USA > History > 2010 > Economy (II)

 Ross MacDonald

Retirees at the Mercy of the Bankers

NYT

25.1.2010

http://www.nytimes.com/2010/01/25/opinion/l25retirees.html

Overqualified?

Yes, but Happy to Have a Job

March 28, 2010
The New York Times
By MICHAEL LUO

GRANDVIEW, Mo. — Don Carroll, a former financial analyst with a master’s degree in business administration from a top university, was clearly overqualified for the job running the claims department for Cartwright International, a small, family-owned moving company here south of Kansas City.

But he had been out of work for six months, and the department badly needed modernization after several decades of benign neglect. It turned out to be a perfect match.

After being hired in December, Mr. Carroll, 31, quickly set about revamping the four-person department, which settles damage claims from moves, and creating tracking tools so the company could better understand its spending.

Conventional wisdom warns against hiring overqualified candidates like Mr. Carroll, who often find themselves chafing at their new roles. (The posting for his job had specified “bachelor’s degree preferred but not required.”) But four months into his employment, it seems to be working out well for all involved.

It is a situation being repeated across the country as the aspirations of many workers have been recalibrated amid the recession, enabling some companies to reap unexpected rewards.

A result is a new cadre of underemployed workers dotting American companies, occupying slots several rungs below where they are accustomed to working. These are not the more drastic examples of former professionals toiling away at “survival jobs” at Home Depot or Starbucks. They are the former chief financial officer working as comptroller, the onetime marketing director who is back to being an analyst, the former manager who is once again an “individual contributor.”

The phenomenon was probably inevitable in a labor market in which job seekers outnumber openings five to one. Employers are seizing the opportunity to stock up on discounted talent, despite the obvious risks that the new hires will become dissatisfied and leave. “They’re trying to really professionalize this company,” said Mr. Carroll, who is the sole breadwinner for his family of four and had lost his home to foreclosure. “I’ve been able to play a big role in that.”

In some cases, of course, the new employees fail to work out, forcing the company through the process of hiring and training someone else. But Mr. Carroll is just one of several recent hires at Cartwright who would be considered overqualified, including a billing clerk who is a certified public accountant and a human resources director who once oversaw that domain for 5,000 employees but is now dealing with just 65.

They represent marked upgrades for Cartwright, a modest-size business with expanding ambitions. The company is benefiting from an influx of talent it probably never would have been able to attract in a better economic climate.

“There’s a nice free-agent market right now,” said Randy Woehl, the human resources director. “The best it’s ever been.”

Exact numbers for workers toiling in positions where their experience or education exceed their job descriptions are hard to come by, in part because the concept is difficult to measure and can be quite subjective. Several studies have put the figure at roughly one in five American workers, although some doubt the numbers are that high. Economists and sociologists, however, agree that the frequency inevitably increases in hard times.

Nevertheless, an overriding complaint among many job seekers, particularly professionals, is how often they are rejected for lower-level positions that they desperately want and believe they could practically do in their sleep.

Academic research on the subject confirms that workers who perceive themselves as overqualified do, in fact, report lower job satisfaction and higher rates of turnover. But the studies also indicate that those workers tend to perform better. Moreover, there is evidence that many of the negatives that come with overqualified hires can be mitigated if they are given autonomy and made to feel valued and respected.

The new variable in all of this is the continuing grim economic climate. Many workers’ ambitions have evolved, after all, from climbing the ladder to simply holding on to a job, any job. Turnover would also seem to be less of a concern amid predictions that it could be years before unemployment returns to pre-recession levels.

Jackie Swanson, 44, accepted a part-time job in May as a facilities manager at Conservation Services Group, a Massachusetts company that delivers energy-efficiency programs and training across the country. She had been laid off after 16 years at another company, where she had handled more than 50 offices as a corporate facilities planner.

In her previous position, she had been more of a project manager, whereas the new job was mostly about the upkeep of the headquarters building. Ms. Swanson managed to convince the company’s recruiter that she was excited about the organization and that her priorities for a job had changed.

“I was willing to take a drastic cut in pay just to have stability,” she said.

Since then, Ms. Swanson has been promoted to full time. Even though her job still represents a step down in responsibilities, she has no plans to leave anytime soon.

“I’m happy here,” she said. “I actually feel respected.”

At Cartwright, Mr. Carroll said he had so far found enough to keep him engaged because he had mostly been given free rein in the department. He has also volunteered to help the company’s finance and accounting managers with anything they might need. Whenever he gets a request from someone higher up the ladder, he consciously tries to overdeliver.

Nevertheless, there are signs of angst. He is being paid a third less than he used to make. He and his wife realize that many of their financial goals could be set back years by this period. He is still paying attention to what is happening in the job market but is not actively looking.

Mr. Carroll’s cubicle mate, Mindy William, a former graphic designer and single mother who had been working at Target before she was recently hired as a claims adjuster, said she had noticed that he seemed to talk about his old job a lot.

“I know it’s been an adjustment for him,” she said. “He’s just making the best of it like the rest of us are. We’re glad to have jobs in this recession.”

For his part, Mr. Carroll admitted that he had caught himself often trying to drop his credentials into conversations at his new workplace.

“Obviously that stems from maybe some embarrassment at the level that I’m at,” he said. “I do want people to know that, to some extent, this isn’t who I am.”

It helps somewhat that most of his former business school classmates are hardly becoming masters of the universe.

“It’s not like anyone else is tearing it up,” he said.

While he is happy for now, Mr. Carroll worries about what will happen once he has finished the more interesting work of overhauling the department. He wonders how long simply having a job will be enough.

    Overqualified? Yes, but Happy to Have a Job, NYT, 29.3.2010, http://www.nytimes.com/2010/03/29/us/29overqualified.html

Households Facing Foreclosure

Rose in 4th Quarter

March 25, 2010
The New York Times
By DAVID STREITFELD

The ranks of those facing foreclosure swelled by a quarter-million households in the fourth quarter, new government data shows.

Households that are at least 90 days delinquent on their mortgage payment now number at least 1.6 million, according to a report Thursday issued by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Though more people are in worse trouble, the good news is that fewer households are entering delinquency. The number of people who were only one payment behind actually dropped in the quarter by 16,000.

One reason for the ballooning number of seriously delinquent borrowers is that foreclosure, for better or worse, is becoming an increasingly lengthy process. Many delinquent borrowers are in trial modifications, which keeps the final stages of foreclosure at bay.

The number of foreclosures completed in the fourth quarter rose 9 percent, to 128,859. Another 38,000 owners disposed of their house in a short sale, where the lender agrees to accept less than it is owed.

Starting this month, the Treasury Department is promoting new rules to facilitate short sales. Borrowers who are trying to sell their house in a short sale can also put off the endgame for many months.

Both lenders and the Treasury are under pressure to save many of the homeowners now in foreclosure limbo. Bank of America, the country’s biggest bank, announced this week that it would forgive principal balances over a period of years on an initial 45,000 troubled loans.

Lenders began offering principal forgiveness last year on loans they held in their own portfolios. In the fourth quarter, however, this process abruptly reversed itself. The number of modifications that included principal reduction fell by half.

The Treasury is expected to announce soon adjustments to its mortgage modification plan that will do more to promote principal forgiveness. On Thursday, it detailed smaller changes to improve the program. Loan servicers are now required to pre-emptively reach out to borrowers who have missed two payments and solicit them for a modification.

The quarterly regulators’ report is one of the broadest surveys of loan performance, covering 34 million first-lien loans. It shows about 4.6 million borrowers qualify as distressed, ranging from only one payment behind to those within days of being evicted by the sheriff.

Since the report only covers about two-thirds of American mortgage loans — and the higher quality loans at that — the actual number of the distressed is about seven million households.

    Households Facing Foreclosure Rose in 4th Quarter, NYT, 26.3.2010, http://www.nytimes.com/2010/03/26/business/economy/26mortgages.html

Sales of New Homes Weaken in February

March 24, 2010
The New York Times
By JAVIER C. HERNANDEZ

Sales of new homes weakened to a record low in February, dimming prospects for a swift recovery for the housing market.

Over all, sales were down 2.2 percent, the Commerce Department said Wednesday, to a seasonally adjusted annual rate of 308,000. Economists had forecast a 1.9 percent rise.

Those numbers followed a similarly bleak report on Tuesday that showed sales of existing homes dropped in February, despite a generous government tax credit meant to lure buyers.

Taken together, the bleak data resurrected concerns that the market could fall into another downturn, with new downward pressure on prices as the supply of homes increases but demand dwindles.

“It was dismal no matter how one tries to slice and dice it,” Joshua Shapiro, an economist for MFR Inc. wrote in a research note.

Sales of new homes have now fallen 23 percent since October. Sales rose at a rapid pace last fall as buyers rushed to take advantage of an $8,000 tax credit before its original expiration date. The credit has since been extended to April 30, but so far there has been no evidence of a buying frenzy.

Mr. Shapiro said he expected the credit to bolster sales somewhat over the next several months. But beyond that, the forecast is murkier. Weaning the housing market from the tax credit “is going to be a difficult process,” he wrote.

The drop in February was partly the result of stronger results the previous month: the government said sales reached a rate of 315,000 units in January, better than the 309,000 rate originally forecast. Economists said a series of snow storms in February may also have contributed to the decline, though they reiterated that the underlying data was still weak.

A separate report on Wednesday showed businesses continued to ramp up spending on durable goods in February, raising hopes that a vigorous rebound for manufacturing may help drive a turnaround for the United States economy.

Orders for long-lasting goods rose 0.5 percent in February, the Commerce Department said, fueled in part by greater demand from abroad and inventory restocking.

But a closely watched measure that excludes volatile aircraft and military orders fell 0.6 percent, suggesting a fast-paced resurgence in orders may be slowing slightly. Severe winter weather may have also hampered growth, economists said.

Paul Dales, an economist for Capital Economics in Toronto, said the results were “further evidence that manufacturers are enjoying a healthy recovery.”

Manufacturing activity has grown briskly since last summer, accompanies by a steady rise in business confidence. Durable goods orders have increased for three consecutive months now, and they rose 3.9 percent in January. They were nearly 8 percent higher than the levels of February 2009.

Economists said that momentum was probably sustainable in the short term, but could weaken later in the year as government stimulus programs end and restocking slows.

“Business decision makers, still uncertain about the long-term outlook for economic growth, are exercising caution with regards to capital spending,” Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, wrote in a research note.

A surge in exports has helped prop up orders. The cheap dollar has made American products more appealing overseas, bolstering demand.

But some sectors continue to lag. Transportation fell 0.7 percent in February after a drop in car orders. Analysts said that may have been related to Toyota’s decision to halt production at several plants after widespread concern over the safety of its vehicles.

    Sales of New Homes Weaken in February, NYT, 24.3.2010, http://www.nytimes.com/2010/03/25/business/economy/25econ.html

Op-Ed Columnist

The Broken Society

March 19, 2010
The New York Times
By DAVID BROOKS

The United States is becoming a broken society. The public has contempt for the political class. Public debt is piling up at an astonishing and unrelenting pace. Middle-class wages have lagged. Unemployment will remain high. It will take years to fully recover from the financial crisis.

This confluence of crises has produced a surge in vehement libertarianism. People are disgusted with Washington. The Tea Party movement rallies against big government, big business and the ruling class in general. Even beyond their ranks, there is a corrosive cynicism about public action.

But there is another way to respond to these problems that is more communitarian and less libertarian. This alternative has been explored most fully by the British writer Phillip Blond.

He grew up in working-class Liverpool. “I lived in the city when it was being eviscerated,” he told The New Statesman. “It was a beautiful city, one of the few in Britain to have a genuinely indigenous culture. And that whole way of life was destroyed.” Industry died. Political power was centralized in London.

Blond argues that over the past generation we have witnessed two revolutions, both of which liberated the individual and decimated local associations. First, there was a revolution from the left: a cultural revolution that displaced traditional manners and mores; a legal revolution that emphasized individual rights instead of responsibilities; a welfare revolution in which social workers displaced mutual aid societies and self-organized associations.

Then there was the market revolution from the right. In the age of deregulation, giant chains like Wal-Mart decimated local shop owners. Global financial markets took over small banks, so that the local knowledge of a town banker was replaced by a manic herd of traders thousands of miles away. Unions withered.

The two revolutions talked the language of individual freedom, but they perversely ended up creating greater centralization. They created an atomized, segmented society and then the state had to come in and attempt to repair the damage.

The free-market revolution didn’t create the pluralistic decentralized economy. It created a centralized financial monoculture, which requires a gigantic government to audit its activities. The effort to liberate individuals from repressive social constraints didn’t produce a flowering of freedom; it weakened families, increased out-of-wedlock births and turned neighbors into strangers. In Britain, you get a country with rising crime, and, as a result, four million security cameras.

In a much-discussed essay in Prospect magazine in February 2009, Blond wrote, “Look at the society we have become: We are a bi-polar nation, a bureaucratic, centralised state that presides dysfunctionally over an increasingly fragmented, disempowered and isolated citizenry.” In a separate essay, he added, “The welfare state and the market state are now two defunct and mutually supporting failures.”

The task today, he argued in a recent speech, is to revive the sector that the two revolutions have mutually decimated: “The project of radical transformative conservatism is nothing less than the restoration and creation of human association, and the elevation of society and the people who form it to their proper central and sovereign station.”

Economically, Blond lays out three big areas of reform: remoralize the market, relocalize the economy and recapitalize the poor. This would mean passing zoning legislation to give small shopkeepers a shot against the retail giants, reducing barriers to entry for new businesses, revitalizing local banks, encouraging employee share ownership, setting up local capital funds so community associations could invest in local enterprises, rewarding savings, cutting regulations that socialize risk and privatize profit, and reducing the subsidies that flow from big government and big business.

To create a civil state, Blond would reduce the power of senior government officials and widen the discretion of front-line civil servants, the people actually working in neighborhoods. He would decentralize power, giving more budget authority to the smallest units of government. He would funnel more services through charities. He would increase investments in infrastructure, so that more places could be vibrant economic hubs. He would rebuild the “village college” so that universities would be more intertwined with the towns around them.

Essentially, Blond would take a political culture that has been oriented around individual choice and replace it with one oriented around relationships and associations. His ideas have made a big splash in Britain over the past year. His think tank, ResPublica, is influential with the Conservative Party. His book, “Red Tory,” is coming out soon. He’s on a small U.S. speaking tour, appearing at Georgetown’s Tocqueville Forum Friday and at Villanova on Monday.

Britain is always going to be more hospitable to communitarian politics than the more libertarian U.S. But people are social creatures here, too. American society has been atomized by the twin revolutions here, too. This country, too, needs a fresh political wind. America, too, is suffering a devastating crisis of authority. The only way to restore trust is from the local community on up.

    The Broken Society, NYT, 19.3.2010, http://www.nytimes.com/2010/03/19/opinion/19brooks.html

Junk Bond Avalanche Looms for Credit Markets

March 15, 2010
The New York Times
By NELSON D. SCHWARTZ

When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.

Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.

The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.

Indeed, worries about the growth of national, or sovereign, debt prompted Moody’s Investors Service to warn on Monday that the United States and other Western nations were moving “substantially” closer to losing their top-notch Aaa credit ratings.

Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses.

The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.

Even Moody’s, which is known for its sober public statements, is sounding the alarm.

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

That is because the record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor’s.

In addition, she said, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but the extra breathing room is only adding to the bill for 2012 and after.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

The credit markets have gradually returned to normal since the financial crisis, particularly in recent months, making more loans available to companies and signaling confidence in the pace of economic recovery. But the issue is whether they can absorb the coming surge in demand for credit.

As was the case with the collapse of the subprime mortgage market three years ago, derivatives played a big role in the explosion of risky corporate debt. In this case the culprit was a financial instrument called a collateralized loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available.

“The question is, ‘Should these deals have ever been financed in the first place?’ ” asked Anders J. Maxwell, a corporate restructuring specialist at Peter J. Solomon Company in New York.

The period from 2012 to 2014 represents payback time for a Who’s Who of private equity firms and the now highly leveraged companies they helped buy in the precrisis boom years.

The biggest include the hospital owner HCA, which was taken private in 2006 by a group led by Bain Capital and Kohlberg Kravis & Roberts for $33 billion, and has $13.3 billion in debt payments coming due between 2012 and 2014. Another buyout led by Kohlberg Kravis, for the giant Texas utility TXU, has $20.9 billion that needs to be refinanced in the same period.

Realogy, which owns real estate franchises like Century 21 and Coldwell Banker, was taken private by Apollo in the spring of 2007 just as the housing market was beginning to unravel and as the first tremors of the subprime crisis were being felt.

Realogy was saddled with $8 to $9 of debt for every $1 in earnings, well above the “$5 to $6 level that is manageable for a company in a highly cyclical industry,” according to Emile Courtney, a credit analyst with Standard & Poor’s.

Realogy has survived — barely. “The company’s cash flow is still below what’s needed to cover the interest on its debt,” Mr. Courtney said.

Realogy said it ended 2009 with a substantial cushion on its financial covenants and over $200 million of available cash on its balance sheet. “The company generated over $340 million of net cash provided by operating activities in 2009 after paying interest on its debt,” the company said.

Not everyone is convinced that 2012 will spell catastrophe for the junk bond market, however.

Optimists like Martin Fridson, a veteran high-yield strategist, note that investors seeking high yields snapped up speculative-grade bonds last year and early this year, and he suggests that continued demand will allow companies to refinance before their loans come due.

“The companies have nearly two years to push out the 2012 maturity wall,” he said. “Of course, the ability to refinance will depend upon the state of the economy.”

That is still a wild card, but even if the economy improves, companies with a lot of debt will be competing with a raft of better-rated borrowers that are expected to seek buyers of their debt at around the same time.

Chief among those is the best-rated borrower of all: the United States government. The Treasury Department estimates that the federal budget deficit in 2012 will total $974 billion, down from this year’s $1.8 trillion, but still huge by historical standards.

Most critics of deficit spending have focused on the budget gap alone, but Washington will actually have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.

In the late 1990s, the federal government ran a surplus and actually paid down a small portion of the national debt. But with the huge deficits of the last few years, the national debt has grown to more than $12 trillion.

Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012. Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.

Even if most of the debt does get refinanced, companies may have to pay more, if heavy government borrowing causes rates for all borrowers to rise.

“These are huge numbers,” said Tom Atteberry, who manages $5.6 billion in bonds for First Pacific Advisors, and is particularly alarmed by Washington’s borrowing. “Other players will get crowded out or have to pay significantly more, because the government is borrowing so much.”

    Junk Bond Avalanche Looms for Credit Markets, NYT, 16.3.2010, http://www.nytimes.com/2010/03/16/business/16debt.html

Michael Jackson’s Estate Signs Sweeping Contract

March 16, 2010
The New York Times
By BEN SISARIO

Nine months after Michael Jackson’s death, his estate has signed one of the biggest recording contracts in history, giving Sony, Mr. Jackson’s longtime label, the rights to sell his back catalog and draw on a large vault of unheard recordings.

The deal, for about 10 recordings through 2017, will guarantee the Jackson estate up to $250 million in advances and other payments and offer an especially high royalty rate for sales both inside and outside the United States, according to people with knowledge of the contract who spoke anonymously because they were not authorized to speak about it publicly.

It also allows Sony and the estate to collaborate on a wide range of lucrative licensing arrangements, like the use of Jackson music for films, television and stage shows and lines of memorabilia that will be limited only by the imagination of the estate and the demand of a hungry worldwide market.

“We think that recordings will always be an important part of the estate,” John Branca, an entertainment lawyer who is one of the estate’s executors, said in an interview on Monday. “New generations of kids are discovering Michael.”

“A lot of the people that went to see ‘This Is It’ were families,” he added, referring to the Jackson concert film released in October. “ ‘This Is It’ was one of the few films allowed into China. So we think there are growing and untapped markets for Michael’s music.”

The first recording covered by the new contract is the “This Is It” soundtrack, released last year, and Sony plans a new album of unreleased recordings for November.

Sony’s contract is a bet on the continued appeal of Mr. Jackson, whose sales spiked after his death in June at the age of 50. With overall record sales on a decade-long plunge, mega-deals like this one have become rare, and Mr. Branca said the deal “exceeds all previous industry benchmarks.” Five years ago Bruce Springsteen signed a deal with Sony worth a reported $110 million, and in 2008 Live Nation and Jay-Z struck a $150 million deal for recordings, concert tours and other rights.

Demand for Jackson music has leveled off after the initial rush — in the weeks after his death Sony scrambled to replenish retailers’ stock of any and all Jackson titles — but remains high. Last year Mr. Jackson was the biggest-selling artist in the United States by a wide margin, with 8.3 million combined album sales and 12.4 million downloads of single tracks, according to Nielsen SoundScan. Mr. Branca said that since his death Mr. Jackson has sold more than 31 million albums, about two-thirds of them outside the United States.

But as record sales have tapered off over the last decade, licensing has emerged as the biggest growth area for revenue from recorded music. And given the success of the Beatles and the Elvis Presley estate in reissuing and repackaging old albums as well as finding new uses for their music — like “Love,” the Beatles’ hit theatrical show by Cirque du Soleil — it is not hard to imagine the direction that the Jackson estate might take in using old recordings in new ways.

“It’s not just a record deal,” said Rob Stringer, chairman of the Columbia/Epic Label Group, a Sony division. “We’re not just basing this on how many CDs we sell or how many downloads. There are also audio rights for theater, movies, computer games. I don’t know how an audio soundtrack will be used in 2017, but you’ve got to bet on Michael Jackson in any new platform.”

    Michael Jackson’s Estate Signs Sweeping Contract, NYT, 16.3.2010, http://www.nytimes.com/2010/03/16/arts/music/16jackson.html

China’s Exports Rise 46%

March 10, 2010
The New York Times
By SHARON LAFRANIERE

BEIJING —China announced Wednesday that its exports climbed 46 percent in February from a year earlier. Economists said the data signaled a rebound in consumer demand from the United States and other Western markets after the financial crisis last year.

It was the third consecutive month of increases in Chinese exports and the fastest growth in three years. Orders from the United States, the European Union and Japan accounted for almost half the growth, following a pickup in demand from emerging markets in the previous two months.

Chinese imports also rose 45 percent over the previous year, led by crude oil as factories stepped up production.

Some economists said the figures indicated China’s recovery was well under way. Tao Wang, head of China research for UBS Securities, predicted that Chinese exports would rebound to the level of 2008 before China took a big hit from the global financial crisis.

She and others suggested that the robust growth could increase pressure on China to let its currency, the renminbi, appreciate against the U.S. dollar.

Western governments contend the peg to the dollar keeps Chinese exports artificially cheap and depresses competing economies. The Chinese prime minister, Wen Jiabao, said last week that exchange rates would remain “basically stable” for now.

Commerce Minister Chen Deming said in late December that the outlook for international trade remained “extremely complicated” and predicted that it could take two or three years for Chinese exports to recover to precrisis levels. A Commerce Ministry spokesman repeated that prediction late last month.

But some analysts saw a hint of a possible shift in policy in comments made Saturday by the central bank governor, Zhou Xiaochuan. He called pegging the renminbi to the U.S. dollar a “special foreign exchange mechanism” that would be abandoned “sooner or later.”

February figures are harder to interpret than those for other months because of China’s holiday break, which occurs early every year but not on the same date. Moreover, the comparison with the previous year could be somewhat misleading because February 2009 was a particularly bleak month for Chinese exports and imports.

Nonetheless, Moody’s Economy.com, an economic research organization, said the data “reflects the dramatic improvement in the trade sector” over a year ago. Other economists said the figures suggested the outlook of the Chinese Commerce Ministry was too pessimistic.

The 46 percent increase in exports beat economists’ predictions and the January increase of 21 percent. Exports of textiles, steel products, televisions and motorcycles also rose. In China’s industrial heartland, some factories are reporting labor shortages as they strive to fill orders.

The pace of growth in imports slowed from January, when China reported an 85 percent increase. Economists attributed that largely to rising prices.

China reported a $7.6 billion trade surplus for the month. The trade surplus for January through February shrank by half compared to a year ago, according to Ms. Wang, of UBS. She said the smaller surplus was probably temporary, because of the rising prices of commodities. She predicted a modest drop in the trade surplus for the year.

Separately, others figures from the National Bureau of Statistics also released Wednesday showed the economy was humming along. Investment in real estate rose 31.1 percent in the first two months of the year, compared with a year earlier, Reuters reported.

China unveiled strict new rules Wednesday governing bankers’ pay that are designed to limit risk taking, Reuters reported from Beijing.

Payment of 40 percent or more of an executive’s salary must be delayed for a minimum of three years and could be withheld if the bank performs poorly, the China Banking Regulatory Commission said in a statement on its Web site.

This would ostensibly put China at the forefront of a global movement to use regulation of bankers’ pay as a way to control investment behavior. The implications in China are less significant, however, because bankers are, in effect, employees of the government in the largely state-owned banking system and their salaries are already significantly lower than those of international peers.


Zhang Jing contributed research.

    China’s Exports Rise 46%, NYT, 11.3.2010, http://www.nytimes.com/2010/03/11/business/global/11yuan.html

Editorial

As Foreclosures Continue ...

March 1, 2010
The New York Times

President Obama went to Henderson, Nev., the other day to show Americans that he was responding to the cries for help from struggling homeowners (and maybe give a boost to Senator Harry Reid’s re-election). He announced a $1.5 billion effort to prevent foreclosures in five states hard-hit by the housing bust — Nevada, Arizona, California, Florida and Michigan — by feeding money into programs that would be developed and carried out by the housing agencies in the targeted states.

