.

Asked how his bank in this steaming town of oil refineries and oversize casinos managed to win over federal regulators, Mr. Spence, 70, said, “I’m still thinking it’s my looks that did it.”

The dearth of new banks follows a particularly wrenching period for the industry. As the financial crisis deepened, hundreds of banks and thrifts closed and thousands more were saddled with bad loans and credit card defaults, costing the industry billions of dollars.

As a result, the number of investor groups applying to start a new bank from scratch has dropped precipitously. And for the intrepid few who have tried, regulators — sharply criticized for lax oversight in recent years — are being particularly stingy in granting approval.

So far this year, Mr. Spence holds the privilege of opening the only truly new federally insured bank. (In seven other instances, investors received regulatory approval to buy an existing bank, usually one that had failed, and reopen it).

Of course, many of the nation’s biggest banks were bailed out by the government, and have since rebounded. But since January 2008, more than 280 smaller banks and thrifts have been closed, and many community banks are struggling to recover from the real estate collapse.

Those bank failures have cost the Federal Deposit Insurance Corporation’s fund roughly $70 billion, and not surprisingly, the agency’s regulators are now giving greater scrutiny to new bank applications, according to bankers and industry officials.

Technically, banks obtain charters from their primary regulatory agency, either state banking regulators or, for national banks, the Office of the Comptroller of the Currency. But the charters are contingent on the applicants’ obtaining deposit insurance from the F.D.I.C.

The F.D.I.C. said the reduction in charters simply reflects the effects of the recession on new businesses. “There was considerable interest in forming banks before the economy deteriorated,” said an agency spokesman, David Barr. “In today’s climate we are seeing very little interest.”

However, last year the agency toughened its oversight of new banks, saying banks that had been open for fewer than seven years were “over represented” among failed banks in 2008 and 2009.

The reason, the agency said in a public release, is that many new banks strayed from their approved business plans and ran into problems because of “weak risk management practices,” among other problems.

Ralph F. “Chip” MacDonald III, a lawyer in Atlanta who advises banks on regulatory matters, said he believed the F.D.I.C. had imposed an “unofficial moratorium” on new bank charters, a charge that the agency denies.

Adam Taylor, president of the Bank Capital Group, an Atlanta company that helps investors set up new banks, said he had several recent clients, whom he declined to name, withdraw applications for new banks after it became clear that the F.D.I.C. would not approve them. He said the agency rarely denies charters — a fact confirmed by agency records — but that it places the applications in “purgatory” until the applicants give up.

The number of banks and thrifts — also known as savings and loans — in the United States has been declining steadily for 25 years, because of consolidation in the industry and deregulation in the 1990s that reduced barriers to interstate banking. There were 6,840 banks and 1,173 thrifts last year, down from 14,507 banks and 3,566 thrifts in 1984.

The number of charters has generally declined too, though there have been periodic swings. The lowest number of bank charters granted in any one year was 15, in 1942.

How, then, did Lakeside Bank win this year’s regulatory lottery?

Mr. Spence’s looks aside, he said that regulators were not ready to grant approval until Lakeside had raised enough capital, created a sufficiently conservative business plan and hired an experienced management team.

The initial idea for Lakeside Bank came from a local real estate developer, Andrew Vanchiere, who was dissatisfied with his existing bank. In 2007, he rounded up a group of local businessmen who set about raising $13 million in start-up capital and began looking for someone to run the bank.

The initial candidates were deemed too inexperienced by regulators. When the group contacted Mr. Spence in 2008, he was a few months into retirement and coming to the realization that fishing for trout and redfish just wasn’t enough to keep him occupied.

“I was bored absolutely stiff,” said Mr. Spence, who had successfully run several Louisiana banks during his career. “My response was, ‘Let’s do it!’

“You can manage a good bank in a bad economy, particularly when you are at the bottom,” he said. Noting that he has a clean balance sheet and can be selective about making loans, he added, “I thought it was a perfect time to be starting.”

Lakeside’s application was also helped by the surprising vitality of Lake Charles, a city of 72,000 roughly 30 miles from the Texas border. Lake Charles has gotten a boost from casino gambling and the oil and gas industry, as well as an infusion of new businesses, including liquefied natural gas terminals and a new plant that builds parts for nuclear reactors.

Louisiana, meanwhile, has fared better than many states during the economic downturn because of the petroleum industry and the infusion of government and insurance money to pay for damages from Hurricanes Katrina, Rita and Ike.

Only one bank has failed in Louisiana since the financial crisis began.

Regulators made it clear that Lakeside would not be approved if other banks in town were struggling to stay afloat, Mr. Spence said. But Lakeside, which opened on July 26, sits on a busy boulevard lined with about a dozen or more banks or credit unions, all of which appear to be thriving.

“There’s enough for all of us, and we are no threat to them for many, many years,” Mr. Spence said of his competitors.

Lakeside Bank is promoting itself as an old-fashioned community bank that focuses on customer service and bread-and-butter banking products, even though it also makes them available online.

Whereas loan decisions for many big banks are made in distant cities, Mr. Spence said that Lakeside will make them right there in the double-wide trailer, at least until the bank moves into a more permanent structure in a year or two.

“That’s our motto, ‘The Way Banking Should Be,’ ” he said, adding later, “It got rushed enough yesterday that I had to answer the phones and work the switchboard.”

    In Hard Times, One New Bank (Double-Wide), NYT, 28.8.2010, http://www.nytimes.com/2010/08/29/business/29bank.html






Fed Ready to Dig Deeper to Aid Growth,

Chief Says


August 27, 2010
The New York Times


JACKSON HOLE, Wyo. — The Federal Reserve chairman, Ben S. Bernanke, signaled once again on Friday that the central bank was prepared to act if the economy continued to weaken, as yet another economic report confirmed that the recovery had slowed to a crawl.

Mr. Bernanke made clear that while the Fed could take various steps, including large purchases of government debt, “central bankers alone cannot solve the world’s economic problems.” Speaking at the Fed’s annual symposium here, he hinted broadly that political leaders had to take steps to tackle the deficit and the trade imbalance.

Hours before Mr. Bernanke spoke, the Commerce Department lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth from April through June was 2.4 percent. Economists had been predicting a steeper decline, and stock prices rose after the markets opened.

While Mr. Bernanke announced no new steps that the Fed would take immediately, he said the central bank was determined to prevent the economy from slipping into a cycle of falling wages and prices, a situation he said he did not think was likely. Instead he predicted that growth would continue modestly in the second half of the year and pick up in 2011.

Mr. Bernanke said the Fed, having kept short-term interest rates at nearly zero since 2008, had essentially four options:

It can purchase more government debt and long-term securities. It can try to coax down long-term interest rates by announcing its intention to keep short-term rates extremely low for even longer than the markets currently expect. It can lower the interest rate it pays on the funds banks hold at the Fed. And it can raise its medium-term target for inflation, which would discourage banks from sitting on their cash.

Mr. Bernanke suggested that the first of those options was the most likely, and all but ruled out the last two.

While the Fed committee that sets monetary policy was prepared to take new steps “if the outlook were to deteriorate significantly,” he said, it “has not agreed on specific criteria or triggers for further action.”

As Mr. Bernanke’s remarks were released publicly, stock prices immediately fell, a sign that investors were hoping for some concrete signs that the Fed would step in to try to bolster the economy. But as the market digested the chairman’s full remarks, prices rebounded and the Dow Jones industrial average rose 164.84 points, or 1.65 percent, to 10,150.65. The yield on the benchmark 10-year Treasury note rose to 2.64 percent, from 2.48 percent. The revised second-quarter growth data came after a week that showed that the economic retrenchment that began in the second quarter had spilled into the summer, with a sharp slowdown in new-home sales and a drop in sales of factory goods.

Consumer spending rose 2 percent in the second quarter — slightly better than the Commerce Department had initially projected. And a closely watched survey by the University of Michigan and Thomson Reuters showed that consumer sentiment ticked up marginally in August, while remaining well below levels seen during the previous six months.

In his first public remarks since the Fed took a modest step on Aug. 10 to lift the economy — a decision to invest proceeds from its huge mortgage-bond portfolio in long-term Treasury securities — Mr. Bernanke tried in some respects to dampen expectations that the Fed could make significant headway against the economic sluggishness.

Alan S. Blinder, a former Fed vice chairman and a Princeton professor, noted that Mr. Bernanke focused his remarks on the costs as well as the benefits of additional action to help the economy.

“The Fed has run out of the strong tools, and is turning to the weak ones,” Mr. Blinder said in an interview here. “When you’re fighting in a foxhole and you’ve used up the machine guns and hand grenades, then you pull out the swords and start throwing rocks.”

Mr. Blinder said that the economy seemed “substantially worse” than it did three months ago — and that Mr. Bernanke had acknowledged the deterioration, cautiously.

The Obama administration is looking to the Fed to do more to spur the recovery, since its own options are few, given the political paralysis in Congress as midterm elections approach. President Obama, vacationing on Martha’s Vineyard, discussed the economy for about 15 minutes with Mayor Michael R. Bloomberg of New York before the two men played golf.

Mr. Bernanke avoided wading into the rancorous political debates over fiscal policy, instead focusing on the two objectives that form the Fed’s legal mandate: price stability and maximum employment.

Inflation has been running well below the Fed’s unofficial target rate of 1.5 to 2 percent. While conceding that inflation had fallen “slightly below” the desirable level, Mr. Bernanke said deflation was “not a significant risk” right now. He said the Fed would “strongly resist deviations from price stability in the downward direction.”

Mr. Bernanke predicted the economy would continue to grow the rest of this year, “albeit at a relatively modest pace.” He said the “preconditions for a pickup of growth in 2011 appear to remain in place,” as banks increase lending, worries over the European sovereign debt crisis abate and consumers save more.

Strikingly, Mr. Bernanke acknowledged that the traditional tradeoff between inflation and employment had become all but obsolete, at least for now. “There is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability,” he said.

Mr. Bernanke explained in detail the Fed’s decision to use money from its mortgage bonds to buy government debt. The Fed has gobbled up $1.25 trillion in mortgage-backed securities and $175 billion in debts owed by Fannie Mae and other government entities — a major reason mortgage rates are at historic lows.

So far, the Fed has received about $140 billion through repayments of the principal on its holdings of those debts. An additional $400 billion or so could be repaid by the end of 2011. If the Fed had not taken the step it did, the central bank’s balance sheet would have gradually shrunk, which would amount to a passive tightening of monetary policy — what Mr. Bernanke called “a perverse outcome.”

He said the Fed’s purchases of longer-term securities had helped bring down long-term interest rates and lower the cost of borrowing, contributing to the modest recovery that began in the spring of 2009.

However, such purchases seemed to be most effective in times of financial stress, and additional purchases would further complicate the Fed’s future “exit strategy” when the time came to return to normal monetary policy, he said.

The Fed has said since March 2009 that “exceptionally low” levels of the fed funds rate, the benchmark short-term interest rate, would be warranted for “an extended period.” The Fed could try to lengthen those expectations, as central banks in Canada and Japan have tried. But Mr. Bernanke cautioned that the Fed might find it “difficult to convey the committee’s policy intentions with sufficient precision and conditionality.”

The Fed currently pays 0.25 percent interest on excess reserves that banks keep at the Fed. But Mr. Bernanke said that slashing that rate even to zero might do no more than lower the fed funds rate by another 0.10 to 0.15 percentage points. He said doing so would harm the liquidity of short-term money markets.

Mr. Bernanke said he saw “no support” on the committee for setting a higher inflation target, as some economists have suggested. He called the strategy “inappropriate for the United States in current circumstances.”

Jackie Calmes contributed reporting from Vineyard Haven, Mass., and Motoko Rich from New York.

    Fed Ready to Dig Deeper to Aid Growth, Chief Says, NYT, 27.8.2010, http://www.nytimes.com/2010/08/28/business/economy/28fed.html






U.S. Economy Slowed

to 1.6% Growth Pace in 2nd Quarter


August 27, 2010
The New York Times


Economic statistics released Friday offered the clearest sign yet that the recovery, already acknowledged to be sauntering, had slowed to a crawl.

The government lowered its estimate of economic growth in the second quarter to an annual rate of 1.6 percent, after originally reporting last month that growth in the three-month period was 2.4 percent.

The revision is a significant slowdownfrom the annual rate of 3.7 percent in the first quarter and 5 percent in the last three months of 2009.

The news came at the end of a week that showed the economic retrenchment that began in the second quarter has spilled over into the summer. Existing home sales in July were down to their lowest level in a decade, and sales of new homes that month were at their lowest level since the government began tracking such data in 1963. Orders for large factory goods, excluding the volatile transportation sector, dropped in July, indicating that recovery in the manufacturing sector is also stalling.

With such grim reports, economists are now concerned that the outlook for job creation, which has been spluttering all summer, could deteriorate further. Companies and consumers tend to be spooked by bad news, and market analysts and economists worry that faltering confidence could cause employers to hold back on hiring.

“When you get a downshift in growth there is a risk that it will feed on itself,” the chief economist at MF Global, James F. O’Sullivan, said. “The question now is to what extent has the improving trend just been temporarily set back or has it really been short-circuited.”

The markets were also awaiting a speech Friday morning from the chairman of the Federal Reserve, Ben S. Bernanke, as well as fresh indicators of consumer sentiment from a closely watched survey by the University of Michigan and Thomson Reuters.

The bulk of the downgrade in the second-quarter G.D.P. resulted from the fact that government analysts had assumed that American companies added more inventories to their warehouse shelves than they actually did. The adjustment also took into account a sharp rise in imports, leading to a wider-than-estimated trade deficit.

Economists polled by Bloomberg had been expecting the second quarter growth figure to be revised down to 1.4 percent.

Inventories, originally reported to have grown by $75.7 billion, actually grew by $63.2 billion. Some economists pointed to a silver lining in this figure. Because companies have kept inventories relatively low, “if demand was to take off, they would have to hire additional workers and ramp up production,” said Omair Sharif, United States economist at the Royal Bank of Scotland. “So the fact that businesses did not accumulate enough inventories sets the stage for a much stronger pickup in employment and hours worked in the future, if demand picks up.”

Imports, which were first reported as growing at an annual rate of 28.8 percent, the biggest jump in a quarter-century, grew by 32.4 percent, compared with a much lower gain of 9.1 percent in exports.

What strength there had been in the original growth number came from business investment in items that included office buildings, equipment and software. The revised number showed that such spending jumped at an annual rate of 17.6 percent, not much changed from the originally reported 17 percent second-quarter increase.

Consumer spending, which economists often look to as a primary indicator of recovery, grew 2 percent. That was a slightly better rate than the Commerce Department originally said last month when it reported that consumption grew at an annual rate of 1.6 percent in the second quarter, and slightly higher than the 1.9 percent increase in the first quarter.

Economists have been revising their forecasts for growth in the second half, with Goldman Sachs now projecting annual growth of 1.5 percent. Ben Herzon, a senior economist at Macroeconomic Advisers, a forecasting group, said the firm had taken its estimate for third-quarter growth down to 1.7 percent from 2.5 percent at the beginning of July.

Mr. Herzon said that he was not expecting a double-dip back into recession, however. “It’s difficult to point to a shock that would be bad enough to put the economy back into a recession,” he said. “I just think it means that this recovery is going to be slower and more painful than we originally expected.”

    U.S. Economy Slowed to 1.6% Growth Pace in 2nd Quarter, NYT, 27.8.2010, http://www.nytimes.com/2010/08/28/business/economy/28econ.html






This Is Not a Recovery


August 26, 2010
The New York Times


What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

The small sliver of truth in claims of continuing recovery is the fact that G.D.P. is still rising: we’re not in a classic recession, in which everything goes down. But so what?

The important question is whether growth is fast enough to bring down sky-high unemployment. We need about 2.5 percent growth just to keep unemployment from rising, and much faster growth to bring it significantly down. Yet growth is currently running somewhere between 1 and 2 percent, with a good chance that it will slow even further in the months ahead. Will the economy actually enter a double dip, with G.D.P. shrinking? Who cares? If unemployment rises for the rest of this year, which seems likely, it won’t matter whether the G.D.P. numbers are slightly positive or slightly negative.

All of this is obvious. Yet policy makers are in denial.

After its last monetary policy meeting, the Fed released a statement declaring that it “anticipates a gradual return to higher levels of resource utilization” — Fedspeak for falling unemployment. Nothing in the data supports that kind of optimism. Meanwhile, Tim Geithner, the Treasury secretary, says that “we’re on the road to recovery.” No, we aren’t.

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

In the case of the Obama administration, officials seem loath to admit that the original stimulus was too small. True, it was enough to limit the depth of the slump — a recent analysis by the Congressional Budget Office says unemployment would probably be well into double digits now without the stimulus — but it wasn’t big enough to bring unemployment down significantly.

Now, it’s arguable that even in early 2009, when President Obama was at the peak of his popularity, he couldn’t have gotten a bigger plan through the Senate. And he certainly couldn’t pass a supplemental stimulus now. So officials could, with considerable justification, place the onus for the non-recovery on Republican obstructionism. But they’ve chosen, instead, to draw smiley faces on a grim picture, convincing nobody. And the likely result in November — big gains for the obstructionists — will paralyze policy for years to come.

So what should officials be doing, aside from telling the truth about the economy?

The Fed has a number of options. It can buy more long-term and private debt; it can push down long-term interest rates by announcing its intention to keep short-term rates low; it can raise its medium-term target for inflation, making it less attractive for businesses to simply sit on their cash. Nobody can be sure how well these measures would work, but it’s better to try something that might not work than to make excuses while workers suffer.

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

Which of these options should policy makers pursue? If I had my way, all of them.

I know what some players both at the Fed and in the administration will say: they’ll warn about the risks of doing anything unconventional. But we’ve already seen the consequences of playing it safe, and waiting for recovery to happen all by itself: it’s landed us in what looks increasingly like a permanent state of stagnation and high unemployment. It’s time to admit that what we have now isn’t a recovery, and do whatever we can to change that situation.

    This Is Not a Recovery, NYT, 26.8.2010, http://www.nytimes.com/2010/08/27/opinion/27krugman.html






Struggling Cities

Shut Firehouses

in Budget Crisis


August 26, 2010
The New York Times


SAN DIEGO — Fire departments around the nation are cutting jobs, closing firehouses and increasingly resorting to “rolling brownouts” in which they shut different fire companies on different days as the economic downturn forces many cities and towns to make deep cuts that are slowing their responses to fires and other emergencies.

Philadelphia began rolling brownouts this month, joining cities from Baltimore to Sacramento that now shut some units every day. San Jose, Calif., laid off 49 firefighters last month. And Lawrence, Mass., north of Boston, has laid off firefighters and shut down half of its six firehouses, forcing the city to rely on help from neighboring departments each time a fire goes to a second alarm.

Fire chiefs and union officials alike say it is the first time they have seen such deep cuts in so many parts of the country. “I’ve never seen it so widespread,” said Harold A. Schaitberger, the general president of the International Association of Fire Fighters.

The risks of cutting fire service were driven home here last month when Bentley Do, a 2-year-old boy who was visiting relatives, somehow got his hands on a gum ball, put it in his mouth, started laughing and then began choking.

“It blocked the air hole,” said his uncle, Brian Do, who called 911 while other relatives frantically tried to dislodge the gum ball. “No air could flow in and out.”

It is only 600 steps from the front door of the neatly kept stucco home where the boy was staying to the nearest fire station, just down the block. But the station was empty that evening: its engine was in another part of town, on a call in an area usually covered by an engine that had been taken out of service as part of a brownout plan.

The police came to the home within five minutes and began performing cardiopulmonary resuscitation, officials said. But it took nine and a half minutes — almost twice the national goal of arriving within five minutes — for the fire engine, with a paramedic and more medical equipment, to get there. An ambulance came moments later and took Bentley to the hospital, where he was pronounced dead.

The San Diego Fire-Rescue chief, Javier Mainar, said it was impossible to say whether the delay contributed to Bentley’s death on July 20. But he said there was no doubt that the city’s brownouts, which take 13 percent of firefighters off the streets each day to save $11.5 million annually, led to the delay.

“You can just lock everything down and look at it sequentially, chronologically, as to what occurred,” Chief Mainar said in an interview. “There is no question that the brownout of Engine 44 resulted in Engine 38 having to take a response in that community, and because of that, Engine 38 was now out of position to respond to something that happened just down the street from their fire station.”

Fire service was once a sacred cow at budget time. But the downturn has lingered so long that many cities, which have already made deep cuts in other agencies, are now turning to their fire departments.

Some are trying to wrest concessions from unions, which over the years have won generous pension plans that allow many firefighters to retire in their 40s and 50s — plans that many cities say are unaffordable. Others want to reduce minimum-staffing requirements, which often force them to resort to costly overtime to fill shifts. Others are simply cutting service.

Analysts worry that some of the cuts could be putting people and property in danger. As the downturn has worn on, ISO, an organization that evaluates cities’ fire protection capabilities for the insurance industry, has downgraded more cities, said Michael R. Waters, ISO’s vice president of risk-detection services.

“This is generally due to a reduction in firefighting personnel available for responding to calls, a reduction in the number of responding fire apparatus, and gaps in the optimal deployment of apparatus or deficiencies in firefighter training programs,” Mr. Waters said in a statement.

Several fire chiefs said in interviews that the cuts were making them nervous.

“It’s roulette,” said Chief James S. Clack of the Baltimore City Fire Department, which recently reduced the number of fire units closed each day to three from six. Officials saw that the closings in the 55-unit department were in some cases leading to longer response times. “I’m always worried that something’s going to happen where one of these companies is closed.”

Early in his mayoralty, Michael R. Bloomberg of New York closed six fire companies to save money. This year, a threat to close 20 more — a 6 percent reduction in New York’s fire companies — was averted when the city found savings elsewhere.

Several cities — including Lawrence — have said that they were forced to cut service because the unions failed to make concessions. Mr. Schaitberger, the union president, who was here for a union convention, said that protecting the pensions his members have won over the years was a top priority this year.

The pension issue has an added resonance in San Diego. The city was forced to consider a bankruptcy filing even before the Great Recession, and was barred from raising money by selling bonds to the public after officials disclosed that they had shortchanged the pension fund for city workers for years, even as they improved pension benefits. San Diego’s pension fund has only two-thirds of the money it needs to pay the benefits promised to retirees, according to an updated calculation made by the city in the spring, and faces a shortfall of $2.1 billion.

So even before the recession and the brownouts, fire service in San Diego was stretched thin. A previous San Diego fire chief, Jeff Bowman, was hired in 2002 with a mandate to build up the department, but he resigned in 2006, after the pension-fueled fiscal crisis surfaced and it became clear that he would not get the money to build and staff the extra fire stations he believed were needed. “The question is whether fire protection is adequate, and in my opinion it’s not,” he said in an interview.

After Bentley Do died, the City Council agreed to put a question on the ballot in November asking voters to approve a sales tax increase, which could be put in place only if the city adopts certain budget and pension reforms. The money could restore the fire service and help close a deep budget gap projected for next year.

But it would come too late for the Do family. Bentley, whose father, Nam Do, an American, was working in Vietnam as an architect, was just visiting San Diego with his mother, Mien Nguyen. Ms. Nguyen, who was six months pregnant, was here to take the oath of United States citizenship. She was sworn in the day after Bentley died, Brian Do, the uncle, said, but she fainted when she got her certificate and was taken to the hospital. Nam Do left his job in Vietnam to come here to grieve for his son, and goes to a temple every day, Brian Do said.

He said that the family had no plans to sue the city. “We’re not blaming the city or blaming the Fire Department,” he said, “but the reason I speak out is because I want them to do a better job for other people.”

    Struggling Cities Shut Firehouses in Budget Crisis, NYT, 26.8.2010, http://www.nytimes.com/2010/08/27/us/27cuts.html






Wall Street Overcomes

Latest Economic Data


August 25, 2010
The New York Times


For much of the summer concerns about economy have focused on the United States, where outlooks from corporate earnings and a stream of indicators have pointed to a recovery that was in danger of losing its momentum.

The latest marker came Wednesday, when the Commerce Department report said that orders for durable goods to American factories had increased less than forecast. Demand rose 0.3 percent in July, much less than the 3 percent increase that analyst had predicted. Orders dropped 3.8 percent when the volatile transportation sector was excluded.

