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Saturday, 21 March 2009
MM Lee on Singapore’s population
Even after the millions spent on Baby Bonuses and other parenthood incentives, policy - makers are confounded by a problem that goes to the very heart of survival: Singaporeans are still not reproducing themselves.
SINGAPORE: Even after the millions spent on Baby Bonuses and other parenthood incentives, policy - makers are confounded by a problem that goes to the very heart of survival: Singaporeans are still not reproducing themselves.
And on Friday, Minister Mentor Lee Kuan Yew reflected on this challenge at the National University of Singapore Society’s (NUSS) dialogue on “Singapore and Singaporeans: A Quarter Century From Now”.
In Singapore, he said, it is becoming a “lifestyle choice” for women past the age of 30 to stay single as they are well - travelled and have no one to worry about.
“My daughter is one of them. What can I do? When she was in her early 30s, my wife used to tell her, what you want is a ‘MRS’. She did not think it was funny.
“Now she is 50 - plus, her mother is bedridden, I’m on a pacemaker, I got this rambling house. Everything is looked after now. What happens if we are both not there?
“She says, ‘I’ll look after myself’. But we know she has not been looking after herself all these years. When she went to Boston for training, her cooking was to just to put her salmon into the microwave.”
Mr. Lee added: “But that’s life. It’s a choice that she has made, and a choice that 30 per cent of our women are making. Who am I to complain? Society lives with the consequences it is making.”
The problem that this trend creates: “Without new citizens and permanent residents, we are going to be the last of the Mohicans. We are going to disappear”.
But immigrants bring their own challenges to a society.
Some Singaporean parents have complained about migrants entering schools and competing with local children. He urged parents: “Would you want them to compete against you or with you as part of the team? If you don’t have them with you as part of your team, they will be on the Chinese and Indian team.”
Some of these migrant students, he acknowledged, use Singapore as a stepping stone to other countries. So “why are we so stupid” in allowing this?
“Because more than half (of these students) do not make the grade to go to America, and the second tier is not bad for us.”
Singapore needs to draw from a big talent pool beyond its own shores, “so that we can continue to punch above our weight. No other way”.
“Would you want the pie to grow? You want a small pie with your children taking the last portion, or a big pie where you get a bigger portion, even though the talented person may get a bigger slice? That’s life. If you are afraid of talent, you will not succeed.”
One catch he foresees: Even as the second generation of today’s immigrants become more Singaporean, one dubious habit they might also adopt, is to have only one child.
“So we got to make this breakthrough, otherwise we are going to have a constant problem.
“We got to get people to realise that if we don’t have 2.1 (babies) to replace ourselves, we are always dependent.”
Earlier in the evening, Mr. Lee officially opened the new NUS Alumni Complex, which comprises the redeveloped NUSS Kent Ridge Guild House and Shaw Foundation Alumni House.
Is there such a thing left as a safe investment? Stocks have been massacred, real estate all but wiped out. Each was promoted in its day — as was gold — as safe and secure, appropriate for widows and orphans.
If there is a truly last bastion of safety, it would be, of course, the U.S. Treasury bond, that venerable instrument with the full faith and credit of the United States behind it. Perhaps it is esteemed so highly because we think of it not as an “investment” per se but as an article of faith in Washington and, by extension, the entire country. It is our tax dollars, after all, that stand behind it — the accumulated output of our citizens. And ever since the Wall Street meltdown, as investors have fled from any security carrying a whiff of danger, Treasuries have been in hot demand.
So it is an eye-opener, and rather depressing, to report that even Treasuries bear risk, in particular, the risk that flows from crowd psychology. Last month, in his annual letter to shareholders (of which I am one), Warren Buffett wrote: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”
Pretty strong words for an investment that has outperformed stocks over the past 25 years and is widely referred to as “riskless.” Yet according to Buffett and other investors of a cautious bent, “risk free” Treasuries of longer maturities are anything but. None other than China’s prime minister, Wen Jiabao, expressed worry about the safety of China’s big stake in U.S. bonds.
Not since World War II has the government borrowed anything close to what it is borrowing now. Because of the economic slowdown, the stimulus package and various financial-relief measures, pundits estimate this year’s federal deficit at $1.75 trillion. To put the figures in (alarming) perspective, over the past half century and regardless of the party in power, federal tax receipts have usually provided 80 to 90 percent of the money needed to fill the budget; thus, the government has had to borrow only the remaining fraction. But this year, it will need to borrow 45 percent, virtually half, of what it is projected to spend. This means that the U.S. government is looking much like a homeowner at the tail end of the boom: too hooked on spending (even if, hopefully, for a worthy cause) to stay within its means.
When you buy a Treasury security, you are actually lending the government money for a set period of time — from 30 days to 30 years — at a fixed rate of interest. Few people worry that Uncle Sam will go the way of a defaulting subprime borrower because the government, unlike other debtors, can always print the money it needs.
But as James Bianco, who runs an eponymous bond-research firm, explains, investors in fixed-income securities face two types of risk. One is credit risk — the risk of default. The other is what bond geeks refer to as “duration” risk. This is the risk that, even if the bonds are paid in full, the promised rate of interest will turn out to be worth less over time.
Inflation destroys bond values. It’s not a big deal over one or two years, but if you hold a long-term bond and inflation takes off, the present value of the security will plummet. Bonds also lose value as interest rates go up. If rates on 30-year U.S. bonds, recently 3 percent, were to rise to, say, 6 percent, the value of bonds issued at the lower rate would fall nearly in half. (The reason is largely intuitive: if the market rate is 6 percent, nobody would be interested in a 3 percent bond, and its price would fall.)
One thing that could make interest rates rise would be an economic recovery that spurred more firms to seek credit. That would be good news for the country, of course, but not for long-term bondholders. And it’s conceivable that rates on Treasuries could rise even without a strong recovery. Government budget deficits always bring a fear of higher rates (interest rates represent the price of credit, and deficits mean that the government will be demanding more of it). And given the looming shortfalls in Social Security and Medicare, it is not clear when the deficits will end.
Granted, Treasury bonds are not quite tulip bulbs or dot-com stocks. Investors purchase them out of fear, not greed. Presumably they are not doubling-down, buying Treasuries with borrowed money to juice profits. But that distinction may not save them.
Think of the yield on Treasuries as a reverse indicator of investor sentiment. The stronger the attachment people have for Treasuries, the more willing they are to accept a low return. Once the Wall Street crisis hit, investors traded what had been a strong attachment to Treasuries for downright love. Naturally enough, given this fearful ardor, the yield touched post-Depression lows.
As with any investment, generalized enthusiasm leads to frothy prices. In seeking safety, global investors pushed Treasuries to a vulnerable level. Bond-market optimists take comfort from the Federal Reserve Board, which has hinted that to keep interest rates from rising, it would be the lender of last resort. But were the Fed to absorb surplus Treasuries, the government would, in fact, merely be “printing money,” says Mohamed El-Erian, chief executive of the bond house Pimco. When the economy rebounds, such a scenario could lead to a textbook case of inflation and devastate the ultimate “safe” investment. And lately, bond rates have begun to rise.
The primary lesson of this crisis is that we, as a nation, took on too much risk — leveraging finite capital on a fantasy that no bet would ever go bad. But there’s another lesson, too. Even safety has its price, and if we overpay for it, we create new risks. Risk, in short, may be something we have to live with.