The audience in Henderson applauded the announcement, and understandably so. In Nevada, unemployment is 13 percent and 70 percent of homeowners with mortgages owe more on their homes than they are worth; in industry parlance, they are “underwater.” Since a combination of joblessness and underwater loans is the main driver of foreclosure, Nevadans are clearly at high risk of losing their homes, as are homeowners in the other four states.

So it was good to see Mr. Obama focusing aid where it is needed most. But two big concerns remain. First, the new plan must be implemented quickly and efficiently for it to be more than a public relations ploy, and as yet there is no timetable. More broadly, it is still not clear whether the administration realizes that the importance of the plan lies not just in what it might do for a handful of states but in the direction it should set nationally.

The administration’s $75 billion antiforeclosure program, which subsidizes lenders to rework bad loans, has been a big disappointment. One reason is that its usual method of modifying loans — lowering the monthly payment by reducing the interest rate — does not work well for jobless and underwater borrowers. Unemployed homeowners often cannot make even reduced payments and underwater borrowers need principal reductions to succeed over the long run, not lower rates.

And yet, the administration has resisted calls to revamp its program, citing cost and complexity. Another obstacle is that banks are generally loath to modify loans by reducing principal, which would require them to take big upfront losses that they would prefer to postpone.

In at least a tacit acknowledgment of those issues, Mr. Obama specifically said that the five-state effort is intended to aid homeowners who are out of work and underwater. To help jobless owners, states could use the money for loans to cover mortgage payments, an approach used successfully in Pennsylvania. With unemployment expected to remain high for a long time, Mr. Obama should consider a national program of that kind.

It is less clear how the new fund would help underwater borrowers. Why would states be successful in negotiating principal reductions when the administration has not been able to persuade or compel the banks to do them? Still, now that Mr. Obama has set the aim of helping underwater borrowers, it is up to the administration — by working with states or by revamping its own efforts — to make it happen. The banks won’t like it. But the alternative is more foreclosures, further price declines and — as the housing market continues to wobble — an endangered economic recovery.

By itself, Mr. Obama’s new plan for Nevada and the other states is too small to make a meaningful dent in foreclosures. But by aiming to help unemployed and underwater borrowers, it is headed in the right direction, if the administration is willing to set a new course.

    As Foreclosures Continue ..., NYT, 1.3.2010, http://www.nytimes.com/2010/03/01/opinion/01mon1.html

Bernanke Forecasts Long Period of Low Interest Rates

February 25, 2010
The New York Times
By SEWELL CHAN

WASHINGTON — Ben S. Bernanke, the Federal Reserve chairman, signaled on Wednesday that he did not plan to begin raising interest rates anytime soon, saying the economic recovery would remain halting for months to come.

In presenting the Fed’s semiannual monetary report to Congress, Mr. Bernanke did not waver from the Jan. 27 statement of the central bank’s key policy making board, or from a Feb. 10 statement in which he explained to Congress the strategies for gradually reducing the vast sums that banks hold in reserves at the Fed.

“Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures,” Mr. Bernanke said in a prepared statement.

While Mr. Bernanke did not change his outlook on interest rates or the economy, he did announce two significant steps to improve transparency and accountability of the Fed, after a period in which the central bank has faced considerable criticism.

Significantly, Mr. Bernanke said that the Fed would “support legislation that would require the release” of the names of borrowers that used the extraordinary lending programs the Fed created in 2008 to prop up the markets for commercial paper, money market funds and even consumer loans. The Fed lent to investment banks for the first time and helped arrange the sale of the investment bank Bear Stearns and the rescues of the American International Group and Citigroup.

“While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operations,” Mr. Bernanke said.

He said the release should not occur until a “lag that is sufficiently long” to avoid creating the impression that the borrower still faces financial problems, undermine market confidence or discourage future borrowing. Mr. Bernanke also said he would support audits by the Government Accountability Office of how the lending programs were conducted.

In his testimony, Mr. Bernanke predicted that the recovery would be slow. Much of the pickup in growth late last year, he said, could be attributed to companies reducing unwanted inventories of unsold goods, making them more willing to bolster production.

“As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services,” he said.

Mr. Bernanke’s prepared testimony, which accompanied the Fed’s 53-page monetary policy report, did not contain many surprises. Observers were more interested in what he would tell members of the House Financial Services Committee under questioning.

In his testimony, Mr. Bernanke said consumer demand seemed to be “growing at a moderate pace,” notably business investment in equipment and software and in a rebound of international trade. Housing starts, however, have been flat, and despite recent signs that job losses have slowed, the “job market remains quite weak.”

As the hearing commenced, the committee chairman, Representative Barney Frank of Massachusetts, allowed various members to air their views.

Representative Ron Paul, the Texas Republican and persistent libertarian critic of the Fed — he favors something like a return to the gold standard — said the Fed continued to create “moral hazard” by allowing companies to take risks because they believe they will be bailed out if they fail.

“ ‘Too big to fail’ creates a tremendous moral hazard,” he said, “but of course the real moral hazard over the many decades has been the deception put into the markets by the Federal Reserve.”

After Mr. Paul suggested that money used in the 1972 Watergate break-in came from the Federal Reserve, and that the Fed had loaned $5.5 billion to the regime of Saddam Hussein of Iraq, Mr. Bernanke replied, “The specific allegations you have made are absolutely bizarre. I have no knowledge of anything remotely like what you’ve described.”

And when Mr. Paul asked whether the Fed would bail out the Greek government, Mr. Bernanke replied, “We have no plans whatsoever to be involved in any foreign bailouts or anything of that sort.”

Under questioning, Mr. Bernanke tried his best not to take a side in the Congressional debates over how best to help the economy despite the huge deficits.

“Obviously unemployment is the biggest problem that we have,” Mr. Bernanke told Mr. Frank. “If the Federal Reserve and the Congress can address that issue, we need to address that issue, but there are difficult trade-offs.”

But he added: “There are real long-term budget problems which need to be addressed.”

In response to Representative Spencer T. Bachus of Alabama, the senior Republican on the committee, Mr. Bernanke conceded that the long-term growth in the debt and deficit was not sustainable. “In order to maintain a stable ratio of debt-to-G.D.P., you need to have a deficit that’s 2.5 to 3 percent at most, so yes, under current projections, we have a deficit, debt, that will continue to grow, interest-rate costs that will continue to grow,” he said.

A plan to bring the nation’s fiscal house in order, he said, would be “very helpful — even to the current recovery, to markets, to confidence.”

The only topic that lawmakers from both parties persistently raised with Mr. Bernanke was the state of the commercial real estate market, and in particular the challenges small businesses are having in obtaining loans.

“We know that small-business lending is closely tied to job creation,” Mr. Bernanke told Representative Melvin L. Watt, Democrat of North Carolina. “We know that there are problems with bank lending to small businesses.”

And he told Representative Nydia M. Velazquez, Democrat of New York: “The real concern at this point is that the fundamentals for hotels and office buildings and malls and so on are quite weak. That’s why the loans are going bad. Really the only solution there is first to strengthen the economy overall and second, to help the banks deal with those problems, work them out.”

    Bernanke Forecasts Long Period of Low Interest Rates, NYT, 28.2.2010, http://www.nytimes.com/2010/02/25/business/economy/25fed.html

The New Poor

Millions of Unemployed Face Years Without Jobs

February 21, 2010
The New York Times
By PETER S. GOODMAN

BUENA PARK, Calif. — Even as the American economy shows tentative signs of a rebound, the human toll of the recession continues to mount, with millions of Americans remaining out of work, out of savings and nearing the end of their unemployment benefits.

Economists fear that the nascent recovery will leave more people behind than in past recessions, failing to create jobs in sufficient numbers to absorb the record-setting ranks of the long-term unemployed.

Call them the new poor: people long accustomed to the comforts of middle-class life who are now relying on public assistance for the first time in their lives — potentially for years to come.

Yet the social safety net is already showing severe strains. Roughly 2.7 million jobless people will lose their unemployment check before the end of April unless Congress approves the Obama administration’s proposal to extend the payments, according to the Labor Department.

Here in Southern California, Jean Eisen has been without work since she lost her job selling beauty salon equipment more than two years ago. In the several months she has endured with neither a paycheck nor an unemployment check, she has relied on local food banks for her groceries.

She has learned to live without the prescription medications she is supposed to take for high blood pressure and cholesterol. She has become effusively religious — an unexpected turn for this onetime standup comic with X-rated material — finding in Christianity her only form of health insurance.

“I pray for healing,” says Ms. Eisen, 57. “When you’ve got nothing, you’ve got to go with what you know.”

Warm, outgoing and prone to the positive, Ms. Eisen has worked much of her life. Now, she is one of 6.3 million Americans who have been unemployed for six months or longer, the largest number since the government began keeping track in 1948. That is more than double the toll in the next-worst period, in the early 1980s.

Men have suffered the largest numbers of job losses in this recession. But Ms. Eisen has the unfortunate distinction of being among a group — women from 45 to 64 years of age — whose long-term unemployment rate has grown rapidly.

In 1983, after a deep recession, women in that range made up only 7 percent of those who had been out of work for six months or longer, according to the Labor Department. Last year, they made up 14 percent.

Twice, Ms. Eisen exhausted her unemployment benefits before her check was restored by a federal extension. Last week, her check ran out again. She and her husband now settle their bills with only his $1,595 monthly disability check. The rent on their apartment is $1,380.

“We’re looking at the very real possibility of being homeless,” she said.

Every downturn pushes some people out of the middle class before the economy resumes expanding. Most recover. Many prosper. But some economists worry that this time could be different. An unusual constellation of forces — some embedded in the modern-day economy, others unique to this wrenching recession — might make it especially difficult for those out of work to find their way back to their middle-class lives.

Labor experts say the economy needs 100,000 new jobs a month just to absorb entrants to the labor force. With more than 15 million people officially jobless, even a vigorous recovery is likely to leave an enormous number out of work for years.

Some labor experts note that severe economic downturns are generally followed by powerful expansions, suggesting that aggressive hiring will soon resume. But doubts remain about whether such hiring can last long enough to absorb anywhere close to the millions of unemployed.

A New Scarcity of Jobs

Some labor experts say the basic functioning of the American economy has changed in ways that make jobs scarce — particularly for older, less-educated people like Ms. Eisen, who has only a high school diploma.

Large companies are increasingly owned by institutional investors who crave swift profits, a feat often achieved by cutting payroll. The declining influence of unions has made it easier for employers to shift work to part-time and temporary employees. Factory work and even white-collar jobs have moved in recent years to low-cost countries in Asia and Latin America. Automation has helped manufacturing cut 5.6 million jobs since 2000 — the sort of jobs that once provided lower-skilled workers with middle-class paychecks.

“American business is about maximizing shareholder value,” said Allen Sinai, chief global economist at the research firm Decision Economics. “You basically don’t want workers. You hire less, and you try to find capital equipment to replace them.”

During periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased about 3.5 percent a year, according to an analysis of Labor Department data by Lakshman Achuthan, managing director of the Economic Cycle Research Institute, a research firm. During expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

“The pace of job growth has been getting weaker in each expansion,” Mr. Achuthan said. “There is no indication that this pattern is about to change.”

Before 1990, it took an average of 21 months for the economy to regain the jobs shed during a recession, according to an analysis of Labor Department data by the National Employment Law Project and the Economic Policy Institute, a labor-oriented research group in Washington.

After the recessions in 1990 and in 2001, 31 and 46 months passed before employment returned to its previous peaks. The economy was growing, but companies remained conservative in their hiring.

Some 34 million people were hired into new and existing private-sector jobs in 2000, at the tail end of an expansion, according to Labor Department data. A year later, in the midst of recession, hiring had fallen off to 31.6 million. And as late as 2003, with the economy again growing, hiring in the private sector continued to slip, to 29.8 million.

It was a jobless recovery: Business was picking up, but it simply did not translate into more work. This time, hiring may be especially subdued, labor economists say.

Traditionally, three sectors have led the way out of recession: automobiles, home building and banking. But auto companies have been shrinking because strapped households have less buying power. Home building is limited by fears about a glut of foreclosed properties. Banking is expanding, but this seems largely a function of government support that is being withdrawn.

At the same time, the continued bite of the financial crisis has crimped the flow of money to small businesses and new ventures, which tend to be major sources of new jobs.

All of which helps explain why Ms. Eisen — who has never before struggled to find work — feels a familiar pain each time she scans job listings on her computer: There are positions in health care, most requiring experience she lacks. Office jobs demand familiarity with software she has never used. Jobs at fast food restaurants are mostly secured by young people and immigrants.

If, as Mr. Sinai expects, the economy again expands without adding many jobs, millions of people like Ms. Eisen will be dependent on an unemployment insurance already being severely tested.

“The system was ill prepared for the reality of long-term unemployment,” said Maurice Emsellem, a policy director for the National Employment Law Project. “Now, you add a severe recession, and you have created a crisis of historic proportions.”

Fewer Protections

Some poverty experts say the broader social safety net is not up to cushioning the impact of the worst downturn since the Great Depression. Social services are less extensive than during the last period of double-digit unemployment, in the early 1980s.

On average, only two-thirds of unemployed people received state-provided unemployment checks last year, according to the Labor Department. The rest either exhausted their benefits, fell short of requirements or did not apply.

“You have very large sets of people who have no social protections,” said Randy Albelda, an economist at the University of Massachusetts in Boston. “They are landing in this netherworld.”

When Ms. Eisen and her husband, Jeff, applied for food stamps, they were turned away for having too much monthly income. The cutoff was $1,570 a month — $25 less than her husband’s disability check.

Reforms in the mid-1990s imposed time limits on cash assistance for poor single mothers, a change predicated on the assumption that women would trade welfare checks for paychecks.

Yet as jobs have become harder to get, so has welfare: as of 2006, 44 states cut off anyone with a household income totaling 75 percent of the poverty level — then limited to $1,383 a month for a family of three — according to an analysis by Ms. Albelda.

“We have a work-based safety net without any work,” said Timothy M. Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin, Madison. “People with more education and skills will probably figure something out once the economy picks up. It’s the ones with less education and skills: that’s the new poor.”

Here in Orange County, the expanse of suburbia stretching south from Los Angeles, long-term unemployment reaches even those who once had six-figure salaries. A center of the national mortgage industry, the area prospered in the real estate boom and suffered with the bust.

Until she was laid off two years ago, Janine Booth, 41, brought home roughly $10,000 a month in commissions from her job selling electronics to retailers. A single mother of three, she has been living lately on $2,000 a month in child support and about $450 a week in unemployment insurance — a stream of checks that ran out last week.

For Ms. Booth, work has been a constant since her teenage years, when she cleaned houses under pressure from her mother to earn pocket money. Today, Ms. Booth pays her $1,500 monthly mortgage with help from her mother, who is herself living off savings after being laid off.

“I don’t want to take money from her,” Ms. Booth said. “I just want to find a job.”

Ms. Booth, with a résumé full of well-paid sales jobs, seems the sort of person who would have little difficulty getting work. Yet two years of looking have yielded little but anxiety.

She sends out dozens of résumés a week and rarely hears back. She responds to online ads, only to learn they are seeking operators for telephone sex lines or people willing to send mysterious packages from their homes.

She spends weekdays in a classroom in Anaheim, in a state-financed training program that is supposed to land her a job in medical administration. Even if she does find a job, she will be lucky if it pays $15 an hour.

“What is going to happen?” she asked plaintively. “I worry about my kids. I just don’t want them to think I’m a failure.”

On a recent weekend, she was running errands with her 18-year-old son when they stopped at an A.T.M. and he saw her checking account balance: $50.

“He says, ‘Is that all you have?’ ” she recalled. “ ‘Are we going to be O.K.?’ ”

Yes, she replied — and not only for his benefit.

“I have to keep telling myself it’s going to be O.K.,” she said. “Otherwise, I’d go into a deep depression.”

Last week, she made up fliers advertising her eagerness to clean houses — the same activity that provided her with spending money in high school, and now the only way she sees fit to provide for her kids. She plans to place the fliers on porches in some other neighborhood.

“I don’t want to clean my neighbors’ houses,” she said. “I know I’m going to come out of this. There’s no way I’m going to be homeless and poverty-stricken. But I am scared. I have a lot of sleepless nights.”

For the Eisens, poverty is already here. In the two years Ms. Eisen has been without work, they have exhausted their savings of about $24,000. Their credit card balances have grown to $15,000.

“I don’t know how we’re still indoors,” she said.

Her 1994 Dodge Caravan broke down in January, leaving her to ask for rides to an employment center.

She does not have the money to move to a cheaper apartment.

“You have to have money for first and last month’s rent, and to open utility accounts,” she said.

What she has is personality and presence — two traits that used to seem enough. She narrates her life in a stream of self-deprecating wisecracks, her punch lines tinged with desperation.

“See that,” she said, spotting a man dressed as the Statue of Liberty. Standing on a sidewalk, he waved at passing cars with a sign advertising a tax preparation business. “That will be me next week. Do you think this guy ever thought he’d be doing this?”

And yet, she would gladly do this. She would do nearly anything.

“There are no bad jobs now,” she says. “Any job is a good job.”

She has applied everywhere she can think of — at offices, at gas stations. Nothing.

“I’m being seen as a person who is no longer viable,” she said. “I’m chalking it up to my age and my weight. Blame it on your most prominent insecurity.”

Two Incomes, Then None

Ms. Eisen grew up poor, in Flatbush in Brooklyn. Her father was in maintenance. Her mother worked part time at a company that made window blinds.

She married Jeff when she was 19, and they soon moved to California, where he had grown up. He worked in sales for a chemical company. They rented an apartment in Buena Park, a growing spread of houses filling out former orange groves. She stayed home and took care of their daughter.

“I never asked him how much he earned,” Ms. Eisen said. “I was of the mentality that the husband took care of everything. But we never wanted.”

By the early 1980s, gas and rent strained their finances. So she took a job as a quality assurance clerk at a factory that made aircraft parts. It paid $13.50 an hour and had health insurance.

When the company moved to Mexico in the early 1990s, Ms. Eisen quickly found a job at a travel agency. When online booking killed that business, she got the job at the beauty salon equipment company. It paid $13.25 an hour, with an annual bonus — enough for presents under the Christmas tree.

But six years ago, her husband took a fall at work and then succumbed to various ailments — diabetes, liver disease, high blood pressure — leaving him confined to the couch. Not until 2008 did he secure his disability check.

And now they find themselves in this desert of joblessness, her paycheck replaced by a $702 unemployment check every other week. She received 14 weeks of benefits after she lost her job, and then a seven-week extension.

For most of October through December 2008, she received nothing, as she waited for another extension. The checks came again, then ran out in September 2009. They were restored by an extension right before Christmas.

Their daughter has back problems and is living on disability checks, making the church their ultimate safety net.

“I never thought I’d be in the position where I had to go to a food bank,” Ms. Eisen said. But there she is, standing in the parking lot of the Calvary Chapel church, chatting with a half-dozen women, all waiting to enter the Bread of Life Food Pantry.

When her name is called, she steps into a windowless alcove, where a smiling woman hands her three bags of groceries: carrots, potatoes, bread, cheese and a hunk of frozen meat.

“Haven’t we got a lot to be thankful for?” Ms. Eisen asks.

For one thing, no pinto beans.

“I’ve got 10 bags of pinto beans,” she says. “And I have no clue how to cook a pinto bean.”

Local job listings are just as mysterious. On a bulletin board at the county-financed ProPath Business and Career Services Center, many are written in jargon hinting of accounting or computers.

“Nothing I’m qualified for,” Ms. Eisen says. “When you can’t define what it is, that’s a pretty good indication.”

Her counselor has a couple of possibilities — a cashier at a supermarket and a night desk job at a motel.

“I’ll e-mail them,” Ms. Eisen promises. “I’ll tell them what a shining example of humanity I am.”

    Millions of Unemployed Face Years Without Jobs, NYT, 20.2.2010, http://www.nytimes.com/2010/02/21/business/economy/21unemployed.html

Data Ease Fear of Inflation, Despite Higher Energy Costs

February 20, 2010
The New York Times
By JAVIER C. HERNANDEZ

Prices for consumers in the United States inched upward in January, but the increase was slight, easing some of the concerns about inflation as economy slowly recovers.

The price of a variety of goods, everything from rent to cigarettes, rose 0.2 percent in January. Excluding food and fuel costs, which tend to be volatile, prices fell 0.1 percent — the first decrease since 1982.

The Labor Department attributed much of the increase in its Consumer Price Index to rising energy costs — namely gasoline, fuel oil and natural gas. A decrease in the price of rent, new cars and airline tickets helped offset the jump in energy prices.

Economists said the results indicated that businesses were keeping prices low in an effort to lure price-conscious customers.

“People are very much price-sensitive, they are still paying down their debts, not taking that vacation, not buying that extra item of apparel,” said Anna Piretti, senior economist for BNP Paribas. “That is going to be the theme for some time. Prospects for employment are not looking very bright.”

Thursday’s report on jobless filings, in fact, rekindled worries that the labor market would be slow to bounce back. First-time unemployment claims last week were much higher than expected — 473,000, up 31,000 from the previous week.

Economists also said that Friday’s consumer price index indicated that the government’s decision to pump billions into the economy has yet to translate into inflation, which should help ease concerns that the Federal Reserve could raise its benchmark rate any time soon.

The results beat Wall Street forecasts, and shortly after their release, stocks pared some of their losses in after-hours trading.

On Thursday, the government offered a similar portrait in its report on producer prices, which rose 1.4 percent in January. There were indications, however, that higher prices may be in the pipeline, especially for metals, food and energy products.

Still, while fuel and food costs may continue to rise, many economists do not see higher prices as a threat in the near term, though they say inflation could become an issue in the next several years.

The Federal Reserve, which has kept interest rates at historic lows to stimulate lending, is not expected to raise the crucial federal funds rate for at least six months. The central bank has begun to take steps to normalize lending, however, and on Thursday it announced it would raise the interest rate it charges on short-term loans to banks, known as the discount rate.

It remains to be seen whether businesses can afford to pass their rising costs down to consumers. But if they do not pass along those price increases, analysts said, that may worsen their own financial health and prolong unemployment.

“If producers see their profits being hurt they will be more reluctant to hire,” Ms. Piretti said. “It’s a circle.”

    Data Ease Fear of Inflation, Despite Higher Energy Costs, NYT, 19.1.2010, http://www.nytimes.com/2010/02/20/business/economy/20econ.html

In a Message to Democrats, Wall St. Sends Cash to G.O.P.

February 8, 2010
The New York Times
By DAVID D. KIRKPATRICK

WASHINGTON — If the Democratic Party has a stronghold on Wall Street, it is JPMorgan Chase.

Its chief executive, Jamie Dimon, is a friend of President Obama’s from Chicago, a frequent White House guest and a big Democratic donor. Its vice chairman, William M. Daley, a former Clinton administration cabinet official and Obama transition adviser, comes from Chicago’s Democratic dynasty.

But this year Chase’s political action committee is sending the Democrats a pointed message. While it has contributed to some individual Democrats and state organizations, it has rebuffed solicitations from the national Democratic House and Senate campaign committees. Instead, it gave $30,000 to their Republican counterparts.

The shift reflects the hard political edge to the industry’s campaign to thwart Mr. Obama’s proposals for tighter financial regulations.

Just two years after Mr. Obama helped his party pull in record Wall Street contributions — $89 million from the securities and investment business, according to the nonpartisan Center for Responsive Politics — some of his biggest supporters, like Mr. Dimon, have become the industry’s chief lobbyists against his regulatory agenda.

Republicans are rushing to capitalize on what they call Wall Street’s “buyer’s remorse” with the Democrats. And industry executives and lobbyists are warning Democrats that if Mr. Obama keeps attacking Wall Street “fat cats,” they may fight back by withholding their cash.

“If the president doesn’t become a little more balanced and centrist in his approach, then he will likely lose that support,” said Kelly S. King, the chairman and chief executive of BB&T. Mr. King is a board member of the Financial Services Roundtable, which lobbies for the biggest banks, and last month he helped represent the industry at a private dinner at the Treasury Department.

“I understand the public outcry,” he continued. “We have a 17 percent real unemployment rate, people are hurting, and they want to see punishment. But the political rhetoric just incites more animosity and gets people riled up.”

A spokesman for JPMorgan Chase declined to comment on its political action committee’s contributions or relations with the Democrats. But many Wall Street lobbyists and executives said they, too, were rethinking their giving.

“The expectation in Washington is that ‘We can kick you around, and you are still going to give us money,’ ” said a top official at a major Wall Street firm, speaking on the condition of anonymity for fear of alienating the White House. “We are not going to play that game anymore.”

Wall Street fund-raisers for the Democrats say they are feeling under attack from all sides. The president is lashing out at their “arrogance and greed.” Republican friends are saying “I told you so.” And contributors are wishing they had their money back.

“I am a big fan of the president,” said Thomas R. Nides, a prominent Democrat who is also a Morgan Stanley executive and chairman of a major Wall Street trade group, the Securities and Financial Markets Association. “But even if you are a big fan, when you are the piñata at the party, it doesn’t really feel good.”

