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Sunday, 8 February 2009
Changes to Foreign Policy
US Vice President Joe Biden announced changes to US foreign policy on Saturday that emphasised diplomacy over military power but also urged allies to shoulder more of the burden in tackling global crises.
MUNICH (Germany) - US Vice President Joe Biden announced changes to US foreign policy on Saturday that emphasised diplomacy over military power but also urged allies to shoulder more of the burden in tackling global crises.
‘I come to Europe on behalf of a new administration determined to set a new tone in Washington, and in America’s relations around the world,’ he told a security conference in Munich, Germany.
‘We will engage. We will listen. We will consult. America needs the world, just as I believe the world needs America.’
Delivering the Obama administration’s first major foreign policy speech, Mr. Biden effectively repudiated former President George W. Bush’s ‘with us or against us’ foreign policy. Mr. Biden’s speech also tried to turn the page on the 2003 US-led invasion of Iraq and Bush’s scepticism over climate change that alienated many Europeans.
But Mr. Biden made clear the United States was still prepared to use military force to protect its national security.
‘There is no conflict between our security and our ideals. They are mutually reinforcing. The force of arms won our independence, and throughout our history, the force of arms has protected our freedom. That will not change,’ he said.
While promising that Washington would consult and listen more to its allies, he said it would also ask for more from them, for example by taking in inmates from the US military prison at Guantanamo, Cuba, which President Barack Obama has said will be closed within a year.
‘America will do more, but America will ask for more from our partners,’ he said. ‘The threats we face have no respect for borders. No single country, no matter how powerful, can best meet them alone.’
In the wide-ranging speech, Mr. Biden called for a greater commitment by NATO members in Afghanistan, a united effort to force Iran to scrap its nuclear programme, a sharp reduction in nuclear arsenals and a halt in what he called a ‘dangerous drift’ in relations with Russia.
His speech was short on any announcements, but analysts had said beforehand that the vice president’s mere appearance at the conference, which is normally attended by the US defense secretary, sent an important signal to Europe that the Obama administration was keen to rebuild strained relations.
There had been much speculation before the conference that Mr. Biden would announce the suspension or review of the former Bush administration plans to build a missile defence shield in Eastern Europe, a move that angered Russia.
‘We will continue to develop missile defences to counter a growing Iranian capability, provided the technology is proven to work and cost effective,’ Mr. Biden told the gathering of security experts and European leaders.
But, he stressed: ‘We will do so in consultation with our NATO allies and Russia.’
December was the 18th month in a row of annual declines in cargo volume at the nation's major retail container ports, and business on the docks is expected to fall precipitously during the first six months of this year, according to a report issued Friday.
The projection, made just as the Labor Department released woeful news that nearly 600,000 payroll jobs were shed in January, describes a worsening economy and unrelenting trouble for retailers.
"(Last year) was one of the most challenging years retailers have seen, and all indications are that 2009 won't be any better," said Jonathan Gold, vice president for supply chain and customs policy for the National Retail Federation, the industry trade association that produced the report. "Unfortunately, cargo volume at the ports reflects retailers' anticipated sales, and (the federation) expects that sales will get worse before they get better. Retailers are only going to import what they can sell."
Shuttered storefronts around the Bay Area tell the tale in the region, while job cuts and belt-tightening at the Port of Oakland are the consequences of diminishing trade.
The port has a $12 million deficit for the fiscal year that will end June 30, and the growth of expenses, at 7 percent, is outpacing the growth of revenue, at 3 percent, "so we need to change that," said Marilyn Sandifur, a spokeswoman for the port.
The retail federation projects that cargo volume at Oakland during the first six months of this year will be 12.3 percent lower than during the same six months in 2008.
The Port of Oakland reported that container traffic declined 6.4 percent in 2008, better than the 7.9 percent decline at all the major ports, according to the report from the National Retail Federation and its statistical partner, HIS Global Insight, which tracks economic and financial information available on countries, regions and industries.
The cargo volume nationally is expected to drop at an even faster pace during the first half of 2009 as the recession continues, the report said. The volume for the first six months is forecast at 6.6 million 20-foot containers, down 11.8 percent from the 7.5 million containers handled during the same period in 2008. The report forecasts only six months into the future, so an estimate of volume for the entire year won't be available until summer.
Final data for 2008 showed volume for the year at 15.2 million containers, compared with 16.5 million in 2007, a decline of 7.9 percent and the lowest total since 2004, when 14 million containers moved through the ports.
The report cited statistics from the Ports of Los Angeles and Long Beach, Oakland, Seattle and Tacoma, Wash., on the West Coast; New York/New Jersey, Hampton Roads, Va., Charleston, S.C., and Savannah, Ga., on the East Coast; and Houston on the Gulf Coast. Not surprisingly, the retail federation and HIS Global Insight reported congestion at the ports is low.
The facilities handled 1.06 million 20-foot containers in December, the last month for which numbers are available. That was down 13.9 percent from November and 17.2 percent from December 2007.
The last month to see an increase in cargo volume was July 2007, when business was up 3.4 percent from July 2006.
LONDON (Reuters) - Sterling hit a two week high versus the dollar on Friday, with the greenback pressured by a slightly more robust approach to risk after a savage U.S. jobs report raised hopes for a major economic stimulus package.
The pound, which is on track to register two straight weeks of gains for the first time since late November, was also cheered domestically by the growing view that UK borrowing costs are near a trough after interest rates were cut this week by 50 basis points to a record low 1 percent.
The dollar, a major beneficiary of fears over a rapidly worsening global economic backdrop, turned lower against the pound and euro after the U.S. Labour Department said employers slashed 598,000 jobs in January, the deepest cut in payrolls in 34 years.
Traders and analysts said the dismal figures may provide an incentive for U.S. legislators to support the Obama administration's fiscal stimulus program and its bank rescue plan, which will be unveiled Monday.