The Implications Of Treasury Bonds Hitting New Lows
by Daniel Aaronson and Lee Markowitz March 13, 2009
The 10 year bond auction on Wednesday led to new bonds being priced at 3.04%, the highest level in four months. The implications of this are very important for all asset markets as the 3% threshold is considered to be a key level.
Investors from hedge funds to Warren Buffet to PIMCO are now talking about the Treasury market bubble. Bubbles do not pop instantly when people begin talking about an asset class, but rather require time and an initial decline in price. As price declines gain momentum, the bubble finally collapses.
Below is a chart of the 30 year Treasury bond since 1977.
As seen in the chart, the 30 year bond is now falling rapidly after having a parabolic rise at the end of a 30 year bull market. The explosive pop at the top of a bubble is what makes that asset uninvestable once the bubble ends because new investors that bought at the top quickly accumulate losses. As investors begin to sell, the asset rapidly falls in price.
Federal Reserve Purchases of Treasuries
Ben Bernanke has implied that the Federal Reserve would be willing to buy Treasury bonds should the need arise (i.e., Treasuries fall rapidly in price). He will do this by printing new US dollars. The reason that Bernanke is fearful of falling Treasury bond prices, and thus higher interest rates, is that higher interest rates would prevent an economic recovery. Although this plan could help to fund the Government's $2 trillion deficit initially, there would be huge implications to the broader fixed income markets if the Federal Reserve were to buy Treasury bonds. Nevermind the negative effect on the dollar from the newly printed money, the crowding out effect on non-government fixed income markets could be devastating. Crowding out will occur because the number of markets that the Federal Reserve can support is limited and the amount of money that is necessary to keep Treasuries from falling is staggering.
As we get closer to the day that the Federal Reserve begins to buy Treasuries, fixed income investors, who hold everything from corporate bonds to mortgages to credit card loans, should begin to sell their holdings in a panic, which in turn will send credit spreads to new highs (new lows in prices). Fixed income prices will fall to new lows because the Fed has been helping to artificially support fixed income prices with plans such as TARP/TALF, among others. As stated earlier, there are limits to the number of problems that the Federal Reserve can attempt to fix. As the Federal Reserve begins to buckle under its bailout programs, rational investors should recognize that instead of a few programs succeeding, all plans will fail together.
The take-home message is that the Federal Reserve can only do so much to instill confidence in markets. So far the Federal Reserve has been working overtime to stabilize fixed income markets. Now that long-term Treasury bonds are falling, the Federal Reserve will be forced to bail out another borrower - the US Government. As the Federal Reserve begins to buy Treasuries, the Federal Reserve will quickly become overwhelmed by its purchases, and all US fixed income prices will fall. At that point, the only option for the Federal Reserve would be to print new money at increasingly faster rates. Likely, it will be too late because the Dollar already will have resumed its decline. Only precious metals and certain foreign currencies will preserve purchasing power as a result of the Federal Reserve's troubled policies.
By Michael Mackenzie in New York and Krishna Guha in Washington February 4 2009
The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.
The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.
The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was “prepared to” buy Treasuries if that would be a “particularly effective” way of reducing private borrowing costs.
“The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects,” said William O’Donnell, UBS strategist.
The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities.
At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.
For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up.
The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.
Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt.
In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.
March 19 (Bloomberg) -- By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.
U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home- loan and other interest rates. The Fed kept its main rate at almost zero and may keep it there for an “extended” time.
The moves sparked the biggest drop in 10-year Treasury yields since 1962, rallies in the stock market and gold and a plunge in the dollar against the euro. Economist Richard Hoey said Bernanke has created the “Rambo Fed,” referring to the Sylvester Stallone character skilled with weapons.
“This is a very powerful and aggressive move,” Hoey, chief economist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”
With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.
Bond Reaction
The 10-year note yield fell as much as 54 basis points yesterday, the most since daily records began in 1962. It was at 2.59 percent at 1:14 p.m. in New York, compared with 3.01 percent at the close two days ago. A basis point is 0.01 percentage point.
The Federal Open Market Committee’s decision was unanimous, indicating the agreement to start buying Treasuries quelled disputes over how the central bank should expand its balance sheet. Richmond Fed President Jeffrey Lacker and others favored government-debt purchases instead of intervening in credit markets, as Bernanke has pioneered in the past six months.
Bernanke has studied the Great Depression extensively and published a book of his papers on the subject in 2000. In 1929, the Fed was “essentially leaderless and lacking in expertise,” Bernanke said in a November 2002 speech. The situation led to decisions that were associated with a “massive collapse of money, prices, and output,” he said.
Fed Purchases
Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.
The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11.
Policy makers acted after the economy worsened since they met in January. Reports today added evidence of a deepening recession. The Conference Board’s index of leading indicators, a measure of the economy’s future performance, fell 0.4 percent in February. The Labor Department said the number of Americans receiving unemployment benefits surged to a record 5.47 million.
TALF Program
The $1 trillion Term Asset-Backed Securities Loan Facility, which is opening this week to jumpstart consumer and business lending, “is likely to be expanded to include other financial assets,” the FOMC statement said, without elaborating.
The Obama administration is considering melding the Treasury’s plan to set up private investment funds to buy frozen assets with the Fed program, known as the TALF, people familiar with the matter said. Treasury Secretary Timothy Geithner may make an announcement as soon as this week, after his first unveiling of the strategy caused a sell-off in financial stocks.
“This is not really a victory for Lacker,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “Lacker seems to be arguing for Treasury purchases instead of targeted programs. They are instead supplementing the targeted programs. They are just using all tools.”
The New York Fed will concentrate Treasury purchases among two- and 10-year securities. The transactions will take place two to three times a week, and the Fed may also buy other maturity Treasuries and Treasury Inflation-Protected Securities, according to a New York Fed statement.
Balance Sheet
The moves may more than double the Fed’s balance-sheet assets by September to $4.5 trillion from $1.9 trillion, said John Ryding, founder of RDQ Economics LLC in New York.
At the same time, the changes increase the danger, once the economy recovers, that the Fed won’t be able to unload the securities quickly enough to raise interest rates and counter inflation, said Ryding, a former Fed economist.
Bernanke floated the idea of buying Treasuries in a Dec. 1 speech. Then the FOMC said in its last statement on Jan. 28 that the Fed would be “prepared” for the purchases if “evolving circumstances” indicated their effectiveness.
The option gained ground after the Bank of England succeeded in lowering long-term rates by buying U.K. government bonds known as gilts in a program announced this month, said Lyle Gramley, a former Fed governor. The 10-year gilt yield slid to the lowest level in at least 20 years after the purchases began.
Bernanke Remarks
“Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes,” Bernanke said at a Feb. 24 Senate hearing. “We are prepared, and we want to keep the option open to buy Treasury securities if we think that is the best way to improve the functioning or reduce interest rates in private markets.”
While Treasury yields fell, the strategy isn’t guaranteed to work in reducing other rates.
The Fed is “naive” if officials think the move will lower borrowing costs, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management. The “historic precedent” of when the Treasury Department was buying back debt amid the budget surpluses of the Clinton administration show it may fail to do so, he said.
The Fed’s decision to purchase $300 billion of long-term treasury bonds is indicative of two things: 1) The U.S. government has lost all sense of value relative to its currency, and 2) The U.S. Federal Reserve is getting desperate and is running out of options.