Spending by businesses on equipment and machines declined, the report said, as did orders for capital goods.

In the latest housing indicator, the Commerce Department said on Wednesday that new-home sales fell 12.4 percent in July from a month earlier to a seasonally adjusted annual sales pace of 276,600. Economists surveyed by Thomson Reuters had expected a pace of 330,000.

Still markets recovered from much of their earlier losses, and managed to end their losing streaks. At the close, the Dow Jones industrial average was up 19.61 points or 0.20 percent, to 10,060.06. The broader Standard & Poor’s 500-stock index was 3.46 points, or 0.33 percent, higher, at 1,055.33, and the technology heavy Nasdaq rose 17.78 points or 0.84 percent, to 2,141,.54.

Amid the poor economic fundamental data, the afternoon upturn was attributed to technical levels. “It looks like a little bit of a technical bounce,” said Jason Arnold, an analyst at RBC Capital Markets Corp. “The market is due for a bounce here and there.”“The last hour is usually the most volatile,” he said. “We will see if it holds on to the gains.”

The rates on Treasury bonds continued to decline, slipping to 2.46 percent from 2.49 percent late Tuesday.

Wednesday’s housing report followed one on Tuesday that said existing-home sales in July plunged to their lowest level in more than a decade. A second housing report, on new home sales, is expected Wednesday, and a revision in second-quarter gross domestic product is expected later in the week.

Many of the things investors are counting on to lead the economy to more normal growth “are either disappointing or not coming to fruition,” said Alan B. Lancz, president of Alan B. Lancz & Associates Inc., a money management and investment advisory firm.

Most recently, that has been especially true with the weak housing data. “Those numbers were incredibly poor, but it has really been the last three or four weeks getting progressively worse, and investors are starting to realize this is not an aberration or one bad number,” Mr. Lancz said.

“The bottom line is not a matter of weeks or months or a quarter, but it might become reality that this is a malaise that might continue unfortunately for years and that is what has got the pressure on Wall Street,” he said.

“There are things investors were counting on as catalysts,” he added. “The earnings season was fine and that was a strength in the July market but on a macro basis the headwinds, the comparisons are going to be much more difficult.”

Dan Greenhaus, chief economist strategist with Miller Tabak & Company, said after the durable goods figures were released that a slowdown in business spending was “unhealthy and worrisome” and forecast further declines in economic output.

“We remain of the belief that our 2 percent growth expectation in Q3 has significant downside risk and if data points continue to come in weaker than expected, the actual growth rate in Q3 will be closer to 1 percent than 2 percent,” he said in a research note.

Equities in Asia and Europe also fell, as the strong yen weighed on Tokyo stocks and a downgrade of Ireland’s credit rating reminded investors of the sovereign debt problems in Europe.

In afternoon trading, the FTSE 100 index in London fell 1.2 percent. The CAC 40 in Paris dropped 1.6 percent, and the DAX in Frankfurt fell 0.83 percent.

Mr. Lancz said the latest economic data, uncertainty over Europe and a slowdown in China were creating a climate of uncertainty.

“We have made a transition from April’s highs where investors were looking at a V-shaped recovery and expecting things to get back to normal,” he said. “Now reality is setting in.”

Standard & Poor’s late Tuesday cut its rating of Ireland’s credit rating by one notch by to AA-, saying a government bailout of the country’s banking sector will worsen its already troubled public finances. Despite that, Irish stocks bucked the global trend, ticking up 0.7 percent.

In other economic news in Europe, the Ifo research institute in Munich said Wednesday that its German business climate index rose to 106.7 in August from 106.2 in July. It was just the latest in a string of reports suggesting that the German economy, Europe’s largest, continues to improve, even as its neighbors and overseas trading partners show signs of slowing.

The Tokyo benchmark Nikkei 225 stock average fell 1.7 percent. The main Sydney market index, the S.& P./ASX 200, was 1.4 percent lower. In Hong Kong, the Hang Seng index drooped 0.1 percent, and in Shanghai the composite index fell 2 percent.

The dollar rose against the yen after declining Tuesday to levels that alarmed Japanese policy makers, who fear that a stronger currency will price Japanese goods out of overseas markets.

The dollar rose to 84.4250 yen from 83.90 yen late Tuesday in New York. On an intraday basis, the dollar fell Tuesday to as low as 83.60 yen — its lowest since 1995.

Buoyed by investor appetite for assets that are deemed safe havens — including Japanese government bonds — the yen has risen sharply against the dollar and the euro in recent months, creating an increasing headache for Japanese companies that derive much of their sales from exports.

That has prompted intensified rhetoric — but still no action — from Japanese policy makers.

The sharp moves in the yen have in recent days fueled expectations that Japan’s central bank will sooner or later intervene in the foreign exchange market — buying dollars and selling yen — to lower the currency’s value.

Japanese policy makers and central bank officials have signaled on a near-daily basis that they are watching developments very closely.

On Wednesday, policy makers ratcheted up the rhetoric a notch: the finance minister, Yoshihiko Noda, told reporters that he would respond appropriately as needed, an expression he has not previously used in his campaign to talk the currency down, Reuters reported. However, Mr. Noda later said he had not received any specific instructions from Prime Minister Naoto Kan on currency issues, leaving markets on tenterhooks as to whether the bank would resort to more forceful action.

Japan’s latest report on exports amplified the concerns about the strong yen.

Tokyo said Wednesday that the value of exports rose 23.5 percent in July from the same month a year ago, though the pace of the growth had begun to slow. Exports expanded 27.7 percent in June and 32.1 percent in May. Exports to Asia rose 23.8 percent, which was also slower than previous months. Exports to the United States increased 25.9 percent in July.

The strong yen is responsible for much of the export slowdown and points to a “soft patch” for exports in the July-September quarter, Kyohei Morita, chief economist at Barclays Capital Japan, wrote in a note to clients, according to The Associated Press.

“Even so, we expect exports to hold their ground as a trend,” Mr. Morita wrote, according to The A.P. “Export volume remains firm, and we expect the economic recovery in the U.S. and China — Japan’s key export destinations — to remain intact despite some deceleration.”

Bettina Wassener contributed reporting.

    Wall Street Overcomes Latest Economic Data, NYT, 25.8.2010, http://www.nytimes.com/2010/08/26/business/26markets.html






Obama and Aides Discuss

Ways to Spur Economy


August 25, 2010
The New York Times


VINEYARD HAVEN, Mass. — Amid the latest signs of a faltering recovery, President Obama held a lengthy conference call with his economic advisers on Wednesday morning to discuss a course of action.

The call, which included Timothy F. Geithner, the Treasury secretary; Christina Romer, the soon-departing chairman of the Council of Economic Advisers, and Lawrence H. Summers, director of the White House National Economic Council, came as the second report in as many days pointed to a softer-than-expected housing sector — a weakness that acts as a drag on the broader economy.

“The discussion focused on recent data reports, global markets and economic growth,” a White House statement said afterward. “The economic team provided an update on the next steps to keep the economy growing including assistance to small businesses and the extension of tax cuts to the middle class.”

The government reported on Wednesday that new-home sales fell unexpectedly in July, the first month in which buyers no longer could get a tax credit that was part of the government’s stimulus program. The news followed an industry report on Tuesday that sales of existing homes in July slid to the lowest level in a decade.

Together, the reports stoked concerns among more pessimistic forecasters of another recession, though most economists still expect the economy to recover, if more slowly than previously thought.

Also this week, the House Republican leader, Representative John A. Boehner of Ohio, delivered a blistering attack on Tuesday of the administration’s stimulus policies to set the opposition’s tone for the campaign stretch. But on the same day, the nonpartisan Congressional Budget Office reported that the policies had increased growth in the second quarter by up to 4.5 percent.

Many economists, in fact, have reduced their growth forecasts partly because the administration’s two-year stimulus plan is winding down and Congress shows little sign of doing more.

There is not a lot that Mr. Obama and Democratic leaders in Congress can do in the short time between lawmakers’ return from their recess in September and their departure in October to campaign for re-election, especially given the opposition of Republicans, who are increasingly hopeful of winning enough seats in November to take control of the House and Senate.

In any case, nothing the Democrats do would have time to show results before the November elections.

The administration’s main initiative, which the President proposed at the start of the year to provide additional tax cuts to small businesses and to create a government-backed facility to increase lending to them, has been stalled by Republicans in the Senate. Mr. Obama has been publicly urging action, most recently in a statement as he departed on Thursday for his 10-day vacation on Martha’s Vineyard.

As the White House statement indicated, Congress must act by the end of the year if the Bush income tax cuts are to be extended beyond their Dec. 31 expiration. Mr. Obama wants to extend the tax cuts for 98 percent of Americans but the Republicans are insisting on extending all the tax cuts given the economy’s continued weakness.

The fight over tax cuts will probably dominate discussion in coming weeks, and the President and his economic and political teams have only begun to focus on their strategy.

Republicans say Democrats want to impose a big tax increase on successful small businesses while Democrats counter that Republicans are fighting for the wealthiest 2 percent of Americans, who do not need the money and would not spend it to stimulate the economy.

Yet while data show that fewer than 3 percent of small businesses would pay higher taxes if the top rates revert to their pre-2001 level, enough Democrats feel vulnerable to Republicans’ arguments about small businesses that the White House and Congressional leaders could end up postponing the issue until after the elections.

With the President on vacation, Vice President Joseph R. Biden Jr. has been the administration’s public face this week. At a forum in a pizza restaurant in Washington on Wednesday, he said, “To extend those tax cuts costs $700 billion over 10 years at a time when we are worried about the economy, when long term we have to be worried about deficits.”

    Obama and Aides Discuss Ways to Spur Economy, NYT, 25.8.2010, http://www.nytimes.com/2010/08/26/business/26obama.html






New-Home Sales Declined

Sharply Last Month


August 25, 2010
The New York Times


New-home sales unexpectedly fell in July, the government said on Wednesday, the second grim report this week that show that the housing sector stalled last month.

The Commerce Department reported that new-homes sales in July fell 12.4 percent from June, to a seasonally adjusted annual rate of 276,000 units. That was the lowest level in July since the government began keeping track in 1963

The July result was 32.4 percent below the same month a year ago. Analysts surveyed by Thomson Reuters had expected that sales of new homes would be flat in July from June. June sales were revised down to a seasonally adjusted annual rate of 315,000, from 330,000.

In addition, the report said, the median sales price was $204,000 in July, down 6 percent from June and 4.8 percent lower than July a year ago. The average sales price was $235,300 in July, down 3.1 percent from June.

July was the first month that buyers could not qualify for a tax credit of up to $8,000, which analysts said may have contributed to the decline.

The report comes a day after the National Association of Realtors reported that sales of existing homes in July plunged to their lowest level in more than a decade, as buyers lost the spur of a government tax credit. The association said that the seasonally adjusted annual sales rate of 3.83 million was 25.5 percent below the level of July a year ago.

Mortgage rates are the lowest in modern memory while affordability, because of price declines of 30 percent in many areas, is the highest in at least a decade. The government is allowing buyers to put only a token amount down, guarantees lenders against default and regularly issues proclamations that the worst is over.

Still, with unemployment steady for month upon month at more than 9 percent, and with millions heavily in debt or simply skittish, many potential buyers are sitting on the sidelines.

Real estate helped drive this recession, and no one expects it to lead the way out. Instead, the urgent question is how much it will drag down other parts of the fragile recovery.

Eric Thorne, an investment adviser for Bryn Mawr Trust, said the housing numbers were expected to show some improvement, and that might have contributed to a market sell-off.

“We are in the middle of the debate as to whether this early stage economic recovery is actually happening,” he said. “We are still fairly optimistic that this recovery is in the early stages of taking hold though a lot of the data points are still not showing up positively.”

In addition to the housing figures, additional economic statistics Wednesday pointed to the sluggish pace of the recovery, in which even the manufacturing sector, once considered a strong point in the recovery, appears to be struggling.

Wednesday’s report on orders of big-ticket items from American factories rose less than forecast in July, an indication that manufacturing was beginning to weaken.

The Commerce Department report said that orders to American factories for durable goods rose 0.3 percent last month, much less than the 3 percent growth that was forecast. Excluding the volatile transportation sector, orders dropped 3.8 percent. Orders for machinery dropped 15 percent, while those for capital goods dropped 8 percent.

“July’s durable goods report adds to the recent evidence from numerous activity surveys that the manufacturing recovery has lost nearly all of the considerable momentum it had,” economists from Capital Economics in a research note said.

“The rebound in manufacturing was one of the bright spots in an otherwise disappointing recovery, the research note said. “Take it away, throw in a renewed collapse in housing, and you don’t have much left.”

On Friday, the government will offer its latest estimate on second-quarter growth. Analysts now expect that the growth in the quarter will be revised down to an annual rate of about 1.4 percent from the previous estimate of 2.4 percent.

Though the low rates have not spurred home buying, the demand for home refinancing loans last week hit a 15-month high, the Mortgage Bankers Association said Wednesday in a statement.

Refinancing accounted for 82.4 percent of total applications last week up 81.4 percent the previous week, which is the highest share observed since January 2009, the association said.

“The volume of refi applications last week was up 26 percent over their level four weeks ago,” said Michael Fratantoni, the association’s vice president for research and economics.

David Streitfeld contributed reporting.

    New-Home Sales Declined Sharply Last Month, NYT, 25.6.2010, http://www.nytimes.com/2010/08/26/business/26econ.html






In Georgia,

a Megamansion Is Finally Sold


August 21, 2010
The New York Times


JOHNS CREEK, Ga. — Bit by bit, Larry Dean’s life, at least as he had constructed it over the last two decades, was ebbing away.

Hundreds of strangers and many friends — most in black dresses or dark suits — showed up on Friday night for an estate sale here at Mr. Dean’s Xanadu-like mansion, once the biggest home in metropolitan Atlanta. They scrutinized every object, from a $10 snow globe to a $60,000 dolphin-sculpture fountain. And many walked out the $17,500 leaded glass and mahogany double front doors, which came from the Chicago Cotton Exchange, with an artifact from Mr. Dean’s past.

And Mr. Dean, a relentlessly upbeat software entrepreneur with cropped gray hair and a busker’s aim to please, gladly watched it go.

“It’s all good,” he said, standing in the soaring rotunda of his megamansion, the pressure almost visibly rising off his shoulders.

The estate sale brought down the curtain on a particular kind of spectacle, a rags-to-riches tale that somewhere along the way slipped into reverse and played itself out in the unforgiving glare of the real estate market.

Mr. Dean, 67, who grew up without indoor plumbing in a low-income section of Atlanta, founded a financial services software company, Stockholder Systems Inc., in the early 1970s and became a millionaire many times over. He and his first wife, Lynda, spent four years and $25 million building their own private Versailles, which they called “Dean Gardens” and finished in 1992. Their architect, Bill Harrison, said each square inch of it was given the attention to detail of a Faberge egg.

The Deans’ dream was to raise their four children here in an atmosphere like “Dynasty,” “only happy,” and then leave the 58-acre estate, with its 18-hole golf course, wedding chapel, band shell and formal gardens to a foundation that would open it to the public for charity events.

But in 1993, shortly after finishing the house, the Deans separated and the house went on the market. It has languished there for the last 17 years. One potential buyer, Mr. Dean said, was Michael Jackson, who wanted the place in 1994 as a surprise for his fiancée, Lisa Marie Presley. But when the media reported Mr. Jackson’s plan and ruined the surprise, he did not sign the contract. Mr. Dean would not say how much Mr. Jackson was going to pay, but the home was on the market for $40 million.

Now, at last, the estate has sold — for $7.6 million. The buyer, the entertainment mogul Tyler Perry, has said he plans to demolish it and build his own home, one that is environmentally friendly and made of concrete.

Even in the Atlanta area, where a developer built a replica of the White House replete with its own Lincoln Bedroom and Oval Office, Dean Gardens stands out. At 32,000 square feet, it is nearly twice as big as the Atlanta White House. And its incongruity of interior styles, combining Egyptian, Renaissance, Vegas and more, has been a source of amusement, if not horror, to some who have attended charity events there or seen pictures online.

Joan Rivers mocked it on her television program, “How’d You Get So Rich?” When she saw a bed surrounded by an elaborate pink and green flower frame, she gasped that it looked like a float she once rode in the Rose Bowl Parade.

Bloggers and commentators have been merciless about what they see as a collision of self-indulgence, bad taste and a waste of money.

“After seeing the inside of this house, it’s no wonder at all that they divorced,” one person wrote after a glimpse via the Internet on hookedonhouses.net. “I can’t imagine anyone being happy living in that monstrosity. Perhaps they should turn it into a prison.”

“Oy,” wrote another. “I’m so embarrassed to be an Atlantan right now. A few years ago, Atlanta was voted the No. 1 city in the country with ‘most conspicuous consumption.’ I guess this would be the feather in that cap!”

Hank Miller, an associate broker and appraiser with Prudential Georgia Realty, said the real value of the property is in the land. “The land is worth more than the structure, which is why they’re going to take it down,” Mr. Miller said.

Jenny Pruitt, co-founder and chief executive of Atlanta Fine Homes Sotheby’s International Realty, whose firm sold Dean Gardens after taking over the listing last year, said, “The luxury-home market has been hit very hard, and this was a very special property.”

The sale price, Ms. Pruitt said, is the highest in Atlanta so far this year, but considerably lower than an $11 million sale last year. And it could easily be made up in tax credits, she said, if Mr. Tyler exercises the property’s conservation rights, given its extensive waterfront along the Chattahoochee River.

Mr. Dean said he was mostly relieved about the sale, which will mean the end of $1 million in annual upkeep, which his first wife had been paying in recent years. On top of the $25 million cost of building the house, they spent an additional $18 million over the years to pay for staff, taxes and utilities, for a total of $43 million.

“I didn’t get a dime out of the sale of the house,” Mr. Dean said. “I own all the personal effects. That’s why I’m having the sale,” though some of the proceeds are going to charities. “The $7.6 million went to pay off the back debts. I owed Lynda more than the buyer paid for it. The buyer basically stole the house.”

As Mr. Dean absorbs the lessons of his experience and faces life with his fortune greatly depleted by divorces and upkeep costs for the house, he said he regretted building the house. If he had it to do all over again, he said, he would not. Still, he thinks of himself as happy and successful.

Mr. Dean, divorced for a third time and looking for wife No. 4, said he planned to move to Florida and would probably write a book on Internet dating, which he says has been a letdown. Everyone lies, he said, especially about their age and weight.

Mr. Dean said he thought the sale would be harder on his oldest son, Chris, who at 21 was given the task of decorating the house and now, at 43, is still trying to come to terms with the experience. It was his first effort at decorating something on such a grand scale; he made one more effort, which ended in disaster, and retired from interior decorating at age 24.

“Our whole family is coming to the end of a chapter,” Chris Dean said wistfully. “This was so wonderful at the beginning, and so new, then after their divorce, when Mom moved out, it lost its life.” He said he missed his mother’s cooking and her cakes and pies that filled the countertop.

“It became almost like a mausoleum sitting here with nobody using it,” he said. “That was more heartbreaking than having it torn down.”

    In Georgia, a Megamansion Is Finally Sold, NYT, 21.8.2010, http://www.nytimes.com/2010/08/22/us/22house.html






In Striking Shift,

Small Investors Flee Stock Market


August 21, 2010
The New York Times


Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group. Now many are choosing investments they deem safer, like bonds.

If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.

One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

So is the timing. After past recessions, ordinary investors have typically regained their enthusiasm for stocks, hoping to profit as the economy recovered. This time, even as corporate earnings have improved, Americans have become more guarded with their investments.

“At this stage in the economic cycle, $10 to $20 billion would normally be flowing into domestic equity funds” rather than the billions that are flowing out, said Brian K. Reid, chief economist of the investment institute. He added, “This is very unusual.”

The notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that a decline in home values and in job stability the last few years has altered Americans’ sense of financial security.

It may take many years before it is clear whether this becomes a long-term shift in psychology. After technology and dot-com shares crashed in the early 2000s, for example, investors were quick to re-enter the stock market. Yet bigger economic calamities like the Great Depression affected people’s attitudes toward money for decades.

For now, though, mixed economic data is presenting a picture of an economy that is recovering feebly from recession.

“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”

One investor who has restructured his portfolio is Gary Olsen, 51, from Dallas. Over the past four years, he has adjusted the proportion of his investments from 65 percent equities and 35 percent bonds so that the $1.1 million he has invested is now evenly balanced.

He had worked as a portfolio liquidity manager for the local Federal Home Loan Bank and retired four years ago.

“Like everyone, I lost” during the recent market declines, he said. “I needed to have a more conservative allocation.”

To be sure, a lot of money is still flowing into the stock market from small investors, pension funds and other big institutional investors. But ordinary investors are reallocating their 401(k) retirement plans, according to Hewitt Associates, a consulting firm that tracks pension plans.

Until two years ago, 70 percent of the money in 401(k) accounts it tracks was invested in stock funds; that proportion fell to 49 percent by the start of 2009 as people rebalanced their portfolios toward bond investments following the financial crisis in the fall of 2008. It is now back at 57 percent, but almost all of that can be attributed to the rising price of stocks in recent years. People are still staying with bonds.

Another force at work is the aging of the baby-boomer generation. As they approach retirement, Americans are shifting some of their investments away from stocks to provide regular guaranteed income for the years when they are no longer working.

And the flight from stocks may also be driven by households that are no longer able to tap into home equity for cash and may simply need the money to pay for ordinary expenses.

On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses.

According to the Investment Company Institute, which surveys 4,000 households annually, the appetite for stock market risk among American investors of all ages has been declining steadily since it peaked around 2001, and the change is most pronounced in the under-35 age group.

For a few months at the start of this year, things were looking up for stock market investing. Optimistic about growth, investors were again putting their money into stocks. In March and April, when the stock market rose 8 percent, $8.1 billion flowed into domestic stock mutual funds.

But then came a grim reassessment of America’s economic prospects as unemployment remained stubbornly high and private sector job growth refused to take off.

Investors’ nerves were also frayed by the “flash crash” on May 6, when the Dow Jones industrial index fell 600 points in a matter of minutes. The authorities still do not know why.

Investors pulled $19.1 billion from domestic equity funds in May, the largest outflow since the height of the financial crisis in October 2008.

Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. But at that time the market was tanking in shocking fashion. The surprise this time around is that Americans are withdrawing money even when share prices are rallying.

The stock market rose 7 percent last month as corporate profits began rebounding, but even that increase was not enough to tempt ordinary investors. Instead, they withdrew $14.67 billion from domestic stock market mutual funds in July, according to the investment institute’s estimates, the third straight month of withdrawals.

A big beneficiary has been bond funds, which offer regular fixed interest payments.

As investors pulled billions out of stocks, they plowed $185.31 billion into bond mutual funds in the first seven months of this year, and total bond fund investments for the year are on track to approach the record set in 2009.

Charles Biderman, chief executive of TrimTabs, a funds researcher, said it was no wonder people were putting their money in bonds given the dismal performance of equities over the past decade. The Dow Jones industrial average started the decade around 11,500 but closed on Friday at 10,213. “People have lost a lot of money over the last 10 years in the stock market, while there has been a bull market in bonds,” he said. “In the financial markets, there is one truism: flow follows performance.”

Ross Williams, 59, a community consultant from Grand Rapids, Minn., began to take profits from his stock funds when the market started to recover last year and invested the money in short-term bonds, afraid that stocks would again drop.

“We have a very volatile market, so we should be in bonds in case it goes down again,” he said. “If the market is moving up, I realized we should be taking this money and putting it into something more safe rather than leaving it at risk.”

    In Striking Shift, Small Investors Flee Stock Market, NYT, 21.8.2010, http://www.nytimes.com/2010/08/22/business/22invest.html






Private Growth Is Tepid

as U.S. Economy Sheds Jobs Overall


August 6, 2010
The New York Times


With the American economic recovery hanging in the balance, private employers added 71,000 jobs in July, up from a downwardly revised 31,000 in June but well below the consensus forecast of 90,000. The unemployment rate stayed steady at 9.5 percent.

Over all, the nation lost 131,000 jobs last month, but those losses came as 143,000 Census Bureau workers left their temporary posts, the Labor Department said. June’s number was revised dramatically downward to a total loss of 221,000 jobs. The agency originally reported that the nation lost 125,000 jobs in June.