"People seem prepared to adopt a more pro-risk attitude and that's why the pound is higher, euro/dollar is higher and Aussie and Kiwi dollars are up as well," said Lee Ferridge, senior FX strategist at State Street Global Markets in London.
"Also on Monday, (U.S. Treasury Secretary) Geithner is speaking and is supposed to be unveiling a new banking package and people are positioning for that," he added.
By 4:15 p.m., the euro was steady at 87.35 pence, having earlier dropped to its weakest since early December at 86.64 pence.
Against the dollar the pound was up 0.8 percent on the day at $1.4735, not far from an earlier two-week high of $1.4767.
Strong gains against the currencies of its major trading partners propelled the pound to a seven-week peak against a basket of currencies of 79.9.
British and US share prices were also up 1.7 and 2.4 percent on the day respectively.
RATES NEAR TROUGH
After trading in a highly volatile fashion this week, the pound has firmed as investors interpret the Bank of England's hefty rate cuts of recent months as proactive.
By contrast, the European Central Bank left its rates unchanged at 2 percent this week, raising further concern about how the currency bloc can navigate its way out of a deep downturn.
Figures revealing the biggest annual fall in UK industrial production since 1981 briefly dented the pound's progress in a reminder of Britain's extreme economic vulnerability.
Industrial output tumbled by 9.4 percent year-on-year in December. In the fourth quarter, production fell 4.5 percent, sparking fears of possible downward revisions to gross domestic product data for that period.
"The numbers are horrendously weak ... it certainly looks like it's right on the borderline of what is necessary to pull GDP down," JP Morgan Chase economist Malcolm Barr said.
The news overshadowed data earlier this week showing UK producer prices were stronger than analysts had forecast in January, although further figures showed UK company insolvencies hit their highest since 1994.
But there's a growing sense that bad news on the UK economy is already priced into sterling after it slumped to a record low close to parity against the euro at the end of last year and a 23-year trough against the dollar last month.
"There was so much bad news priced into sterling and it was way oversold. Sentiment towards the UK economy is still very negative, it is just a case of things being just as bad everywhere else," Dublin-based AIB Group Treasury economist Geraldine Concagh said.
As interest rates near zero, investors are waiting to see if the Bank will resort to measures like quantitative easing, where central banks flood the banking system with money to keep official rates low enough to shore up the financial system.
Three U.S. Banks Shut by Regulators as Financial Crisis Deepens
By Margaret Chadbourn and Ari Levy
Feb. 7 (Bloomberg) -- Three banks, two in California and one in Georgia, were seized by regulators, bringing this year’s tally of closings to nine as a recession and record foreclosures extend the biggest financial crisis in more than 70 years.
County Bank of Merced, California, with deposits of $1.3 billion and assets of $1.7 billion, was shut yesterday by the state’s Department of Financial Institutions, according to an e-mailed statement from the Federal Deposit Insurance Corp. Westamerica Bancorporation, holding company for Westamerica Bank, acquired all the assets and deposits.
The Georgia Department of Banking and Finance closed McDonough-based FirstBank Financial Services Inc., which had $337 million in assets and $279 million in deposits as of Dec. 31, the FDIC said in a statement. The California Department of Financial Institutions shut Culver City-based Alliance Bank, with assets of $1.14 billion and $951 million in deposits.
The FDIC was named receiver of the institutions, which will resume business as branches of the acquiring banks. Regulators seized six banks in January, the largest monthly toll since 1993, including Salt Lake City-based MagnetBank, which the FDIC closed Jan. 30 after being unable to find a buyer. The FDIC shuttered 25 banks last year, matching the total for 2001 through 2007.
The FDIC, other U.S. bank regulators and Congress are taking steps to help banks avoid losses as the administration of President Barack Obama readies a stimulus package that may include guarantees for toxic assets, according to people familiar with the plan.
Insurance Legislation
Legislation that would more than double deposit insurance coverage and offer safeguards for banks is being considered by Congress. The House Financial Services Committee unanimously approved a measure that would raise coverage to $250,000 per depositor per bank, from $100,000.
Congress also may extend the FDIC’s line of credit with the Treasury to $100 billion from $30 billion to replenish the deposit fund. The FDIC said bank failures through 2013 may cost the fund more than the $40 billion estimated in October.
“We do expect there to be more stress on banks, which could result in an increase in commercial bank failures,” said Comptroller of the Currency John Dugan in a Feb. 2 interview. A deepening recession that adds stress may lead to “significantly more losses,” said Dugan, regulator of national banks.
The FDIC on Dec. 16 doubled premiums it charges banks to replenish its reserves, which totaled $34.6 billion as of the third quarter. The Washington-based agency oversees 8,384 institutions with $13.6 trillion in assets.
Price Tag
The latest bank failures will cost the FDIC’s deposit insurance fund a combined $452 million. The fund is supported by fees on insured banks.
Westamerica, based in San Rafael, California, acquired 39 County Bank branches. The branches with Saturday hours will open as Westamerica offices today, and the rest will open Monday as usual. Westamerica shares have declined less than 1 percent in the past 12 months, to $48.52, as the 24-company KBW Bank Index has plummeted by almost two-thirds.
Regions Financial Corp. will buy about $17 million of FirstBank’s assets and assume all of the deposits, the FDIC said. FirstBank’s four branches will open as offices of Regions, a Birmingham, Alabama-based bank. Regions’ acquisition is its second in five months, following the purchase of Alpharetta, Georgia-based Integrity Bank’s assets in August.
“It is our responsibility to work with and support the FDIC in finding solutions for depositors in these challenging times,” said Regions Chief Executive Officer Dowd Ritter. “We also felt it was important to be a safe harbor for all customers by assuming both insured and uninsured deposits.”
Zions Bancorporation
California Bank and Trust of San Diego, owned by Salt Lake City-based Zions Bancorporation, acquired Alliance’s deposits and bought $1.12 billion of its assets at a discount. Alliance Bank’s five branches will open next week as offices of California Bank, the FDIC said. Zions, which operates in 10 Western states, also acquired the deposits of Henderson, Nevada-based Silver State Bank in September.