Roger C. Altman, a former Clinton administration Treasury official who founded the Wall Street boutique Evercore Partners, called the Wall Street backlash against Mr. Obama “a constant topic of conversation.” Many bankers, he said, failed to appreciate the “white hot anger” at Wall Street for the financial crisis. (Mr. Altman said he personally supported “the substance” of the president’s recent proposals, though he questioned their feasibility and declined to comment at all on what he called “the rhetoric.”)

Mr. Obama’s fight with Wall Street began last year with his proposals for greater oversight of compensation and a consumer financial protection commission. It escalated with verbal attacks this year on what he called Wall Street’s “obscene bonuses.” And it reached a new level in his calls for policies Wall Street finds even more infuriating: a “financial crisis responsibility” tax aimed only at the biggest banks, and a restriction on “proprietary trading” that banks do with their own money for their own profit.

“If the president wanted to turn every Democrat on Wall Street into a Republican,” one industry lobbyist said, “he is doing everything right.”

Though Wall Street has long been a major source of Democratic campaign money (alongside Hollywood and Silicon Valley), Mr. Obama built unusually direct ties to his contributors there. He is the first president since Richard M. Nixon whose campaign relied solely on private donations, not public financing.

Wall Street lobbyists say the financial industry’s big Democratic donors help ensure that their arguments reach the ears of the president and Congress. White House visitors’ logs show dozens of meetings with big Wall Street fund-raisers, including Gary D. Cohn, a president of Goldman Sachs; Mr. Dimon of JPMorgan Chase; and Robert Wolf, the chief of the American division of the Swiss bank UBS, who has also played golf, had lunch and watched July 4 fireworks with the president.

Lobbyists say they routinely brief top executives on policy talking points before they meet with the president or others in the administration. Mr. Wolf, in particular, also serves on the Presidential Economic Recovery Advisory Board led by the former Federal Reserve Chairman Paul A. Volcker.

Mr. Wolf was the only Wall Street executive on the panel and became the board’s leading opponent of what became known as the Volcker rule against so-called proprietary trading, according to participants. Such trading did nothing to cause the crisis, Mr. Wolf argued, as the industry lobbyists do now. (The panel concluded that the crisis established a precedent for government rescue that could enable big banks to speculate for their own gain while taxpayers took the biggest risks.)

Mr. Wolf and Mr. Dimon, who was in Washington last week for meetings on Capitol Hill and lunch with the president, have both pressed the industry’s arguments against other proposed regulations and the bank tax as well — saying the rules could cramp needed lending and send business abroad, according to lobbyists.

Both men are said to remain personally supportive of the president. But UBS’s political action committee has shifted its contributions, according to the Center for Responsive Politics. After dividing its money evenly between the parties for 2008, it has given about 56 percent to Republicans this cycle.

Most of its biggest contributions, of $10,000 each, went to five Republican opponents of Mr. Obama’s regulatory proposals, including Senator Richard C. Shelby of Alabama, the ranking minority member of the Banking Committee.

The Democratic campaign committees declined to comment on Wall Street money. But their Republican rivals are actively courting it.

Senator John Cornyn of Texas, chairman of the National Republican Senatorial Committee, said he visited New York about twice a month to try to tap into Wall Street’s “buyers’ remorse.”

“I just don’t know how long you can expect people to contribute money to a political party whose main plank of their platform is to punish you,” Mr. Cornyn said.

    In a Message to Democrats, Wall St. Sends Cash to G.O.P., 13.2.2010, http://www.nytimes.com/2010/02/08/us/politics/08lobby.html

The Safety Net

Once Stigmatized, Food Stamps Find New Acceptance

February 11, 2010
The New York Times
By JASON DEPARLE and ROBERT GEBELOFF

A decade ago, New York City officials were so reluctant to give out food stamps, they made people register one day and return the next just to get an application. The welfare commissioner said the program caused dependency and the poor were “better off” without it.

Now the city urges the needy to seek aid (in languages from Albanian to Yiddish). Neighborhood groups recruit clients at churches and grocery stores, with materials that all but proclaim a civic duty to apply — to “help New York farmers, grocers, and businesses.” There is even a program on Rikers Island to enroll inmates leaving the jail.

“Applying for food stamps is easier than ever,” city posters say.

The same is true nationwide. After a U-turn in the politics of poverty, food stamps, a program once scorned as “welfare,” enjoys broad new support. Following deep cuts in the 1990s, Congress reversed course to expand eligibility, cut red tape and burnish the program’s image, with a special effort to enroll the working poor. These changes, combined with soaring unemployment, have pushed enrollment to record highs, with one in eight Americans now getting aid.

“I’ve seen a remarkable shift,” said Senator Richard G. Lugar, an Indiana Republican and prominent food stamp supporter. “People now see that it’s necessary to have a strong food stamp program.”

The revival began a decade ago, after tough welfare laws chased millions of people from the cash rolls, many into low-wage jobs as fast-food workers, maids, and nursing aides. Newly sympathetic officials saw food stamps as a way to help them. For states, the program had another appeal: the benefits are federally paid.

But support also turned on chance developments, including natural disasters (which showed the program’s value in emergencies) and the rise of plastic benefit cards (which eased stigma and fraud). The program has commercial allies, in farmers and grocery stores, and it got an unexpected boost from President George W. Bush, whose food stamp administrator, Eric Bost, proved an ardent supporter.

“I assure you, food stamps is not welfare,” Mr. Bost said in a recent interview.

Still, some critics see it as welfare in disguise and advocate more restraints.

So far their voices have been muted, unlike in the 1990s when members of Congress likened permissive welfare laws to feeding alligators and wolves. But last month, a Republican candidate for governor in South Carolina, Andre Bauer, criticized food stamps by saying his grandmother “told me as a small child to quit feeding stray animals. You know why? Because they breed.”

Mr. Bauer, the lieutenant governor, apologized for his phrasing but said, “somebody has to have the gumption to talk about the cycle of dependency.”

The drive to enroll the needy can be seen in the case of Monica Bostick-Thomas, 45, a Harlem widow who works part-time as a school crossing guard. Since her husband died three years ago, she has scraped by on an annual income of about $15,000.

But she did not seek help until she got a call from the Food Bank of New York City, one of the city’s outreach partners. Last year, she balked, doubting she qualified. This year, when the group called again, she agreed to apply. A big woman with a broad smile, Ms. Bostick-Thomas swept into the group’s office a few days later, talking up her daughters’ college degrees and bemoaning the cost of oxtail meat.

“I’m not saying I go hungry,” Ms. Bostick-Thomas said. “But I can’t always eat what I want.”

The worker projected a benefit of $147 a month. “That’s going to help!” she said. “I wouldn’t have gone and applied on my own.”

Since its founding in 1964, the food stamp program has swung between seasons of bipartisan support and conservative attack. George McGovern, a Democrat, and Bob Dole, a Republican, were prominent Senate backers. But Ronald Reagan told stories about the “strapping young buck” who used food stamps to buy a “T-bone steak.”

By the 1990s, the program was swept up in President Bill Clinton’s pledge to “end welfare.” While he meant cash aid, Congressional Republicans labeled food stamps welfare, too. The 1996 law that restricted cash benefits included major cuts in food stamps benefits and eligibility. Some states went further and pushed eligible people away.

But as attention shifted to poor workers, food stamps won new support. Wisconsin’s former governor, Tommy G. Thompson, a Republican, boasted of cutting the cash rolls, but advertised the food stamp rise. “Leading the Way to Make Work Pay,” a 2000 news release said.

States eased limits on people with cars and required fewer office visits from people with jobs. The federal government now gives bonuses to states that enroll the most eligible people.

A self-reinforcing cycle kicked in: outreach attracted more workers, and workers built support for outreach. In a given month, nearly 90 percent of food stamp recipients still have incomes below the federal poverty line, according to the Department of Agriculture. But among families with children, the share working rose to 47 percent in 2008, from 26 percent in the mid-1990s, and the share getting cash welfare fell by two-thirds.

In 2008, the program got an upbeat new name: the Supplemental Nutrition Assistance Program — SNAP. By contrast, cash welfare remains stigmatized, and the rolls have scarcely budged.

Nowhere have attitudes swung as far as in New York City, where Mayor Rudolph W. Giuliani and his welfare commissioner, Jason A. Turner, laid siege in the late 1990s to what they called the welfare capital of the world. After bitter fights, a federal judge made the city end delays in handing out food stamp applications. But attitudes remained stern.

“I count food stamps as being part of welfare,” Mr. Turner said at the time. “You’re better off without either one.”

Since Mayor Michael R. Bloomberg took office eight years ago, the rolls have doubled, to 1.6 million people, with most of the increase coming in his second term after critics accused him of neglecting the poor.

He intensified outreach. He reduced paperwork. He hired a new welfare commissioner, Robert Doar, with orders to improve service for the working poor.

“If you’re working, I want to help you, and that’s how the mayor feels,” Mr. Doar said.

Albany made a parallel push to enroll the working poor, setting an explicit goal for caseload growth. “This is all federal money — it drives dollars to local economies,” said Russell Sykes, a senior program official.

But Mr. Turner, now a consultant in Milwaukee, warns that the aid encourages the poor to work less and therefore remain in need. “It’s going to be very difficult with large swaths of the lower middle class tasting the fruits of dependency to be weaned from this,” he said.

The tension between self-reliance and relief can be seen at the food bank’s office in Harlem, where the city lets outreach workers file applications.

Juan Diego Castro, 24, is a college graduate and Americorps volunteer whose immigrant parents warned him “not to be a burden on this country.” He has a monthly stipend of about $2,500 and initially thought food stamps should go to needier people, like the tenants he organizes. “My concern was if I’m taking food stamps and I have a job, is it morally correct?” he said.

But federal law eases eligibility for Americorps members, and a food bank worker urged him and fellow volunteers to apply, arguing that there was enough aid to go around and that use would demonstrate continuing need. “That meeting definitely turned us around,” Mr. Castro said.

While Mr. Castro seemed contemplative, Alba Catano, 44, appeared dejected. A Colombian immigrant, she has spent a dozen years on a night janitorial crew but fell and missed three months of work after knee surgery.

Last November, she limped into a storefront church in Queens, where a food bank worker was taking applications beside the pews.

About her lost wages, she struck a stoic pose, saying her san cocho — Colombian soup — had less meat and more plantains. But her composure cracked when she talked of the effect on her 10-year-old daughter.

“My refrigerator is empty,” Ms. Catano said.

Last month, Ms. Catano was back at work, with a benefit of $170 a month and no qualms about joining 38 million Americans eating with government aid. “I had the feeling that working people were not eligible,” she said. “But then they told me, ‘No, no, the program has improved.’ ”

    Once Stigmatized, Food Stamps Find New Acceptance, NYT, 11.2.2010, http://www.nytimes.com/2010/02/11/us/11foodstamps.html

U.S. Trade Deficit Widened in December

February 11, 2010
The New York Times
By JAVIER C. HERNANDEZ

Rising demand for foreign goods in the United States caused the trade deficit to widen more than expected in December, the government said Wednesday, suggesting that American businesses and consumers were growing more confident about spending.

The gap between the value of imports and exports was $40.2 billion in December, up 10.4 percent from November. Wall Street analysts had expected the deficit to grow to $35.8 billion.

As economies start to recover, demand is picking up for American exports like soybeans and auto parts. Exports rose 3.3 percent in December to $142.7 billion, continuing an upward trend. That was not enough, however, to offset the 4.8 percent increase in imports, which totaled $182.9 billion.

“That’s consistent with the rebound in manufacturing activity,” said Julia Coronado, senior United States economist at BNP Paribas. “Companies have to increase production to meet demand, and that requires a lot of imported goods, so in the near term we will probably see further widening.”

The larger-than-expected trade gap could mean that the government will have to revise its estimate for economic expansion in the fourth quarter of last year. Last month, the government said the economy expanded at a rate of 5.7 percent from October to December — the fastest pace in six years — aided by a rise in exports.

A weak dollar has made American products — everything from airplanes to microchips — cheaper for many foreign consumers.

“Exports will continue to be boosted by better economic conditions abroad,” Joshua Shapiro, chief United States economist for MFR Inc., wrote in a research note on Wednesday.

Oil imports rose sharply in December, contributing to the swelling trade gap, reaching $28.1 billion from $24.4 billion in November. In recent months, fluctuations in the price of oil have often been a central reason for the widening trade deficit. But that was not the case in December — the price of oil remained relatively steady, and businesses simply imported larger quantities of petroleum. Excluding oil, the trade deficit in December was little changed from November.

The politically important trade gap with China narrowed slightly in December, retreating 10.3 percent.

    U.S. Trade Deficit Widened in December, NYT, 11.2.2010, http://www.nytimes.com/2010/02/11/business/economy/11econ.html

As Data Flows In, Families See the Dollars Flow Out

February 9, 2010
The New York Times
By JENNA WORTHAM

John Anderson and Sharon Rapoport estimate they spend $400 a month, or close to $5,000 a year, keeping their family of four entertained at home.

There are the $30-a-month data plans on their BlackBerry Tour cellphones. The Roanoke, Va., couple’s teenage sons, Seth and Isaac, each have $50 subscriptions for Xbox Live and send thousands of texts each month on their cellphones, requiring their own data plans.

DirecTV satellite service, high-speed Internet access and Netflix for movie nights add more.

“We try to be aware of it so it doesn’t get out of control,” said Mr. Anderson, who with his wife founded an advertising agency. “But, yeah, I would say we’re pretty wired.”

It used to be that a basic $25-a-month phone bill was your main telecommunications expense. But by 2004, the average American spent $770.95 annually on services like cable television, Internet connectivity and video games, according to data from the Census Bureau. By 2008, that number rose to $903, outstripping inflation. By the end of this year, it is expected to have grown to $997.07. Add another $1,000 or more for cellphone service and the average family is spending as much on entertainment over devices as they are on dining out or buying gasoline.

And those government figures do not take into account movies, music and television shows bought through iTunes, or the data plans that are increasingly mandatory for more sophisticated smartphones.

For many people, the subscriptions and services for entertainment and communications, which are more often now one and the same, have become indispensable necessities of life, on par with electricity, water and groceries. And for every new device, there seems to be yet another fee. Buyers of the more advanced Apple iPad, to cite the latest example, can buy unlimited data access for $30 a month from AT&T even if they already have a data plan from the carrier.

“You don’t really lump these expenses into a discretionary category,” said Robert H. Frank, an economics professor at the Johnson Graduate School of Management at Cornell University. “As the expectation of connectedness increases, it’s what is expected for people to be functional in society.”

Americans are transforming their homes into entertainment hubs, which is driving up the amount of money they spend, said Lee Rainie, director of the Pew Internet and American Life Project.

“More people are creating experiences in their homes that are very similar to the kinds of public experiences they enjoy in movie theaters and concert halls,” he said. “Our homes are bristling with technology.”

Most people think home entertainment is cheaper. “Every time I want to go to Fenway Park or see the Killers in concert, I’m paying $50 to $100 each time. But once you build and install that home system, its basically pennies per minute of enjoyment,” said James McQuivey, an analyst with Forrester Research.

But they do not take into consideration the long-term economic effect — both in the maintenance and operational costs — of the devices they purchase. “A subscription model is the perfect drug,” Mr. McQuivey said. “People see $15 per month as a very low amount of money but it quickly adds up.”

Kate Goodall, for example, a 32-year-old director of fund-raising for museums, in Alexandria, Va., said the high costs of home cable and other subscriptions began to eat into her budget. “We saw the writing on the wall in terms of the cost,” she said. “It was getting ridiculous.”

She and her husband disconnected their cable and home phone line so they could more easily afford frequent dinners out and swimming, ballet and art lessons for their two small sons. Instead, they catch shows like “The Daily Show With Jon Stewart” free at Hulu.com and rely on their cellphones as their primary phone lines.

Her husband, Mike Hughes, 37, a project manager, has both an Xbox and a Wii game console, but, in an effort to keep their bills down, she would not let him sign up for any gaming subscription services.

Consumers will have to make tough choices like Ms. Goodall and her husband as the next generation of connected devices — TVs and various mobile devices — that have their own data plan or subscription service come to market. The cable TV companies battle the phone companies by bundling cable, landline phone and Internet services, but most wireless carriers do not yet have any programs to bundle the data plans and offer discounts for myriad mobile devices.

Ms. Goodall says she dreads the day when her sons, 1 and 4, get bitten by the texting craze, as her 12-year-old nephew has.

“We’ll probably have to sign our sons up for cellphones even sooner than we’d like because we don’t have a home phone,” she said. “I’m not looking forward to dealing with that set of issues.”

    As Data Flows In, Families See the Dollars Flow Out, NYT, 9.2.2010, http://www.nytimes.com/2010/02/09/technology/09spend.html

Editorial

The Truth About the Deficit

February 7, 2010
The New York Times

When the White House released its new budget last week, including more spending to create desperately needed jobs, Republican leaders in Congress denounced President Obama for driving up the deficit and demanded that the Democrats halt their “reckless” ways.

The deficit numbers — a projected $1.3 trillion in fiscal 2011 alone — are breathtaking. What is even more breathtaking is the Republicans’ cynical refusal to acknowledge that the country would never have gotten into so deep a hole if President George W. Bush and the Republican-led Congress had not spent years slashing taxes — mainly on the wealthy — and spending with far too little restraint. Unfortunately, the problem does not stop there.

The Republican amnesia and posturing are playing well on the hustings, where Americans are deeply anxious about the economy and fearful of losing their jobs and homes. Far too many Democratic lawmakers are losing their nerve.

Americans should be anxious, for reasons including the huge deficit. But the cold economic truth is this: At a time of high unemployment and fragile growth, the last thing the government should do is to slash spending. That will only drive the economy into deeper trouble.

None of this means that the politicians — from either party — are off the hook. They will soon need to make hard decisions about how to reduce the deficit. But more posturing and sniping is not going to make the economy better or solve the deficit problem. President Obama has called on the Republicans to join a bipartisan commission to help make those tough decisions, but they have been resistant to the proposal.

•

We fear the demagoguing is not going to stop, especially with Congressional elections this November. As the budget debate plays out, here are some basic facts about the deficit that Americans need to consider:

HOW DID WE GET HERE? When President Bush took office in 2001, the federal budget had been in the black for three years, and continued surpluses were projected for a decade to come.

By the time Mr. Bush left office in early 2009, the government had run big deficits for seven straight years, and the economy was on the brink of another Great Depression. On Jan. 7, 2009 — two weeks before Mr. Obama was inaugurated — the Congressional Budget Office issued new budget estimates showing a fiscal year 2009 deficit of well over $1 trillion.

About half of today’s huge deficits can be chalked up to Bush-era profligacy: mainly cutting taxes deeply while borrowing to wage two wars and to enact the Medicare prescription drug benefit — all of which Republicans supported, virtually in lockstep.

The other half of recent deficits is due to the recession and the financial crisis.

To avoid a meltdown, the government — under President Bush and President Obama — rightly decided it had no choice but to spend hundreds of billions of dollars to bail out banks and car companies and to stimulate the economy. That prevented a very bad situation from becoming much worse, but as the recession dragged on, hundreds of billions in tax revenues have also dried up.

As for why the financial system and the economy imploded, President Bush and Congress deserve much of the blame for their devotion to debt-driven growth and blind deregulatory zeal — although on deregulation, President Clinton and his team (some of whom are back in the White House) were also complicit.

Were it not for those multiple calamities, budget deficits today would be negligible. That does not mean we would be off the hook. An aging population and relentlessly rising health care costs will hit the country with even deeper deficits as the baby boomers retire. Politicians need to pass health care reform now and start thinking seriously about Social Security and tax reform.

So what are the immediate fiscal lessons here? The first lesson is that spending without taxing is a recipe for huge deficits, and that running big deficits when the economy is expanding only sets the country up for bigger deficits when the economy contracts. The second lesson is that once a deep recession takes hold, slashing government spending is not going to solve the problem. It will only make it worse.

WHAT CAN BE DONE NOW? Here is an unpopular but undeniable fact of life: When private sector demand is weak, the federal government must serve as the spender of last resort. Otherwise, collapsing demand sets in motion a negative, self-reinforcing spiral in which lack of demand — for goods, services and new employees — leads to ever deepening economic weakness.

That is why when the banks and the economy began to crumble in 2008, President Bush responded with a $700 billion bank bailout and a $168 billion stimulus package. When Mr. Obama took office, the banks were still shaky and the economy was still plunging— as measured by real-life indicators like jobs, consumer spending, credit availability, home equity, retirement savings and business confidence. The new administration made the sound decision to continue the bailout and pushed a $787 billion stimulus through Congress, with very little Republican help.

The stimulus package slowed job losses and helped spur activity — in the third quarter of 2009, the economy grew at an annual rate of 2.2 percent, and the initial fourth-quarter reading was 5.7 percent, a rebound few thought possible a year ago.

Still, without a jobs revival to boost consumer spending and tax revenues — and with the states facing immense budget shortfalls — the economy is unlikely to do anything other than limp along, at best, once the effects of the stimulus fade this year.

In his recent budget, Mr. Obama proposed to spend $266 billion on tax credits for hiring and new job-creation investments, and on other short-term stimulus including extended unemployment compensation. That would improve on the House-passed $154 billion jobs bill. But in the Senate, Republicans are balking at the prospect of a big bill, saying they need to hold down the deficit. They have spooked the Democrats, who are now trying to negotiate what appears to be a far too modest bill in hopes of winning Republican support.

What they should be saying — and what the White House should be saying a lot louder — is that a prolonged downturn or a renewed recession would do far more damage to the budget than upfront deficit spending. In fact, a clear lesson from the Depression of the 1930s is that reducing deficits at a time of economic fragility undercuts recovery.

 

SO DO WE JUST LIVE WITH THE DEFICIT? The problem must be addressed. Persistently high deficits are harmful to the economy and the country’s long-run security.

If the government must keep borrowing to make up the difference, it could drive up interest rates and force private companies to compete with the government for investors. That, in turn, would reduce economic growth and, by extension, the potential earnings — and standard of living — of everyone.

The process is generally gradual. But it could be wrenching if creditors lose confidence that the government will ever put its fiscal house in order and suddenly decide to put their money elsewhere. That could lead to a fiscal crisis, with sharp spikes in interest rates and a rapidly depreciating currency.

There is no question that, over the next several decades, deficits and debt in the United States are headed for dangerously high levels. But today’s deficit fearmongers invariably fail to note that the impact of stimulus spending on the long-term fiscal problem is small, because the spending is temporary.

The real problem, which also goes unmentioned, is that dangerous deficits will accumulate over time if continuing trends and policies — especially in health care — persist unchanged.

 

SO HOW DO WE FIX IT? Mr. Obama’s budget makes a down payment on deficit reduction by freezing some nonsecurity discretionary spending for three years, and by letting the Bush tax cuts for the richest Americans expire at the end of this year.

To truly tame deficits will require serious health care reform, the sooner the better. Other aspects of the long-term fiscal problem — raising taxes and retooling Social Security — must take place in earnest as the economy recovers.

Contrary to popular belief, there are many well-thought-out ideas for such reforms. Where technical questions are difficult, particularly on health care costs, reformers have advocated demonstration projects that can be tested over time. Where the real difficulty lies is summoning the political will to do what must be done, even though it will be unpopular.

If these problems are not addressed, here is what we face: Under current policies, federal debt in the United States — the sum total of annual deficits — would grow from 53 percent of the size of the economy in 2009 to more than 300 percent by 2050, driven mainly by rapidly rising health care costs and, in part, by the aging of the population. Combined, those two factors exert enormous pressure on the government’s biggest spending programs, Medicare and Medicaid, and, to a lesser extent, Social Security.

Unless health care costs are controlled, there is no way to solve the country’s long-term deficit and debt problems.

But that will not be enough. Broad tax reform is also essential to ensure that revenues keep pace with expenditures. From 1978 to 2008, revenues averaged about 18.4 percent of the economy. But without policy changes, expenditures for everything other than interest on the national debt will increase from 19.2 percent of the size of the economy in 2008 to 24.5 percent in 2050.

On the need for more taxes, Mr. Obama has been less than candid, pledging never to raise taxes on anyone making less than $250,000. Republican lawmakers have been worse, calling for tax cuts at most every opportunity — and never acknowledging that a shortfall in revenue is one of the important causes of the deficit.

The deficit commission that Mr. Obama intends to establish could be helpful in breaking this logjam, by calling for necessary changes that politicians would be loath to broach without political cover.

We hope that health care reform will move ahead before that. If it does, the commission will still have to press for new taxes that both raise revenue and broaden the tax base, including a value added tax.

And then there is Social Security. What is needed is a combination of benefit cuts and tax increases that preserve the program’s essential nature — a contract under which the young support the old via taxes and the rich help the poor via a benefits formula that favors low- income beneficiaries. One sound approach would be to link benefit levels to life expectancy, so that as people live longer, future benefits would be modestly reduced while payroll taxes that support Social Security would be modestly increased.

•

There is no way to get deficits under control until our political leaders are willing to acknowledge difficult truths and make even more difficult political choices. We have heard and seen too little of that from the Democrats lately, and none at all from the Republicans. That is truly a recipe for disaster.

    The Truth About the Deficit, NYT, 7.2.2010, http://www.nytimes.com/2010/02/07/opinion/07sun1.html

20,000 Jobs Lost in January as Jobless Rate Falls to 9.7%

February 6, 2010
The New York Times
By JAVIER C. HERNANDEZ

The United States economy shed 20,000 jobs in January, the government said Friday, deepening concern that relief from the deepest economic downturn in a generation would be slow to come. But even as the economy struggled to start creating jobs again, the unemployment rate fell to 9.7 percent from 10 percent in December.