Figures released last week confirmed that the United States economy slowed in the spring, and the Department of Labor’s monthly statistical snapshot of hiring pointed toward a stall in hiring this summer, as employers failed to add jobs at the rate they were earlier this year.

What’s more, the number of jobs added in July is about half the 125,000 to 150,000 that economists generally say employers need to generate simply to accommodate new entrants to the labor market. With more than 8 million people having lost their jobs during the recession, such tepid job growth can’t begin to plug the hole.

“The private sector is still hobbled and certainly is not nearly strong enough to overcome the drain on the government side,” said Robert A. Dye, senior economist at PNC Financial Services Group in Pittsburgh.

Mr. Dye added that employers were pushing for productivity gains among existing workers, as evidenced by a slight increase in the average workweek for private workers. “I think that many employers are realizing that they can get by with very lean payrolls and are pushing their employees as much as they can and without adding,” he said.

Although the unemployment rate did not worsen, that was in part because people continued to leave the labor force, which means they simply stopped looking for work during the month. In July, 181,000 people left the labor force.

With some economists predicting a “double dip” back into recession and the political stakes for the Obama administration rising as the weeks tick closer to the midterm elections, Friday’s unemployment report renewed pressure on lawmakers to consider the next steps they might take to bolster the economy.

The Senate voted earlier this week to approve a $26 billion package of aid to states and school districts, and the House is expected to vote on the measure on Tuesday. Still to come is a fierce debate over whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year. Recent indicators focusing on consumer confidence, retail sales and housing appear to put the economy in a holding pattern.

Earlier this week, a crucial index of manufacturing showed that growth had slipped slightly in July, chain stores reported anemic increases in sales and unemployment claims rose above the level usual for this stage of a recovery. On the more positive side, auto sales increased 5.1 percent in July compared with a year earlier, although from a very low base.

For now, companies appear nervous about expanding their payrolls. “Businesses just don’t want to hire,” said Allen Sinai, chief global economist at Decision Economics. “Workers are too costly and it’s very easy to substitute technology for labor.”

He added that with corporate earnings rising partly on the back of cost-cutting, employers are reluctant to give up profits. “So while corporate earnings were spectacular,” Mr. Sinai said, “the job market just stinks.”

State government employment fell by 10,000 in July, and local governments lost 38,000 jobs as agencies came under budget pressures. In the past three months, state and local governments have shed a total of 102,000 jobs.

Manufacturing, which had recently been a bright spot in hiring, added 36,000 jobs during July, in part because automakers that usually close factories during the month kept plants open.

The number of people out of work for 27 weeks or more dipped slightly to 6.6 million from 6.8 million, while the median duration of unemployment eased to 22.2 weeks in July, from 25.5 weeks in June.

The overall unemployment rate, incorporating people who want jobs but did not look during the month, remained unchanged at 16.5 percent. .

“Our own view is that this is going to be a really protracted, drawn out recovery here,” said Joshua Shapiro, chief United States economist at MFR Inc. “You sometimes have to take a magnifying glass to see it. There are others who are more optimistic and they just keep saying just wait, just wait and they’ve been saying just wait for quite some time.”

For the 14.6 million people currently looking for work, the reluctance to hire outstrips the modest signs of economic growth. “This economy is absolutely appalling,” said Mary Moore, 39, who has been applying for jobs as an administrative assistant in Norfolk. Va., since the publishing company she worked for closed in May of last year. Ms. Moore, who can collect unemployment benefits for a few more months, is struggling to pay her $525-a-month rent and health care premiums that recently nearly tripled to $379 a month.

“As an American I did not believe we would see times such as this,” she said.

    Private Growth Is Tepid as U.S. Economy Sheds Jobs Overall, NYT, 6.8.2010, http://www.nytimes.com/2010/08/07/business/economy/07econ.html






Going to Extremes

as the Downturn Wears On


August 6, 2010
The New York Times


Plenty of businesses and governments furloughed workers this year, but Hawaii went further — it furloughed its schoolchildren. Public schools across the state closed on 17 Fridays during the past school year to save money, giving students the shortest academic year in the nation and sending working parents scrambling to find care for them.

Many transit systems have cut service to make ends meet, but Clayton County, Ga., a suburb of Atlanta, decided to cut all the way, and shut down its entire public bus system. Its last buses ran on March 31, stranding 8,400 daily riders.

Even public safety has not been immune to the budget ax. In Colorado Springs, the downturn will be remembered, quite literally, as a dark age: the city switched off a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.

Faced with the steepest and longest decline in tax collections on record, state, county and city governments have resorted to major life-changing cuts in core services like education, transportation and public safety that, not too long ago, would have been unthinkable. And services in many areas could get worse before they get better.

The length of the downturn means that many places have used up all their budget gimmicks, cut services, raised taxes, spent their stimulus money — and remained in the hole. Even with Congress set to approve extra stimulus aid, some analysts say states are still facing huge shortfalls.

Cities and states are notorious for crying wolf around budget time, and for issuing dire warnings about draconian cuts that never seem to materialize. But the Great Recession has been different. Around the country, there have already been drastic cuts in core services like education, transportation and public safety, and there are likely to be more before the downturn ends. The cuts that have disrupted lives in Hawaii, Georgia and Colorado may be extreme, but they reflect the kinds of cuts being made nationwide, disrupting the lives of millions of people in ways large and small.



MILILANI, Hawaii — It was a Friday, and Maria Marte, an administrator for an online college that caters to members of the military, should have been at her office at a nearby Army hospital. Her daughters, Nira, 11, and Sonia, 9, should have been in school.

Instead, Ms. Marte was sitting with a laptop in the dining room of her home in this neatly manicured suburb of Honolulu. “Did you already send your registration in?” she asked a client on the phone, trying to speak above the peals of laughter coming from the backyard, where the girls were having a water-balloon fight with some friends.

It was the 17th, and last, Furlough Friday of the year, the end of a cost-cutting experiment that closed schools across the state, outraging parents and throwing a wrench into that most delicate of balances for families with children: the weekly routine

“I have to pay attention to the customers, and make sure that I’m understanding what they need,” said Ms. Marte, 37, whose husband, Odalis, an Army major, had been deployed in Afghanistan for nearly a year. Then she nodded at the window, toward the girls. “But at the same time, I have to make sure that they’re not killing each other.”

For those 17 Fridays, parents reluctantly worked from home or used up vacation and sick days. Others enlisted the help of grandparents. Many paid $25 to $50 per child each week for the new child care programs that had sprung up.

Children, meanwhile, adjusted to a new reality of T.G.I.T. Getting them up for school on Mondays grew harder. Fridays were filled with trips to pools and beaches, hours of television and Wii, long stretches alone for older children, and, occasionally, successful attempts to get them to do their homework early.

But if three-day-weekends in Hawaii sound appealing in theory, many children said that they wound up missing school.

“I’m really not a big fan of furloughs,” said Nira Marte, a fifth grader, explaining that she missed the time with her friends and her teacher.

Four-day weeks have been used by a small number of rural school districts in the United States, especially since the oil shortage of the 1970s. During the current downturn, their ranks have swelled to more than 120 districts, and more are weighing the change.

But Hawaii is an extreme case. It shut schools not only in rural areas but also in high-rise neighborhoods in Honolulu. Suffering from steep declines in tourism and construction, and owing billions of dollars to a pension system that has only 68.8 percent of the money it needs to cover its promises to state workers, Hawaii instituted the furloughs even after getting $110 million in stimulus money for schools.

Unlike most districts with four-day weeks, Hawaii did not lengthen the hours of its remaining school days: its 163-day school year was the shortest in the nation.

The furloughs were originally supposed to last two years, but the outcry was so great — some parents were arrested staging sit-ins at the office of Gov. Linda Lingle, a Republican — that a deal was hammered out to restore the days next year.

On the last furlough day, Ms. Marte toggled back and forth between her girls — making them pizza, taking them to swim practice — and a stream of e-mails and calls. At one point, a soldier on the mainland was interrupted when his baby started bawling.

“Don’t worry, that’s fine,” Ms. Marte reassured him. “I’m in the same boat.”



RIVERDALE, Ga. — Kelly Smith was reading a library copy of “The Politician,” the tell-all about John Edwards, as his public bus rumbled through a suburb of Atlanta. It was heading toward the airport, where he could switch to a train to his job downtown, in the finance department of the Atlanta Public Schools system. But his mind was drifting.

It was March 31, the last day of public bus service. Clayton County had decided to balance its budget by shutting down C-Tran, the bus system, stranding 8,400 daily riders. Mr. Smith, 45, like two-thirds of the riders, had no car. He needed a plan.

“I think that what they’re doing is criminal,” Mr. Smith said as his 504 bus filled up. “I’ll figure something out, but I see a lot of people here who don’t have an out.”

The next morning, this is what he had figured out: a state-run express bus stopped around three miles from his apartment in Riverdale. So Mr. Smith rose at 5, walked past the defunct C-Tran bus stop just outside his apartment complex and hiked the miles of dark, deserted streets, many of which had no sidewalks.

“If I get hit by a car, it’s my fault,” he said as he crossed a highway. “Who wants to start their day off like this? This is why I don’t get up and jog.”

Mr. Kelly was determined to get to the job he had landed in November, and to get there on time. “I was out of work for two and half years, with the economic crisis,” he said. “So the last thing I want to do is walk away from a job.”

Around the country, public transportation has taken a beating during the downturn. Fares typically cover less than half the cost of each ride, and the state and local taxes that most systems depend on have been plummeting.

In most places, that has meant longer waits for more crowded, dirtier and more expensive trains and buses. But it meant the end of the line in Clayton County, a struggling suburb south of Atlanta where “Gone With the Wind” was set and which is now home to most of Hartsfield-Jackson Atlanta International Airport.

The county — hit hard by the subprime mortgage crisis and the wave of foreclosures that followed — decided it could no longer afford spending roughly $8 million a year on its bus system, which started in 2001. It hoped that some other entity — like the state — would pick up the cost.

If the threat to shut the system down was a game of chicken, no one blinked.

Now all five bus routes are gone, and riders are trying to adjust.

Jennifer McDaniel, a hostess at a Chili’s in the airport, was forced to spend her tax refund, and take out a big loan, to buy a car. Jaime Tejada, 36, a Delta flight attendant, wondered why transit was so much better in the countries he flies to.

And Tierra Clark, 19, who studies dental hygiene and works five nights a week at the Au Bon Pain at the airport, was left with an unwanted new expense. “I’ll have to call a taxi from now on — $13.75 every night,” Ms. Clark said, as she rode the very last C-Tran bus home.

Now there is talk of levying a new sales tax so the county can join the Metropolitan Atlanta Rapid Transit Authority, which it voted not to join when it was created nearly four decades ago. That could get the buses up and running again.

Even if that happens, though, it could be years off — too late for Mr. Smith. After spending a carless Easter vacation trying to figure out a better way to get to work, or even to get his groceries, he ended up quitting his first job in two and a half years and moving just outside Dallas, where his girlfriend had landed a job with a bank.

“A lot of people are leaving Riverdale,” he said.



COLORADO SPRINGS — It was when the street lights went out, Diane Cunningham said, that the trouble started.

Her tires were slashed, she said. Her car was broken into. Strange men showed up on her porch. Her neighborhood had grown deserted at night, ever since four streetlights in a row were put out on Airport Road, the street outside her mobile home park.

That is why Ms. Cunningham, 41, and her son Jonathan, 22, were carrying a flat-screen television out of their mobile home on a recent afternoon. “I’m going to pawn this,” Ms. Cunningham said, “to get a shotgun.”

It is impossible to say whether the darkness had contributed to any of the events that frightened the Cunninghams. But ever since Colorado Springs shut off a third of its 24,512 streetlights this winter to save $1.2 million on electricity — while reducing the size of its police force — many resident have said that they feel less safe.

A few miles down Airport Road a 62-year-old man, Esteban Garcia, was shot to death in April when he was robbed outside his family’s taqueria and grocery in a parking lot that had lost the illumination of its nearest streetlight. Gaspar Martinez, a neighboring shopkeeper, said that he believed the lack of the light was partly to blame.

“You figure the robbers think that if it’s dark, it’s the best time to hit,” said Mr. Martinez, 34, whose store, Ruskin Liquor, is in the same small strip mall. Mr. Martinez said that he put more lights up outside his store after the shooting.

The police, who arrested several suspects, said that there was no indication that the doused light had played a role in the crime — or, indeed, in any crimes in Colorado Springs, which remains safer than most cities of its size. But this might be a case, they said, where perception is as important as reality.

“All the sociologists have said this for years: what matters to people isn’t really the number of reported crimes, it’s their perception of safety,” said the city’s police chief, Richard W. Myers. “And let’s say we don’t see any bump in crime — that would be a good thing. But people don’t feel as safe. They’re already telling us that, even if the numbers don’t bear that out. So do we have a problem? I think so.”

Chief Myers said he worried that if law-abiding citizens stopped going out at night or visiting parks, the city’s deserted open spaces could attract more criminals.

One of most influential policing concepts in recent years has been the “broken windows” theory, which holds that addressing minor crimes and signs of disorder can head off bigger problems down the road. Colorado Springs is taking a different tack.

To close a budget gap — the city’s voters, many of whom favor smaller government, turned down a property tax increase in November, and a taxpayer’s bill of rights makes it hard for city officials to raise taxes — Colorado Springs has stopped collecting trash in its parks, stopped watering many medians on its roads and reduced its police force.

The sprawling city of roughly 400,000 at the foot of Pike’s Peak — which covers 194 square miles — made national news when it auctioned off its police helicopters. But less-heralded police cuts could have more impact: the force, which had 687 officers two years ago, is down to 643 and dropping. At any given time, the department estimates that there is a 23 percent chance that all units will be busy.

So it has reduced the number of detectives who investigate property crimes, cut the number of officers assigned to the schools and eliminated units that tracked juvenile offenders and caught fugitives. Officers no longer respond to the scene of most burglaries, at least if they are not in progress.

At the same time, the city joined others — from Fitchburg, Mass., to Santa Rosa, Calif., and began turning off streetlights. Several recent studies have suggested that streetlights help reduce crime — something residents here say is obvious.

Natalie Bartling, a new mother, could not believe it when the light outside her home was shut off in April. Ms. Bartling, 38, had successfully lobbied for the light five years ago after a wave of vandalism and petty thefts hit her middle-class block. So this time she called daily until the city agreed to turn it back on.

“When it got shut off, it was like missing something,” she said on a recent night, standing under its glow. “Part of your life.”

    Going to Extremes as the Downturn Wears On, NYT, 6.8.2010, http://www.nytimes.com/2010/08/07/us/07cutbacksWEB.html






Top Obama Adviser on Economics

to Step Down


August 5, 2010
The New York Times


WASHINGTON — Christina D. Romer is resigning as the chairwoman of President Obama’s Council of Economic Advisers, the White House announced on Thursday night. She will be the second member this summer to leave an economic team that has steered the administration through the worst recession since the Depression.

Ms. Romer, the only woman in the inner circle of Mr. Obama’s economic advisers, early on had tense relations with Lawrence H. Summers, who, as director of his National Economic Council, coordinates the advice that goes to the president.

But according to the announcement, Ms. Romer wanted to return to her tenured position as an economics professor at the University of California, Berkeley, in time for her son to begin high school in California this fall. Her resignation is effective Sept. 3.

Peter R. Orszag left last week as Mr. Obama’s budget director, citing personal reasons, and Ms. Romer’s announcement had been rumored for weeks.

It has been common in administrations for either budget directors or heads of the Council of Economic Advisers to serve less than two years, and those in the Obama administration have been under uncommon pressures.

Ms. Romer had a bigger role than many predecessors in her job but was said to express frustration that she did not have more direct access to the president, or more influence.

At some cost to her credibility, Ms. Romer was perhaps best known publicly for her early projection that unemployment would not top 8 percent if Mr. Obama’s $787 billion stimulus package became law; the spending was approved a month after his inauguration, but by year’s end the jobless rate hit 10 percent.

“Christy Romer has provided extraordinary service to me and our country during a time of economic crisis and recovery,” Mr. Obama said in the White House statement. “The challenges we faced demanded more of Christy than any of her predecessors, and I greatly valued and appreciated her skill, commitment and wise counsel.

“While Christy’s family commitments require that she return home, I’m gratified that she will continue to offer her insights and advice as a member of my Economic Recovery Advisory Board.”

Ms. Romer called it the “honor of a lifetime” to serve in the administration.

    Top Obama Adviser on Economics to Step Down, NYT, 5.8.2010, http://www.nytimes.com/2010/08/06/business/06advise.html






Still in the Time of Economic Anxiety


August 4, 2010
The New York Times


To the Editor:

Re “Welcome to the Recovery,” by Timothy F. Geithner, the secretary of the Treasury (Op-Ed, Aug. 3):

Forgive me, Mr. Geithner, if I remain skeptical. Recovering? I think a very temporary remission is more accurate.

“We suffered a terrible blow, but we are coming back,” you say. No one I know went anywhere. Their savings went, their investments went, their jobs went, their homes went. And those who took them — and received obscene bonuses for doing so — are coming back for even more.

My question is, Where are we going? We, the public, the average person upon whom the health and well-being of the nation rests. The reality is that there are not enough good jobs for everyone, housing prices are still far too high, lenders are making it increasingly hard to borrow, credit card companies are still being allowed to charge exorbitant interest and no one that I know is saving; every penny goes to keep body and soul together.

Insecurity — financial, emotional and physical — is creating increasing health problems, yet crucial public services, which could at least help in the short term, are being cut to the bone.

What I have learned in the last few years is that the private sector plays fast and loose with the public welfare, and no one seems to care. The gulf between rich and poor is huge and getting wider every day.

Coming back? We’re still on the edge, and it’s still crumbling.

Susan A. McGregor
North Kingston, R.I., Aug. 3, 2010

To the Editor:

Re “Defining Prosperity Down,” by Paul Krugman (column, Aug. 2):

Maybe now we can finally admit that “trickle down” economics doesn’t work. We’ve had 25 years of tax cuts (cuts in income taxes, estate taxes and capital gains taxes) for the wealthiest Americans. The myth was that the wealthy would invest that money in ways that would create more jobs and prosperity for the rest of us. It’s not working, obviously.

Our return for trickling so much of our wealth upward was supposed to be good jobs and a solid income for the middle class. Instead we’ve got the wealthy playing hedge fund roulette on Wall Street, while one-sixth of American workers are unemployed or underemployed.

Trickle-down policies increased the wealth gap, but didn’t create jobs. The only time in the past decade that we’ve approached full employment was when the middle class went into debt and spent virtually 100 percent of its income or even more, as it did over the four years before 2008. That “mortgage and credit” bubble taught us that the real “jobs engine” is middle-class spending.

To get our economy running again (instead of wheezing along), we need to eliminate the Bush tax cuts, eliminate the tax break for hedge fund managers and establish a meaningful estate tax. Keep that money out of the Wall Street casino; invest instead in the middle class.

John Ranta
Hancock, N.H., Aug. 2, 2010

To the Editor:

Re “99 Weeks Later, Jobless Have Only Desperation” (front page, Aug. 3):

The story of Alexandra Jarrin’s odyssey from middle-class striver to unemployed and homeless graphically illustrates the terrifying underside of what’s left of the American dream.

A week after the 9/11 terror attacks, I was laid off from my position as head of public relations at a publishing house. For the next year and a half, with increasing desperation, I tried to claw my way back into a corporate life in which I had thrived for nearly 20 years.

As it turns out, I was actually one of the lucky ones. My skills were transferable to the entrepreneurial world, and I eventually started an independent public relations firm. But what I learned from that experience is just how far one can fall — and is allowed to fall — in the 21st-century United States.

There is very little safety net in this country. For those who make it, this can still be the land of opportunity. But for those who, for whatever reason, lose their grip on what we take for security — job, home, bank account — the drop is very long indeed, with no one or nothing to catch you.

Alan Winnikoff
Sleepy Hollow, N.Y., Aug. 3, 2010

To the Editor:

In what state of callous cruelty is this country living when it can allow a sizable number of its people to live in cars or on the streets because their unemployment has run out during this long and protracted recession — all while it still manages to send expensive armaments halfway around the world?

Should we start a citizens’ emergency fund, or a clearinghouse where people can donate available housing, or a sponsorship program where you can help someone for six months, since the government does not seem to have the will to do any of this?

Forget about will, how about heart? Where is it?

Shameful, shameful, shameful.

Lynn Lauber
Bridport, Vt., Aug. 3, 2010

To the Editor:

Re “Four Deformations of the Apocalypse,” by David Stockman (Op-Ed, Aug. 1):

During the past 30 years in which Republicans largely dominated the White House and Congress, these so-called conservatives have mortgaged our country to the brink of bankruptcy via reckless spending, borrowing from abroad and giving tax breaks to the rich only to run up today’s obscene national debt and trigger our current deep recession.

And when President Obama increases deficits to stimulate the moribund economy — a strategy recommended by virtually all reputable economists — the irresponsible Republicans have the nerve to blame his administration for our national debt.

Will the American voters see through this charade? Given our propensity to run up personal debt to buy stuff we don’t need with money we don’t have, I fear that the answer is no. What a legacy we are leaving future generations.

James G. Goodale
Houston, Aug. 1, 2010

To the Editor:

To David Stockman’s perceptive analysis, one must add the basic Republican financial strategy dating back at least to Ronald Reagan: Pushing up the deficit makes it difficult or impossible for the Democrats to finance, increase or develop programs disfavored by Republicans. It’s that simple.

The Republican arguments for deficit reduction fly in the face of fact, as the Bush administration’s policies so clearly show. “Tax and spend” Democrats have been upstaged by “spend and don’t tax” Republicans. The cynicism exceeds imagination.

Doug Giebel
Big Sandy, Mont., Aug. 1, 2010

    Still in the Time of Economic Anxiety, NYT, 4.8.2010, http://www.nytimes.com/2010/08/05/opinion/l05econ.html






Welcome to the Recovery


August 2, 2010
The New York Times



THE devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes. The scars of the crisis are fresh, and every new economic report brings another wave of anxiety. That uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth.

The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.

From the start, President Obama made clear that recovery from a crisis of this magnitude would not come quickly and that the recovery would not follow a straight line. We saw that this past spring, when the European fiscal crisis posed a serious challenge to the markets and to business confidence, dampening investment and the rate of growth here.

While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.

Together, private consumption and fixed investment contributed about 3.25 percent to growth. Even the surge in imports, which lowered the rate of increase of G.D.P., actually reflects healthy and growing American demand.

As the economists Ken Rogoff and Carmen Reinhart have written, recoveries that follow financial crises are typically a hard climb. That is reality. The process of repair means economic growth will come slower than we would like. But despite these challenges, there is good news to report:

• Exports are booming because American companies are very competitive and lead the world in many high-tech industries.

• Private job growth has returned — not as fast as we would like, but at an earlier stage of this recovery than in the last two recoveries. Manufacturing has generated 136,000 new jobs in the past six months.

• Businesses have repaired their balance sheets and are now in a strong financial position to reinvest and grow.

• American families are saving more, paying down their debt and borrowing more responsibly. This has been a necessary adjustment because the borrow-and-spend path we were on wasn’t sustainable.

• The auto industry is coming back, and the Big Three — Chrysler, Ford and General Motors — are now leaner, generating profits despite lower annual sales.

• Major banks, forced by the stress tests to raise capital and open their books, are stronger and more competitive. Now, as businesses expand again, our banks are better positioned to finance growth.

• The government’s investment in banks has already earned more than $20 billion in profits for taxpayers, and the TARP program will be out of business earlier than expected — and costing nearly a quarter of a trillion dollars less than projected last year.

We all understand and appreciate that these signs of strength in parts of the economy are cold comfort to those Americans still looking for work and to those industries, like construction, hit hardest by the crisis. But these economic measures, nonetheless, do represent an encouraging turnaround from the frightening future we faced just 18 months ago.

The new data show that this recession was even deeper than previously estimated. The plunge in economic activity started an entire year before President Obama took office and was accelerating at the end of 2008, when G.D.P. fell at an annual rate of roughly 7 percent.

Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January.

The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy.