The FDIC classified 171 banks as “problem” in the third quarter, a 46 percent jump from the second quarter, and said industry earnings fell 94 percent to $1.73 billion from the previous year. The agency doesn’t identify problem banks by name.
The Obama administration is considering a range of options to unclog bank balance sheets, and may emphasize the guarantee of toxic assets over proposals to create a government-run bank. Treasury Secretary Timothy Geithner will unveil a plan as part of the financial-recovery package on Feb. 9, a Treasury official said yesterday.
Preventing Failures
The FDIC and the Office of the Comptroller of the Currency have taken steps to stem failures, such as allowing private- equity firms and other bidders to buy assets and deposits of lenders running out of cash. IndyMac Bank, the fourth-largest U.S. lender to fail last year, was sold to a private-equity investor for $1.3 billion on Jan. 2. The sale was led by Steven Mnuchin of Dune Capital Management LP.
Washington Mutual Inc., the biggest savings and loan, was seized on Sept. 25 and its assets were sold to JPMorgan Chase & Co. after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp. was near failure before being bought by Wells Fargo & Co. for $12.7 billion.
Macquarie Group reports it has $32b to cover debts and pursue opportunities
David McIntyre February 05, 2009
MACQUARIE Group is confident it has enough cash to cover its debts and pursue opportunities thrown up by the global financial crisis next year.
Despite forecasting its first annual profit fall in 17 years, shares in Australia's biggest investment bank gained more than 5 per cent yesterday after it reported it had $32.1 billion of cash and equivalents that easily covered debt due in the next 12 months.
"Having a strong balance sheet in a capital-scarce world is a good place to be and we think we can be even more useful to our clients than we have been in the past," chief executive Nicholas Moore said. "We're beginning to see acquisition opportunities come through."
The update has eased investor fears the company may have trouble funding operations, at a time when the cost of new loans has blown out.
The figures suggest the investment firm is not only surviving, but is likely to thrive in the coming months and years.
"They've handled the situation very well," Argo Investments managing director Rob Patterson said.
"This puts them in a strong position for when the recovery comes, relative to their peers, many of whom have left the scene."
Macquarie stock gained $1.26, or 5.51 per cent, to $24.13.
Still, the company has been hit by the financial crisis and Macquarie said profit for the 12 months to March 31 was likely to halve to about $900 million from $1.8 billion the year before.
The expected second-half profit has also halved to about $300 million from the forecast made in November.
It will be the first annual decline since profit fell 11 per cent to $47.2 million in 1992 because of a recession.
Profits will ease as the company takes writedowns and impairment charges of $900 million in the second half, after the $1.1 billion booked in the first half. Macquarie forecast writedowns of about $400 million in November.
"Market conditions are exceptionally challenging out there," Mr Moore said.
He said the outlook was subject to significant swings in factors such as market conditions, asset realisations, completion rate of transactions and asset prices.
CMC Markets market analyst David Taylor said: "The group is still well capitalised, the balance sheet is in good shape and they're very well diversified.
"The $900 million hit isn't a huge surprise and the debt position is not nearly as bad as other diversified financials."
Operating income is forecast to fall 15 per cent from the $8.25 billion made in fiscal 2008, before impairments.
That will be better than the consensus analyst forecast of a 28 per cent decline to $5.92 billion before the update.
Bush administration paid billions over market value in bank bailouts, watchdog panel finds
By JIM KUHNHENN February 6, 2009
WASHINGTON (AP) -- The Bush administration overpaid tens of billions of dollars for stocks and other assets in its massive bailout last year of Wall Street banks and financial institutions, a new study by a government watchdog says.
The Congressional Oversight Panel, in a report released Friday, said last year's overpayments amounted to a taxpayer-financed $78 billion subsidy of the firms.
The findings added to the frustrations of lawmakers already wary of the $700 billion rescue plan, known as the Troubled Asset Relief Program. Congress approved the plan last fall, but members of both parties criticized spending decisions by the Bush administration and former Treasury Secretary Henry Paulson.
Financially ailing insurance giant American International Group, which the Treasury Department deemed to be too big to be allowed to fail, received $40 billion from the Treasury for assets valued at $14.8 billion, the oversight panel found.
In December, in response to questions from the oversight panel, the department wrote that the value of preferred stock purchased by the government was "at or near par," meaning Treasury paid $1 for every $1 dollar of asset.
"The way the Treasury secretary described it does not fit with the numbers that were produced in our much more extensive valuation analysis," panel chairwoman Elizabeth Warren told reporters Friday. "The secretary of the Treasury described it in December that these were par transaction and that is not supported by the numbers."
The continued scrutiny comes as new Treasury Secretary Timothy Geithner prepares to place the Obama administration's imprint on the program with a sweeping new framework for helping banks, loosening credit and helping reduce foreclosures. Geithner plans to unveil the changes Monday.
And while Paulson is gone and Geithner is in charge, the program itself remains in the hands of Neel Kashkari, a holdover from the Bush administration.
In December, Kashkari defended the Treasury purchasing strategy as bank stock prices dropped.
"We're not day traders, and we're not looking for a return tomorrow," he said. "Over time, we believe the taxpayers will be protected and have a return on their investment."
In a bright spot for the rescue program, the same banks that received capital infusions from Treasury have already paid $271 million in dividends to the federal government and are expected to pay $1.5 billion more in dividends by the end of this month. Wells Fargo, which received a $25 billion infusion, has already announced it would pay Treasury $371 million in dividends this month.
The oversight panel examined 10 transactions, including eight made under a capital purchase program designed to put liquidity into the banks in hopes of easing credit. That money went to banks considered "healthy" financially but in need of capital to make loans.
Two other transactions went to AIG and to Citigroup Inc. under programs designed to help companies that were facing serious financial difficulties.