As the broader economy gains steam and crucial sectors like manufacturing spring back to life, analysts say the recovery appears to be intact. But the nation’s stubbornly high unemployment rate remains a persistent thorn in the side of optimists, and economists expect the situation to worsen before it gets better.

Some forecasts call for the jobless rate to reach nearly 11 percent by year’s end, which would significantly dampen spending by consumers, a critical driver of growth. That has prompted concern that the economy could enter a painful period of slow growth or even fall into another downturn.

“We are turning the corner,” an economist for IHS Global Insight, Nigel Gault, said. “But the gains will probably not be big enough to make serious inroads into the unemployment rate for some time.”

The manufacturing sector showed signs of improvement, adding jobs for the first time since the onset of the recession in 2007. Construction continued to suffer, as builders grappled with a crisis in the commercial real estate market. Temporary jobs increased, a sign that employers were tentatively beginning to expand their ranks.

The results were greeted on Wall Street with caution. The major stock indexes swung between gains and losses in early trading, with many investors still rattled by a steep downturn in the market on Thursday amid worries about the stability of the European financial system. Analysts had expected the economy to create 15,000 jobs in January and for the unemployment rate to hold steady at 10 percent.

In its report, the government revised its job loss numbers for November, saying the economy gained 64,000 in that month rather than 4,000. But the picture in December was much worse than previously stated; the economy lost 150,000 jobs rather than the 85,000 originally reported. (In total, job losses in August, September and October of last year were 240,000 worse than original forecasts.)

The overall toll of the recession, meanwhile, grew larger: 8.4 million jobs have been lost since December 2007, the government said, nearly one million more than previously recorded. Those numbers jumped significantly from December because the Labor Department on Friday said it had completed a benchmark revision of job losses since April 2008.

Economists said the drop in the unemployment rate, which reached its lowest level since August, was a statistical quirk and probably did not indicate the start of a downward trend. The unemployment rate is gleaned from interviews with a random sample of Americans, and its results can be erratic. The monthly tally of job losses is considered a more reliable snapshot of the economy because it incorporates data from a large number of businesses.

The dissonance between the tepid recovery for the jobs market and robust turnaround for Wall Street has exacerbated populist tensions.

President Obama has sought to persuade the public that his priority is jobs creation, announcing a series of efforts in recent weeks aimed at clamping down on banks and jump-starting the labor market. On Tuesday, Mr. Obama proposed using $30 billion of repaid bailout loans to help community banks increase lending to small businesses.

Many business owners continue to complain that strict lending standards are hampering their access to funds that would allow them to expand.

Kirk K. Meurer, the owner of store in Cleveland that provides furniture to businesses, has frozen the pay of his 30 employees and stopped buying new cars in an effort to trim costs. He has a $250,000 loan, but he said it has been difficult to persuade his bank to lend any more.

“I’m being very frugal with my decisions,” Mr. Meurer said. “For us to hire, we need to see a turn in the economy.”

Many more Americans, even those with jobs, are feeling the pinch. The underemployment rate, which counts people who have given up looking for work and those who are working part-time because of a lack of full-time positions, rose for much of last year. In January, it touched 16.5 percent, down from 17.3 percent in December.

There were also signs that businesses were beginning to spend more on employees, even though they remain reluctant to add full-time positions. The average workweek rose slightly, to 33.9 hours in January, up from 33.8 in December.

On Friday, economists were also focused on the disparate effects of the nation’s economic woes on various racial groups. The unemployment rate for white women, for instance, fell to 6.8 percent in January from 7.4 percent the month before. The rate for black women, meanwhile, climbed to 13.3 percent, up from 13.1 percent in December.

Employment in state and local governments — excluding education — fell in January, while the federal government added 33,000 jobs, including 9,000 jobs related to the 2010 census.

    20,000 Jobs Lost in January as Jobless Rate Falls to 9.7%, NYT, 6.2.2010,  http://www.nytimes.com/2010/02/06/business/economy/06jobs.html

Bernanke Voices Economic Concerns as He's Sworn In

February 3, 2010
Filed at 2:31 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- Federal Reserve Chairman Ben Bernanke expressed concerns Wednesday about the economic recovery during a ceremonial swearing-in for another four-year term.

In brief remarks to staffers, Bernanke said that while the economy is growing, ''far too many people remain unemployed, foreclosures continue at record rates and bank credit continues to contract.''

One of the Fed's challenges is protecting its independence from congressional meddling, he said.

Another is making the Fed more open and accountable about its operations. And another is improving its oversight of banks. Lawmakers have complained about deficiencies in those areas.

The Fed ''cannot hope'' to solve the nation's economic problems on its own, Bernanke said.

    Bernanke Voices Economic Concerns as He's Sworn In, NYT, 3.2.2010, http://www.nytimes.com/aponline/2010/02/03/business/AP-US-Bernanke-Second-Term.html

News Analysis

Huge Deficits May Alter U.S. Politics and Global Power

February 2, 2010
The New York Times
By DAVID E. SANGER

WASHINGTON — In a federal budget filled with mind-boggling statistics, two numbers stand out as particularly stunning, for the way they may change American politics and American power.

The first is the projected deficit in the coming year, nearly 11 percent of the country’s entire economic output. That is not unprecedented: During the Civil War, World War I and World War II, the United States ran soaring deficits, but usually with the expectation that they would come back down once peace was restored and war spending abated.

But the second number, buried deeper in the budget’s projections, is the one that really commands attention: By President Obama’s own optimistic projections, American deficits will not return to what are widely considered sustainable levels over the next 10 years. In fact, in 2019 and 2020 — years after Mr. Obama has left the political scene, even if he serves two terms — they start rising again sharply, to more than 5 percent of gross domestic product. His budget draws a picture of a nation that like many American homeowners simply cannot get above water.

For Mr. Obama and his successors, the effect of those projections is clear: Unless miraculous growth, or miraculous political compromises, creates some unforeseen change over the next decade, there is virtually no room for new domestic initiatives for Mr. Obama or his successors. Beyond that lies the possibility that the United States could begin to suffer the same disease that has afflicted Japan over the past decade. As debt grew more rapidly than income, that country’s influence around the world eroded.

Or, as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade.

Mr. Obama himself hinted at his own concern when he announced in early December that he planned to send 30,000 American troops to Afghanistan, but insisted that the United States could not afford to stay for long.

“Our prosperity provides a foundation for our power,” he told cadets at West Point. “It pays for our military. It underwrites our diplomacy. It taps the potential of our people, and allows investment in new industry.”

And then he explained why even a “war of necessity,” as he called Afghanistan last summer, could not last for long.

“That’s why our troop commitment in Afghanistan cannot be open-ended,” he said then, “because the nation that I’m most interested in building is our own.”

Mr. Obama’s budget deserves credit for its candor. It does not sugarcoat, at least excessively, the potential magnitude of the problem. President George W. Bush kept claiming, until near the end of his presidency, that he would leave office with a balanced budget. He never got close; in fact, the deficits soared in his last years.

Mr. Obama has published the 10-year numbers in part, it seems, to make the point that the political gridlock of the past few years, in which most Republicans refuse to talk about tax increases and Democrats refuse to talk about cutting entitlement programs, is unsustainable. His prescription is that the problem has to be made worse, with intense deficit spending to lower the unemployment rate, before the deficits can come down.

Mr. Summers, in an interview on Monday afternoon, said, “The budget recognizes the imperatives of job creation and growth in the short run, and takes significant measures to increase confidence in the medium term.”

He was referring to the freeze on domestic, non-national-security-related spending, the troubled effort to cut health care costs, and the decision to let expire Bush-era tax cuts for corporations and families earning more than $250,000.

But Mr. Summers said that “through the budget and fiscal commission, the president has sought to provide maximum room for making further adjustments as necessary before any kind of crisis arrives.”

Turning that thought into political action, however, has proved harder and harder for the Washington establishment. Republicans stayed largely silent about the debt during the Bush years. Democrats have described it as a necessary evil during the economic crisis that defined Mr. Obama’s first year. Interest in a long-term solution seems limited. Or, as Isabel V. Sawhill of the Brookings Institution put it Monday on MSNBC, “The problem here is not honesty, but political will.”

One source of that absence of will is that the political warnings are contradicted by the market signals. The Treasury has borrowed money to finance the government’s deficits at remarkably low rates, the strongest indicator that the markets believe they will be paid back on time and in full.

The absence of political will is also facilitated by the fact that, as Prof. James K. Galbraith of the University of Texas puts it, “Forecasts 10 years out have no credibility.”

He is right. In the early years of the Clinton administration, government projections indicated huge deficits — over the “sustainable” level of 3 percent — by 2000. But by then, Mr. Clinton was running a modest surplus of about $200 billion, a point Mr. Obama made Monday as he tried anew to remind the country that the moment was squandered when “the previous administration and previous Congresses created an expensive new drug program, passed massive tax cuts for the wealthy, and funded two wars without paying for any of it.”

But with this budget, Mr. Obama now owns this deficit. And as Mr. Galbraith pointed out, it is possible that the gloomy projections for 2020 are equally flawed.

Simply projecting that health care costs will rise unabated is dangerous business.

“Much may depend on whether we put in place the financial reforms that can rebuild a functional financial system,” Mr. Galbraith said, to finance growth in the private sector — the kind of growth that ultimately saved Mr. Clinton from his own deficit projections.

His greatest hope, Mr. Galbraith said, was Stein’s law, named for Herbert Stein, chairman of the Council of Economic Advisers under Presidents Richard M. Nixon and Gerald R. Ford.

Stein’s law has been recited in many different versions. But all have a common theme: If a trend cannot continue, it will stop.

    Huge Deficits May Alter U.S. Politics and Global Power, NYT, 2.2.2010, http://www.nytimes.com/2010/02/02/us/politics/02deficit.html

In $3.8 Trillion Budget, Obama Pivots to Trim Future Deficits

February 2, 2010
The New York Times
By JACKIE CALMES and JEFF ZELENY

WASHINGTON — President Obama sent Congress on Monday a proposed budget of $3.8 trillion for the fiscal year 2011, saying that his plan would produce a decade-long reduction in the deficit from $1.6 trillion this year, a shortfall swollen by $100 billion in additional tax cuts and public works spending that he is seeking right away.

“We simply cannot continue to spend as if deficits don’t have consequences, as if waste doesn’t matter, as if the hard-earned tax money of the American people can be treated like Monopoly money,” Mr. Obama said at the White House.

But at the end of the decade, the yearly deficits would begin moving up again, as the projected costs of health and retirement programs for an aging population start to escalate, according to forecasts in the administration’s new blueprint.

No budget proposal is ever enacted wholesale by Congress, and the spreadsheet-boggling numbers in the White House plan are sure to produce anguished partisan and ideological debates over how best to address the deficit and the nation’s lingering economic problems between now and the start of the new fiscal year next Oct. 1 — if indeed Congress manages to complete its work by then, right before the midterm elections.

“We won’t be able to bring down this deficit overnight,” Mr. Obama told reporters, saying that his budget includes investments in education and other areas that are critical to the country’s future. “We will continue to do what it takes to create jobs.”

The president said that the proposed budget was built around the goal of turning the country around “after what can only be described as a decade of profligacy.”

In brief remarks in the Grand Foyer at the White House, the president outlined the principles contained in his budget, saying: “Changing spending as usual depends on changing politics as usual.” He offered several examples of programs he believes should be eliminated and urged Congress to follow suit.

“I’m asking Republicans and Democrats alike to take a fresh look at programs they supported in the past to see what’s working and see what’s not and trim back accordingly,” Mr. Obama said.

He said that his proposal to freeze many domestic programs for three years as a down payment involves “hard choices and painful tradeoffs not seen in Washington for many years.” Yet with the debt accumulated from the deficits of the past decade, he acknowledged, “our fiscal situation remains unacceptable.”

So he will ask a yet-to-be-named bipartisan commission to recommend by December a plan to balance the operating budget by fiscal year 2015, not counting the growing payments on the country’s amassed debt. Congressional leaders have committed to hold a vote on whatever plan such a commission produces.

The senior Republicans on the House and Senate Budget committees, Senator Judd Gregg of New Hampshire and Representative Paul D. Ryan of Wisconsin, each used the same phrase to criticize the Obama budget: "more of the same."

Mr. Ryan called the budget “a very aggressive agenda of more government spending, more taxes, more deficits and more debt — with just a few cosmetic budget maneuvers to give the illusion of restraint.”

Mr. Ryan’s own blueprint for a balanced budget relies heavily on changes in the system of Medicare benefits for future recipients, the kind of proposal that would surely provoke an outcry among Democrats.

The president’s pivot from stimulus spending to deficit reduction in the budget for the coming fiscal year assumes that the economy will have fully recovered from the worst recession in eight decades.

But because the recovery remains fragile and unemployment high, Mr. Obama is first seeking the additional stimulus measures he has outlined in recent days, including a new tax credit for small businesses that hire new employees or raise the pay of existing workers. That sum is less than the $154 billion package the House approved in December, but more than the Senate has been planning for.

A $1.6 trillion deficit for this fiscal year, which ends Sept. 30, would be about $150 billion greater than the shortfall in 2009, which was the highest since World War II. It would equal almost 11 percent of the gross domestic product. Economists generally consider anything above 3 percent to be unsustainable over the long haul, although many say it is a necessary evil at a time of deep economic distress.

For 2011, Mr. Obama’s budget projects a slightly lower deficit of $1.3 trillion — about the level he inherited when he took office. That would be about 8.3 percent of gross domestic product, budget documents show.

Then, largely due to economic growth, the deficit would drop sharply for 2012, when Mr. Obama will be up for re-election, the budget shows. It would fall below $1 trillion for the first time in three years to an estimated $828 billion, or just over 5 percent of gross domestic product.

But annual deficits through fiscal year 2020 would not drop below 3.6 percent of gross domestic product under the administration’s projections. That confirms that the downturn, which was more severe than the administration and many economists had anticipated, has dashed Mr. Obama’s promise to reduce the deficit to 3 percent of gross domestic product by the end of his term.

And by the end of the decade, projections show the annual deficit ticking upwards again, to 4.2 percent of G.D.P. in 2020, as growing health costs and an increasingly older population force up spending for Medicare and Medicaid benefits.

If a bipartisan commission were to produce, and Congress accept, a plan that would balance all spending by 2015 except for interest on the debt, that still would leave that year’s deficit at 3 percent of gross domestic product — reflecting the ballooning cost of financing growing government debt.

Beyond that near-term goal, Mr. Obama also will ask the commission recommend ways to reduce entitlement spending and raise revenues to put the country on stable fiscal footing for the long term.

Administration officials said they did not know when Mr. Obama would be ready to create and name a commission. It is not clear that Congressional Republican leaders will cooperate. They have opposed the idea, saying Democrats are responsible for the budget problem, though more than half the debt stems from policies enacted when Republicans controlled Congress and the White House.

The commission, as uncertain as it is, is a key part of Mr. Obama’s deficit reduction policy, which Mr. Orszag has described as a three-legged stool.

Another leg is renewed economic growth: The 10-year budget relies heavily on projections of higher tax collections from revived businesses and workers, and less spending for jobless benefits and other safety-net programs. (The White House forecasts economic growth of 3 percent next year and 4.25 percent in the following two years, with stubbornly high unemployment rates and continuing low inflation; that’s not far from the consensus of leading private forecasters.)

And the third leg is a mix of proposed spending cuts and tax increases that would save $1.2 trillion over the next decade, the administration estimates.

Most of that, $678 billion, would result from letting the Bush income tax cuts expire as scheduled after this year for households that have more than $250,000 a year in income. For everyone else, Mr. Obama will propose that Congress extend the tax cuts indefinitely.

A proposed tax on big banks to recoup any losses from the financial bailout program would collect $90 billion over a decade, and Mr. Obama would raise $40 billion by ending some tax breaks for oil, gas and coal companies.

Another $250 billion would be saved by freezing for three years the overall spending for domestic programs that make up about one-eighth of the federal budget, and by holding spending thereafter to the rate of inflation — a level of austerity that has no modern precedent in Washington.

Medicare, Medicaid and Social Security — the so-called entitlement programs that are the largest and fastest-growing part of the budget — would be exempted, along with defense and veterans programs.

The freeze would not affect the domestic programs across the board; Mr. Obama opposed such an approach in the presidential campaign when his Republican rival, Senator John McCain, proposed it. Instead, the budget would cut or eliminate more than 120 mostly minor programs while others — chiefly for education, research and energy programs—will get increases. The savings would be about $20 billion in fiscal year 2011.

For all the talk of fiscal restraint, the budget proposal hews closely to Mr. Obama’s long-standing policy goals, especially in areas like energy research and development, military contracting, education, transportation, homeland security and immigration control.

Among the winners, elementary and secondary education programs would receive $28 billion, a $3 billion increase, and the Pell grants for college would be increased $17 billion.

Civilian research and development programs would receive $61.6 billion, a $3.7 billion increase. States and cities would get more than $100 billion for infrastructure spending, and Mr. Obama is proposing a new $4 billion national infrastructure fund to help underwrite regional projects.

For war spending, Mr. Obama requested an additional $33 billion for this year and $159 billion in 2011 for operations in Afghanistan and Pakistan. The total for all Defense Department spending would rise to $708. 3 billion in 2011; this year, Congress has already approved $660.4 billion and is being asked for another $33 billion for immediate war costs.

The State Department is seeking big increases next year nonmilitary assistance to Afghanistan, which would get $4 billion, and Pakistan, getting $3.1 billion. And Iraq would get $2.6 billion in 2011. In addition, those three nations would get an immediate $4.5 billion this year if Congress goes along. That means the war zones would consume the biggest slice of international programs, which in total would grow only slightly, to $56.8 billion in 2011.

The budget for the Department of Homeland Security would increase 2 percent to $43.6 billion, including $734 million to buy up to 1,000 advanced imaging machines for screening airline passengers as well as new equipment for detecting explosives in baggage. There would be more money to allow air marshals on more international flights.

While Mr. Obama’s budget for the coming fiscal year would total $3.8 trillion, just $1.4 trillion is domestic and defense spending that he and Congress directly control through annual appropriations. The rest is mostly automatic spending for the entitlement benefit programs and interest on a $12.4 trillion debt.

The administration said its proposed tax cuts for families and businesses would total about $300 billion over the decade. It would extend for a third year Mr. Obama’s “Making Work Pay” tax credit that is intended to offset payroll taxes for 110 million lower- and middle-income workers.

He also proposes to increase the child care tax credit, eliminate small businesses’ capital gains taxes on new investments and extend through this year a provision of last year’s economic stimulus law that allows small businesses to write off in the first year up to $250,000 in equipment investments.

    In $3.8 Trillion Budget, Obama Pivots to Trim Future Deficits, NYT, 2.2.2010, http://www.nytimes.com/2010/02/02/us/politics/02budget.html

Obama Outlines Plan to Increase Employment

January 30, 2010
The New York Times
By SEWELL CHAN

WASHINGTON — In proposing a one-year, $33 billion tax credit for small businesses, the Obama administration is simultaneously seeking to stimulate hiring by reducing payroll taxes and to turn its attention to a constituency that has historically been associated with Republicans.

Hours after the Commerce Department announced that economic growth had picked up at the end of last year, President Obama visited a machine plant in Baltimore on Friday to promote the plan, which would give companies a tax credit of up to $5,000 for each new hire and reimburse them for Social Security taxes if they expand their payrolls. The credit is capped at $500,000 for each employer.

“Now is the perfect time for this kind of incentive because the economy is growing, but businesses are still hesitant to start hiring again,” Mr. Obama said at the Chesapeake Machine Company, which makes custom industrial equipment.

Earlier this month, the nonpartisan Congressional Budget Office concluded that reducing the payroll taxes of employers would be the most cost-effective approach — after extending unemployment benefits — to stimulating economic output and job growth.

Even so, the proposal, which would be the first federal wage subsidy since the New Jobs Tax Credit in 1977-78, met with a wary response from Republicans.

Representative Dave Camp of Michigan, the top Republican on the House Ways and Means Committee, which oversees tax matters, said, “A sprinkling here and there of a few poll-tested proposals won’t provide enough help or get small businesses hiring again.”

He said that business owners were alarmed about how Mr. Obama’s proposals on health care and energy would affect their bottom line.

Charles E. Grassley of Iowa, who is the top Republican on the Senate Finance Committee, said in a statement that “tax incentives that encourage job creation can help if they’re done right.” He added, however, that “Congress will be swimming upstream with tax relief if it doesn’t also do something about the bad environment for small-business growth.”

The National Federation of Independent Business, a small-business lobby group that has traditionally been close with Republicans, also expressed skepticism. It said the $5,000 tax credit for new hires would only benefit “a limited number of small employers” but said the payroll-tax credit had potential.

Administration officials said the proposal was intended to offer the maximum incentives for employers to add workers, as well as to increase wages and working hours for current employees.

With the unemployment rate at 10 percent, the administration also wants a policy that can have an immediate effect.

“The president’s plan is to make the credit retroactive to Jan. 1 of this year, so employers can go out and start hiring right now,” said Alan B. Krueger, assistant Treasury secretary for economic policy. Employers would have the option of receiving the tax credit on a quarterly estimated basis, which would get the money into their hands earlier in the year and provide an added incentive to hire.

Mr. Krueger said the plan contained provisions to prevent abuse by employers seeking to get the tax credit and wage bonus by, for example, replacing a full-time worker with two part-time ones making the same total salary. The rules would also prevent companies from renaming themselves or merging to claim the credit.

“We’re not going to let you game the system to take advantage of the tax credit, unless you’re doing right by your workers,” Mr. Obama said in Baltimore.

One criticism of wage subsidies like the one in the 1970s, which Mr. Krueger said served in some ways as a model for the Obama administration’s proposal, is that they benefit employers that would have hired new workers anyway.

At its peak, the 1977-78 program, established during the Carter administration, directly subsidized some 2.1 million new workers, the Congressional Budget Office found. But it is impossible to know what hiring would have been without the credit. Only a tiny fraction of employers that knew about the credit at the time said it had prompted them to hire more workers, one study found.

Jason Furman, deputy director of the National Economic Council, said the new proposal addressed that problem by encouraging all forms of payroll expansion, not just hiring. “We have very much been emphasizing that you get a tax cut not only for hiring additional workers but also for raising wages, increasing work hours and creating better-paid jobs,” he said. “We view this as having all the benefits of a normal tax cut, plus the extra benefit of job and wage incentives.”

In combining a tax credit for new workers with a wage bonus for payroll expansion, the administration’s proposal resembles elements from other recent proposals.

Under a plan announced this week by Senators Orrin G. Hatch, Republican of Utah, and Charles E. Schumer, Democrat of New York, companies that hire an unemployed worker would not have to pay the Social Security payroll tax on that worker for the duration of 2010. Another plan, put forward last October by the Economic Policy Institute, a liberal research group, emphasizes expanding payrolls. It would refund 15 percent of new payroll costs in 2010 and 10 percent in 2011.

Timothy J. Bartik, an author of the institute’s plan, estimated on Friday that the president’s proposal would create at least one million jobs at a cost of $30,000 a job. “It will not solve the United States’ current employment crisis, but it will make a significant dent in our employment problems,” said Mr. Bartik, an economist at the W. E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

The National Federation of Independent Business said it would prefer to see a payroll tax holiday extended to “all small employers, not just to employers that can afford to increase wages,” but the Obama administration believes such a plan would not do enough to stimulate hiring or wage increases. Such a plan would also provide a bigger benefit for higher-paid workers, while under the Obama plan, companies would not get credit for increasing wages on employees making more than $106,000, the maximum annual wage subject to Social Security taxes.

Even so, Mr. Obama himself left room for negotiation. “I’m open to any good ideas from Democrats or Republicans,” he said in Baltimore. “The key thing is it’s time to put America back to work.”

    Obama Outlines Plan to Increase Employment, NYT, 30.1.2010, http://www.nytimes.com/2010/01/30/business/smallbusiness/30small.html

Economy Grew at Vigorous Pace in Last Quarter

January 30, 2010
The New York Times
By CATHERINE RAMPELL

The United States economy grew at its fastest pace in more than six years at the end of 2009, even as businesses resisted hiring and continued to do more with less.

The broadest measure of economic activity, gross domestic product, expanded at an annual rate of 5.7 percent in the fourth quarter, after a 2.2 percent increase the previous quarter.

“It was an excellent report, but it’s not clear how sustainable this pace of growth is,” said John Ryding, chief economist of RDQ Economics.

The growth rate was the fastest since the third quarter of 2003, when the economy grew at a rate of 6.9 percent. But even 2009’s fourth-quarter surge was not enough to overcome a terrible start to the year. The economy finished 2009 with its biggest contraction since 1946, when the country was still cooling off from World War II.

The Obama administration seized on news of the latest upturn as an opportunity to push its proposal to encourage hiring. Companies would receive a tax credit of up to $5,000 for each new hire, and an additional credit on Social Security payroll taxes for raising wages — by increasing hourly pay or work hours, for example — in excess of inflation.

“Now’s the perfect time for this kind of incentive because the economy is growing, but businesses are still hesitant to start hiring again,” President Obama said in Baltimore.

The economy has been able to grow even without adding workers because employers have found ways to accomplish more with fewer workers. Productivity grew at a robust rate of 8.1 percent in the third quarter of 2009, the most recent data available.