According to a report released last week by Alan Blinder and Mark Zandi, advisers to President Bill Clinton and Senator John McCain, respectively, the combined actions since the fall of 2007 of the Federal Reserve, the White House and Congress helped save 8.5 million jobs and increased gross domestic product by 6.5 percent relative to what would have happened had we done nothing. The study showed that government action delivered a powerful bang for the buck, and that the bank rescue on its own will turn a profit for taxpayers.

We have a long way to go to address the fiscal trauma and damage across the country, and we will need to monitor the ups and downs in the economy month by month. The share of workers who have been unemployed for six months or more is at its highest level since 1948, when the data was first recorded, and we must do more to ensure that they have the skills they need to re-enter the 21st-century economy. Small businesses are still battling a tough climate. State and local governments are still hurting.

There are urgent tasks to be undertaken to reinforce the recovery, and Congress should move now to help small business, to assist states in keeping teachers in the classroom, to increase investments in public infrastructure, to promote clean energy and to increase exports. And while making smart, targeted investments in our future, we must also cut the deficit over the next few years and make sure that America once again lives within its means.

These are considerable challenges, but we are in a much stronger position to face them today than when President Obama took office. By taking aggressive action to fix the financial system, reduce growth in health care costs and improve education, we have put the American economy on a firmer foundation for future growth.

And as the president said last week, no one should bet against the American worker, American business and American ingenuity.

We suffered a terrible blow, but we are coming back.

Timothy F. Geithner is the secretary of the Treasury.

    Welcome to the Recovery, NYT, 2.8.2010, http://www.nytimes.com/2010/08/03/opinion/03geithner.html






Obama Signs

Overhaul of Financial System


July 21, 2010
The New York Times


WASHINGTON — President Obama signed a sweeping expansion of federal financial regulation on Wednesday, signaling perhaps the Democrats’ last major legislative victory before the midterm elections in November, which could recast the Congressional landscape.

Within minutes of the bill signing, several Wall Street groups were leveling criticism at the new regulations, reflecting Mr. Obama’s increasingly fractious relations with corporate America.

The Business Roundtable complained in a statement that the law “takes our country in the wrong direction” and may discourage investment and job growth, echoing concerns made by the United States Chamber of Commerce and other business organizations.

In a signal that Wall Street is ready to keep lobbying as regulators work out the details of how to apply the new law, Larry Burton, the roundtable’s executive director, said: “We will work with President Obama and policy makers to ensure this legislation is implemented in a manner that continues to promote sustainable economic growth and job creation.”

Still, Democrats and White House officials were euphoric about passage of the legislation, a response to the 2008 financial crisis that tipped the nation into the worst recession since the Great Depression.

The law subjects more financial companies to federal oversight and regulates many derivatives contracts while creating a consumer protection regulator and a panel to detect risks to the financial system.

A number of the details have been left for regulators to work out, inevitably setting off complicated tangles down the road that could last for years.

But “because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes,” Mr. Obama said before signing the legislation. “There will be no more taxpayer-funded bailouts. Period.”

He was surrounded by a group of mostly Democratic lawmakers and advocates of the overhaul legislation, including the House speaker, Nancy Pelosi of California, and the Senate majority leader, Harry Reid of Nevada, as well as Senator Christopher J. Dodd of Connecticut and Representative Barney Frank of Massachusetts, chairmen of crucial committees involved in developing the legislation.

The White House orchestrated a major signing ceremony at the Ronald Reagan Building across from the Commerce Department to trumpet the new law.

Mr. Obama took pains to try to show how the complex legislation, with its dense pages on derivatives practices, will protect ordinary Americans.

“If you’ve ever applied for a credit card, a student loan or a mortgage, you know the feeling of signing your name to pages of barely understandable fine print,” Mr. Obama said. “But what often happens as a result is that many Americans are caught by hidden fees and penalties, or saddled with loans they can’t afford.”

He said the law would crack down on abusive practices in the mortgage industry, simplifying contracts and ending hidden fees and penalties, “so folks know what they’re signing.”

The law expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight.

It also imposes regulation for the first time on opaque markets like the enormous trade in credit derivatives.

It creates a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies.

And it creates a powerful regulator, to be appointed by the president and housed in the Federal Reserve, to protect consumers of financial products.

The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans.

Mr. Obama acknowledged three Republican senators — Susan Collins and Olympia J. Snowe of Maine and Scott P. Brown of Massachusetts — who broke with their party to approve the bill, saying that they “put partisanship aside, judged the bill on the merits and voted for reform.”

    Obama Signs Overhaul of Financial System, ,NYT, 21.7.2010, http://www.nytimes.com/2010/07/22/business/22regulate.html






S.E.C. Settling Its Complaints

With Goldman


July 15, 2010
The New York Times


WASHINGTON — Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday.

If approved by a federal judge in Manhattan, the settlement would rank among the largest in the 76-year history of the Securities and Exchange Commission, but it would represent only a small financial dent for Goldman, which reported $13.39 billion in profit last year.

News of the settlement sent Goldman’s shares 5 percent higher in after-hours trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement.

Even so, the settlement is humbling for Goldman, whose elite reputation and lucrative banking business endured through the financial crisis, only to be battered by government investigations that shed light on potential conflicts of interest in its dealings.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert S. Khuzami, the commission’s director of enforcement.

The civil suit brought by the S.E.C. focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, John A. Paulson, to place a bet against mortgage bonds.

The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr. Paulson’s involvement in creating the deal. Mr. Paulson has not been accused of wrongdoing.

Though Goldman did not formally admit to the S.E.C.’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.

In addition, Goldman acknowledged that the marketing materials for Abacus “contained incomplete information” and that it was “a mistake” not to have disclosed Mr. Paulson’s role. As part of the agreement, the bank also said it “regrets that the marketing materials did not contain that disclosure.”

Goldman’s general counsel, Gregory K. Palm, signed the S.E.C. settlement on Wednesday, though it was not announced until after markets closed on Thursday. Officials said the timing was not affected by the Senate’s approval of an overhaul of financial regulations.

Word that Goldman had settled the case began leaking about 30 minutes before the markets closed and appeared to please investors; some analysts had expected a settlement by this Monday, when Goldman, which had been under pressure by shareholders to reach a settlement, was expected to deliver a formal response to the commission’s complaint.

“We believe that this settlement is the right outcome for our firm, our shareholders and our clients,” Goldman said in a written statement on Thursday.

When the commission filed its case in April, Goldman took a notably defensive stance. The bank had apparently been surprised that investigators did not warn its executives about the case and give them a chance to settle at that time.

Yet Goldman began holding settlement talks with the S.E.C. immediately after the complaint was filed. As the weeks and months dragged on, Goldman executives heard concerns from clients and former executives.

Goldman was bound to face another round of questions from analysts next week, when the bank is scheduled to report its earnings.

The settlement removes a significant problem looming over Goldman, but it could still face other legal problems.

Though Goldman said that it understood the S.E.C. was not planning to bring other cases, the commission continues to investigate collateralized debt obligations, like the Abacus security, issued by Goldman and other banks, and could still take action.

The Justice Department also had been reviewing the Abacus deal, and the S.E.C. could refer other findings to prosecutors.

Goldman faces private lawsuits related to multiple mortgage securities and to its decision not to tell its shareholders last year when it received formal notification that the S.E.C. was investigating the Abacus deal.

“Goldman played fast and loose in the Abacus deal, misled its clients, and got called on it today,” said Senator Carl M. Levin, a Michigan Democrat who led a separate Congressional investigation that examined the Abacus deal.

“A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices,” Mr. Levin said in a written statement. “I hope the Goldman settlement together with the new financial reform law — which prohibits additional unethical practices and conflicts of interest — signal an end to the abusive practices that contributed to the 2008 financial crisis and the beginning of needed Wall Street reforms.”

The settlement announced on Thursday awaits approval by a federal judge, Barbara S. Jones, in the Southern District of New York. A year ago, the S.E.C. suffered a black eye when a different judge in that district rejected a settlement between the commission and Bank of America. The commission settled with the bank later on, after substantially increasing the fine.

Under the proposed settlement, Goldman would pay back the $15 million in profit it made from the Abacus deal and also pay a civil penalty of $535 million. The money would be given to the two banks that had losses on the deal — $150 million to IKB Deutsche Industriebank and $100 million to the Royal Bank of Scotland Group — with the rest, $300 million, going to the United States Treasury as a fine.

Goldman’s settlement requires it to make changes in how it reviews and approves offerings of certain mortgage securities.

Cornelius K. Hurley, director of the Morin Center for Banking and Financial Law at Boston University and a former Federal Reserve lawyer, said the dollar amount would not dent the public anger at the banks.

“You have to consider the symbolism of the S.E.C.’s case. When it was filed back in April, it completely changed the dynamic on Capitol Hill,” Mr. Hurley said. “Now comes the settlement and it’s $550 million. Well, two weeks ago we were talking about a $19 billion tax on the likes of Goldman. The public wanted to see either more financial pain or actually have a trial.”

Goldman was not the only Wall Street firm to create complex mortgage securities that allowed investors to make negative bets, and the commission continues to look at other deals from across the industry.

Fabrice P. Tourre, the Goldman vice president who was named in the S.E.C. case, was not included in the settlement.

Mr. Tourre took a leave from Goldman after the case was filed. When he appeared before a Senate committee in April, he said he should have pointed out Mr. Paulson’s involvement in Abacus in the deal’s marketing materials. The lawyer for Mr. Tourre did not return a phone call seeking comment on Thursday.

The Goldman settlement would be larger than the $400 million the mortgage giant Fannie Mae, accused of inflating its earnings while lavishing its executives with bonuses, agreed to pay in 2006, but smaller than the $750 million the telecommunications company WorldCom was ordered to pay in 2003 after an accounting scandal. Fannie Mae was seized by the government in 2008, and WorldCom, after emerging from bankruptcy, eventually became part of Verizon.

Sewell Chan reported from Washington, and Louise Story from New York. Edward Wyatt contributed reporting.

    S.E.C. Settling Its Complaints With Goldman, NYT, 15.7.2010, http://www.nytimes.com/2010/07/16/business/16goldman.html






Google Expansion Helps Economy,

Hurts Stock Price


July 16, 2010
Filed at 12:07 a.m. ET
The New York Times


SAN FRANCISCO (AP) -- Google Inc. is doing its part to stimulate the economy and hurting its stock in the process.

With its payroll swelling at the fastest rate in four years, some of Google's expenses are climbing faster than its revenue.

That's creating a drag on its earnings, which is pulling down the Internet search leader's stock price.

Consider Google's second-quarter results released late Thursday. Both net income and revenue rose 24 percent from the previous year, but that didn't impress investors because the earnings missed the target set by analysts.

Google shares dropped $19.52, or nearly 4 percent, in extended trading after the results came out. The stock had closed Thursday at $494.02.

Here's the main reason for the earnings letdown: Google is spending more to maintain its commanding lead in Internet search while it also tries to diversify by developing products in other promising niches such as online video, mobile devices and computer operating systems. To help achieve its goals, the company added nearly 1,200 employees in the second quarter to end June with more than 21,800 workers.

Google, based in Mountain View, has hired nearly 2,000 workers through the first half of the year, putting it on pace to add the most people to its payroll since 2006 when it ushered in 6,100 new employees in 12 months.

The European debt crisis also worked against Google in the April-June period.

Investors are worried the euro will crumble if governments in Greece, Spain, Portugal and Italy default on their perilously high debts.

Those fears hurt Google because about one-third of the company's revenue comes from Europe, and customer payments made with the euro translated into fewer dollars than a year ago. Even so, the currency squeeze wasn't as severe as some analysts anticipated.

The dollar seems more likely to weaken than Google's commitment to bring in more engineers and sales representatives to peddle the online ads that generate most of the company's income.

Without making specific projections, Google's management left little doubt substantially more people will be joining the company in the months ahead as it pursues long-term opportunities.

''Google is building a business not for this quarter or the next quarter, but an infrastructure for the next half-decade to decade,'' Patrick Pichette, Google's chief financial officer, said in an interview late Thursday. ''What a great moment for us to invest to create these fantastic products that everybody is going to live on.''

Even as Google sacrifices earnings growth, it is accumulating more cash. Google had $30 billion at the end of June, up from $26.5 billion. And it might not even use that money to invest in new technology or buy more companies. That's because the company revealed Thursday that it may borrow up to $3 billion on the premise that its money managers can realize investment returns that outstrip its borrowing costs.

Although Google remains the Internet's most profitable company, investors have been fretting about signs of decelerating growth amid stiffer competition from Apple Inc., Facebook and Microsoft Corp. On top of those challenges, a showdown over online censorship in China that has muddied Google's future prospects in the world's most populous country.

Those factors have contributed to a 23 percent decline in Google's stock price that has erased about $45 billion in shareholder wealth so far this year.

Google earned $1.84 billion, or $5.71 per share, in the second quarter, up 24 percent from $1.48 billion, or $4.66 per share, a year ago.

If not for expenses covering employee stock compensation, Google said it would have made $6.45 per share. That figure was below the average estimate of $6.52 per share among analysts polled by Thomson Reuters.

Revenue climbed 24 percent to $6.82 billion, from $5.52 billion a year earlier. After subtracting commissions paid to its ad partners, Google's revenue stood at $5.09 billion -- about $10 million above analyst projections.

In another key figure watched closely by investors, the number of revenue-generating clicks on Google's ads in the second quarter increased 15 percent from the same time last year. The gain is in the same range as the increases in the past year.

The average price per ad click in the second quarter edged up 4 percent from last year, but it's slower than the growth seen during the previous two quarters.

    Google Expansion Helps Economy, Hurts Stock Price, NYT, 16.7.2010, http://www.nytimes.com/aponline/2010/07/16/business/AP-US-Earns-Google.html






Financial Oversight Bill Signals Shift

on Deregulation


July 15, 2010
The New York Times


WASHINGTON — Congress approved a sweeping expansion of federal financial regulation on Thursday, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.

The bill, heavily promoted by President Obama and Congressional Democrats as a response to the 2008 financial crisis, cleared the Senate by a vote of 60 to 39, largely along party lines, after weeks of wrangling that allowed Democrats to pick up the three Republican votes to ensure passage.

The vote was the culmination of nearly two years of fierce lobbying and intense debate over the appropriate response to the financial excesses that dragged the nation into the worst recession since the Great Depression.

The result is a catalog of repairs and additions to the rusted infrastructure of a regulatory system that has failed to keep up with the expanding scope and complexity of modern finance.

The bill subjects more financial companies to federal oversight, regulates many derivatives contracts, and creates a panel to detect risks to the financial system along with a consumer protection regulator. It leaves a vast number of details for regulators to work out, inevitably setting off another round of battles that could last for years.

Over the last half-century, as traders and lenders increasingly drove the nation’s economic growth, politicians of both parties scrambled to get out of the way, passing a series of landmark bills that allowed financial companies to become larger, less transparent and more profitable.

Usury laws were set aside. Banks were allowed to expand across state lines, sell insurance, trade securities. The government watched and did nothing as the bulk of financial activity moved into a parallel universe of private investment funds, unregulated lenders and black markets like derivatives trading.

That era of hands-off optimism was gaveled to an end on Thursday as the Senate gave final approval to a bill that reasserts the importance of federal supervision of financial transactions.

“The financial industry is central to our nation’s ability to grow, to prosper, to compete and to innovate. This reform will foster that innovation, not hamper it,” Mr. Obama said Thursday. “Unless your business model depends on cutting corners or bilking your customers, you have nothing to fear.”

The White House said Mr. Obama would sign the legislation next week.

Democrats, who celebrated with high fives and handshakes as the bill was packed in a blue box for delivery to the White House, argue that the government’s expanded role will improve the stability of the financial system without sapping its vitality. But that project faces considerable challenges. Many investors have withdrawn from markets like commercial paper that were once seen as safe. Lenders have lost faith in borrowers. Politicians and central bankers are struggling to repair economies and restore the flow of credit.

Even the bill’s political luster no longer seems certain. Despite public anger at Wall Street, the vast majority of Republicans opposed the bill with loud confidence, betting ahead of hotly contested midterm elections that the public dislikes government even more.

Senator Richard Shelby, Republican of Alabama, described the bill as “a 2,300-page legislative monster.”

“It creates vast new bureaucracies with little accountability and seriously, I believe, undermines the competitiveness of the American economy,” Mr. Shelby said on the Senate floor before the final vote. “Unfortunately, the bill does very little to make our system safer.”

The three Republicans who voted in favor were New England moderates, Olympia J. Snowe and Susan Collins of Maine and Scott Brown of Massachusetts. The one Democratic holdout was Russ Feingold of Wisconsin, who said he voted against the bill because it was not tough enough.

The bill expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight, and imposing regulation for the first time on “black markets” like the enormous trade in credit derivatives.

It creates a council of federal regulators, led by the Treasury secretary, to coordinate the detection of risks to the financial system, and it provides new powers to constrain and even dismantle troubled companies.

It also creates a powerful new regulator, appointed by the president, to protect consumers of financial products, which will be housed in the Federal Reserve. The first visible result may come in about two years, the deadline for the consumer regulator to create a simplified disclosure form for mortgage loans.

Officials are already working to prepare for the expansion of government, including finding buildings in Washington to house the new agencies.

The rhythms of Washington have long dictated that crises beget legislation, but Democrats insisted Thursday that these changes also represented a long-overdue response to the evolution of the financial industry.

“This is a public sector response to transformative changes in the private sector,” said Representative Barney Frank, Democrat of Massachusetts and a crucial author of the legislation. “You have to have rules that allow you to continue to get the benefit of the innovation but curtail abuses.”

Democrats divided initially over how to pursue that goal. Some pushed to break apart large banks and curtail risky kinds of trading. Others sought a grander overhaul of federal regulation. The administration’s approach, which prevailed, instead is focused on giving existing regulators additional powers in the hope that they will produce better results.

The legislation is painted in broad strokes, so like actors handed a script, those regulators have broad leeway to shape its meaning and its impact.

“This is a framework that has the potential to be as modern as the markets, but its efficacy will certainly depend upon the judgments that regulators make,” said Lawrence H. Summers, the president’s chief economic adviser.

The legislation, for example, requires many derivatives to be traded through clearinghouses, a form of insurance for the traders, and it requires traders to disclose pricing data to encourage competition. But regulators will decide which derivatives, and how long traders can wait to disclose pricing information.

The administration can shape that process through the appointment of new leaders for the various agencies. The Senate held confirmation hearings on Thursday for three nominees to the Fed’s board of governors. In addition to appointing a new consumer regulator, the president will nominate a new comptroller of the currency, responsible for regulating national banks.

The same groups that fought to shape the legislation — bankers and business groups, consumer advocates and trade unions — already have turned their attention to the rule-making process, seeking a second chance to influence outcomes. Much of the work must be completed over the next two years, but the bill sets some deadlines more than a decade from now.

Senator Christopher J. Dodd of Connecticut, who as banking committee chairman was a main architect of the legislation, said its success ultimately would depend on regulators’ performance.

“We can’t legislate wisdom or passion. We can’t legislate competency. All we can do is create the structures and hope that good people will be appointed who will attract other good people,” Mr. Dodd said.

Mr. Dodd said he would hold hearings beginning in September to check up on that work before he retires at the end of the year.

The legislation will be carried out mostly by the same federal workers who were on duty as the financial system collapsed. The new consumer bureau, for example, mostly will be staffed with employees transferred from the consumer divisions of the existing banking regulators, which have been excoriated by Congress and other critics for failing to protect borrowers from obvious and widespread abuses.

Administration officials said they were confident that providing new leaders for those employees and granting them new powers, would produce better results.

    Financial Oversight Bill Signals Shift on Deregulation, NYT, 15.7.2010, http://www.nytimes.com/2010/07/16/business/16regulate.html






Fed Leaders

Show Division Over Deflation


July 14, 2010
The New York Times


WASHINGTON — The Federal Reserve disclosed on Wednesday that its chief policy makers were divided on whether the weak economy faced a new, potentially dangerous threat in the form of deflation.

The dissent within the Fed emerged as the White House released a report estimating that its economic stimulus program had saved or created 2.5 million to 3.6 million jobs since it was enacted, over nearly unanimous Republican opposition, at the start of President Obama’s term.

The estimates in the report were in line with those of the nonpartisan Congressional Budget Office and independent experts. But Senate Republicans, who have blocked legislation to extend unemployment benefits, continued to portray the administration as fiscally reckless and the stimulus as ineffective.

“I know what they’re against, but I don’t know what they’re for,” Vice President Joseph R. Biden Jr. said of the Republicans as he unveiled the report. “I mean that literally.”

With Congress deadlocked over fiscal policy, attention has shifted to monetary policy as a tool for attacking the 9.5 percent unemployment rate. But on that score, the Fed is also divided, though its disagreements are expressed in a far more genteel manner.

On Wednesday, the Fed lowered its estimate of economic growth for this year, to a range of 3 to 3.5 percent, from the 3.2 percent to 3.7 percent forecast in April. Inflation has been running well below the Fed’s unofficial target of nearly 2 percent, so much so that a few officials fear that the United States is at risk of the kind of deflationary spiral that has hobbled the Japanese economy for the better part of two decades.

The Fed’s chairman, Ben S. Bernanke, has not embraced that view, but even those who disagree with it say the Fed, whose modern institutional culture was built around fighting inflation, now confronts a distinctly different problem of high joblessness.

“If federal fiscal policy is approaching its political or economic limits, some believe that the Federal Reserve should do more, including expansion of its balance sheet,” Kevin M. Warsh, a Fed governor who is close to Mr. Bernanke, said in a recent speech to the Atlanta Rotary Club. “In my view, any judgment to expand the balance sheet further,” by acquiring mortgage bonds and debt, “should be subject to strict scrutiny.”

The central bank has already held interest rates lower for longer than at any time since the Great Depression, keeping the benchmark short-term interest rate near zero since December 2008. Since the start of the financial crisis, the Fed has more than doubled its balance sheet, to $2.3 trillion, by buying mortgage bonds and Treasury debt to keep long-term interest rates low.

But, as Mr. Bernanke pointed out in a speech in 2002, when he was a Fed governor, a central bank that has run out of ordinary tools to prop up the economy, like lowering short-term interest rates, still has other options to prevent deflation.

By resuming its purchases of assets or by being more explicit about its intentions to keep interest rates low, the Fed could lower inflation expectations and long-term interest rates. That could further stimulate borrowing and spending by companies and individuals.

The minutes released Wednesday from the June 22-23 meeting of the Federal Open Market Committee, the Fed’s crucial policy body, cited the threat of deflation in the United States for the first time in a year.

“A few participants cited some risk of deflation,” the minutes noted. “Other participants, however, thought that inflation was unlikely to fall appreciably further, given the stability of inflation expectations in recent years and very accommodative monetary policy.”

The minutes, which are carefully worded to avoid the appearance of discord, nonetheless made clear a growing divergence in views.

“Several participants noted that a continuation of lower-than-expected inflation and high unemployment could eventually lead to a downward movement in inflation expectations that would reinforce disinflationary pressure,” the minutes stated. “By contrast, a few participants noted the possibility that a potentially unsustainable fiscal position and the size of the Federal Reserve’s balance sheet could boost inflation expectations and actual inflation over time.”

The direction of monetary policy will probably be raised at a hearing on Thursday, at which the Senate Banking Committee will take up the nominations of Janet L. Yellen, president of the Federal Reserve Bank of San Francisco; Peter A. Diamond, an economist; and Sarah Bloom Raskin, a banking regulator, to seats on the Fed’s seven-member board of governors.

While the Fed debate continues, the White House is combating skepticism over the $787 billion stimulus program.

In the latest CBSNews poll, almost three-quarters of Americans said the stimulus had not improved the economy. A new poll by The Washington Post and ABC also found that more than half of respondents said the government should not provide additional stimulus.

“More debt only subtracts capital from the private markets that could be used for loans, to hire more people and create more jobs,” Senator Lamar Alexander of Tennessee, the chairman of the Senate Republican Conference, said in an interview.

He said the administration’s proposals on health care, regulation, energy and trade had discouraged private sector growth.

To shore up support for the stimulus program, the White House has been promoting what Mr. Biden has called the “summer of recovery.”

The new report, by the Council of Economic Advisers, showed that the pace of fiscal stimulus had accelerated, with spending growing to $116 billion in the second quarter, from $108 billion in the first quarter and $80 billion in the final three months of 2009.

The report also estimated that gross domestic product, a measure of overall economic output, was 2.7 to 3.2 percent higher than it would have been without the stimulus.