Overall, the panel and the analysts it retained to conduct the valuation study found that the Treasury used taxpayers' money to pay $62.5 billion more than the value of assets in the 10 transactions it examined. By extrapolating to the more than 300 institutions that received money, the panel concluded that the government in effect paid $78 billion more than the actual value of the assets at the time.
"Treasury chose to offer 'one size fits all' pricing in order to encourage all institutions to participate, and in so doing disregarded apparent differences in their financial condition," the report states. "A consequence is that Treasury effectively offered weaker participants greater subsidies than it offered to stronger participants."
Reacting to the panel's conclusions, Treasury spokesman Isaac Baker said in a statement: "Treasury's efforts since the fall prevented a systemwide collapse, but more needs to be done to stabilize the financial sector, increase lending and protect taxpayer dollars."
He said the plan Geithner will announce Monday aims to free up credit, "while strengthening transparency and accountability measures so that taxpayers know where and how their money is being spent and whether it's achieving real results."
Senate Banking Chairman Chris Dodd, D-Conn., said the overpayment was sure to "raise eyebrows."
"I can understand some gap," he said. "No one is expecting perfection between the price you pay and what you think you're getting. But that's a pretty large disparity."
Scores of California state offices won’t be open today
More than 200,000 California employees will be forced to take an unpaid day off in response to the state's worsening fiscal crisis. The DMV will be among the departments not open.
By Jean Merl February 6, 2009
Scores of state offices will be closed today as more than 200,000 workers take their first unpaid day off in response to California's deepening fiscal crisis.
That means Californians won't be able to take a driver's license test or conduct business at some state office buildings.
But, adding to the potential for consumer confusion, some state services and facilities will be open for business as usual.
The state judge who last month upheld the governor's furlough order said Thursday that his decision did not apply to about 15,600 employees of statewide elected officials, such as the attorney general, schools chief and controller. Administration officials said they may file a lawsuit in coming weeks seeking to also keep those workers home.
Workers in some other departments will take their unpaid days off on a different schedule, and the governor's office decided Thursday to keep open all one-stop career centers for the unemployed.
Among the closed offices will be all Department of Motor Vehicles outlets, Fish and Game, Food and Agriculture, Social Services and the Commission on Teacher Credentialing.
The Department of Mental Health will be closed, but mental hospitals will remain open. Workers Compensation offices will be closed.
State parks, which generate revenue from entrance fees, will remain open, as will state courts, the secretary of state's offices, California Highway Patrol offices and campuses of the University of California, Cal State and California Community Colleges. Public safety employees are exempt from the Friday furloughs and can schedule their days off differently.
In downtown Los Angeles, the Ronald Reagan Building and the Junipero Serra Building will be open and the Caltrans District 7 office will offer limited services.
The closures are part of the governor's cost-cutting program that requires state employees to take two unpaid days off per month, about a 9% pay cut, which his office estimates will save $1.4 billion through June 2010, the end of the next fiscal year. For many, those days off will be the first and third Fridays of each month.
All statewide elected officials except the governor have said they will not comply with the furlough order.
The governor's office said its staff will work today but take the pay cut.
The Republican governor and the Democrat-dominated Legislature remain at an impasse over how to balance the state's budget. The governor has declared a fiscal state of emergency, enabling him to order the furloughs.
GE's credit rating 'unsustainable,' says J.P. Morgan
A tough 2009 will mean the global conglomerate faces a dividend cut
By Christopher Hinton Feb. 6, 2009
NEW YORK -- General Electric Co.'s troubled industrial and financial businesses are leading to a credit-rating cut, which will likely force the conglomerate to reduce its dividend, J.P. Morgan said Friday.
But until the Fairfield, Conn., company lowers its dividend, it will be near impossible for it to restructure with a possible spin-off of GE Capital, according to analyst Stephen Tusa said in a note to investors.
"These events are necessary catalysts of change for a culture that was built to manage earnings in a way that is clearly unsustainable over the long term," Tusa wrote. "The bottom line is that, with deteriorating fundamentals - clearly at [GE Capital] and with industrial following - staying the course is a hurdle to capitulation."
Adding, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable."
No one from GE was available to comment.
Tusa's analysis follow General Electric's bruising fourth-quarter results posted two weeks ago, showing a 44% drop in its net earnings on declines in its financial and consumer-product businesses. That trend is expected to continue through 2009, and the company said it would bulk up its cash reserve to weather the challenge. .
GE is a member of the Dow 30 and is considered a bellwether for the economy.
After falling earlier, GE shares on Friday posted a 3.5% gain to $11.23. Since mid-September, the stock is off nearly 60% and is trading at a 13-year low. Some analysts have said a slash to its annual dividend has already been priced in.
JPMorgan maintained its neutral rating for GE stock, but lowered its price target to $9 from $13, predicting double-digit earnings decline through 2010 with a profit trough that year of 70 cents a share.
Analysts polled by FactSet Research are looking for 2010 earnings of $1.30 a share, on average.
GE isn't the only member of the Dow Jones Industrial Average where investors are nervous over the dividend. Pharmaceutical giant Pfizer Corp. (PFE), Caterpillar Inc. (CAT), American Express Co. (AXP), and Alcoa Inc. (AA), are all under the microscope. Citigroup Inc. (C), Bank of America (BAC) and General Motors Corp. (GM) have already reduced their dividends.
Elsewhere, GE Chairman and Chief Executive Jeff Immelt has been included in President Barack Obama's new Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker.
The board also includes Caterpillar Inc. (CAT) CEO James Owens.
A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.
It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.
Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.
It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.
Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.
Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.
It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy ... the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”
Worst of all is the possibility that the economy will, as it did in the ’30s, end up stuck in a prolonged deflationary trap.
We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.
As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.
And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?
Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.
So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.
It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.