Far from giving the economy any kind of boost, these tactics are essentially more of the same, which has already proven futile in terms of getting the economy moving again. Major financial institutions are not lending or borrowing much more than they were when the crisis began, and all the Fed is doing is undermining what little value is left in the U.S. Dollar.
Gold’s reaction, shooting up $42 upon release of the news, underscores the fact that inflation is now an expectation, and the safe haven attraction of treasuries will now accrue to other asset classes such as gold, silver and oil.
Although oil’s price has strengthened recently in reaction to the Fed news as well as OPEC’s decision not to cut production, this rally in commodities may be short-lived, especially if the massive inflation of money supply fails to loosen the gears of the global lending apparatus.
A renewed downward contraction of economic output manifested in more lost jobs, more foreclosures, more industrial bankruptcies, and more closed financial institutions would have the effect of sending oil and other consumable commodities (metals, but not gold) on another downward fall.
The likelihood of this happening hinges entirely on the next six months.
It is likely that the Fed will continue to buy its own Treasurys as well as distressed assets, and will continue nationalization of major financial institutions. At some point, however, there will be an end to the number of institutions left to rescue, because the Fed will own pretty much everything. It is at that point the real Great Depression will begin.
What else is there the Fed can do?
The answer to that is absolutely nothing. The U.S. Federal Reserve is a privately held institution with nearly unlimited powers to print money and establish policy. But their ability to act effectively is contingent upon the rest of the world’s conviction that the policy matters and the money has value. Increasingly, the paralysis seen in the industrial complex worldwide in terms of monetary velocity and attendant industrial output would seem to suggest that confidence in either value or relevance of policy has, for the time being, been destroyed.
As the institution widely perceived as being at fault for the policy environment and absence of regulation that engendered the over-capitalized and over-leveraged economy in the first place, it is highly unlikely the Fed will be in a position to lead the resurrection of confidence in the global monetary system.
It is more likely, that after the collapse of the United States currency and government, that it will take a coalition of representatives from a wide range across the G7, or more likely, the G20, to render sufficient assurance and integrity to set the wheels of the great global economic machine back in motion.
Financial Crisis Caused by a 'Culture of Complicity'
US ECONOMIST JAMES GALBRAITH 03/19/2009
While the world talks about new ways to save struggling banks, there are a handful of economists who think some banks shouldn't be saved at all. American economist James Galbraith told Manager Magazin that it might make more sense to break them up and start over.
Manager Magazin: Professor Galbraith, you suggest that banks that suffer from bad assets should simply be declared insolvent, instead of rescuing them with taxpayers' money. Why?
What should be done with the world's ailing banks?
James Galbraith: We need a correct assessment of the degree of losses suffered by a bank which is functionally insolvent. But as long as the old management is in place, there are no incentives to cooperate in the evaluation you need to make. That's the first problem.
The second problem is: When a bank is insolvent, the incentives for normal banking practice disappear. They become perverse. The incumbent management has good reason to gamble excessively and to make capital losses. This is because it appears that the regulators could soon close down the bank.
Beyond that, if the situation for the bank is truly hopeless or if the management is truly corrupt, then the incentive is to loot the institution, to take as much money out of it -- e.g. in the shape of bonuses and dividends -- before the true state of the books is discovered.
Manager Magazin: Is this something we are witnessing right now?
Galbraith: Certainly those incentives are in place. In a situation when a bank has suffered losses sufficient to impair its capital, you need to have regulatory supervision in place.
This does not mean that you necessarily close the bank. The way it usually works in the USA is that a bank is closed on Friday and re-opened on Monday under a new name, with a new leadership and with a team of examiners who are going through the books, trying to sort the good business loans and personal loans from those which are hopeless. Then you isolate the hopeless stuff, you force a write down of the equity and the subordinated debts of the people who put in risk capital -- so they have to take their losses as they should. And then you break up the bank into pieces which have a better prospect to gain viability soon. That's a process of re-organization and re-capitalization.
Manager Magazin: The change of management is probably the most important step.
Galbraith: A change of management is essential, because firstly, the incumbents are responsible, whether they were culpable or not, and secondly, you need new people who are in line with the public purpose of this re-organization. It's the same principle in the navy: When a ship runs aground, the captain is removed, no matter if he caused the accident or not. No one would think it's a good idea to have the subsequent investigation headed by the ones who are to be investigated.
Manager Magazin: What you suggest is hard for two groups of people: for the management in place and for the shareholders of the bank.
Galbraith: Why worry? The shareholders have already lost most of their capital. In the case of Citigroup, it was traded at $55 (€41) per share a year ago and it's now at $3.58. That's approximately a 95 percent loss. And the remaining 5 percent exists in the books only because of the expectation that the government would bail them out. So, even this poor market capitalization is only nominal. Everybody understands that the bank in fact is insolvent.
Another question is: Who are the shareholders? Who holds shares at that price? A good deal of them could be people who bought their Citi shares at $5 or $4. Clearly, they are gambling on the bailout. There's nothing wrong with them doing this. But they have no claim on public support.
Manager Magazin: What about the management?
Galbraith: The managers are in their positions on behalf of the shareholders who gave them great powers and, of course, like to see them perform well. When they do, they are very well off. Most of them have been in place for a couple of years, and they have earned very much in recent years, in some cases bonuses of $20 million.
Again: When the bank runs aground, there have to be consequences. The management has no claim on sympathy. They won't be poor. They have enough to send their kids to college. Some of them may have to sell some houses or boats. This is not a sad thing -- this is called the capitalist system. Well, it used to be called the capitalist system. Do we still have a capitalist system somewhere? China, maybe? (laughs) It's certainly a life change for them, but there's no human tragedy involved in changing the management of an insolvent bank.
Manager Magazin: In your scenario, the deposits must be guaranteed by the state.
Galbraith: Yes, that's absolutely essential. The standard practice in this case is to establish a deep insolvency insurance fund. This follows the principle that the ordinary depositor is not responsible for the problems of the bank because it's unreasonable to expect ordinary depositors to be monitoring the performance of the management. It's that simple: If the depositors feel that there's something wrong with the way the bank is run, they just leave, and that causes a systemic problem very quickly. And that's also the reason why you try as hard as possible to keep this ordinary business going after declaring a bank insolvent.
Manager Magazin: The most prominent example of a German bank facing a possible breakdown is an institution named Hypo Real Estate ...
Galbraith: (laughs) Why am I not surprised to hear that?
Manager Magazin: Yes, their core business is rather obvious... Their main problems stem from asset backed securities from the US. The government has already put some €100 billion into preventing the bank from collapsing. What's your recommendation for the future of such a bank?
Galbraith: I sincerely hope the bank management conducted some due diligence with the products they bought. And if they relied on agency ratings, they should have asked whether the agencies were working on their behalf. But I am very sure that, again, the answer is 'no'. The rating agencies made a mess by rating asset backed securities with AAA, so we're seeing a failure of due diligence at every stage. And a deep fraudulence at every stage. When a rating agency certifies that a security is AAA, it is making a claim about the quality of that security. It cannot make this claim unless it has closely looked at this security...
Manager Magazin: One would think.
Galbraith: One would think. The representation of such a quality of this security without examination is fraud. Perhaps Hypo Real Estate has legal recourse to these rating agencies for having relied on their fraudulent ratings.
Actually I doubt that, as there was some hidden understanding between such banks and rating agencies. The language they used reveals a different story than the one bank managers are selling to the public these days. "Liars' loans," "toxic waste," or my favorite: "neutron loans" -- loans that destroy the people but leave the buildings intact. These were the words to describe these loans and they were used by the people who were working in this industry. They reveal a culture of fraudulence on a massive scale. And of course governments now have to come to recognize that these are things they have to deal with.