“I am absolutely confident we are moving in the right direction, absolutely confident,” Mr. Biden said. He said federal money had been used to stimulate emerging industries like clean energy.

“None of this would have been possible if our friends on the other side — as my mother would say, God love them — our friends on the other side had gotten their way,” Mr. Biden said.

The report used historical data and statistical modeling to arrive at the estimate of jobs saved or created, but Christina D. Romer, chairwoman of the Council of Economic Advisers, acknowledged that there was some uncertainty over the job estimates, which rely on reporting from recipients of federal aid.

“I suspect the true effects of the act will not be fully analyzed or fully appreciated for many years,” she said, adding that most experts agreed that the stimulus had had a “significant, beneficial impact on employment and output over the past year.”

Mr. Biden acknowledged public frustration over the economy, but noted that the crisis predated the administration. “Before we walked in the West Wing, we were handed a deficit, a bill for that year, for over $1 trillion,” he said.

Real G.D.P. started growing in the second half of last year, and private sector payrolls have increased by nearly 600,000 since their low point in December. But that has been barely enough to keep pace with the normal rate of growth of the work force.

    Fed Leaders Show Division Over Deflation, NYT, 14.7.2010, http://www.nytimes.com/2010/07/15/business/economy/15econ.html






The Dream Job, Out of Reach


July 9, 2010
The New York Times


To the Editor:

A New Generation, an Elusive American Dream” (front page, July 7) shines a light on the significant changes in the lives of educated, well-off, hard-working people who by all standards should be succeeding and are instead finding themselves struggling in wholly unfamiliar territory.

Educated couples with good jobs provided loving homes to their children and promised them that they could be president one day, only to find that their efforts weren’t enough. They did everything right by their children, only to watch them flail.

And as children of this generation, we were always told to chase our dreams, that we could be anything we wanted to be, so why should we settle for less? Why should we major in something practical at a reasonably priced college instead of following our passions in theoretical studies with bills in the six digits? Why should we take any job when we’ve been groomed to believe that we can have the job of our dreams?

Who erred — our parents for telling us we could have everything, or us for believing them?

Heidi Kim
New York, July 8, 2010

To the Editor:

I was always one of those top-of-the-class kids whom everyone loved to hate but who everyone also assumed was destined to succeed.

I finished graduate school in August 2007, briefly taught English abroad and landed back in Washington about two years ago, looking for work. In the last couple of years, I’ve worked hard to gain experience — in administrative positions, as a tutor, as a freelance writer and so forth. But I’ve never held a paying job in my field — international human rights and welfare — and I would willingly have taken such a job for $30,000 a year.

I know a lot of other incredible young people in situations like mine.

Many readers, in the comments on your Web site, criticized Scott Nicholson for expecting too much in his job search. But while there may be some millennials deserving of such criticism, there are many more of us who ask, for the time being, for little more than jobs that take our brains out for a jog at least a few times a day and offer us a modicum of personal fulfillment.

We’ll hold off on wanting the manicured lawns and white picket fences until later, if we’ll ever want them at all. For us, for now, the dream is simply to keep our feet moving, step by step, along the basic pathway to eventual success.

And yes, for many of us, that dream is proving elusive.

Arielle K. Eirienne
Washington, July 7, 2010

To the Editor:

Unfortunately, it sounds as if the “American dream” to which the article refers is a new one based on privilege and entitlement.

I don’t think the dream is gone. I just think that well-meaning parents who continue to pay their son’s cellphone bill and rent leave their son with no incentive to realize and appreciate that a $40,000-a-year job offer after two years of unemployment is what many Americans would call a dream come true.

Vivian Todini
Brooklyn, July 7, 2010

To the Editor:

Instead of taking an entry-level job at $40,000 a year, Scott Nicholson turned it down in search of something more corporate. As a 2007 honors graduate of Skidmore College (on the eve of the recession), I entered the work force as a foreclosure intervention counselor making barely more than $26,000 a year — work that was far from ideal.

Over the course of the last three years I have changed my “career” twice. In each case, the work at my “dead-end job” provided immense résumé value and I got job offers within a few days. I have even used the experience and connections I gained from my “dead-end job” to start two businesses, grant-writing and publishing poetry pamphlets.

The tragedy has been that we, as a generation, were led to believe that job security and high earnings would fall into our lap. I have had to prove my own worth and dedication in this economic climate, and I wish the absolute best for all my fellow recent graduates and my many friends who still struggle to find their way.

Daniel Schrager
Holyoke, Mass., July 7, 2010

To the Editor:

As an executive recruiter in the financial services industry in New York City, I would call the outlook for this new generation an American nightmare. I see hundreds of résumés every week from young men and women graduating from college, some with advanced degrees, and some with terrific experience in the Peace Corps and other worthwhile volunteer services, and they all face the same dilemma: no jobs.

As your article points out, there are many young people who have dropped out of the search for a decent well-paying job, and some are severely depressed and caught in a vise between parental reproach and peer pressure from those who have landed good jobs.

When asked by young college graduates what to do, I suggest graduate school, volunteer organizations or unpaid internships with companies in industries in which they are interested. Anything these young people can do to make themselves stand out from what has become an ever-increasing legion of job seekers may be the key to success in finding a job and restoring their sense of confidence and self-worth.

Henry A. Lowenstein
New York, July 7, 2010

To the Editor:

A friend once referred to “the lost generation” as she watched uncomfortably while her daughter, a law school graduate, found herself unemployed and, for a short period, back home. It is a distressing time for the older generation as we watch the dreams of our young being deferred and hope that they are not permanently destroyed.

I am a parent of two children in their 20s. I have witnessed a number of their friends get stressed over remaining in jobs that were a bad fit because of fear of the alternative. Others have decided that the anguish of being in the wrong workplace is ultimately just not worth it. They now are either in their childhood bedrooms, looking for something that makes sense, or seeking the shelter of a further degree, hoping they find a different economic environment down the road.

Next year, my daughter completes her graduate education. I hope that all her hard work will result in a job that is both satisfying and pays the bills. It is not too much to wish for, but with an “elusive American dream” I recognize that it is something that she, like so many others, could find just out of reach.

Robert S. Nussbaum
Fort Lee, N.J., July 7, 2010

    The Dream Job, Out of Reach, NYT, 9.7.2010, http://www.nytimes.com/2010/07/12/opinion/l12jobs.html






Big Oil’s Good Deal


July 11, 2010
The New York Times


No industry enjoys the array of tax breaks and subsidies that the oil and gas industry does. No industry needs them less. For all the damage it has caused, the disastrous oil spill in the Gulf of Mexico may provide the political momentum to end this special treatment.

President Obama’s 2011 budget, proposed before the spill, would eliminate $4 billion in annual tax breaks for oil and gas companies. Bills in both houses introduced after the spill would achieve many of the same results. Industry has spent $340 million on lobbying over the last two years to block these sorts of initiatives, and until recently Congress has been eager to do its bidding. This year could be different.

The White House has proposed eliminating nine tax breaks. Some are modest, all are complicated, but in toto they provide a range of cushy benefits — fast write-offs for upfront drilling expenses, generous depletion allowances, and the like — that are available at virtually every stage of the exploration and production process.

The net result, as The Times reported recently, is an effective tax rate on investment far lower than that paid by other industries. That, the Treasury Department argues, has encouraged overinvestment in oil and gas drilling at the expense of other parts of the economy.

Industry argues that these and other breaks are vital to robust domestic production and that both investment and employment would fall if they were eliminated. These arguments, which may have made sense years ago, are much less compelling when oil prices are hovering near $80 a barrel and oil companies — including BP — have been racking up huge profits.

Moreover, a Treasury Department analysis says that ending these breaks would reduce domestic production by less than 1 percent. A separate study by Congress’s Joint Economic Committee says that ending the biggest of the deductions — 9 percent of qualified income from gas and oil produced in the United States — would have zero effect on consumer prices.

Apart from these benefits, two other areas cry out for reform. One is the royalty relief program, enacted by Congress in 1995 to encourage the kind of deepwater drilling that has now landed the gulf, its wildlife and its neighboring citizens in so much trouble. Royalty rates are currently 12.5 percent of the per-barrel price for onshore leases, and up to 18.75 percent offshore.

The law suspended royalties as long as oil remained below a threshold price of $28 a barrel. Prices have long since exceeded that threshold, even adjusted for inflation; and because the law was not tightly written, companies have been able to exploit its ambiguities to save themselves billions of dollars.

Sima Gandhi, a tax expert at the Center for American Progress, a liberal advocacy group, estimates that the losses from lost royalties could eventually exceed $80 billion unless Congress fixes the law. It is high time to review the entire royalty relief program, which at current prices is surely outdated and may be unnecessary.

The administration also needs to look carefully at the oil industry’s use of tax havens abroad. The Senate Finance Committee has already announced that it will examine whether Transocean, the operator of the Deepwater Horizon drilling rig, exploited tax laws when it moved its headquarters first to the Cayman Islands, then to Switzerland. Other oil companies also have foreign subsidiaries; the question is whether and to what extent they use them to dodge taxes. The Times article reported that Transocean alone had saved $1.8 billion in taxes since moving overseas in 1999.

Instead of enriching the oil companies, Congress should end these unjustifiable breaks and focus on encouraging alternative fuel sources that create cleaner energy and new clean-energy jobs.

    Big Oil’s Good Deal, NYT, 11.7.2010, http://www.nytimes.com/2010/07/12/opinion/12mon1.html






Biggest Defaulters on Mortgages

Are the Rich


July 8, 2010
The New York Times


LOS ALTOS, Calif. — No need for tears, but the well-off are losing their master suites and saying goodbye to their wine cellars.

The housing bust that began among the working class in remote subdivisions and quickly progressed to the suburban middle class is striking the upper class in privileged enclaves like this one in Silicon Valley.

Whether it is their residence, a second home or a house bought as an investment, the rich have stopped paying the mortgage at a rate that greatly exceeds the rest of the population.

More than one in seven homeowners with loans in excess of a million dollars are seriously delinquent, according to data compiled for The New York Times by the real estate analytics firm CoreLogic.

By contrast, homeowners with less lavish housing are much more likely to keep writing checks to their lender. About one in 12 mortgages below the million-dollar mark is delinquent.

Though it is hard to prove, the CoreLogic data suggest that many of the well-to-do are purposely dumping their financially draining properties, just as they would any sour investment.

“The rich are different: they are more ruthless,” said Sam Khater, CoreLogic’s senior economist.

Five properties here in Los Altos were scheduled for foreclosure auctions in a recent issue of The Los Altos Town Crier, the weekly newspaper where local legal notices are posted. Four have unpaid mortgage debt of more than $1 million, with the highest amount $2.8 million.

Not so long ago, said Chris Redden, the paper’s advertising services director, “it was a surprise if we had one foreclosure a month.”

The sheriff in Cook County, Ill., is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of Chicago — like Wilmette, La Grange and Glencoe. The occupants are always gone by the time a deputy gets there, a spokesman said, but just barely.

In Las Vegas, Ken Lowman, a longtime agent for luxury properties, said four of the 11 sales he brokered in June were distressed properties.

“I’ve never seen the wealthy hit like this before,” Mr. Lowman said. “They made their plans based on the best of all possible scenarios — that their incomes would continue to grow, that real estate would never drop. Not many had a plan B.”

The defaulting owners, he said, often remain as long as they can. “They’re in denial,” he said.

Here in Los Altos, where the median home price of $1.5 million makes it one of the most exclusive towns in the country, several houses scheduled for auction were still occupied this week. The people who answered the door were reluctant to explain their circumstances in any detail.

At one house, where the lender was owed $1.3 million, there was a couch out front wrapped in plastic. A woman said she and her husband had lost their jobs and were moving in with relatives. At another house, the family said they were renters. A third family, whose mortgage is $1.6 million, said they would be moving this weekend.

At a vacant house with a pool, where the lender was seeking $1.27 million, a raft and a water gun lay abandoned on the entryway floor.

Lenders are fearful that many of the 11 million or so homeowners who owe more than their house is worth will walk away from them, especially if the real estate market begins to weaken again. The so-called strategic defaults have become a matter of intense debate in recent months.

Fannie Mae and Freddie Mac, the two quasi-governmental mortgage finance companies that own most of the mortgages in America with a value of less than $500,000, are alternately pleading with distressed homeowners not to be bad citizens and brandishing a stick at them.

In a recent column on Freddie Mac’s Web site, the company’s executive vice president, Don Bisenius, acknowledged that walking away “might well be a good decision for certain borrowers” but argues that those who do it are trashing their communities.

The CoreLogic data suggest that the rich do not seem to have concerns about the civic good uppermost in their mind, especially when it comes to investment and second homes. Nor do they appear to be particularly worried about being sued by their lender or frozen out of future loans by Fannie Mae, possible consequences of default.

The delinquency rate on investment homes where the original mortgage was more than $1 million is now 23 percent. For cheaper investment homes, it is about 10 percent.

With second homes, the delinquency rate for both types of owners was rising in concert until the stock market crashed in September 2008. That sent the percentage of troubled million-dollar loans spiraling up much faster than the smaller loans.

“Those with high net worth have other resources to lean on if they get in trouble,” said Mr. Khater, the analyst. “If they’re going delinquent faster than anyone else, that tells me they are doing so willingly.”

Willingly, but not necessarily publicly. The rapper Chamillionaire is a plain-talking exception. He recently walked away from a $2 million house he bought in Houston in 2006.

“I just decided to let it go, give it back to the bank,” he told the celebrity gossip TV show “TMZ.” “I just didn’t feel like it was a good investment.”

The rich and successful often come naturally to this sort of attitude, said Brent T. White, a law professor at the University of Arizona who has studied strategic defaults.

“They may be less susceptible to the shame and fear-mongering used by the government and the mortgage banking industry to keep underwater homeowners from acting in their financial best interest,” Mr. White said.

The CoreLogic data measures serious delinquencies, which means the borrower has missed at least three payments in a row. At that point, lenders traditionally file a notice of default and the house enters the official foreclosure process.

In the current environment, however, notices of default are down for all types of loans as lenders work with owners in various modification programs. Even so, owners in some of the more expensive neighborhoods in and around San Francisco are beginning to head for the exit, according to data compiled by MDA DataQuick.

In Los Altos, Los Altos Hills and the most expensive neighborhood in adjoining Mountain View, defaults in the first five months of this year edged up to 16, from 15 in the same period in 2009 and four in 2008.

The East Bay suburb of Orinda had eight notices of default for million-dollar properties, up from five in the same period last year. On Nob Hill in San Francisco, there were four, up from one. The Marina neighborhood had four, up from two.

The vast majority of owners in these upscale communities are still paying the mortgage, of course. But they appear to be cutting back in other ways. The once-thriving Los Altos downtown is pocked with more than a dozen empty storefronts in a six-block stretch.

But this is still Silicon Valley, where failure can always be considered a prelude to success.

In the middle of a workday, one troubled homeowner here leaned over his laptop at the kitchen table, trying to maneuver his way out from under his debt and figure out the next big thing.

His five-bedroom house, drained of hundreds of thousands of dollars of equity over the last 13 years, is scheduled for auction July 20. Nine months ago, after his latest business (he has had several) failed in what he called “the global meltdown,” the man, a technology entrepreneur, said he quit making his $9,000 monthly payments.

“I’m going to be downsizing,” he said.

The man spoke on the condition of anonymity because, he said, he did not want his current problems to interfere with his coming reinvention. “I’m a businessman,” he explained. “I have to be upbeat.”

Carol Pogash contributed reporting.

    Biggest Defaulters on Mortgages Are the Rich, NYT, 8.7.2010, http://www.nytimes.com/2010/07/09/business/economy/09rich.html






Apple Making New Push Into China


July 8, 2010
The New York Times


SHANGHAI — Although Apple is widely admired in China, most fans of its products here have been buying their iPhones, iPods and Mac computers from smugglers who operate through underground electronics markets. The company has few sales outlets in the country and only one Apple Store, a branch in Beijing.

But with Apple set to open a flagship Saturday in Shanghai — one of its largest stores in Asia — the company is embarking on a concerted effort to raise its profile in the world’s biggest mobile phone market and tap more directly into China’s fast-growing consumer electronics market.

Apple intends to open 25 retail stores in China over the next two years, starting with the Shanghai outlet, which it previewed for reporters Thursday.

“We view this store as a kind of launching pad,” Ron Johnson, senior vice president of retail operations at Apple, said Thursday.

By opening retail outlets in China, Apple is following other global brands eager to market to the country’s increasingly affluent consumers. While overall retail sales in the United States and Europe are weak, China’s economy is booming, and companies like Best Buy, the Gap, Nike, Starbucks, Zara and most of Europe’s big luxury brands are opening new stores in China.

Analysts who follow Apple say that China offers a huge opportunity for the a company because Apple’s market share in the country is tiny — less than 5 percent in most major categories.

“Apple plans a major invasion of China over the next 18 months to two years,” said Charles Wolf, an analyst who follows Apple for Needham & Co. and credits its retail stores with significantly bolstering Apple’s brand. “To date, Apple has not been a force in China. But it will be.”

But other analysts say Apple faces significant hurdles in China. The company’s product releases have been dogged by delays. Sales through official distributors have been weakened by prices that are substantially higher than in the United States, fueling a brisk underground trade in smuggled goods.

The iPhone, for instance, was officially released in China only late last year, nearly two years after it was introduced in the United States. By then, analysts say, more than one million iPhones had been brought into the country by tourists or smugglers.

Apple also faces stiff competition from Nokia, Motorola, HTC and other mobile phone brands that use Google’s Android operating system. Those companies have been aggressively marketing their products in China, which has more than 650 million mobile phone users.

Even Lenovo, the Chinese computer maker, has entered the smart phone market by introducing what it calls LePhone, which is priced far below the iPhone.

In an interview published Monday in The Financial Times, Liu Chuanzhi, the head of Lenovo, said Apple was missing a huge opportunity in the Chinese market because the company was spending too little time serving Chinese consumers and understanding their needs.

Apple would not comment on the Lenovo statements. But Apple executives hope that building stores in China will give the company more direct contact with its consumers and duplicate the excitement Apple has generated elsewhere. If Apple opens 25 stores by 2012, China would most likely become the company’s third-largest market after the United States and Britain.

Retail stores could also help China Unicom, a state-owned telecommunications company that now has an exclusive multiyear deal to sell the iPhone in China.

Analysts estimate that China Unicom has sold about one million iPhones since late last year. They say the company had expected to sell far more by now but that the high price of the iPhone (5,880 renminbi, or about $864 up front for the 3GS model with a complicated calling plan and refunds over a two-year period) have prevented stronger sales.

“The price of the official iPhones is too high compared to that on the grey market,” says Sandy Shen, an analyst at Gartner, a research firm based in Stamford, Connecticut. “Also, Apple has too few retail stores in China. It is inconvenient for consumers to find one when they want to buy the iPhone, iPod or Mac.”

China Unicom recently introduced a cheaper plan, and sales have improved, analysts say.

Black market sellers say that even with new Apple stores, they have an advantage because Apple has been delaying the international release of new products like the iPhone 4 and the iPad.

“They won’t have any impact on our clients,” said Yang Zijie, a vendor selling Apple products Thursday at an electronics market in Shanghai. “Their price for the iPhone 3GS is much higher. Customers who already got used to the price of smuggled goods won’t turn to them. And they don’t have the iPhone 4 or the iPad at all!”

But many analysts say consumers will flock to Apple stores. Apple products are widely and comically imitated in China, and the large number of phones smuggled into the country is an indication of pent-up demand.

Apple will get a taste of that demand on Saturday, when the Shanghai flagship store is set to open in an upscale mall in the Pudong financial district near some of the city’s gleaming new skyscrapers.

The shop is designed in Apple’s sleek, minimalist style and punctuated by a cylindrical glass shell 12 meters, or 40 feet, tall that echoes the company’s iconic Fifth Avenue store in New York.

The entrance to the store, which has about 175 workers, is through a winding staircase that takes customers into an underground area that sells computers, smartphones and accessories. It is outfitted with the company’s trademark Genius Bar (where customers can get technical support) and a “briefing room” intended for business seminars.

Mr. Johnson was beaming Thursday as he introduced the store’s features to about 100 journalists, saying that the shop offered “all the hallmarks of an Apple store experience plus a couple more.”

At the end of his briefing, even the members of the news media could not hold back their enthusiasm; the group broke into loud applause.

Bao Beibei contributed research.

    Apple Making New Push Into China, NYT, 8.7.2010, http://www.nytimes.com/2010/07/09/technology/09apple.html






Many U.S. Retailers

Report Sluggish June Sales


July 8, 2010
The New York Times


Americans focused on deeply discounted clothing that they needed in June amid escalating worries about jobs, resulting in sluggish sales for many retailers, according to early reports released Thursday.

June’s lackluster performance is raising concerns about the back-to-school shopping season and the health of the overall recovery.

As merchants reported their results Thursday, the Costco Wholesale Corporation posted a solid revenue gain, but it was fueled by its international business. Many merchants that cater to teenagers, including the Buckle, Hot Topic and Wet Seal reported drops in revenue.

Limited Brands, which owns Victoria’s Secret and Bath and Body Works, was among the bright spots.

The figures are based on revenue at stores open at least a year and are a crucial indicator of retailers’ health.

“My sense is that the consumer is very cautious at this stage given the state of the labor market, the housing market,” said Ken Perkins, president of research firm RetailMetrics. “June sales are going to reflect that caution.”

A sluggish June sets up a “disappointing back-to-school season,” he said, adding that he expected those sales “to be very promotional.”

Stores normally try to clear out summer goods in June to make room for back-to-school merchandise. But analysts say discounting was heavier than expected as stores had to work hard to pull in shoppers.

Clothing stores accelerated discounting toward the end of the month after not getting enough business, said John Morris, an analyst at BMO Capital Markets. He estimated that volume and level of discounts at the mall-based apparel chains he tracked was even with a year ago even as stores carried less inventory. Discounting was down 5 percent in May from a year earlier, after being down 10 percent from February through April, Mr. Morris said.

Uncertainty is growing as evidence mounts — from disappointing housing data to sluggish hiring — that the recovery may be stalling heading into the second half of 2010. And that is when the benefits of most of the government’s stimulus spending will begin to fade.

Costco said Thursday that revenue in stores open at least one year rose 4 percent in June, helped by international results. Analysts surveyed by Thomson Reuters, on average, expected a 4.2 percent gain.

Revenue in stores open at least one year rose 2 percent in the United States and 14 percent internationally.

The discount retailer, Target, said sales were “relatively soft” in June. Revenue in stores open at least one year rose 1.7 percent, which was short of the 2.7 percent increase expected by analysts.

Revenue for the five weeks ended July 4 rose 4 percent to $5.92 billion. Clothing, food, health care and beauty products were strong sellers, Target said, but electronics, video games, music and movies were weaker.

Target said it expected July revenue to rise in the low single digits in stores open at least a year.

Wal-Mart Stores, the world’s largest retailer, stopped reporting monthly results last year.

Among department stores, Macy’s enjoyed a 6.5 percent gain in June, topping analysts’ estimates for a 6.1 percent increase

The Gap, dragged down by weak business at its namesake clothing chain, was flat with last June, when it suffered a 10 percent drop.

“June was a difficult month with lighter traffic than we anticipated,” Gap’s chief financial officer, Sabrina Simmons, said in a statement.

Limited Brands said it posted a 6 percent gain in June, better than the 3.2 percent growth forecast.

Wet Seal had a 3.6 percent drop in June, and the teenage clothing seller said it now expected second-quarter results at the low end of its previous guidance. Analysts had expected a smaller 1.8 percent drop.

The Buckle suffered a 7.3 percent drop in June, much worse than the slight rise analysts expected.

Hot Topic posted a 2.1 percent decline in June, though that was better than the 5.4 percent drop analysts had expected.

    Many U.S. Retailers Report Sluggish June Sales, NYT, 8.7.2010, http://www.nytimes.com/2010/07/09/business/economy/09shop.html






I.M.F. Raises Growth Forecasts

for World Economy


July 8, 2010
The New York Times


HONG KONG — The good news is the world economy will grow faster than expected this year. The bad news is recovery remains overshadowed by major risks, and the pace of growth is likely to slow next year.