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Changes to Foreign Policy
Reuters
7 February 2009
MUNICH (Germany) - US Vice President Joe Biden announced changes to US foreign policy on Saturday that emphasised diplomacy over military power but also urged allies to shoulder more of the burden in tackling global crises.
‘I come to Europe on behalf of a new administration determined to set a new tone in Washington, and in America’s relations around the world,’ he told a security conference in Munich, Germany.
‘We will engage. We will listen. We will consult. America needs the world, just as I believe the world needs America.’
Delivering the Obama administration’s first major foreign policy speech, Mr. Biden effectively repudiated former President George W. Bush’s ‘with us or against us’ foreign policy. Mr. Biden’s speech also tried to turn the page on the 2003 US-led invasion of Iraq and Bush’s scepticism over climate change that alienated many Europeans.
But Mr. Biden made clear the United States was still prepared to use military force to protect its national security.
‘There is no conflict between our security and our ideals. They are mutually reinforcing. The force of arms won our independence, and throughout our history, the force of arms has protected our freedom. That will not change,’ he said.
While promising that Washington would consult and listen more to its allies, he said it would also ask for more from them, for example by taking in inmates from the US military prison at Guantanamo, Cuba, which President Barack Obama has said will be closed within a year.
‘America will do more, but America will ask for more from our partners,’ he said. ‘The threats we face have no respect for borders. No single country, no matter how powerful, can best meet them alone.’
In the wide-ranging speech, Mr. Biden called for a greater commitment by NATO members in Afghanistan, a united effort to force Iran to scrap its nuclear programme, a sharp reduction in nuclear arsenals and a halt in what he called a ‘dangerous drift’ in relations with Russia.
His speech was short on any announcements, but analysts had said beforehand that the vice president’s mere appearance at the conference, which is normally attended by the US defense secretary, sent an important signal to Europe that the Obama administration was keen to rebuild strained relations.
There had been much speculation before the conference that Mr. Biden would announce the suspension or review of the former Bush administration plans to build a missile defence shield in Eastern Europe, a move that angered Russia.
‘We will continue to develop missile defences to counter a growing Iranian capability, provided the technology is proven to work and cost effective,’ Mr. Biden told the gathering of security experts and European leaders.
But, he stressed: ‘We will do so in consultation with our NATO allies and Russia.’
Cargo volume falls at U.S. ports
George Raine
February 7, 2009
December was the 18th month in a row of annual declines in cargo volume at the nation's major retail container ports, and business on the docks is expected to fall precipitously during the first six months of this year, according to a report issued Friday.
The projection, made just as the Labor Department released woeful news that nearly 600,000 payroll jobs were shed in January, describes a worsening economy and unrelenting trouble for retailers.
"(Last year) was one of the most challenging years retailers have seen, and all indications are that 2009 won't be any better," said Jonathan Gold, vice president for supply chain and customs policy for the National Retail Federation, the industry trade association that produced the report. "Unfortunately, cargo volume at the ports reflects retailers' anticipated sales, and (the federation) expects that sales will get worse before they get better. Retailers are only going to import what they can sell."
Shuttered storefronts around the Bay Area tell the tale in the region, while job cuts and belt-tightening at the Port of Oakland are the consequences of diminishing trade.
The port has a $12 million deficit for the fiscal year that will end June 30, and the growth of expenses, at 7 percent, is outpacing the growth of revenue, at 3 percent, "so we need to change that," said Marilyn Sandifur, a spokeswoman for the port.
The retail federation projects that cargo volume at Oakland during the first six months of this year will be 12.3 percent lower than during the same six months in 2008.
The Port of Oakland reported that container traffic declined 6.4 percent in 2008, better than the 7.9 percent decline at all the major ports, according to the report from the National Retail Federation and its statistical partner, HIS Global Insight, which tracks economic and financial information available on countries, regions and industries.
The cargo volume nationally is expected to drop at an even faster pace during the first half of 2009 as the recession continues, the report said. The volume for the first six months is forecast at 6.6 million 20-foot containers, down 11.8 percent from the 7.5 million containers handled during the same period in 2008. The report forecasts only six months into the future, so an estimate of volume for the entire year won't be available until summer.
Final data for 2008 showed volume for the year at 15.2 million containers, compared with 16.5 million in 2007, a decline of 7.9 percent and the lowest total since 2004, when 14 million containers moved through the ports.
The report cited statistics from the Ports of Los Angeles and Long Beach, Oakland, Seattle and Tacoma, Wash., on the West Coast; New York/New Jersey, Hampton Roads, Va., Charleston, S.C., and Savannah, Ga., on the East Coast; and Houston on the Gulf Coast. Not surprisingly, the retail federation and HIS Global Insight reported congestion at the ports is low.
The facilities handled 1.06 million 20-foot containers in December, the last month for which numbers are available. That was down 13.9 percent from November and 17.2 percent from December 2007.
The last month to see an increase in cargo volume was July 2007, when business was up 3.4 percent from July 2006.
Sterling at 2-week high vs dollar
By Jessica Mortimer
Feb 6, 2009
LONDON (Reuters) - Sterling hit a two week high versus the dollar on Friday, with the greenback pressured by a slightly more robust approach to risk after a savage U.S. jobs report raised hopes for a major economic stimulus package.
The pound, which is on track to register two straight weeks of gains for the first time since late November, was also cheered domestically by the growing view that UK borrowing costs are near a trough after interest rates were cut this week by 50 basis points to a record low 1 percent.
The dollar, a major beneficiary of fears over a rapidly worsening global economic backdrop, turned lower against the pound and euro after the U.S. Labour Department said employers slashed 598,000 jobs in January, the deepest cut in payrolls in 34 years.
Traders and analysts said the dismal figures may provide an incentive for U.S. legislators to support the Obama administration's fiscal stimulus program and its bank rescue plan, which will be unveiled Monday.