The single biggest factor in the strong growth rate last quarter was not consumers buying more, but businesses letting their stockpiles shrink at a slower rate than they had been previously.

For example, a bike company usually keeps its warehouse well stocked. In tough times, it cuts production and sells what it already has in the warehouse.

When its financial worries ease, the company still does not fully replenish its warehouses, but it lets its inventories shrink at a slower pace.

Because of the way the government calculates growth, this business moderation translates into an increase in output. The change in inventories added 3.4 percentage points to the growth rate in the final quarter of 2009.

Those inventory changes alone cannot sustain growth over an extended period of time. Economists are hoping that once business executives become more confident about the recovery, they may increase production to refill their stockroom shelves.

“What goes down wildly has to go up at a pretty good clip,” said Robert J. Barbera, chief economist at ITG.

So far, though, final sales to consumers and businesses have been disappointing. Consumer spending grew at an annualized pace of 2 percent in the fourth quarter, after an increase of 2.8 percent in the third quarter. That is better than many had feared when the quarter began, considering the end of the cash-for-clunkers program that had helped stimulate auto spending. Still, in the past, consumption has been a much bigger driver of growth after a recession.

Many analysts foresee tepid growth in the months ahead. Ian Shepherdson, of High Frequency Economics, expects output to expand by just 1 or 2 percent, at an annualized rate, this quarter and next.

The biggest challenge in the near future is the job market.

On net, the economy lost 208,000 nonfarm payroll jobs last quarter, and the unemployment rate rose to 10 percent, from 9.7 percent. As long as the labor market remains weak, consumers — whose purchases make up the bulk of economic output each quarter — will be reluctant to spend money. That means businesses will need to look for other sources of demand, like exports.

Perhaps the most promising aspect of Friday’s report in terms of jobs was the pickup in equipment and software spending.

Businesses increased their investment in these areas at an annualized rate of 13.3 percent last quarter, compared with an increase of 1.5 percent in the third quarter.

“Businesses that are spending more on equipment and software are probably going to be hiring more as well,” said Nigel Gault, chief United States economist for IHS Global Insight. “If we see more hiring, that means we may see more consumer spending, too.”

Obama administration officials say they see other signs that output growth will eventually transform into job growth.

“Employers are seeing demand go up,” said Christina Romer, the chairwoman of the president’s Council of Economic Advisers. “They’re starting to hire temporary workers. We’re trying to get them to take the plunge and hire permanent workers. And do the hiring sooner rather than later.”

Total government spending fell slightly, by an annualized rate of 0.1 percent, from the third quarter to the fourth quarter, largely because of declines in military spending and state and local government spending.

Federal nonmilitary spending rose at an annual rate of 8.1 percent last quarter, after rising 7 percent the previous quarter.

International trade increased last quarter, and exports grew nearly twice as fast as imports, aided by a relatively weak dollar.

The latest measure of the nation’s output is a backward-looking figure, providing only clues of where the country may be headed. The number can be subject to major revisions, especially when the economy is at a turning point. The annual growth rate initially reported by the government for the third quarter of 2009 was 3.5 percent, but was later revised to 2.2 percent. The government’s final tally of last quarter’s output will be released in March.

    Economy Grew at Vigorous Pace in Last Quarter, NYT, 30.1.2010, http://www.nytimes.com/2010/01/30/business/economy/30econ.html

Existing Home Sales Drop More Than Forecast

January 26, 2010
The New York Times
By DAVID STREITFELD

Home sales plunged in December even faster than predicted, deepening questions about whether the housing market can function without ample government assistance.

Sales of existing homes in December fell 16.7 percent from November to a seasonally adjusted annual rate of 5.45 million units, the National Association of Realtors said Monday.

That was the lowest annual rate since August, although still 15 percent higher than December 2008.

Analysts expected a weak number. An index that tracks pending home deals, released at the beginning of January, was down 16 percent. Most pending deals become final in six weeks to two months.

However, analysts generally did not think it would be quite this bad. “A nose dive,” Jennifer Lee of BMO Capital Markets called it.

The housing market has been distorted recently by the government’s tax credit for buyers. In November, fears of the credit’s expiration compelled people to buy, pushing sales to an annual rate of 6.54 million.

The credit was ultimately extended and broadened by Congress until April 30 but the urgency is gone, at least for the moment. Analysts expect the appeal to reappear in February and March, but are unsure of what happens after that.

“Given that the tax credit appears to account for a good deal of the improvement in the housing market,” Paul Dales, U.S. economist for Capital Economics Ltd., wrote in a research note, “we’re becoming increasingly concerned that the housing recovery will falter once it is removed.”

The pain in December was shared relatively equally in three out of the four regions. The Midwest was down 25.8 percent from November; the Northeast dropped 19.5 percent; and the South 16.3 percent. The West fared best, down 4.9 percent.

Distressed homes accounted for about a third of all sales in December, down from levels approaching 50 percent earlier in the year.

The number of homes on the market is continuing to fall, dropping to 3.29 million homes. But since sales fell even faster, the supply on the market rose to 7.2 months in December from 6.5 months in November.

Larger inventories often anticipate a drop in prices. A normal market has about a six month’s supply.

The real estate association said that 2009 was the first year since 2005 to record an annual sales gain. Sales in 2009 were up 4.9 percent from 2008.

The association said that median home price rose 1.4 percent in December to $177,500.

With the drop in sales, Tuesday’s release of the Case-Shiller home price data for November will be watched even more closely than usual. After a summer and fall of modest improvement, analysts are expecting the results to be unchanged at best from the previous month.

    Existing Home Sales Drop More Than Forecast, NYT, 26.1.2010, http://www.nytimes.com/2010/01/26/business/economy/26econ.html

Letters

Retirees at the Mercy of the Bankers

January 25, 2010
The New York Times

To the Editor:

Re “How Retirees Saved the Banks” (editorial, Jan. 18):

Kudos to the editors for highlighting the ramifications of low interest rates. Yes, retirees have, through a laudable concern with safety, enabled the banks to obtain cheap money at the expense of not only the elderly but also of those who are starting their nest eggs.

Are there larger issues here that need to be addressed? For example: Is the spread of bank interest rates and mortgage rates unduly wide? Are we shoring up the stock market by fostering unhealthy choices? What will be the future incentives to save? How sure are we that low interest rates always help business and in turn the economy? How much regulation is advisable?

Your editors should be applauded for finally bringing this well-kept secret out of the closet. E. Ward Herlands

Stamford, Conn., Jan. 18, 2010

•

To the Editor:

A huge thank-you for airing this largely ignored problem.

I’m one of those innumerable seniors who depended heavily on income from investments in order to supplement Social Security, which, by itself, does not cover half of my necessary expenses. There will be no surprise estates left me, no earnings to supplement what I may lose. Thus, I have had no choice but the safest investments: CDs, T-bills and municipal bonds.

I cannot afford to lose any of the money I have left. Yet I am losing every day. The inflation I’m told does not exist clearly does. Inflation not only exists, but it’s also eroding what resources we have. And not unlike legions of seniors, I have had no choice but to spend capital. There are no notches left on my belt.

Last year, my total income from T-bills, one-third of my investments, was $19.

There will be new hordes of homeless, needy people if the scales continue to swing in favor of wealthy, large institutions. I’m looking at an economy of smoke and mirrors, and through the smoke, it’s my face that I see in the mirror. Mae B. Haynes

Wayzata, Minn., Jan. 18, 2010

•

To the Editor:

I’m not just “a retiree who relies on interest income”; I’m a retiree looking for something more than nominal interest.

Pardon me for asking a simple question: Why are the executive ranks of the banks that are holding and using our money preparing to receive bonuses well over 100 percent of their salaries, but can’t pay depositors 2 or 3 percent additional interest? Ed Jaworski

Brooklyn, Jan. 18, 2010

•

To the Editor:

Your editorial is a long-overdue recognition of the vital fact that our loss of income has not been mentioned by any media in the great euphoria of cheap mortgages, multiple refinancing and the housing market bubble.

It has been a singular mistake to deprive old people — who are the one segment of the population normally able to spend money (having paid off their homes, sent their offspring to college and prudently saved for their old age) — to the point of needing food stamps and charity when they could have afforded purchases to stimulate the economy.

Retirees used to travel (using gasoline, hotels, tourism attractions), go on cruises, modernize their homes, buy appliances and eat out. So far, no chamber of commerce or advertising firm has “connected the dots” why spending is down in these categories.

We can thank Ronald Reagan for the rise in interest rates that turned our small I.R.A. savings into sizable retirement cushions and stimulated the economy, to say nothing of a sense of security that reduced stress and its physical and social consequences.

It has been Alan Greenspan’s and the past administration’s concern for the rich to get richer that now have made senior citizens pay for the banks’ billions held for the bonuses of their officers.

Eva B. Neisser

Vineland, N.J., Jan. 18, 2010

•

To the Editor:

“How Retirees Saved the Banks” correctly notes that with near-zero borrowing rates, banks can make money, with little or no risk and without lending to consumers and businesses, by buying Treasuries and high-grade corporate bonds, and that, while this is good for the health of the banks, it does little if anything for savers.

President Obama rightly wants to tax banks at the point where they engage in the kind of risky endeavors that created the financial crisis. But this would address just half the problem because taxing to disincentivize risky behavior does nothing to incentivize what is needed from the banks to bring about a robust recovery — namely, more lending to consumers and businesses.

So if banks were taxed on returns from their “investments” in Treasuries and other bonds at a significantly higher rate than returns from real lending to consumers and businesses, such real lending would begin in earnest and the economic recovery would accelerate and strengthen.

In short, then, deterring risky conduct and having healthy banks is good, but adding an incentive tax to promote productive conduct and commerce would be even better. Eugene D. Cohen

Phoenix, Jan. 18, 2010

•

To the Editor:

Along with saving the banks by leaving money on deposit at low rates, retirees also made it easy for traders to earn large bonuses.

The bonuses this year were earned by traders who borrowed virtually free money and invested it with the assurance from the leaders of the Federal Reserve that short-term rates would not go up. This is why a one-time tax on bonuses is warranted.

Instead of using all of the free money to support lending and strengthen their balance sheets, Wall Streeters used much of it to pay themselves bonuses under the false claim that they earned it. Hypocrites without shame.

Joe Messinger

Cedarburg, Wis., Jan. 18, 2010

    Retirees at the Mercy of the Bankers, NYT, 25.1.2010, http://www.nytimes.com/2010/01/25/opinion/l25retirees.html

Obama Moves to Limit ‘Reckless Risks’ of Big Banks

January 22, 2010
The New York Times
By SEWELL CHAN

WASHINGTON — Declaring that huge banks had nearly brought down the economy by taking “huge, reckless risks in pursuit of huge profits,” President Obama on Thursday proposed legislation to limit the scope and size of large financial institutions.

The changes would prohibit bank holding companies from owning, investing, or sponsoring hedge fund or private equity funds or engaging in proprietary trading — what Mr. Obama called the Volcker Rule, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has championed the restriction.

In addition, Mr. Obama will seek to limit consolidation in the financial sector, by placing curbs on the growth of the market share of liabilities at the biggest firms. An existing cap, put in place in 1994, put a cap of 10 percent on the share of insured deposits that can be held by any one bank. That cap would be expanded, officials said, to include liabilities other than deposits.

Both changes require legislation by Congress, and Republican leaders, as well as the banking industry, signaled on Thursday that they would resist the proposals.

Mr. Obama, speaking in the Diplomatic Reception Room at the White House, said he anticipated such opposition, saying an “army of industry lobbyists” had already descended on the capital to oppose regulatory reform.

“If these folks want a fight, it’s a fight I’m ready to have,” he said.

He was flanked by Mr. Volcker; William H. Donaldson, a former chairman of the Securities and Exchange Commission; Barney Frank, the chairman of the House Financial Services chairman; and Christopher J. Dodd, the chairman of the Senate Banking Committee.

Mr. Obama — still stinging from a stunning setback on Tuesday, when Republicans captured the seat formerly held by the late Edward M. Kennedy — took a populist posture in criticizing the banks for bringing on the crisis and necessitating hundreds of billions of dollars in government assistance.

Taxpayers were “forced to rescue financial firms facing a crisis largely of their own creation,” he said.

Mr. Obama said of the Troubled Asset Relief Program, the 2008 bank bailout: “That rescue, undertaken by the previous administration, was deeply offensive, but it was the necessary thing to do.” But he said the financial system was “still operating under the same rules that led to its near-collapse,” and vowed: “Never again will the American taxpayer be held hostage by a bank that is too big to fail.”

Under existing rules, he said, the banks “concealed their exposure to debt” through complex financial maneuvers, made “speculative investments,” and took on “risks so vast that they posed threats to the entire system,” Mr. Obama said.

    Obama Moves to Limit ‘Reckless Risks’ of Big Banks, NYT, 22.1.2010, http://www.nytimes.com/2010/01/22/business/22banks.html

Strong Year for Goldman, as It Trims Bonus Pool

January 22, 2010
The New York Times
By GRAHAM BOWLEY

Goldman Sachs reported a record profit for 2009 on Thursday.

But in reaction to the public outcry over executive compensation, the bank reduced the share of revenue going to bonuses.

The bank said that for 2009, it earned a profit of $13.4 billion on revenue of $45.2 billion. For the fourth quarter, Goldman earned $4.95 billion on $9.6 billion in revenue.

In a conference call with journalists, David Viniar, chief financial officer, repeatedly said the bank was showing “restraint” in its pay policies while trying to be fair to employees. “We are not blind to the economic environment and the pain and suffering still going on around the world,” Mr. Viniar said.

After a period in which the federal government devoted billions of taxpayers dollars to bailing out the banking industry, Mr. Viniar said the bank had been “clearly helped by government actions and policies.” But he said Goldman had paid back its federal bailout aid, with interest, and rebuffed ideas that the firm benefited from all government policies. He said the bank did not especially gain any advantage from the current low interest rates.

“It was not the only thing that drove our performance,” he said in an interview, referring to government programs supporting the banking industry. “Our people, I think, did a really good job.”

Even though the firm reported a big drop in interest expenses, he said the firm thrived in both low and high interest rate environments because of its hedging.

Mr. Viniar said Goldman’s business through 2009 had been bolstered by its strong trading activities — helping companies and governments hedge interest rates or deal in currencies. This activity dropped off in the final quarter, he said, but its revenues were helped by strong investment banking activities, like equity and debt underwriting, in the fourth quarter. The dramatic slowdown in trading, however, had already begun to reverse itself in 2010, he said.

The bank’s earnings of $8.20 a share easily topped analysts’ expectations of $5.20 a share and compared with a loss of $2.12 billion, or $4.97 a share, in the quarter a year earlier.

Goldman also disclosed that it had set aside $16.2 billion of its revenues for bonuses and compensation in 2009. The amount was nearly 50 percent higher than in 2008 but below the record year of 2007, when it devoted $20.2 billion to bonuses and salaries.

The figure for 2009 represented 35.8 percent of revenues, down from 48 percent in 2008, and its lowest ratio since it became a public company. In a sign that Goldman is being swayed by the public outcry over high levels of executive compensation, the bank took about $500 million out of its bonus pool in the fourth quarter to pay for its charitable and small business initiatives.

Goldman had already begun decreasing the share of revenue as the year progressed. The bank set aside 50 percent in the first quarter, but that figure fell to 48 percent and then to 43 percent in the next two quarters. Nevertheless, on average, each Goldman employee is set to receive about $498,000 in bonus and compensation for 2009, an amount that could still incense the bank’s critics, given the economic pain elsewhere in the country.

But bank executives would not discuss whether this meant the ratio would stay low in coming years — or whether the measure was simply a one-off reduction aimed at a short-term political fix.

Mr. Viniar said he regarded the latest figure “not as a one-time thing and not necessarily not as a one-time thing.”

In a statement, Lloyd C. Blankfein, chairman and chief executive, highlighted the firm’s reduction in its compensation pool as a share of revenue. He said the firm’s strong performance “as well as recognition of the broader environment, resulted in our lowest ever compensation to net revenues ratio.”

The results over all underline how much Goldman has rebounded from the financial crisis and its single quarterly loss in the final three months of 2008. Its disclosure on bonuses underlines the extent to which compensation will again eat up much of Wall Street’s revenue this year.

.

In December, Goldman announced that its top 30 executives would be paid only in stock, with no cash component. Now, nearly everyone on Wall Street is waiting to see how much stock will be awarded to Mr. Blankfein, who has become a focus for criticism over executive pay. In 2007, Mr. Blankfein was paid $68 million, a Wall Street record. He did not receive a bonus in 2008.

Details of Mr. Blankfein’s stock award may emerge this week, although some Wall Street executives say the disclosure of who gets what from Goldman’s bonus pool could be delayed until later this month.

Despite Goldman’s reduction of its bonus pool in the final three months, the numbers may still provoke more outcry over the level of executive pay on Wall Street, a year after the government rescued the financial system with billions of taxpayers’ dollars.

Many banks are bracing for more scrutiny from Washington, as well as from officials like Andrew M. Cuomo, the attorney general of New York, who last year demanded that banks disclose details about their bonus payments. Some bankers worry that the United States, like Britain, might create an extra tax on bank bonuses.

But these concerns aside, few banks are taking immediate steps to cut their bonuses substantially. Because of the potential criticism, some big banks are changing their pay practices, paring or even eliminating some cash bonuses in favor of stock awards and reducing the portion of their revenue earmarked for pay.

Since the financial crisis, all Wall Street banks have benefited from an array of federal programs and low interest rate policies that enabled the industry to roar back in profitability in 2009.

As most big banks have started repaying the billions of dollars in federal aid that propped them up during the crisis, the power that the federal government once had over banker pay has waned.

To Wall Street critics and, indeed, many ordinary Americans, the prospect of a new era of Wall Street wealth, so soon after the financial collapse, and with so many people out of work, seems shocking.

Some see the current round of bonuses as evidence that Washington policy makers failed to reform pay practices that in, some cases, fostered the risky businesses that lead to the financial crisis in the first place.

Though Wall Street bankers and traders earn six-figure base salaries, they generally receive most of their pay as bonuses based on the previous year’s performance. While average bonuses are expected to hover around half a million dollars, they will not be evenly distributed across the banks. Senior banking executives and top Wall Street producers expect to reap millions. Goldman put aside $16.7 billion for compensation during the first nine months of 2009. Goldman’s compensation ratio was 47 percent for the first nine months of the year. It earned a profit of $3.19 billion in the third quarter.

    Strong Year for Goldman, as It Trims Bonus Pool, NYT, 22.1.2010, http://www.nytimes.com/2010/01/22/business/22goldman.html

Rise in Jobless Claims Signals Bump in Recovery

January 21, 2010
Filed at 12:13 p.m. ET
The New York Times
By THE ASSOCIATED PRESS

WASHINGTON (AP) -- A surprising jump in first-time claims for unemployment aid sent a painful reminder Thursday that jobs remain scarce six months into the economic recovery.

The surge in last week's claims deflated hopes among some analysts that the economy would produce a net gain in jobs in January and help fuel the recovery.

A Labor Department analyst said much of the increase was due to holiday-season-related administrative backlogs at the state agencies that process the claims. Still, economists noted that that would mean claims in previous weeks had been artificially low. Those earlier declines had sparked optimism that layoffs were tapering and that employers would add a modest number of jobs in January.

The January employment report will be issued Feb. 5. But the surveys used to compile that report were done last week, so economists are paying close attention to the jobless claims figures from that week.

''The trend in the data is still discouraging,'' Diane Swonk, chief economist for Mesirow Financial, wrote in a note to clients. ''Hopes for a positive employment number in January ... are rapidly dimming.''

The disappointing jobless claims report contributed to a gloom on Wall Street. The Dow Jones industrial average dropped 182 points by late morning, or 1.7 percent, and broader indexes also fell.

A separate report Thursday that seeks to forecast future economic activity offered a more positive outlook. The Conference Board's index of leading economic indicators jumped 1.1 percent in December, suggesting that economic growth could pick up this spring.

In its report on jobless claims, the Labor Department said initial claims for unemployment aid rose by 36,000 to a seasonally adjusted 482,000. Wall Street economists had expected a small drop, according to Thomson Reuters.The four-week average, which smooths fluctuations, rose for the first time since August, to 448,250.

Initial claims had dropped steadily since last fall as companies cut fewer jobs. First-time claims have dropped by 50,000, or nearly 10 percent, since late October.

Still, employers are reluctant to hire. The Labor Department said earlier this month that employers cut 85,000 jobs in December, after adding 4,000 in November. November's increase was the first in nearly two years. The unemployment rate was 10 percent in December, unchanged from November.

Many economists say the four-week average of jobless claims would need to fall consistently below 425,000 to signal that the economy is close to generating net job gains.

The economy is growing, but not fast enough to bring down widespread joblessness. Most economists estimate that the gross domestic product, the broadest measure of the economy's output, grew at about a 4 percent clip in last year's fourth quarter. That followed 2.2 percent growth in the July-September period.

The Labor Department report said the number of people continuing to claim regular benefits dropped slightly to just under 4.6 million. The continuing claims data lags behind initial claims by a week.

But the so-called continuing claims do not include millions of people who have used up the regular 26 weeks of benefits customarily provided by states and are now receiving extended benefits for up to 73 additional weeks, paid for by the federal government.

More than 5.9 million people received extended benefits in the week that ended Jan. 2, the latest period for which data are available. That's an increase of more than 600,000 from the previous week. The data for emergency benefits lags behind initial claims by two weeks.

The rising number of people claiming extended unemployment insurance indicates that even as layoffs are declining, hiring hasn't picked up. That leaves people out of work for longer periods .

Among the states, California saw the largest increase in claims, with 16,160. Texas, Florida, Pennsylvania and Georgia saw the next largest increases. The state data lags the initial claims data by a week.

Oregon saw the biggest drop in claims, of 5,784, followed by Iowa, Kentucky, Michigan and Massachusetts.

    Rise in Jobless Claims Signals Bump in Recovery, NYT, 21.1.2010, http://www.nytimes.com/aponline/2010/01/21/us/politics/AP-US-Economy.html

Citigroup Reports a $1.6 Billion Loss for Year

January 20, 2010
The New York Times
By ERIC DASH

Even as it untangles itself from the federal government, the banking giant Citigroup announced a loss for a second consecutive year and showed few signs of a quick recovery.

The bank said Tuesday that it lost $1.6 billion in 2009 — an improvement from the $27.7 billion loss the year before. Citigroup reported a $7.6 billion loss for the fourth quarter after a $10.1 billion accounting charge tied to the repayment of its bailout money erased any chance of a profit.

Still, Citigroup plans to hand out large bonus checks in the coming weeks. Bank employees, on average, took home about $94,000 in pay last year, slightly less than the $96,000 average in 2008. Top investment bankers and traders, however, could receive bonuses worth at least several million dollars. Over all, the bank paid a total of $25 billion in compensation, about 20 percent less than in 2008 although the company has almost 100,000 fewer employees.

As has been the case, losses in Citigroup’s domestic mortgages and credit units overwhelmed gains from investment banking, a trend that is likely to continue. Bank executives set aside another $700 million in the fourth quarter to cover future losses, bringing the total amount of reserves to about $36 billion.

After two years at the helm, Vikram S. Pandit, Citigroup’s chief executive, is facing a crucial year. Mr. Pandit must stanch the losses in the bank’s consumer businesses and shift the bank’s strategy. He must mollify his top managers and discourage bankers and traders from fleeing. All the while, he must address the demands of a multitude of government overseers. Although Citigroup has repaid its bailout money, taxpayers still own 34 percent, as well as preferred stock worth billions of dollars.

In a statement, Mr. Pandit said he believed the house of Citigroup was finally in order. “We have made enormous progress in 2009,” he said. “In the near term, we will continue to focus on sustainable profitability and growth, and supporting the global economic recovery.” Investors, however, are growing impatient. Saudi Prince Al-Walid bin Talal, once the bank’s single largest shareholder, told Fox Business Network that “2010 is for him the year to make it or break it, and he has to deliver.”

Citigroup booked a net loss of 80 cents a share in 2009 compared with $5.61 a share in 2008. The bank’s fourth quarter loss of $7.6 billion, or 33 cents a share, compared with a loss of $17.3 billion, or a $3.40 a share, a year earlier.

For the full year, net revenue climbed to $80.2 billion as the markets roared back in the first part of 2009 and the bank finally ended a string of multibillion write-offs on mortgage-related investments.

The bank’s fourth quarter, like the previous eight, was messy. There were several one-time items, including the charge from exiting the government support programs, another $1.8 billion accounting charge tied to the improved perception of the bank’s health, and smaller gains from the divestitures of certain businesses.

Although clouded by the bottom-line results, there are signs of progress. Mr. Pandit has followed through on plans to beef up risk management and cut expenses. After three government bailouts, he has shored up the bank’s finances and stockpiled tens of billions of dollars in cash. In a tough market, he shed more than $168 billion of assets, shrinking the balance sheet by 23 percent.

Bank executives say a speedier recovery in Asia and parts of Latin America has helped consumer loan losses. But amid double-digit unemployment and a weak housing market, the North American mortgage and credit card businesses keep hemorrhaging money — albeit, at a slower pace.

“Whether these trends continue will depend on the U.S. economy,” said John Gerspach, Citigroup’s chief financial officer.

Mr. Gerspach warned that stiffer credit card regulations would present a considerable headwind and the fate of the administration’s mortgage modification could significantly impact results. That program, by allowing the bank to delay booking losses on borrowers that fall behind on their loans, reduced credit losses by about $200 million in the fourth quarter.