That was the thrust of the International Monetary Fund’s latest assessment of the global economy, which was released on Thursday.

“While we predict the recovery will continue, it is clear that downside risks have risen sharply,” Olivier Blanchard, the I.M.F.’s chief economist, said in a statement accompanying the organization’s latest report. “How Europe deals with fiscal and financial problems, how advanced countries proceed with fiscal consolidation, and how emerging market countries rebalance their economies, will determine the outcome.”

So far this year, growth has been stronger than widely expected, particularly in Asia and other emerging markets, prompting the I.M.F. on Thursday to raise its global growth forecast for 2010 to 4.6 percent. That is up from the 4.2 percent projection it had issued in April.

Overshadowing the recovery, however, is the lingering danger that the concerns over the high debt levels of several of the smaller European economies will escalate into a wider financial crisis, the I.M.F. cautioned.

Worries that Greece and several other European states might be unable to service their sovereign debt began to erode confidence in the soundness of banks in some euro zone countries this year, causing financial strains as banks became less willing to lend to each other.

The European debt jitters also caused global stock markets to tumble and the euro to fall sharply. Despite a modest recovery in recent weeks, the European currency is down nearly 12 percent against the U.S. dollar, and 16 percent against the Japanese yen since the start of the year.

“In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk,” the I.M.F. said. “This could lead to additional increases in funding costs and weaker bank balance sheets, and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in exchange rates.”

In addition, the I.M.F. said growth is expected to slow during the second half of this year and into next year.

Advanced countries, for example, expanded an estimated 3 percent during the first half, the I.M.F. said, but the pace is expected to fall to only 2 percent during the second half of 2010, as growth in private demand slows.

For 2011, the I.M.F. projects a global expansion of 4.3 percent, a more muted pace than for this year, as governments around the world gradually withdraw the stimulus measures they implemented as the global financial crisis escalated in late 2008.

The I.M.F. projected that the world’s advanced economies will expand by 2.4 percent next year, compared to 2.6 percent this year. Growth in Japan will slow from 2.4 percent this year to 1.8 percent in 2011, and in the United States, from 3.3 percent this year to 2.9 percent next year.

For emerging Asian nations, the I.M.F. forecast 8.5 percent expansion next year, down from the projected 9.2 percent this year.

It raised its 2010 growth forecast for China to 10.5 percent, but projects 9.6 percent for 2011, down from the 9.9 percent it had previously forecast.

    I.M.F. Raises Growth Forecasts for World Economy, NYT, 8.7.2010, http://www.nytimes.com/2010/07/09/business/global/09imf.html






Obama Promises Push on Trade Pacts


July 7, 2010
The New York Times


WASHINGTON — President Obama, who vowed in his State of the Union address to double American exports over the next five years, said on Wednesday that he would renew his efforts to renegotiate long-stalled free trade agreements with Panama and Colombia and persuade Congress to adopt them.

The two trade pacts, and a third one with South Korea, were negotiated by the administration of former President George W. Bush, but all three have languished in Congress because of deep opposition from Democrats. Mr. Obama said in Toronto last month that he intended to make a new push for the South Korean agreement, and on Wednesday he pledged to press ahead with the two Latin American pacts as well.

“For a long time, we were trapped in a false political debate in this country, where business was on one side and labor was on the other,” Mr. Obama said in the East Room of the White House, at an event intended to highlight his administration’s efforts to promote exports. “What we now have an opportunity to do is to refocus our attention where we’re all in it together.”

Trade is a particularly difficult issue for many Democrats, especially in an election year when jobs are already scarce, because of a widespread view that American workers suffer disproportionately when the United States lowers trade barriers.

On the South Korea pact, for instance, Democrats have expressed concerns about that country’s restrictions on automobile and beef imports from the United States — concerns that Mr. Obama has vowed to address before sending the agreement to Congress for passage.

But Mr. Obama, who has been under pressure from business leaders, does have some Democratic allies on the issue. After the president’s announcement in Toronto, Representative Steny Hoyer, the House Democratic leader, called for Mr. Obama to renegotiate all three stalled pacts and send them to Congress.

The president made his call as part of a broader push to increase American exports under conditions that he said would “keep the playing field level” for American companies that send their products overseas. He appointed 18 corporate and labor leaders — including the chief executives of Ford Motor and Walt Disney — to a council to advise him.

The White House said there has been a 17 percent increase in American exports during the first four months of this year, compared with the same period from last year.

“We’re upping our game for the playing field of the 21st century,” Mr. Obama said. “But we’ve got to do it together. We’ve got to all row in the same direction.”

    Obama Promises Push on Trade Pacts, 7.7.2010, http://www.nytimes.com/2010/07/08/us/politics/08exports.html






Facing Tough Economic Realities


July 7, 2010
The New York Times


To the Editor:

Re “Punishing the Jobless,” by Paul Krugman (column, July 5):

Do those opposing the extension of unemployment benefits understand the consequences of their action? The result will not be more economic activity or employment; with five people looking for every job, few who will lose their benefits will find employment.

Instead, many will find that they will lose their home, their dignity and even their family. Many, after spending any savings they may have had, will find themselves on welfare receiving payments under the Temporary Assistance to Needy Families program.

And who pays most of the costs of this welfare? The federal government. So the savings hoped to be achieved by those opposing benefits will be largely illusory. But the misery to the individuals and the negative effect on their families and communities will be all too real.

James N. Adler
Los Angeles, July 6, 2010

The writer, a drafter of the Economic Opportunity Act of 1964, is a member of the Los Angeles Public Social Services Commission.

To the Editor:

Instead of yet another round of extended unemployment benefits, why not offer tax-free, interest-free government loans equivalent to the one year’s additional unemployment benefits to those who have exhausted theirs? This would solve several issues, both real and political.

It would counter any argument that those on unemployment won’t look for work, because it’s a loan that must eventually be repaid.

It would stimulate the economy without contributing to the deficit.

And working citizens wouldn’t be as resentful.

Bruce Silverman
Minneapolis, July 6, 2010

To the Editor:

Paul Krugman is at a loss to explain why some people oppose extending unemployment benefits. One reason people hold such an opinion is that when government subsidizes something, there tends to be more of it.

The more government subsidizes unemployment, the more people will indulge in it for longer periods of time.

Ryan Young
Washington, July 6, 2010

The writer is a journalism fellow at the Competitive Enterprise Institute.

To the Editor:

Offhand, punishing the unemployed by not extending benefits would not seem to help get votes from them and their families in November. But the Republicans know exactly what they’re doing. This is a cynical variant of the old, reliable Southern strategy, aimed at the much more numerous currently employed.

History shows that during tough times many direct their anger at marginalized minorities. In this case, the marginalized are not only in cities but highly visible in affluent suburbs as well. So silly statements like “paying people for not working” gain support, despite the fact that unemployment insurance ultimately comes out of workers’ wages.

Scott Davidson
Dover, N.H., July 6, 2010

To the Editor:

In “A Little Economic Realism” (column, July 6), David Brooks asks if we are “willing to risk national insolvency on the basis of a model,” as if the demand-side economists have invented some new, exotic formula for helping us rebuild jobs and the economy.

Keynesian economics is basic Econ 101 and, though not the panacea it was once thought to be, has been used in some fashion or other to help us out of every economic downturn since, and including, the Great Depression.

To say that we have no way of knowing the effectiveness of the last stimulus because we don’t know what would have happened without it is like trying to prove a negative. We do know that the downturn was not as bad as many feared — and, at the very least, it would have been much worse if banks and insurance companies had been allowed to default.

Mr. Brooks’s prescription is to extend unemployment insurance and to mitigate the pain caused by reductions in state spending. Isn’t this exactly what our current administration has been promoting, along with seeking ways to reduce long-term deficits? Republicans continue their politics of fear — this time with threats of national default — to obstruct any efforts for short-term help and meaningful long-term change.

I am so tired of today’s Democrats still being maligned as the tax-and-spend party when, in reality, we have been the fiscally prudent party since Bill Clinton took office.

Renee Shaker
Jupiter, Fla., July 6, 2010

To the Editor:

Re “The Pessimism Bubble,” by Ross Douthat (column, July 5):

The United States is involved in a prolonged war. Unemployment is almost in double digits, threatening families with losing their homes and bankruptcies. State governments face a total budget shortfall of about $140 billion, resulting in cutbacks in services and layoffs. We have an environmental disaster in the Gulf of Mexico that threatens the livelihoods of millions of people.

Most worryingly, Congress, largely because of Republican threats of filibusters in the Senate, is unable to take meaningful action on a range of critical issues of the day, and President Obama is unwilling or unable to do much about that.

Mr. Douthat is right: pessimism is a destructive, disempowering attitude. But I disagree with his suggestion that the challenges facing the United States might be overstated. What is missing in Washington and in too much of our national discourse is a sense of urgency. We’re facing economic, political and environmental crises that demand the sort of action taken by F.D.R. or L.B.J., not timidity and inaction.

John Forrest Tomlinson
New York, July 5, 2010

    Facing Tough Economic Realities, NYT, 7.7.2010, http://www.nytimes.com/2010/07/08/opinion/l08econ.html






American Dream Is Elusive

for New Generation


July 6, 2010
The New York Times


GRAFTON, Mass. — After breakfast, his parents left for their jobs, and Scott Nicholson, alone in the house in this comfortable suburb west of Boston, went to his laptop in the living room. He had placed it on a small table that his mother had used for a vase of flowers until her unemployed son found himself reluctantly stuck at home.

The daily routine seldom varied. Mr. Nicholson, 24, a graduate of Colgate University, winner of a dean’s award for academic excellence, spent his mornings searching corporate Web sites for suitable job openings. When he found one, he mailed off a résumé and cover letter — four or five a week, week after week.

Over the last five months, only one job materialized. After several interviews, the Hanover Insurance Group in nearby Worcester offered to hire him as an associate claims adjuster, at $40,000 a year. But even before the formal offer, Mr. Nicholson had decided not to take the job.

Rather than waste early years in dead-end work, he reasoned, he would hold out for a corporate position that would draw on his college training and put him, as he sees it, on the bottom rungs of a career ladder.

“The conversation I’m going to have with my parents now that I’ve turned down this job is more of a concern to me than turning down the job,” he said.

He was braced for the conversation with his father in particular. While Scott Nicholson viewed the Hanover job as likely to stunt his career, David Nicholson, 57, accustomed to better times and easier mobility, viewed it as an opportunity. Once in the door, the father has insisted to his son, opportunities will present themselves — as they did in the father’s rise over 35 years to general manager of a manufacturing company.

“You maneuvered and you did not worry what the maneuvering would lead to,” the father said. “You knew it would lead to something good.”

Complicating the generational divide, Scott’s grandfather, William S. Nicholson, a World War II veteran and a retired stock broker, has watched what he described as America’s once mighty economic engine losing its pre-eminence in a global economy. The grandfather has encouraged his unemployed grandson to go abroad — to “Go West,” so to speak.

“I view what is happening to Scott with dismay,” said the grandfather, who has concluded, in part from reading The Economist, that Europe has surpassed America in offering opportunity for an ambitious young man. “We hate to think that Scott will have to leave,” the grandfather said, “but he will.”

The grandfather’s injunction startled the grandson. But as the weeks pass, Scott Nicholson, handsome as a Marine officer in a recruiting poster, has gradually realized that his career will not roll out in the Greater Boston area — or anywhere in America — with the easy inevitability that his father and grandfather recall, and that Scott thought would be his lot, too, when he finished college in 2008.

“I don’t think I fully understood the severity of the situation I had graduated into,” he said, speaking in effect for an age group — the so-called millennials, 18 to 29 — whose unemployment rate of nearly 14 percent approaches the levels of that group in the Great Depression. And then he veered into the optimism that, polls show, is persistently, perhaps perversely, characteristic of millennials today. “I am absolutely certain that my job hunt will eventually pay off,” he said.

For young adults, the prospects in the workplace, even for the college-educated, have rarely been so bleak. Apart from the 14 percent who are unemployed and seeking work, as Scott Nicholson is, 23 percent are not even seeking a job, according to data from the Bureau of Labor Statistics. The total, 37 percent, is the highest in more than three decades and a rate reminiscent of the 1930s.

The college-educated among these young adults are better off. But nearly 17 percent are either unemployed or not seeking work, a record level (although some are in graduate school). The unemployment rate for college-educated young adults, 5.5 percent, is nearly double what it was on the eve of the Great Recession, in 2007, and the highest level — by almost two percentage points — since the bureau started to keep records in 1994 for those with at least four years of college.

Yet surveys show that the majority of the nation’s millennials remain confident, as Scott Nicholson is, that they will have satisfactory careers. They have a lot going for them.

“They are better educated than previous generations and they were raised by baby boomers who lavished a lot of attention on their children,” said Andrew Kohut, the Pew Research Center’s director. That helps to explain their persistent optimism, even as they struggle to succeed.

So far, Scott Nicholson is a stranger to the triumphal stories that his father and grandfather tell of their working lives. They said it was connections more than perseverance that got them started — the father in 1976 when a friend who had just opened a factory hired him, and the grandfather in 1946 through an Army buddy whose father-in-law owned a brokerage firm in nearby Worcester and needed another stock broker.

From these accidental starts, careers unfolded and lasted. David Nicholson, now the general manager of a company that makes tools, is still in manufacturing. William Nicholson spent the next 48 years, until his retirement, as a stock broker. “Scott has got to find somebody who knows someone,” the grandfather said, “someone who can get him to the head of the line.”

While Scott has tried to make that happen, he has come under pressure from his parents to compromise: to take, if not the Hanover job, then one like it. “I am beginning to realize that refusal is going to have repercussions,” he said. “My parents are subtly pointing out that beyond room and board, they are also paying other expenses for me, like my cellphone charges and the premiums on a life insurance policy.”

Scott Nicholson also has connections, of course, but no one in his network of family and friends has been able to steer him into marketing or finance or management training or any career-oriented opening at a big corporation, his goal. The jobs are simply not there.


The Millennials’ Inheritance

The Great Depression damaged the self-confidence of the young, and that is beginning to happen now, according to pollsters, sociologists and economists. Young men in particular lost a sense of direction, Glen H. Elder Jr., a sociologist at the University of North Carolina, found in his study, “Children of the Great Depression.” In some cases they were forced into work they did not want — the issue for Scott Nicholson.

Military service in World War II, along with the G.I. Bill and a booming economy, restored well-being; by the 1970s, when Mr. Elder did his retrospective study, the hardships of the Depression were more a memory than an open sore. “They came out of the war with purpose in their lives, and by age 40 most of them were doing well,” he said, speaking of his study in a recent interview.

The outlook this time is not so clear. Starved for jobs at adequate pay, the millennials tend to seek refuge in college and in the military and to put off marriage and child-bearing. Those who are working often stay with the jobs they have rather than jump to better paying but less secure ones, as young people seeking advancement normally do. And they are increasingly willing to forgo raises, or to settle for small ones.

“They are definitely more risk-averse,” said Lisa B. Kahn, an economist at the Yale School of Management, “and more likely to fall behind.”

In a recent study, she found that those who graduated from college during the severe early ’80s recession earned up to 30 percent less in their first three years than new graduates who landed their first jobs in a strong economy. Even 15 years later, their annual pay was 8 to 10 percent less.

Many hard-pressed millennials are falling back on their parents, as Scott Nicholson has. While he has no college debt (his grandparents paid all his tuition and board) many others do, and that helps force them back home.

In 2008, the first year of the recession, the percentage of the population living in households in which at least two generations were present rose nearly a percentage point, to 16 percent, according to the Pew Research Center. The high point, 24.7 percent, came in 1940, as the Depression ended, and the low point, 12 percent, in 1980.


Striving for Independence

“Going it alone,” “earning enough to be self-supporting” — these are awkward concepts for Scott Nicholson and his friends. Of the 20 college classmates with whom he keeps up, 12 are working, but only half are in jobs they “really like.” Three are entering law school this fall after frustrating experiences in the work force, “and five are looking for work just as I am,” he said.

Like most of his classmates, Scott tries to get by on a shoestring and manages to earn enough in odd jobs to pay some expenses.

The jobs are catch as catch can. He and a friend recently put up a white wooden fence for a neighbor, embedding the posts in cement, a day’s work that brought Scott $125. He mows lawns and gardens for half a dozen clients in Grafton, some of them family friends. And he is an active volunteer firefighter.

“As frustrated as I get now, and I never intended to live at home, I’m in a good situation in a lot of ways,” Scott said. “I have very little overhead and no debt, and it is because I have no debt that I have any sort of flexibility to look for work. Otherwise, I would have to have a job, some kind of full-time job.”

That millennials as a group are optimistic is partly because many are, as Mr. Kohut put it, the children of doting baby boomers — among them David Nicholson and his wife, Susan, 56, an executive at a company that owns movie theaters.

The Nicholsons, whose combined annual income is north of $175,000, have lavished attention on their three sons. Currently that attention is directed mainly at sustaining the self-confidence of their middle son.

“No one on either side of the family has ever gone through this,” Mrs. Nicholson said, “and I guess I’m impatient. I know he is educated and has a great work ethic and wants to start contributing, and I don’t know what to do.”

Her oldest, David Jr., 26, did land a good job. Graduating from Middlebury College in 2006, he joined a Boston insurance company, specializing in reinsurance, nearly three years ago, before the recession.

“I’m fortunate to be at a company where there is some security,” he said, adding that he supports Scott in his determination to hold out for the right job. “Once you start working, you get caught up in the work and you have bills to pay, and you lose sight of what you really want,” the brother said.

He is earning $75,000 — a sum beyond Scott’s reach today, but not his expectations. “I worked hard through high school to get myself into the college I did,” Scott said, “and then I worked hard through college to graduate with the grades and degree that I did to position myself for a solid job.” (He majored in political science and minored in history.)

It was in pursuit of a solid job that Scott applied to Hanover International’s management training program. Turned down for that, he was called back to interview for the lesser position in the claims department.

“I’m sitting with the manager, and he asked me how I had gotten interested in insurance. I mentioned Dave’s job in reinsurance, and the manager’s response was, ‘Oh, that is about 15 steps above the position you are interviewing for,’ ” Scott said, his eyes widening and his voice emotional.

Scott acknowledges that he is competitive with his brothers, particularly David, more than they are with him. The youngest, Bradley, 22, has a year to go at the University of Vermont. His parents and grandparents pay his way, just as they did for his brothers in their college years.


In the Old Days

Going to college wasn’t an issue for grandfather Nicholson, or so he says. With World War II approaching, he entered the Army not long after finishing high school and, in the fighting in Italy, a battlefield commission raised him overnight from enlisted man to first lieutenant. That was “the equivalent of a college education,” as he now puts it, in an age when college on a stockbroker’s résumé “counted for something, but not a lot.”

He spent most of his career in a rising market, putting customers into stocks that paid good dividends, and growing wealthy on real estate investments made years ago, when Grafton was still semi-rural. The brokerage firm that employed him changed hands more than once, but he continued to work out of the same office in Worcester.

When his son David graduated from Babson College in 1976, manufacturing in America was in an early phase of its long decline, and Worcester was still a center for the production of sandpaper, emery stones and other abrasives.

He joined one of those companies — owned by the family of his friend — and he has stayed in manufacturing, particularly at companies that make hand tools. Early on, he and his wife bought the home in which they raised their sons, a white colonial dating from the early 1800s, like many houses on North Street, where the grandparents also live, a few doors away.

David Nicholson’s longest stretch was at the Stanley Works, and when he left, seeking promotion, a friend at the Endeavor Tool Company hired him as that company’s general manager, his present job.

In better times, Scott’s father might have given his son work at Endeavor, but the father is laying off workers, and a job in manufacturing, in Scott’s eyes, would be a defeat.

“If you talk to 20 people,” Scott said, “you’ll find only one in manufacturing and everyone else in finance or something else.”


The Plan

Scott Nicholson almost sidestepped the recession. His plan was to become a Marine Corps second lieutenant. He had spent the summer after his freshman year in “platoon leader” training. Last fall he passed the physical for officer training, and was told to report on Jan. 16.

If all had gone well, he would have emerged in 10 weeks as a second lieutenant, committed to a four-year enlistment. “I could have made a career out of the Marines,” Scott said, “and if I had come out in four years, I would have been incredibly prepared for the workplace.”

It was not to be. In early January, a Marine Corps doctor noticed that he had suffered from childhood asthma. He was washed out. “They finally told me I could reapply if I wanted to,” Scott said. “But the sheen was gone.”

So he struggles to get a foothold in the civilian work force. His brother in Boston lost his roommate, and early last month Scott moved into the empty bedroom, with his parents paying Scott’s share of the $2,000-a-month rent until the lease expires on Aug. 31.

And if Scott does not have a job by then? “I’ll do something temporary; I won’t go back home,” Scott said. “I’ll be a bartender or get work through a temp agency. I hope I don’t find myself in that position.”

    American Dream Is Elusive for New Generation, NYT, 6.7.2010, http://www.nytimes.com/2010/07/07/business/economy/07generation.html






After a Shift, Shares Surge at SanDisk


July 5, 2010
The New York Times


MILPITAS, Calif. — Eli Harari demands that his drinking water arrive at room temperature. It’s an understandable desire for something moderate from a man who spends so much of his life battling extremes.

Mr. Harari runs SanDisk, a Silicon Valley maker and seller of the high-speed memory that goes into products like iPods, smartphones, digital cameras and some laptops.

This type of memory, known as flash, stands as something of a commodity in the technology world.

And so SanDisk’s destiny tends to be ruled by the volatile laws of supply and demand, and the company has become accustomed to the booms and busts that reflect consumers’ changing tastes.

At the moment, SanDisk, which fought a takeover bid in 2008, is booming once again. Its shares, which hovered just above $5 about 18 months ago, topped $50 last month and closed Friday at $41.47.

With this performance, SanDisk has outperformed just about all of the major players in the technology game, including far flashier outfits like Apple and Google.

“It’s somewhat of a cult stock,” said Hans Mosesmann, an analyst with Raymond James & Associates. “Over the past six months, it’s been rocking and rolling.”

Mr. Harari, 65, will not gloat.

“We fully expect there will be another downturn,” he said, during a recent meeting at the company’s headquarters here.

“We have been through five of them in the last 22 years,” he said, adding that “you just have to understand that it is what it is.”

What makes SanDisk’s revival more than just a fluctuation of supply and demand is that the company used the latest downturn as an opportunity to redirect its business. It shifted away from the fickle whims of the retail market, where it sells memory cards to individual consumers, and toward selling memory straight to device makers and sellers.

According to analysts, these moves have given SanDisk more control over the price of its products and have complemented some cost-cutting measures to create a healthier company.

Meanwhile, people following the market expect demand for memory to soar as new devices go on sale and the economy improves.

“There is a lot of enthusiasm from a demand perspective for some of the new Apple products and other devices that have captured peoples’ imagination,” Mr. Mosesmann said.

Like other chip makers, producers of memory are in a constant battle with the laws of physics. They have to design smaller, faster products that can hold more information, all the while working on a Lilliputian scale that is tough to fathom.

SanDisk, for example, can arrange about 100 billion transistors on one of its thumbnail-size memory cards that fit into cellphones and other hand-held devices. “Most people think it’s just a piece of plastic,” Mr. Harari joked.

Samsung, Toshiba, SanDisk and the other producers of this high-speed flash memory receive few pats on the back for their efforts. As they accomplish one feat of engineering after another, the price of memory just tends to fall. In late 2008, as demand for technology products declined, a desperate situation arose for these companies: the selling price of memory fell below the cost to produce it.

The memory companies responded by closing down older factories and halting plans to build new ones. In addition, they began trying to consolidate. In September 2008, Samsung offered $26 a share for SanDisk.

Mr. Harari rejected the offer in a letter, saying Samsung had undervalued SanDisk. By November, the memory market had worsened and SanDisk’s shares had slipped to $5 a share, from $15 at the time of the Samsung bid.

“It was very tough,” Mr. Harari said of this period. “We had to take some very drastic actions to get ourselves out of that situation, and we did.”

SanDisk used to sell about two-thirds of its products through retail stores like Best Buy and Fry’s Home Electronics, with consumers buying memory cards to give their devices more storage space. The remaining third of SanDisk’s products went to companies making cellphones, music players and other devices.