"People seem prepared to adopt a more pro-risk attitude and that's why the pound is higher, euro/dollar is higher and Aussie and Kiwi dollars are up as well," said Lee Ferridge, senior FX strategist at State Street Global Markets in London.
"Also on Monday, (U.S. Treasury Secretary) Geithner is speaking and is supposed to be unveiling a new banking package and people are positioning for that," he added.
By 4:15 p.m., the euro was steady at 87.35 pence, having earlier dropped to its weakest since early December at 86.64 pence.
Against the dollar the pound was up 0.8 percent on the day at $1.4735, not far from an earlier two-week high of $1.4767.
Strong gains against the currencies of its major trading partners propelled the pound to a seven-week peak against a basket of currencies of 79.9.
British and US share prices were also up 1.7 and 2.4 percent on the day respectively.
RATES NEAR TROUGH
After trading in a highly volatile fashion this week, the pound has firmed as investors interpret the Bank of England's hefty rate cuts of recent months as proactive.
By contrast, the European Central Bank left its rates unchanged at 2 percent this week, raising further concern about how the currency bloc can navigate its way out of a deep downturn.
Figures revealing the biggest annual fall in UK industrial production since 1981 briefly dented the pound's progress in a reminder of Britain's extreme economic vulnerability.
Industrial output tumbled by 9.4 percent year-on-year in December. In the fourth quarter, production fell 4.5 percent, sparking fears of possible downward revisions to gross domestic product data for that period.
"The numbers are horrendously weak ... it certainly looks like it's right on the borderline of what is necessary to pull GDP down," JP Morgan Chase economist Malcolm Barr said.
The news overshadowed data earlier this week showing UK producer prices were stronger than analysts had forecast in January, although further figures showed UK company insolvencies hit their highest since 1994.
But there's a growing sense that bad news on the UK economy is already priced into sterling after it slumped to a record low close to parity against the euro at the end of last year and a 23-year trough against the dollar last month.
"There was so much bad news priced into sterling and it was way oversold. Sentiment towards the UK economy is still very negative, it is just a case of things being just as bad everywhere else," Dublin-based AIB Group Treasury economist Geraldine Concagh said.
As interest rates near zero, investors are waiting to see if the Bank will resort to measures like quantitative easing, where central banks flood the banking system with money to keep official rates low enough to shore up the financial system.
Three U.S. Banks Shut by Regulators as Financial Crisis Deepens
By Margaret Chadbourn and Ari Levy
Feb. 7 (Bloomberg) -- Three banks, two in California and one in Georgia, were seized by regulators, bringing this year’s tally of closings to nine as a recession and record foreclosures extend the biggest financial crisis in more than 70 years.
County Bank of Merced, California, with deposits of $1.3 billion and assets of $1.7 billion, was shut yesterday by the state’s Department of Financial Institutions, according to an e-mailed statement from the Federal Deposit Insurance Corp. Westamerica Bancorporation, holding company for Westamerica Bank, acquired all the assets and deposits.
The Georgia Department of Banking and Finance closed McDonough-based FirstBank Financial Services Inc., which had $337 million in assets and $279 million in deposits as of Dec. 31, the FDIC said in a statement. The California Department of Financial Institutions shut Culver City-based Alliance Bank, with assets of $1.14 billion and $951 million in deposits.
The FDIC was named receiver of the institutions, which will resume business as branches of the acquiring banks. Regulators seized six banks in January, the largest monthly toll since 1993, including Salt Lake City-based MagnetBank, which the FDIC closed Jan. 30 after being unable to find a buyer. The FDIC shuttered 25 banks last year, matching the total for 2001 through 2007.
The FDIC, other U.S. bank regulators and Congress are taking steps to help banks avoid losses as the administration of President Barack Obama readies a stimulus package that may include guarantees for toxic assets, according to people familiar with the plan.
Insurance Legislation
Legislation that would more than double deposit insurance coverage and offer safeguards for banks is being considered by Congress. The House Financial Services Committee unanimously approved a measure that would raise coverage to $250,000 per depositor per bank, from $100,000.
Congress also may extend the FDIC’s line of credit with the Treasury to $100 billion from $30 billion to replenish the deposit fund. The FDIC said bank failures through 2013 may cost the fund more than the $40 billion estimated in October.
“We do expect there to be more stress on banks, which could result in an increase in commercial bank failures,” said Comptroller of the Currency John Dugan in a Feb. 2 interview. A deepening recession that adds stress may lead to “significantly more losses,” said Dugan, regulator of national banks.
The FDIC on Dec. 16 doubled premiums it charges banks to replenish its reserves, which totaled $34.6 billion as of the third quarter. The Washington-based agency oversees 8,384 institutions with $13.6 trillion in assets.
Price Tag
The latest bank failures will cost the FDIC’s deposit insurance fund a combined $452 million. The fund is supported by fees on insured banks.
Westamerica, based in San Rafael, California, acquired 39 County Bank branches. The branches with Saturday hours will open as Westamerica offices today, and the rest will open Monday as usual. Westamerica shares have declined less than 1 percent in the past 12 months, to $48.52, as the 24-company KBW Bank Index has plummeted by almost two-thirds.
Regions Financial Corp. will buy about $17 million of FirstBank’s assets and assume all of the deposits, the FDIC said. FirstBank’s four branches will open as offices of Regions, a Birmingham, Alabama-based bank. Regions’ acquisition is its second in five months, following the purchase of Alpharetta, Georgia-based Integrity Bank’s assets in August.
“It is our responsibility to work with and support the FDIC in finding solutions for depositors in these challenging times,” said Regions Chief Executive Officer Dowd Ritter. “We also felt it was important to be a safe harbor for all customers by assuming both insured and uninsured deposits.”
Zions Bancorporation
California Bank and Trust of San Diego, owned by Salt Lake City-based Zions Bancorporation, acquired Alliance’s deposits and bought $1.12 billion of its assets at a discount. Alliance Bank’s five branches will open next week as offices of California Bank, the FDIC said. Zions, which operates in 10 Western states, also acquired the deposits of Henderson, Nevada-based Silver State Bank in September.