Citigroup’s global consumer banking business posted a $1.9 billion profit for 2009, though that significantly overstated the performance of its mortgage and credit card businesses. For reporting purposes, the bank does not include its big mortgage, consumer finance and private-label credit card businesses. Those businesses, under the category of “Local Consumer Lending,” lost about $10 billion in 2009.

Over all, Citigroup’s investment bank reported the best results, though it still lagged competitors. Profit in the unit rose to $2.4 billion, up 6 percent from 2008. Although trading revenue surged in the first half of the year, it started to fizzle in the third and fourth quarters as the markets recovered. Its results also swung wildly from quarter to quarter from the impact of an obscure accounting charge on bank-issued debt, known as credit valuation adjustment, based on the perception of Citigroup’s financial health.

Mr. Gerspach said the figures needed to be adjusted again at the end of the year — lowering earnings by $840 million. “We corrected a mechanical miscalculation,” he said on the conference call.

As it has since last summer, Citigroup split its results into segments that made its main businesses appear stronger. Citicorp, its core consumer and corporate banking operation, posted $14.7 billion profit for 2009. Citi Holdings, which contains the money-losing businesses and toxic assets the bank plans to sell, showed a $8.2 billion loss.

Citigroup’s results were a sharp contrast from those last week of JPMorgan Chase, which reported earnings $11.7 billion last year, more than double its profit in 2008. The bank earned $3.3 billion in the fourth quarter alone.

    Citigroup Reports a $1.6 Billion Loss for Year, NYT, 20.1.2010, http://www.nytimes.com/2010/01/20/business/20bank.html

Editorial

How Retirees Saved the Banks

January 18, 2010
The New York Times

If you’re a retiree who relies on interest income, you know that the tap is running dry. In fact, many investors in certificates of deposits, savings accounts and money market accounts are losing money once taxes and inflation are subtracted from today’s extremely low yields.

Less well known is that measly savings yields are central to the government effort to buy time for the banks to earn their way back to health. It is important to rebuild the banks. But more attention must be paid to the collateral damage from that effort.

Here’s what’s happening: By lowering the short-term interest rate it controls to virtually zero and creating lending programs, the Federal Reserve has enabled banks to borrow cheaply. The banks re-lend that cheap money, but not necessarily to consumers and businesses. They can, for example, lend it to back to the federal government by buying Treasury securities, and earn a nice spread between their cost of funds and Treasury yields.

At the same time, banks are awash in deposits, much of it from investors who have pulled their money out of riskier investments. With money rolling in, big banks don’t need to compete with one another for savers, which further depresses the interest on offer.

The result is presumably healthier banks and certainly poorer savers. Or, as William Gross, the legendary bond investor told The Times’s Stephanie Strom: “It’s capitalism, I guess, but it’s not to be applauded.”

The situation is especially tough on retirees who depend on interest income to supplement their Social Security. Some will have to spend their capital to make ends meet. Some will probably take on more risk by investing in stocks or bonds, or will have to live on less. Some, as Ms. Strom reported, have taken out reverse mortgages to increase their income — another example of how Americans’ wealth is being sapped. Reverse mortgages allow people who are 62 and older to convert the equity in their homes into cash, with the loans usually repaid by selling the house after the owner dies.

Regulators have put safeguards in place to combat abusive lending on government-insured reverse mortgages, about 90 percent of the market. (They include prohibitions on cross-selling, whereby a lender urges borrowers to use the money from the mortgage to buy other investments from the lender.) Given the nation’s recent experiences — and the vulnerability of many elderly people — regulators will have to be vigilant.

The effect of the financial crisis on retirees — and planning for retirement — has been largely overlooked. It deserves a high place on policy makers’ agendas.

    How Retirees Saved the Banks, NYT, 18.1.2010, http://www.nytimes.com/2010/01/18/opinion/18mon3.html

JPMorgan Chase Earns $11.7 Billion

January 16, 2010
The New York Times
By ERIC DASH

JPMorgan Chase kicked off what is expected to be a robust — and controversial — reporting season for the nation’s banks on Friday with news that its profit and pay for 2009 soared.

In a remarkable rebound from the depths of the financial crisis, JPMorgan earned $11.7 billion last year, more than double its profit in 2008, and generated record revenue. The bank earned $3.3 billion in the fourth quarter alone.

Those cheery figures were accompanied by news that JPMorgan had earmarked $26.9 billion to compensate its workers, much of which will be paid out as bonuses. That is up about 18 percent, with employees, on average, earning about $129,000.

Workers in JPMorgan’s investment bank, on average, earned roughly $380,000 each. Top producers, however, expect to collect multimillion-dollar paychecks.

The strong results — coming a day after the Obama administration, to howls from Wall Street, announced plans to tax big banks to recoup some of the money the government expects to lose from bailing out the financial system — underscored the gaping divide between the financial industry and the many ordinary Americans who are still waiting for an economic recovery.

Over the next week or so, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley are expected to report similar surges in pay when they release their year-end numbers.

But not all the news from JPMorgan Chase was good. Signs of lingering weakness in its consumer banking business unnerved Wall Street and drove down its share price along with those of other banks.

Chase’s consumer businesses are still hemorrhaging money. Chase Card Services, its big credit card unit, lost $2.23 billion in 2009 and is unlikely to turn a profit this year. Chase retail services eked out a $97 million profit for 2009, though it posted a $399 million loss in the fourth quarter. To try to stop the bleeding, the bank agreed to temporarily modify about 600,000 mortgages. Only about 89,000 of those adjustments have been made permanent. In a statementon Friday, Jamie Dimon, the chairman and chief executive of JPMorgan, said that bank “fell short” of its earnings potential and remained cautious about 2010 considering that the job and housing markets continued to be weak.

“We don’t have visibility much beyond the middle of this year and much will depend on how the economy behaves,” Michael J. Cavanagh, the bank’s finance chief, said in a conference call with journalists. Across the industry, analysts expect investment banking revenue to moderate this year and tighter regulations to dampen profit. As consumers and businesses continue to hunker down, lending has also fallen.

Just as it did throughout 2009, JPMorgan Chase pulled off a quarterly profit after the strong performance of its investment bank helped offset large losses on mortgages and credit cards. The bank set aside another $1.9 billion for its consumer loan loss reserves — a hefty sum, but less than in previous periods.

That could be a sign that bank executives are more comfortable that the economy may be turning a corner. The bank has now stockpiled more than $32.5 billion to cover future losses. Still, Mr. Dimon warned that the economy was still too fragile to declare that the worst was over, though he hinted that things might stabilize toward the middle of the year. “We want to see a real recovery, just in case you have another dip down,” he said in a conference call with investors. Earlier, Mr. Cavanagh said that the bank hoped to restore the dividend to 75 cents or $1 by the middle of 2010, from 20 cents at present.

Over all, JPMorgan said 2009 net income rose to $11.7 billion, or $2.26 a share. That compares with a profit of $5.6 billion, or $1.35 a share, during 2008, when panic gripped the industry. Revenue grew to a record $108.6 billion, up 49 percent.

JPMorgan has emerged from the financial crisis with renewed swagger. Unlike several other banking chiefs, Mr. Dimon has entered 2010 with his reputation relatively unscathed. Indeed, he is regarded on Wall Street and in Washington as a pillar of the industry. On Wednesday on Capitol Hill, during a hearing of the government panel charged with examining the causes of the financial crisis, Mr. Dimon avoided the grilling given to Lloyd C. Blankfein, the head of Goldman Sachs. Mr. Dimon was also the only banker to publicly oppose the administration’s proposed tax on the largest financial companies.

Moreover, JPMorgan appears have taken advantage of the financial crisis to expand its consumer lending business and vault to the top of the investment banking charts, including a top-flight ranking as a fee-earner. Over all, the investment bank posted a $6.9 billion profit for 2009 after a $1.2 billion loss in 2008 when the bank took huge charges on soured mortgage investments and buyout loans.

The division posted strong trading revenue, though well short of the blow-out profits during the first half of the year when the markets were in constant flux. The business of arranging financing for corporations and advising on deals fell off in the last part of the year, though Mr. Cavanagh said there were signs of a rebound in the first two weeks of January.

As the investment bank’s income surged, the amount of money set aside for compensation in that division rose by almost one-third, to about $9.3 billion for 2009. But JPMorgan officials cut the portion of revenue they put in the bonus pool by almost half from last year.

The division, which employs about 25,000 people, reduced the share of revenue going to the compensation pool, to 37 percent by midyear, from 40 percent in the first quarter. The share fell to 11 percent in the fourth quarter because of the impact of the British bonus tax and the greater use of stock awards.

Bank officials have said that they needed to reward the firm’s standout performance, but to show restraint before a public outraged over banker pay. Other Wall Street firms may make similarly large adjustments.

Chase’s corporate bank, meanwhile, booked a $1.3 billion profit this year, even as it recorded losses on commercial real estate loans. Still, that represents a smaller portion of the bank’s overall balance sheet compared with many regional and community lenders. JPMorgan’s asset management business and treasury services units each booked similar profits for 2009.

    JPMorgan Chase Earns $11.7 Billion, NYT, 16.1.2010, http://www.nytimes.com/2010/01/16/business/16morgan.html

Banks Prepare for Bigger Bonuses, and Public’s Wrath

January 10, 2010
The New York Times
By LOUISE STORY and ERIC DASH

Everyone on Wall Street is fixated on The Number.

The bank bonus season, that annual rite of big money and bigger egos, begins in earnest this week, and it looks as if it will be one of the largest and most controversial blowouts the industry has ever seen.

Bank executives are grappling with a question that exasperates, even infuriates, many recession-weary Americans: Just how big should their paydays be? Despite calls for restraint from Washington and a chafed public, resurgent banks are preparing to pay out bonuses that rival those of the boom years. The haul, in cash and stock, will run into many billions of dollars.

Industry executives acknowledge that the numbers being tossed around — six-, seven- and even eight-figure sums for some chief executives and top producers — will probably stun the many Americans still hurting from the financial collapse and ensuing Great Recession.

Goldman Sachs is expected to pay its employees an average of about $595,000 apiece for 2009, one of the most profitable years in its 141-year history. Workers in the investment bank of JPMorgan Chase stand to collect about $463,000 on average.

Many executives are bracing for more scrutiny of pay from Washington, as well as from officials like Andrew M. Cuomo, the attorney general of New York, who last year demanded that banks disclose details about their bonus payments. Some bankers worry that the United States, like Britain, might create an extra tax on bank bonuses, and Representative Dennis J. Kucinich, Democrat of Ohio, is proposing legislation to do so.

Those worries aside, few banks are taking immediate steps to reduce bonuses substantially. Instead, Wall Street is confronting a dilemma of riches: How to wrap its eye-popping paychecks in a mantle of moderation. Because of the potential blowback, some major banks are adjusting their pay practices, paring or even eliminating some cash bonuses in favor of stock awards and reducing the portion of their revenue earmarked for pay.

Some bank executives contend that financial institutions are beginning to recognize that they must recalibrate pay for a post-bailout world.

“The debate has shifted in the last nine months or so from just ‘less cash, more stock’ to ‘what’s the overall number?’ ” said Robert P. Kelly, the chairman and chief executive of the Bank of New York Mellon. Like many other bank chiefs, Mr. Kelly favors rewarding employees with more long-term stock and less cash to tether their fortunes to the success of their companies.

Though Wall Street bankers and traders earn six-figure base salaries, they generally receive most of their pay as a bonus based on the previous year’s performance. While average bonuses are expected to hover around half a million dollars, they will not be evenly distributed. Senior banking executives and top Wall Street producers expect to reap millions. Last year, the big winners were bond and currency traders, as well as investment bankers specializing in health care.

Even some industry veterans warn that such paydays could further tarnish the financial industry’s sullied reputation. John S. Reed, a founder of Citigroup, said Wall Street would not fully regain the public’s trust until banks scaled back bonuses for good — something that, to many, seems a distant prospect.

“There is nothing I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis,” Mr. Reed said. “They just don’t get it. They are off in a different world.”

The power that the federal government once had over banker pay has waned in recent months as most big banks have started repaying the billions of dollars in federal aid that propped them up during the crisis. All have benefited from an array of federal programs and low interest rate policies that enabled the industry to roar back in profitability in 2009.

This year, compensation will again eat up much of Wall Street’s revenue. During the first nine months of 2009, five of the largest banks that received federal aid — Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley — together set aside about $90 billion for compensation. That figure includes salaries, benefits and bonuses, but at several companies, bonuses make up more than half of compensation.

Goldman broke with its peers in December and announced that its top 30 executives would be paid only in stock. Nearly everyone on Wall Street is waiting to see how much stock is awarded to Lloyd C. Blankfein, Goldman’s chairman and chief executive, who is a lightning rod for criticism over executive pay. In 2007, Mr. Blankfein was paid $68 million, a Wall Street record. He did not receive a bonus in 2008.

Goldman put aside $16.7 billion for compensation during the first nine months of 2009.

Responding to criticism over its pay practices, Goldman has already begun decreasing the percentage of revenue that it pays to employees. The bank set aside 50 percent in the first quarter, but that figure fell to 48 percent and then to 43 percent in the next two quarters.

JPMorgan executives and board members have also been wrestling with how much pay is appropriate.

“There are legitimate conflicts between the firm feeling like it is performing well and the public’s prevailing view that the Street was bailed out,” said one senior JPMorgan executive who was not authorized to speak for the company.

JPMorgan’s investment bank, which employs about 25,000 people, has already reduced the share of revenue going to the compensation pool, from 40 percent in the first quarter to 37 percent in the third quarter.

At Bank of America, traders and bankers are wondering how much Brian T. Moynihan, the bank’s new chief, will be awarded for 2010. Bank of America, which is still absorbing Merrill Lynch, is expected to pay large bonuses, given the bank’s sizable trading profits.

Bank of America has also introduced provisions that would enable it to reclaim employees’ pay in the event that the bank’s business sours, and it is increasing the percentage of bonuses paid in the form of stock.

“We’re paying for results, and there were some areas of the company that had terrific results, and they will be compensated for that,” said Bob Stickler, a Bank of America spokesman.

At Morgan Stanley, which has had weaker trading revenue than the other banks, managers are focusing on how to pay stars in line with the industry. The bank created a pay program this year for its top 25 workers, tying a fifth of their deferred pay to metrics based on the company’s later performance.

A company spokesman, Mark Lake, said: “Morgan Stanley’s board and management clearly understands the extraordinary environment in which we operate and, as a result, have made a series of changes to the firm’s compensation practices.”

The top 25 executives will be paid mostly in stock and deferred cash payments. John J. Mack, the chairman, is forgoing a bonus. He retired as chief executive at the end of 2009.

At Citigroup, whose sprawling consumer banking business is still ailing, some managers were disappointed in recent weeks by the preliminary estimates of their bonus pools, according to people familiar with the matter. Citigroup’s overall 2009 bonus pool is expected to be about $5.3 billion, about the same as it was for 2008, although the bank has far fewer employees.

The highest bonus awarded to a Citigroup executive is already known: The bank said in a regulatory filing last week that the head of its investment bank, John Havens, would receive $9 million in stock. But the bank’s chief executive, Vikram S. Pandit, is forgoing a bonus and taking a salary of just $1.

    Banks Prepare for Bigger Bonuses, and Public’s Wrath, NYT, 10.1.2010, http://www.nytimes.com/2010/01/10/business/10pay.html

U.S. Job Losses in December Dim Hopes for Quick Upswing

January 9, 2010
The New York Times
By PETER S. GOODMAN

The American economy lost another 85,000 jobs in December and the unemployment rate remained at 10 percent, setting back hopes for a swift recovery from the worst downturn since the Great Depression.

The latest monthly snapshot of the national job market released by the Labor Department on Friday provided one potentially encouraging milestone: Data for November was revised to show that the economy gained 4,000 net jobs that month, in contrast to initial reports showing a loss of 11,000 jobs. That marked the first monthly improvement since the recession began two years ago.

But the December data failed to repeat the trend, and the report disappointed economists who had generally been expecting a decline of perhaps 10,000 jobs.

The report broadly confirmed that while the pace of job market deterioration has declined markedly in recent months, companies remain reluctant to hire, heightening the likelihood that scarce paychecks will remain a dominant feature of American life for many months.

“We’re still losing jobs,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It’s nothing like we had in the freefall of last winter, but we’re not about to turn around. We’re still looking at a really weak economy.”

The report intensified pressures on the Obama administration to show progress for the $787 million spending bill it championed last year to stimulate the economy. In recent months, the administration has emphasized initiatives aimed at encouraging jobs, while cognizant that concerns about the federal deficit limit its ability to pursue further spending.

“It certainly isn’t the best report, because we continue to lose jobs,” the Labor secretary Hilda L. Solis, said. “But last year at this time we were losing over 700,000 jobs a month. The recovery act continues to help.”

Some economists fixed on a potentially positive trend tucked within the data: For a fifth consecutive month, temporary help services expanded, adding 47,000 positions in December. The increase burnished the notion that companies are recognizing fresh opportunities and are inclined to add labor, even as they hold off on hiring full-time workers.

“We’re going in the right direction,” said Michael T. Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “If we just have a little bit of patience, we’ll start see monthly increases of 200,000 to 300,000 jobs within six months.”

But in millions of households still grappling with the bite of a wrenching downturn, patience has long been exhausted — along with savings, credit and cash to pay the bills.

In Charlotte, N.C., Kumar G. Navile, 33, has applied for 500 positions across the country since he lost his job as an engineer a year ago. Each month, he finds himself about $600 short in his monthly expenses after the $1,680 he secures in unemployment benefits. He pays the difference from a savings account, but expects that money to dry up in the next two months.

“You get up every day and say today will be different, but it is mentally challenging when you don’t find opportunities,” Mr. Navile said. “I performed well in school. I got a job the day I graduated. It’s been a struggle, and it continues to be.”

For those out of work, the market is bleaker than ever. Unemployed people had been jobless for an average of 29 weeks in December, the longest duration since the government began tracking such data in 1948. Roughly 4 in 10 unemployed workers had been jobless for six months or longer.

In recent weeks, the number of new claims for unemployment insurance benefits has tailed off sharply. But the persistence of double-digit unemployment underscored that companies remain unwilling to add payroll.

“There is almost no hiring going on outside the temporary help sector,” said Andrew Stettner, deputy director of the National Employment Law Project. “Just slowing layoffs is not enough to produce jobs.”

Indeed, even as temporary workers increased, the average workweek for rank-and-file employees — roughly 80 percent of the work force — was essentially unchanged in December, at 33.2 hours.

Amid the usual parsing of data that accompanies the monthly jobs report, the spinning of forecasts and dueling outlooks, no complexity cloaked the simple fact that employment remains scarce. Experts assume the economy needs to add about 100,000 jobs a month just to keep pace with new people entering the work force.

“There’s really no dynamism in this economy,” Mr. Baker said. “Most people, they’re not looking at the data. They’re just asking, ‘Can I get a job?’ And that’s not getting any easier.”

The government’s monthly jobs report is always important, yet in recent times it has emerged as the crucial indicator of economic health.

For years, ordinary households have spent in excess of incomes by borrowing against the value of homes, leaning on credit cards and tapping stock portfolios. But home prices have plummeted in much of the country. Stock holdings have diminished. Nervous banks have sliced credit even for healthy borrowers. That has left the paycheck as the primary source of household finance in an economy in which consumer spending comprises roughly 70 percent of all activity.

Economists have grown increasingly divided over the nation’s economic prospects. Some argue that recent expansion on the American factory floor presages broader economic improvement that will eventually deliver large numbers of jobs.

The December report failed to deliver clear evidence for that scenario, even as it saw the pace of job losses continue to slow. Construction lost another 53,000 jobs and manufacturing saw 27,000 positions disappear. Despite a surprisingly strong holiday shopping season, retail trade gave up 10,000 jobs in December.

Health care remained a rare bright spot, expanding by 22,000 jobs.

Skeptics argue that the factory expansion merely reflects a rebuilding of inventories after many businesses slashed stocks during the panic that accompanied the fall of prominent financial institutions such as Lehman Brothers in the fall of 2008. Expansion has also been aided by $787 billion in federal spending aimed at stimulating economic growth, and by tax credits for homebuyers.

Once these factors fade in coming months, skeptics argue, the economy will confront the same challenges that have dogged it for more than two years — strapped households fretting about debts and weak job prospects, curtailing spending; banks still worrying about losses to come on mortgage holdings, reluctant to lend; businesses unwilling to hire.

Those with the gloomiest outlooks envision a so-called double dip recession, in which the economy resumes contracting. Others fear years of stagnant growth much like Japan’s Lost Decade in the 1990s.

The one point of agreement among economists is that the nation cannot recover without millions of new jobs. Workers must gain fresh wages they can spend at other businesses, creating jobs for other workers — a virtuous cycle, in the parlance of economists.

Recent months have produced tentative signs that such a cycle might be unfolding, even as economists debate its sustainability. The December jobs report only added to the ambiguity that now grips economic forecasting.

“Standing still feels good when you’ve been used to falling backwards,” said Stuart G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. “But we want to move forward.”

 

Javier Hernandez contributed reporting.

    U.S. Job Losses in December Dim Hopes for Quick Upswing, NYT, 9.1.2010, http://www.nytimes.com/2010/01/09/business/economy/09jobs.html

Op-Ed Columnist

Bubbles and the Banks

January 8, 2010
The New York Times
By PAUL KRUGMAN

Health care reform is almost (knock on wood) a done deal. Next up: fixing the financial system. I’ll be writing a lot about financial reform in the weeks ahead. Let me begin by asking a basic question: What should reformers try to accomplish?

A lot of the public debate has been about protecting borrowers. Indeed, a new Consumer Financial Protection Agency to help stop deceptive lending practices is a very good idea. And better consumer protection might have limited the overall size of the housing bubble.

But consumer protection, while it might have blocked many subprime loans, wouldn’t have prevented the sharply rising rate of delinquency on conventional, plain-vanilla mortgages. And it certainly wouldn’t have prevented the monstrous boom and bust in commercial real estate.

Reform, in other words, probably can’t prevent either bad loans or bubbles. But it can do a great deal to ensure that bubbles don’t collapse the financial system when they burst.

Bear in mind that the implosion of the 1990s stock bubble, while nasty — households took a $5 trillion hit — didn’t provoke a financial crisis. So what was different about the housing bubble that followed?

The short answer is that while the stock bubble created a lot of risk, that risk was fairly widely diffused across the economy. By contrast, the risks created by the housing bubble were strongly concentrated in the financial sector. As a result, the collapse of the housing bubble threatened to bring down the nation’s banks. And banks play a special role in the economy. If they can’t function, the wheels of commerce as a whole grind to a halt.

Why did the bankers take on so much risk? Because it was in their self-interest to do so. By increasing leverage — that is, by making risky investments with borrowed money — banks could increase their short-term profits. And these short-term profits, in turn, were reflected in immense personal bonuses. If the concentration of risk in the banking sector increased the danger of a systemwide financial crisis, well, that wasn’t the bankers’ problem.

Of course, that conflict of interest is the reason we have bank regulation. But in the years before the crisis, the rules were relaxed — and, even more important, regulators failed to expand the rules to cover the growing “shadow” banking system, consisting of institutions like Lehman Brothers that performed banklike functions even though they didn’t offer conventional bank deposits.

The result was a financial industry that was hugely profitable as long as housing prices were going up — finance accounted for more than a third of total U.S. profits as the bubble was inflating — but was brought to the edge of collapse once the bubble burst. It took government aid on an immense scale, and the promise of even more aid if needed, to pull the industry back from the brink.

And here’s the thing: Since that aid came with few strings — in particular, no major banks were nationalized even though some clearly wouldn’t have survived without government help — there’s every incentive for bankers to engage in a repeat performance. After all, it’s now clear that they’re living in a heads-they-win, tails-taxpayers-lose world.

The test for reform, then, is whether it reduces bankers’ incentives and ability to concentrate risk going forward.

Transparency is part of the answer. Before the crisis, hardly anyone realized just how much risk the banks were taking on. More disclosure, especially with regard to complex financial derivatives, would clearly help.

Beyond that, an important aspect of reform should be new rules limiting bank leverage. I’ll be delving into proposed legislation in future columns, but here’s what I can say about the financial reform bill the House passed — with zero Republican votes — last month: Its limits on leverage look O.K. Not great, but O.K. It would, however, be all too easy for those rules to get weakened to the point where they wouldn’t do the job. A few tweaks in the fine print and banks would be free to play the same game all over again.

And reform really should take on the financial industry’s compensation practices. If Congress can’t legislate away the financial rewards for excessive risk-taking, it can at least try to tax them.

Let me conclude with a political note. The main reason for reform is to serve the nation. If we don’t get major financial reform now, we’re laying the foundations for the next crisis. But there are also political reasons to act.

For there’s a populist rage building in this country, and President Obama’s kid-gloves treatment of the bankers has put Democrats on the wrong side of this rage. If Congressional Democrats don’t take a tough line with the banks in the months ahead, they will pay a big price in November.

    Bubbles and the Banks, NYT, 8.1.2010, http://www.nytimes.com/2010/01/08/opinion/08krugman.html

Promise to Trim Deficit Is Growing Harder to Keep

January 6, 2010
The New York Times
By JACKIE CALMES

WASHINGTON — President Obama is making final decisions on his budget for next year and is still promising to outline a path to substantially lower federal deficits. But on nearly every front, that goal has gotten harder since his first budget a year ago.