Manager Magazin: So in your view, the talk about systemic failures is aiming to hide the real crimes that are actually involved?
Galbraith: There was clearly a systemic failure. But that does not mean there was no criminal energy around. The language one uses to describe these things is very important. I tend to stay away from neutral terms like "systemic failure" or "bubble," because these terms imply the innocence of the people involved -- and I can't see that.
Manager Magazin: What was it, then?
Galbraith: The reality of the financial crisis is that it was caused by a culture of complicity. That makes it so difficult for people to come to grips with it, especially for people who were involved, who were denying it themselves and who were partially aware of the extent of the damage. Probably many of them thought they would get away with it and now they realize that they have created an enormous slump.
Manager Magazin: Back to the consequences you suggest, declaring the banks insolvent and just saving the loans. What about the domino effect that could result, damaging systemically relevant banks?
Galbraith: The domino effect will happen anyway. The question politicians have to deal with is: Do they want to have the effect now or do they want to have to deal with these problems for another decade? They should be warned: The longer this goes on, the bigger the losses are. That's the lesson to be learned from the Japanese experience. There are moments where the state has to assert its autonomy. If, in the case of Hypo Real Estate, one assumes that the functioning of this bank for the entire system is necessary, then it's about time to make these bankers work for the public rather than having the public work for the bankers.
WASHINGTON (AP) - Federal regulators now say the nation's banks lost $32.1 billion in the final quarter of last year, even worse than the $26.2 billion originally reported last month.
The Federal Deposit Insurance Corp. said Friday that "significant" revisions it received from banks also lowered the industry's net income for all of last year to $10.2 billion from $16.1 billion.
Rising losses on loans and eroding values of assets bit into the revenue of U.S. banks and thrifts in late 2008, causing them to post the first quarterly deficit in 18 years.
The $26.2 billion loss originally reported for the October-December period already was the largest on 25 years of FDIC records. It compared with a $575 million profit in the fourth quarter of 2007.
And the originally reported 2008 net income of $16.1 billion was the smallest annual profit since 1990, during the savings and loan crisis.
The FDIC's revised banking industry data also include "substantially higher" charges for an accounting item known as goodwill impairment, which reduced the overall net income for the quarter.
Goodwill is an asset on a company's balance sheets, which gives an idea of what it is worth beyond the tangible — the added value from the potential for future success, for example.
The recession and stressed financial markets have reduced the goodwill value, for example, of companies that were acquired by others. So the acquiring company has had to write down the asset and take a goodwill impairment charge on it.
The FDIC said last month that there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter.
The agency expects U.S. bank failures to cost the deposit insurance fund more than $40 billion over the next four years.
Seventeen federally-insured institutions already have failed this year, extending a wave of collapses that began in 2008. Last year's tally of 25 failed banks was more than in the previous five years combined, and up from only three in 2007.
The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1993. That compares with $52.4 billion a year earlier.
G20 summit: Gordon Brown's G20 dream fades amid European hostility
David Charter in Brussels March 20, 2009
Gordon Brown’s hopes of leading the world out of recession at next month’s pivotal summit in London were undermined yesterday when European leaders flatly rejected calls for a further massive stimulus package.
The Prime Minister has been forced to lower expectations for the G20 summit, where leaders of the richest 20 countries will gather. Mr Brown has stopped comparing his event on April 2 to the Bretton Woods meeting in 1944 which set up the postwar world financial system. He recognises that there is no appetite to create new global institutions in the face of reservations in the European Union and the US.
The London meeting risks being overshadowed by a dispute between Europe and the US over public spending. A series of leaders at an EU summit led by Angela Merkel, the Germany Chancellor, refused yesterday to go along with American calls for greater borrowing and spending by Europe.
Amid scaled-down ambitions for the G20 Mr Brown is backing a doubling of resources for the International Monetary Fund (IMF), the lender of last resort to bankrupt governments that Bretton Woods set up. He will push for its reform to involve China and other big developing economies further.
“We are doing enough,” said Mirek Topolanek, the Czech Prime Minister, whose country holds the EU presidency.
“Some of us have not quite yet implemented our national recovery plans, so we do not know their impact. It does not make sense to introduce new packages.” In a further sign of resistance to the extra European spending called for recently by Larry Summers, chief economic adviser to President Obama, Ms Merkel also vowed to oppose further stimulus plans unless they could be shown to have immediate benefits.
“It is not time to look at more growth measures. I disagree with this idea completely. The existing measures must work. They must be allowed to develop,” she said.
José Manuel Barroso, the European Commission President, said that leaders should focus on existing measures and suggested that leaders risked causing public anxiety about the economy by proposing ever-larger rescue plans. “Instead of anticipating the next plan, let’s concentrate on implementing the plans we have,” he said.
“If the message we send to our public is, ‘our plan is not enough’, that is not going to create confidence.”
Mr Brown has shown sympathy for the US calls and on Wednesday said that world leaders’ efforts so far were not enough and that the London summit must take “further decisions”.
At last October’s EU summit Mr Brown competed with President Sarkozy of France to propose the most ambitious plans for redrawing the world’s financial architecture, but senior figures at the EU summit in Brussels yesterday poured cold water on a radical revamp of the world’s financial systems.
One leading EU figure told The Times that there was no need for the radical overhaul of existing structures and creation of new international regulators that they called for then. Instead the meeting should concentrate on better coordination between the Organisation for Economic Cooperation and Development (OECD), the umbrella group for the top 30 developed nations, and the IMF.
“Everyone agrees it is not really how many institutions you have and whether there is a new umbrella organisation,” he said. “Rather, there is increased talk about linkage between the existing institutions like the IMF and OECD.”
A senior British government spokesman denied that Mr Brown had reined in his plans for a second Bretton Woods and insisted that the idea of ripping up the old institutions and replacing them was “an impression that was never created” by the Prime Minister. Last October Mr Brown wrote a letter to EU leaders saying: “Global financial markets present challenges that no one nation can solve in isolation. We must therefore strengthen global cooperation and build a new global financial architecture for the years ahead – a new Bretton Woods which recognises the globalisation of financial risk in the responsibilities of global institutions.”
EU leaders today will hammer out their formal aims for the G20 summit and will try to appear unified around a pledge to do whatever is necessary to revive the economy and ensure that such a crisis cannot happen again.
They will also agree to fight against protectionism. Behind the consensus, though, lie deep fears among smaller countries that larger economies such as France and Germany will prioritise their industries over support for the principles of the EU’s internal market.
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MM Lee on Singapore’s population
TODAY
21 March 2009
SINGAPORE: Even after the millions spent on Baby Bonuses and other parenthood incentives, policy - makers are confounded by a problem that goes to the very heart of survival: Singaporeans are still not reproducing themselves.
And on Friday, Minister Mentor Lee Kuan Yew reflected on this challenge at the National University of Singapore Society’s (NUSS) dialogue on “Singapore and Singaporeans: A Quarter Century From Now”.
In Singapore, he said, it is becoming a “lifestyle choice” for women past the age of 30 to stay single as they are well - travelled and have no one to worry about.
“My daughter is one of them. What can I do? When she was in her early 30s, my wife used to tell her, what you want is a ‘MRS’. She did not think it was funny.