The FDIC classified 171 banks as “problem” in the third quarter, a 46 percent jump from the second quarter, and said industry earnings fell 94 percent to $1.73 billion from the previous year. The agency doesn’t identify problem banks by name.
The Obama administration is considering a range of options to unclog bank balance sheets, and may emphasize the guarantee of toxic assets over proposals to create a government-run bank. Treasury Secretary Timothy Geithner will unveil a plan as part of the financial-recovery package on Feb. 9, a Treasury official said yesterday.
Preventing Failures
The FDIC and the Office of the Comptroller of the Currency have taken steps to stem failures, such as allowing private- equity firms and other bidders to buy assets and deposits of lenders running out of cash. IndyMac Bank, the fourth-largest U.S. lender to fail last year, was sold to a private-equity investor for $1.3 billion on Jan. 2. The sale was led by Steven Mnuchin of Dune Capital Management LP.
Washington Mutual Inc., the biggest savings and loan, was seized on Sept. 25 and its assets were sold to JPMorgan Chase & Co. after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp. was near failure before being bought by Wells Fargo & Co. for $12.7 billion.
Macquarie Group reports it has $32b to cover debts and pursue opportunities
David McIntyre
February 05, 2009
MACQUARIE Group is confident it has enough cash to cover its debts and pursue opportunities thrown up by the global financial crisis next year.
Despite forecasting its first annual profit fall in 17 years, shares in Australia's biggest investment bank gained more than 5 per cent yesterday after it reported it had $32.1 billion of cash and equivalents that easily covered debt due in the next 12 months.
"Having a strong balance sheet in a capital-scarce world is a good place to be and we think we can be even more useful to our clients than we have been in the past," chief executive Nicholas Moore said. "We're beginning to see acquisition opportunities come through."
The update has eased investor fears the company may have trouble funding operations, at a time when the cost of new loans has blown out.
The figures suggest the investment firm is not only surviving, but is likely to thrive in the coming months and years.
"They've handled the situation very well," Argo Investments managing director Rob Patterson said.
"This puts them in a strong position for when the recovery comes, relative to their peers, many of whom have left the scene."
Macquarie stock gained $1.26, or 5.51 per cent, to $24.13.
Still, the company has been hit by the financial crisis and Macquarie said profit for the 12 months to March 31 was likely to halve to about $900 million from $1.8 billion the year before.
The expected second-half profit has also halved to about $300 million from the forecast made in November.
It will be the first annual decline since profit fell 11 per cent to $47.2 million in 1992 because of a recession.
Profits will ease as the company takes writedowns and impairment charges of $900 million in the second half, after the $1.1 billion booked in the first half. Macquarie forecast writedowns of about $400 million in November.
"Market conditions are exceptionally challenging out there," Mr Moore said.
He said the outlook was subject to significant swings in factors such as market conditions, asset realisations, completion rate of transactions and asset prices.
CMC Markets market analyst David Taylor said: "The group is still well capitalised, the balance sheet is in good shape and they're very well diversified.
"The $900 million hit isn't a huge surprise and the debt position is not nearly as bad as other diversified financials."
Operating income is forecast to fall 15 per cent from the $8.25 billion made in fiscal 2008, before impairments.
That will be better than the consensus analyst forecast of a 28 per cent decline to $5.92 billion before the update.
Bush Overpaid Banks in Bailout, Watchdog Says
Bush administration paid billions over market value in bank bailouts, watchdog panel finds
By JIM KUHNHENN
February 6, 2009
WASHINGTON (AP) -- The Bush administration overpaid tens of billions of dollars for stocks and other assets in its massive bailout last year of Wall Street banks and financial institutions, a new study by a government watchdog says.
The Congressional Oversight Panel, in a report released Friday, said last year's overpayments amounted to a taxpayer-financed $78 billion subsidy of the firms.
The findings added to the frustrations of lawmakers already wary of the $700 billion rescue plan, known as the Troubled Asset Relief Program. Congress approved the plan last fall, but members of both parties criticized spending decisions by the Bush administration and former Treasury Secretary Henry Paulson.
Financially ailing insurance giant American International Group, which the Treasury Department deemed to be too big to be allowed to fail, received $40 billion from the Treasury for assets valued at $14.8 billion, the oversight panel found.
In December, in response to questions from the oversight panel, the department wrote that the value of preferred stock purchased by the government was "at or near par," meaning Treasury paid $1 for every $1 dollar of asset.
"The way the Treasury secretary described it does not fit with the numbers that were produced in our much more extensive valuation analysis," panel chairwoman Elizabeth Warren told reporters Friday. "The secretary of the Treasury described it in December that these were par transaction and that is not supported by the numbers."
The continued scrutiny comes as new Treasury Secretary Timothy Geithner prepares to place the Obama administration's imprint on the program with a sweeping new framework for helping banks, loosening credit and helping reduce foreclosures. Geithner plans to unveil the changes Monday.
And while Paulson is gone and Geithner is in charge, the program itself remains in the hands of Neel Kashkari, a holdover from the Bush administration.
In December, Kashkari defended the Treasury purchasing strategy as bank stock prices dropped.
"We're not day traders, and we're not looking for a return tomorrow," he said. "Over time, we believe the taxpayers will be protected and have a return on their investment."
In a bright spot for the rescue program, the same banks that received capital infusions from Treasury have already paid $271 million in dividends to the federal government and are expected to pay $1.5 billion more in dividends by the end of this month. Wells Fargo, which received a $25 billion infusion, has already announced it would pay Treasury $371 million in dividends this month.
The oversight panel examined 10 transactions, including eight made under a capital purchase program designed to put liquidity into the banks in hopes of easing credit. That money went to banks considered "healthy" financially but in need of capital to make loans.
Two other transactions went to AIG and to Citigroup Inc. under programs designed to help companies that were facing serious financial difficulties.