“Over the past 18 months, we’ve flipped those ratios,” Mr. Harari said. During the recession, SanDisk also cut its operating expenses by close to 25 percent, Mr. Harari said, while also laying off 12 percent of its employees.

Maintaining tight relationships with the device makers will be crucial to SanDisk’s future as those companies look to use memory as a point of leverage, Mr. Harari said.

Apple, for example, exerts tremendous influence in the flash memory market, accounting for 20 to 25 percent of the total orders, according to Daniel L. Amir, a senior research analyst at Lazard Capital Markets.

SanDisk supplies memory to Apple, but it also competes against the iPod through its Sansa music players.

Mr. Amir said that cellphone makers have shown increasing interest in memory add-on cards, as they try to give consumers options. In addition, competitors of Apple’s iPad have increased purchases of the high-speed memory.

Mr. Harari added that he expected the demand for high-speed memory in laptops to increase.

Analysts warn that another bust is always looming in the memory market. The major manufacturers have already announced plans to go forward with new chip plants, meaning that a greater supply of chips should be available by 2012. At that point, the price of memory could fall again.

In addition, the memory makers are expected to struggle in their journey to improve storage capacity. “Some people have talked about there being a brick wall coming in three years or so,” Mr. Mosesmann said. “It’s not clear that SanDisk or anyone else in the industry has figured out how to get around these technological hurdles.”

Chip makers, however, have shown a remarkable ability to overcome what seem to be impossible challenges, and Mr. Harari remains confident about SanDisk’s prospects.

Over all, he is encouraged that the new wave of computing devices that have caught consumers’ attention all tend to rely on the type of memory SanDisk makes.

He argued that device makers and entertainment companies would look more and more to memory cards as a way to drum up interest in their products by putting their own software, music and movies onto the tiny cards. In that regard, the memory card could evolve from dumb bits of plastic to tiny packages full of intelligence.

“The business models are changing very rapidly,” Mr. Harari said.

    After a Shift, Shares Surge at SanDisk, NYT, 5.7.2010, http://www.nytimes.com/2010/07/06/technology/06memory.html






Supply Chain for iPhone

Highlights Costs in China


July 5, 2010
The New York Times


SHENZHEN, China — Last month, while enthusiastic consumers were playing with their new Apple iPhone 4, researchers in Silicon Valley were engaged in something more serious.

They cracked open the phone’s shell and started analyzing the new model’s components, trying to unmask the identity of Apple’s main suppliers. These “teardown reports” provide a glimpse into a company’s manufacturing.

What the latest analysis shows is that the smallest part of Apple’s costs are here in Shenzhen, where assembly-line workers snap together things like microchips from Germany and Korea, American-made chips that pull in Wi-Fi or cellphone signals, a touch-screen module from Taiwan and more than 100 other components.

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

At the end of June, a manager at Foxconn Technology — one of Apple’s major contract manufacturers — said the company planned to reduce costs by moving hundreds of thousands of workers to other parts of China, including the impoverished Henan Province.

While the labor involved in the final assembly of an iPhone accounts for a small part of the overall cost — about 7 percent by some estimates — analysts say most companies in Apple’s supply chain — the chip makers and battery suppliers and those making plastic moldings and printed circuit boards — depend on Chinese factories to hold down prices. And those factories now seem likely to pass along their cost increases.

“Electronics companies are trying to figure out how to deal with the higher costs,” says Jenny Lai, a technology analyst at CLSA, an investment bank based in Hong Kong. “They’re already squeezed, so squeezing more costs out of the system won’t be easy.”

Apple can cope better than most companies because it has fat profit margins of as much as 60 percent and pricing power to absorb some of those costs. But makers of personal computers, cellphones and other electronics — including Dell, Hewlett-Packard and LG — deal with much slimmer profit margins according to several analysts. “The challenges are going to be much bigger for them,” Ms. Lai said. Most other industries, from textiles and toys to furniture, are under considerably more pressure.

One way to understand the changes taking shape in southern China is to follow the supply chain of the iPhone 4, which was designed by Apple engineers in the United States, sourced with high-tech components from around the world and assembled in China. Shipped back to the United States, the iPhone is priced at $600, though the cost to consumers is less, subsidized by AT&T in exchange for service contracts.

“China makes very little money on these things,” said Jason Dedrick, a professor at Syracuse University and an author of several studies of Apple’s supply chain. Much of the value in high-end products is captured at the beginning and end of the process, by the brand and the distributors and retailers.

According to the latest teardown report compiled by iSuppli, a market research firm in El Segundo, Calif., the bulk of what Apple pays for the iPhone 4’s parts goes to its chip suppliers, like Samsung and Broadcom, which supply crucial components, like processors and the device’s flash-memory chip.

In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device, according to iSuppli.

Apple, for instance, pays Samsung about $27 for flash memory and $10.75 to make its (Apple-designed) applications processor; and a German chip maker called Infineon gets $14.05 a phone for chips that send and receive phone calls and data. Most of the electronics cost much less. The gyroscope, new to the iPhone 4, was made by STMicroelectronics, based in Geneva, and added $2.60 to the cost.

The total bill of materials on a $600 iPhone — the supplies that go into final assembly — is $187.51, according to iSuppli.

The least expensive part of the process is manufacturing and assembly. And that often takes place here in southern China, where workers are paid less than a dollar an hour to solder, assemble and package products for the world’s best-known brands.

No company does more of it than Foxconn, a division of the Hon Hai Group of Taiwan, the world’s largest contract electronics manufacturer.

With 800,000 workers in China alone and contracts to supply Apple, Dell and H.P., Foxconn is an electronics goliath that also sources supplies, designs parts and uses its enormous size and military-style efficiency to assemble and speed a wide range of products to market.

“They’re like Wal-Mart stores,” Professor Dedrick said. “They’re low-margin, high-volume. They survive by being efficient.”

The world of contract manufacturers is invisible to consumers. But it’s a $250 billion industry, with just a handful of companies like Foxconn, Flextronics and Jabil Circuit manufacturing and assembling for all the global electronics brands.

They compete fiercely on price to earn small profit margins, analysts say. And they seek to benefit from tiny operational changes.

When a company is operating on the slimmest of profit margins as contract manufacturers are, soaring labor costs pose a serious problem. Wages in China have risen by more than 50 percent since 2005, analysts say, and this year many factories, under pressure from local governments and workers who feel they have been underpaid for too long, have raised wages by an extra 20 to 30 percent.

China’s currency has also appreciated sharply against the United States dollar since 2005, and after a two-year pause by Beijing, economists expect the renminbi to rise about 3 to 5 percent a year for the next several years.

“It takes 3,000 procedures to assemble an H.P. computer,” says Isaac Wang, an iSuppli analyst based in China. “If a contract manufacturer can find a way to save 10 percent of the procedures, then it gets a real good deal.”

Contract manufacturers like Foxconn are now searching for ways to reduce costs. Foxconn is considering moving inland, where wages are 20 to 30 percent lower. The company is also spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material.

“We either outsource the components manufacturing to other suppliers, or we can research and manufacture our own components,” says Arthur Huang, a Foxconn spokesman. “We even have contracts with mines which are located near our factories.”

Many analysts are optimistic the big brands will find new innovations to improve profitability. But within the crowd, there is growing skepticism about China’s manufacturing model after years of pressing workers to toil six or seven days a week, 10 to 12 hours a day.

“We’ve concluded Hon Hai’s labor-intensive model is not sustainable,” says Mr. Wang at iSuppli Research. “Though it can keep hiring 800,000 to one million workers, the problem is these workers can’t keep working like screws in an inhuman system.”

This type of low-end assembly work is also no longer favored in China, analysts say, because it does not produce big returns for the companies or the country. “China doesn’t want to be the workshop of the world anymore,” says Pietra Rivoli, a professor of international business at Georgetown University and author of “The Travels of a T-Shirt in the Global Economy.”

“The value goes to where the knowledge is.”

Bao Beibei and Chen Xiaoduan contributed research.

    Supply Chain for iPhone Highlights Costs in China, NYT, 5.7.2010, http://www.nytimes.com/2010/07/06/technology/06iphone.html





A Little Economic Realism


July 5, 2010
The New York Times


Let’s say you’re the leader of the free world. The economy is stuck in the doldrums. Naturally, you want to do something.

Many economists say we need another stimulus bill. They debate about whether the stimulus should take the form of tax cuts or spending increases, but the ones in your party are committed to spending increases. They trot out a plausible theory with computer models to go with it. If the federal government borrows X amount of dollars and pumps it into the economy, that would produce Y amount of growth and Z amount of jobs. In a $14 trillion economy, you’d probably have to borrow hundreds of billions more to have any noticeable effect, but at least you’d be doing something to help the jobless.

These Demand Side theorists are giving you a plan of action. But you’re not a theorist. You’re a practical executive, and you have some concerns.

These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

The Demand Siders don’t have a good explanation for the past two years. There is no way to know for sure how well the last stimulus worked because we don’t know what would have happened without it. But it is certainly true that the fiscal spigots have been wide open. The U.S. and most other countries have run up huge, historic deficits. And while this has helped save public-sector jobs, we certainly haven’t seen much private-sector job growth. It could be that government spending is a weak lever to counter economic cycles. Maybe monetary policy is the only strong tool we have.

The theorists have high I.Q.’s but don’t seem to know much psychology. Lord Keynes, though a lesser mathematician, wrote that the state of confidence “is a matter to which practical men pay the closest and most anxious attention.”

These days, debt-fueled government spending doesn’t increase confidence. It destroys it. Only 6 percent of Americans believe the last stimulus created jobs, according to a New York Times/CBS News survey. Consumers are recovering from a debt-fueled bubble and have a moral aversion to more debt.

You can’t read models, but you do talk to entrepreneurs in Racine and Yakima. Higher deficits will make them more insecure and more risk-averse, not less. They’re afraid of a fiscal crisis. They’re afraid of future tax increases. They don’t believe government-stimulated growth is real and lasting. Maybe they are wrong to feel this way, but they do. And they are the ones who invest and hire, not the theorists.

The Demand Siders are brilliant, but they write as if changing fiscal policy were as easy as adjusting the knob on your stove. In fact, it’s very hard to get money out the door and impossible to do it quickly. It’s hard to find worthwhile programs to pour money into. Once programs exist, it’s nearly impossible to kill them. Spending now creates debt forever and ever.

Moreover, public spending seems to have odd knock-off effects. Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. They found that federal spending increases dampened corporate hiring and investment in those districts. You wish somebody could explain that one to you before you pass on more debt burdens to your grandchildren.

So you have your doubts, but you are practical. You want to do something. Too much debt could lead to national catastrophe. Too much austerity could lead to stagnation.

Well, there’s a few short-term things you can do. First, extend unemployment insurance; that’s a foolish place to begin budget-balancing. Second, you need to mitigate the pain caused by the state governments that are slashing spending. You need a program modeled on Race to the Top. You will provide federal money now to states that pass responsible long-term budget plans that will reduce spending and pension commitments. That would save public-sector jobs and ease contractionary pressures without throwing the country into a fiscal-debt spiral.

But the overall message is: Don’t be arrogant. This year, don’t engage in reckless new borrowing or reckless new cutting. Focus on the fundamentals. Cut programs that don’t enhance productivity. Spend more on those that do.

You don’t have the ability to play the economy like a fiddle. You do have the ability to lay some foundations for long-term growth and stability.

    A Little Economic Realism, NYT, 5.7.2010, http://www.nytimes.com/2010/07/06/opinion/06brooks.html






Punishing the Jobless


July 4, 2010
The New York Times


There was a time when everyone took it for granted that unemployment insurance, which normally terminates after 26 weeks, would be extended in times of persistent joblessness. It was, most people agreed, the decent thing to do.

But that was then. Today, American workers face the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks. Yet the Senate went home for the holiday weekend without extending benefits. How was that possible?

The answer is that we’re facing a coalition of the heartless, the clueless and the confused. Nothing can be done about the first group, and probably not much about the second. But maybe it’s possible to clear up some of the confusion.

By the heartless, I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do — including, or perhaps especially, anything that might alleviate the nation’s economic pain — improves their chances in the midterm elections. Don’t pretend to be shocked: you know they’re out there, and make up a large share of the G.O.P. caucus.

By the clueless I mean people like Sharron Angle, the Republican candidate for senator from Nevada, who has repeatedly insisted that the unemployed are deliberately choosing to stay jobless, so that they can keep collecting benefits. A sample remark: “You can make more money on unemployment than you can going down and getting one of those jobs that is an honest job but it doesn’t pay as much. We’ve put in so much entitlement into our government that we really have spoiled our citizenry.”

Now, I don’t have the impression that unemployed Americans are spoiled; desperate seems more like it. One doubts, however, that any amount of evidence could change Ms. Angle’s view of the world — and there are, unfortunately, a lot of people in our political class just like her.

But there are also, one hopes, at least a few political players who are honestly misinformed about what unemployment benefits do — who believe, for example, that Senator Jon Kyl, Republican of Arizona, was making sense when he declared that extending benefits would make unemployment worse, because “continuing to pay people unemployment compensation is a disincentive for them to seek new work.” So let’s talk about why that belief is dead wrong.

Do unemployment benefits reduce the incentive to seek work? Yes: workers receiving unemployment benefits aren’t quite as desperate as workers without benefits, and are likely to be slightly more choosy about accepting new jobs. The operative word here is “slightly”: recent economic research suggests that the effect of unemployment benefits on worker behavior is much weaker than was previously believed. Still, it’s a real effect when the economy is doing well.

But it’s an effect that is completely irrelevant to our current situation. When the economy is booming, and lack of sufficient willing workers is limiting growth, generous unemployment benefits may keep employment lower than it would have been otherwise. But as you may have noticed, right now the economy isn’t booming — again, there are five unemployed workers for every job opening. Cutting off benefits to the unemployed will make them even more desperate for work — but they can’t take jobs that aren’t there.

Wait: there’s more. One main reason there aren’t enough jobs right now is weak consumer demand. Helping the unemployed, by putting money in the pockets of people who badly need it, helps support consumer spending. That’s why the Congressional Budget Office rates aid to the unemployed as a highly cost-effective form of economic stimulus. And unlike, say, large infrastructure projects, aid to the unemployed creates jobs quickly — while allowing that aid to lapse, which is what is happening right now, is a recipe for even weaker job growth, not in the distant future but over the next few months.

But won’t extending unemployment benefits worsen the budget deficit? Yes, slightly — but as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided.

So, is there any chance that these arguments will get through? Not, I fear, to Republicans: “It is difficult to get a man to understand something,” said Upton Sinclair, “when his salary” — or, in this case, his hope of retaking Congress — “depends upon his not understanding it.” But there are also centrist Democrats who have bought into the arguments against helping the unemployed. It’s up to them to step back, realize that they have been misled — and do the right thing by passing extended benefits.

    Punishing the Jobless, NYT, 4.7.2010, http://www.nytimes.com/2010/07/05/opinion/05krugman.html






The Pessimism Bubble


July 4, 2010
The New York Times


This is a day for hangovers and sunburns, discarded sparklers and spent rockets smoking weakly on brown lawns. Yesterday was all euphoria and patriotism — a chance to forget about the unemployment rate, the deficit, the oil spill and whichever political party you hold responsible for the country’s sorry state. But now it’s time to sit around in your undershirt, put off cleaning the backyard grill and contemplate all the things you spent the Fourth of July trying not to think about.

Enough of the star-spangled American dream. Back to the grim American reality.

How grim? Well, after the United States limped through five months of anemic “recovery,” last Friday brought news that our economy actually shed jobs in June, thanks to the expiration of more than 200,000 Census positions. It’s now been 30 months since the beginning of the recession, and it looks as if it could take another 30 or so to regain the level of employment we enjoyed in the autumn of 2007.

If we regain it at all. The public seems doubtful: in a recent survey, conducted before the latest wave of dismal economic news, the Pew Research Center found that less than half of Americans expect that their children will enjoy a higher standard of living than their own. Economists are throwing around phrases like “lost decade” and “double-dip recession,” and drawing analogies to the Great Depression. And those aren’t even the real doomsayers. On Sunday, The Times profiled the market forecaster Robert Prechter, who’s convinced that the stock market is headed for a sell-off that will send the Dow Jones average below not 10,000, but 1,000.

This gloom is understandable, up to a point. The crash of 2008 exposed systemic problems with our way of life that no legislation can resolve: a reckless financial elite, an overextended public sector, and a culture of irresponsibility that’s visible everywhere from our debt-to-income ratios to our out-of-wedlock birth rate.

But just as healthy optimism can turn into irrational exuberance, a clear-eyed realism about the challenges facing the United States can gradually inflate a pessimism bubble.

Since the financial crisis hit, there’s been a lot of talk about the bubble mentality — how a run of growth and good news persuades people that what goes up need never come back down. “This time is different,” the enthusiasts always say, in a refrain that provided the title for Carmen Reinhart’s and Kenneth Rogoff’s recent history of financial panics. But it never, ever is.

A similar mentality, though, can take hold during downturns. The “this time is different” mistake applies to busts as well as booms: when things get dark enough, people start believing that dawn will never come.

Pessimism bubbles formed during America’s last two economic crises — the stagflation era in the late 1970s and the post-cold war recession that ushered Bill Clinton into the White House. Go back and read Jimmy Carter’s famous “malaise speech,” which liberals have lately been rehabilitating. With its warnings about retrenchment, rationing and a permanent energy crisis, it feels like a contemporary document. But it isn’t, and Carter’s prophecies were wrong: the grimmest speech any modern president has given was delivered just a few years before America kicked off a long era of impressive economic growth.

The same goes for many of the dire predictions ventured in the early 1990s, when America was supposedly entering a period of debt-driven decline, while Japan rose inexorably to dominance. Swap in a rising China for Japan, and Tea Party chants for Ross Perot’s charts, and the fears of that era map neatly onto the anxieties of our own. But the Clinton-era boom pricked that bubble of pessimism soon enough.

Maybe this time is different. The recession is deeper. Our debts are piled higher. The gloom is more pervasive.

But even now, there isn’t a major power in the world that wouldn’t happily change places with the United States. Our weaknesses are real, but so is our potential for resilience. While our rivals (in Asia as well as the West) face a slow demographic decline, our population is steadily increasing. The European Union’s recent follies make our creaking 200-year-old institutions look flexible by comparison. And China can throw up all the high-speed rails and solar panels it wants, but it won’t change the fact that most of the country is still sunk in rural poverty.

All of this is cold comfort if you can’t find a job, or can’t afford your mortgage payments. But historical perspective is important. The more we remember the pessimism bubbles of the past, the better our chances of bursting out of this one.

Here endeth the pep talk. Happy Fifth of July.

    The Pessimism Bubble, NYT, 4.7.2010, http://www.nytimes.com/2010/07/05/opinion/05douthat.html






As Oil Industry Fights a Tax,

It Reaps Billions From Subsidies


July 3, 2010
The New York Times


When the Deepwater Horizon drilling platform set off the worst oil spill at sea in American history, it was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes.

The owner, Transocean, moved its corporate headquarters from Houston to the Cayman Islands in 1999 and then to Switzerland in 2008, maneuvers that also helped it avoid taxes.

At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.

With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.

But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by var-ious credits. These companies’ returns on those investments are often higher after taxes than before.

“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey, who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”

Oil industry officials say that the tax breaks, which average about $4 billion a year according to various government reports, are a bargain for taxpayers. By helping producers weather market fluctuations and invest in technology, tax incentives are supporting an industry that the officials say provides 9.2 million jobs.

The American Petroleum Institute, an industry advocacy group, argues that even with subsidies, oil producers paid or incurred $280 billion in American income taxes from 2006 to 2008, and pay a higher percentage of their earnings in taxes than most other American corporations.

As oil continues to spread across the Gulf of Mexico, however, the industry is being forced to defend tax breaks that some say are being abused or are outdated.

The Senate Finance Committee on Wednesday announced that it was investigating whether Transocean had exploited tax laws by moving overseas to avoid paying taxes in the United States. Efforts to curtail the tax breaks are likely to face fierce opposition in Congress; the oil and natural gas industry has spent $340 million on lobbyists since 2008, according to the nonpartisan Center for Responsive Politics, which monitors political spending.

Jack N. Gerard, president of the American Petroleum Institute, warns that any cut in subsidies will cost jobs.

“These companies evaluate costs, risks and opportunities across the globe,” he said. “So if the U.S. makes changes in the tax code that discourage drilling in gulf waters, they will go elsewhere and take their jobs with them.”

But some government watchdog groups say that only the industry’s political muscle is preserving the tax breaks. An economist for the Treasury Department said in 2009 that a study had found that oil prices and potential profits were so high that eliminating the subsidies would decrease American output by less than half of one percent.

“We’re giving tax breaks to highly profitable companies to do what they would be doing anyway,” said Sima J. Gandhi, a policy analyst at the Center for American Progress, a liberal research organization. “That’s not an incentive; that’s a giveaway.”

Some of the tax breaks date back nearly a century, when they were intended to encourage exploration in an era of rudimentary technology, when costly investments frequently produced only dry holes. Because of one lingering provision from the Tariff Act of 1913, many small and midsize oil companies based in the United States can claim deductions for the lost value of tapped oil fields far beyond the amount the companies actually paid for the oil rights.

Other tax breaks were born of international politics. In an attempt to deter Soviet influence in the Middle East in the 1950s, the State Department backed a Saudi Arabian accounting maneuver that reclassified the royalties charged by foreign governments to American oil drillers. Saudi Arabia and others began to treat some of the royalties as taxes, which entitled the companies to subtract those payments from their American tax bills. Despite repeated attempts to forbid this accounting practice, companies continue to deduct the payments. The Treasury Department estimates that it will cost $8.2 billion over the next decade.

Over the last 10 years, oil companies have also been aggressive in using foreign tax havens. Many rigs, like Deepwater Horizon, are registered in Panama or in the Marshall Islands, where they are subject to lower taxes and less stringent safety and staff regulations. American producers have also aggressively exploited the tax code by opening small offices in low-tax countries. A recent study by Martin A. Sullivan, an economist for the trade publication Tax Analysts, found that the five oil drilling companies that had undergone these “corporate inversions” had saved themselves a total of $4 billion in taxes since 1999.

Transocean — which has approximately 18,000 employees worldwide, including 1,300 in Houston and about a dozen in Zug, Switzerland — has saved $1.8 billion in taxes since moving overseas in 1999, the study found.

Transocean said it had paid more than $300 million in taxes so far for 2009, and that its move reflected its global scope, with only 15 of its 139 rigs located in the United States. “Transocean is truly a global company,” it said in a statement.

Despite the public anger at the gulf spill, it is far from certain that Congress will eliminate the tax breaks. As recently as 2005, when windfall profits for energy companies prompted even President George W. Bush — a former Texas oilman himself — to publicly call for an end to incentives, the energy bill he and Congress enacted still included $2.6 billion in oil subsidies. In 2007, after Democrats took control of Congress, a move to end the tax breaks failed.

Mr. Menendez said he believed the Gulf spill was devastating enough to spur Congress into action. But one notable omission in his bill shows the vast economic reach of the industry. While the legislation would cut many incentives over the next decade, it would not touch the tax breaks for oil refineries, many of which have operations and employees in his home state, New Jersey.

Mr. Menendez’s aides said the senator thought it was legitimate to allow refineries to continue claiming a manufacturing tax credit that he wants to eliminate for drillers because refining is a manufacturing business and because refineries do not benefit from high oil prices. Mr. Menendez did not consult with New Jersey refineries when writing the bill, his aides said.

    As Oil Industry Fights a Tax, It Reaps Billions From Subsidies, NYT, 3.7.2010, http://www.nytimes.com/2010/07/04/business/04bptax.html






Little Shops of Horrors


July 2, 2010
The New York Times



WITH more shopping centers per capita than any other place in the country, is Dallas the most American city?

Shopping is the primeval activity here in the Queen City of the Southwest, which began as a lonely trading post on the banks of the Trinity River but never really took off until the Texas and Pacific Railroad crossed the Houston and Texas Central, and a critical mass of “terminal merchants” — dry-goods dealers, many of them Jewish, who followed the railroads west — set up permanent shop. Mr. Marcus, Mr. Neiman, the Sanger brothers: their savvy helped build the great American economy, which relies for soul and substance on that perennial workhorse made up of you, me and everyone else we know, i.e., the retail consumer. In other words, if we didn’t shop, life as we know it would come to an abrupt and gruesome end.