“Now she is 50 - plus, her mother is bedridden, I’m on a pacemaker, I got this rambling house. Everything is looked after now. What happens if we are both not there?
“She says, ‘I’ll look after myself’. But we know she has not been looking after herself all these years. When she went to Boston for training, her cooking was to just to put her salmon into the microwave.”
Mr. Lee added: “But that’s life. It’s a choice that she has made, and a choice that 30 per cent of our women are making. Who am I to complain? Society lives with the consequences it is making.”
The problem that this trend creates: “Without new citizens and permanent residents, we are going to be the last of the Mohicans. We are going to disappear”.
But immigrants bring their own challenges to a society.
Some Singaporean parents have complained about migrants entering schools and competing with local children. He urged parents: “Would you want them to compete against you or with you as part of the team? If you don’t have them with you as part of your team, they will be on the Chinese and Indian team.”
Some of these migrant students, he acknowledged, use Singapore as a stepping stone to other countries. So “why are we so stupid” in allowing this?
“Because more than half (of these students) do not make the grade to go to America, and the second tier is not bad for us.”
Singapore needs to draw from a big talent pool beyond its own shores, “so that we can continue to punch above our weight. No other way”.
“Would you want the pie to grow? You want a small pie with your children taking the last portion, or a big pie where you get a bigger portion, even though the talented person may get a bigger slice? That’s life. If you are afraid of talent, you will not succeed.”
One catch he foresees: Even as the second generation of today’s immigrants become more Singaporean, one dubious habit they might also adopt, is to have only one child.
“So we got to make this breakthrough, otherwise we are going to have a constant problem.
“We got to get people to realise that if we don’t have 2.1 (babies) to replace ourselves, we are always dependent.”
Earlier in the evening, Mr. Lee officially opened the new NUS Alumni Complex, which comprises the redeveloped NUSS Kent Ridge Guild House and Shaw Foundation Alumni House.
The Way We Live Now
No Safety in Numbers
By ROGER LOWENSTEIN
March 16, 2009
Is there such a thing left as a safe investment? Stocks have been massacred, real estate all but wiped out. Each was promoted in its day — as was gold — as safe and secure, appropriate for widows and orphans.
If there is a truly last bastion of safety, it would be, of course, the U.S. Treasury bond, that venerable instrument with the full faith and credit of the United States behind it. Perhaps it is esteemed so highly because we think of it not as an “investment” per se but as an article of faith in Washington and, by extension, the entire country. It is our tax dollars, after all, that stand behind it — the accumulated output of our citizens. And ever since the Wall Street meltdown, as investors have fled from any security carrying a whiff of danger, Treasuries have been in hot demand.
So it is an eye-opener, and rather depressing, to report that even Treasuries bear risk, in particular, the risk that flows from crowd psychology. Last month, in his annual letter to shareholders (of which I am one), Warren Buffett wrote: “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.”
Pretty strong words for an investment that has outperformed stocks over the past 25 years and is widely referred to as “riskless.” Yet according to Buffett and other investors of a cautious bent, “risk free” Treasuries of longer maturities are anything but. None other than China’s prime minister, Wen Jiabao, expressed worry about the safety of China’s big stake in U.S. bonds.
Not since World War II has the government borrowed anything close to what it is borrowing now. Because of the economic slowdown, the stimulus package and various financial-relief measures, pundits estimate this year’s federal deficit at $1.75 trillion. To put the figures in (alarming) perspective, over the past half century and regardless of the party in power, federal tax receipts have usually provided 80 to 90 percent of the money needed to fill the budget; thus, the government has had to borrow only the remaining fraction. But this year, it will need to borrow 45 percent, virtually half, of what it is projected to spend. This means that the U.S. government is looking much like a homeowner at the tail end of the boom: too hooked on spending (even if, hopefully, for a worthy cause) to stay within its means.
When you buy a Treasury security, you are actually lending the government money for a set period of time — from 30 days to 30 years — at a fixed rate of interest. Few people worry that Uncle Sam will go the way of a defaulting subprime borrower because the government, unlike other debtors, can always print the money it needs.
But as James Bianco, who runs an eponymous bond-research firm, explains, investors in fixed-income securities face two types of risk. One is credit risk — the risk of default. The other is what bond geeks refer to as “duration” risk. This is the risk that, even if the bonds are paid in full, the promised rate of interest will turn out to be worth less over time.
Inflation destroys bond values. It’s not a big deal over one or two years, but if you hold a long-term bond and inflation takes off, the present value of the security will plummet. Bonds also lose value as interest rates go up. If rates on 30-year U.S. bonds, recently 3 percent, were to rise to, say, 6 percent, the value of bonds issued at the lower rate would fall nearly in half. (The reason is largely intuitive: if the market rate is 6 percent, nobody would be interested in a 3 percent bond, and its price would fall.)
One thing that could make interest rates rise would be an economic recovery that spurred more firms to seek credit. That would be good news for the country, of course, but not for long-term bondholders. And it’s conceivable that rates on Treasuries could rise even without a strong recovery. Government budget deficits always bring a fear of higher rates (interest rates represent the price of credit, and deficits mean that the government will be demanding more of it). And given the looming shortfalls in Social Security and Medicare, it is not clear when the deficits will end.
Granted, Treasury bonds are not quite tulip bulbs or dot-com stocks. Investors purchase them out of fear, not greed. Presumably they are not doubling-down, buying Treasuries with borrowed money to juice profits. But that distinction may not save them.
Think of the yield on Treasuries as a reverse indicator of investor sentiment. The stronger the attachment people have for Treasuries, the more willing they are to accept a low return. Once the Wall Street crisis hit, investors traded what had been a strong attachment to Treasuries for downright love. Naturally enough, given this fearful ardor, the yield touched post-Depression lows.
As with any investment, generalized enthusiasm leads to frothy prices. In seeking safety, global investors pushed Treasuries to a vulnerable level. Bond-market optimists take comfort from the Federal Reserve Board, which has hinted that to keep interest rates from rising, it would be the lender of last resort. But were the Fed to absorb surplus Treasuries, the government would, in fact, merely be “printing money,” says Mohamed El-Erian, chief executive of the bond house Pimco. When the economy rebounds, such a scenario could lead to a textbook case of inflation and devastate the ultimate “safe” investment. And lately, bond rates have begun to rise.
The primary lesson of this crisis is that we, as a nation, took on too much risk — leveraging finite capital on a fantasy that no bet would ever go bad. But there’s another lesson, too. Even safety has its price, and if we overpay for it, we create new risks. Risk, in short, may be something we have to live with.
The Implications Of Treasury Bonds Hitting New Lows
by Daniel Aaronson and Lee Markowitz
March 13, 2009
The 10 year bond auction on Wednesday led to new bonds being priced at 3.04%, the highest level in four months. The implications of this are very important for all asset markets as the 3% threshold is considered to be a key level.
Investors from hedge funds to Warren Buffet to PIMCO are now talking about the Treasury market bubble. Bubbles do not pop instantly when people begin talking about an asset class, but rather require time and an initial decline in price. As price declines gain momentum, the bubble finally collapses.
Below is a chart of the 30 year Treasury bond since 1977.
As seen in the chart, the 30 year bond is now falling rapidly after having a parabolic rise at the end of a 30 year bull market. The explosive pop at the top of a bubble is what makes that asset uninvestable once the bubble ends because new investors that bought at the top quickly accumulate losses. As investors begin to sell, the asset rapidly falls in price.