Overall, the panel and the analysts it retained to conduct the valuation study found that the Treasury used taxpayers' money to pay $62.5 billion more than the value of assets in the 10 transactions it examined. By extrapolating to the more than 300 institutions that received money, the panel concluded that the government in effect paid $78 billion more than the actual value of the assets at the time.
"Treasury chose to offer 'one size fits all' pricing in order to encourage all institutions to participate, and in so doing disregarded apparent differences in their financial condition," the report states. "A consequence is that Treasury effectively offered weaker participants greater subsidies than it offered to stronger participants."
Reacting to the panel's conclusions, Treasury spokesman Isaac Baker said in a statement: "Treasury's efforts since the fall prevented a systemwide collapse, but more needs to be done to stabilize the financial sector, increase lending and protect taxpayer dollars."
He said the plan Geithner will announce Monday aims to free up credit, "while strengthening transparency and accountability measures so that taxpayers know where and how their money is being spent and whether it's achieving real results."
Senate Banking Chairman Chris Dodd, D-Conn., said the overpayment was sure to "raise eyebrows."
"I can understand some gap," he said. "No one is expecting perfection between the price you pay and what you think you're getting. But that's a pretty large disparity."
Scores of California state offices won’t be open today
More than 200,000 California employees will be forced to take an unpaid day off in response to the state's worsening fiscal crisis. The DMV will be among the departments not open.
By Jean Merl
February 6, 2009
Scores of state offices will be closed today as more than 200,000 workers take their first unpaid day off in response to California's deepening fiscal crisis.
That means Californians won't be able to take a driver's license test or conduct business at some state office buildings.
But, adding to the potential for consumer confusion, some state services and facilities will be open for business as usual.
The state judge who last month upheld the governor's furlough order said Thursday that his decision did not apply to about 15,600 employees of statewide elected officials, such as the attorney general, schools chief and controller. Administration officials said they may file a lawsuit in coming weeks seeking to also keep those workers home.
Workers in some other departments will take their unpaid days off on a different schedule, and the governor's office decided Thursday to keep open all one-stop career centers for the unemployed.
Among the closed offices will be all Department of Motor Vehicles outlets, Fish and Game, Food and Agriculture, Social Services and the Commission on Teacher Credentialing.
The Department of Mental Health will be closed, but mental hospitals will remain open. Workers Compensation offices will be closed.
State parks, which generate revenue from entrance fees, will remain open, as will state courts, the secretary of state's offices, California Highway Patrol offices and campuses of the University of California, Cal State and California Community Colleges. Public safety employees are exempt from the Friday furloughs and can schedule their days off differently.
In downtown Los Angeles, the Ronald Reagan Building and the Junipero Serra Building will be open and the Caltrans District 7 office will offer limited services.
The closures are part of the governor's cost-cutting program that requires state employees to take two unpaid days off per month, about a 9% pay cut, which his office estimates will save $1.4 billion through June 2010, the end of the next fiscal year. For many, those days off will be the first and third Fridays of each month.
All statewide elected officials except the governor have said they will not comply with the furlough order.
The governor's office said its staff will work today but take the pay cut.
The Republican governor and the Democrat-dominated Legislature remain at an impasse over how to balance the state's budget. The governor has declared a fiscal state of emergency, enabling him to order the furloughs.
GE's credit rating 'unsustainable,' says J.P. Morgan
A tough 2009 will mean the global conglomerate faces a dividend cut
By Christopher Hinton
Feb. 6, 2009
NEW YORK -- General Electric Co.'s troubled industrial and financial businesses are leading to a credit-rating cut, which will likely force the conglomerate to reduce its dividend, J.P. Morgan said Friday.
But until the Fairfield, Conn., company lowers its dividend, it will be near impossible for it to restructure with a possible spin-off of GE Capital, according to analyst Stephen Tusa said in a note to investors.
"These events are necessary catalysts of change for a culture that was built to manage earnings in a way that is clearly unsustainable over the long term," Tusa wrote. "The bottom line is that, with deteriorating fundamentals - clearly at [GE Capital] and with industrial following - staying the course is a hurdle to capitulation."
Adding, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable."
No one from GE was available to comment.
Tusa's analysis follow General Electric's bruising fourth-quarter results posted two weeks ago, showing a 44% drop in its net earnings on declines in its financial and consumer-product businesses. That trend is expected to continue through 2009, and the company said it would bulk up its cash reserve to weather the challenge. .
GE is a member of the Dow 30 and is considered a bellwether for the economy.
After falling earlier, GE shares on Friday posted a 3.5% gain to $11.23. Since mid-September, the stock is off nearly 60% and is trading at a 13-year low. Some analysts have said a slash to its annual dividend has already been priced in.
JPMorgan maintained its neutral rating for GE stock, but lowered its price target to $9 from $13, predicting double-digit earnings decline through 2010 with a profit trough that year of 70 cents a share.
Analysts polled by FactSet Research are looking for 2010 earnings of $1.30 a share, on average.
GE isn't the only member of the Dow Jones Industrial Average where investors are nervous over the dividend. Pharmaceutical giant Pfizer Corp. (PFE), Caterpillar Inc. (CAT), American Express Co. (AXP), and Alcoa Inc. (AA), are all under the microscope. Citigroup Inc. (C), Bank of America (BAC) and General Motors Corp. (GM) have already reduced their dividends.
Elsewhere, GE Chairman and Chief Executive Jeff Immelt has been included in President Barack Obama's new Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker.
The board also includes Caterpillar Inc. (CAT) CEO James Owens.
On the Edge
By PAUL KRUGMAN
February 5, 2009
A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.
It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.
Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.
It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.
Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.
Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.
It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy ... the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”
Worst of all is the possibility that the economy will, as it did in the ’30s, end up stuck in a prolonged deflationary trap.
We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.
As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.
And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?
Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.
So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.
It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.
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