A deeper recession and slower recovery than the administration initially forecast have increased the tab for economic stimulus measures beyond the original $787 billion package, adding hundreds of billions of dollars for programs like unemployment relief and tax credits for homebuyers.

The savings Mr. Obama once projected from winding down the war in Iraq are being eroded by a bigger buildup in Afghanistan than he had initially contemplated. Congress has rejected or ignored his proposals to raise revenues by changing tax rules for multinational corporations and capping deductions by wealthy individuals; for Mr. Obama to reprise those proposals could raise questions about the credibility of the numbers in his budget.

Meanwhile, the biggest tool usually employed to chisel away at projected deficits — shaving Medicare payments to health care providers — is already being used to offset the costs of overhauling the health care system.

At the same time, the persistently high unemployment rate has intensified the pressure on the White House and Congress to not emphasize deficit reduction so much that they risk undercutting the already sluggish recovery or even tipping the economy back into recession. In February, Mr. Obama must submit his budget for the fiscal year that starts Oct. 1.

“The White House faces a tough challenge preparing a budget with very different goals: cutting the deficit while maintaining stimulative policies designed to keep the recovery going,” said Thomas S. Kahn, staff director for the House Budget Committee. “There are unfortunately no politically painless ways to cut the deficit. Virtually all the low-hanging fruit has already been picked.”

Not least among the president’s constraints, this is a Congressional election year. His party is on the defensive, and less inclined than usual to take politically risky votes on cutting spending and raising taxes.

Moreover, the party is somewhat split over how aggressively to pursue deficit reduction, with many liberals warning that fiscal contraction could set off a double-dip recession as well as crimp their agenda.

While Mr. Obama has few budget decisions left, administration officials say, those decisions are “weighty,” as one put it.

The intensity of his struggles to show lower deficits over the next decade is captured by one idea that was considered and apparently shelved.

With most Bush tax cuts scheduled to expire at the end of this year, some officials, including Mr. Obama’s budget director, Peter R. Orszag, suggested that instead of permanently extending the cuts for all but the richest Americans — as the president has long promised — Mr. Obama could instead propose to extend them a year or two, arguing that further action would await the recommendations of a bipartisan budget commission that leading Senate Democrats want to create.

Critics countered that Republicans would say Democrats were laying the groundwork to raise taxes on the middle class, violating Mr. Obama’s campaign promise. Mr. Obama has decided to stick with his plan to extend the tax cuts permanently for those making less than $250,000, officials familiar with the deliberations say.

Among other issues is how to account for additional stimulus spending and tax cuts now that Congress and the president are committed to producing in coming weeks a new package of measures to spur businesses to create jobs. The president and Congressional Democrats argue that the new costs are offset in effect by the one recent bit of good fiscal news: that losses from the government’s financial bailout effort, the Troubled Asset Relief Program, will reach about $120 billion, or roughly $220 billion less than forecast last year.

In its August review of the fiscal outlook, the administration acknowledged that without further cuts it would not reduce the deficit to about 3 percent of the size of the economy — the maximum most economists consider prudent — by the end of Mr. Obama’s term, as his first budget projected. Instead, the review of the Office of Management and Budget forecast that the fiscal year 2013 deficit would be 4.6 percent of the gross domestic product.

Mr. Orszag, the budget office’s director, told a group of business leaders in November that he was committed to reaching 3 percent of the gross domestic product by 2015, a formidable challenge since that is nearly a full percentage point below current administration projections for that year. He has since said that goal will require a bipartisan commission to force some policy changes.

“The administration faces a dual challenge: promoting job growth in the near term while also addressing our out-year deficits,” Mr. Orszag said in a statement on Tuesday. “We remain firmly committed to putting the nation back to work and also back on the path to fiscal sustainability.”

The $1.4 trillion deficit for the 2009 fiscal year, which ended Sept. 30, was about 10 percent of the gross domestic product. Assuming the economy resumes growing, future deficits will be lower simply because of rising tax revenues, lower safety-net spending and the end of the temporary stimulus programs. But they will still be consistently higher than is considered fiscally responsible, mainly because of costs for Medicare and Medicaid.

Mr. Obama last year proposed $622 billion in savings from the health care programs’ payments to hospitals, doctors and insurance companies over the next 10 years to help pay for an overhaul of the health insurance system. That exceeds by almost $200 billion the amount in pending House and Senate bills, leading some administration officials to suggest that the budget could call for additional Medicare cuts.

But James R. Horney, director of federal fiscal policy for the liberal-leaning Center on Budget and Policy Priorities, said that especially in an election year, “it would be very difficult to come back this year and say, ‘Oh, we’re going to have big cuts in Medicare after presumably we’re going to pass a health reform bill that has pretty substantial Medicare cuts.’ ”

Mr. Obama could also again propose various tax increases that would raise about $600 billion over a decade. One would limit to 28 percent the deductions rich taxpayers could claim, and others would increase taxes for companies operating internationally. But because Congress has refused to act on those proposals, they would not be seen as realistic ways to reduce the deficits.

Increasingly, even supporters are saying Mr. Obama cannot keep both his promise to bring deficits under control and his vow not to raise taxes on anyone making less than $250,000.

    Promise to Trim Deficit Is Growing Harder to Keep, NYT, 6.1.2010, http://www.nytimes.com/2010/01/06/us/politics/06budget.html

Ford Has Its Best Month Since 2008, but Chrysler Lags

January 6, 2010
The New York Times
By NICK BUNKLEY

DETROIT — After many miserable months, Ford ended the year with sharply higher sales in December, while Chrysler’s struggles continued into the new year. The Ford Motor Company said Tuesday that its sales in the United States rose 33 percent in December from a year ago, making it the company’s best month since May 2008. Overall for the year, however, Ford’s sales fell 15 percent.

Ford’s cross-town rival Chrysler said its sales for all of 2009 fell below 1 million for the first time since 1962. It sales fell 4 percent in December and 36 percent on the year, to 931,402 vehicles. Its performance in 2009 was the worst among major automakers.

Chrysler also announced more buyer incentives, including “zero percent financing” for almost all 2010 models.

Another carmaker, Nissan, said sales were up 18 percent in December.

Ford estimated that its market share rose 1 percentage point in 2009, to 15 percent. That would represent Ford’s first full-year share increase since 1995.

“Ford’s plan is working,” Ken Czubay, Ford’s vice president for United States marketing, sales and service, said in a statement. “Customer consideration continues to grow for our high-quality, fuel-efficient vehicles.”

Shares of Ford, the only Detroit automaker to avoid bankruptcy, reached their highest level since 2005 on Tuesday, rising 8.5 percent to $11.15 in midday trading. They were worth as little as $1.50 in January 2009.

Other automakers, including General Motors and Toyota, are scheduled to release their December sales figures Tuesday afternoon.

Automakers expect the year ahead to be much less turbulent than 2009, when both G.M. and Chrysler borrowed billions of dollars from the federal government before filing for bankruptcy protection, though sales are expected to improve only modestly.

In a positive sign, the industry’s seasonally adjusted annualized selling rate has been rising steadily for several months, ending 2009 at around 11 million vehicles, analysts estimated.

“Excluding the cash-for-clunkers months, this would constitute the strongest sales rate since September 2008, suggesting the industry is witnessing a real improvement in underlying demand for U.S. autos which bodes well for 2010,” Brian A. Johnson, an automotive analyst with Barclays Capital, wrote in a recent note to clients.

Still, the industry has considerable ground to make up. Sales in the United States were down 24 percent in the first 11 months of 2009, making 2009 the worst year in at least 27 years. Slow sales in December could make 2009 the worst since 1970.

Sales would have been even more dismal but for the government’s “cash-for-clunkers” program, which gave credits of up to $4,500 to new-vehicle buyers who turned in an older, less-efficient car or truck to be destroyed. The program, which started in late July, burned through $3 billion in about a month.

Only three automakers — Hyundai and Kia, which are affiliated in South Korea, and Subaru — sold more vehicles in 2009 than they did in 2008.

    Ford Has Its Best Month Since 2008, but Chrysler Lags, NYT, 6.1.2010, http://www.nytimes.com/2010/01/06/business/06auto.html

Editorial

This Year’s Housing Crisis

January 5, 2010
The New York Times

The financial crisis and Great Recession have their roots in the housing bust. When it comes, a lasting recovery will be evident in a housing rebound. Unfortunately, housing appears to be weakening anew.

Figures released last week show that after four months of gains, home prices flattened in October. At that time, low mortgage rates (courtesy of the Federal Reserve) and a home buyer’s tax credit (courtesy of Congress) were fueling sales. That should have propped up prices. But it was not enough to overcome the drag created by a glut of 3.2 million new and existing unsold single-family homes — about a seven-month supply.

The situation, we fear, will only get worse in months to come. Rates already are starting to rise as lenders brace for the Fed to curtail support for mortgage lending as early as the end of March. The home buyer’s tax credit is scheduled to expire at the end of April. And a new flood of foreclosed homes is ready to hit the market.

It is increasingly clear that the Obama administration’s anti-foreclosure effort — which pressed lenders to reduce interest rates — isn’t doing nearly enough. High unemployment rates also mean that many borrowers who did qualify for aid have been unable to keep up with even reduced monthly payments.

As a result, an estimated 2.4 million foreclosed homes will be added to the existing glut in 2010, driving prices down by another 10 percent or so. That would bring the average decline nationwide to about 40 percent since the peak of the market in 2006.

A renewed price drop could usher in a new grim chapter in the foreclosure crisis. Already an estimated one-third of homeowners with a mortgage — nearly 16 million people — owe more than their homes are worth; in industry parlance, they are “underwater.” If prices drop further, ever more borrowers will sink ever deeper. Research suggests that the greater the loss of home equity, the greater the likelihood that borrowers will decide to turn in the keys and find a cheaper place to rent.

Things didn’t have to get this bad.

The best way to modify an underwater loan is to reduce the principal balance, lowering the monthly payment and restoring equity. But for the most part, lenders have refused to reduce principal because it would force them to take an immediate loss on the loan. Lenders also have vehemently — and successfully — resisted Congressional efforts to change the law so that bankruptcy courts could reduce the mortgage balances for bankrupt borrowers.

The administration decided not to press lenders to grant principal reductions in the flawed belief that simply making payments more affordable would be enough to forestall foreclosures. It hasn’t. The administration also didn’t fight for the bankruptcy fix when it was before Congress last year despite President Obama’s campaign promise to do so.

The economy is hard pressed to function, let alone thrive, when house prices are falling. As home equity erodes, consumer spending falls and foreclosures increase. Lenders lose the ability and willingness to extend credit and employers are disinclined to hire. True economic recovery is all but impossible.

To avert the worst, the White House should alter its loan-modification effort to emphasize principal reduction. Job creation should also be a priority so that rising unemployment does not cause more defaults.

We wish we could proclaim a Happy New Year in housing. But until more is done to help struggling homeowners, the portents are not good.

    This Year’s Housing Crisis, NYT, 5.1.2010, http://www.nytimes.com/2010/01/05/opinion/05tue1.html

Slowing Pace of Home Sales Raises Fears of New Retreat

January 6, 2010
The New York Times
By DAVID STREITFELD

The number of houses placed under contract fell sharply in November in the first drop in nearly a year, data released Tuesday show. It was the clearest sign yet that predictions of another downturn in real estate may become a reality.

The National Association of Realtors said that its pending home sales index plunged to 96 from a revised level of 114.3 in October. Analysts had been expecting a decline but predicted it would be much smaller.

In November of 2008, when the financial crisis was at its peak, the index was 83.1.

Pending sales rose throughout 2009, starting from a low of 80.4 in January. It proved a harbinger of both completed sales, which began climbing in April, and prices, which started rising over the summer.

Real estate’s modest recovery after years of decline was largely powered by concerns that the government’s $8,000 tax credit for first-time buyers would expire. When the credit was extended and broadened in November, the urgency to buy right away was greatly reduced.

While at least a small dip in sales this winter is almost assured, its depth and duration depends on whether that urgency will reignite as the credit once again heads toward its new expiration date, April 30.

Lawrence Yun, the association’s chief economist, is among the optimists.

“We expect another surge in the spring as more home buyers take advantage of affordable housing conditions before the tax credit expires,” he said in a statement.

Other analysts are less sure that will happen, saying that the credit’s effect on sales will diminish as the pool of eligible first-time buyers is used up. When move-up buyers are also eligible for the credit, these owners must sell first — no easy task.

The data indicate that the weakest parts of the country are the Northwest and Midwest, both of which fell 26 percent in November after adjusting for seasonal variations. The South dropped 15 percent while the West was off 3 percent.

    Slowing Pace of Home Sales Raises Fears of New Retreat, NYT, 6.1.2010, http://www.nytimes.com/2010/01/06/business/economy/06econ.html

Op-Ed Columnist

That 1937 Feeling

January 4, 2010
The New York Times
By PAUL KRUGMAN

Here’s what’s coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.

    That 1937 Feeling, NYT, 4.1.2010, http://www.nytimes.com/2010/01/04/opinion/04krugman.html

Bernanke Blames Weak Regulation for Financial Crisis

January 4, 2010
The New York Times
By CATHERINE RAMPELL

ATLANTA — Regulatory failure, not lax monetary policy, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke, whose nomination for a second term awaits Senate confirmation, said in remarks to the American Economic Association.

Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued that the interest rates set by the central bank between 2002 and 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve System for most of that period.

Technical models based on historical trends in United States housing prices and monetary policy show that home prices rose much faster than interest rates alone would have predicted, Mr. Bernanke said.

He also argued that trends in other countries demonstrated a “quite weak” connection between housing price appreciation and monetary policy.

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” he said.

The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition from critics such as Senator Bernard Sanders, an independent from Vermont.

Even if confirmed, however, Mr. Bernanke will most likely face further political challenges over financial regulatory reform and the governance of the Fed.

He has been pushing for Congress to grant the Fed greater oversight powers over the financial system, including the authority to help monitor and regulate against “systemic risk.”

But anger at the Fed’s failure to foresee the financial crisis — and persistent disagreement over whether the Fed would have been able to prevent the crisis even with better forecasts — have fueled arguments for limiting the Fed’s power and independence.

Last month, as part of a larger financial reform package, the House passed a provision to audit the Fed.

    Bernanke Blames Weak Regulation for Financial Crisis, NYT, 4.1.2010, http://www.nytimes.com/2010/01/04/business/economy/04fed.html

Real Estate in Cape Coral, Fla., Is Far From a Recovery

January 3, 2010
The New York Times
By PETER S. GOODMAN

CAPE CORAL, Fla.

FELLOW adventurers, refugees from winter and armchair archaeologists, we are here on this shiny green tour bus to embark on a safari of sorts. We’ll be exploring the local habitat, as upended and reconfigured by an epochal real estate fiasco.

Our guide, Marc Joseph, stalks wildlife of the white-elephant variety. A real estate agent, he specializes in houses that proved financially disastrous for someone — the banker, the homeowner, the American taxpayer, often all three. Mr. Joseph’s bus is emblazoned with red letters spelling the name of this thrill ride: ForeclosureToursRUs.com.

As we navigate this speculator’s paradise turned financial wasteland, Mr. Joseph stands at the front of the bus in a green polo shirt, highlighting specimens like this one: a white stucco house fronted by palm trees and topped by a Spanish tile roof on a canal emptying into the Gulf of Mexico. It last sold in 2005 for $850,000. Yours today for $273,000.

“How much cheaper does it have to go before you say, ‘Well, that’s just craziness,’ ” Mr. Joseph beseeches as our tour group — mostly retirees from up North, basking in Bermuda shorts on another December day stolen from winter — examines the swimming pool and the Jacuzzi. “I’m telling you now, your opportunity is banging at your door.”

Yes, it has come to this in Cape Coral, a reluctant symbol for the excesses of the great American real estate bubble: foreclosed homes served up as tourist attraction. The struggles and pain that produced this ecosystem are neatly masked by the newly installed granite countertops, pristine carpets and fresh coats of paint that now ornament many properties on the tour.

I am on the bus because, two years earlier, I spent a week here looking at the myriad ways in which plunging home prices were undermining the American dream. Cape Coral and the Fort Myers metropolitan area were confronting an especially potent cauldron of troubles. Unemployment was soaring, and tax revenue was plunging, forcing cuts in government services and intensifying anxiety.

Now I am back to see what has happened.

The dominant pursuit of the moment here is cleaning up The Mess left behind by the era of easy money. The Mess is found in the glut of vacant commercial spaces; in the local unemployment rate, now pushing 14 percent; and in the discarded furniture at curbside and the overgrown front lawns left by some of those relinquishing their homes to foreclosure.

“We’ve been at the epicenter of this,” says Frank Cassidy, a retired Los Angeles police officer who heads Cape Coral’s code enforcement division, which carts away much of the detritus. “We’re the front line on blight.”

He lays out a satellite map showing the city of Cape Coral, a thumb-shape expanse jutting into the gulf. It shows 64,571 single-family homes. Each one touched by foreclosure over the last three years is marked red, as if the city were stricken with a rash: 18,575 red dots pockmark the map.

Kristy Clifton — at 30, the youngest member of the code enforcement team — patrols northwestern Cape Coral in her white Ford Taurus, summoning colleagues to help with the latest clean-out.

This is not work for the squeamish. Some people depart in a rage, leaving graffiti on living room walls (profane suggestions about how bankers might rearrange their anatomy), mounds of trash, dirty diapers, even piles of human excrement.

“It’s pretty gross,” says Ms. Clifton.

As she gathers the artifacts of lives gone wrong and deposits them into Dumpsters, she wonders what happened. “People can just up and leave, and it seems like they leave their whole lives behind,” she says. “Army medals. Photo albums. Framed photos of children. Cribs. Toys. I don’t know if they don’t have anywhere to go or anywhere to put this stuff. But you’d think that pictures of your kids you’d take.”

THE MESS is the product of The Story, the fable that waterfront living beyond winter’s reach exerts such a powerful pull that it justifies almost any price for housing. The Story propelled the orgy of borrowing, investing and flipping that dominated life here and in other places where January doesn’t include a snow blower.

The Story lost its magic amid the realization that speculators had simply been selling to other speculators, making the real estate market look like a Ponzi scheme. The ensuing crash was breathtaking. By the winter of 2007, median housing prices in Cape Coral and the rest of Lee County had fallen to about $215,000, down from a high of $278,000 in 2005. By October 2009, they had fallen to near $92,000.

Somewhere on that long, steep downhill path, what was once portrayed here as a momentary if wrenching setback seeped into the community’s bones, embedding lowered expectations and fear.

The first time I visited in 2007, James W. Browder, the Lee County schools superintendent, had recently scrapped plans to construct seven new schools. When I visited last month, he detailed how one-fourth of his elementary schools were now sending home weekly backpacks of food with students.

“One elementary school principal noticed parents going into schools with kids in the morning and sitting down in the cafeteria with them,” Mr. Browder said. “Then they noticed parents eating breakfast off kids’ plates. And then they noticed parents taking scraps home.”

In Texas, the all-consuming gauge of prosperity is the price of a barrel of oil. Here, it was once the value of a developable parcel of land. Today, it is the volume of foreclosures.

At the end of 2007, the pace was already grim here, with foreclosures running at 1,100 a month, a more than fivefold increase from early that year, according to RealtyTrac, a real estate research firm. By late 2008, the pace had quickened again, to about 2,000 a month.

By the fall of 2009, foreclosures had fallen to about 1,400 a month, prompting hopes that the worst was over. But real estate agents and mortgage brokers wary of optimism are focusing on a new term that has entered the housing lexicon: ghost inventory. Banks appear to be sitting on thousands of homes caught in limbo, neither foreclosing nor receiving any payments.

“We’re not in a recession,” says Bobby Mahan, an amiable broker here, describing conditions in the area. “We’re in a depression.”

Two years ago, Mr. Mahan’s office, Selling Paradise, displayed a sign that seemed unusual at the time. It invited customers to come in for a free list of available foreclosed properties. Now, nearly every surviving real estate agent seeks business with such signs.

Out in Lehigh Acres, a sprawling empire of cookie-cutter ranch houses, agents once worked in a strip of model properties, waiting in pristinely carpeted living rooms with plates of cookies for prospective buyers. Today, many of the models have themselves succumbed to foreclosure. Those still going are draped in banners offering foreclosure expertise.

Prices are now so low that inventory is moving. From the beginning of last year through October, the Fort Myers metropolitan area had already had 14,000 sales of single-family homes — more than in all of 2007 and 2008 combined. Roughly three-fourths of the deals were foreclosed homes and short sales, in which property sells for less than the bank is owed.

Yet about three-fourths of the buyers have been paying cash, an apparent indication that most are investors, not ordinary homeowners.

“That doesn’t give me a lot of confidence,” says Cape Coral’s newly elected mayor, John Sullivan. “Where are they going to sell these properties? The party’s over.”

For a select few, however, the party rages on.

Allen Olofson-Ring, a clean-cut, sandy-haired, Harvard-educated real estate agent from Boston, is enjoying his best year since entering the local real estate business seven years ago. He has parlayed longstanding relationships with mortgage companies — Chase, in particular — into the acquisition of exclusive rights to selling their foreclosed properties.

Back in 2006, the end of the bubble, Mr. Olofson-Ring sold about 27 properties for a total value of roughly $14 million. By December, he was on pace to complete 800 deals valued at $41 million. “These are the greatest times,” he says.

When he gets new listings, he visits the properties to see whether they are occupied. To get inside, he uses the tools that fill the trunk of his Nissan Altima: a power drill, specialty keys, flathead screwdrivers.

“It can get wild,” he says. “We’re about to break in the house — no, rephrase that — gain entry, and some guy comes out half-naked and says, ‘What you doing in my house, boy?’ ”

When he encounters residents, he offers them cash to vacate, from $500 to $3,000, while threatening eviction if they stay. Then, he puts the houses on the market, priced to sell.

“I get numb to it, I guess, because I’ve done so many,” he says. “It’s a little surreal. You feel bad. It gnaws at you. At the same time, what are you going to do? Life goes on.”

What are you going to do? This question has insinuated itself seemingly everywhere here, like a soundtrack stuck on an infinite loop.

Dave Robison has lived in northwest Cape Coral since 2002, when he moved down from Cincinnati, paying $160,000 for his house. He figured that he would stay until his house fetched enough to allow him to retire full time in Mexico. Now, he bitterly regrets that he didn’t cash in back in 2005, when the house was worth perhaps $400,000.

He walks his two greyhounds past a tan stucco house on the corner, where the grass on the lawn reaches three feet high, possibly sheltering possums and snakes. An official abatement notice is tacked to the front door, ordering the owner — someone in Reseda, Calif. — to cut the grass. A house across the street is similarly forlorn.

“You think you’ve got something and you don’t,” says Mr. Robison. “There’s nothing you can do but just ride it out.”

Farther down the block, another house sits cloaked in overgrown shrubbery with yet another abatement notice tacked to the door. Two years ago at this very house, I met the two women who were then living there — Elaine and Charlene Pellegrino — a mother and daughter. They were sifting through the belongings of Elaine’s husband, Charlene’s father, who had recently died, leaving them with two troubled businesses to run and debts they couldn’t manage.

Elaine Pellegrino, then 53, was disabled, living on Social Security. Her daughter was jobless. They had resigned themselves to losing their home and had stopped making the mortgage payments. Yet they were cognizant that they could stay for many months as their case worked its way through a local court system already overwhelmed by foreclosures.

Now their days there have ended. Tax documents sit in a rain-matted stack in front of the garage. A “for sale” sign lies warped and discarded in the weeds.

Inside the house, bills are scattered across the floor with playing cards, a March 2008 TV Guide and the innards of a VCR. A plastic trash bag brimmed with foreclosure documents. Behind the house, green slime chokes the swimming pool — the same green slime that now colonizes countless pools left to the elements in South Florida.

The Pellegrinos moved out in July 2008, Charlene explains. A bathroom pipe had burst, and mold had grown on the walls. She and her mother couldn’t afford repairs.

The strangest thing was how the bank implored them to stay, she says. Even after it became clear that they were not going to pay their mortgage, the bank figured that it would be better having them there to deter scavengers who would strip out the cabinets, the wiring, the toilets.

“They wanted us to stay on indefinitely,” Charlene says. “It was weird.”

When the Pellegrinos left, they found an upside to the bust: the seemingly limitless array of affordable rentals.

After walking away from their house and its $1,500 monthly mortgage payments, they rented a nearby four-bedroom home for $950 a month. Now Charlene, earning $2,400 a month as a home health worker, has designs on moving to a better place still, for $700 a month.

KEVIN JARRETT is also on the move, adding his own house to the growing stock of local ghost inventory.

Circumstances were already dire for Mr. Jarrett, a real estate agent, when I met him two years ago. He and his wife had arrived from Illinois in the mid-1990s, aggressively borrowing as they snared four properties. The peak came in the summer of 2007, when they paid $730,000 for a waterfront home in Cape Coral.

By the end of that year, Mr. Jarrett hadn’t closed a deal in months. He was falling behind on the mortgages for all four of his properties and had dropped his health insurance.

“Here we are, two years later, and there’s no end to this,” he says, leaning into a booth at the University Grill, a steak-and-lobster place he used to enjoy regularly during the boom years. “I make a mean Hamburger Helper now.”