Federal Reserve Purchases of Treasuries
Ben Bernanke has implied that the Federal Reserve would be willing to buy Treasury bonds should the need arise (i.e., Treasuries fall rapidly in price). He will do this by printing new US dollars. The reason that Bernanke is fearful of falling Treasury bond prices, and thus higher interest rates, is that higher interest rates would prevent an economic recovery. Although this plan could help to fund the Government's $2 trillion deficit initially, there would be huge implications to the broader fixed income markets if the Federal Reserve were to buy Treasury bonds. Nevermind the negative effect on the dollar from the newly printed money, the crowding out effect on non-government fixed income markets could be devastating. Crowding out will occur because the number of markets that the Federal Reserve can support is limited and the amount of money that is necessary to keep Treasuries from falling is staggering.
As we get closer to the day that the Federal Reserve begins to buy Treasuries, fixed income investors, who hold everything from corporate bonds to mortgages to credit card loans, should begin to sell their holdings in a panic, which in turn will send credit spreads to new highs (new lows in prices). Fixed income prices will fall to new lows because the Fed has been helping to artificially support fixed income prices with plans such as TARP/TALF, among others. As stated earlier, there are limits to the number of problems that the Federal Reserve can attempt to fix. As the Federal Reserve begins to buckle under its bailout programs, rational investors should recognize that instead of a few programs succeeding, all plans will fail together.
The take-home message is that the Federal Reserve can only do so much to instill confidence in markets. So far the Federal Reserve has been working overtime to stabilize fixed income markets. Now that long-term Treasury bonds are falling, the Federal Reserve will be forced to bail out another borrower - the US Government. As the Federal Reserve begins to buy Treasuries, the Federal Reserve will quickly become overwhelmed by its purchases, and all US fixed income prices will fall. At that point, the only option for the Federal Reserve would be to print new money at increasingly faster rates. Likely, it will be too late because the Dollar already will have resumed its decline. Only precious metals and certain foreign currencies will preserve purchasing power as a result of the Federal Reserve's troubled policies.
US Treasury in plans for record debt sale
By Michael Mackenzie in New York and Krishna Guha in Washington
February 4 2009
The US Treasury on Wednesday opened the floodgates of government bond issuance, revealing plans for a record debt sale in February and more frequent auctions in the months to come.
The announcement came amid growing fears about US government deficits and sent the yield on the benchmark 10-year Treasury note rising to 2.95 per cent, up from just over 2 per cent at the end of December.
The rise in Treasury yields has been pushing mortgage rates higher, complicating efforts to revive the economy. The US Federal Reserve said last week it was “prepared to” buy Treasuries if that would be a “particularly effective” way of reducing private borrowing costs.
“The Fed has to be troubled by the fact that mortgage rates have been rising and the buying of Treasuries by the Fed may come sooner than the market expects,” said William O’Donnell, UBS strategist.
The Treasury said it would sell $67bn (£46bn) in new securities next week, the largest ever quarterly refunding, beating the last peak in August 2003. It may also start monthly sales of all its benchmark Treasury securities.
At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month.
For Barack Obama’s administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up.
The Treasury Borrowing Advisory Committee expressed concern on Wednesday over the sharp jump in net borrowing needs – which market analysts estimate could reach $1,500bn to $2,500bn for the 2009 financial year.
Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn in Treasury debt.
In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling dollars by buying Treasuries. However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes.
‘Rambo Fed’ Will Buy Treasuries to Combat Crisis
By Scott Lanman
March 19 (Bloomberg) -- By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.
U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home- loan and other interest rates. The Fed kept its main rate at almost zero and may keep it there for an “extended” time.
The moves sparked the biggest drop in 10-year Treasury yields since 1962, rallies in the stock market and gold and a plunge in the dollar against the euro. Economist Richard Hoey said Bernanke has created the “Rambo Fed,” referring to the Sylvester Stallone character skilled with weapons.
“This is a very powerful and aggressive move,” Hoey, chief economist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”
With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.
Bond Reaction
The 10-year note yield fell as much as 54 basis points yesterday, the most since daily records began in 1962. It was at 2.59 percent at 1:14 p.m. in New York, compared with 3.01 percent at the close two days ago. A basis point is 0.01 percentage point.
The Federal Open Market Committee’s decision was unanimous, indicating the agreement to start buying Treasuries quelled disputes over how the central bank should expand its balance sheet. Richmond Fed President Jeffrey Lacker and others favored government-debt purchases instead of intervening in credit markets, as Bernanke has pioneered in the past six months.
Bernanke has studied the Great Depression extensively and published a book of his papers on the subject in 2000. In 1929, the Fed was “essentially leaderless and lacking in expertise,” Bernanke said in a November 2002 speech. The situation led to decisions that were associated with a “massive collapse of money, prices, and output,” he said.
Fed Purchases
Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.
The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11.
Policy makers acted after the economy worsened since they met in January. Reports today added evidence of a deepening recession. The Conference Board’s index of leading indicators, a measure of the economy’s future performance, fell 0.4 percent in February. The Labor Department said the number of Americans receiving unemployment benefits surged to a record 5.47 million.
TALF Program
The $1 trillion Term Asset-Backed Securities Loan Facility, which is opening this week to jumpstart consumer and business lending, “is likely to be expanded to include other financial assets,” the FOMC statement said, without elaborating.
The Obama administration is considering melding the Treasury’s plan to set up private investment funds to buy frozen assets with the Fed program, known as the TALF, people familiar with the matter said. Treasury Secretary Timothy Geithner may make an announcement as soon as this week, after his first unveiling of the strategy caused a sell-off in financial stocks.
“This is not really a victory for Lacker,” said James O’Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. “Lacker seems to be arguing for Treasury purchases instead of targeted programs. They are instead supplementing the targeted programs. They are just using all tools.”
The New York Fed will concentrate Treasury purchases among two- and 10-year securities. The transactions will take place two to three times a week, and the Fed may also buy other maturity Treasuries and Treasury Inflation-Protected Securities, according to a New York Fed statement.
Balance Sheet
The moves may more than double the Fed’s balance-sheet assets by September to $4.5 trillion from $1.9 trillion, said John Ryding, founder of RDQ Economics LLC in New York.
At the same time, the changes increase the danger, once the economy recovers, that the Fed won’t be able to unload the securities quickly enough to raise interest rates and counter inflation, said Ryding, a former Fed economist.
Bernanke floated the idea of buying Treasuries in a Dec. 1 speech. Then the FOMC said in its last statement on Jan. 28 that the Fed would be “prepared” for the purchases if “evolving circumstances” indicated their effectiveness.
The option gained ground after the Bank of England succeeded in lowering long-term rates by buying U.K. government bonds known as gilts in a program announced this month, said Lyle Gramley, a former Fed governor. The 10-year gilt yield slid to the lowest level in at least 20 years after the purchases began.
Bernanke Remarks
“Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes,” Bernanke said at a Feb. 24 Senate hearing. “We are prepared, and we want to keep the option open to buy Treasury securities if we think that is the best way to improve the functioning or reduce interest rates in private markets.”
While Treasury yields fell, the strategy isn’t guaranteed to work in reducing other rates.
The Fed is “naive” if officials think the move will lower borrowing costs, said Doug Dachille, chief executive officer of New York-based First Principles Capital Management. The “historic precedent” of when the Treasury Department was buying back debt amid the budget surpluses of the Clinton administration show it may fail to do so, he said.