Curious to see how retail was holding up against apocalyptic derivatives and credit-default swaps, I went to Rich Hippie, a boutique straddling two upscale neighborhoods, Preston Hollow and University Park. The owners, Nikki Solomon and Mindi Kahn, both moms, both locally born with sales in their blood, call themselves “just one little store in Dallas, Tex.,” but they’ve shown how to survive and thrive in difficult times.

Their business model for the subprime era was sublimely basic: serve the customer, be at the store every day, build relationships with vendors and pay the bills on time. Nikki and Mindi also upped their inventory of everyday wear while maintaining the splurge stuff, the python handbags and the vavoom cocktail dresses with all manner of breathtaking scoops and hollows. Those luxury items scrape the upper price points (“That’s why it’s not Poor Hippie,” they told me), but there was, among them, a striking absence of big designer brands.

That got me thinking: There is much pleasure to be had in wearing attractive, well-made clothes, but designer-label lust speaks to the high-anxiety regions of the brain. Social status is a contact sport in Dallas, upward mobility as much a reflex as slapping mosquitoes, yet one wonders about the psychological wear and tear of all this aspirational shopping. “I think the economy gave a lot of our new customers an excuse to break from name designers,” said Mindi. “Maybe some of them still buy designer, but now they’re buying us, too.”

So is the rumored, much-longed-for, often-disputed-by-the-numbers recovery real? “It’s hard to know whether you’re feeling it or hearing it,” Mindi said. “People are definitely spending more. Our customers hear it on the news every day just like we do, the economy’s coming back.”

Good news can be self-fulfilling, but there’s a line out there called reality, and beyond that line good news becomes puff, and puff becomes a bubble, and bubbles, well, any underwater mortgagor can tell you the rest.

Next, I ventured down the road to Highland Park Village, established in 1931, where no fewer than three historical plaques note its distinction of being the first suburban shopping center in the world. This smallish, pleasant compound of Spanish Mission-style buildings was once full of homegrown institutions like the S & S Tea Room, where Miss Willie would tell you over the loudspeaker to leave if she felt you’d lingered at your table too long. But such flavorful funk has long since been replaced by Prozac parking jobs (anywhere but between the lines) and the relentless ritzification of American taste. Here among the world-famous brand names, I continued my search for the consumer-led recovery.

Inside Jimmy Choo I encountered, hmm, no customers. In the antiques store down the way, two. Loro Piana, zero. Escada, zero. Hermès, one. Chanel, zero. According to every sales clerk queried at these fine establishments, business was great, super, fantastic or any one of a number of other perky superlatives. Yet the longer I hung around, the more I sensed the torpor of a dusty Catalan village that time has passed by.

O.K., so it was a Monday. There was slightly more activity the following Thursday, then a less-than-effervescent hum on Saturday. But as my fashion-sensible daughter told me as we stood outside Ralph Lauren admiring the psycho-preppie window displays, you can’t expect hordes of customers in the high-end shops: “Different market, Dad.” Then again, maybe Nikki and Mindi are right. Maybe there’s nothing like a recession to bring on designer fatigue. Meanwhile, average debt per Dallas resident ranks second in the country, with the lowest consumer credit quality of the nation’s largest metro areas.

Leverage, too, is a long and durable strand in Dallas’s DNA. Le Grand Hotel opened in 1875, boasting a 30-foot chandelier in the main lobby, frescoed walls, gas jets, elegant rooms and a restaurant and bar unsurpassed in the city. The railroads had arrived a mere three years before and, with them, the terminal merchants who would make retail history. Tom Smith, the proprietor of Le Grand, was later quoted as saying that when the hotel opened, nothing in it was paid for.

Ben Fountain is the author of the story collection “Brief Encounters with Che Guevara.”

    Little Shops of Horrors, NYT, 2.7.2010, http://www.nytimes.com/2010/07/04/opinion/04fountain.html






School for Brides


July 2, 2010
The New York Times


Las Cruces, N.M.

LAST year, I lost my tenure-track teaching job when the College of Santa Fe, founded in 1859, closed after years of financial risk-taking and mismanagement. I was lucky enough to land another position elsewhere in New Mexico. A few of my colleagues found jobs in places like Florida, California, Canada, Singapore.

But for those faculty members determined to stay in Santa Fe, the odds of finding another academic job were close to zero. The political science professor now teaches Spanish at a local high school. The music professor decided to pursue nursing. And the costume design professor, Cheryl Odom, took a job as the alterations manager at a bridal shop.

I didn’t know Cheryl all that well. One of the pitfalls of joining an institution two years before it folds is a general lack of collegiality. But as others were sweating in corners, scheming ways to avoid layoffs, Cheryl was actively kind, chatting with me after meetings, shaking off the bad vibes with a flip of her long auburn hair. She joined the college in 1980 after a brief but successful costuming career in Los Angeles. A veteran of the college’s constant struggle with money, she wasn’t so easily undone.

The last year we taught there, one of my quieter students brought a piece of white satin to my office and showed me a stitch she’d learned in Cheryl’s class. Not since my own college days, when a snotty redheaded costuming professor denigrated me for my shyness, had I given a thought to the craft.

But I saw then that Cheryl and I did essentially the same thing. She showed students how to make something beautiful out of ideas, patience and simple tools. Using their imaginations and some muslin, they could go from nothing to mock-up to fully rendered spectacle. She empowered them not just to make dresses but to have a vision and to execute it.

Vision and its execution didn’t happen often in the administrative offices of the artsy College of Santa Fe. The college, which struggled for decades with its identity, had a history of selling off land to stay afloat. By the time I arrived in 2007, the ragged little campus peered out from a cluster of strip malls and banks.

Unable to pay a debt that hovered around $30 million, the fragile institution began courting Laureate Education, which runs for-profit universities abroad and online, hoping for a “partnership” (i.e., bailout). For a while, it seemed that this might work, though we’d lose things like tenure and sabbaticals, receiving instead an undefined form of “merit pay” and the chance to teach at Laureate’s campuses worldwide. But Laureate couldn’t strike a deal with the college’s creditors — so the problematic, idealistic school finally closed last May.

Last summer, the city finally figured out a deal that allowed Laureate to lease the land and buildings, without taking responsibility for pesky things like tenured faculty or the huge debt. The college reopened as a for-profit art school and in August will be renamed the Santa Fe University of Art and Design; a handful of faculty members now teach about 200 of the original 700 students.

I spoke to Cheryl on the phone recently. She explained that the chairman of the theater department couldn’t hire back everyone and, forced to choose, decided to focus on acting and performing. “At first I was angry,” she said. “I spent 29 years at that college. I designed over 100 shows, made more than a half-million-dollars worth of costumes. I put my child through school there. But now, I’m over it. I’m O.K.”

She’s 60 now, and when she applied for health insurance, she was denied. A part-time gig at the local community college allows her to keep mentoring the next generation of artists, but it can’t pay her bills or her mortgage. So Cheryl looked through the classified ads. “My son graduated from the College of Santa Fe on a Saturday,” she said. “I was working at David’s Bridal on Monday.”

“They love me at the bridal shop,” she told me. “They’re thrilled by how fast I can work and how happy I make my customers.” Her brides are about the same age as most of her former students, so she still gets to be part of a young person’s transformation, though admittedly, it’s a very different job.

When I asked her if the alterations are ever artistically fulfilling, she explained that the dresses are all under copyright; there’s not much you can do to add flair. It’s nothing like the pirate costumes, flapper dresses and tailored men’s suits that are bagged up in a storage unit somewhere on campus.

Instead, she specializes in fancy bustles. She can work with the bones, the beadwork, the crinoline. “Some of the trains are so long, it’s like a white-out under there. But I know how to work with all that,” she said. “And I get the hugs and the tears.”

Robin Romm is the author of the short-story collection “The Mother Garden,” and “The Mercy Papers: A Memoir of Three Weeks.”

    School for Brides, NYT, 2.7.2010, http://www.nytimes.com/2010/07/04/opinion/04romm.html






Getting Rich on Fungus


July 2, 2010
The New York Times


McCall, Idaho

“THE brakes on the Volvo are screeching,” reports my wife, a fitting way to begin a Monday. Front pads, rear pads, rear rotors: the first bid comes in at $1,234, the second at $760.

I go for a walk. “I think that I cannot preserve my health and spirits,” Thoreau wrote in his essay “Walking,” “unless I spend four hours a day at least — and it is commonly more than that — sauntering through the woods and over the hills and fields absolutely free from all worldly engagements.”

Four hours a day? I’ll have to settle for 30 minutes. Unfortunately, even in Valley County, Idaho, hiking along a forested ridge above the glittering, cloud-swept 5,000 acres of Payette Lake, worldly engagements prove hard to shake. At 14.3 percent, county unemployment is the highest in the state, foreclosure notices routinely fill five pages of the local newspaper and Tamarack, the once chic ski resort in nearby Donnelly, has been in default since 2008.

During my half-hour stroll, it snows, then hails, then becomes fabulously, luxuriously sunny. I’m watching a wet fox sun himself on a rock, steam rising from his back, when I notice a morel mushroom, like the hat of a little forest gnome, poking up out of leaf litter. Within a minute, I’ve found four more.

These honeycombed, wrinkled treasures are famously elusive, famously delicious — and famously expensive. Recently, morels were selling for $15 a pound at the Capital City Public Market in Boise. Sometimes, around here, it’s as high as 30 bucks a pound. That’s for about only 40 medium-size mushrooms.

In other words, I was standing in a shaft of sunlight seeing Volvo brakes growing from the ground; I was seeing gold.

I head out the next day, and again the following weekend. I saunter through the woods and over the hills and fields; I see a wood frog in a hole, a doe curled up for a nap and a clutch of oyster mushrooms growing beneath a fallen aspen. I find exactly zero morels.

“Oh, they don’t call morels elusive for nothing,” Claudia Nally tells me later. She is an employee in the governor’s office who has been picking mushrooms in these mountains for almost three decades. “Some people look for years but just don’t develop the eyes for them.” Of course, two breaths later she’s telling me a story about how she once found a patch of morels so big she filled a 33-gallon trash bag and had to turn her shirt into a sack to fit the rest.

It’s my eyes, I think. I haven’t developed them yet. I peer into the ground harder than ever. Do they favor ridgelines? Rotting stumps? “I’m not sure if you have ever found a large amount of morels, but it’s sort of like a gold-rush feeling,” enthuses 27-year-old Clay Tuck, a student at Boise State University who was laid off from a factory job last August. “Especially when you plan on selling them.”

On my third morel hunt, I stumble on two, each no bigger than my thumb. Maybe even the mushrooms are in a recession.

But on my last excursion, I discover 11 mushrooms growing among some purple trillium. Before I return home that day, I find 14 more scattered across the hillsides.

Twenty-six: maybe enough for $8. My plans of becoming a mushroom millionaire will have to wait. I bring home my sackful of fungi, wash them, slice them, dunk them in beaten egg, roll them in crushed saltines and fry them in butter. My wife and I eat them outside with glasses of cold beer.

They taste like pine trees, like weather, like triumph. And here’s the real gift: For those afternoons that I went walking in the mountains, my eyes on the forest floor, my cellphone out of range, I felt the joy of being fully present, of paying attention to the world. For a few hours, I was finally away from oil spills and foreclosures and layoffs, free from all but the simplest of worldly engagements.

Anthony Doerr is the author of the forthcoming story collection “Memory Wall.”

Getting Rich on Fungus, NYT, 2.7.2010, http://www.nytimes.com/2010/07/04/opinion/04doerr.html






Ingredients for a New City


July 2, 2010
The New York Times


Providence, R.I.

IN 1992, when my husband, Lorne, tried to convince me to marry him and move to Rhode Island, he took me to a big hole in downtown Providence. “Someday,” Lorne said with a sweep of his hand, “there will be a beautiful river here with bridges and people.”

I looked at the bulldozers and the pile of mud in front of me — all part of a $60 million project to uncover the city’s paved-over rivers — and thought: I am never moving here. I had grown up in West Warwick, a mill town about 14 miles away, and I had left as soon as possible. Supposedly, Providence was having a renaissance. But the downtown still had mostly empty buildings and deserted streets.

That night, Lorne took me to dinner at a tiny restaurant called New Rivers. Owned by Pat and Bruce Tillinghast, the two-year-old restaurant had twinkly white lights, paintings of pears and a menu that used local ingredients. When Lorne finally succeeded in wooing me to Providence, it became our place for romantic dinners.

Bruce, now 63, is boyish-looking despite his salt-and-pepper hair. With his tortoise-shell glasses and madras shirt, he could be a character in one of the 1950s sitcoms that he watched growing up in nearby Lincoln, where his family shared a double-decker house with his grandparents. He describes his suburban middle-class childhood as charmed, with his mother creating Halloween costumes that always won him and his sister first prize at school and his father taking him on a search for the then-unusual ingredient of leeks to make vichyssoise.

He met Pat in 1974 when he was working as a waiter at Harrah’s in Lake Tahoe, Nev., where she was a hostess. “Here was this absolutely gorgeous auburn-haired woman with broad, tanned shoulders — in April! — floating through the room,” Bruce said. “I was a goner at first glance.”

They eventually moved to Rhode Island, married and decided to pursue Bruce’s dream of opening a restaurant. A Rhode Island School of Design graduate, he had fallen in love with cooking. “It became a new form of creativity,” he told me. With Pat at the front of the house and Bruce in the kitchen, Providence grew to love New Rivers and the Tillinghasts.

But it wasn’t until Pat died in 1999 that Bruce realized just how vital the restaurant was to the community. “We built this business together and it was important not to let it slip away,” he said. That commitment to keeping New Rivers going has been challenged again and again.

“I can’t tell you the number of times people have asked me, ‘Are you going to close?’ ” Bruce said, shaking his head. They asked him that when the basement flooded in 2005 during Brown University’s parents’ weekend, one of the busiest times for Providence restaurants. Bruce put on a pair of waders, grabbed a flashlight and went down to retrieve wine. The flood knocked out his point of sale system and he had to handwrite all the credit card slips, only to find out two weeks later that the banks would accept only electronic transactions.

They asked him again a year-and-a-half later when the kitchen caught fire and Bruce had to take out a home-equity loan to bring it up to code. That time, the restaurant was closed for six months.

When the economy tanked in 2008, Providence restaurant owners were scratching their heads trying to figure out how to survive. That’s when Bruce took the incredible leap of expanding New Rivers. He had long dreamed of moving into the space next door where a small cafe had been. “All these windows!” Bruce exclaimed, marveling at his renovated restaurant, which he unveiled seven months ago. Despite the still struggling economy, on a good weekend night, Bruce and his chef du cuisine, Beau Vestal, serve more than 100 dinners.

On one such sultry summer evening, I sat gazing out those big windows. The steeple of the First Baptist Church shone to the east. Below was the river Lorne promised me all those years ago. On the menu, there was bluefish from Block Island Sound and blueberries from nearby Seekonk, Mass. And there was Bruce himself in his customary bow tie, blue eyes sparkling. “It will come together again,” he said hopefully. “Just in a different way.”

Ann Hood is the author, most recently, of “The Red Thread.”

    Ingredients for a New City, NYT? 2.7.2010, http://www.nytimes.com/2010/07/04/opinion/04hood.html






Help Needed for the Economy


July 2, 2010
The New York Times

If the economy were a coal mine, the job market would be an 800-pound canary, warning of a recovery that is running out of oxygen.

The economy shed 125,000 jobs in June. A loss of 225,000 government Census jobs overwhelmed a gain of 83,000 jobs in the private sector. The Census layoffs were expected, but the private sector additions were lower than anticipated, and far less than needed to keep pace with new workers joining the labor force. Adding to the slack, employers cut hours in June, reversing a boost recorded in May, while temporary hiring, an important harbinger of full-time job growth, slowed markedly.

Even a drop in the unemployment rate, from 9.7 percent in May to 9.5 percent in June, represents a pullback, not an improvement. The rate fell because 652,000 people left the work force last month. Since they were neither working nor looking for work, they were not counted as unemployed. If they had been counted, the jobless rate in June would have been 9.9 percent.

Worse, the uncounted, often referred to as “missing workers,” are not the only ones on the sidelines. In June, nearly half of the 14.6 million unemployed workers had been out of work for more than six months, with the average spell of unemployment rising from 34.4 weeks in May to a record 35.2 weeks. Swollen ranks of missing and chronically jobless workers are the human equivalent of idled factories — a waste of resources, a diminution of wealth, and a sign of despair.

And the despair is not confined to the labor force. An array of recent indicators shows that there is no way to turn a nascent recovery into a self-sustaining expansion without plentiful good jobs. Stocks fell every day last week, as investors anticipated and then confronted the worse-than-expected jobs report. In May, factory orders for manufactured goods hit their lowest point in over a year. Home sales in May were abysmal, and retail sales fell for the first time since last fall; auto sales in June declined. Perhaps most ominous, budget cuts at the state and local level are expected to result in mass layoffs in the next year or so; in June, state and local governments cut 10,000 jobs.

For all that, the biggest obstacle to recovery is not economic, it is political. The economy is limping badly as the federal stimulus and other government support are removed, obviously before the private sector is able to take up the slack. But Congress has failed to provide even the most basic support — extended unemployment benefits and bolstered aid to states.

Instead, Republicans and several Democrats have made the argument that cutting the deficit is more important than spurring the economy. The argument is wrong — jobs and the resulting tax revenue are crucial to repairing the budget. But the Democratic leadership in Congress and the White House has been incapable or unwilling to successfully rebut the deficit-mongers.

The economy has come a long way since the darkest days of the financial crisis, nearly two years ago, but it is still weak. The question now is whether it will move backward or forward.

    Help Needed for the Economy, NYT, 2.7.2010, http://www.nytimes.com/2010/07/04/opinion/04sun1.html






Factory Jobs Return,

but Employers Find Skills Shortage


July 1, 2010
The New York Times


BEDFORD, Ohio — Factory owners have been adding jobs slowly but steadily since the beginning of the year, giving a lift to the fragile economic recovery. And because they laid off so many workers — more than two million since the end of 2007 — manufacturers now have a vast pool of people to choose from.

Yet some of these employers complain that they cannot fill their openings.

Plenty of people are applying for the jobs. The problem, the companies say, is a mismatch between the kind of skilled workers needed and the ranks of the unemployed.

Economists expect that Friday’s government employment report will show that manufacturers continued adding jobs last month, although the overall picture is likely to be bleak. With the government dismissing Census workers, more jobs might have been cut than added in June.

And concerns are growing that the recovery could be teetering, with some fresh signs of softer demand this week. A central index of consumer confidence dropped sharply in June, while auto sales declined from the previous month.

Pending home sales plunged by 30 percent in May from April as tax credits for home buyers expired. Fretting that global growth is slowing, investors have driven stock indexes in the United States down to their levels of last October, for losses as great as 8 percent for 2010.

As unlikely as it would seem against this backdrop, manufacturers who want to expand find that hiring is not always easy. During the recession, domestic manufacturers appear to have accelerated the long-term move toward greater automation, laying off more of their lowest-skilled workers and replacing them with cheaper labor abroad.

Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency than was previously required of the typical assembly line worker.

Makers of innovative products like advanced medical devices and wind turbines are among those growing quickly and looking to hire, and they too need higher skills.

“That’s where you’re seeing the pain point,” said Baiju R. Shah, chief executive of BioEnterprise, a nonprofit group in Cleveland trying to turn the region into a center for medical innovation. “The people that are out of work just don’t match the types of jobs that are here, open and growing.”

The increasing emphasis on more advanced skills raises policy questions about how to help low-skilled job seekers who are being turned away at the factory door and increasingly becoming the long-term unemployed. This week, the Senate reconsidered but declined to extend unemployment benefits, after earlier extensions raised the maximum to 99 weeks.

The Obama administration has advocated further stimulus measures, which the Senate rejected, and has allocated more money for training. Still, officials say more robust job creation is the real solution.

But a number of manufacturers say that even if demand surges, they will never bring back many of the lower-skilled jobs, and that training is not yet delivering the skilled employees they need.

Here in this suburb of Cleveland, supervisors at Ben Venue Laboratories, a contract drug maker for pharmaceutical companies, have reviewed 3,600 job applications this year and found only 47 people to hire at $13 to $15 an hour, or about $31,000 a year.

The going rate for entry-level manufacturing workers in the area, according to Cleveland State University, is $10 to $12 an hour, but more skilled workers earn $15 to $20 an hour.

All candidates at Ben Venue must pass a basic skills test showing they can read and understand math at a ninth-grade level. A significant portion of recent applicants failed, and the company has been disappointed by the quality of graduates from local training programs. It is now struggling to fill 100 positions.

“You would think in tough economic times that you would have your pick of people,” said Thomas J. Murphy, chief executive of Ben Venue.

How many more people would be hired if manufacturers could find qualified candidates is hard to say. Since January, they have added 126,000 jobs, or about 6 percent of those slashed during the recession. The number may understate activity somewhat, as many factories have turned to temporary workers.

Christina D. Romer, chairwoman of the Council of Economic Advisers, said the skills shortages reported by employers stem largely from a long-term structural shift in manufacturing, which should not be confused with the recent downturn. “I do think that manufacturing can come back to what it was before the recession,” she said.

Automakers, for example, have been ramping up and mainly filling slots with people laid off a year or two ago.

Manufacturers who profess to being shorthanded say they have retooled the way they make products, calling for higher-skilled employees. “It’s not just what is being made,” said David Autor, an economist at the Massachusetts Institute of Technology, “but to the degree that you make it at all, you make it differently.”

In a survey last year of 779 industrial companies by the National Association of Manufacturers, the Manufacturing Institute and Deloitte, the accounting and consulting firm, 32 percent of companies reported “moderate to serious” skills shortages. Sixty-three percent of life science companies, and 45 percent of energy firms cited such shortages.

In the Cleveland area, historically a center of metalworking and rubber production, more than 40,000 manufacturing workers lost their jobs in the recession, a 21 percent decline, according to an analysis of employment data by Cleveland State University. Since the beginning of the year, the region has added 4,500 positions.

Employers say they are looking for aptitude as much as specific skills. “We are trying to find people with the right mindset and intelligence,” said Mr. Murphy.

Ben Venue has recruited about half its new factory hires from outside the pool of former manufacturing workers. Zachary Flyer, a 32-year-old Army veteran, had been laid off from a law firm filing room when he applied at the drug maker last summer.

He spent four months this year learning how to operate a 400-square-foot freeze dryer that helps preserve vials of medicine. Monitoring vacuum pressure and temperatures on a color-coded computer screen with flashing numbers, Mr. Flyer said last month that he preferred his new work to the law firm, where he had spent seven years.

“I like jobs that are more hands-on, as opposed to watching paperwork all day,” he said.

Local leaders worry that the skills shortage now will be exacerbated once baby boomers start retiring. In Ohio, officials project that about 30 percent of the state’s manufacturing workers will be eligible for retirement by 2016.

“The new worker of tomorrow is in about sixth grade,” said John Gajewski, executive director of the advanced manufacturing, engineering and apprenticeship program at Cuyahoga Community College in downtown Cleveland. “And they need training to move into manufacturing.”

At Astro Manufacturing and Design, a maker of parts and devices for the aerospace, medical and military industries, Rich Peterson, vice president for business development, recently gave a tour to a group of eighth graders.

He showed off surgical simulators and torpedo parts, saying he wanted them to see the “cool” things the company makes. By the end of the tour, more than a third of the students said they might consider working at a place like Astro, which is based in Eastlake and has five plants in the Cleveland area.

For now, the company urgently needs six machinists to run what are known as computer numerical control — or CNC — machines. An outside recruiter has reviewed 50 résumés in the last month and come up empty.

The jobs, which would pay $18 to $23 an hour, require considerable technical skill. On an afternoon last month, Christopher Debruycker, 34, was running such a machine, the size and shape of a camper van parked on the factory floor.

Mr. Debruycker, who has been an operator for 15 years, had programmed the machine to carve an intricate part for a flight simulator out of a block of aluminum, and he monitored its progress on a control pad with an array of buttons.

“We need 10 more people like him,” Mr. Peterson said.

David Maxwell contributed reporting.

Factory Jobs Return, but Employers Find Skills Shortage, NYT, 1.7.2010, http://www.nytimes.com/2010/07/02/business/economy/02manufacturing