Deals have shrunk to almost nothing. Three of his four homes have been lost to foreclosure. He remains in the place on the water in Cape Coral, though he has not made a payment in roughly two years. “Sometimes I think they just lost my file,” he says.

The house is mostly empty, owing to impromptu yard sales he conducts to keep food on the table. The piano, the sofa, the coffee table, the dining room table and chairs: all gone. His living and dining rooms are devoid, save for one piece of art he cannot bear to surrender: a statuette of Don Quixote.

“You know, dream the impossible dream,” he says. “It’s just one of those little remnants to keep dreaming, because if you don’t dream, you don’t get anything.”

His wife left in July 2008, he says, taking their daughter back to Illinois. (“Not having the finances to sustain the lifestyle you had is very trying on a relationship,” he says.)

Last winter, a repo man came for Mr. Jarrett’s boat, a 22-foot Hurricane power cruiser. In the spring, he sold his beloved yellow 2001 Corvette convertible for $13,500, paying $5,300 for a used 2000 Cadillac.

Still boyish-looking at 50 despite his graying hair, Mr. Jarrett is starting over, moving down the coast to Marco Island, where houses sell for much more than they do here. A friend is offering a place to stay. His employer, Keller Williams, promises a desk in its local office.

He is full of gratitude, yet deeply unsettled by the reality that he is walking away from his dream home.

“You’re admitting failure,” he says. “You signed a note and now you’re not paying. As a human being, you have to process this. It’s as tough as going through a divorce. You promised to be with this woman, but in the end, it wasn’t working. Your neighbor is paying their mortgage every month. You feel that stigma that you’re a loser.”

He mows the lawn and trims the trees, in place of the landscaping service he gave up long ago. “I try to somewhat justify my existence here by knowing that the bank is not getting a distressed property,” he says.

On a recent morning, he turned the knob on his bathroom sink to wash his hands and discovered that the water had been shut off for lack of payment.

“What I’ve learned is the strength that you can reach down and get,” he says. “I’m the same guy. No matter what I had, I’m the same guy.”

THE MESS is not without its spiritual element: the cleansing power of separation from worldly possessions. Marina memberships are no longer so abundant, yet Cape Coral is enjoying a bumper harvest in these taking-stock-of-what-matters moments.

Michael Pfaff and his wife, Diane, still mourn the loss of the 40-foot catamaran they owned back when he was bringing in huge commissions as a mortgage broker. But they still enjoy the water, albeit from a motorized rowboat.

“We’ve been poor together, and we’ve been rich together,” Mr. Pfaff says. “It doesn’t matter that much to us. We prefer to be rich, though.”

Getting rich is a feat best accomplished here today by tapping into the inventory spawned by the unfortunate end to other people’s richness.

This is the sort of opportunistic thinking that prompted Mr. Joseph — our tour guide on today’s foreclosure safari — to buy a bus on Craigslist. After he bought the vehicle, which had previously been used to ferry parishioners to a Baptist church, he had it painted green, then added his new tour-company logo in red. (Another employer of the “‘R’ Us” designation, Toys ‘R’ Us, threatened legal action to force him to find another name, Mr. Joseph tells riders on his bus. He says he has agreed to change the name in the next few months.)

Tanned and sinewy with sunglasses nesting in his hair, Mr. Joseph looks and sounds like the comedian Ray Romano, minus the agita. He deals primarily in houses owned by Fannie Mae, the government-backed mortgage financier. He cleans and sometimes renovates them before putting them on the market, clearing away The Mess in the service of selling an updated version of The Story.

On a recent tour, eight potential buyers occupied the upholstered bench seats of his bus.

Norm Tardie, a semiretiree down from Vermont, is hunting for bargain investments. A retired heating and air-conditioning contractor from Massachusetts in a yellow Hawaiian shirt is looking for a possible vacation place.

Mr. Joseph indulges the classic shtick of the Florida sales pitch.

“Where we from?” he asks one couple, who conveniently hail from Illinois.

“How cold is it in Illinois today?” he asks.

Impressively cold.

“So we appreciate where we’re at today,” he says. “That’s the way we want you to feel when you walk into a house.”

These prices cannot last! This is Mr. Joseph’s essential message, one he expresses in a multitude of ways. “You cannot purchase the bricks and mortar, and build a house for what they’re selling for.”

He lavishes particular attention on Paulette O’Rourke, a tan, reddish-blond retiree from Cincinnati, whose pink nails and enthusiasm make her seem game. She just bought one house here, and she likes the thought of owning another, as an investment.

Not unimportantly, she has cash, roughly $100,000 in retirement funds from her old hospital job.

“You call up your financial guy,” Mr. Joseph is saying, adopting the tones of the liberation theologian. “You say, ‘I want to sell all my stocks and mutual funds,’ and you’re done. You call him up and say: ‘I’m taking control. I want to buy a house in Florida.’ ”

This idea is germinating as Ms. O’Rourke admires the swimming pool and the white ceramic tile at a house that sold for $350,000 three years ago and is now on the market for $164,500.

“It is that opportunity,” Mr. Joseph is saying. “It is that time.”

    Real Estate in Cape Coral, Fla., Is Far From a Recovery, NYT, 3.1.2010, http://www.nytimes.com/2010/01/03/business/economy/03coral.html

The Safety Net

Living on Nothing but Food Stamps

January 3, 2010
The New York Times
By JASON DEPARLE and ROBERT M. GEBELOFF

CAPE CORAL, Fla. — After an improbable rise from the Bronx projects to a job selling Gulf Coast homes, Isabel Bermudez lost it all to an epic housing bust — the six-figure income, the house with the pool and the investment property.

Now, as she papers the county with résumés and girds herself for rejection, she is supporting two daughters on an income that inspires a double take: zero dollars in monthly cash and a few hundred dollars in food stamps.

With food-stamp use at a record high and surging by the day, Ms. Bermudez belongs to an overlooked subgroup that is growing especially fast: recipients with no cash income.

About six million Americans receiving food stamps report they have no other income, according to an analysis of state data collected by The New York Times. In declarations that states verify and the federal government audits, they described themselves as unemployed and receiving no cash aid — no welfare, no unemployment insurance, and no pensions, child support or disability pay.

Their numbers were rising before the recession as tougher welfare laws made it harder for poor people to get cash aid, but they have soared by about 50 percent over the past two years. About one in 50 Americans now lives in a household with a reported income that consists of nothing but a food-stamp card.

“It’s the one thing I can count on every month — I know the children are going to have food,” Ms. Bermudez, 42, said with the forced good cheer she mastered selling rows of new stucco homes.

Members of this straitened group range from displaced strivers like Ms. Bermudez to weathered men who sleep in shelters and barter cigarettes. Some draw on savings or sporadic under-the-table jobs. Some move in with relatives. Some get noncash help, like subsidized apartments. While some go without cash incomes only briefly before securing jobs or aid, others rely on food stamps alone for many months.

The surge in this precarious way of life has been so swift that few policy makers have noticed. But it attests to the growing role of food stamps within the safety net. One in eight Americans now receives food stamps, including one in four children.

Here in Florida, the number of people with no income beyond food stamps has doubled in two years and has more than tripled along once-thriving parts of the southwest coast. The building frenzy that lured Ms. Bermudez to Fort Myers and neighboring Cape Coral has left a wasteland of foreclosed homes and written new tales of descent into star-crossed indigence.

A skinny fellow in saggy clothes who spent his childhood in foster care, Rex Britton, 22, hopped a bus from Syracuse two years ago for a job painting parking lots. Now, with unemployment at nearly 14 percent and paving work scarce, he receives $200 a month in food stamps and stays with a girlfriend who survives on a rent subsidy and a government check to help her care for her disabled toddler.

“Without food stamps we’d probably be starving,” Mr. Britton said.

A strapping man who once made a living throwing fastballs, William Trapani, 53, left his dreams on the minor league mound and his front teeth in prison, where he spent nine years for selling cocaine. Now he sleeps at a rescue mission, repairs bicycles for small change, and counts $200 in food stamps as his only secure support.

“I’ve been out looking for work every day — there’s absolutely nothing,” he said.

A grandmother whose voice mail message urges callers to “have a blessed good day,” Wanda Debnam, 53, once drove 18-wheelers and dreamed of selling real estate. But she lost her job at Starbucks this year and moved in with her son in nearby Lehigh Acres. Now she sleeps with her 8-year-old granddaughter under a poster of the Jonas Brothers and uses her food stamps to avoid her daughter-in-law’s cooking.

“I’m climbing the walls,” Ms. Debnam said.

Florida officials have done a better job than most in monitoring the rise of people with no cash income. They say the access to food stamps shows the safety net is working.

“The program is doing what it was designed to do: help very needy people get through a very difficult time,” said Don Winstead, deputy secretary for the Department of Children and Families. “But for this program they would be in even more dire straits.”

But others say the lack of cash support shows the safety net is torn. The main cash welfare program, Temporary Assistance for Needy Families, has scarcely expanded during the recession; the rolls are still down about 75 percent from their 1990s peak. A different program, unemployment insurance, has rapidly grown, but still omits nearly half the unemployed. Food stamps, easier to get, have become the safety net of last resort.

“The food-stamp program is being asked to do too much,” said James Weill, president of the Food Research and Action Center, a Washington advocacy group. “People need income support.”

Food stamps, officially the called Supplemental Nutrition Assistance Program, have taken on a greater role in the safety net for several reasons. Since the benefit buys only food, it draws less suspicion of abuse than cash aid and more political support. And the federal government pays for the whole benefit, giving states reason to maximize enrollment. States typically share in other programs’ costs.

The Times collected income data on food-stamp recipients in 31 states, which account for about 60 percent of the national caseload. On average, 18 percent listed cash income of zero in their most recent monthly filings. Projected over the entire caseload, that suggests six million people in households with no income. About 1.2 million are children.

The numbers have nearly tripled in Nevada over the past two years, doubled in Florida and New York, and grown nearly 90 percent in Minnesota and Utah. In Wayne County, Mich., which includes Detroit, one of every 25 residents reports an income of only food stamps. In Yakima County, Wash., the figure is about one of every 17.

Experts caution that these numbers are estimates. Recipients typically report a small rise in earnings just once every six months, so some people listed as jobless may have recently found some work. New York officials say their numbers include some households with earnings from illegal immigrants, who cannot get food stamps but sometimes live with relatives who do.

Still, there is little doubt that millions of people are relying on incomes of food stamps alone, and their numbers are rapidly growing. “This is a reflection of the hardship that a lot of people in our state are facing; I think that is without question,” said Mr. Winstead, the Florida official.

With their condition mostly overlooked, there is little data on how long these households go without cash incomes or what other resources they have. But they appear an eclectic lot. Florida data shows the population about evenly split between families with children and households with just adults, with the latter group growing fastest during the recession. They are racially mixed as well — about 42 percent white, 32 percent black, and 22 percent Latino — with the growth fastest among whites during the recession.

The expansion of the food-stamp program, which will spend more than $60 billion this year, has so far enjoyed bipartisan support. But it does have conservative critics who worry about the costs and the rise in dependency.

“This is craziness,” said Representative John Linder, a Georgia Republican who is the ranking minority member of a House panel on welfare policy. “We’re at risk of creating an entire class of people, a subset of people, just comfortable getting by living off the government.”

Mr. Linder added: “You don’t improve the economy by paying people to sit around and not work. You improve the economy by lowering taxes” so small businesses will create more jobs.

With nearly 15,000 people in Lee County, Fla., reporting no income but food stamps, the Fort Myers area is a laboratory of inventive survival. When Rhonda Navarro, a cancer patient with a young son, lost running water, she ran a hose from an outdoor spigot that was still working into the shower stall. Mr. Britton, the jobless parking lot painter, sold his blood.

Kevin Zirulo and Diane Marshall, brother and sister, have more unlikely stories than a reality television show. With a third sibling paying their rent, they are living on a food-stamp benefit of $300 a month. A gun collector covered in patriotic tattoos, Mr. Zirulo, 31, has sold off two semiautomatic rifles and a revolver. Ms. Marshall, who has a 7-year-old daughter, scavenges discarded furniture to sell on the Internet.

They said they dropped out of community college and diverted student aid to household expenses. They received $150 from the Nielsen Company, which monitors their television. They grew so desperate this month, they put the breeding services of the family Chihuahua up for bid on Craigslist.

“We look at each other all the time and say we don’t know how we get through,” Ms. Marshall said.

Ms. Bermudez, by contrast, tells what until the recession seemed a storybook tale. Raised in the Bronx by a drug-addicted mother, she landed a clerical job at a Manhattan real estate firm and heard that Fort Myers was booming. On a quick scouting trip in 2002, she got a mortgage on easy terms for a $120,000 home with three bedrooms and a two-car garage. The developer called the floor plan Camelot.

“I screamed, I cried,” she said. “I took so much pride in that house.”

Jobs were as plentiful as credit. Working for two large builders, she quickly moved from clerical jobs to sales and bought an investment home. Her income soared to $180,000, and she kept the pay stubs to prove it. By the time the glut set in and she lost her job, the teaser rates on her mortgages had expired and her monthly payments soared.

She landed a few short-lived jobs as the industry imploded, exhausted her unemployment insurance and spent all her savings. But without steady work in nearly three years, she could not stay afloat. In January, the bank foreclosed on Camelot.

One morning as the eviction deadline approached, Ms. Bermudez woke up without enough food to get through the day. She got emergency supplies at a food pantry for her daughters, Tiffany, now 17, and Ashley, 4, and signed up for food stamps. “My mother lived off the government,” she said. “It wasn’t something as a proud working woman I wanted to do.”

For most of the year, she did have a $600 government check to help her care for Ashley, who has a developmental disability. But she lost it after she was hospitalized and missed an appointment to verify the child’s continued eligibility. While she is trying to get it restored, her sole income now is $320 in food stamps.

Ms. Bermudez recently answered the door in her best business clothes and handed a reporter her résumé, which she distributes by the ream. It notes she was once a “million-dollar producer” and “deals well with the unexpected.”

“I went from making $180,000 to relying on food stamps,” she said. “Without that government program, I wouldn’t be able to feed my children.”

Matthew Ericson contributed research.

    Living on Nothing but Food Stamps, NYT, 3.1.2010, http://www.nytimes.com/2010/01/03/us/03foodstamps.html

Americans Doing More, Buying Less, a Poll Finds

January 3, 2010
The New York Times
By DAMIEN CAVE

MIAMI — Rosario and Igor Montoya used to buy, buy, buy for themselves and their two children without a second thought. Expensive sneakers, a new laptop, Legos — they all got what they wanted. But with the recession slashing the Montoyas’ workload and income by more than half, their priorities have shifted from products to activities.

After school and on weekends, the family now hops into a pink canoe they bought secondhand. They paddle though Biscayne Bay to nearby islands, naming each, sometimes making boats out of sticks and leaves.

“I’m trying to teach the kids that you don’t need to have expensive toys to have fun,” said Mr. Montoya, 47, an artist and freelance art director in advertising. “You can make it fun, from anything.”

Quietly but noticeably over the past year, Americans have rejiggered their lives to elevate experiences over things. Because of the Great Recession, a recent New York Times/CBS News poll has found, nearly half of Americans said they were spending less time buying nonessentials, and more than half are spending less money in stores and online.

But Americans are not just getting by with less. They are also doing more.

Some are working longer hours, but a larger proportion, the poll shows, are spending additional time with family and friends, gardening, cooking, reading, watching television and engaging in other hobbies.

The Department of Labor’s time-use surveys show a similar trend: compared with 2005, Americans spent less time in 2008 buying goods and services and more time cooking or taking part in “organizational, civic and religious activities.”

Just as tellingly, evidence can also be found in culture. While one new study shows that attendance at museums and cultural events dropped from 2002 to 2008, it has climbed in 2009 at many major institutions, including the Museum of Modern Art in New York and the Art Institute of Chicago. Movie attendance was also up 5 percent in 2009, and in the world of the Walt Disney Company, product sales have declined as the company’s theme parks enjoyed a 3 percent increase in visitors last quarter.

Even here in Miami, a city famous for its materialism, retailers are hurting while audiences continue to grow at the Adrienne Arsht Center for the Performing Arts, at parks and for cheap activities like yoga by the beach.

“It’s a different kind of recession,” said Richard Florida, the author of several best-selling books about the economics of cities. “It’s not like in the ’30s when people stopped going to concerts. Now people seem to be keeping up with experience consumption and cutting back on other necessities.”

Psychologists have been saying for years that shared experiences like vacations lead to more long-term happiness than the latest bauble. And perhaps the change was inevitable — to be expected when a shopping-spree nation trades a glut of credit for layoffs and furloughs.

“Part of it is cyclical,” said Scott Hoyt, senior director of consumer economics for Moody’s Economy.com. “They have less money, so they’ll spend less time and money shopping, whether they want to or not.”

Still, the New York Times/CBS News poll — a telephone survey of 855 adults, conducted Nov. 6 to Nov. 8, with a margin of sampling error of plus or minus three percentage points — found that the shift spanned income brackets. And in interviews, many Americans described motives beyond pure economic necessity.

Barbara Koricanek, 73, a retired nurse in rural Texas, said she cut back on shopping after a recent mission trip to Nicaragua made her realize that “we don’t need half of what we got.” Over the past few months, Ms. Koricanek has started purging her closets and baking bread from scratch, partly because it tastes better, she said, partly to become more independent.

“We cannot rely on money and the banking system and government to come up with all the answers,” she said. “People years ago were more self-reliant and were more able to take hold of the reins and do things themselves. I think we need to get back some of those basics.”

Many young people, experiencing their first economic downturn, are also making different choices. Megan Stallings, 25, an investment analyst in Raleigh, N.C., said she first learned to value experiences while studying abroad in college, when the dollar was weak and trips brought her better memories than souvenirs. Now, she said, she spaces out her shopping trips to preserve time for activities. She has even studied how stores organize displays to make people buy more than they need.

“That awareness has saved me a lot of money,” she said. “Now I am having fun working on projects around my house, even if it is just pulling weeds or taking my dog, Amos, for a long walk.”

Those with diminished incomes described activities in slightly different terms: as a distraction from financial fear. Some, like Rebecca Heverin, 57, a former tollbooth collector in South Carolina who now lives on disability payments, have hunkered down with hobbies. Ms. Heverin said she worked on her doll collection at home instead of accepting dinner invitations from neighbors because “it’s kind of embarrassing to be struggling.”

Others have been desperate to get out of the house, though in many cases, what began as psychic necessity ended with deep appreciation. Rosa Claudio, 47, of Chicago, said that since her husband was laid off from his job in construction last year, she and several relatives had made a family ritual out of going to museums. “It’s something we can do for free,” she said. “It’s enjoyable.”

The Montoyas, meanwhile, likened canoeing to therapy. “When you’re out there in the water,” Mr. Montoya said, “you can think about things openly and freely,”

Only a few years ago, Mr. Montoya and his wife — who worked as a freelance wardrobe stylist, mainly for Macy’s — had enough disposable income to spend up to $1,000 a month on designer clothes for themselves and their children, Camila, 13, and Diego, 6. But after major advertising cutbacks last year, work practically disappeared. Their lives, they said, were thrown into reverse.

First, they told their children that “we can’t spend money every day” and that they were living on savings and family help. Then they started camping more. And as they hatched plans to start a catering business in the spring, Mr. Montoya discovered a used canoe on Craigslist.

He talked the seller down to $150, from $200. “Money is tight,” Mr. Montoya said, as he packed a picnic in the boat on a recent Saturday morning. “But it’s worth it.”

There are, of course, potential problems as the United States drops old habits of consumption. On the macro level, economists worry that it could undermine a recovery. And the shift may be temporary: holiday shopping appears to have increased a little in 2009.

But in many homes today, experiences have become a more valued element of life. Mr. Hoyt, at Moody’s Economy.com, said that the behavioral changes were likely to be less transformative than what followed the Depression but that after three decades when consumer spending outpaced gross domestic product, the end of a spendthrift era may be here.

Camila Montoya said that even teenagers were now wearing old clothes longer. And for Christmas this year, she said she wanted something different and a little more hands-on: a camera.

Her parents gave in only after finding a discount they could afford.

“It’s the only present that she got,” said Mrs. Montoya, 43. “We didn’t want to spend too much money on someone who is 13 years old.”

 

Marjorie Connelly contributed reporting from New York.

    Americans Doing More, Buying Less, a Poll Finds, NYT, 3.1.2010, http://www.nytimes.com/2010/01/03/business/economy/03experience.html

U.S. Loan Effort Is Seen as Adding to Housing Woes

January 2, 2010
The New York Times
By PETER S. GOODMAN

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

The Treasury Department publicly maintains that its program is on track. “The program is meeting its intended goal of providing immediate relief to homeowners across the country,” a department spokeswoman, Meg Reilly, wrote in an e-mail message.

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

In late November, with scant public disclosure, the Treasury Department started the Foreclosure Alternatives Program, through which it will encourage arrangements that result in distressed borrowers surrendering their homes. The program will pay incentives to mortgage companies that allow homeowners to sell properties for less than they owe on their mortgages — short sales, in real estate parlance. The government will also pay incentives to mortgage companies that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program did not represent a new policy. “We have said from the start that modifications will not be the solution for all homeowners and will not solve the housing crisis alone,” Ms. Reilly said by e-mail. “This has always been a multi-pronged effort.”

Whatever the merits of its plans, the administration has clearly failed to reverse the foreclosure crisis.

In 2008, more than 1.7 million homes were “lost” through foreclosures, short sales or deeds in lieu of foreclosure, according to Moody’s Economy.com. Last year, more than two million homes were lost, and Economy.com expects that this year’s number will swell to 2.4 million.

“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”

From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.

Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

“We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Under the current program, the government provides cash incentives to mortgage companies that lower monthly payments for borrowers facing hardships. The Treasury Department set a goal of three to four million permanent loan modifications by 2012.

“That’s overly optimistic at this stage,” said Richard H. Neiman, the superintendent of banks for New York State and an appointee to the Congressional Oversight Panel, a body created to keep tabs on taxpayer bailout funds. “There’s a great deal of frustration and disappointment.”

As of mid-December, some 759,000 homeowners had received loan modifications on a trial basis typically lasting three to five months. But only about 31,000 had received permanent modifications — a step that requires borrowers to make timely trial payments and submit paperwork verifying their financial situation.

The government has pressured mortgage companies to move faster. Still, it argues that trial modifications are themselves a considerable help.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.

In Lakeland, Fla., Jaimie S. Smith, 29, called her mortgage company, then Washington Mutual, in October 2008, when she realized she would get a smaller bonus from her employer, a furniture company, threatening her ability to continue the $1,250 monthly mortgage payments on her three-bedroom house.

In April, Chase, which had taken over Washington Mutual, lowered her payment to $1,033.62 in a trial that was supposed to last three months.

Ms. Smith made all three payments on time and submitted required documents, Chase confirms. She called the bank almost weekly to inquire about a permanent loan modification. Each time, she says, Chase told her to continue making trial payments and await word on a permanent modification.

Then, in October, a startling legal notice arrived in the mail: Chase had foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)

“I cried,” she said. “I was hysterical. I bawled my eyes out.”

Later that week came another letter from Chase: “Congratulations on qualifying for a Making Home Affordable loan modification!”

When Ms. Smith frantically called the bank to try to overturn the sale, she was told that the house was no longer hers. Chase would not tell her how long she could remain there, she says. She feared the sheriff would show up at her door with eviction papers, or that she would return home to find her belongings piled on the curb. So Ms. Smith anxiously set about looking for a new place to live.

She had been planning to continue an online graduate school program in supply chain management, and she had about $4,000 in borrowed funds to pay tuition. She scrapped her studies and used the money to pay the security deposit and first month’s rent on an apartment.

Later, she hired a lawyer, who is seeking compensation from Chase. A judge later vacated the sale. Chase is still offering to make her loan modification permanent, but Ms. Smith has already moved out and is conflicted about what to do.

“I could have just walked away,” said Ms. Smith. “If they had said, ‘We can’t work with you,’ I’d have said: ‘What are my options? Short sale?’ None of this would have happened. God knows, I never would have wanted to go through this. I’d still be in grad school. I would not have paid all that money to them. I could have saved that money.”

A Chase spokeswoman, Christine Holevas, confirmed that the bank mistakenly foreclosed on Ms. Smith’s house and sold it at the same time it was extending the loan modification offer.

“There was a systems glitch,” Ms. Holevas said. “We are sorry that an error happened. We’re trying very hard to do what we can to keep folks in their homes. We are dealing with many, many individuals.”

Many borrowers complain they were told by mortgage companies their credit would not be damaged by accepting a loan modification, only to discover otherwise.

In a telephone conference with reporters, Jack Schakett, Bank of America’s credit loss mitigation executive, confirmed that even borrowers who were current before agreeing to loan modifications and who then made timely payments were reported to credit rating agencies as making only partial payments.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

“This is a conscious choice we made, not to start with principal reduction,” Mr. Geithner told the Congressional Oversight Panel. “We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”

Mr. Geithner’s explanation did not satisfy the panel’s chairwoman, Elizabeth Warren.

“Are we creating a program in which we’re talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?” she asked, raising the prospect “that we’ll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?”

A good question, Mr. Geithner conceded.

“What to do about it,” he said. “That’s a hard thing.”

    U.S. Loan Effort Is Seen as Adding to Housing Woes, NYT, 2.2.1010, http://www.nytimes.com/2010/01/02/business/economy/02modify.html