Fed Running Out of Ammo
By David Paul Krugman
March 20, 2009
The Fed’s decision to purchase $300 billion of long-term treasury bonds is indicative of two things: 1) The U.S. government has lost all sense of value relative to its currency, and 2) The U.S. Federal Reserve is getting desperate and is running out of options.
Far from giving the economy any kind of boost, these tactics are essentially more of the same, which has already proven futile in terms of getting the economy moving again. Major financial institutions are not lending or borrowing much more than they were when the crisis began, and all the Fed is doing is undermining what little value is left in the U.S. Dollar.
Gold’s reaction, shooting up $42 upon release of the news, underscores the fact that inflation is now an expectation, and the safe haven attraction of treasuries will now accrue to other asset classes such as gold, silver and oil.
Although oil’s price has strengthened recently in reaction to the Fed news as well as OPEC’s decision not to cut production, this rally in commodities may be short-lived, especially if the massive inflation of money supply fails to loosen the gears of the global lending apparatus.
A renewed downward contraction of economic output manifested in more lost jobs, more foreclosures, more industrial bankruptcies, and more closed financial institutions would have the effect of sending oil and other consumable commodities (metals, but not gold) on another downward fall.
The likelihood of this happening hinges entirely on the next six months.
It is likely that the Fed will continue to buy its own Treasurys as well as distressed assets, and will continue nationalization of major financial institutions. At some point, however, there will be an end to the number of institutions left to rescue, because the Fed will own pretty much everything. It is at that point the real Great Depression will begin.
What else is there the Fed can do?
The answer to that is absolutely nothing. The U.S. Federal Reserve is a privately held institution with nearly unlimited powers to print money and establish policy. But their ability to act effectively is contingent upon the rest of the world’s conviction that the policy matters and the money has value. Increasingly, the paralysis seen in the industrial complex worldwide in terms of monetary velocity and attendant industrial output would seem to suggest that confidence in either value or relevance of policy has, for the time being, been destroyed.
As the institution widely perceived as being at fault for the policy environment and absence of regulation that engendered the over-capitalized and over-leveraged economy in the first place, it is highly unlikely the Fed will be in a position to lead the resurrection of confidence in the global monetary system.
It is more likely, that after the collapse of the United States currency and government, that it will take a coalition of representatives from a wide range across the G7, or more likely, the G20, to render sufficient assurance and integrity to set the wheels of the great global economic machine back in motion.
Financial Crisis Caused by a 'Culture of Complicity'
US ECONOMIST JAMES GALBRAITH
03/19/2009
While the world talks about new ways to save struggling banks, there are a handful of economists who think some banks shouldn't be saved at all. American economist James Galbraith told Manager Magazin that it might make more sense to break them up and start over.
Manager Magazin: Professor Galbraith, you suggest that banks that suffer from bad assets should simply be declared insolvent, instead of rescuing them with taxpayers' money. Why?
What should be done with the world's ailing banks?
James Galbraith: We need a correct assessment of the degree of losses suffered by a bank which is functionally insolvent. But as long as the old management is in place, there are no incentives to cooperate in the evaluation you need to make. That's the first problem.
The second problem is: When a bank is insolvent, the incentives for normal banking practice disappear. They become perverse. The incumbent management has good reason to gamble excessively and to make capital losses. This is because it appears that the regulators could soon close down the bank.
Beyond that, if the situation for the bank is truly hopeless or if the management is truly corrupt, then the incentive is to loot the institution, to take as much money out of it -- e.g. in the shape of bonuses and dividends -- before the true state of the books is discovered.
Manager Magazin: Is this something we are witnessing right now?
Galbraith: Certainly those incentives are in place. In a situation when a bank has suffered losses sufficient to impair its capital, you need to have regulatory supervision in place.
This does not mean that you necessarily close the bank. The way it usually works in the USA is that a bank is closed on Friday and re-opened on Monday under a new name, with a new leadership and with a team of examiners who are going through the books, trying to sort the good business loans and personal loans from those which are hopeless. Then you isolate the hopeless stuff, you force a write down of the equity and the subordinated debts of the people who put in risk capital -- so they have to take their losses as they should. And then you break up the bank into pieces which have a better prospect to gain viability soon. That's a process of re-organization and re-capitalization.
Manager Magazin: The change of management is probably the most important step.
Galbraith: A change of management is essential, because firstly, the incumbents are responsible, whether they were culpable or not, and secondly, you need new people who are in line with the public purpose of this re-organization. It's the same principle in the navy: When a ship runs aground, the captain is removed, no matter if he caused the accident or not. No one would think it's a good idea to have the subsequent investigation headed by the ones who are to be investigated.
Manager Magazin: What you suggest is hard for two groups of people: for the management in place and for the shareholders of the bank.
Galbraith: Why worry? The shareholders have already lost most of their capital. In the case of Citigroup, it was traded at $55 (€41) per share a year ago and it's now at $3.58. That's approximately a 95 percent loss. And the remaining 5 percent exists in the books only because of the expectation that the government would bail them out. So, even this poor market capitalization is only nominal. Everybody understands that the bank in fact is insolvent.
Another question is: Who are the shareholders? Who holds shares at that price? A good deal of them could be people who bought their Citi shares at $5 or $4. Clearly, they are gambling on the bailout. There's nothing wrong with them doing this. But they have no claim on public support.
Manager Magazin: What about the management?
Galbraith: The managers are in their positions on behalf of the shareholders who gave them great powers and, of course, like to see them perform well. When they do, they are very well off. Most of them have been in place for a couple of years, and they have earned very much in recent years, in some cases bonuses of $20 million.
Again: When the bank runs aground, there have to be consequences. The management has no claim on sympathy. They won't be poor. They have enough to send their kids to college. Some of them may have to sell some houses or boats. This is not a sad thing -- this is called the capitalist system. Well, it used to be called the capitalist system. Do we still have a capitalist system somewhere? China, maybe? (laughs) It's certainly a life change for them, but there's no human tragedy involved in changing the management of an insolvent bank.
Manager Magazin: In your scenario, the deposits must be guaranteed by the state.
Galbraith: Yes, that's absolutely essential. The standard practice in this case is to establish a deep insolvency insurance fund. This follows the principle that the ordinary depositor is not responsible for the problems of the bank because it's unreasonable to expect ordinary depositors to be monitoring the performance of the management. It's that simple: If the depositors feel that there's something wrong with the way the bank is run, they just leave, and that causes a systemic problem very quickly. And that's also the reason why you try as hard as possible to keep this ordinary business going after declaring a bank insolvent.
Manager Magazin: The most prominent example of a German bank facing a possible breakdown is an institution named Hypo Real Estate ...
Galbraith: (laughs) Why am I not surprised to hear that?
Manager Magazin: Yes, their core business is rather obvious... Their main problems stem from asset backed securities from the US. The government has already put some €100 billion into preventing the bank from collapsing. What's your recommendation for the future of such a bank?
Galbraith: I sincerely hope the bank management conducted some due diligence with the products they bought. And if they relied on agency ratings, they should have asked whether the agencies were working on their behalf. But I am very sure that, again, the answer is 'no'. The rating agencies made a mess by rating asset backed securities with AAA, so we're seeing a failure of due diligence at every stage. And a deep fraudulence at every stage. When a rating agency certifies that a security is AAA, it is making a claim about the quality of that security. It cannot make this claim unless it has closely looked at this security...
Manager Magazin: One would think.
Galbraith: One would think. The representation of such a quality of this security without examination is fraud. Perhaps Hypo Real Estate has legal recourse to these rating agencies for having relied on their fraudulent ratings.
Actually I doubt that, as there was some hidden understanding between such banks and rating agencies. The language they used reveals a different story than the one bank managers are selling to the public these days. "Liars' loans," "toxic waste," or my favorite: "neutron loans" -- loans that destroy the people but leave the buildings intact. These were the words to describe these loans and they were used by the people who were working in this industry. They reveal a culture of fraudulence on a massive scale. And of course governments now have to come to recognize that these are things they have to deal with.
Manager Magazin: So in your view, the talk about systemic failures is aiming to hide the real crimes that are actually involved?
Galbraith: There was clearly a systemic failure. But that does not mean there was no criminal energy around. The language one uses to describe these things is very important. I tend to stay away from neutral terms like "systemic failure" or "bubble," because these terms imply the innocence of the people involved -- and I can't see that.
Manager Magazin: What was it, then?
Galbraith: The reality of the financial crisis is that it was caused by a culture of complicity. That makes it so difficult for people to come to grips with it, especially for people who were involved, who were denying it themselves and who were partially aware of the extent of the damage. Probably many of them thought they would get away with it and now they realize that they have created an enormous slump.
Manager Magazin: Back to the consequences you suggest, declaring the banks insolvent and just saving the loans. What about the domino effect that could result, damaging systemically relevant banks?
Galbraith: The domino effect will happen anyway. The question politicians have to deal with is: Do they want to have the effect now or do they want to have to deal with these problems for another decade? They should be warned: The longer this goes on, the bigger the losses are. That's the lesson to be learned from the Japanese experience. There are moments where the state has to assert its autonomy. If, in the case of Hypo Real Estate, one assumes that the functioning of this bank for the entire system is necessary, then it's about time to make these bankers work for the public rather than having the public work for the bankers.
Interview conducted by Matthias Kaufmann
Banks Lost $32.1 Billion in Fourth Quarter
By MARCY GORDON,
20 March 2009
WASHINGTON (AP) - Federal regulators now say the nation's banks lost $32.1 billion in the final quarter of last year, even worse than the $26.2 billion originally reported last month.
The Federal Deposit Insurance Corp. said Friday that "significant" revisions it received from banks also lowered the industry's net income for all of last year to $10.2 billion from $16.1 billion.
Rising losses on loans and eroding values of assets bit into the revenue of U.S. banks and thrifts in late 2008, causing them to post the first quarterly deficit in 18 years.
The $26.2 billion loss originally reported for the October-December period already was the largest on 25 years of FDIC records. It compared with a $575 million profit in the fourth quarter of 2007.
And the originally reported 2008 net income of $16.1 billion was the smallest annual profit since 1990, during the savings and loan crisis.
The FDIC's revised banking industry data also include "substantially higher" charges for an accounting item known as goodwill impairment, which reduced the overall net income for the quarter.
Goodwill is an asset on a company's balance sheets, which gives an idea of what it is worth beyond the tangible — the added value from the potential for future success, for example.
The recession and stressed financial markets have reduced the goodwill value, for example, of companies that were acquired by others. So the acquiring company has had to write down the asset and take a goodwill impairment charge on it.
The FDIC said last month that there were 252 banks in trouble at the end of 2008, up from 171 in the third quarter.
The agency expects U.S. bank failures to cost the deposit insurance fund more than $40 billion over the next four years.
Seventeen federally-insured institutions already have failed this year, extending a wave of collapses that began in 2008. Last year's tally of 25 failed banks was more than in the previous five years combined, and up from only three in 2007.
The failures sliced the amount in the deposit insurance fund to $18.9 billion as of Dec. 31, the lowest level since 1993. That compares with $52.4 billion a year earlier.
G20 summit: Gordon Brown's G20 dream fades amid European hostility
David Charter in Brussels
March 20, 2009
Gordon Brown’s hopes of leading the world out of recession at next month’s pivotal summit in London were undermined yesterday when European leaders flatly rejected calls for a further massive stimulus package.
The Prime Minister has been forced to lower expectations for the G20 summit, where leaders of the richest 20 countries will gather. Mr Brown has stopped comparing his event on April 2 to the Bretton Woods meeting in 1944 which set up the postwar world financial system. He recognises that there is no appetite to create new global institutions in the face of reservations in the European Union and the US.
The London meeting risks being overshadowed by a dispute between Europe and the US over public spending. A series of leaders at an EU summit led by Angela Merkel, the Germany Chancellor, refused yesterday to go along with American calls for greater borrowing and spending by Europe.
Amid scaled-down ambitions for the G20 Mr Brown is backing a doubling of resources for the International Monetary Fund (IMF), the lender of last resort to bankrupt governments that Bretton Woods set up. He will push for its reform to involve China and other big developing economies further.
“We are doing enough,” said Mirek Topolanek, the Czech Prime Minister, whose country holds the EU presidency.
“Some of us have not quite yet implemented our national recovery plans, so we do not know their impact. It does not make sense to introduce new packages.” In a further sign of resistance to the extra European spending called for recently by Larry Summers, chief economic adviser to President Obama, Ms Merkel also vowed to oppose further stimulus plans unless they could be shown to have immediate benefits.
“It is not time to look at more growth measures. I disagree with this idea completely. The existing measures must work. They must be allowed to develop,” she said.
José Manuel Barroso, the European Commission President, said that leaders should focus on existing measures and suggested that leaders risked causing public anxiety about the economy by proposing ever-larger rescue plans. “Instead of anticipating the next plan, let’s concentrate on implementing the plans we have,” he said.
“If the message we send to our public is, ‘our plan is not enough’, that is not going to create confidence.”
Mr Brown has shown sympathy for the US calls and on Wednesday said that world leaders’ efforts so far were not enough and that the London summit must take “further decisions”.
At last October’s EU summit Mr Brown competed with President Sarkozy of France to propose the most ambitious plans for redrawing the world’s financial architecture, but senior figures at the EU summit in Brussels yesterday poured cold water on a radical revamp of the world’s financial systems.
One leading EU figure told The Times that there was no need for the radical overhaul of existing structures and creation of new international regulators that they called for then. Instead the meeting should concentrate on better coordination between the Organisation for Economic Cooperation and Development (OECD), the umbrella group for the top 30 developed nations, and the IMF.
“Everyone agrees it is not really how many institutions you have and whether there is a new umbrella organisation,” he said. “Rather, there is increased talk about linkage between the existing institutions like the IMF and OECD.”
A senior British government spokesman denied that Mr Brown had reined in his plans for a second Bretton Woods and insisted that the idea of ripping up the old institutions and replacing them was “an impression that was never created” by the Prime Minister. Last October Mr Brown wrote a letter to EU leaders saying: “Global financial markets present challenges that no one nation can solve in isolation. We must therefore strengthen global cooperation and build a new global financial architecture for the years ahead – a new Bretton Woods which recognises the globalisation of financial risk in the responsibilities of global institutions.”
EU leaders today will hammer out their formal aims for the G20 summit and will try to appear unified around a pledge to do whatever is necessary to revive the economy and ensure that such a crisis cannot happen again.
They will also agree to fight against protectionism. Behind the consensus, though, lie deep fears among smaller countries that larger economies such as France and Germany will prioritise their industries over support for the principles of the EU’s internal market.
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